Client Alert Archives

The new Rules come into effect from 3 April 2025.

Background:

On 21 February 2025, the Minister of Commerce officially decreed and published into law the Ultimate Beneficial Ownership Rules (UBO Rules). In line with steps taken by other financial centers and leading jurisdictions around the world, the UBO Rules require all companies in KSA, other than companies publicly listed in KSA, to disclose and maintain accurate information about their ultimate beneficial owners. The UBO Rules come into effect from 3 April 2025.

How does the UBO Rules define an Ultimate Beneficial Owner?

The UBO Rules define an “ultimate beneficial owner” as any natural person who meets the following criteria:
1. owns at least 25% of the company’s share capital whether directly or indirectly;
2. controls at least 25% o the voting shares in the company, whether directly or indirectly;
3. is entitled to appoint or remove a majority of the company’s board of directors, its manager or president, whether directly or indirectly;
4. ability to influence decision-making or the business of the company whether directly or indirectly; or
5. is a representative of any legal person to which any of above criteria applies.
The UBO Rules clarify that if an ultimate beneficial owner cannot be identified by applying the foregoing criteria, then the company’s manager or members of its board of directors or its president will be regarded as its ultimate beneficial owner.

Key obligations under the UBO Rules:

Some of the key obligations under the UBO Rules include the following:

Incorporation: The Ministry of Commerce will now require applicants to disclose information on their ultimate beneficial owners as part of the application process for incorporation of companies in KSA.

Annual Filings: In relation to those companies already established at the time the UBO Rules come into effect, such companies will be required to make annual filings disclosing their ultimate beneficial owners. Such filings are due on the anniversary of the date on which companies were registered with the Ministry’s commercial register.
Maintenance & Updates: All existing companies will be required to maintain an ultimate beneficial owner register and notify the Ministry of any changes in the identity of an ultimate beneficial owner.
Required Information: It remains unclear what information will be requested by the Ministry to validate the identity of an ultimate beneficial owner in a relevant KSA company. Unsurprisingly, the UBO Rules grant the Ministry with broad authority to require disclosure. The UBO Rules state that the Ministry will publish guidelines with respect to its procedures and requirements for the identification of ultimate beneficial owners.

Exemption from UBO Rules:

The following entities are exempted from the application of the UBO Rules:

Companies wholly owned by the state or any state-owned authorities whether directly or indirectly; and
Companies undergoing insolvency proceedings in accordance with the Bankruptcy Law.

Additionally, the Minister of Commerce may issue exemptions on a case-by-case basis. All companies exempted from the UBO Rules are nevertheless required to prove to the Ministry that they enjoy such an exempted status.

Penalties for Non-Compliance:

A person that is required to comply with the UBO Rules but fails to do so, including its obligations to disclose/update information to the Ministry with respect to ultimate beneficial ownership, may face a fine of SAR 500,000.

Investors with complex shareholding structures in KSA should be wary of these UBO Rules as indirect changes in their shareholding structures could trigger disclosure obligations with the Ministry in KSA. All investors in KSA must start thinking about introducing appropriate internal protocols to ensure full compliance with the UBO Rules.

The following Gibson Dunn lawyers prepared this update: Mohamed A. Hasan and Lojain AlMouallimi.

Gibson Dunn’s lawyers are available to assist with any questions you may have regarding these developments. To learn more, please contact the Gibson Dunn lawyer with whom you usually work, or the authors in Riyadh:

Mohamed A. Hasan (+966 55 867 5974, malhasan@gibsondunn.com)

Lojain AlMouallimi (+966 11 827 4046, lalmouallimi@gibsondunn.com)

Attorney Advertising: These materials were prepared for general informational purposes only based on information available at the time of publication and are not intended as, do not constitute, and should not be relied upon as, legal advice or a legal opinion on any specific facts or circumstances. Gibson Dunn (and its affiliates, attorneys, and employees) shall not have any liability in connection with any use of these materials. The sharing of these materials does not establish an attorney-client relationship with the recipient and should not be relied upon as an alternative for advice from qualified counsel. Please note that facts and circumstances may vary, and prior results do not guarantee a similar outcome.

We are pleased to provide you with Gibson Dunn’s ESG update covering the following key developments during January 2025. Please click on the links below for further details.

I. GLOBAL

The International Financial Reporting Standards (IFRS) Foundation publishes guide for reporting only climate-related information using International Sustainability Standards Board (ISSB) Standards

On January 30, 2025, the IFRS Foundation published a new guide to help companies prepare abbreviated disclosures using the transition relief provided under ISSB Standards IFRS S1, General Requirements for Disclosure of Sustainability-related Financial Information to report only climate-related information under IFRS S2, Climate-related Disclosures, in the first reporting year. For those filing voluntary under the ISSB standards, this relief would apply to disclosure for the fiscal year beginning on or after January 1, 2024.

The International Auditing and Assurance Standards Board (IAASB) and the International Ethics Standards Board for Accountants (IESBA) jointly launch a new international framework to support the implementation of their sustainability standards

On January 27, 2025, the IAASB and IESBA jointly launched new and revised standards intended to enhance the trust and transparency of sustainability reporting and assurance. The standards are IAASB’s International Standard on Sustainability Assurance 5000 (ISSA 5000), which provides a framework for the assurance of sustainability information, and IESBA’s International Ethics Standards for Sustainability Assurance (IESSA), which provide ethical principles for sustainability reporting and assurance. ISSA 5000 and IESSA will become effective for periods starting on or after December 15, 2026, in the jurisdictions that choose to adopt them.

Net Zero Asset Managers (NZAM) and Glasgow Financial Alliance for Net Zero (GFANZ) respond to departures

Following the public withdrawals of several large financial institutions from NZAM, on January 13, 2025, NZAM announced it was launching a review of the initiative following “[r]ecent developments in the U.S. and different regulatory and client expectations in investors’ respective jurisdictions.” While the review is in process, NZAM will suspend its activities tracking signatory implementation and reporting and will remove from its website the commitment statement and list of NZAM signatories, as well as their targets and related case studies.

Citing recent departures from its Net Zero Banking Alliance, GFANZ announced a restructuring plan to focus its efforts on mobilizing capital in support of the transition to net zero. In particular, the group seeks to close “the investment gap” in support of technology and public policy and to pursue public-private partnerships.

II. UNITED KINGDOM

Prudential Regulation Authority (PRA) and Financial Conduct Authority (FCA) publish Climate Change Adaptation Reports 2025

On January 30, 2025, the PRA published its report on climate change adaptation reporting. The report notes that the current goal of the Bank of England’s policy work on climate change and the transition to net zero is to play a leading role in enhancing the resilience of the UK financial system and in understanding the financial, operational, and economic impacts on the macroeconomy. The PRA expects to publish in 2025 a consultation paper seeking views on an update to Supervisory Statement 3/19 on enhancing banks’ and insurers’ approaches to managing the financial risks from climate change.

On January 28, 2025, the FCA published its report identifying three major issues that affect climate change adaptation in the financial services industry: (i) data and modelling for quantification and management of climate risks; (ii) barriers and enablers to insurance underwriting for climate risks and in consequence lending and investment; and (iii) barriers and enablers to financial services in allocating capital to adaptation.

UK confirms 2035 Nationally Determined Contribution (NDC) emissions reduction target under the Paris Agreement

On January 30, 2025, the UK submitted its NDC target to the United Nations Framework Convention on Climate Change (UNFCCC). First announced by the Prime Minister at COP29 in November 2024, the UK has now committed to reduce all greenhouse gas emissions (GHGs) by at least 81% by 2035 compared to 1990 levels, excluding international aviation and shipping emissions. The commitment aligns with the recommendations of the U.K. government’s climate advisory body, which has verified the target as a credible contribution towards limiting global warming to 1.5 °C.

UK Government votes to end debate and adjourn the Climate and Nature Bill

On January 24, 2025, the House of Commons debate resulted in a majority decision to adjourn the Climate and Nature Bill during its second reading, thereby preventing a vote on the proposed legislation. The bill proposes to impose a duty on the Secretary of State to ensure the UK implements its obligations and commitments under the Paris Agreement and the Global Biodiversity Framework, as well as a strategy to implement certain climate and nature targets. Debate on the bill will continue in July 2025.

The Equality and Human Rights Commission (EHRC) publishes parliamentary briefing on the UK Employment Rights Bill

On January 14, 2025, the EHRC published its parliamentary briefing on the proposed UK Employment Rights Bill. The briefing notes the potential of many measures set out in the bill to improve working conditions and reduce inequalities in the workplace but also raises concerns about the level of detail intended to be left to secondary legislation. The EHRC highlights that this approach could limit the ability of parliamentarians and stakeholders to assess the legislation’s unintended impacts on certain protected groups. The briefing calls for the UK Government to consider and avoid such impacts. The EHRC also warned of the current lack of clarity around the UK Government’s intentions for enforcing the bill.

III. EUROPE

EU Commission releases proposal of “First Omnibus Package” scaling back Sustainability Reporting and Due Diligence Obligations under CSRD, Taxonomy and CSDDD

Please see Gibson Dunn’s February 28, 2025 alert, Omnibus Simplification Package Proposed by the EU Commission: Scaling Back Sustainability Reporting and Due Diligence Obligations.

EU Platform on Sustainable Finance publishes draft reports suggesting revisions and simplifications of the EU Taxonomy Regulation and Climate Delegated Act

On January 8, 2025, the EU Platform on Sustainable Finance, tasked by the EU Commission with reviewing and recommending revisions to the Climate Delegated Act as well as with simplifying the EU Taxonomy Regulation, published a draft report. The report recommends simplifying the application of Do No Significant Harm criteria and expanding the scope of activities covered by the EU Taxonomy. This includes reducing complexity, improving the clarity and consistency of technical screening criteria, and providing more detailed guidance for reporting to ease the compliance process for companies and financial institutions.

On February 5, 2025, the EU Platform on Sustainable Finance published a second report in which it outlines “specific proposals to revise the Taxonomy Disclosures Delegated Act, leading to a reduction of over a third in the reporting burden for non-financial companies and a significant simplification for financial institutions.” Key recommendations include introducing a materiality threshold for corporate KPIs, making the OpEx KPI mandatory only for R&D costs, and simplifying the Green Asset Ratio by allowing estimates and proxies for non-EU and retail exposures.

Switzerland sets new Climate Goals for 2035

On January 29, 2025, the Swiss government approved a new climate target, aiming for a 65% reduction in GHGs by 2035 compared to 1990 levels, to be implemented as an emission budget covering 2031-2035. This goal will be part of Switzerland’s second NDC under the Paris Agreement. The new target aligns with Switzerland’s Climate and Innovation Act, which mandates net zero emissions by 2050 and includes various measures to reduce energy consumption and transition away from fossil fuels. The government also plans to achieve an average 59% GHG reduction between 2031 and 2035, primarily through domestic measures, while retaining the option to use international emissions reductions.

CSRD Transposition

No countries transposed the CSRD in January; however, the Dutch government submitted a CSRD implementation bill (Wet implementatie richtlijn duurzaamheidsrapportering) to the House of Representatives for consideration. An overview of the transposition of CSRD into national laws can be found here.

IV. NORTH AMERICA

The California Air Resources Board (CARB) extends comment period deadline for California Senate Bills 253 and 261

As described in our recent blog post, on December 16, 2024, CARB issued a request for public feedback and information regarding certain implementing regulations for Senate Bill (SB) 253 (the Climate Corporate Data Accountability Act) and SB 261 (the Climate Related Financial Risk Act). CARB has extended the comment deadline to March 21, 2025, due to the Southern California wildfires.

Attorneys general issue request for information to financial institutions on ESG activities

On January 27, 2025, a coalition of 11 state attorney generals, led by Texas Attorney General Ken Paxton, sent a letter to several large financial institutions expressing concern that the companies had breached their fiduciary duty to maximize shareholder returns by making investment decisions based on diversity and climate considerations.

United States Climate Alliance (U.S. Climate Alliance) reaffirms commitment to Paris Agreement climate goals amid U.S. withdrawal

On January 20, 2025, the U.S. Climate Alliance, a bipartisan coalition of 24 state governors, delivered a letter to the Executive Secretary of the UNFCCC stating that the U.S. Climate Alliance, remains committed to the Paris Agreement, is “on track to meet [its] near-term climate target by reducing collective net greenhouse gas (GHG) emissions 26 percent below 2005 levels by 2025,” and noted that the states have “broad authority” to pursue climate initiatives despite President Trump’s announcement that he will withdraw from the Paris Agreement. .

Tennessee drops ESG lawsuit against BlackRock following settlement agreement

As described in our Winter 2023 ESG update, Tennessee filed a consumer protection lawsuit in Tennessee state court against BlackRock alleging the company had misled or made false representations to the state’s consumers regarding the incorporation of ESG into its investment strategy. On January 17, 2025, Tennessee announced a settlement with BlackRock. As part of the settlement agreement, BlackRock agreed to increase disclosure and compliance around its use of ESG factors and to disclose on its website membership in climate-focused organizations. For funds that do not have investment objectives beyond financial performance or screens based on non-financial criteria, BlackRock agreed to cast votes “solely to further the financial interests of investors,” remove ESG ratings from main product pages, provide quarterly as opposed to annual disclosures regarding its proxy voting, and provide the rationale behind any proxy voting that is contrary to management’s recommendations.

Federal Acquisition Regulatory Council (FARC) withdraws proposed climate-related disclosure rule

On January 13, 2025, FARC withdrew a proposed rule titled “Disclosure of Greenhouse Gas Emissions and Climate-Related Financial Risk.” The rule, originally proposed on November 14, 2022, would have required certain government contractors to publicly disclose GHG emissions and major contractors (those that received over $50 million in federal contract obligations) to disclose climate-related financial risks and set emissions reduction targets in order to qualify for future federal contracts.

In case you missed it…

The Gibson Dunn Securities Regulation and Corporate Governance Practice Group has published updates regarding the Securities and Exchange Commission’s issuance of Staff Legal Bulletin 14M, which is relevant for the 2025 shareholder proposal season; its potential strategy shift in the climate disclosure rule litigation; and its new interpretive guidance on Schedule 13G eligibility for large stockholders engaging with companies on ESG.

The Gibson Dunn Workplace DEI Task Force has published several updates for January and February summarizing the latest key developments, media coverage, case updates, and legislation related to diversity, equity, and inclusion, including dedicated alerts describing:

a recent executive order revoking affirmative action requirements for government contractors and directing agencies to identify nine large targets for investigations of private sector DEI practices;
the impacts of recent executive orders regarding race and gender on corporate DEI programs; and
potential insights an Office of Personnel Management memorandum may give into future enforcement of the DEI directives.

Gibson Dunn also published two alerts regarding energy-related executive orders:

key takeaways from the executive order “Unleashing American Energy” and its potential impact on various energy initiatives as well as the M&A and capital markets outlook for energy companies; and
ten regulatory and policy issues energy industry experts will be monitoring in the early days of President Trump’s second administration.

More information on executive orders and other announcements from the White House is available in our White House Executive Order Tracker. A collection of our analyses of the legal and industry impacts from the presidential transition is available here.

V. APAC

Securities Commission Malaysia and the Central Bank of Malaysia releases 2025 climate change priorities

On January 22, 2025, Securities Commission Malaysia and Bank Negara Malaysia, co-chairs of Joint Committee on Climate Change (JC3), held its 14th meeting and released a joint statement outlining their priorities and action plans for addressing climate change in 2025. JC3 will focus on building climate resilience in the financial sector in three key areas: addressing data challenges, facilitating small and medium enterprises’ transition, and designing climate finance solutions.

Securities Commission Malaysia releases guidance to aid company directors in driving sustainability reporting

On January 20, 2025, the Securities Commission Malaysia released a guide titled “Navigating the Transition: A Guide for Boards” to provide actionable steps for directors to adopt the National Sustainability Reporting Framework (NSRF). The NSRF addresses the use of the sustainability disclosure standards issued by the ISSB. Large-listed issuers on the Bursa Malaysia’s Main Market with market capitalization of RM2 billion and above will start NSFR implementation this year, while other listed issuers and non-listed large companies will be expected to comply with the reporting requirements by 2027 under a phased approach.

Bank of China joins the Taskforce on Nature-related Financial Disclosures

On January 13, 2025, the Taskforce on Nature-related Financial Disclosures (TNFD) welcomed the Bank of China (BOC) as the first Chinese institution to join the TNFD.

Lauren Assaf-Holmes, Mellissa Campbell Duru, Mitasha Chandok, Becky Chung, Georgia Derbyshire, Ferdinand Fromholzer, Muriel Hague, Michelle Kirschner, Vanessa Ludwig, Babette Milz, Kiernan Panish, Johannes Reul, Annie Saunders, and Helena Silewicz*

Gibson Dunn lawyers are available to assist in addressing any questions you may have regarding these developments. Please contact the Gibson Dunn lawyer with whom you usually work, the authors, or any leader or member of the firm’s ESG: Risk, Litigation, and Reporting practice group:

ESG: Risk, Litigation, and Reporting Leaders and Members:
Susy Bullock – London (+44 20 7071 4283, sbullock@gibsondunn.com)
Elizabeth Ising – Washington, D.C. (+1 202.955.8287, eising@gibsondunn.com)
Perlette M. Jura – Los Angeles (+1 213.229.7121, pjura@gibsondunn.com)
Ronald Kirk – Dallas (+1 214.698.3295, rkirk@gibsondunn.com)
Michael K. Murphy – Washington, D.C. (+1 202.955.8238, mmurphy@gibsondunn.com)
Robert Spano – London/Paris (+33 1 56 43 13 00, rspano@gibsondunn.com)

*Helena Silewicz is a trainee solicitor in London and is not admitted to practice law.

This update provides an overview of the major developments in federal and state securities litigation since our 2024 Mid-Year Securities Litigation Update.

Introduction

In this update:

We report on orders from the Supreme Court that dismissed two securities-related cases from the Court’s merits docket, leaving unresolved questions about pleading standards and the nature of misstatements under the PSLRA. We also examine one potential circuit conflict involving federal courts’ jurisdiction to hear securities-related cases under the Class Action Fairness Act.
We cover recent developments in Delaware, including the latest opinion in Tornetta v. Musk, a recent Delaware Supreme Court opinion addressing aiding and abetting liability, and two new opinions addressing litigation over commercially reasonable efforts clauses.
Lawsuits challenging public companies’ environmental, social and governance (ESG) disclosures and policies continue to be filed, as do cases challenging ESG policies implemented by states, asset managers, and trading platforms. We survey notable developments in securities cases involving ESG allegations.
The cryptocurrency space has seen considerable activity since our last Update. Below, we discuss noteworthy new case filings and rulings in various lawsuits, as well as other developments that could impact cryptocurrencies going forward.
We discuss recent cases addressing price impact issues in the wake Goldman Sachs Group., Inc. v. Arkansas Teacher Retirement System. We also highlight recent opinions addressing market efficiency and preview cases on appeal implicating various reliance-related issues.
Finally, we address several other notable developments, including a recent opinion from the Second Circuit addressing materiality, a recent opinion from the Ninth Circuit involving a Special Purpose Acquisition Company or “SPAC,” a Tenth Circuit decision pertaining to short-selling, and recent securities lawsuits implicating Artificial Intelligence.

TABLE OF CONTENTS

I. Filing And Settlement Trends

II. What To Watch for In The Supreme Court

III. Delaware Developments

IV. ESG Civil Litigation

V. Cryptocurrency Litigation

VI. Market Efficiency And “Price Impact”

VII. Other Notable Developments

I. Filing And Settlement Trends

A recent NERA Economic Consulting (NERA) study provides an overview of federal securities litigation filings in 2024. This section highlights several notable trends.

A. Filing Trends

Figure 1 below reflects the federal filing rates from 1996 through 2024. In 2024, 229 federal cases were filed, matching the number of federal filings in 2023. That figure is considerably lower than in the peak years of 2017-2019, but is consistent with the number of filings from 2021 onwards. Note, however, that this figure does not include class action suits filed in state court or state court derivative suits, including those in the Delaware Court of Chancery.

Figure 1:

B. Mix Of Cases Filed In 2023

1. Filings By Industry Sector

As shown in Figure 2 below, the distribution of non-merger objections and non-crypto unregistered securities filings in 2024, varied somewhat from 2023. Notably, after a dip in 2023, the “Health and Technology Services” sector percentage returned to the percentages seen in 2021 and 2022. Similarly, the percentage of “Electronic Technology and Technology Services” filings increased in 2024, returning to levels last seen in 2021. Together, “Health and Technology Services” and “Electronic Technology and Technology Services” filings once again comprised over 50% of filings after dipping to 41% in 2023. Meanwhile, “Finance” sector filings decreased from 18% to 10%.

Figure 2:

2. Filings By Type

As shown in Figure 3 below, Rule 10b-5 filings make up the vast majority of federal filings this year. In fact, filings of other types are as low as they have been in years.

Figure 3:

3. Filings By Circuit

Figure 4 provides insight into the distribution of federal filings by Circuit. Most filings occur in the Second and Ninth Circuits. After trending down from 2021 to 2023, the number of filings in the Second Circuit increased this year. By contrast, the number of filings in the Ninth Circuit has remained steady or increased each year since 2021.

Figure 4:

4. Event-Driven And Other Special Cases

Figure 5 illustrates trends in the number of event-driven and other special case filings since 2020. The number of Artificial Intelligence-related filings in 2024, was more than double the number of such filings in 2023 and 2022. By contrast, SPAC and Cybersecurity and Customer Privacy Breach filings have decreased steadily since 2021.

Figure 5:

C. Settlement Trends

As reflected in Figure 6 below, the average settlement value in 2024 was $43 million. That is the highest number since 2016, and a significant increase from the mid-year average ($26 million). (Note that the average settlement value excludes merger-objection cases, crypto unregistered securities cases, and cases settling for more than $1 billion or $0 to the class.)

Figure 6:

As for median settlement value, it equaled the values from 2022 and 2023. At $14 million, the median settlement value also increased significantly from the mid-year median ($9 million). (Note that median settlement value excludes settlements over $1 billion, merger objection cases, crypto unregistered securities cases, and zero-dollar settlements.)

Figure 7:

II. What To Watch For In The Supreme Court

A. Supreme Court Update: Both Securities Cases Heard in November 2024 Dismissed As Improvidently Granted

As our 2024 Mid-Year Update discussed, by the beginning of its 2024 Term, the Supreme Court had granted review in two securities cases: Facebook, Inc. v. Amalgamated Bank, No. 23-980, and NVIDIA Corp. v. E. Ohman J:or Fonder AB, No. 23-970. Each case presented questions about pleading standards in securities class actions, and each petition identified circuit splits on those issues. See Petition for Writ of Certiorari at 16-17, Facebook, Inc., No. 23-980 (Mar. 4, 2024) (“Facebook Pet.”); Petition for Writ of Certiorari at 3-5, NVIDIA Corp., No. 23-970 (Mar. 4, 2024) (“NVIDIA Pet.”). However, after hearing oral argument in November 2024, in each of these cases, the Court issued a per curiam order dismissing each writ as “improvidently granted,” a disposition that sends a case back to the court below without a resolution on the merits. NVIDIA Corp. v. E. Ohman J:or Fonder AB, 2024 WL 5058572 (U.S. Dec. 11, 2024); Facebook, Inc. v. Amalgamated Bank, 604 U.S. 4 (2024); see also Garrett v. McCotter, 807 F.2d 482, 484 n.5 (5th Cir. 1987). These dismissals mean that, for now, lower courts across the country will continue to apply their own circuits’ precedents to these questions.

In Facebook, shareholders alleged that Facebook made misstatements in securities filings, where it had purportedly characterized as “hypothetical” the risk that third parties might misuse Facebook user data when that risk has already allegedly materialized. Facebook Pet. at 10. The Supreme Court granted Facebook’s petition for certiorari to resolve the question of whether risk disclosures are “false or misleading when they do not disclose that a risk has materialized in the past, even if that past event presents no known risk of ongoing or future business harm.” See id. at i; see also Facebook, Inc. v. Amalgamated Bank, 144 S. Ct. 2629 (2024) (granting certiorari in part). Gibson Dunn represents the petitioners in Facebook.

The question of whether such risk disclosures are misstatements unless they also disclose any and all materializations of the disclosed risk, no matter how inconsequential, remains subject to a circuit split. The Supreme Court’s dismissal in Facebook leaves intact the Ninth Circuit’s rule, which holds that a risk disclosure is materially misleading when it fails to disclose a past instance of the risk having materialized, even if the past event poses no known risk of harm. In re Facebook, Inc. Sec. Litig., 87 F.4th 934, 949-50 (9th Cir. 2023). As Facebook argued in its petition for certiorari, this puts the Ninth Circuit at odds with the Sixth Circuit, which treats risk disclosures as prospective only; and with the First, Second, Third, Fifth, Tenth, and D.C. Circuits, which have held that a risk’s materialization in the past must be disclosed only when the company knows or believes that the past event will harm the business. Facebook Pet. at 19-22 (citations omitted).

In NVIDIA, a group of investors brought a securities-fraud class action against NVIDIA, a company that produces graphics processing units (GPUs). E. Ohman J:or Fonder AB v. NVIDIA Corp., 81 F.4th 918, 924-25 (9th Cir. 2023). They alleged that NVIDIA’s CEO and two other defendants (whose dismissal was affirmed by the Ninth Circuit) had misled investors about the extent to which NVIDIA’s revenue growth was linked to demand from cryptocurrency miners. Id. at 924-27. In support of allegations about the falsity of NVIDIA’s statements and its knowledge, the investors’ amended complaint relied on statements from former NVIDIA employees about internal company documents, as well as on the independent analysis of an expert consulting firm. Id. at 929-30, 937-39.

The Supreme Court granted NVIDIA’s petition for certiorari to decide (1) whether, under the heightened pleading standards of the Private Securities Litigation Reform Act (PSLRA), plaintiffs making allegations of scienter based on company-internal documents must “plead with particularity the contents of those documents,” and (2) whether, under the PSLRA, allegations of falsity based on expert opinions—rather than “particularized allegations of fact”—suffice to survive a motion to dismiss. See NVIDIA Pet. at i; see also NVIDIA Corp. v. E. Ohman J:or Fonder AB, 144 S. Ct. 2655 (2024) (granting certiorari). Now, with certiorari dismissed in NVIDIA, both of these questions remain subject to the circuit splits identified in the NVIDIA petition. As to the standard for pleading scienter based on internal documents, the First and Ninth Circuits permit more general allegations, whereas the Second, Third, Fifth, Seventh, and Tenth Circuits require particularized allegations of the documents’ contents. NVIDIA Pet. at 4 (citations omitted). And as to the role of expert opinions in alleging falsity, the Ninth Circuit alone has held that expert opinions suffice; the Second and Fifth Circuits have held that expert opinions can “bolster” factual allegations of falsity but will be insufficient on their own to survive a motion to dismiss. See id. at 5 (citations omitted).

B. Lower Court Development: Circuit Split Recognized On Federal Court Jurisdiction Under The Class Action Fairness Act

After the Court’s dismissals in November and December, there are no securities cases currently pending before the Supreme Court. We highlight one securities-related development from the lower courts, which may reach the Supreme Court for resolution in a future Term.

On September 4, 2024, in Kim v. Cedar Realty Trust, Inc., 116 F.4th 252 (4th Cir. 2024), the Fourth Circuit acknowledged a circuit split on the extent of federal court jurisdiction under the Class Action Fairness Act (CAFA). Although the Second Circuit had determined CAFA did not confer federal subject-matter jurisdiction in a “nearly identical action,” the Kim court found that it was bound by Fourth Circuit precedent to reach a different conclusion. Id. at 260-61.

In Kim, an action brought by a class of preferred stockholders in Cedar Realty, the district court asserted subject-matter jurisdiction under CAFA’s exception to the usual jurisdictional requirement of complete diversity of citizenship between the parties. Id. at 260 (citing 28 U.S.C. §§ 1331, 1332(d)). On appeal, the Fourth Circuit raised the question of its own jurisdiction, noting that CAFA also incorporates carveouts under which there is not federal jurisdiction in cases without complete diversity. Id. Specifically, the court considered whether the Kim action “solely involve[d] a claim” relating to either state-law issues about a business entity’s internal affairs or the “rights, duties (including fiduciary duties), and obligations relating to or created by or pursuant to any security.” Id. at 260 (quoting 28 U.S.C. § 1332(d)(9)(B)-(C)).

The claims in Kim were for breaches of contract and fiduciary duty by Cedar Realty, based on rights and obligations arising from the preferred shares; and for interference with contract and aiding and abetting breaches of fiduciary duty, by Wheeler, which merged with Cedar Realty while the plaintiffs held their preferred stock. Id. at 258-59. The court acknowledged that a panel of the Second Circuit had found that it lacked jurisdiction under CAFA in a “nearly identical action,” Krasner v. Cedar Realty Trust, Inc., 86 F.4th 522 (2d Cir. 2023). Kim, 116 F.4th at 260-61. But the Kim court was bound by prior Fourth Circuit precedent, in which the court held that aiding-and-abetting claims against corporate outsiders do not “relate[] to” either internal corporate governance or rights and duties conferred by a security. Id. at 261 (citing Dominion Energy, Inc. v. City of Warren Police & Fire Ret. Sys., 928 F.3d 325, 335-43 (4th Cir. 2019)). Under that precedent, the Cedar Realty stockholders’ claims against Wheeler were not carved out from CAFA and the court retained federal jurisdiction over the appeal. Id.

For now, under the apparent circuit split identified in Kim, shareholder class actions like these, involving aiding-and-abetting claims against corporate outsiders, may face different treatment in different circuits. In the Fourth Circuit and any others that follow the rule stated in Kim, these cases can remain in federal court, while in the Second Circuit and any other circuits following the Krasner rule, the same claims will be remanded to state court for lack of federal jurisdiction.

III. Delaware Developments

A. Ratification In Tornetta v. Musk

On December 2, 2024, the Delaware Chancery Court issued a much-anticipated opinion in Tornetta v. Musk, 326 A.3d 1203 (Del. Ch. 2024). This latest installment in Tornetta addresses the effect on the Court’s post-trial opinion of a subsequent stockholder vote in favor of the compensation award the post-trial opinion ordered rescinded. In short, the Court concluded the subsequent vote had no effect.

Tornetta centers on Elon Musk’s 2018 compensation package. The compensation award was approved at a special meeting of the Tesla Board on January 21, 2018, and then approved by a majority of Tesla’s stockholders in March 2018. Tornetta v. Musk, 310 A.3d 430, 485-86, 490 (2024). The compensation award carried a grant date fair value of $2.6 billion and a maximum value to Musk of $55.8 billion. Id. at 445. That maximum value represented “the largest potential compensation opportunity ever observed in public markets by multiple orders of magnitude.” Id.

On January 30, 2024, the Court issued a post-trial opinion that ordered Elon Musk’s 2018 compensation award rescinded after finding (1) Musk was a conflicted controller with respect to the compensation award, (2) the entire fairness standard applied to the transaction as a result, (3) the defendants failed to prove the March 2018 stockholder vote on the award was “fully informed,” and (4) the defendants failed to prove the transaction was entirely fair. Id. at 501, 520-21, 526-27, 544 (2024). Roughly three months after the Court’s post-trial opinion, Tesla filed a proxy statement in which it recommended that stockholders “ratify” the compensation award that the post-trial opinion ordered rescinded. Tornetta, 326 A.3d at 1218. On June 13, 2024, Tesla stockholders voted in favor of the proposal. Id. at 1219.

On June 28, 2024, certain Tornetta defendants, citing the stockholder vote, filed a Motion to Revise the Tornetta post-trial opinion, which this latest December 2, 2024 opinion denies. Id. at 1219, 1264.

The Court provided four independent bases for doing so, one of which is addressed here—ratification. The Court rejected Tesla’s ratification arguments on the merits. It began by framing the defendants’ arguments as being incorrectly built on agency principles that treat a corporation’s directors as agents of stockholders, with stockholders, as principals, able to “do whatever they want in all contexts.” Id. at 1230. According to the Court, the defendants’ view is contrary to Delaware law, which regards directors as more “analogous to trustees for stockholders.” Id. (citations omitted). Thus, agency principles apply “only by analogy.” Id.

Next, the Court opined that Delaware recognizes two forms of stockholder ratification, one of which was applicable in its view. The Court designated the applicable form of ratification “fiduciary ratification.” Id. Per the Court, fiduciary ratification “allows stockholders to express, through an affirmative vote,” that “a corporate act is ‘consistent with shareholder interests.’” Id. (quoting Vogelstein, 699 A.2d at 335). According to the opinion, the effect of fiduciary ratification varies depending on context, ranging from “act[ing] as a complete defense,” to “hav[ing] no effect.” Id. (quoting Vogelstein, 699 A.2d at 334). “Just as the standard of review increases as conflicts become more direct and serious, the effect of fiduciary ratification diminishes.” Id. (footnote omitted).

Here, the Court explained that the fiduciary ratification was occurring in the context of a conflicted controller transaction. That context, the Court noted, presents “multiple risks to minority stockholders.” Id. Considering those risks and the presumptive application of entire fairness, the Court held that the “maximum effect of stockholder ratification . . . [would be] to shift the burden of proving entire fairness.” Id. at 1232. A standard of review shift, the Court explained, depended instead on the company committing from the outset of the transaction to the requirements set forth in MFW. Id. Tesla did not do so, however, and it could not “‘MFW’ a vote”—i.e., obtain the benefits of MFW by “implementing the MFW protections before” the stockholder ratification vote. Id. at 1233. The Court therefore rejected the ratification argument.

The Court’s post-trial opinion prompted discussion about re-domestication and the relative merits of incorporating in Delaware as compared to states like Texas and Nevada. A detailed discussion of those topics is beyond the scope of this Update, though we note that systemic movement does not appear be occurring—at least not yet. See generally Stephen M. Bainbridge, DExit Drivers: Is Delaware’s Dominance Threatened (UCLA Sch. L. Rsch. Paper No. 24-04), https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4909689. This latest opinion, and its recent appeal to the Delaware Supreme Court, suggest those discussions are likely to persist, and we will continue to monitor this case and these issues as developments unfold.

B. The Delaware Supreme Court Reiterates The High Bar for Bringing Aiding And Abetting Claims Against Third-Party Buyers

In its recent decision in In re Mindbody, Inc., Stockholder Litigation, the Delaware Supreme Court reversed a controversial holding that an arms-length buyer’s “passive failure to act rather than active participation or ‘substantial assistance’ can give rise to liability.” 2024 WL 4926910, No. 484, 2023 at *30 (Del. Ch. Dec. 2, 2024). The Court also addressed the several novel issues, “including . . . whether contractual undertakings in merger agreements can create fiduciary duties for third parties to the target’s stockholders.” Id.

As discussed in our April 10, 2023 Client Alert, the Court of Chancery ruled that Mindbody’s founder and CEO, Richard Stollmeyer, breached his Revlon duties. Id. at *22. The Court of Chancery also found that (1) Stollmeyer was liable for breaching his duty of disclosure, (2) Vista Equity Partners Management, LLC (Vista)—Mindbody’s acquirer—was liable for aiding and abetting Stollmeyer’s disclosure breach, and (3) the defendants had waived the issue of settlement credit. Id. at *22. Apart from the Court of Chancery’s aiding and abetting ruling, the Delaware Supreme Court affirmed.

To be liable for aiding and abetting a breach of fiduciary duty, plaintiffs must plead and prove that the third party was a “knowing participa[nt]” in the underlying breach. Id. at *31. For its part, the Court of Chancery “held that Vista’s ‘contractual obligation’ in the [Vista-Mindbody] merger agreement to review Mindbody’s proxy statements and ‘correct’ any misstatements or omissions, and Vista’s subsequent failure to correct omissions, amounted to ‘knowing participation’ in Stollmeyer’s breach of his duty of disclosure.” Id. at *30.

The Delaware Supreme Court disagreed. In reversing the Court of Chancery’s aiding and abetting determination, the Delaware Supreme Court provided an overview of the “knowing participation” element of an aiding and abetting claim. See id. at *31-35. It explained that the “knowing” factor comprises two types of knowledge—i.e., knowledge by the alleged aider and abettor that (1) “the primary party’s conduct constitutes a breach,” and (2) its own conduct was legally improper. Id. at *32 (citation and emphasis omitted). Participation, in turn, generally requires “substantial assistance.” Id. at *33. At least in the corporate governance context, the Supreme Court explained, substantial assistance has generally been limited to “overt participation,” as opposed to a “failure to act” or “passive awareness.” Id. It also cited Section 876 of the Restatement (Second) of Torts approvingly and structured its analysis around the Restatement factors. See id. at *34-36.

Considering these various factors and elements, along with the record, the Supreme Court held that the “the ‘participation’ requirement ha[d] not been established,” and that “aspects of the scienter requirement, namely, Vista’s knowledge of the wrongfulness of its own conduct regarding the disclosure breach, also f[e]ll short.” Id. at *31. Although it described the opinion as “narrow,” the Supreme Court’s analysis in this respect nonetheless included notable commentary. For example, it held that, “in the case before [it],” “a contractual obligation between a target corporation and a third-party buyer to notify the other of potential disclosure violations” did not “create[] an independent duty of disclosure between the third-party buyer and the target’s stockholders that [could] form the basis for secondary aiding and abetting liability,” id. at *38; there are “compelling public policy reasons not to read contractual disclosure-based obligation between a third-party buyer and a target company as implying independent fiduciary duties between the third-party buyer and the target’s stockholders,” id. at *43; taking “no action to facilitate or assist [the primary violator] in his breach,” and instead merely “passively st[anding] by” did not amount to “substantial assistance,” id. at *41; and “when an aiding and abetting claim is brought against a third-party acquirer negotiating at arms’-length, participation should be the most difficult to prove,” id.

As the Court acknowledged, In re Mindbody is unlikely to be the last word on aiding and abetting liability. See id. at *39 n.117 (noting another case on appeal “addresses similar issues with different facts”). Accordingly, we will continue monitoring these issues and provide updates on future cases implicating them.

C. Delaware Supreme Court Affirms Delaware Court Of Chancery’s Dismissal Of Breach Of Fiduciary Claims Against Directors Involved In A SPAC Merger

The Delaware Supreme Court recently affirmed the dismissal of a lawsuit alleging that the sponsor of a special purpose acquisition company (SPAC) and its directors breached their fiduciary duties “by touting an outdated business model that the target had decided to scrap.” In re Hennessy Cap. Acquisition Corp. IV S’holder Litig., 318 A.3d 306, 310 (Del. Ch. 2024), aff’d, No. 245, 2024, 2024 WL 5114140 (Del. Dec. 16, 2024). In doing so, the Supreme Court adopted the reasoning of the Court of Chancery, which provided guidance clarifying that the MultiPlan standard is not as lenient as some had thought. Id.

In 2018, Hennessy Capital Acquisition Corp. IV (Hennessy) was formed as a SPAC. Id. at 311. Hennessy then merged with an entity named Canoo in late 2020. Id. at 314-15. In advance of the merger, Hennessy and Legacy Canoo issued a press release, and Hennessy subsequently issued a proxy, that outlined Canoo’s “three projected revenue streams.” Id. at 313-15. After the merger, Canoo’s board and management changed appreciably, and Canoo’s new leadership publicly announced a shift in Canoo’s business model, resulting in some volatility and an eventual fall in Canoo’s stock price. See id. at 315-17. In June 2022, the plaintiff, a Canoo stockholder, filed a putative class action alleging fiduciary duty breaches, among other claims. Id. at 317-18.

After outlining the “narrow[ness]” of a MultiPlan claim and rejecting the plaintiff’s contention that “the pleading standard is ‘relaxed’ in the context of SPAC claims,” the Court of Chancery dismissed the plaintiff’s breach of fiduciary duty claim. Id. at 319-21. The Court explained that “[t]o state a viable MultiPlan claim, a plaintiff is required to plead facts making it reasonably conceivable that conflicted fiduciaries deprived public stockholders of a fair chance to exercise their redemption rights.” Id. at 320. And in the case of disclosures, the pleaded facts “must provide grounds to infer that the defendants made a material misstatement or omission—one affecting the total mix of information available to public stockholders deciding whether to redeem.” Id. But—notwithstanding the success of prior SPAC-related suits—”[p]oor performance is not . . . indicative of a breach of fiduciary duty,” “[c]onflicts are not a cause of action,” “[a]nd pleading requirements exist even where entire fairness applies.” Id. at 310. “Entire fairness is not . . . a free pass to trial.” Id. at 319. And here, the plaintiff’s allegations were deficient under those standards.

D. Court Of Chancery Issues Opinions Providing Guidance On Commercially Reasonable Efforts Requirements Related To Earnout Provisions

The Court of Chancery issued two cases in the second half of the year finding that buyers failed to use commercially reasonable efforts to achieve agreed-upon milestones in acquisition agreements. See Fortis Advisors LLC v. Johnson & Johnson, 2024 WL 4048060 (Del. Ch. Sept. 4, 2024); S’holder Representative Servs. LLC v. Alexion Pharma., Inc., 2024 WL 4052343 (Del. Ch. Sept. 5, 2024). The opinions address two different types of common commercially reasonable efforts requirements—”inward-facing” and “outward-facing” ones—and provide helpful insight into how courts approach them.

Commercially reasonable efforts requirements are often found in earnout provisions. Earnout provision are a “common risk allocation tool[] in merger agreements” that require a buyer to “pay[] an upfront sum and an additional amount if the seller’s business achieves specific targets by a deadline,” or milestone. Fortis, 2024 WL 4048060, at *1. To lessen the risk for the seller, buyers often provide a contractual assurance that they will “devote commercially reasonable efforts” to reach the milestones. Id.

Fortis Advisors arose out of an acquisition by Johnson & Johnson (J&J) of Auris Health, Inc. (Auris), a venture-backed startup developing surgical robots. Id. As part of the acquisition, J&J agreed to pay $3.4 billion up front and another $2.35 billion upon the achievement of several commercial and regulatory milestones for two of Auris’s products. Id. The merger agreement included an “inward-facing efforts provision,” which required J&J to make “commercially reasonable efforts” to meet these milestones that were to be measured by J&J’s own standards and “usual practice” for such products. Id. at *14. Rather than make efforts to achieve those milestones, however, J&J, the Court found, instituted a series of tests designed to rank one of Auris’s products against another J&J product to determine which product to pursue and which to abandon. Id. at 2.

Among other things, the Court concluded that J&J breached its contractual obligation to use commercially reasonable efforts to reach the agreed-upon milestones for one of Auris’s products. Id. at *24-26. In doing so, the Court noted that J&J agreed to make Auris’s product a “priority medical device,” and that “commercially reasonable efforts” clauses require a party “to take all reasonable steps toward an end.” Id. at 24 (quotation omitted). The Court found that instead, J&J took steps that were “reasonably certain to have caused [the product] to miss its regulatory milestones.” Id. at *26.

Alexion arose out of Alexion Pharmaceuticals, Inc.’s (Alexion) acquisition of Syntimmune, Inc. As part of the acquisition, Alexion agreed to pay $400 million up front and an additional $800 million in installments upon the completion of several development milestones. 2024 WL 4052343, at *1, *14. The merger agreement provided that Alexion would use commercially reasonable efforts to achieve each milestone, and defined the efforts with an “outward-facing metric” of “what a similarly situated company would do” with a similar product. Id. at *1, 14. Alexion eventually terminated the acquired program altogether after its acquisition by AstraZeneca. Id. at *2, *20.

The Court concluded that Alexion breached its obligation to use commercially reasonable efforts to achieve several of the milestones. Id. at *36. In doing so, the Court noted that the merger agreement’s definition of commercially reasonable efforts did not permit Alexion to “consider its own efforts and cost required for the undertaking,” but rather only allowed for the consideration of “anticipated profitability, but only insofar as typical companies might typically consider it.” Id. at *37. As a result, the Court found that Alexion could not “consider[] its self-interest in determining what is commercially reasonable,” but rather could consider “its self-interest only in drawing the upper bound of its commercially reasonable efforts,” namely to ensure that its efforts were not “contrary to prudent business judgment.” Id.

E. The Limits Of Integration Clauses And Benefits Of Anti-Reliance Provisions

Two recent Court of Chancery decisions reinforce the limits of integrations clauses while underscoring the importance of anti-reliance provisions in precluding fraud claims. In Trifecta Multimedia Holdings Inc. v. WCG Clinical Services LLC, the plaintiff alleged that the defendant—in addition to breaching the parties’ purchase agreement—”fraudulently induced it to enter into [the] purchase agreement by claiming that the [defendant] portfolio company would be the best partner for growth, would allow the [plaintiff] healthcare company to continue operating autonomously, would support the [plaintiff] healthcare company’s sales and marketing efforts, and would generally help the [plaintiff] healthcare company secure new contracts and sell its flagship product.” 318 A.3d 450, 454 (Del. Ch. 2024). The Court, after dismissing a handful of statements as puffery, denied the defendant’s motion to dismiss in the main. Id. at 454-55. Among other things, the Court rejected the defendant’s argument that the parties’ purchase agreement precluded reliance, noting that “an integration clause, standing alone, is not sufficient to bar a fraud claim; the agreement must also contain explicit anti-reliance language,” which the parties’ agreement lacked. Id. at 465; see id. at 467.

Cytotheryx Inc. v. Castle Creek Biosciences, Inc. is similar. 2024 WL 4503220, at *3-4 (Del. Ch. Oct. 16, 2024). There, the plaintiff likewise argued that the integration clause in the parties’ agreement “prohibit[ed] any reliance on extra-contractual statements.” Id. at *3. Once again, the Court rejected the plaintiff’s argument, noting not only that the integration clause at issue did not bar the plaintiff’s particular claims but also that the parties’ agreement specifically “preserve[d] [the plaintiff’s] right to bring an action for fraud.” Id. at *5. Together Trifecta and Cytotheryx show that Delaware courts will sustain adequately pleaded fraud claims in the face of integration clauses where explicit anti-reliance provisions are absent.

F. Stockholder Agreements And Moelis

As discussed in our 2024 Mid-Year Update, the Delaware General Assembly passed S.B. 313 in July 2024, which contained what is now Section 122(18) of the Delaware General Corporation Law, in response to West Palm Beach Firefighters’ Pension Fund v. Moelis & Company, 311 A.3d 809 (Del. Ch. 2024). As a reminder, Section 122(18) “specifically authorizes a corporation to enter into contracts with one or more of its stockholders or beneficial owners of its stock, for such minimum consideration as approved by its board of directors, and provides a non-exclusive list of contract provisions by which a corporation may agree to.” Section 122(18), however, “does not apply to or affect any civil action or proceeding completed or pending on or before” August 1, 2024—meaning it has no effect on the Moelis decision. S.B. 313 § 6. Accordingly, on August 16, 2024, Moelis filed a notice of appeal. See Moelis & Co. v. W. Palm Beach Firefighters’ Pension Fund, 340-2024, Doc. No. 74077020 (Del. Supr. Aug. 16, 2024). Briefing is now complete, and we will continue to monitor the case as it proceeds.

IV. ESG Civil Litigation

A. Environmental Litigation

Swanson v. Danimer Sci., Inc., 2024 WL 4315109 (2d Cir. Sept. 27, 2024): In May 2021, investors filed a putative class action lawsuit against Danimer Scientific, Inc., a bioplastics manufacturer, and certain executives. In re Danimer Sci. Sec. Litig., Case No. 21-cv-02708, ECF No. 1 (E.D.N.Y.). The plaintiffs alleged that the defendants made misleading public statements regarding the biodegradability of Danimer’s products. Id. ¶ 5. They further alleged that when an article published in The Wall Street Journal claimed that the timing in which the company’s product would biodegrade was more variable than suggested, the company’s stock price allegedly dropped. Id. ¶ 6. The United States District Court for the Eastern District of New York dismissed the lawsuit, concluding that the plaintiffs failed to adequately plead that the defendants knowingly made false or misleading statements about the biodegradability of the Danimer’s products. In re Danimer Sci. Sec. Litig., 2023 WL 6385642, at *16 (E.D.N.Y. Sept. 30, 2023). On appeal, the United States Court of Appeals for the Second Circuit affirmed the district court’s dismissal. Swanson, 2024 WL 4315109, at *3. The Second Circuit noted that the plaintiffs’ allegations, even when considered collectively, did not raise a strong inference that the defendants acted with the requisite intent to deceive or defraud investors. Gibson Dunn represented the defendants in this case. Id.

Lyall v. Elsevier Inc., et al., No. 24-cv-12022 (D. Mass.): The plaintiff, a former employee of a subsidiary of RELX PLC, filed a class action complaint against RELX PLC and its subsidiaries (RELX) for violations of federal securities laws on August 6, 2024. ECF No. 1. The plaintiff alleged RELX mislead both consumers and investors by greenwashing, i.e., representing to the public that it was doing more to protect the environment than it was actually doing. Id. ¶ 7. On October 16, 2024, the defendants filed a motion to dismiss the complaint, arguing that the plaintiff failed to comply with the requirements of the Private Securities Litigation Reform Act. ECF No. 12 at 1. Before the Court ruled on that motion, the plaintiff filed an amended complaint. ECF No. 25. The amended complaint continues to assert federal securities claims, alleging that RELX mislead investors by engaging in greenwashing. ECF No. 25. On February 7, 2025, the defendants moved to dismiss. ECF Nos. 28-29.

Texas et al. v. BlackRock Inc., et al., No. 24-cv-00437 (E.D. Tex.): In November 2024, Texas and 10 other states filed a lawsuit against major asset managers—BlackRock, State Street, and Vanguard—alleging their climate-focused investment strategies violated antitrust laws. ECF No. 1. The states claimed that these firms’ ESG initiatives reduced coal production, leading to higher energy prices. Id. ¶¶ 5-6. As of the date of this publication, the defendants have not yet filed an answer or a motion to dismiss the complaint. Gibson Dunn represents BlackRock in this matter.

B. Diversity And Inclusion

Alliance for Fair Board Recruitment v. SEC, No. 21-60626 (5th Cir. 2021): The petitioners in this case sued the SEC, alleging that Nasdaq’s Board Diversity Rules were unconstitutional and contrary to federal statutes. ECF No. 1-2. The Board Diversity Rules, which the SEC approved, required companies that list shares on Nasdaq’s exchange to (1) disclose aggregated information about board members’ diversity characteristics (including race, gender, and sexual orientation) and (2) provide an explanation if less than two board members are diverse. Id. at 3-4. On December 11, 2024, an en banc panel of the Fifth Circuit issued an opinion vacating the SEC’s order approving Nasdaq’s Board Diversity Rules. ECF. No. 532-1. Gibson Dunn represents Nasdaq in this action, which intervened as an interested party.

Kanaly v. McDonald et al., No. 24-cv-08839 (S.D.N.Y): On November 20, 2024, a shareholder filed a derivative complaint against Canadian athletic apparel brand Lululemon. In that lawsuit, the plaintiff, in part, alleged that the defendants made false and/or misleading statements and omissions related to IDEA, Lululemon’s diversity program. ECF No. 1 ¶ 44. Lululemon announced the IDEA program in October 2020, saying the company would aim to reflect “the diversity of the communities the Company serves and operates in around the world by 2025.” Id. ¶ 3. The plaintiff alleges that, in reality, the IDEA program was not structured to combat purported discrimination within Lululemon in any meaningful way. Id. ¶ 4. The plaintiff also alleges that the company’s 11-person board never had more than two racially diverse members during the relevant period, and that the company’s financial statements were silent on racial diversity goals. Id. ¶¶ 58, 77, 162. The defendants have not yet filed a response to the complaint.

McCollum v. Target Corp. et al., No. 25-cv-00021 (M.D. Fla.): On January 9, 2025, the plaintiff filed a shareholder derivative action on behalf of Target Corporation against officers and members of the Board alleging the Target’s Diversity, Equity, and Inclusion (DEI) initiatives and its 2023 LGBTQ Campaign harmed company investors. ECF No. 1. The plaintiff alleges that Target’s DEI initiatives and 2023 LGBTQ Campaign resulted in significant financial harm to investors by alienating a portion of the company’s customer base and leading to a decline in sales and stock value. Id. ¶ 7. The complaint asserts that the company’s directors and officers breached their fiduciary duties by deciding to pursue these initiatives. Id. ¶ 13. The defendants have not yet filed a response to the complaint.

Securities Industry & Financial Markets Association v. Ashcroft et al., No. 23-cv-04154 (W.D. Mo.): We first reported on this case in our Securities Litigation 2023 Year-End Update. In June 2023, the Missouri Securities Division adopted new rules requiring investment professionals to obtain client signatures before providing advice that “incorporates a social objective or other nonfinancial objective.” ECF No. 24 ¶¶ 69, 78. In August 2023, the Securities Industry and Financial Markets Association (SIFMA), filed a lawsuit against Missouri Secretary of State John Ashcroft and Missouri Securities Commissioner Douglas Jacoby, challenging these rules. ECF No. 1 at 41. On August 14, 2024, the U.S. District Court for the Western District of Missouri granted SIFMA’s motion for a permanent injunction, holding that the rules were preempted by federal law, violated the First Amendment, and were unconstitutionally vague. ECF. No. 115; ECF. No. 117 (as amended on August 28, 2024). This decision prevents Missouri from enforcing the contested rules.

V. Cryptocurrency Litigation

A. Class Actions

Naeem Azad v. Caitlyn Jenner, Sophia Hutchins, No. 24-cv-09768 (C.D. Cal.): On November 13, 2024, the plaintiffs filed a class action complaint in the Central District of California against Caitlyn Jenner and Sophia Hutchins, alleging violations of federal and California state securities laws. Specifically, they alleged a “scheme . . . [to] offer[] and s[ell] unregistered securities,” namely, “the cryptocurrency, $JENNER,” and “fraudulently solicit[] financially unsophisticated investors throughout the United States and abroad to purchase the unregistered securities.” ECF No. 1, ¶ 1. The plaintiffs described this cryptocurrency as a “memecoin,” i.e., a “blockchain-based digital asset that draws its inspiration from memes, characters, trends or, as in this case, the social media accounts and online presence of celebrities.” Id. ¶ 2. The value of memecoins, the plaintiffs alleged, is mainly derived from the ability of the “issuer or promoter to attract and sustain community engagement.” Id. ¶ 3. The plaintiffs—purportedly unsophisticated retail investors—accused the defendants of using social media accounts to promote the cryptocurrency without filing registration statements with the SEC or otherwise complying with all federal and state securities laws. Id. ¶¶ 4, 7. They further alleged that the defendants withheld or omitted material information from investors, such as “personal holdings” of the currency, “public wallet addresses she uses to hold or trade” the currency, and other facts. Id. ¶¶ 89-92. The case is in its early stages, and the defendants have not responded to the complaint at the time of this publication.

Hawes v. Argo Blockchain plc, 2024 WL 4451967 (S.D.N.Y. Oct. 9, 2024): On October 9, 2024, the District Court for the Southern District of New York granted defendant Argo Blockchain plc’s (Argo) motion to dismiss a securities fraud class action brought on behalf of investors who bought “American Depositary Receipts” in Argo’s U.S. IPO and in the aftermarket. Id. at *1. The plaintiffs filed their original class action complaint on January 26, 2023, ECF No. 1, and filed their amended complaint on September 26, 2023, ECF No. 45. Argo is a global cryptocurrency mining business, with facilities in Canada and Texas. ECF No. 45, ¶¶ 3-4. “Like many investors in the cryptocurrency arena, [the plaintiffs] lost money – specifically when, in mid-2022, Argo announced that unexpected increases in energy prices and a fall in the price of Bitcoin led to a decline in the price of Argo’s shares and ADRs.” Hawes, 2024 WL 4451967, at *1. The plaintiffs, accordingly, brought claims under the Securities Act and the Securities and Exchange Act, alleging that the defendants made “misleading statements deal[ing] principally with Argo’s capitalization and its ability to withstand adverse market conditions.” Id. The Court dismissed the plaintiffs’ complaint, noting that the “fact that an adverse event occurred following the making of a statement to the market . . . is an insufficient basis from which to infer that the statement was false when made,” and rejected the plaintiffs’ “[h]indsight pleading,” which is “too frequently seen in securities fraud cases.” Id. at *3. The Court also took pains to evaluate, and then reject, every allegedly misleading statement in the plaintiffs’ complaint. As of the date of this publication, no notice of appeal has been filed.

B. Regulatory Lawsuits

SEC v. Payward, Inc., 2024 WL 4819259 (N.D. Cal. Nov. 18, 2024): On November 18, 2024, the United States District Court for the Northern District of California denied a motion by Payward, Inc. (also known as “Kraken”) to certify for interlocutory appeal the Court’s August 23, 2024 order denying Kraken’s motion to dismiss. Id. at *1. The Court ruled that only discovery would establish whether the third-party cryptocurrency assets that are sold, exchanged, and traded on Kraken form the basis of investment contracts such that transactions involving those assets are subject to the securities laws. Id. at *2. On November 19, 2024, the parties filed a joint statement about a discovery dispute concerning the SEC’s objections to Kraken’s requests for three categories of documents concerning (1) Bitcoin and Ether, (2) the SEC’s public statements and testimony regarding digital assets, and (3) the SEC’s internal trading policies on digital assets. ECF No. 108 at 1. The case was referred to a magistrate judge for discovery, ECF No. 109, and the Court denied Kraken’s request to compel the production of these documents on December 16, 2024, ECF No. 113. On December 26, 2024, the Court granted the parties’ stipulated agreement to stay Kraken’s deadline to file objections to the Court’s order until March 31, 2025, so as to allow Kraken time to narrow its document requests. ECF No. 116. On January 24, 2025, the Court granted in part the SEC’s motion for judgment on the pleadings. ECF No. 126.

SEC v. Balina, 2024 WL 4607048 (W.D. Tex. Aug. 16, 2024): On August 16, 2024, the United States District Court for the Western District of Texas granted Ian Balina’s motion to certify its May 22, 2024 order for interlocutory appeal to allow the Fifth Circuit to consider whether Balina’s purported sales, offers to sell, and promotion of Sparkster or “SPRK” was domestic or extraterritorial conduct. Id. at *3. Balina did not seek to appeal the Court’s decision that tokens are securities as a matter of law. As discussed in a previous update, the SEC alleges that Balina, a cryptocurrency investor, sold and promoted SPRK tokens without disclosing his compensation, and the SEC maintains that U.S. securities laws apply because Balina targeted U.S. investors on U.S. social media platforms. ECF No. 1, ¶¶ 1-5. Balina contends that because his transactions occurred outside the United States, they are outside the purview of Section 5(a), 5(c), and 17(b) of the Securities Act. ECF No. 7 at 35. Trial, which had been set for January 13, 2025, is suspended pending resolution of the interlocutory appeal.

SEC v. Cumberland DRW LLC, No. 24-cv-09842 (N.D. Ill.): On October 10, 2024, the SEC charged Chicago-based Cumberland DRW LLC with operating as an unregistered dealer in more than $2 billion of crypto assets. ECF No. 1. On December 31, 2024, the defendant filed an unopposed motion to extend the briefing schedule regarding its motion to dismiss, pointing to news articles asserting that the upcoming change in Presidential administrations could impact crypto-related cases as the Trump administration would likely pull back on crypto-related enforcement. ECF No. 22. The Court denied the request, finding that neither the possibility of withdrawal of the lawsuit due to a change of administration nor the other reasons cited warranted an extension. ECF No. 24. Cumberland’s motion to dismiss, ECF No. 28, filed on January 15, 2025, remains pending.

C. Other Developments

Coinbase, Inc. v. SEC, 2025 WL 78330 (3d. Cir. Jan. 13, 2025): In July 2022—almost a year before the SEC publicly filed an enforcement case against Coinbase in federal court in the Southern District of New York for allegedly operating as an unregistered broker, exchange, and clearing agency—Coinbase petitioned the SEC to create clear rules on how federal securities laws apply to digital assets. The SEC denied Coinbase’s petition in a single paragraph, and Coinbase subsequently sought judicial review of that denial under the Administrative Procedure Act, asking the Third Circuit to order the SEC to institute a notice-and-comment rulemaking proceeding. The Court heard oral argument on September 24, 2024. Coinbase, represented by Gibson Dunn, asserted that (1) the SEC acted arbitrarily and capriciously by bringing enforcement actions seeking to apply the securities laws to digital assets without engaging in rulemaking, (2) digital assets are largely incompatible with existing securities regulations for several reasons, and these workability concerns are fundamental changes in the factual predicates underlying the existing securities-law framework, and (3) the SEC’s order was insufficiently reasoned. The Third Circuit issued its opinion on January 13, 2025, in which it declined to require the SEC to engage in formal notice-and-comment rulemaking regarding the application of securities laws to digital assets, but did require the SEC to provide a more complete explanation for its refusal to engage in such rulemaking. Id. at *1.

Crypto Freedom All. of Texas v. SEC, 2024 WL 4858590 (N.D. Tex. Nov. 21, 2024): As reported in our 2024 Mid-Year Update, CFAT and the Blockchain Association filed an action challenging the SEC’s Dealer Rule on April 23, 2024. Crypto Freedom Alliance of Texas v. SEC, No. 24-cv-361, ECF No. 1, ¶¶ 4, 7 (N.D. Tex. filed Apr. 23, 2024). The plaintiffs sought summary judgment on May 17, 2024. ECF No. 28. The SEC filed a cross-motion for summary judgment on June 26, 2024. ECF No. 38. The Court ruled in favor of the plaintiffs, finding that “Defendants engaged in unlawful agency action taken in excess of their authority.” Crypto Freedom All. of Texas, 2024 WL 4858590 at *1. The Court explained that “the Dealer Rule departs from . . . commonly recognized and historical interpretations by broadly defining a dealer as someone who ‘engage[s] in a regular pattern of buying and selling securities that has the effect of providing liquidity to other market participants.’” Id. at *4 (quoting Further Definition of “As a Part of a Regular Business,” 89 Fed. Reg. at 14944). “The Rule as it currently stands de facto removes the distinction between ‘trader’ and ‘dealer’ as they have commonly been defined for nearly 100 years.” Id. at *5. Accordingly, the Court vacated the Dealer Rule. Id. at *5. On January 17, 2025, the SEC filed a notice of appeal for the Fifth Circuit to review the district court’s decision. ECF No. 53. The SEC subsequently moved to dismiss the appeal, and dismissal was granted.

VI. Market Efficiency And “Price Impact” Cases

A. Price Impact

Because reliance is an essential element of securities fraud, plaintiffs seeking to bring securities claims as class actions must show that reliance can be presumed, rather than proven for each individual class member. To do this, plaintiffs typically invoke the decades-old precedent from Basic Inc. v. Levinson, 485 U.S. 224 (1988), which allows a rebuttable presumption of reliance if certain threshold requirements are met. Basic reasoned that material misrepresentations about a stock that trades in an efficient market would be reflected in the stock’s market price, and that any investor who decided to purchase based on the market price indirectly relied on all public information. See Basic, 485 U.S. at 247. Since the Supreme Court’s 2014 decision in Halliburton Co. v. Erica P. John Fund, Inc., 573 U.S. 258 (2014), defendants have focused on rebutting that presumption of reliance with evidence that the statements at issue did not actually impact the stock price and, therefore, class members trading on the open market did not rely on them.

As we covered in our 2024 Mid-Year Update and our 2023 Year-End Update, in 2021, the Supreme Court in Goldman Sachs Group., Inc. v. Arkansas Teacher Retirement System (“Goldman”) held that courts analyzing whether to certify a class must consider all evidence of price impact, even if the evidence overlaps with materiality and other merits questions. 594 U.S. 113, 121-22 (2021). If a plaintiff’s price impact theory is “inflation-maintenance”—where the price impact of a challenged statement is shown indirectly by a drop in the company’s stock price following a corrective disclosure, instead of by an increase in price when the statement is made—a court must consider whether there is a “mismatch” between the alleged corrective disclosure and challenged statement. Id. at 123. In 2023, the Second Circuit elaborated on the Goldman “mismatch framework,” and held that when plaintiffs rely on the inflation-maintenance theory they cannot simply “identify a specific back-end, price-dropping event” and match it to “a front-end disclosure bearing on the same subject” unless “the front-end disclosure is sufficiently detailed in the first place.” Ark. Tchr. Ret. Sys. v. Goldman Sachs Grp., Inc., 77 F.4th 74, 81, 102 (2d Cir. 2023) (“ATRS”).

This year, the Ninth Circuit will opine for the first time on the application of Goldman. A district judge recently held that a series of negative disclosures related to the “Zillow Offers” group need not “precisely mirror” the alleged misrepresentation to support a finding of price impact, and any mismatch was not sufficient to rebut the presumption of reliance. Jaeger v. Zillow Grp., Inc., ___ F. Supp. 3d ____, 2024 WL 3924557, at *6 (W.D. Wash. Aug. 23, 2024). On January 8, Zillow filed its opening brief with the Ninth Circuit, arguing that the lower court erred, in part by disregarding the Company’s evidence from its expert that “no analyst referred to the allegedly concealed information,” and the “stock price declines were attributable to factors unrelated to the alleged misstatements.” Opening Brief of Defendant-Appellants at 53, Jeager v. Zillow Group, Inc., Case No. 24-6605 (9th Cir. Jan. 8, 2025), ECF No. 10-1.

Lower courts also continue to examine price impact arguments, with a focus on what “mismatch” between the alleged corrective disclosures and the challenged statements is sufficient to defeat the presumption. See, e.g., See, e.g., Pardi v. Tricida, Inc., 2024 WL 4336627, at *7 (N.D. Cal. Sept. 27, 2024).

B. Affiliate Ute Presumption

In 2025, we expect the Sixth Circuit will decide whether the Supreme Court’s decision in Affiliated Ute Citizens of Utah v. United States, 406 U.S. 128 (1972)—which presumes class wide reliance on “omissions” without requiring plaintiffs to prove the Basic prerequisites—applies to cases that have a “mix” of both omissions and misrepresentations. Opening Brief of Defendants at 8-9, In re: FirstEnergy Corp. Sec. Litig., Case No. 23-0303 (6th Cir. Apr. 14, 2023). FirstEnergy has argued that the district court inappropriately extended Affiliated Ute to allegations of incomplete statements or “half-truths,” and has asked the Sixth Circuit to vacate the district court’s decision to certify. Id. at 9. In reaching a decision, the Sixth Circuit will have to consider whether Affiliated Ute can be reconciled with Macquarie Infrastructure Corp. v. Moab Partners, L. P., in which the Supreme Court recently held that “pure omissions” are not actionable under Rule 10b-5 of the Exchange Act, 601 U.S. 257, 260 (2024), as well as decisions from other circuits holding that Affiliated Ute only allows the reliance element to be presumed in cases involving primarily omissions. See, e.g., Binder v. Gillespie, 184 F.3d 1059, 1063-64 (9th Cir. 1999); Waggoner v. Barclays PLC, 875 F.3d 79, 93-96 (2d Cir. 2017); Joseph v. Wiles, 223 F.3d 1155, 1162-63 (10th Cir. 2000), abrogated on other grounds by Cal. Pub. Emps. Ret. Sys. v. ANZ Sec., Inc., 582 U.S. 497 (2017).

C. Basic Presumption

In a fairly recent development, the “meme stock” phenomenon has made it more challenging for investors to invoke the Basic presumption in the first place. The “meme stock” phenomenon began online during the COVID-19 pandemic, when investors began using social media to coordinate “short squeezes,” causing large impacts in the market for the target security.

In Bratya SPRL v. Bed Bath & Beyond Corp., 2024 WL 4332616, at *9-19 (D.D.C. Sept. 27, 2024), Bed Bath & Beyond argued its stock’s status as a meme stock, which put the price “in wild flux” despite the absence of new, value-relevant information, in the weeks before and during the class period, rendered the stock’s market inefficient throughout the class period. Id. at *12. The Court agreed and declined to certify the class. Id. at *19-21. Although the Court noted that typical factors indicated an efficient market, it found the short squeeze dynamics undermined the relevance of the traditional factors by rendering the market so volatile that it cannot possibly have “reflected all public, material information,” including the alleged misstatements. Id. at *12.

In Shupe v. Rocket Companies, Inc., the Court rejected the defendant’s argument that its two-day status as a “meme stock” during the two-month-long class period rendered the market for its stock inefficient. Shupe v. Rocket Companies, Inc., ___ F. Supp. 3d ____, 2024 WL 4349172, at *19-24 (E.D. Mich. Sept. 30, 2024). There, the Court held that the plaintiffs still were entitled to the Basic presumption because “meme-stocks and efficient markets are not mutually exclusive” and even inaccurately priced stocks can still respond to false statements, causing loss. Id. at *23 (citing Halliburton, 573 U.S. at 272). The Rocket Companies court still declined to certify the class because the defendants successfully rebutted the presumption of reliance by demonstrating that the analysts did not report on the alleged misstatement throughout the class period, thus severing the link between price drop and the misrepresentations. Id. at *24-26 (citing ATRS 77 F.4th at 104).

VII. Other Notable Developments

A. Second Circuit Reconsiders And Reverses Prior Decision, Now Finds Auditor Opinions Can Be Material

In New England Carpenters Guaranteed Annuity and Pension Funds v. DeCarlo (“DeCarlo II”), the Second Circuit reconsidered and reversed its own prior opinion concerning 10b-5 claims involving auditor opinions, now concluding that standardized language in auditor opinions may be material to investors. 122 F.4th 28 (2d Cir. 2023) (opinion amended on October 31, 2024).

As detailed in our 2023 Year-End Update, the plaintiffs alleged violations of the Securities Act and the Exchange Act against AmTrust Financial Services, its officers and directors, various underwriters, and its auditor, BDO, arising from AmTrust’s restatement of five years of financial statements. See New Eng. Carpenters Guaranteed Annuity & Pension Funds v. DeCarlo (“DeCarlo I”), 80 F.4th 158, 174-79 (2d Cir. 2023). In DeCarlo I, the Second Circuit affirmed the dismissal of 10b-5 claims against the auditor, finding that the “[c]omplaint fail[ed] to allege any link between BDO’s misstatements in the 2013 Auditor Opinion and the material errors contained in AmTrust’s 2013 Form 10-K,” and called the audit statements “so general . . . that a reasonable investor would not depend on them as a guarantee.” Id. at 182 (internal citations omitted).

Upon reconsideration, the Second Circuit reversed its earlier opinion, now reasoning that “[a]lthough the challenged audit certification reflects standardized language, it is not so general that a reasonable investor would not depend on it as a guarantee.” DeCarlo II, 122 F.4th at 53 (internal citations omitted). The Court further explained that “BDO’s certification that the audit was conducted in accordance with PCAOB standards succinctly conveyed to investors that AmTrust’s audited financial statements were reliable,” and had the auditor not issued an opinion, it “would have alerted investors to potential problems in the company’s financial reports.” Id.

The Second Circuit also found the complaint adequately alleged loss causation against the auditor, explaining that a “[Wall Street Journal] article revealed the specific deficiencies that rendered the audit opinion misleading” and calling the article a “‘clean match’ between the misleading audit opinion and the subsequent disclosure.” Id. at 54. The Court was also satisfied that the complaint adequately alleged scienter by “alleg[ing] that BDO consciously covered up its own misrepresentation that its audit complied with PCAOB standards.” Id. at 55.

B. Ninth Circuit Clarifies SPAC Investors Lack Standing To Challenge Statements Made By The Target Acquisition Company Prior To A De-SPAC Merger

In a follow up to our prior discussion of standing issues related to SPACs in our 2023 Mid-Year Update, the Ninth Circuit became only the second appellate court to analyze standing for 10b-5 claims challenging pre-merger statements made by the target acquisition company. In In re CCIV / Lucid Motors Securities Litigation, the Ninth Circuit addressed the standing of investors who purchased shares in Churchill Capital Corporation IV (CCIV), a SPAC, before its merger with Lucid Motors. 110 F.4th 1181, 1182 (9th Cir. 2024). Reversing the district court’s decision (previously detailed in our 2022 Year-End Securities Litigation Update), the Ninth Circuit held that investors in the SPAC lacked standing to sue for alleged misstatements by the target acquisition company made before the merger because the investors purchased stock in the SPAC, not the target acquisition company that allegedly made the misstatements. Id. at 1187. The Ninth Circuit’s decision is consistent with the Second Circuit’s decision in Menora Mivtachim Insurance Ltd. V. Frutarom Industries Ltd., 54 F.4th 82, 88 (2d Cir. 2022) (“Menora”).

The plaintiffs in CCIV alleged Lucid’s CEO “made misrepresentations about Lucid’s ability to meet certain production targets” before either company publicly announced the merger, though “extensive reporting in the financial press” speculated a deal was imminent. 110 F.4th at 1183. The plaintiffs purchased CCIV stock based on these statements by Lucid’s CEO when Lucid was still a private company and before the merger was announced. Id. The plaintiffs alleged that it was not until the day the merger was announced that the true production targets were revealed to be far below Lucid’s CEO’s projections. Id.

The Ninth Circuit held that the plaintiffs lacked standing. Id. at 1187. Relying on the purchaser-seller rule (or Birnbaum Rule) announced in Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723, 742 (1975), the Ninth Circuit found that Section 10(b) standing is a “bright-line rule” requiring that a “plaintiff purchased or sold the securities about which the alleged misrepresentations were made.” Id. at 1186. The plaintiffs had urged the Court to instead use a “connected to” standard, which would analyze standing on a “case-by-case basis” by looking at “whether the security plaintiff purchased is sufficiently connected to the misstatement.” Id. The Ninth Circuit declined to adopt that rule, noting the Second Circuit had recently rejected a similar argument in Menora. Id. at 1185 (citing Menora, 54 F.4th at 86). Instead, the Court explained the alleged misrepresentations were those of Lucid when it was a private company, and not of CCIV, the SPAC whose shares the plaintiffs had purchased, and dismissed the case. Id. at 1186-87.

C. Tenth Circuit Rejects Short Sellers’ 10b-5 And Market Manipulation Claims

In In re Overstock Securities Litigation, the Tenth Circuit made it more difficult for short seller investors to challenge statements and actions taken by companies. In brief, it provided an avenue for the defendants to rebut the presumption of reliance against short seller plaintiffs whose lending contracts include an obligation to repurchase shares, while also clarifying market manipulation requires some element of deception. 119 F.4th 787 (10th Cir. 2024).

The short-seller plaintiff alleged that Overstock manipulated the market by announcing plans to issue an unregistered digital dividend to create a short squeeze, which artificially inflated the stock price. Overstock, 119 F.4th at 795-98. The Court ultimately concluded that the short seller failed to plausibly allege reliance as required to bring a 10b-5 claim. Id. at 799. The Court clarified that short sellers (whose investment strategy is based on borrowing the stock and selling it high with an obligation to repurchase it at some point in the future) may rely upon the Basic presumption of reliance. Id. at 800 (citing Basic Inc. v. Levinson, 485 U.S. 224, 248-49 (1988)). But this presumption can be rebutted “by demonstrating that the plaintiff would have bought or sold the stock even if he was aware that the stock’s price was tainted by fraud,” or traded their shares while believing the defendants’ statements were false “because of other unrelated concerns.” Id. (quotations and citations omitted). Here, the short seller admitted it bought shares to cover its position to satisfy its lending contracts because of the dividend, not because of the alleged misrepresentations. Id.

The Tenth Circuit affirmed the dismissal of the short seller’s manipulation claims, holding “that an open-market transaction may qualify as manipulative conduct, but only if accompanied by plausibly alleged deception” and noting that Overstock’s “truthful disclosure of the terms of the upcoming dividend transaction did not deceive investors.” Id. at 802-03. The Court also reasoned that even though an open-market transaction was not inherently manipulative, such a transaction could become so if done with manipulative intent. Id. The Court concluded that manipulative intent required an element of “secrecy” that was not present. Id. at 804.

D. 2024 Marked An Increase In Securities Class Actions Related To Artificial Intelligence

As discussed in the 2024 Mid-Year Update, the number of Artificial Intelligence-related filings are on the rise as both private plaintiffs and the SEC focus on “AI washing” claims, and 2025 will likely be no different.

Similar to “greenwashing” claims, AI washing claims involve allegations that a company’s AI statements or disclosures misrepresented its AI capabilities or failed to disclose risks associated with its use of AI. These claims can be brought against AI companies or companies that use AI for various business purposes. For example, in Hoare v. Oddity Tech Ltd., 24-cv-06571 (S.D.N.Y. July 19, 2024), the plaintiffs alleged that Oddity, a consumer wellness platform that portrayed itself as a “disruptor in the cosmetics industry” falsely claimed to use “proprietary AI technologies to target consumer needs” through the use of algorithms and machine-learning models to match customers with beauty products. Dkt. 1 at ¶ 28. The plaintiffs allege that Oddity “overstated its AI technology and capabilities, and/or the extent to which this technology drove the Company’s sales” because Oddity’s AI-product-matching technology amounted to a normal questionnaire. Id. ¶¶ 44, 47. Similarly, in SEC v. Raz, 24-cv-04466 (S.D.N.Y. June 11, 2024), the SEC alleges that the founder of a technology platform that claimed to use artificial intelligence to match its clients with diverse job candidates from underrepresented backgrounds made false and misleading statements about the platform’s AI capabilities. Dkt. 1 at ¶ 2. The SEC alleges that the technology platform did not actually use AI and automation and “its technology was not as advanced” as the founder claimed. Id. at ¶¶ 67-68. The case is currently stayed pending the conclusion of a criminal case against the founder. See SEC v. Raz, 1:24-cv-04466 (S.D.N.Y. July 31, 2024), Stipulation and Order at 1.

We will continue to monitor these and similar cases in the coming year.

The following Gibson Dunn lawyers prepared this update: Monica K. Loseman, Brian M. Lutz, Craig Varnen, Jefferson E. Bell, Michael D. Celio, Allison Kostecka, Mary Beth Maloney, Mark Mixon, Lissa Percopo, Chase Weidner, Luke A. Dougherty, Lydia Lulkin, Tim Kolesk, Trevor Gopnik, Dillon M. Westfall, Megan R. Murphy, Mimra Aslaoui, Edmund Bannister, Kio Bell, Angela A. Coco, Justine Drohan, John Harrison, John Ito, Joel A. Kagan, Christopher Scott, Ty Shockley, Beshoy Shokralla, and Alon Sugarman.

Gibson Dunn lawyers are available to assist in addressing any questions you may have regarding these developments. Please contact the Gibson Dunn lawyer with whom you usually work, the authors, or any of the following leaders and members of the firm’s Securities Litigation practice group:

Christopher D. Belelieu – New York (+1 212.351.3801, cbelelieu@gibsondunn.com)
Jefferson Bell – New York (+1 212.351.2395, jbell@gibsondunn.com)
Michael D. Celio – Palo Alto (+1 650.849.5326, mcelio@gibsondunn.com)
Colin B. Davis – Orange County (+1 949.451.3993, cdavis@gibsondunn.com)
Jonathan D. Fortney – New York (+1 212.351.2386, jfortney@gibsondunn.com)
Monica K. Loseman – Co-Chair, Denver (+1 303.298.5784, mloseman@gibsondunn.com)
Brian M. Lutz – Co-Chair, San Francisco (+1 415.393.8379, blutz@gibsondunn.com)
Mary Beth Maloney – New York (+1 212.351.2315, mmaloney@gibsondunn.com)
Jason J. Mendro – Co-Chair, Washington, D.C. (+1 202.887.3726, jmendro@gibsondunn.com)
Alex Mircheff – Los Angeles (+1 213.229.7307, amircheff@gibsondunn.com)
Lissa M. Percopo – Washington, D.C. (+1 202.887.3770, lpercopo@gibsondunn.com)
Jessica Valenzuela – Palo Alto (+1 650.849.5282, jvalenzuela@gibsondunn.com)
Craig Varnen – Co-Chair, Los Angeles (+1 213.229.7922, cvarnen@gibsondunn.com)
Allison K. Kostecka – Denver (+1 303.298.5718, akostecka@gibsondunn.com)
Mark H. Mixon, Jr. – New York (+1 212.351.2394, mmixon@gibsondunn.com)

Dewberry Group, Inc. v. Dewberry Engineers, Inc., No. 23-900 – Decided February 26, 2025

Today, the Supreme Court unanimously held that a court awarding disgorgement of the “defendant’s profits” under the Lanham Act cannot include the profits of the defendant’s non‑party corporate affiliates.

“[The Lanham Act] cannot justify ignoring the distinction between a corporate defendant (i.e., Dewberry Group) and its separately incorporated affiliates. By treating those entities as one and the same, the courts below approved an award including non-defendants’ profits—and thus went further than the Lanham Act permits.”

Justice Kagan, Writing for the Court

Background:

The Lanham Act authorizes a prevailing trademark plaintiff to recover, “subject to the principles of equity,” the “defendant’s profits,” as well as any damages the owner sustained and costs of the suit. 15 U.S.C. § 1117(a). If the court finds that “the amount of the recovery based on profits is either inadequate or excessive,” it “may in its discretion enter judgment for such sum as the court shall find to be just, according to the circumstances of the case.” Id.

Dewberry Engineers sued the similarly named Dewberry Group for infringing on its registered “Dewberry” trademark. After the district court held Dewberry Group liable, it ordered Dewberry Group to disgorge nearly $43 million in profits earned by its affiliate companies, which are separate corporations and not parties to the suit. The Fourth Circuit affirmed in a divided decision, holding that, even though Dewberry Engineers did not try to pierce the corporate veil separating Dewberry Group from its legally distinct affiliates, the district court correctly treated Dewberry Group and the affiliates as a single corporate entity when calculating the profits from infringement.

Issue:

Can an award of “defendant’s profits” under the Lanham Act include profits earned by the defendant’s separate non-party corporate affiliates?

Court’s Holding:

Under the Lanham Act, a court may not overlook corporate separateness and treat the defendant and its affiliates as a single corporate entity when calculating the “defendant’s profits” from trademark infringement, absent a showing that veil-piercing is appropriate.

What It Means:

The opinion underscores that corporate separateness is foundational and that Congress must speak clearly if it wishes to displace that rule. Because nothing in the text of the Lanham Act overcomes that principle, courts may not disregard corporate separateness when calculating a defendant’s profits, unless a traditional rationale for piercing the corporate veil applies.
The Court also rejected the argument that the provision of the Lanham Act authorizing the court to “enter judgment for such sum as the court shall find to be just” if the amount of recovery based on profits is “inadequate or excessive” permits courts to reach “non‑defendants’ profits.”
Although the opinion emphasizes the importance of corporate separateness, it left a number of questions to be resolved in future cases. It did not address, for instance, whether courts “can look behind a defendant’s tax or accounting records to consider ‘the economic realities of a transaction’ and identify the defendant’s ‘true financial gain.’”

Gibson Dunn represented winning party Dewberry Group

The Court’s opinion is available here.

Appellate and Constitutional Law

Thomas H. Dupree Jr. +1 202.955.8547 tdupree@gibsondunn.com	Allyson N. Ho +1 214.698.3233 aho@gibsondunn.com	Julian W. Poon +1 213.229.7758 jpoon@gibsondunn.com
Jonathan C. Bond +1 202.887.3704 jbond@gibsondunn.com	Bradley J. Hamburger +1 213.229.7658 bhamburger@gibsondunn.com	Thomas G. Hungar +1 202.887.3784 thungar@gibsondunn.com
Brad G. Hubbard +1 214.698.3326 bhubbard@gibsondunn.com	Lucas C. Townsend +1 202.887.3731 ltownsend@gibsondunn.com	Helgi C. Walker +1 202.887.3599 hwalker@gibsondunn.com

Related Practice: Intellectual Property

Kate Dominguez
+1 212.351.2338
kdominguez@gibsondunn.com

Josh Krevitt
+1 212.351.4000
jkrevitt@gibsondunn.com

Jane M. Love, Ph.D.
+1 212.351.3922
jlove@gibsondunn.com

Howard S. Hogan
+1 202.887.3640
hhogan@gibsondunn.com

Ilissa Samplin
+1 213.229.7354
isamplin@gibsondunn.com

This alert was prepared by associates Patrick J. Fuster, Matt Aidan Getz, and Connor P. Mui.

On February 21, 2025, the White House issued the “America First Investment Policy” National Security Presidential Memorandum, signaling an intention to increase restrictions and modify review criteria for U.S. inbound investments with Chinese touchpoints and expand the scope of the nascent outbound investment restrictions.

On February 21, 2025, the White House issued a National Security Presidential Memorandum titled the “America First Investment Policy” (the “America First Investment memo”) and accompanying fact sheet (Fact Sheet) proposing material changes to the U.S. foreign direct investment and outbound investment regulatory landscape, including to regulations for the Committee on Foreign Investment in the United States (CFIUS) and the Outbound Investment Security Program. It also directs CFIUS to promulgate new rules and regulations to implement some of these changes.

The America First Investment memo both underscores some continuing trends and foreshadows more significant changes to come in the months ahead. Of note, there will be no immediate change to CFIUS or the Outbound Investment Security Program because the memo requires further implementing rules and other agency action and potentially, in some cases, further action by Congress. That said, investors and companies should start considering the memo’s directives now, while continuing to monitor new developments from the Trump Administration, as they plan for transactions that will close later in 2025 and in 2026.

Continuing Trends:

The America First Investment memo elaborates on a few continuing trends:

1. The United States will remain open to investment, particularly passive
investment.

The memo reiterates the United States’ long-held policy of being “open” to foreign investment, noting that “[o]ur Nation is committed to maintaining the strong, open investment environment that benefits our economy and our people.” Specifically, the memo states that “passive investments from all foreign persons”—which “include non-controlling stakes and shares with no voting, board, or other governance rights and that do not confer any managerial influence, substantive decisionmaking, or non-public access to technologies or technical information, products, or services”—will continue to be welcomed and encouraged.

2. The United States will continue to disfavor non-passive investment—
both inbound and outbound—implicating China and other “foreign
adversaries.”

The memo specifies that “foreign adversaries” include the People’s Republic of China, including Hong Kong and Macau (China), as well as Cuba, Iran, North Korea, Venezuela, and—notably—Russia. For nearly a decade, the United States has presented an increasingly harsh investment environment for non-passive Chinese investors. The memo reiterates a continuation of this trend. Moreover, CFIUS continues to exercise greater scrutiny of non-Chinese investors’ ties to China, including through their minority investors, joint ventures, supply chain risk, and even arms-length commercial agreements. One example of relationships that continue gaining ever greater scrutiny is cooperation on technology development.

3. The United States will maintain restrictions on outbound investments to
China and look to expand these restrictions to additional industries.

As we discussed in a recent client alert, the newly enacted Outbound Investment Security Program that places conditions on certain U.S. person investments in the Chinese semiconductors, artificial intelligence, and quantum technology sectors is here to stay, and may be expanded further this year. The America First Investment memo directs that covered sectors be “reviewed and updated regularly” and enumerates a few sectors that may be added to the list of prohibited sectors, including biotechnology, hypersonics, aerospace, advanced manufacturing, and directed energy.

Changes to Come:

1. While lacking in detail, the memo directs CFIUS to develop rules
for an expedited “fast-track” process for foreign investment from
allied and partner countries.

The America First Investment memo directs the U.S. government to create an “expedited ‘fast-track’ process, based on ‘objective standards,’ to facilitate greater investment from specified allied and partner sources in United States businesses involved with United States advanced technology and other important areas.”[1] The memo states that the investments may include certain security provisions and assurances that the investors will not partner with U.S. foreign adversaries “in corresponding areas.” The memo raises critical, threshold questions, which we expect will be answered in the implementing laws and regulations and associated guidance:

How will this work? The memo provides no detail on what the fast-track process will look like or what the timing for reviews will be, nor what the attendant security provisions may look like. Important terms, such as “objective standards” remain undefined.

What will count as partnering with foreign adversaries? The memo does not provide any information on what constitutes “partnering.” While we would expect investments to be covered, it remains unclear whether investors will receive unfavorable treatment based on having Chinese vendors, customers, or entities and facilities located in China. Similarly, the memo does not explain to what extent partners and allies must distance themselves from China to gain favorable investment treatment. While the Fact Sheet indicates that any restrictions on partnering will be limited to “corresponding areas” (i.e., “advanced technology and other important areas”), the memo itself does not include any such qualification and suggests a rather broad restriction on engagement with Chinese counterparties.

To whom will this apply? Although the memo does not provide a list of approved allies and partners, it explains that some have “tremendous sovereign wealth funds.” This suggests a possible deviation from long-held practice for CFIUS to more strictly scrutinize government-controlled investors, including those from the Middle East.

2. The memo calls for expanded authorities for CFIUS to more strictly
scrutinize greenfield investments.

In past years, CFIUS’s primary tool to review and restrict greenfield investment in the United States, particularly by investors affiliated with China, was through its real estate regulations. We discussed expansions to real estate reviews in a recent client alert. Some of the real estate-related risks that the memo highlights include China’s investments in U.S. “food supplies, farmland, minerals, natural resources, ports, and shipping terminals,” with particular attention on “farmland and real estate near sensitive facilities.” In addition to restrictions on investment in real estate, President Trump appears poised to continue the previous administration’s efforts to further restrict greenfield investments by seeking additional authority for CFIUS to review these projects. This will require, as the memo notes, “consultation with Congress” and updated laws to expand CFIUS’s already expansive jurisdiction.

3. The memo portends sweeping changes to how CFIUS uses national
security mitigation agreements.

The memo states that the Trump Administration will “cease the use of overly bureaucratic, complex, and open-ended ‘mitigation’ agreements for United States investments from foreign adversary countries.” This suggests that more transactions from adversary countries could be blocked outright, rather than being approved subject to mitigation. Allied and partner nations may also feel pressure to reduce future investments in U.S. foreign adversaries in order to receive more favorable mitigation agreement conditions, or to avoid mitigation altogether. More generally, the memo states that “mitigation agreements should consist of concrete actions that companies can complete within a specific time, rather than perpetual and expensive compliance obligations.” The memo raises many questions about how this will work in practice because, owing to the nature of developing technology and evolving threats to national security, compliance efforts for areas related to personal data, cybersecurity, and sensitive and export-controlled technology are ongoing efforts—not one and done fixes.

4. The memo directs greater scrutiny be applied to investment in Chinese
companies.

The memo calls attention to Chinese companies raising capital by selling interests to American investors through foreign public exchanges and U.S. exchanges, which the memo warns “exploits United States investors to finance and advance the development and modernization of [China’s] military.” The memo directs the review of a few laws and regulations governing investments into Chinese companies, including the 1984 U.S./China tax treaty, financial auditing standards and rules for U.S. exchanges, and restrictions on U.S. pension plan investments through foreign exchanges. Notably, review of the outbound investment restrictions will also include the potential application of restrictions to investments by U.S. pension funds, university endowments, and other limited-partner investors in publicly traded securities of Chinese companies engaged in certain sensitive sectors. Such restrictions would mark a significant intensification of the Outbound Investment Security Program that currently specifically excludes investments in publicly traded securities from its ambit, though investments by U.S. persons in certain publicly traded securities of Chinese military-industrial complex companies are separately restricted by the U.S. Department of the Treasury.

As the Trump Administration attempts to leave its mark on U.S. inbound and outbound investments, we expect additional action in the coming months to implement provisions of the America First Investment memo. Companies should remain abreast of changing regulations and enforcement priorities moving forward.

[1] The memo also highlights expedited environmental reviews for investments over $1 billion but does not provide any details of the conditions or process for these reviews, nor the timing for when they will be implemented.

The following Gibson Dunn lawyers prepared this update: Adam M. Smith, Stephenie Gosnell Handler, David Wolber, Michelle Weinbaum, Dharak Bhavsar, and Chris Mullen.

Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding these issues. For additional information about how we may assist you, please contact the Gibson Dunn lawyer with whom you usually work, the authors, or the following leaders and members of the firm’s International Trade Advisory & Enforcement practice group:

United States:
Ronald Kirk – Co-Chair, Dallas (+1 214.698.3295, rkirk@gibsondunn.com)
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Qi Yue – Beijing (+86 10 6502 8534, qyue@gibsondunn.com)
Dharak Bhavsar – Hong Kong (+852 2214 3755, dbhavsar@gibsondunn.com)
Arnold Pun – Hong Kong (+852 2214 3838, apun@gibsondunn.com)

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Patrick Doris – London (+44 207 071 4276, pdoris@gibsondunn.com)
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Penny Madden KC – London (+44 20 7071 4226, pmadden@gibsondunn.com)
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Vanessa Ludwig – Frankfurt (+49 69 247 411 531, vludwig@gibsondunn.com)

Pitts v. Rivas, No. 23-0427 – Decided February 21, 2025

On Friday, a unanimous Texas Supreme Court adopted the anti-fracturing rule, confirming that plaintiffs can’t use artful pleading—for example, recasting professional negligence claims as fraud or breach of fiduciary duty—to gain a litigation advantage.

“Under the anti-fracturing rule, if the crux or gravamen of the plaintiff’s claim is a complaint about the quality of professional services provided by the defendant, then the claim will be treated as one for professional negligence even if the petition also attempts to repackage the allegations under the banner of additional claims.”

Chief Justice Blacklock, writing for the Court

Background:

A home builder and real estate developer sued his accountants, alleging they improperly prepared his financial statements. He asserted claims for professional negligence, fraud, breach of fiduciary duty, and breach of contract.

The accountants argued that the fraud and breach of fiduciary duty claims were barred by the anti-fracturing rule, which prevents plaintiffs from pleading around a professional negligence claim for some litigation advantage—here, to avoid the statute of limitations. The trial court granted summary judgment, but the court of appeals reversed, finding that the fraud and breach of fiduciary duty claims survived because they alleged additional misconduct and acts beyond the scope of the parties’ written agreements.

Issue:

Does the anti-fracturing rule bar plaintiffs from relabeling their professional negligence claims to gain a litigation advantage, even if the professional services at issue are outside the scope of a written contract?

Court’s Holding:

Yes. The anti-fracturing rule applies whenever the crux of the plaintiff’s allegations sound in professional negligence.

What It Means:

By formally adopting the anti-fracturing rule—which Texas courts of appeals have applied for decades—the Court made clear that parties can’t use artful pleading to evade the procedural and substantive rules that would otherwise apply to their claims. Courts should look beyond immaterial or formal distinctions between the claims pursued and a professional negligence claim to determine whether the conduct alleged and supporting evidence equate to professional negligence.
The Court explained that the anti-fracturing rule “ensure[s] that professional malpractice allegations are litigated under the law applicable to professional malpractice claims.”
Friday’s decision fits within with the Court’s broader jurisprudence, which consistently refuses to permit artful pleading to defeat substantive or procedural rules. It should make it easier for defendants to winnow artfully pleaded claims earlier in litigation.
The Court held that the plaintiff had not met the high bar for showing that an informal fiduciary relationship—a fiduciary duty that arises from “personal relationships of special trust and confidence” rather than a defined, legally recognized fiduciary role—existed between him and the accountants. A four-Justice concurrence (Justice Huddle, joined by Justices Lehrmann, Bland, and Young) went further, arguing that the doctrine should be discarded entirely. The remaining Justices expressed no view on this question.

The Court’s opinion is available here.

Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding developments at the Texas Supreme Court. Please feel free to contact the following practice group leaders:

Appellate and Constitutional Law Practice

Thomas H. Dupree Jr. +1 202.955.8547 tdupree@gibsondunn.com	Allyson N. Ho +1 214.698.3233 aho@gibsondunn.com	Julian W. Poon +1 213.229.7758 jpoon@gibsondunn.com
Brad G. Hubbard +1 214.698.3326 bhubbard@gibsondunn.com

Related Practice: Texas General Litigation

Trey Cox +1 214.698.3256 tcox@gibsondunn.com	Collin Cox +1 346.718.6604 ccox@gibsondunn.com	Gregg Costa +1 346.718.6649 gcosta@gibsondunn.com
Ashley Johnson +1 214.698.3111 ajohnson@gibsondunn.com

This alert was prepared by Texas associates Elizabeth Kiernan, Stephen Hammer, and Catherine Frappier.

Gibson Dunn is available to help clients understand what these and other expected regulatory reforms will mean for them and how to navigate the shifting regulatory environment.

On February 19, 2025, President Trump signed an executive order titled, Ensuring Lawful Governance and Implementing the President’s “Department of Government Efficiency” Deregulatory Initiative. The order aims to focus “limited enforcement resources on regulations squarely authorized by constitutional” statutes and to “commence the deconstruction of the overbearing and burdensome administrative state,” which the accompanying “fact sheet“ claims will “unleash a new Golden Age of America.” While the executive order leaves many questions about the Trump Administration’s enforcement plans unanswered, it confirms that the Administration is likely to move regulatory enforcement in a direction that will have significant implications for corporate America.

The order’s core mandates are two-fold. First, agency heads are directed, “in coordination with their DOGE Team Leads,” to initiate a review process to identify potentially unconstitutional or otherwise problematic regulations and guidance documents—a process that Gibson Dunn has analyzed in a separate alert. As further described in that alert, the order directs agency heads to initiate a 60-day review of all regulations “for consistency with law and Administration policy,” with the goal of rescinding or modifying inconsistent regulations in conjunction with the Administrator of the Office of Information and Regulatory Affairs (OIRA). Second, the executive order requires agency heads to de-prioritize or terminate enforcement actions that are based on regulations that are at odds with federal statutory authority, the Constitution, or Administration policy.

Specifically, in parallel with reviewing regulations, the order directs agency heads to exercise their enforcement discretion to de-prioritize and terminate certain types of enforcement, subject to their “paramount obligation to discharge their legal obligations, protect public safety, and advance the national interest.” Agency heads should identify enforcement actions arising from regulations “that are based on anything other than the best reading of a statute” or that exceed the powers vested by the Constitution in the federal government.

Agency heads are also directed to “determine whether ongoing enforcement of any regulations identified in their regulatory review is compliant with law and Administration policy,” and, in consultation with the Director of the Office of Management and Budget (OMB), “on a case-by-case basis and as appropriate and consistent with applicable law, then direct the termination of all such enforcement proceedings that do not comply with the Constitution, laws, or Administration policy.”

The order defines enforcement actions broadly to include “all attempts, civil or criminal, by any agency to deprive a private party of life, liberty, or property, or in any way affect a private party’s rights or obligations” regardless of how the agency historically labeled the action. The order’s directives thus appear to reach not only administrative agencies charged with civil enforcement, but also the Department of Justice’s (DOJ) criminal enforcement policies, guidelines, and actions. We can anticipate that many ongoing Biden-era enforcement actions may be reviewed under the order.

Several areas are expressly exempted from the order—specifically, “any action related to a military, national security, homeland security, foreign affairs, or immigration-related function of the United States.” The order also does not apply to personnel decisions within the executive branch or “anything else” exempted by the director of OMB.

Potential Impact and Implications

The order’s directive regarding enforcement may affect different areas of federal enforcement to different extents, both in the immediate days ahead, as the order is implemented and faces any legal challenge, and longer into the future.

The extent of the impact of the order remains to be seen. In the short term, the order could lead agencies to pause or abandon ongoing investigations and enforcement actions, whether because those actions appear immediately to be contrary to Administration priorities or as a result of a review process. Additionally, the rapidly changing personnel landscape following DOGE-related initiatives and reductions in force may slow agency actions, including the review of enforcement actions required under this order, as a function of limited enforcement resources.

The order’s focus on ensuring that enforcement actions are properly grounded in authority granted to the agency by statute echoes the reasoning of the Supreme Court’s decision in Loper Bright Enterprises v. Raimondo, 603 U.S. 369 (2024), impacts of which Gibson Dunn has discussed previously. In that opinion, the Supreme Court overruled Chevron v. Natural Resources Defense Council, 467 U.S. 837 (1984), ending judicial deference to administrative agencies’ reasonable interpretations of ambiguous statutes and requiring that judges, rather than administrative agencies, declare what the law is, including with respect to statutes that may be the basis for enforcement actions. The executive order expressly directs agencies to focus enforcement on regulations that are “squarely authorized by constitutional” statutes. And this action by President Trump follows his direction a day earlier, in EO 14215, that “[n]o employee of the executive branch acting in their official capacity may advance an interpretation of the law as the position of the United States that contravenes the President or the Attorney General’s opinion on a matter of law, including but not limited to the issuance of regulations, guidance, and positions advanced in litigation.”

The implications may be more readily apparent for certain industries and areas than others. For example, even before the order, the U.S. Securities and Exchange Commission (SEC) had begun to reverse its Biden Era enforcement positions in the cryptocurrency space (including some that harken back to the first Trump Administration), as evidenced by the SEC seeking to dismiss high-profile litigation,[1] announcing internal reorganizations with the express goal of deploying enforcement resources judiciously,[2] rescinding certain staff bulletins that were part of the Biden Administration’s “stark aberration from longstanding norms as to” the SEC’s “legal authority, policy priorities, and use of enforcement,”[3] and forming a task force to “operate within the statutory framework provided by Congress” and establish “a sensible regulatory path” regarding crypto “that respects the bounds of the law.”[4]

Even for industries that have not yet been touched by Trump Administration shifts in focus, the executive order may create opportunities for entities that are highly regulated or subject to elevated enforcement scrutiny to argue that ongoing enforcement actions should be terminated. Such entities may need to brace for an extended period of uncertainty as their regulators determine how to implement the order. As a result, identifying, assessing, and quantifying regulatory and enforcement risks in the next several years might involve aiming at a moving target.

Open Questions

Although the language in the executive order reaches broadly, the full extent and specific bounds of its impact remain unclear. We expect at least two types of shifts, occurring in parallel and sometimes overlapping: (1) steps to end enforcement actions not based on the best reading of the relevant statute, and (2) changes that further the Administration’s new policy priorities. Some immediate questions arising from the order include, in each category:

Shifts to End Enforcement Not Based on the “Best Reading” of the Law

Might the reviews of enforcement actions cause agencies to terminate compliance monitors, other mandated remedial measures, and undertakings arising from previously resolved enforcement actions? The order directs a review only of “ongoing” enforcement actions, contemplates termination of any non-compliant enforcement actions, and provides direction for prospective enforcement. In contrast to at least one other recent executive order (EO 14209), it does not expressly require agencies to review prior enforcement actions that have concluded. With respect to actions that have already been resolved, it remains unclear to what extent an agency might—or could, legally—seek to terminate ongoing obligations (such as corporate compliance commitments and self-reporting obligations) or to redress past enforcement actions that are now determined to be federal overreach or non-compliant with Administration policy. Such a possibility would be consistent with the approach required by EO 14209 regarding Foreign Corrupt Practices Act (FCPA) enforcement actions, discussed in our recent client alert. In a recent memorandum, the Administration also signaled an end, in the context of the foreign investment in the United States, to “open-ended ‘mitigation’ agreements” in favor of “concrete actions . . . within a specific time, rather than perpetual and expensive compliance obligations.”
What are the implications of this executive order on the use of guidance documents as a basis for enforcement actions? During the previous Trump Administration, DOJ’s Office of the Associate Attorney General issued a policy prohibiting the use of guidance documents to establish violations of law in civil enforcement actions.[5] This executive order directs agencies to de-prioritize actions to enforce certain regulations and defines “regulation” as including non-binding guidance documents, but it does not explicitly address enforcement actions that enforce guidance documents. We expect this Administration may reinstate its previous policy, or a version thereof, and view with skepticism investigations and enforcement actions premised on violations of agency guidance. Such skepticism could have particularly meaningful effects in False Claims Act or criminal enforcement actions related to healthcare, government contracting, and regulated products.
What is the interplay between this executive order and Attorney General Bondi’s recently issued policy memoranda? The Attorney General’s memoranda issued shortly after her swearing in are consistent with the policy pronouncements in this order. For example, we previously asked whether Attorney General Bondi’s February 5, 2025 memorandum, Reinstating the Prohibition on Improper Guidance Documents, signaled that DOJ may rescind Biden Administration guidance and memoranda regarding criminal enforcement, such as the current incarnations of the Criminal Division’s Evaluation of Corporate Compliance Programs guidance or Corporate Enforcement and Voluntary Self-Disclosure Policy. This executive order is another sign pointing in the direction of possible significant revisions in this space.
Do agency administrative proceedings have much of a future? The order’s focus on regulations’ conformity with clearly vested authority could dovetail with a continued push to constrain regulatory enforcement processes with a strict reading of the Constitution. In the wake of the Supreme Court’s opinion in Loper Bright, it would not be a surprise to see Trump Administration agencies bring more enforcement actions in federal courts, which is already required for certain categories of enforcement following the Supreme Court’s opinion in SEC v. Jarkesy, 603 U.S. 109 (2024).

Shifts in Furtherance of Administration Policies and Priorities

What impact will the executive order have on negotiated resolutions and settlements of enforcement actions? The order may have some impact on settlements and negotiated resolutions, but it remains an open question whether an interest in saving limited resources will lead to a greater tendency to settle or whether agencies will opt instead for litigation to press aggressive readings of statutes, regulations, or executive branch authority in service of the Administration’s priorities. By broadly defining enforcement actions, the order appears to apply equally to enforcement actions in adversarial proceedings and to those on pathways to negotiated resolutions. Agencies have historically used such settlements to save limited agency resources—one of the stated goals of the order. However, the order’s central theme of ensuring agencies bring only a subset of the enforcement actions they have historically pursued may mean less appetite for negotiated resolutions, if that subset is composed of stronger cases in areas important to the Administration.
How will agencies continue enforcement outside the Administration’s stated priorities? It remains unclear how and to what extent agencies with legal obligations and a remit that partially touch on stated Administration priorities will conduct enforcement in other areas, and how agencies without such a remit will continue enforcement or receive further guidance and direction. In the latter category, the Consumer Financial Protection Bureau (CFPB) stands out as an early example of the Administration taking steps that effectively end agency enforcement that did not align with its policies, as Gibson Dunn discussed in a recent alert.

Questions Implicating Both Types of Shifts

Do the order’s exemptions and “paramount obligations” matter? Although the subject matters explicitly exempted by the order appear straightforward, the devil may lie in the details. For example, EO 14209, which a week earlier mandated a review of FCPA enforcement, expressly relied on those enforcement actions’ importance in foreign affairs—an area exempt from this order. The accompanying fact sheet to that executive order also characterized the need for strategic advantages in critical minerals, deepwater ports, and other key infrastructure or assets around the world as “critical” to national security—another exemption from this order. Assuming the Administration maintains a consistent view, enforcement actions in these areas—and related regulations, policies, and guidance—would all be exempt from this order’s directives. It is equally possible, in theory, that agency heads’ “paramount obligations” to discharge their duties, protect public safety, and further national interests could exempt certain types of enforcement from the order’s directives.
Is change the only constant? These directives are but the latest in a series of executive orders, which we track and have analyzed at length. It would be difficult to summarize succinctly their collective breadth and varying degrees of specificity. One thing we can say is that we have now seen several instances of executive orders intersecting with, and building upon, earlier ones. It is possible, if not probable, that the Administration will issue other directives that have an impact on a particular agency, regulation, or enforcement action before the agencies complete their reviews or OIRA develops a Unified Regulatory Agenda, as prescribed by this order.

We will continue monitoring and reporting on the changes implemented by the new Administration.

[1] See Dave Michaels & Vicky Ge Huang, Coinbase Says SEC Intends to Drop Lawsuit Against Crypto Exchange, Wall St. J., Feb. 21, 2025.

[2] See Press Release, SEC, SEC Announces Cyber and Emerging Technologies Unit to Protect Retail Investors (Feb. 20, 2025), https://www.sec.gov/newsroom/press-releases/2025-42.

[3] Mark T. Uyeda, Acting Chairman, SEC, Remarks at the Florida Bar’s 41st Annual Federal Securities Institute and M&A Conference (Feb. 24, 2025), https://www.sec.gov/newsroom/speeches-statements/uyeda-remarks-florida-bar-022425.

[4] Press Release, SEC, SEC Crypto 2.0: Acting Chairman Uyeda Announces Formation of New Crypto Task Force (Jan. 21, 2025), https://www.sec.gov/newsroom/press-releases/2025-30.

[5] Memorandum from the Associate Attorney General to Heads of Civil Litigating Components, DOJ, Limiting Use of Agency Guidance Documents in Affirmative Civil Enforcement Cases (Jan. 25, 2018), https://www.justice.gov/archives/opa/press-release/file/1028756/dl?inline. See Press Release, DOJ, Associate Attorney General Brand Announces End to Use of Civil Enforcement Authority to Enforce Agency Guidance Documents (Jan. 25, 2018), https://www.justice.gov/archives/opa/pr/associate-attorney-general-brand-announces-end-use-civil-enforcement-authority-enforce-agency.

The following Gibson Dunn lawyers prepared this update: F. Joseph Warin, Stephanie Brooker, David Burns, M. Kendall Day, Stuart F. Delery, Gustav W. Eyler, Melissa L. Farrar, Amy Feagles, Svetlana S. Gans, Katlin McKelvie, David C. Ware, Bryan H. Parr, Chelsea D’Olivo, Veronica Goodson, and Todd Truesdale.

Gibson Dunn’s White Collar Defense and Investigations Practice Group successfully defends corporations and senior corporate executives in a wide range of federal and state investigations and prosecutions, and conducts sensitive internal investigations for leading companies and their boards of directors in almost every business sector. The Group has members across the globe and in every domestic office of the Firm and draws on more than 125 attorneys with deep government experience, including more than 50 former federal and state prosecutors and officials, many of whom served at high levels within the Department of Justice and the Securities and Exchange Commission, as well as former non-U.S. enforcers.

Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding these issues. Please contact the Gibson Dunn lawyer with whom you usually work, the authors, or any leader or member of Gibson Dunn’s White Collar Defense and Investigations or Anti-Corruption and FCPA practice groups:

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Gibson Dunn is closely monitoring regulatory developments and executive orders in this fast-paced environment for administrative law. Our lawyers are available to assist clients as they navigate the challenges and opportunities posed by the current, evolving legal landscape.

In just the first month of the new administration, President Trump has taken several actions to exercise Executive Branch control over “independent” agencies. Agencies generally have been considered “independent” from presidential control if a statute provides that the agency’s leader or leaders may be removed only for cause.[1] These include many powerful and important agencies, including the Securities and Exchange Commission (SEC), Federal Trade Commission (FTC), the Federal Communications Commission (FCC), National Labor Relations Board (NLRB), Federal Energy Regulatory Commission (FERC), Board of Governors of the Federal Reserve System, Equal Employment Opportunity Commission (EEOC), and many more.

In his recent Executive Order titled “Ensuring Accountability For All Agencies,” President Trump ordered all independent agencies to submit their major regulations for White House review and approval in the same manner that traditional Executive Branch agencies do, authorized the Office of Management and Budget (OMB) to review and adjust independent agencies’ use of funds to ensure consistency with the President’s policies, and ordered all Executive Branch officers and employees to adopt as “controlling” the interpretations of law advanced by the President and Attorney General. A number of President Trump’s other executive orders, including the order requiring each agency to establish its own Department of Government Efficiency (DOGE) Team and the order requiring review of all existing regulations, lack carveouts for independent agencies that past administrations have frequently included in similar directives. Separately, the acting Solicitor General has informed Congress that the Department of Justice will no longer defend the constitutionality of for-cause removal protections at certain agencies and will seek to limit or overturn Humphrey’s Executor—the Supreme Court decision upholding the independence of the 1930s version of the FTC. The acting Solicitor General also has stated that multiple layers of for-cause removal protections for administrative law judges are unconstitutional. President Trump has also fired agency leaders at the EEOC, NLRB, the Merit Systems Protection Board, and the Office of Special Counsel, though litigation is ongoing as to whether those terminations were lawful.

I. The President’s Historical Control Over Independent Agencies.

Since the Interstate Commerce Commission was established in the late 1800s and the FTC in 1914, Congress has protected some agency leaders from presidential removal on the theory that nonpolitical experts should be insulated from political pressure. Almost from the start, these limits on the President’s removal powers proved controversial, and in 1926 the Supreme Court ruled that the Constitution requires that the President be able to remove certain Executive Branch officials. Recent Supreme Court decisions have established only “two exceptions to the President’s unrestricted removal power.” The first exception applies to “multimember expert agencies that do not wield substantial executive power.” Notably, this exception tracks the Court’s 1935 decision in Humphrey’s Executor v. United States, which upheld removal protections for FTC commissioners because, as the 1935 Court framed it, the commissioners exercised primarily “quasi-judicial and quasi-legislative” functions. The second exception applies to “inferior officers with limited duties and no policymaking or administrative authority.”

The Court has rejected removal protections beyond these two exceptions, including double layers of protection for certain lower-level agency employees and removal protections for a single-member agency head. Today, independent agencies generally consist of multimember, partisan-balanced boards where statutes provide that leaders may be removed only for cause and not at the President’s pleasure.

The Trump Administration has taken an assertive view of the President’s removal powers and the corresponding power to control the entire Executive Branch, including independent agencies. It has asserted that a number of statutory removal protections for heads of independent agencies are unconstitutional because they wield substantial executive power and the President must be able to supervise all executive power. To the extent Humphrey’s Executor allows such removal protections, the Trump Administration has said that it will ask the Supreme Court to overrule that decision. Likewise, the Trump Administration has concluded that multiple layers of removal protections for administrative law judges (officials who preside over agency adjudications) are unconstitutional.

II. The Implications Of President Trump’s “Ensuring Accountability For All Agencies” Executive Order.

President Trump’s Order on “ensuring accountability” would subject independent agencies to significant political control across activities including rulemaking, legal interpretations, enforcement priorities, and expenditures. This Order has a number of implications that are discussed in turn below.

OIRA Review. The Order requires independent agencies to submit their major regulations to the Office of Information and Regulatory Affairs (OIRA) for review and approval in the same way traditional executive branch agencies have done for decades. OIRA is a division of OMB that reviews agency rules before they are issued to ensure the rules are consistent with principles of administrative law and consistent with the President’s policy priorities. While some independent agencies have informally and voluntarily cooperated with OIRA reviews in the past, this Order for the first time makes compliance with the OIRA process mandatory. The need to clear proposed and final rules through OIRA prior to publication could delay independent agencies’ ability to initiate and finalize rulemakings. As part of the review process, independent agencies will need to conduct a cost-benefit analysis under Executive Order 12866, which OIRA will review. By subjecting independent agencies’ economic analyses to OIRA review, the Order could improve the quality and consistency of the methodology underlying agencies’ estimates of the costs and benefits of their rules. In some instances, OIRA’s review could persuade agencies not to proceed with a planned rulemaking or could result in a White House directive that the rulemaking be halted.

Interpretation of Laws. The Order also provides that “[t]he President and the Attorney General . . . shall provide authoritative interpretations of law for the executive branch” and their “opinions on questions of law are controlling on all employees in the conduct of their official duties.” Further, no employee or officer “may advance an interpretation of the law as the position of the United States that contravenes the President or the Attorney General’s opinion on a matter of law, including but not limited to the issuance of regulations, guidance, and positions advanced in litigation, unless authorized to do so by the President or in writing by the Attorney General.”[2] Accordingly, when the President or Attorney General have provided an opinion or authoritative interpretation of any statute or regulation, the agency official generally may not advance a contrary interpretation of the law.

This is a meaningful limitation for independent agencies. President Trump has already advanced a number of legal interpretations through executive orders and memoranda, and traditionally, the Department of Justice (headed by the Attorney General) offers opinions on many legal issues. Although in the past independent agencies have often advanced their own legal interpretations in regulations and in litigation (at least until a case reached the Supreme Court, where the Solicitor General takes over)—sometimes in opposition to positions put forward by the Department of Justice—the Order requires them to adopt the views of the President and Attorney General moving forward.

Apportionment. The Order authorizes the Director of OMB to “review independent regulatory agencies’ obligations for consistency with the President’s policies and priorities” and to “adjust such agencies’ apportionments by activity, function, project, or object … to advance the President’s policies and priorities” including to “prohibit independent regulatory agencies from expending appropriations on particular activities, functions, projects, or objects, so long as such restrictions are consistent with law.”

This provision grants the Director of OMB control over independent agencies’ budgets, expenditures, and—to a significant extent—discretion. The “obligations,” “apportionments,” and “appropriations” are budgetary terms referring to various ways agencies are authorized to spend and do spend money. Notably, the Director’s authority to prohibit expenditures on certain activities could allow him to order nonenforcement of regulations or defunding programs that are inconsistent with the President’s policy preferences.

Exceptions for Monetary Policy and Other Legal Authorities. The Order exempts the Federal Reserve’s monetary policy from its scope. Accordingly, the Federal Reserve’s interest rate decisions will not be subject to OIRA review, though its banking regulatory functions are covered by the scope of the Order.

The Order also notes that it should not be read to affect “the authority granted by law to an executive department, agency, or the head thereof.”

Indirect Implications. The President’s assertion of Executive Branch control over independent agencies will have additional consequences not mentioned in the Order. As we previously noted, many of President Trump’s other executive orders do not include carve outs for independent agencies. Accordingly, the executive orders requiring cooperation with DOGE appear to apply to independent agencies. These orders include requirements to establish a DOGE team, share information with DOGE, engage in workforce-optimization efforts, and conduct comprehensive reviews of existing regulations and deregulation. In combination with the Order’s requirement that independent agencies follow the President’s interpretation of the law, independent agencies may also be required to adopt the President’s legal views as espoused in executive orders such as those that describe certain DEI and DEIA policies as illegal.[3]

Two of these orders may have particular significance for independent agencies:

“Ensuring Lawful Governance And Implementing The President’s ‘Department Of Government Efficiency’ Deregulatory Initiative.” This order requires agencies to identify all regulations that are potentially unlawful and then develop a plan to rescind or modify them. Specifically, in coordination with OMB, DOGE, and the Attorney General, agencies have sixty days to identify all regulations that: (1) are “unconstitutional” or “raise serious constitutional difficulties;” (2) “are based on unlawful delegations of legislative power;” (3) contravene the “the best reading of the underlying statutory authority or prohibition;” (4) violate the major-questions doctrine; (5) “impose significant costs upon private parties that are not outweighed by public benefits;” (6) “significantly and unjustifiably” impede innovation; or (7) “impose undue burdens on small business and impede private enterprise and entrepreneurship.” The OIRA Administrator (who has not yet been designated) shall then consult with agency heads to develop a Unified Regulatory Agenda to rescind or modify these regulations.

“Unleashing Prosperity Through Deregulation.” As we have previously discussed, this order requires that agencies identify at least ten existing regulations to repeal for every new regulation they promulgate, and it requires the total incremental cost of new regulations be “significantly less than zero.”

Because independent agencies have historically been exempt from similar deregulatory efforts, these orders could materially change the agencies’ longstanding regulatory processes.

III. Pending Litigation Regarding the President’s Control Over Independent Agencies.

The President’s assertion of control over independent agencies has already begun to attract legal challenges. These challenges could affect the practical consequences of the Order and of President Trump’s other actions regarding independent agencies. Currently, some of the most notable litigation has been brought by heads of independent agencies who were fired without an explanation or compliance with statutory notice requirements (e.g., without complying with a “for cause” removal restriction). For example:

Dellinger v. Bessent, 1:25-cv-00385 (D.D.C. filed Feb. 10, 2025), is a case by the Special Counsel leading the Office of Special Counsel (which oversees various whistleblower and government accountability projects), whom President Trump fired without explanation. The District Court issued a temporary restraining order reinstating Dellinger as the Special Counsel, the D.C. Circuit dismissed an appeal/denied mandamus for lack of jurisdiction, and the Supreme Court held the government’s appeal in abeyance until the temporary restraining order expires on February 26.

Wilcox v. Trump, No. 1:25-cv-00334 (D.D.C. filed Feb. 5, 2025), is a suit by a former Democratic member of the National Labor Relations Board whom President Trump fired without explanation. The case is currently before the U.S. District Court for the District of Columbia, and expedited summary judgment briefing is underway.

Harris v. Bessent, No. 1:25-cv-00412 (D.D.C. filed Feb. 11, 2025), is a suit by the former chair of the Merit Systems Protection Board, whom President Trump demoted and subsequently fired without explanation. The U.S. District Court for the District of Columbia issued a temporary restraining order reinstating Harris as the Chair. The Trump Administration has appealed the case to the D.C. Circuit and/or the Supreme Court, where it would likely have the same fate as Dellinger. Meanwhile, the plaintiff moved for a preliminary injunction in the district court.

IV. Conclusion

[1] Congress sometimes labels agencies as “independent” without providing any removal protections. See Collins v. Yellen, 594 U.S. 220, 248–50 (2021).

[2] The Executive Order just refers to “employees,” but defines employees according to 5 U.S.C. § 2105, which includes officers.

[3] A federal district court recently granted a preliminary injunction enjoining some of these orders, so the efficacy of these orders may be subject to change.

The following Gibson Dunn lawyers prepared this update: Michael Bopp, Stuart Delery, Eugene Scalia, Helgi Walker, Matt Gregory, Andrew Kilberg, Tory Lauterbach, Amanda Neely, Noah Delwiche, Maya Jeyendran, and Aaron Gyde.

Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding these developments. Please contact the Gibson Dunn lawyer with whom you usually work, any leader or member of the firm’s Public Policy, Administrative Law & Regulatory, Energy Regulation & Litigation, Labor & Employment, or Government Contracts practice groups, or the following in Washington, D.C.:

Michael D. Bopp – Co-Chair, Public Policy Practice Group,
(+1 202.955.8256, mbopp@gibsondunn.com)

Stuart F. Delery – Co-Chair, Administrative Law & Regulatory Practice Group,
(+1 202.955.8515, sdelery@gibsondunn.com)

Eugene Scalia – Co-Chair, Administrative Law & Regulatory Practice Group,
(+1 202.955.8673, dforrester@gibsondunn.com)

Helgi C. Walker – Co-Chair, Administrative Law & Regulatory Practice Group,
(+1 202.887.3599, hwalker@gibsondunn.com)

Matt Gregory – Partner, Administrative Law & Regulatory Practice Group,
(+1 202.887.3635, mgregory@gibsondunn.com)

Andrew G.I. Kilberg – Partner, Administrative Law & Regulatory Practice Group,
(+1 202.887.3759, akilberg@gibsondunn.com)

Tory Lauterbach – Partner, Energy Regulation & Litigation Practice Group,
(+1 202.955.8519, tlauterbach@gibsondunn.com)

Amanda H. Neely – Of Counsel, Public Policy Practice Group,
(+1 202.777.9566, aneely@gibsondunn.com)

Gibson Dunn’s Immigration Task Force is available to help clients understand what these and other expected policy changes will mean for them and how to comply with new requirements.

Over the past month, the Trump administration has imposed several limitations on the ability of noncitizens from countries experiencing times of crisis to obtain temporary refuge in the United States. For example, the administration canceled a Biden-era program allowing nationals of Cuba, Haiti, Nicaragua, and Venezuela with U.S.-based sponsors to obtain short-term lawful status and work authorization in the United States. The program was created in part to minimize unlawful migration from individuals fleeing desperate circumstances, as each of these countries has experienced massive economic collapses, widespread government corruption, and persecution of political dissenters and marginalized groups over the past few years.[1]

Further, earlier this month, the administration announced that it was “pausing” these individuals’ applications for other, more durable forms of immigration status in the United States.[2] While presently unclear, this ostensibly includes forms of relief individuals fleeing persecution are entitled to seek under applicable U.S. and international law. Court challenges for each of these actions is either already underway or anticipated.

Termination of the CHNV Humanitarian Parole Program

On January 20, 2025, President Trump issued an executive order, titled Securing Our Borders, that directed the Secretary of Homeland Security to “take appropriate action to . . . [t]erminate all categorical parole programs that are contrary to the policies of the United States established in [President Trump’s] Executive Orders, including the program known as the ‘Processes for Cubans, Haitians, Nicaraguans, and Venezuelans,’” also known as the CHNV program.[3] Recently, news sources have reported that the Department of Homeland Security (DHS) has proposed (in an unpublished memorandum) such termination of the CHNV program.[4] The proposal would purport to revoke the parole status of CHNV parolees and place them in deportation proceedings if the parolees have failed to apply for, or obtain, another immigration benefit.[5]

The CHNV program was announced by the Biden Administration on January 5, 2023, and allows certain nationals from Cuba, Haiti, Nicaragua, and Venezuela to apply to be temporarily paroled into the United States for up to two years.[6] The CHNV program, which does not grant long-term immigration status to these individuals, is an emergency measure that allows applicants from these four countries who meet stringent requirements to come to the United States for urgent humanitarian reasons. The program requires applicants to meet various criteria, including having a U.S.-based financial supporter and passing security vetting. Once accepted, “parolees” can seek certain immigration benefits, including employment authorization, and can apply for other forms of humanitarian relief (e.g., asylum). The program accepts only 30,000 people each month; through the end of December 2024, approximately 531,000 people had been granted parole status through the CHNV program.[7]

The full effects of the program’s termination are currently unclear. Nothing has been reported on how U.S. Citizenship and Immigration Services (USCIS) will handle pending CHNV applications, although it seems likely from the Trump Administration’s rhetoric that those applications will be rejected, and thus those applicants not eligible to apply for work authorization on that basis alone. It is also unclear how many of the 531,000 parolees under the CHNV program have applied for alternative immigration benefits (and thus are potentially able to, if eligible, retain work authorization under those programs). Based on what has been reported, it seems likely that parolees who have not applied for alternative immigration benefits could have their parole—and work authorization—revoked. In that event, without status or parole permitting the parolees to stay in the country, they could be at risk of removal from the United States; many parolees could even be subject to an expedited removal process whereby they could be removed from the United States without ever seeing a judge or being permitted to raise claims for relief in a court.

The CHNV program may not be the only humanitarian parole program currently at risk of termination. On January 28, 2025, USCIS reported that it was pausing acceptance of the form that U.S. supporters of CHNV applicants need to submit to start the application process (Form I-134A, the Online Request to be a Supporter and Declaration of Financial Support).[8] But this is the same form used for applications for other “categorical” parole programs, including Uniting for Ukraine (for Ukrainians fleeing Russian invasion). Thus, new applications under those programs may also not be processed. In addition, several U.S. Senators have written a letter expressing their concern over the Department of Homeland Security’s directive to “‘phase out’ humanitarian parole” and the potential impact on Afghans fleeing from the Taliban who are seeking such status.[9]

Petitioners are still technically able to submit humanitarian parole applications for either themselves or other individuals located outside the United States, including individuals from the CHNV countries, which will be processed on a case-by-case basis by federal agencies. However, given the Trump administration’s expressed skepticism toward this mechanism and the discretionary nature of humanitarian parole, those individual applications likely have a very low chance of approval.

Pause on Certain Humanitarian Parolees’ Ability to Apply for Others Forms of Status: On February 14, 2025, Andrew Davidson, the acting deputy director of USCIS, ordered an “administrative pause” on accepting or processing applications for immigration benefits other than humanitarian parole for recipients of the CHNV and Uniting for Ukraine programs, as well as certain other individuals.[10] USCIS cited fraud and national security risks as the justification for the freeze.[11] Under this administrative pause, USCIS will not process any applications for asylum, temporary protected status, or family-based visas from individuals who entered the United States under one of the affected humanitarian parole programs.

USCIS justified their directive by stating that “fraud information and public safety or national security concerns are not being properly flagged in USCIS’ adjudicative systems.”[12] The concerns include “serial sponsors,” applications submitted for deceased individuals or with identical addresses, and grants of parole without being “fully vetted.”[13] The USCIS memorandum references the Biden Administration’s July 2024 pause to the CHNV program due to fraud concerns over screening processes for sponsor applications.[14] However, this temporary pause only affected travel authorizations and did not affect the application process—let alone these individuals’ abilities to apply for entirely separate forms of immigration status while lawfully present in the country.[15]

While the administrative pause is indefinite, the memorandum states that the pause will be lifted only after a “comprehensive review and evaluation of the in-country population of aliens who are or were paroled into the United States under these categorical parole programs.”[16] Currently, it is unclear how applications for other forms of immigration status submitted by these individuals will be treated by USCIS—it is possible they will simply not be processed.

Termination of Temporary Protected Status (TPS) for Venezuelans

Temporary Protected Status (TPS) is a lawful immigration status granted by “[t]he Attorney General, after consultation with appropriate agencies of the Government” to nationals of a specific country who are present in the United States at the time of the country’s designation.[17] TPS is unavailable to individuals who have been convicted of most crimes or otherwise present security concerns; it is within the Attorney General’s discretion to grant TPS.[18] If the Secretary of Homeland Security determines that the designated country no longer meets these conditions, the Attorney General must terminate the designation.[19]

In response to the “severe humanitarian emergency” in Venezuela—marked by economic crisis, political crisis, health crisis, food insecurity, a “collapse of basic services,” crime, and human rights violations—then-Secretary of Homeland Security Alejandro Mayorkas designated Venezuela for TPS in 2021.[20] Then-Secretary Mayorkas later extended that designation twice for a total of 36 months. At the time of the second extension (October 3, 2023), he also redesignated Venezuela for 18 months, explicitly creating “two distinct TPS designations of Venezuela”. In other words, Venezuelans who had obtained TPS through the initial 2021 designation could extend their TPS status through September 10, 2025, while more recent arrivals could apply for TPS via the 2023 designation. On January 17, 2025, then-Secretary Mayorkas consolidated and extended those separate designations for 18 months, such that TPS status for all Venezuelans was extended through October 2, 2026.[21]

On January 28, 2025, Secretary of Homeland Security Kristi Noem vacated the January 17, 2025 extension of Venezuelan TPS.[22] A week later, on February 5, 2025, USCIS announced the termination of the October 3, 2023 designation of Venezuela for TPS, effective April 6, 2025.[23] Although USCIS did not terminate the 2021 TPS designation, it vacated the extension through October 2026. As a result, TPS status under the 2021 designation is now set to expire on September 10, 2025, barring any further agency action.[24] The vacatur and termination already are the subject of two lawsuits, which are pending in the Northern District of California and the District of Maryland.

Policy Considerations. The February 5, 2025 notice explains that termination of Venezuela’s TPS designation is based not on changed conditions in Venezuela, but rather on DHS’s assessment that “it is contrary to the national interest to permit the Venezuelan nationals (or aliens having no nationality who last habitually resided in Venezuela) to remain temporarily in the United States.”[25] This conclusion rests on four “policy imperatives” articulated by President Trump in recent executive orders and proclamations.[26]

First, DHS points to the direction to terminate the CHNV program. The notice explains that an estimated 33,600 individuals in the country as CHNV parolees secured TPS status and employment authorization under the 2023 authorization and cites concerns about the resources of local communities where those with TPS status are settling.[27] The notice also cites concerns about crimes blamed on a Venezuelan gang.[28]
Second, DHS cites President Trump’s emphasis on enforcing immigration laws, as well as his statement in Executive Order 14159 (“Protecting the American People Against Invasion”) that “the prior administration invited, administered, and oversaw an unprecedented flood of illegal immigration into the United States [that] . . . has cost taxpayers billions of dollars.”[29] That same order instructed the Secretary of State, the Attorney General, and the Secretary of Homeland Security to “ensur[e] that designations of Temporary Protected Status are consistent with [the INA], and that such designations are appropriately limited in scope and made for only so long as may be necessary to fulfill the textual requirements of that statute.”[30]
Third, DHS points to President Trump’s declaration of a national emergency at the southern border, combined with the potential “magnet effect” of a TPS designation.[31]
Fourth, DHS points to President Trump’s directive that “the foreign policy of the United States shall champion core American interests and always put America and American citizens first.”[32] Expanding on this pronouncement, the notice states that “U.S. foreign policy interests, particularly in the Western Hemisphere, are best served and protected by curtailing policies that facilitate or encourage illegal and destabilizing migration.”[33]

Current Status: The status of Venezuelan nationals who were granted TPS under the 2021 designation is currently unchanged, although their TPS status will now expire on September 10, 2025 (instead of October 2, 2026). Those who received TPS through the 2023 designation and have no other form of lawful immigration status may lose their immigration status and employment authorization on April 6, 2025, barring injunctive relief in the litigation challenging the termination or changes to individual circumstances.

[1] See, e.g., Amnesty International Report on Cuba 2023/4, available at https://www.amnesty.org/en/location/americas/central-america-and-the-caribbean/cuba/report-cuba/; Amnesty International Report of Haiti 2023/4, available at https://www.amnesty.org/en/location/americas/central-america-and-the-caribbean/haiti/; Amnesty International Report of Nicaragua 2023/4, available at https://www.amnesty.org/en/location/americas/central-america-and-the-caribbean/nicaragua/; Amnesty International Report of Venezuela 2023/4, available at https://www.amnesty.org/en/location/americas/south-america/venezuela/report-venezuela/

[2] Camilo Montoya-Galvez, US Pauses Immigration Applications for Certain Migrants Welcomed Under Biden, CBS News (Feb. 19, 2025), available at https://www.cbsnews.com/news/u-s-pauses-immigration-applications-for-certain-migrants-welcomed-under-biden/

[3] Exec. Order No. 14165, 90 F.R. 8467, § 7(b) (Jan. 20, 2025), available at https://www.federalregister.gov/documents/2025/01/30/2025-02015/securing-our-borders.

[4] See, e.g., Camilo Montoya-Galvez, Trump Officials Make Plans to Revoke Legal Status of Migrants Welcomed Under Biden, CBS News (Feb. 1, 2025), https://www.cbsnews.com/news/trump-officials-make-plans-to-revoke-legal-status-of-migrants-welcomed-under-biden/.

[5] Id.

[6] See The Biden Administration’s Humanitarian Parole Program for Cubans, Haitians, Nicaraguans, and Venezuelans: An Overview, Am. Immigration Council (Oct. 31, 2023), https://www.americanimmigrationcouncil.org/research/biden-administrations-humanitarian-parole-program-cubans-haitians-nicaraguans-and; What is the CHNV Parole Program?, Global Refuge (Oct. 23, 2024), https://www.globalrefuge.org/news/what-is-the-chnv-parole-program/.

[7] https://www.cbp.gov/newsroom/national-media-release/cbp-releases-december-2024-monthly-update

[8] See Update on Form I-134A, USCIS (Jan. 28, 2025), https://www.uscis.gov/newsroom/alerts/update-on-form-i-134a.

[9] See Letter from Amy Klobuchar, United States Senator, et al. to Pete Hegseth, Sec’y, U.S. Dep’t of Defense, Marco Rubio, Sec’y, U.S. Dep’t of State, and Kristi Noem, Sec’y, U.S. Dep’t of Homeland Sec. (Feb. 4, 2025), https://www.klobuchar.senate.gov/public/index.cfm/2025/2/klobuchar-colleagues-call-on-administration-to-clarify-status-of-afghan-wartime-allies.

[10] Camilo Montoya-Galvez, US Pauses Immigration Applications for Certain Migrants Welcomed Under Biden, CBS News (Feb. 19, 2025), available at https://www.cbsnews.com/news/u-s-pauses-immigration-applications-for-certain-migrants-welcomed-under-biden/.

[11] Id.

[12] Id.

[13] Id.

[14] Id. See Kristina Cooke & Ted Hesson, US Pause Humanitarian Entry Program for Citizens of Four Countries, Reuters (Aug. 2, 2024), available at https://www.reuters.com/world/us/us-pauses-humanitarian-entry-program-citizens-four-countries-2024-08-02/.

[15] Ted Hessen & Kanishka Singh, US Government Resumes Humanitarian Entry Program for Citizens of 4 Countries, Reuters (Aug. 29, 2024), https://www.reuters.com/world/us/us-government-resumes-humanitarian-entry-program-citizens-4-countries-2024-08-29/.

[16] Camilo Montoya-Galvez, US Pauses Immigration Applications for Certain Migrants Welcomed Under Biden, CBS News (Feb. 19, 2025), available at https://www.cbsnews.com/news/u-s-pauses-immigration-applications-for-certain-migrants-welcomed-under-biden/.

[17] 8 U.S.C. § 1254a(b)(1).

[18] 8 U.S.C. § 1254a(c)(2)(B); 8 U.S.C. § 1231(b)(3)(B); see also Asylum Bars, USCIS (last updated May 31, 2022), available at https://www.uscis.gov/humanitarian/refugees-and-asylum/asylum/asylum-bars.

[19] 8 U.S.C. § 1254a(b)(3)(B).

[20] Designation of Venezuela for Temporary Protected Status and Implementation of Employment Authorization for Venezuelans Covered by Deferred Enforced Departure, 86 FR 13574 (Mar. 9, 2021), available at https://www.federalregister.gov/documents/2021/03/09/2021-04951/designation-of-venezuela-for-temporary-protected-status-and-implementation-of-employment.

[21] Extension of the 2023 Designation of Venezuela for Temporary Protected Status, 90 FR 5961 (Jan. 17, 2025), available at https://www.federalregister.gov/documents/2025/01/17/2025-00769/extension-of-the-2023-designation-of-venezuela-for-temporary-protected-status.

[22] Vacatur of 2025 Temporary Protected Status Decision for Venezuela, 90 F.R. 8805 (Feb. 3, 2025), available at https://www.federalregister.gov/documents/2025/02/03/2025-02183/vacatur-of-2025-temporary-protected-status-decision-for-venezuela.

[23] Termination of the October 3, 2023 Designation of Venezuela for Temporary Protected Status, 90 F.R. 9040 (Feb. 5, 2025), available at https://www.federalregister.gov/documents/2025/02/05/2025-02294/termination-of-the-october-3-2023-designation-of-venezuela-for-temporary-protected-status (quoting 8 U.S.C. 1254a(b)(1).

[24] Id.

[25] Id.

[26] Id.

[27] Id.

[28] Id.

[29] E.O. 14159, Protecting the American People Against Invasion, 90 F.R. 8443 (Jan. 20, 2025), available at https://www.federalregister.gov/documents/2025/01/29/2025-02006/protecting-the-american-people-against-invasion.

[30] Id.

[31] Id.

[32] Id.; see also Proc. 10886, Declaring a National Emergency at the Southern Border of the United States, 90 F.R. 8327 (Jan. 20, 2025), available at https://www.federalregister.gov/documents/2025/01/29/2025-01948/declaring-a-national-emergency-at-the-southern-border-of-the-united-states.

[33] Termination of the October 3, 2023 Designation of Venezuela for Temporary Protected Status, 90 F.R. 9040 (Feb. 5, 2025), available at https://www.federalregister.gov/documents/2025/02/05/2025-02294/termination-of-the-october-3-2023-designation-of-venezuela-for-temporary-protected-status (quoting 8 U.S.C. 1254a(b)(1)).

The following Gibson Dunn lawyers prepared this update: Stuart Delery, Ariana Sanudo, Patty Herold, Laura Raposo, Cydney Swain, Carolyn Ye, and Kayla Jahangiri.

Stuart F. Delery – Co-Chair, Administrative Law & Regulatory Practice Group,
Washington, D.C. (+1 202.955.8515, sdelery@gibsondunn.com)

Naima L. Farrell – Partner, Labor & Employment Practice Group,
Washington, D.C. (+1 202.887.3559, nfarrell@gibsondunn.com)

Nancy Hart – Partner, Litigation Practice Group,
New York (+1 212.351.3897, nhart@gibsondunn.com)

Katie Marquart – Partner & Chair, Pro Bono Practice Group,
Los Angeles (+1 213.229.7475, kmarquart@gibsondunn.com)

Laura Raposo – Associate General Counsel,
New York (+1 212.351.5341, lraposo@gibsondunn.com)

Matthew S. Rozen – Partner, Appellate & Constitutional Law Practice Group,
Washington, D.C. (+1 202.887.3596, mrozen@gibsondunn.com)

Ariana Sañudo – Associate, Pro Bono Practice Group,
Los Angeles (+1 213.229.7137, asanudo@gibsondunn.com)

Betty X. Yang – Partner & Co-Chair, Trials Practice Group,
Dallas (+1 214.698.3226, byang@gibsondunn.com)

Gibson Dunn’s DEI Task Force is available to help clients understand what these and other expected policy changes will mean for them and how to comply with new requirements.

In Brief

On February 21, 2025, the United States District Court for the District of Maryland entered a preliminary injunction enjoining in part President Trump’s Executive Orders titled “Ending Radical and Wasteful Government DEI Programs and Preferencing” (EO 14151) and “Ending Illegal Discrimination and Restoring Merit-Based Opportunity” (EO 14173). Nat’l Ass’n of Diversity Officers in Higher Educ., et al., v. Donald J. Trump, et al., No. 1:25-cv-00333-ABA, Dkt. 44–45 (D. Md. 2025). The court opened its opinion by stating that

The term ‘DEI,’ of course, is shorthand for ‘diversity, equity, and inclusion.’ And ensuring equity, diversity, and inclusion has long been a goal, and at least in some contexts arguably a requirement, of federal anti-discrimination law. But the administration has declared ‘DEI’ to be henceforth ‘illegal,’ has announced it will be terminating all ‘“equity-related” grants or contracts’—whatever the administration might decide that means—and has made ‘practitioners’ of what the government considers “DEI” the targets of a “strategic enforcement plan.

Dkt. 45 at 2.

The court enjoined the government defendants from freezing or terminating existing “equity-related” contracts and grants (pursuant to EO 14151). With respect to EO 14173, the court enjoined the government defendants from (1) requiring federal contractors and grant recipients to certify that they do not “operate any programs promoting DEI that violate any applicable Federal anti-discrimination laws,” (2) requiring federal contractors and grant recipients “to agree that [their] compliance in all respects with all applicable Federal anti-discrimination laws is material” for purposes of the False Claims Act, and (3) bringing any enforcement action targeting “DEI programs or principles.” However, the court declined to “enjoin the Attorney General from … engaging in investigation” of DEI programs. Dkt. 44 at 62.

The preliminary injunction covers nine Cabinet-level departments, the Office of Management and Budget, and the National Science Foundation, but not President Trump. The Equal Employment Opportunity Commission (EEOC) is not a defendant and is not directly subject to the injunction. However, the injunction does cover “other persons who are in active concert or participation with” the defendant agencies. Dkt. 45 at § 3.

The preliminary injunction is nationwide and not restricted to the plaintiffs in the case. See Dkt. 44 at 60–62.

The government undoubtedly will appeal the decision to the U.S. Court of Appeals for the Fourth Circuit, which could reverse or narrow the injunction. The government also may seek a stay of the district court’s injunction while the appeal is pending. If it does not prevail before the Fourth Circuit (or only prevails in part), the government might seek an emergency stay from the Supreme Court. Accordingly, it is possible that the preliminary injunction will be lifted soon.

Digging Deeper

The plaintiffs—the National Association of Diversity Officers in Higher Education, the American Association of University Professors, Restaurant Opportunities Centers United, and the mayor and city council of Baltimore, Maryland—challenge one portion of EO 14151 and two portions of EO 14173. The plaintiffs sued President Trump and the following agencies: (1) the Department of Health and Human Services; (2) the Department of Education; (3) the Department of Labor; (4) the Department of the Interior; (5) the Department of Commerce; (6) the Department of Agriculture; (7) the Department of Energy; (8) the Department of Transportation; (9) the Department of Justice; (10) the National Science Foundation; and (11) the Office of Management and Budget.

First, the plaintiffs challenge EO 14151’s direction to agencies to “terminate, to the maximum allowed by law, … all [federal] ‘equity-related’ grants or contracts.” Exec. Order No. 14151, § 2(b)(i) (“Termination Provision”). The district court held that the plaintiffs had shown a likelihood of success on their claim that the Termination Provision violates the Due Process Clause of the Fifth Amendment because the term “equity-related” is impermissibly vague.

With respect to the Termination Provision, the court enjoined the agencies from “paus[ing], freez[ing], imped[ing], block[ing], cancel[ing] or terminat[ing] any awards, contracts or obligations …, or chang[ing] the terms of any” awards, contracts or obligations based on the Termination Provision. Dkt. 45 at § 3(a).

Second, the plaintiffs challenge section 3(b)(iv) of EO 14173 (referred to as the “Certification Provision” by the district court), which directs agencies to include two clauses in federal contracts and grants:

(A) A term requiring the contractual counterparty or grant recipient to agree that its compliance in all respects with all applicable Federal anti-discrimination laws is material to the government’s payment decisions for purposes of section 3729(b)(4) of title 31, United States Code; and

(B) A term requiring such counterparty or recipient to certify that it does not operate any programs promoting DEI that violate any applicable Federal anti-discrimination laws.

The court held that the plaintiffs had shown a likelihood of success on their claim that the Certification Provision violates the First Amendment, and enjoined the agencies from “requir[ing] any grantee or contractor to make any ‘certification’ or other representation pursuant to the Certification Provision.” Dkt. 45 at § 3(b). The phrase “other representation” appears to prohibit the agencies from requiring modifications of federal contracts to include the contract clauses described above.

Third, the plaintiffs challenge EO 14173’s instruction to the Attorney General to compile a report identifying, among other things, potential targets for “civil compliance investigations.” Exec. Order 14173, § 4(b)(iii). The district court refers to this as the “Enforcement Threat Provision.”

The court held that the plaintiffs had shown a likelihood of success on their claims that the Enforcement Threat Provision violates the First Amendment and the Due Process Clause of the Fifth Amendment because there is no guidance regarding the DEI programs or practices that the administration considers illegal.

The preliminary injunction prohibits the agencies from “bring[ing] any False Claims Act enforcement action, or other enforcement action, pursuant to the Enforcement Threat Provision, including but not limited to any False Claims Act enforcement action premised on any certification made pursuant to the Certification Provision.” Dkt. 45 at § 3(c). The court specifically declined to “enjoin the Attorney General from … engaging in investigation” of DEI programs or to prohibit the Attorney General from preparing a report identifying investigation targets. Dkt. 44 at 62.

Implications and Next Steps

As noted above, the district court’s preliminary injunction is not party-restricted and applies nationwide. However, the injunction is directed to the “Defendants” in the case. Dkt. 45 at § 3. The government is thus likely to take the position that agencies that are not defendants to the case—including the Departments of State, Defense, and Treasury, and the EEOC, Federal Communications Commission, and the General Services Administration—are not subject to the injunction except to the extent they “are in active concert or participation with” the defendant agencies. Moreover, agencies covered by the injunction might argue that the injunction does not prevent them from bringing actions against companies so long as such actions are not “pursuant to the Enforcement Threat Provision,” although this could be challenging.

As noted above, the Department of Justice is very likely to appeal this decision to the Fourth Circuit immediately, and it is possible that the Fourth Circuit will stay the district court’s order while the appeal is pending and then either reverse or narrow it after review by a merits panel. If it is unsuccessful or partially successful in the Fourth Circuit, the government might seek an emergency stay from the Supreme Court.

A separate challenge to EO 14151 and EO 14173, as well as EO 14168 (“Defending Women From Gender Ideology Extremism and Restoring Biological Truth to the Federal Government”), is pending in the United States District Court for the District of Columbia. See Nat’l Urban League, et al., v. Donald J. Trump, et al., No. 1:25-cv-00471 (D.D.C. 2025).

Finally, it is worth noting that regardless of the resolution of these cases, the Trump Administration will likely attempt to continue to pursue its policies with respect to DEI programs through other enforcement mechanisms, whether through the EEOC or other agencies.

Gibson Dunn is closely monitoring these challenges to President Trump’s executive orders, and is tracking all of the President’s executive orders here. Gibson Dunn’s DEI Task Force is available to help clients understand what these and other expected policy and litigation developments will mean for them and how to comply with new requirements.

The following Gibson Dunn lawyers prepared this update: Jason Schwartz, Katherine V.A. Smith, Zakiyyah Salim-Williams, Mylan Denerstein, Cynthia Chen McTernan, Molly Senger, Greta Williams, Blaine Evanson, Zoë Klein, and Maya Jeyendran.

Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding these developments. To learn more about these issues, please contact the Gibson Dunn lawyer with whom you usually work, the authors, or any leader or member of the firm’s DEI Task Force or Labor and Employment, Government Contracts, or False Claims Act/Qui Tam Defense practice groups:

Jason C. Schwartz – Partner & Co-Chair, Labor & Employment Group,
Washington, D.C. (+1 202.955.8242, jschwartz@gibsondunn.com)

Katherine V.A. Smith – Partner & Co-Chair, Labor & Employment Group,
Los Angeles (+1 213.229.7107, ksmith@gibsondunn.com)

Mylan L. Denerstein – Partner & Co-Chair, Public Policy Group,
New York (+1 212.351.3850, mdenerstein@gibsondunn.com)

Zakiyyah T. Salim-Williams – Partner & Chief Diversity Officer,
Washington, D.C. (+1 202.955.8503, zswilliams@gibsondunn.com)

Lindsay M. Paulin – Partner & Co-Chair, Government Contracts Group,
Washington, D.C. (+1 202.887.3701, lpaulin@gibsondunn.com)

Jonathan M. Phillips – Partner & Co-Chair, False Claims Act/Qui Tam Defense Group,
Washington, D.C. (+1 202.887.3546, jphillips@gibsondunn.com)

Jake M. Shields – Partner, False Claims Act/Qui Tam Defense Group,
Washington, D.C. (+1 202.955.8201, jmshields@gibsondunn.com)

Blaine H. Evanson – Partner, Appellate & Constitutional Law Group,
Orange County (+1 949.451.3805, bevanson@gibsondunn.com)

Molly T. Senger – Partner, Labor & Employment Group,
Washington, D.C. (+1 202.955.8571, msenger@gibsondunn.com)

Greta B. Williams – Partner, Labor & Employment Group,
Washington, D.C. (+1 202.887.3745, gbwilliams@gibsondunn.com)

Zoë Klein – Of Counsel, Labor & Employment Group,
Washington, D.C. (+1 202.887.3740, zklein@gibsondunn.com)

On February 20, 2025, the Federal Energy Regulatory Commission (FERC) issued two important orders addressing the treatment of co-located loads, including data centers, in the PJM Interconnection, L.L.C. (PJM) region. FERC directed PJM and its Transmission Owners (the TOs) to take steps to resolve co-located load issues.

I. Introduction

In the marquee order of the day, FERC consolidated several proceedings raising questions about co-located loads and data centers and instituted a “show cause” proceeding under Section 206 of the Federal Power Act (FPA) and directed PJM and the TOs—within thirty (30) days—to either (a) demonstrate that the PJM Open Access Transmission Tariff along with related PJM governing documents (PJM Tariff) is just and reasonable without any changes notwithstanding its failure to state with sufficient clarity or consistency the rates, terms, and conditions of service that apply to co-located load arrangements or (b) explain what changes to the PJM Tariff would remedy the identified concerns if FERC were to find the PJM Tariff unjust and unreasonable. The order directs PJM and the TOs to respond to numerous complex questions (38, to be exact) related to co-located loads. Importantly, FERC invites other interested parties to submit responses to PJM and the TOs filings.[1] FERC directs PJM and the PJM TOs to respond to the Show Cause Order and answer all 38 specific questions within 30 days – by March 24, 2025. Other interested parties are invited to file responses within 30 days of the PJM and PJM TO filings.

In a second related order, FERC rejected the Exelon TOs’ proposed tariff filings under Section 205 of the FPA aimed at clarifying how the Exelon TOs would treat co-located load. FERC said that the proposed changes would change a defined term or condition in the PJM Tariff, and found that individual PJM TOs do not have Section 205 filing rights to proposed changes to such terms and conditions.[2] However, as discussed herein, the substantive issues raised by the Exelon TOs are incorporated into the questions raised in the FERC Show Cause Order.

In the following paragraphs we provide more detail on these proceedings and why the co-located load issue has become an acute concern for PJM, the PJM TOs, generators and data center developers in PJM, and state regulators. The Show Cause Order also has important implications for generators, data center developers, RTOs, transmission owners, and state regulators across the country.

II. New FERC Orders on Co-Located Loads, including Data Centers

a. PJM Consolidated Show Cause Order

The new Consolidated Show Cause Order consolidates two pre-existing dockets (a technical conference docket and a complaint docket) with a new Section 206 docket and directs PJM and its TOs to make further filings to address crucial questions raised by FERC regarding co-located loads and their impact on the transmission system.[3] The first pre-existing docket, Docket No. AD24-11-000, is for the FERC technical conference on co-located large loads held on November 1, 2024. The second pre-existing docket, Docket No. EL25-20-000, is regarding the Constellation Energy Generation, LLC complaint against PJM (“Constellation Complaint”) asking that FERC (1) find the PJM Tariff unjust and unreasonable because it does not address the interconnection of co-located loads and (2) incorporate parts of PJM’s existing guidance on co-located loads into the PJM Tariff. FERC consolidated the two pre-existing dockets into the Show Cause Order in order to capture the extensive records that had been created in these two proceedings. Notably, however, FERC did not grant the Constellation Complaint, and instead indicated that that the PJM Tariff appears to be unjust and unreasonable in its treatment of co-located loads.

In the Consolidated Show Cause Order, FERC discussed the questions that were raised in the consolidated proceedings but provided very few answers to most of those questions. FERC did, however, show its hand on a few important issues related to co-located load. First, FERC addressed federal and state jurisdiction over the sale of electricity, an issue which had been raised not only in the consolidated proceedings but also in a separate another, unconsolidated proceeding in which Exelon companies filed a petition for declaratory order field by two of Exelon’s TOs in Docket No. EL24-149-000 (“Exelon Petition”). In that Petition, the Exelon TOs requested FERC to find, among other things, that “interconnection of end-use load is a matter of state, not federal, jurisdiction.”[4] In the Consolidated Show Cause Order, FERC addressed important aspects of federal and state jurisdiction over co-located loads. First, FERC confirmed that its own jurisdiction is over interstate wholesale sales, interstate transmission, and the facilities used for such transmission and sale, while states’ jurisdiction is “over any other sale of electric energy,” which includes retail sales, non-interstate wholesale sales, and sales that are not for resale (i.e., sales made directly to the end-user).[5] Importantly, FERC found that as “[a]pplied in the context of co-location, . . . under the FPA, the states get to determine which entities are legally permitted to provide electricity to retail customers in co-location arrangements.”[6] Confirming this, FERC stated “[t]hat is true irrespective of where the load interconnects (i.e., to the distribution system, the transmission system, or the generator itself).”[7] Further clarifying jurisdiction, FERC stated “if [sales] are made directly to the end-use customer . . . then the co-located generator’s sales are under state jurisdiction.”[8]

Also, while it did not yet draw conclusions, FERC indicated that it is very concerned that co-located loads are not being required to pay for PJM wholesale services they are receiving, and likely benefit from the use of the PJM transmission system. FERC stated “we are especially concerned that the absence of [PJM] Tariff provisions creates the potential that participates in a co-location arrangement may not be required to pay for wholesale services that they receive, as required by the cost causation principle . . . .”[9] FERC also stated that “[t]he record demonstrates that different co-location arrangement are likely to use or benefit from the transmission system in different ways depending on how they are configured . . . .”[10] In particular, with regard to black start service, FERC stated that it “appears to be undisputed in the record” that co-located load arrangements with nuclear facilities cannot function without a PJM resource providing black start service.[11] We expect that these issues will be vigorously addressed in the responses to FERC’s 38 questions.

In contrast to the jurisdictional question, FERC did not offer much substantive guidance on the many other co-located load questions raised at the technical conference and in the Constellation Complaint. Instead, FERC asked PJM and the TOs to answer a list of 38 questions about co-located loads, and will allow interested parties to respond to PJM and the TOs’ answers to those questions. FERC also specifically stated that parties could “introduce the issues raised in the [Exelon Petition]” into the consolidated dockets in order to address those issues there.[12]

Although FERC stated in the Consolidated Show Cause Order that the PJM Tariff may be unjust and unreasonable , it stopped short of finding that PJM’s Tariff was actually unjust and unreasonable. Instead, FERC noted concerns with the status quo of co-location arrangements in PJM, noting in particular the PJM Tariff may be unjust and unreasonable because it (1) “does not contain provisions addressing with sufficient clarity or consistency the rates, terms, and conditions of service that apply to co-location arrangements;”[13] (2) lacks “rates, terms, and conditions governing the use and sale of ancillary services and black start services by co-location arrangements;”[14] and (3) “lacks rules necessary to provide PJM with sufficient information to perform appropriate analysis to ensure reliable system operations given the characteristics of co-location arrangements.”[15]

FERC’s 38 questions request input on a broad swath of topics related to co-located load, including:

whether filers agree with FERC’s assessment of FERC’s and states’ jurisdiction over issues related to co-location arrangements;
how co-located loads rely on or use the transmission system or increase transmission-related costs to other parties;
what it means to be “electrically connected and synchronized to the PJM Transmission System when consuming power;”
whether co-located loads should be required to take certain types of transmission service and how they should be charged for those services;
the types of ancillary or wholesale services co-located loads use or would benefit from using, how to charge for those services, and how PJM should determine which co-located loads use such services;
how study processes, interconnection procedures and agreements, and cost allocation processes should be modified to account for co-located loads and generators;
how PJM’s capacity market should be modified to ensure the PJM Tariff specifies how co-located generators may participate in the capacity market;
whether PJM’s existing rules are sufficient to ensure resource adequacy if increasing numbers of existing large generators choose to co-locate with load;
what deactivation or interconnection modification studies should be required to ensure resource adequacy when an existing generator seeks to co-locate with load and what remediation techniques may be appropriate to address issues identified through such studies;
what changes may be necessary to PJM’s planning processes to prepare for and address resource adequacy and reliability impacts of co-location arrangements;
under what circumstances PJM should be permitted to direct operators of co-located arrangements to shed load in response to a system emergency;
benefits of co-location, such as the potential for reducing required transmission system upgrades, reducing congestion, or providing operational flexibility in times of system stress or emergency;
national security implications of co-location; and
the justness and reasonableness of removing generation units originally paid for by utility consumers to supply energy to one or a few large customers.

b. Order Rejecting Exelon TO Tariff Filings

In Docket Nos. ER24-2888-001 et al., the Exelon TOs proposed changes under Section 205 of the FPA to the Exelon-specific provisions of Attachment H of the PJM Tariff that would have required co-located load either to be “designated as Network Load,” or to arrange “appropriate Point-to-Point transmission service . . . for the end-use customer,” by modifying the definition of “Network Load.”[16] FERC sidestepped the Exelon filings on a legal technicality. However, FERC captured the issues raised by Exelon, including the important matter of state and federal jurisdiction, in the Show Cause order. FERC rejected Exelon’s Section 205 filing, finding that Exelon’s proposed change to the definition of “Network Load” would altered “terms and conditions” of the PJM Tariff, and only PJM (not TOs) can propose changes to the generally-applicable terms and conditions of the PJM Tariff under Section 205.[17] Based on that determination, FERC completely bypassed the substance of the Exelon filings.[18] However, in his concurrence, Commissioner Willie Phillips observed that the issues raised by Exelon are incorporated in the Consolidated Show Cause Order, and noted that he is “grateful that [Exelon] has raised such important questions, which will help the Commission set the framework for how we address co-location arrangements going forward, including a transparent mechanism for ensuring that large loads pay their fair share of costs.”[19]

c. No Order on Exelon Petition for Declaratory Order on Co-Located Loads

Notably absent from FERC’s orders was any action on Exelon’s pending petition for declaratory order regarding co-located loads in Docket No. EL24-149-000. In that the Exelon Petition, two Exelon TOs (BG&E and PECO) asked FERC to address jurisdictional issues for co-located loads, including whether interconnection of end-use load is a matter of state, not federal, jurisdiction. It was filed in October 2024, and FERC has not acted on the Petition. In the new Show Cause Order, however, FERC squarely addresses matters of FERC and state jurisdiction, and asks parties to comment on FERC’s view in the 38 questions. Because FERC addressed jurisdiction in the Show Cause Order, it is possible that FERC will not act on the Exelon Petition.

III. Next Steps and FERC-Wide Implications

In the Consolidated Show Cause Order, FERC directs PJM and the TOs to respond to FERC’s concerns regarding the treatment of co-located loads under the PJM Tariff. FERC directed PJM and the TOs to within 30 days (by March 24, 2025) to either (a) demonstrate the PJM Tariff remains just and reasonable with no changes, or (b) explain what changes to the PJM Tariff would remedy the identified concerns.[20] FERC also directed PJM and the TOs to answer all 38 of FERC’s questions on co-located loads, with supporting evidence and analysis. FERC indicated that interested parties may respond to PJM and the TOs’ filings within 30 days of PJM’s and the PJM TOs’ filings, addressing either or both (a) whether the current PJM Tariff is just and reasonable and not unduly discriminatory or preferential, and (b) if not, what changes to the PJM Tariff should be implemented as a replacement rate.[21]

We expect the outcome of this proceeding will have broad impacts on the co-located load and data center requirements in other FERC-jurisdictional ISO and RTO regions. If the PJM Tariff is unjust and unreasonable because it does not address co-located load matters, then other ISO and RTO tariffs presumably would be found by FERC to be unjust and unreasonable as well. As a result, a broad array of interested parties, including generators, data center developers, transmission owners, and RTOs and ISOs are advised to pay close attention to this PJM proceeding. Interested parties may consider filing comments on the PJM and TO filings scheduled for March 24. Such responsive comments would be due in late April.

[1] PJM Interconnection, L.L.C., 190 FERC ¶ 61,115 (2025) (“Consolidated Show Cause Order”).

[2] PJM Interconnection, L.L.C., 190 FERC ¶ 61,109 (2025) (“PJM Exelon Order”).

[3] Consolidated Show Cause Order.

[4] Petition for Declaratory Order of Baltimore Gas & Electric Company and PECO Energy Company, Docket No. EL24-149-000 (Sep. 30, 2025).

[5] Consolidated Show Cause Order at PP 66-67.

[6] Id. at P 69 (emphasis added).

[7] Id. at P 69 (emphasis added).

[8] Id. at P 71 (emphasis added).

[9] Id. at P 74.

[10] Id. at P 76.

[11] Id. at P 81.

[12] Id. at P 73, n.225 (mentioning Docket No. ER24-149-000 stating that “to the extent that parties to this proceeding want to introduce the issues raised in the petition in Docket No. EL24-149-000 to this proceeding and address those issues, they are free to do so.”).

[13] Id. at P 74.

[14] Id. at P 82.

[15] Id. at P 83.

[16] Tariff Filing of Atlantic City Electric Company, Docket No. ER24-2888-000 (Aug. 8, 2024).

[17] PJM Exelon Order at P 33.

[18] Id. at P 39.

[19] Id., Commissioner Phillips Concurrence at PP 5-7.

[20] Consolidated Show Cause Order at P 87, Ordering Para. (B).

[21] Id. at P 87.

The following Gibson Dunn lawyers prepared this update: William R. Hollaway, Ph.D., Tory Lauterbach, Janine Durand, and Jess Rollinson.

Gibson Dunn lawyers are available to assist in addressing any questions you may have about these developments. To learn more about these issues or for assistance with data center energy supply issues, such as preparing comments to be filed in the above-discussed proceedings, please contact the Gibson Dunn lawyer with whom you usually work, any member of the firm’s Energy Regulation and Litigation, Power and Renewables, Real Estate/Data Centers, Cleantech, or Oil and Gas practice groups, or the following members of the firm’s Energy team:

Energy Regulation and Litigation:
William R. Hollaway – Washington, D.C. (+1 202.955.8592, whollaway@gibsondunn.com)
Tory Lauterbach – Washington, D.C. (+1 202.955.8519, tlauterbach@gibsondunn.com)

Power and Renewables:
Peter J. Hanlon – New York (+1 212.351.2425, phanlon@gibsondunn.com)
Nicholas H. Politan, Jr. – New York (+1 212.351.2616, npolitan@gibsondunn.com)

Real Estate/Data Centers:
Emily Naughton – Washington, D.C. (+1 202.955.8509, enaughton@gibsondunn.com)
Whitney Smith – Washington, D.C. (+1 202.777.9307, wsmith@gibsondunn.com)

Cleantech:
John T. Gaffney – New York (+1 212.351.2626, jgaffney@gibsondunn.com)
Daniel S. Alterbaum – New York (+1 212.351.4084, dalterbaum@gibsondunn.com)
Adam Whitehouse – Houston (+1 346.718.6696, awhitehouse@gibsondunn.com)

Oil and Gas:
Michael P. Darden – Houston (+1 346.718.6789, mpdarden@gibsondunn.com)
Rahul D. Vashi – Houston (+1 346.718.6659, rvashi@gibsondunn.com)

New Developments

SEC Announces Cyber and Emerging Technologies Unit to Protect Retail Investors. On February 20, the SEC announced the creation of the Cyber and Emerging Technologies Unit (“CETU”). According to the SEC, CETU will focus on combatting cyber-related misconduct and is intended to protect retail investors from bad actors in the emerging technologies space. CETU, led by Laura D’Allaird, replaces the Crypto Assets and Cyber Unit and is comprised of approximately 30 fraud specialists and attorneys across multiple SEC offices. The SEC noted that CETU will utilize the staff’s substantial fintech and cyber-related experience to combat misconduct as it relates to securities transactions in the following priority areas: fraud committed using emerging technologies, such as artificial intelligence and machine learning; use of social media, the dark web, or false websites to perpetrate fraud; hacking to obtain material nonpublic information; takeovers of retail brokerage accounts; fraud involving blockchain technology and crypto assets; regulated entities’ compliance with cybersecurity rules and regulations; and public issuer fraudulent disclosure relating to cybersecurity. [NEW]
Acting Chairman Pham Announces Brian Young as Director of Enforcement. On February 14, the CFTC Acting Chairman Caroline D. Pham today announced Brian Young will serve as the agency’s Director of Enforcement. Young has been serving in an acting capacity since January 22, and previously was the Director of the Whistleblower Office. He is a distinguished federal prosecutor with nearly 20 years of service at the Department of Justice, including Acting Director of Litigation for the Antitrust Division and Chief of the Litigation Unit for the Fraud Section of the Criminal Division, and has successfully tried some of the most high-profile criminal fraud and manipulation cases in the CFTC’s markets.
Trump Plans to Pick Brian Quintenz to Lead CFTC. On February 11, several mainstream news sources began to report that U.S. President Donald Trump plans to nominate Brian Quintenz, the head of policy at Andreessen Horowitz’s a16z crypto arm, as Chairman of the CFTC. Quintenz previously served as a commissioner for the CFTC during the first Trump administration.
CFTC Announces Crypto CEO Forum to Launch Digital Asset Markets Pilot. On February 7, the CFTC announced that it will hold a CEO Forum of industry-leading firms to discuss the launch of the CFTC’s digital asset markets pilot program for tokenized non-cash collateral such as stablecoins. Participants will include Circle, Coinbase, Crypto.com, MoonPay and Ripple.
CFTC Statement on Allegations Targeting Acting Chairman. On February 6, the CFTC released a statement regarding allegations targeting Acting Chairman Pham.
David Gillers to Step Down as Chief of Staff. On February 6, the CFTC announced that David Gillers will step down as Chief of Staff to Commissioner Behnam on February 7.
CFTC Announces Prediction Markets Roundtable. On February 5, the CFTC announced that it will hold a public roundtable in approximately 45 days at the conclusion of its requests for information on certain sports-related event contracts. The CFTC said that the goal of the roundtable is to develop a robust administrative record with studies, data, expert reports, and public input from a wide variety of stakeholder groups to inform the Commission’s approach to regulation and oversight of prediction markets, including sports-related event contracts. According to the CFTC, the roundtable will include discussion of key obstacles to the balanced regulation of prediction markets, retail binary options fraud and customer protection, potential revisions to Part 38 and Part 40 of CFTC regulations to address prediction markets, and other improvements to the regulation of event contracts to facilitate innovation. The roundtable will be held at the CFTC’s headquarters in Washington, D.C.
CFTC Division of Enforcement to Refocus on Fraud and Helping Victims, Stop Regulation by Enforcement. On February 4, CFTC Acting Chairman Caroline D. Pham announced a reorganization of the Division of Enforcement’s task forces to combat fraud and help victims while ending the practice of regulation by enforcement. According to the CFTC, previous task forces will be simplified into two new Division of Enforcement task forces: the Complex Fraud Task Force and the Retail Fraud and General Enforcement Task Force. The Complex Fraud Task Force will be responsible for all preliminary inquiries, investigations, and litigations relating to complex fraud and manipulation across all asset classes. The Acting Chief will be Deputy Director Paul Hayeck. The Retail Fraud and General Enforcement Task Force will focus on retail fraud and handle general enforcement matters involving other violations of the Commodity Exchange Act. The Acting Chief will be Deputy Director Charles Marvine.
CFTC Staff Issues No-Action Letter to Korea Exchange Concerning the Offer or Sale of KOSPI and Mini KOSPI 200 Futures Contracts. On February 4, the CFTC’s Division of Market Oversight issued a no-action letter stating it will not recommend the CFTC take enforcement action against Korea Exchange (“KRX”) for the offer or sale of Korea Composite Stock Price Index (“KOSPI”) 200 Futures Contracts and Mini KOSPI 200 Futures Contracts to persons located within the United State while the Commission’s review of KRX’s forthcoming request for certification of the contracts under CFTC Regulation 30.13 is pending. DMO issued similar letters when the KOSPI 200 became a broad-based security index in 2021 and 2022. See CFTC Press Release Nos. 8464-21 and 8610-22. The KOSPI 200 became a narrow-based security index in February 2024. The KOSPI 200 is set to become a broad-based security index on February 6, 2025, and the no-action position in DMO’s letter will be effective on that date.

New Developments Outside the U.S.

IOSCO concludes Thematic Review on Technological Challenges to Effective Market Surveillance. On February 19, IOSCO published a Thematic Review on the status of implementation of its recommendations on Technological Challenges to Effective Market Surveillance issued in 2013. The IOSCO Assessment Committee conducted the review and assessed the consistency of outcomes arising from the implementation of its recommendations by market authorities in 34 IOSCO member jurisdictions. According to IOSCO, the review found that most market authorities have implemented the recommendations and have made significant progress in addressing technological challenges to market surveillance, particularly in more complex markets. However, IOSCO noted the following concerns: some regulators lack the necessary organizational and technical capabilities to conduct effective surveillance of their markets in the midst of rapid technological developments; the absence of regular review of the surveillance capabilities of market authorities; difficulties with regard to the collection and comparison of data across venues in markets with multiple trading venues; and the inability of many regulators to map their cross-border surveillance capabilities. [NEW]
ESMA Consults on the Criteria for the Assessment of Knowledge and Competence Under MiCA. On February 17, ESMA launched a consultation on the criteria for the assessment of knowledge and competence of crypto-asset service providers’ (“CASPs”) staff giving information or advice on crypto-assets or crypto-asset services. ESMA is seeking stakeholder inputs about, notably: the minimum requirements regarding knowledge and competence of staff providing information or advice on crypto-assets or crypto-asset services; and organizational requirements of CASPs for the assessment, maintenance and updating of knowledge and competence of the staff providing information or advice. ESMA said that the guidelines aim to ensure staff giving information or advising on crypto-assets or crypto-asset services have a minimum level of knowledge and competence, enhancing investor protection and trust in the crypto-asset markets.  ESMA indicated that it will consider all comments received by April 22, 2025. [NEW]
ASIC Updates Technical Guidance on OTC Derivative Transaction Reporting. The Australian Securities and Investments Commission (“ASIC”) has updated its technical guidance on OTC derivatives reporting under ASIC Derivative Transaction Rules (Reporting) 2024. The guidance includes ASIC’s observations on, and the industry’s experience with, reporting under the 2024 rules since their commencement on October 21, 2024. It also responds to the industry’s requests for additional clarifications. The key updates include: emphasizing reporting entities’ responsibilities to create unique product identifier codes for accurate reporting; recognizing circumstances when ‘effective date’ and ‘event timestamp’ are reported on a back-dated basis; and clarifying certain aspects of ‘block trade’ reporting. The updated technical guidance is available on ASIC’s derivative transaction reporting webpage. [NEW]
ESMA Launches a Common Supervisory Action with NCAs on Compliance and Internal Audit Functions. On February 14, ESMA launched a Common Supervisory Action (“CSA”) with National Competent Authorities (“NCAs”) on compliance and internal audit functions of undertaking for collective investment in transferable securities (“UCITS”) management companies and Alternative Investment Fund Managers (“AIFMs”) across the EU. The CSA will be conducted throughout 2025 and aims to assess to what extent UCITS management companies and AIFMs have established effective compliance and internal audit functions with the adequate staffing, authority, knowledge, and expertise to perform their duties under the AIFM and UCITS Directives.
ESMA Consults on Amendments to Settlement Discipline. On February 13, ESMA launched a consultation on settlement discipline, with the objective of improving settlement efficiency across various areas. ESMA is consulting on a set of proposals to amend the technical standards on settlement discipline that include: reduced timeframes for allocations and confirmations, the use of electronic, machine-readable allocations and confirmations according to international standards, and the implementation of hold & release and partial settlement by all central securities depositories.
ESMA Consults on Revised Disclosure Requirements for Private Securitizations. On February 13, ESMA launched a consultation on revising the disclosure framework for private securitizations under the Securitization Regulation (“SECR”). The consultation proposes a simplified disclosure template for private securitizations designed to improve proportionality in information-sharing processes while ensuring that supervisory authorities retain access to the essential data for effective oversight. The new template introduces aggregate-level reporting and streamlined requirements for transaction-specific data, reflecting the operational realities of private securitizations.
Geopolitical and Macroeconomic Developments Driving Market Uncertainty. On February 13, ESMA published its first risk monitoring report of 2025, setting out the key risk drivers currently facing EU financial markets. ESMA finds that overall risks in EU securities markets are high, and market participants should be wary of potential market corrections.
ESMA Appoints Birgit Puck as new Chair of the Markets Standing Committee. On February 11, ESMA appointed Birgit Puck, Finanzmarktaufsicht, as a new Chair of the Markets Standing Committee.
ESMA consults on CCP Authorizations, Extensions and Validations. On February 7, ESMA launched two public consultations following the review of the European Market Infrastructure Regulation (“EMIR 3”). ESMA is encouraging stakeholders to share their views on: (i) the conditions for extensions of authorization and the list of required documents and information for applications by central counterparties (“CCPs”) for initial authorizations and extensions, and (ii) the conditions for validations of changes to CCP’s models and parameters and the list of required documents and information for applications for validations of such changes. EMIR 3 introduces several measures to make EU clearing services and EU CCPs more efficient and competitive, notably by streamlining and shortening supervisory procedures for initial authorizations, extensions of authorization and validations of changes to models and parameters.
DPE Regime for Post-Trade Transparency Becomes Operational. On February 3, the public register listing designated publishing entities (“DPEs”) that now bear the reporting obligation for post-trade transparency under MIFIR went live, bringing the DPE regime into full operational effect. The public register can be found here. The post-trade reporting obligation for systematic internalizers (“SIs”) has been replaced by an analogous obligation on investment firms that have chosen to register as DPEs. As a further consequence of the DPE regime launch, ESMA has decided to discontinue the voluntary publication of quarterly SI calculations data early, ahead of the scheduled removal of the obligation on ESMA to perform SI calculations from September 2025. As of February 1, the mandatory SI regime will no longer apply and investment firms will not need to perform the SI test. However, investment firms can continue to opt into the SI regime. ESMA’s press release on these measures can be found here.

New Industry-Led Developments

ISDA Responds to FCA on Improving the UK Transaction Reporting Regime. On February 14, ISDA submitted a response to the UK Financial Conduct Authority’s discussion paper (DP) 24/2 on improving the UK transaction reporting regime. In the response, ISDA indicated its support for the use of the unique product identifier in place of the international securities identification numbering system. ISDA also highlighted its opinion on the importance of aligning to global standards and similar reporting regimes, reducing duplicative reporting and using existing technology and data standards, such as the Common Domain Model and ISDA’s Digital Regulatory Reporting initiative. [NEW]
ISDA and IIF Respond on Counterparty Credit Risk Hedging. On January 31, ISDA and the Institute of International Finance (“IIF”) submitted a joint response to the Basel Committee on Banking Supervision’s proposed technical amendment on counterparty credit risk (“CCR”) hedging exposures. In the response, the associations explain that they believe the proposed changes to the treatment of CCR hedges are unnecessary, as the current substitution method is already very conservative and the new calculation would be complex and burdensome.

The following Gibson Dunn attorneys assisted in preparing this update: Jeffrey Steiner, Adam Lapidus, Marc Aaron Takagaki, Hayden McGovern, and Karin Thrasher.

Jeffrey L. Steiner, Washington, D.C. (202.887.3632, jsteiner@gibsondunn.com)

Michael D. Bopp, Washington, D.C. (202.955.8256, mbopp@gibsondunn.com)

Michelle M. Kirschner, London (+44 (0)20 7071.4212, mkirschner@gibsondunn.com)

Darius Mehraban, New York (212.351.2428, dmehraban@gibsondunn.com)

Jason J. Cabral, New York (212.351.6267, jcabral@gibsondunn.com)

Adam Lapidus – New York (212.351.3869, alapidus@gibsondunn.com )

Stephanie L. Brooker, Washington, D.C. (202.887.3502, sbrooker@gibsondunn.com)

William R. Hallatt , Hong Kong (+852 2214 3836, whallatt@gibsondunn.com )

David P. Burns, Washington, D.C. (202.887.3786, dburns@gibsondunn.com)

Marc Aaron Takagaki , New York (212.351.4028, mtakagaki@gibsondunn.com )

Hayden K. McGovern, Dallas (214.698.3142, hmcgovern@gibsondunn.com)

Karin Thrasher, Washington, D.C. (202.887.3712, kthrasher@gibsondunn.com)

This update provides an overview of key class action-related developments from the fourth quarter of 2024 (October through December).

Table of Contents

Part I summarizes decisions from the Ninth and Fourth Circuits reversing class certification under Rule 23’s commonality and predominance requirements; and
Part II highlights decisions from two courts of appeals analyzing the enforcement of arbitration agreements.

I. The Ninth and Fourth Circuits Reverse Class Certification for Want of Commonality
and Predominance Under Rule 23

Two appellate decisions from this past quarter illustrate the vital role of appellate courts in ensuring compliance with Rule 23’s stringent requirements.

One argument frequently advanced by plaintiffs seeking class certification is that certification is proper because they have alleged that a defendant engaged in a uniform legal violation across the putative class. But the Ninth Circuit’s decision in Small v. Allianz Life Insurance Co., 122 F.4th 1182 (9th Cir. 2024)—a closely watched case involving issues relevant to many pending class actions against life insurers—shows that an asserted uniform legal violation isn’t always enough.

In Small, the district court had certified a class of life-insurance beneficiaries who claimed that their insurer failed to comply with statutory notice requirements before terminating policies for non-payment of premium. The Ninth Circuit reversed. It acknowledged that the question whether the insurer “had a corporate policy to terminate life insurance policies for non-payment of premiums without first complying with” the statutory notice requirements may indeed have been a common question. 122 F.4th at 1198. But it further held that this question would not predominate because class members would still need to show that the insurer’s failure to provide the required notice caused the policies to lapse and thus the policyholders to lose their coverage. Id. at 1198-99. In light of evidence that many policyholders knowingly or intentionally let their policies lapse due to nonpayment, the Ninth Circuit ruled that determining whether the lapse was caused by the insurer’s failure to notify (rather than by a policyholder’s intentional nonpayment) could not be determined on a classwide basis. Id. at 1199-200. (Gibson Dunn filed an amicus brief on behalf of Hancock Life Insurance in support of the insurer.)

Another notable decision from this quarter, Stafford v. Bojangles’ Restaurants, Inc, 123 F.4th 671 (4th Cir. 2024), underscores that class certification is particularly inappropriate where there’s no uniform unlawful conduct in the first place. In this case, shift managers at Bojangles asserted claims under the Fair Labor Standards Act, alleging unpaid off-the-clock work and unauthorized edits to employee time records. Id. at 676-77. The district court certified classes defined as “all persons who worked as a shift manager at Bojangles” in North Carolina and South Carolina, relying “heavily on the fact that 80% of prospective class members worked opening shifts” and were thus subject to Bojangles’ Opening Checklist “policy.” Id. at 677.

The Fourth Circuit held that the district court made two errors. First, the district court granted certification based on “a vague and overly general ‘policy’ by which Bojangles allegedly mandated shift managers’ off-the-clock work and time-record edits,” without actual evidence of across-the-board company policies to that effect. 123 F.4th at 679-80. Because the plaintiffs hadn’t shown uniform conduct on the defendant’s part, the Fourth Circuit ruled they could satisfy neither commonality nor predominance. Id. at 679-80. Second, the district court defined the class too broadly, with “[n]o reference . . . to the type of off-the-clock work class members performed or whether a class member even performed off-the-clock work at all.” Id. at 681. The Fourth Circuit emphasized that “[t]he sheer breadth of the class definitions” can reveal the “underlying flaws with the classes’ commonality, predominance, and typicality.” Id.

II. The Courts of Appeals Continue to Address Issues Relating to Arbitration

Arbitration continues to be an important issue affecting many putative class actions, and two recent decisions from the courts of appeals show the variety of issues that arise when it comes to enforcing arbitration agreements.

In New Heights Farm I, LLC v. Great American Insurance Co., 119 F.4th 455 (6th Cir. 2024), the Sixth Circuit affirmed an order compelling arbitration and held that the parties had validly delegated threshold arbitrability questions to the arbitrator. Although the parties’ contract itself did not include an express delegation clause, the court nonetheless observed that the parties’ contract referred disputes to “arbitration in accordance with the rules of the American Arbitration Association.” Id. at 461. And because the American Arbitration Association’s rules in turn include a rule that the arbitrator may “rule on his or her own jurisdiction,” the court found this delegation rule to be incorporated into the parties’ contract. Id. New Heights represents the latest in a long line of decisions recognizing that incorporation of arbitration rules that themselves give arbitrators the power to resolve threshold disputes will satisfy the “clear and unmistakable” standard for delegation of arbitrability. Rent-A-Ctr., W., Inc. v. Jackson, 561 U.S. 63, 69 n.1 (2010).

And in Young v. Experian Information Solutions, Inc., 119 F.4th 314 (3d Cir. 2024), the Third Circuit clarified the proper standard for discovery when a party moves to compel arbitration. Because the plaintiff’s complaint didn’t mention the arbitration agreement, the district court ruled that the defendant’s motion to compel arbitration should be decided under a summary judgment standard and permitted “discovery on the narrow issue of whether an arbitration agreement exist[ed].” Id. at 317-18. But on appeal, the Third Circuit held that the district court erred in granting discovery on the issue of arbitrability, clarifying that even when a motion to compel arbitration is decided under the summary-judgment standard, “discovery addressing a motion to compel arbitration is unnecessary when no factual dispute exists as to the existence or scope of the arbitration agreement.” Id. at 319-20.

The following Gibson Dunn lawyers contributed to this update: Jessica Pearigen, Cate Harding, Daniel Magalotti, Matt Aidan Getz, Wesley Sze, Lauren Blas, Bradley Hamburger, Kahn Scolnick, and Christopher Chorba.

Gibson Dunn attorneys are available to assist in addressing any questions you may have regarding these developments. Please contact the Gibson Dunn lawyer with whom you usually work in the firm’s Class Actions, Litigation, or Appellate and Constitutional Law practice groups, or any of the following lawyers:

Theodore J. Boutrous, Jr. – Los Angeles (+1 213.229.7000, tboutrous@gibsondunn.com)

Christopher Chorba – Co-Chair, Class Actions Practice Group, Los Angeles
(+1 213.229.7396, cchorba@gibsondunn.com)

Theane Evangelis – Co-Chair, Litigation Practice Group, Los Angeles
(+1 213.229.7726, tevangelis@gibsondunn.com)

Lauren R. Goldman – Co-Chair, Technology Litigation Practice Group, New York
(+1 212.351.2375, lgoldman@gibsondunn.com)

Kahn A. Scolnick – Co-Chair, Class Actions Practice Group, Los Angeles
(+1 213.229.7656, kscolnick@gibsondunn.com)

Bradley J. Hamburger – Los Angeles (+1 213.229.7658, bhamburger@gibsondunn.com)

Michael Holecek – Los Angeles (+1 213.229.7018, mholecek@gibsondunn.com)

Lauren M. Blas – Los Angeles (+1 213.229.7503, lblas@gibsondunn.com)

On February 18, 2025, the First Circuit handed down a much-anticipated decision on the causation element of False Claims Act (FCA) cases premised on the Anti-Kickback Statute (AKS), as amended by the Affordable Care Act in 2010. See United States v. Regeneron Pharms., Inc., No. 23-2086, slip op. (1st Cir. Feb. 18, 2025).

Summary

Since 2010, the Anti-Kickback Statute has provided that claim for government payment “resulting from” an AKS violation is automatically false or fraudulent for purposes of the FCA. The U.S. Department of Justice historically has interpreted this provision exceptionally broadly, often taking the position that a kickback inherently “taints” every claim submitted after a kickback is payment, regardless of whether the provider would have prescribed or recommended an item or service even without the kickback. That is, DOJ’s view has been that it should not have to prove a claim was actually caused by a kickback at all.

The First Circuit, however, joined the Sixth and Eighth Circuits—and deepened a split with the Third Circuit—in holding that, to prove that a claim “result[s] from” an AKS violation, the government (or a qui tam relator) must prove that the claim would not have been submitted but for the AKS violation. The First Circuit rejected less onerous causation standards advanced by the government and adopted by the Third Circuit—including variations of DOJ’s so-called “taint” theory of AKS-based FCA liability. But the First Circuit’s opinion simultaneously muddied the waters, as it observed, in dicta, that the AKS’s “resulting from” provision is just one “pathway” to FCA liability from an AKS violation, and that FCA plaintiffs could pursue a different “pathway”—not before the Court on appeal—based on alleged materially false certifications of AKS compliance to government health programs.

The Regeneron Decision

Regeneron Pharmaceuticals manufactures, markets, and sells the drug Eylea, a treatment for wet age-related macular degeneration (AMD). The drug is reimbursed under Medicare Part B, which requires patients to pay 20% of the drug’s cost as a co-pay. The government accused Regeneron of violating the AKS by indirectly paying the copayments for Medicare patients who took the drug. According to the government, the price of the drug—more than $1,800 per injection—meant that patients often faced annual out-of-pocket costs exceeding $2,000, which discouraged them from using the drug.

To alleviate this financial burden, Regeneron allegedly donated more than $60 million to the Chronic Disease Fund (CDF), a charitable foundation that provides copayment assistance. The government alleged that these donations comprised kickbacks intended to induce doctors to prescribe Eylea (and patients to maintain their prescriptions), thereby increasing Medicare reimbursement claims. The government argued that, because these payments violated the AKS, any Medicare claim for Eylea prescribed to a patient who received this co-pay assistance should be considered false or fraudulent under the FCA.

In litigation with DOJ, Regeneron argued that its co-pay assistance did not directly cause doctors to prescribe Eylea and that a Medicare claim should only be false under the FCA if the kickback was the but-for cause of the claim. In other words, if a doctor would have prescribed Eylea and submitted a Medicare claim even without the co-pay assistance, then the claim could not have “resulted from” an AKS violation. The district court sided with this argument, granted Regeneron’s motion to dismiss DOJ’s complaint, and then agreed to certify the issue for interlocutory review.

On appeal, the First Circuit focused on the phrase “resulting from” in the text of the AKS, which (as amended in 2010) states that “a claim that includes items or services resulting from a violation of [the AKS] constitutes a false or fraudulent claim” under the FCA. 42 U.S.C. § 1320a-7b(g) (emphasis added).

The First Circuit held that the “resulting from” phrase imposes a but-for causation standard. This means that for a claim to be considered false under the FCA due to an AKS violation, the government (or a qui tam relator) must prove that the kickback was the “actual cause” of the claim being submitted. The court relied on Supreme Court precedent (e.g., Burrage v. United States, 571 U.S. 204 (2014) and Paroline v. United States, 572 U.S. 434 (2014)) which generally interpreted similar causation language as requiring proof that the event in question would not have occurred but for the preceding act. The First Circuit found no textual or contextual reasons to deviate from this default causal standard. Notably, the First Circuit rejected the government’s argument that, for example, the legislative history and purpose of the AKS require a broader construction of the phrase “resulting from” (i.e., an interpretation that would allow liability even when the claim would have been submitted regardless of the kickback).

But the First Circuit also indicated, in dicta, that a false-certification theory may provide a separate pathway to proving FCA liability based on alleged kickbacks. Before Congress amended the AKS in 2010, various courts recognized that FCA liability could attach to AKS violations under a false-certification theory if compliance with the AKS was material to the government’s decision to pay a claim. On appeal, the government argued that Congress enacted the 2010 amendment to supplement, not replace, false-certification case law. The First Circuit agreed, stating in dicta that false certification remains a valid theory of FCA liability even after the amendment. The court explained that theory requires proof that the provider falsely represented compliance with the AKS and that the misrepresentation could have influenced the government’s decision to pay a claim (i.e., was material to the payment), but does not require proof that the AKS violation was a but-for cause of the submission of the claim.

Other Relevant Jurisprudence

In reaching this result, the First Circuit joins the Sixth and Eighth Circuits in holding that “resulting from” requires but-for causation. See United States ex rel. Martin v. Hathaway, 63 F.4th 1043 (6th Cir. 2023); United States ex rel. Cairns v. D.S. Med. LLC, 42 F.4th 828 (8th Cir. 2022). In those cases, the Sixth and Eighth Circuits had held that the government or a relator must show that, but for the AKS violation, the false claim would not have been submitted to a federal healthcare program.

In so holding, those circuits rejected the Third Circuit’s less stringent approach from United States ex rel. Greenfield v. Medco Health Sols., Inc., 880 F.3d 89 (3d Cir. 2018). In Greenfield, the Third Circuit held that an AKS violation can trigger FCA liability even if there is no proof that the kickback directly caused the claim as long as a patient has been exposed to an illegal inducement before a claim is submitted.

Potential Ramifications

Although the First Circuit provided much-needed clarity on the “resulting from” language in the AKS, its analysis of the false-certification theory may cause the government or relators to attempt an end run around the as-amended AKS and revert to the no-causation “taint theory” of liability. Meanwhile, Supreme Court review of the AKS causation question feels inevitable—there is a circuit split; the Court has taken up an FCA-related case in most terms in recent memory; and the Court has previously agreed to take up cases like Burrage and Paroline. But given the Regeneron court’s apparent invitation to a different “pathway” to AKS-based FCA claims, plaintiffs may feel less need to press the issue in petitions for certiorari.

In the meantime, we expect to see:

Efforts by the defense bar to persuade other circuit courts to side with the First, Sixth, and Eighth Circuits;
Scrutiny at the pleading stage as to whether the government or relators have adequately pleaded a causal connection between alleged AKS violations and false claims;
Litigation about whether the certification “pathway” remains open after Congress amended the AKS to link it to the FCA;
Additional arguments by defendants regarding the various factors that contribute to a healthcare provider’s decision-making (e.g., analysis of clinical treatment guidelines, Department of Health and Human Services expert panel recommendations, clinical treatment patterns, and/or medical association guidance, prior efficacious use of a particular therapy, etc.);
Increased use of statistical experts to try to demonstrate (or rebut) but-for causation; and
Arguments focused on DOJ’s historical position that the measure of damages in AKS matters is the full value of the paid claim.

Open questions about the scope of liability in AKS-based FCA cases still abound after Regeneron. The Supreme Court has been clear in recent years that it believes the elements of common law fraud should be read into the FCA—elements that presumably include causation. Thus, it stands to reason that even certification theories require proof of causation—and we expect that defendants will retrench and advance causation-, falsity-, and materiality-focused arguments even under those theories.

Moreover, none of the cases interpreting the AKS’s causation requirement have taken head-on the question of what the government’s damages should be in a civil FCA case based on alleged AKS violations. The FCA imposes “the amount of damages which the Government sustains because of” the violation (trebled). While the government’s position in AKS cases is that its damages are 100% of the claim amount—even where the item or service claimed for reimbursement was medically necessary and actually provided—that position does not square with common law principles of fraud damages or federal courts’ analysis of damages in other types of FCA cases. Regardless of how the AKS causation question is ultimately answered in the coming months and years, we may well see a new wave of cases focused on this damages question.

The following Gibson Dunn lawyers prepared this update: Jonathan Phillips, John Partridge, Jake Shields, and John Turquet Bravard.

Gibson Dunn lawyers regularly counsel clients on the False Claims Act issues and are available to assist in addressing any questions you may have regarding these issues. Please contact the Gibson Dunn lawyer with whom you usually work, the authors, or any leader or member of the firm’s False Claims Act/Qui Tam Defense practice group:

Washington, D.C.
Jonathan M. Phillips – Co-Chair (+1 202.887.3546, jphillips@gibsondunn.com)
Stuart F. Delery (+1 202.955.8515,sdelery@gibsondunn.com)
F. Joseph Warin (+1 202.887.3609, fwarin@gibsondunn.com)
Jake M. Shields (+1 202.955.8201, jmshields@gibsondunn.com)
Gustav W. Eyler (+1 202.955.8610, geyler@gibsondunn.com)
Lindsay M. Paulin (+1 202.887.3701, lpaulin@gibsondunn.com)
Geoffrey M. Sigler (+1 202.887.3752, gsigler@gibsondunn.com)
Joseph D. West (+1 202.955.8658, jwest@gibsondunn.com)

San Francisco
Winston Y. Chan – Co-Chair (+1 415.393.8362, wchan@gibsondunn.com)
Charles J. Stevens (+1 415.393.8391, cstevens@gibsondunn.com)

New York
Reed Brodsky (+1 212.351.5334, rbrodsky@gibsondunn.com)
Mylan Denerstein (+1 212.351.3850, mdenerstein@gibsondunn.com)

Denver
John D.W. Partridge (+1 303.298.5931, jpartridge@gibsondunn.com)
Ryan T. Bergsieker (+1 303.298.5774, rbergsieker@gibsondunn.com)
Monica K. Loseman (+1 303.298.5784, mloseman@gibsondunn.com)

Dallas
Andrew LeGrand (+1 214.698.3405, alegrand@gibsondunn.com)

Los Angeles
James L. Zelenay Jr. (+1 213.229.7449, jzelenay@gibsondunn.com)
Nicola T. Hanna (+1 213.229.7269, nhanna@gibsondunn.com)
Jeremy S. Smith (+1 213.229.7973, jssmith@gibsondunn.com)
Deborah L. Stein (+1 213.229.7164, dstein@gibsondunn.com)
Dhananjay S. Manthripragada (+1 213.229.7366, dmanthripragada@gibsondunn.com)

Palo Alto
Benjamin Wagner (+1 650.849.5395, bwagner@gibsondunn.com)

Gibson Dunn’s U.S. Supreme Court Round-Up provides summaries of cases decided during the October 2024 Term and highlights other key developments on the Court’s docket. During the October 2023 Term, the Court heard 61 oral arguments and released 59 opinions. For the October 2024 Term, the Court has granted 71 petitions for a total of 62 arguments. To date, it has heard 34 arguments in 36 cases and disposed of seven cases, releasing four opinions in five cases and dismissing two cases as improvidently granted.

Spearheaded by Miguel Estrada, the U.S. Supreme Court Round-Up keeps clients apprised of the Court’s most recent actions. The Round-Up previews cases scheduled for argument, tracks the actions of the Office of the Solicitor General, and recaps recent opinions. The Round-Up provides a concise, substantive analysis of the Court’s actions. Its easy-to-use format allows the reader to identify what is on the Court’s docket at any given time, and to see what issues the Court will be taking up next. The Round-Up is the ideal resource for busy practitioners seeking an in-depth, timely, and objective report on the Court’s actions.

View the Round-Up Here

Gibson Dunn has a longstanding, high-profile presence before the Supreme Court of the United States, appearing numerous times in the past decade in a variety of cases. Twelve current Gibson Dunn lawyers have argued before the Supreme Court, and during the Court’s ten most recent Terms, the firm has argued a total of 27 cases, including closely watched cases with far-reaching significance in the areas of intellectual property, securities, separation of powers, and federalism. Moreover, although the grant rate for petitions for certiorari is below 1%, Gibson Dunn’s petitions have captured the Court’s attention: Gibson Dunn has persuaded the Court to grant over 40 petitions for certiorari since 2006.

* * * *

Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding developments at the U.S. Supreme Court. Please feel free to contact the following attorneys in the firm’s Washington, D.C. office, or any member of the Appellate and Constitutional Law Practice Group.

Miguel A. Estrada (+1 202.955.8257, mestrada@gibsondunn.com)

Jessica L. Wagner (+1 202.955.8652, jwagner@gibsondunn.com)

Lavi Ben Dor (+1 202.777.9331, lbendor@gibsondunn.com)

Christian Talley (+1 202.777.9537, ctalley@gibsondunn.com)

The developments follow mounting concerns in Delaware about “DExit”—the actual and potential departures of Delaware-incorporated corporations from the State for jurisdictions perceived to be more friendly to certain types of corporations.

On February 17, 2025, amendments were introduced in the Delaware legislature intended to both lower Delaware courts’ scrutiny of controlling stockholder transactions and moderate the scope of investors’ access to company books and records. Senate Bill 21 (SB21) proposes amendments to Sections 144 and 220 of the Delaware General Corporation Law (DGCL). The bill’s lead sponsor has stated publicly that the amendments would not apply retroactively.

These developments follow mounting concerns in Delaware about “DExit”—the actual and potential departures of Delaware-incorporated corporations from the State for jurisdictions perceived to be more friendly to certain types of corporations.[1]

Proposed Amendments to Section 144

SB21 proposes amendments to Section 144 of the DGCL that, if adopted, would significantly change how controlling stockholder transactions are reviewed by the court.[2] The amendments also would strengthen the presumption that a public company director is disinterested and independent.

Controller Transactions Other than Going Private Transactions. SB21 would legislatively reverse the Delaware Supreme Court’s recent decision in In re Match Group, Inc. Derivative Litigation, 315 A.3d 446 (Del. 2024). As Gibson Dunn discussed in its April 8, 2024 Client Alert, Match reaffirmed that entire fairness is the default standard of review for corporate acts or transactions involving a controlling stockholder unless procedures are in place satisfying the requirements of Kahn v. M&F Worldwide Corp.,88 A.3d 635, 645 (Del. 2014) (“MFW”), and related case law; Match also held that all members of a special committee must be disinterested and independent to shift the burden or standard of review at the pleading stage. SB21 also lowers the requirements of MFW.

SB21 proposes the following changes to the current common law, as articulated in Match, MFW, and related cases:

Current Common Law	Proposed Amendments
Entire fairness applies to controller acts or transactions approved by either a special committee of independent and disinterested directors or disinterested stockholders, unless the below elements are satisfied.	The business judgment rule applies to controller acts or transactions (other than going private transactions) approved by either a special committee of independent and disinterested directors or disinterested stockholders.
An act or transaction must be conditioned on special committee and disinterested stockholder approval from inception, i.e. before substantive economic negotiations begin.	For disinterested stockholder approval to be effective, the act or transaction must be conditioned on such approval at or prior to the time it is submitted to stockholders.
All members of the special committee are disinterested and independent.	A majority of the members of the special committee are disinterested and independent.
The special committee is empowered to select and retain its own advisors.	The special committee need not be empowered to select and retain its own advisors.
The special committee is empowered to reject the proposed act or transaction.	The special committee is empowered to reject the proposed act or transaction (no change).
The special committee satisfies its duty of care in negotiating the act or transaction.	The special committee approves the act or transaction in good faith.
The act or transaction must be approved by a majority of outstanding voting power of disinterested stockholders.	The act or transaction must be approved by a majority of votes cast by disinterested stockholders.
Disinterested stockholder approval must be uncoerced and fully informed.	Disinterested stockholder approval must be uncoerced and fully informed (no change).

Going Private Transactions. Under the amendments, for the business judgment rule to apply to going private transactions at the pleading stage, such transactions would require informed, uncoerced approval by both a special committee and disinterested stockholders, subject to the other changes to MFW discussed above.
- For public companies, SB21 would define “going private transaction” as a Rule 13e-3 transaction (as defined in 17 CFR § 240.13e-3(a)(3)).
- Otherwise, a “going private transaction” would be one in which all shares of capital stock held by disinterested stockholders are cancelled or acquired (other than those of the controlling stockholder).
Definition of Controlling Stockholder. The amendments propose to define who is a controlling stockholder to address uncertainty in Delaware law regarding who may be a “controlling stockholder.”
- A stockholder with majority voting power is and would be controlling.
- Otherwise, a stockholder with less than majority voting power would be controlling only if it has both (i) power functionally equivalent to majority voting power by virtue of one-third in voting power of the outstanding stock of the corporation entitled to vote (A) generally in the election of directors or (B) for the election of directors who have a majority in voting power of the votes of all directors on the board of directors, and (ii) power to exercise managerial authority over the business and affairs of the corporation.
Exculpation for Controlling Stockholders. The amendments would exculpate controlling stockholders and members of a control group from liability for duty of care violations. The exculpation would automatically apply without any option to opt out.
Disinterestedness and Independence of Public Company Directors. The amendments would define what it means to be “disinterested” for purposes of “disinterested” director or stockholder status. Among other things, for publicly listed companies, a director would be presumed to be a disinterested director with respect to an act or transaction to which he or she is not a party if the board determined that such director is an independent director or satisfies the relevant criteria for determining director independence under any applicable stock exchange rule. This presumption would be more difficult to rebut at the pleading stage, because rebuttal requires “substantial and particularized facts” of a “material interest” or a “material relationship,” as defined in the proposed amendments. Historically, Delaware took a facts-and-circumstances approach to director conflicts (for Delaware law purposes), which introduced uncertainty around which directors would qualify as disinterested and independent under what circumstances.
- Nomination or Election by Interested Person. Under the amendments, an interested person’s nomination or election of a director to the board would not, by itself, evidence that such director, if not a party to an act or transaction, is not a disinterested director. This means that directors designated to a board by a stockholder, for instance, would not automatically be disqualified from being considered independent for Delaware law purposes.

Proposed Amendments to Section 220

Following judicial expansion of stockholder inspection rights in recent years, corporations have increasingly been subjected to invasive demands for an ever-widening range of corporate records, including director, officer, or management communications that in some cases courts have permitted for inspection. SB21 proposes amendments to Section 220 of the DGCL that would narrow the scope of books and records available to stockholders and increase the burden on stockholders for obtaining such records.

Scope of Books and Records. The amendments would limit the definition of “books and records” to the certificate, bylaws, minutes and signed consents of stockholder meetings, formal communications to stockholders as a whole, minutes and resolutions of the board and committees, materials provided to the board and committees, annual financial statements, Section 122(18) (i.e., Moelis) agreements, and director independence questionnaires. Director, officer, and manager communications like emails and text messages are notably absent from this definition.
Relevant Period. The amendments would limit the period of time from which stockholders may inspect books and records to those within three years of the date of the demand.
Demand Requirement. Under the amendments, to obtain inspection, a stockholder demand would be required to describe its purpose and the records it seeks with “reasonable particularity.” At least for the purpose of investigating suspected mismanagement or wrongdoing, this would appear to heighten, if not outright replace, the low “credible basis” standard.
Protections. The amendments would codify the court’s current practice of permitting a company to impose reasonable restrictions on confidentiality, use, and distribution of books and records, and deeming produced materials to be incorporated by reference into any complaint. The latter is important because otherwise stockholders can mislead the court by cherry-picking facts from documents in a complaint without permitting the court to consider the whole document. A company also would be permitted to redact portions of documents that are not specifically related to the stockholder’s purpose.
Court’s Discretion to Expand “Books and Records.” The amendments would prohibit the court from compelling production of materials outside the defined term—e.g., director, officer, or management communications—with a few narrow exceptions. If the amendments are adopted and a company does not have minutes and consents of stockholder meetings, minutes and resolutions of the board and committees, or annual financial statements (and, for public companies, director questionnaires), then the court would be permitted to order production of additional records that are the “functional equivalent” of these materials and “only to the extent necessary and essential” to fulfill a proper purpose.
- Notably, under the amendments, in the event board or committee materials do not exist or are unavailable, the court would not be permitted to order production of additional materials.

More to Come

The legislature published a Press Release about SB21 and Senate Concurrent Resolution 17 (SCR17). SCR17 also directs the Corporation Law Council to report to the governor by March 31, 2025, with recommendations for legislative action that might help balance the fee awards so that they are not overly excessive. These proposed amendments will undoubtedly be subject to public debate in the coming weeks, as some academics and plaintiffs’ firms are objecting to not only the merits of the amendments, but also the process and timing of their consideration by the CLC and Delaware legislature.

Gibson Dunn will continue monitoring these developments as they progress.

[1] For example, following Tesla’s reincorporation in Texas, TradeDesk reincorporated in Nevada, Dropbox filed notice that it is in the process of reincorporating in Nevada, and other controller-led companies announced they are considering reincorporation.

[2] SB21 also would provide a safe harbor for an act or transaction for which a majority of directors are conflicted—for example, decisions regarding director compensation—if such act or transaction is approved by a majority of the disinterested, independent directors or approved or ratified by disinterested stockholders, in each case on a fully informed basis.

The following Gibson Dunn lawyers prepared this update: Ari Lanin, Monica K. Loseman, Brian M. Lutz, Mary Beth Maloney, Julia Lapitskaya, Colin B. Davis, Jonathan D. Fortney, and Mark H. Mixon, Jr.

Gibson Dunn lawyers are available to assist in addressing any questions you may have regarding these developments. Please contact the Gibson Dunn lawyer with whom you usually work, the authors, or any of the following Securities Litigation, Mergers and Acquisitions, Private Equity, or Securities Regulation and Corporate Governance practice group leaders and members:

Securities Litigation:
Colin B. Davis – Orange County (+1 949.451.3993, cdavis@gibsondunn.com)
Jonathan D. Fortney – New York (+1 212.351.2386, jfortney@gibsondunn.com)
Monica K. Loseman – Denver (+1 303.298.5784, mloseman@gibsondunn.com)
Brian M. Lutz – San Francisco (+1 415.393.8379, blutz@gibsondunn.com)
Mary Beth Maloney – New York (+1 212.351.2315, mmaloney@gibsondunn.com)
Mark H. Mixon, Jr. – New York (+1 212.351.2394, mmixon@gibsondunn.com)
Craig Varnen – Los Angeles (+1 213.229.7922, cvarnen@gibsondunn.com)

Mergers and Acquisitions:
Robert B. Little – Dallas (+1 214.698.3260, rlittle@gibsondunn.com)
Saee Muzumdar – New York (+1 212.351.3966, smuzumdar@gibsondunn.com)
George Sampas – New York (+1 212.351.6300, gsampas@gibsondunn.com)

Private Equity:
Richard J. Birns – New York (+1 212.351.4032, rbirns@gibsondunn.com)
Wim De Vlieger – London (+44 20 7071 4279, wdevlieger@gibsondunn.com)
Federico Fruhbeck Jr. – London (+44 20 7071 4230, ffruhbeck@gibsondunn.com)
Ari Lanin – Los Angeles (+1 310.552.8581, alanin@gibsondunn.com)
Michael Piazza – Houston (+1 346.718.6670, mpiazza@gibsondunn.com)
John M. Pollack – New York (+1 212.351.3903, jpollack@gibsondunn.com)

Securities Regulation and Corporate Governance:
Elizabeth Ising – Washington, D.C. (+1 202.955.8287, eising@gibsondunn.com)
Julia Lapitskaya – New York (+1 212.351.2354, jlapitskaya@gibsondunn.com)
James J. Moloney – Orange County (+1 949.451.4343, jmoloney@gibsondunn.com)
Lori Zyskowski – New York (+1 212.351.2309, lzyskowski@gibsondunn.com)

On February 18, 2025, the U.S. District Court for the Eastern District of Texas entered a stay of its January 7, 2025 order that had paused the “Reporting Rule” implementing the Corporate Transparency Act (CTA). On February 19, 2025, the Financial Crimes Enforcement Network (FinCEN) issued guidance that extends the reporting deadline for all reporting companies until at least March 21, 2025. In its guidance, FinCEN also noted that it may further modify this deadline.

Entities that may be subject to the CTA and its associated Reporting Rule that have not filed Beneficial Ownership Information (BOI) reports should consult with their CTA advisors as necessary to understand their obligations now that the CTA and the Reporting Rule are enforceable again, and BOI reports for the vast majority of entities will now be due by March 21, 2025.

On December 3, Judge Mazzant of the U.S. District Court for the Eastern District of Texas ruled that the CTA was likely unconstitutional, issued a nationwide preliminary injunction against enforcement of the law, and postponed the effective date of the Reporting Rule that set filing deadlines for compliance, in Texas Top Cop Shop, Inc. et al. v. Garland et al. (“Texas Top Cop Shop”).[1] After substantial litigation, that order was ultimately stayed by the Supreme Court on January 23, 2025.[2] The Court’s decision was 8–1.

In a separate case decided in early January, but prior to the Supreme Court’s decision to stay the Texas Top Cop Shop order, Judge Kernodle of the U.S. District Court for the Eastern District of Texas also ruled that the CTA was likely unconstitutional, in Smith v. U.S. Department of the Treasury (“Smith”).[3] Judge Kernodle enjoined enforcement of the CTA with respect to the plaintiffs in that case and stayed the effective date of the Reporting Rule nationwide.[4]

On February 5, 2025, the Department of the Treasury asked Judge Kernodle to stay the order in Smith and filed a notice of appeal to the U.S. Court of Appeals for the Fifth Circuit.[5] Additionally, on February 7, 2025, the Department of Justice filed appellate briefs defending the constitutionality of the CTA in separate cases pending in the Fourth and Fifth Circuits.[6]

On February 18, 2025, Judge Kernodle issued a stay of his January decision in Smith.[7]

On February 19, 2025, FinCEN issued guidance regarding the applicable deadlines now that no court orders bar enforcement of the CTA nationwide.[8] In its guidance, FinCEN extended the reporting deadline for reporting companies to March 21, 2025, except for reporting entities previously granted extensions even beyond March 21, 2025 (for example, because of natural disasters).[9] FinCEN added that during the period between February 19 and March 21, 2025, FinCEN “will assess its options to further modify deadlines, while prioritizing reporting for those entities that pose the most significant national security risks.”[10] FinCEN also stated it intends to revise the Reporting Rule to reduce the burden for lower-risk entities, including many U.S. small businesses.[11]

The government’s request for a stay in Smith, its merits briefs in the Fourth and Fifth Circuits, and FinCEN’s recent guidance, all indicate that the Trump Administration’s Departments of Justice and the Treasury will likely continue defending the constitutionality of the CTA and Reporting Rule going forward. At the same time, FinCEN has indicated openness to revising the Reporting Rule to reduce the burden for some businesses.

While the Reporting Rule is enforceable again now that no judicial stays remain in effect, litigation remains ongoing, and it is still theoretically possible that another court could enjoin enforcement of the law against particular plaintiffs or nationwide. Moreover, Congress could intervene by enacting new legislation: the House of Representatives recently passed a bill seeking to extend the deadline to file BOI reports until January 1, 2026.[12] The Senate has yet to act on the bill.

Entities that believe they may be subject to the CTA and its associated Reporting Rule should closely monitor this matter, and consult with their CTA advisors as necessary, to understand their obligations now that the CTA is enforceable again and BOI reports for most entities are due by March 21, 2025.

For additional background information, please refer to our Client Alerts issued on December 5, December 9, December 16, December 24, and December 27, 2024, and January 24, 2025.

[1] Texas Top Cop Shop, Inc. et al. v. Garland et al., No. 4:24-CV-478, Dkt. 30 (E.D. Tex. Dec. 3, 2024).

[2] Order, McHenry v. Top Cop Shop, Inc., No. 24A653 (U.S. Supreme Court Jan. 23, 2025).

[3] Smith v. U.S. Dep’t of the Treasury, No. 6:24-cv-00336-JDK, Dkt. 30 at 33–34 (E.D. Tex. Jan. 7, 2025).

[4] Id.

[5] Smith v. U.S. Dep’t of the Treasury, No. 6:24-cv-00336-JDK, Dkts. 32, 33 (E.D. Tex. Feb. 5, 2025).

[6] See Community Assocs. Institute v. U.S. Dep’t of the Treasury, No. 24-2118, Dkt. 40 (4th Cir. Feb. 7, 2025); Texas Top Cop Shop, Inc. et al. v. Bondi et al., No. 24-40792, Dkt. 212 (5th Cir. Feb. 7, 2025). Additionally, we note that another district court has now held that the CTA is constitutional. Boyle v. Bessent, No. 2:23-cv-00081, Dkt. 51 (D. Me. Feb. 14, 2025).

[7] Smith v. U.S. Dep’t of the Treasury, No. 6:24-cv-00336-JDK, Dkt. 39 (E.D. Tex. Feb. 17, 2025).

[8] https://fincen.gov/sites/default/files/shared/FinCEN-BOI-Notice-Deadline-Extension-508FINAL.pdf. Additionally, nothing in FinCEN’s guidance disturbs the Reporting Rule’s requirements that companies created or registered in 2024 have 90 days to file their BOI reports and companies created or registered in 2025 have 30 days to file their BOI reports. Therefore, any entity created in 2024 whose reporting deadline had not yet passed should have until March 21, 2025 or 90 days after creation or registration to file their BOI reports, whichever is later. Companies created or registered on or after January 1, 2025 will have until March 21, 2025 or 30 days after creation or registration to file their BOI reports, whichever is later.

[9] Id.

[10] Id.

[11] Id.

[12] Protect Small Businesses from Excessive Paperwork Act, H.R. 736 (119th Cong. 2025).

The following Gibson Dunn lawyers assisted in preparing this update: Kevin Bettsteller, Stephanie Brooker, Matt Gregory, Justin Newman, Dave Ware, Shannon Errico, Sam Raymond, and Connor Mui.

Gibson Dunn has deep experience with issues relating to the Bank Secrecy Act, the Corporate Transparency Act, other AML and sanctions laws and regulations, and challenges to Congressional statutes and administrative regulations.

For assistance navigating white collar or regulatory enforcement issues, please contact the authors, the Gibson Dunn lawyer with whom you usually work, or any leader or member of the firm’s Anti-Money Laundering, Administrative Law & Regulatory, Investment Funds, Real Estate, or White Collar Defense & Investigations practice groups.

Please also feel free to contact any of the following practice group leaders and members and key CTA contacts:

Anti-Money Laundering:
Stephanie Brooker – Washington, D.C. (+1 202.887.3502, sbrooker@gibsondunn.com)
M. Kendall Day – Washington, D.C. (+1 202.955.8220, kday@gibsondunn.com)
David Ware – Washington, D.C. (+1 202.887.3652, dware@gibsondunn.com)
Ella Capone – Washington, D.C. (+1 202.887.3511, ecapone@gibsondunn.com)
Sam Raymond – New York (+1 212.351.2499, sraymond@gibsondunn.com)

Administrative Law and Regulatory:
Stuart F. Delery – Washington, D.C. (+1 202.955.8515, sdelery@gibsondunn.com)
Eugene Scalia – Washington, D.C. (+1 202.955.8673, dforrester@gibsondunn.com)
Helgi C. Walker – Washington, D.C. (+1 202.887.3599, hwalker@gibsondunn.com)
Matt Gregory – Washington, D.C. (+1 202.887.3635, mgregory@gibsondunn.com)

Investment Funds:
Kevin Bettsteller – Los Angeles (+1 310.552.8566, kbettsteller@gibsondunn.com)
Shannon Errico – New York (+1 212.351.2448, serrico@gibsondunn.com)
Greg Merz – Washington, D.C. (+1 202.887.3637, gmerz@gibsondunn.com)

Real Estate:
Eric M. Feuerstein – New York (+1 212.351.2323, efeuerstein@gibsondunn.com)
Jesse Sharf – Los Angeles (+1 310.552.8512, jsharf@gibsondunn.com)
Lesley V. Davis – Orange County (+1 949.451.3848, ldavis@gibsondunn.com)
Anna Korbakis – Orange County (+1 949.451.3808, akorbakis@gibsondunn.com)

White Collar Defense and Investigations:
Stephanie Brooker – Washington, D.C. (+1 202.887.3502, sbrooker@gibsondunn.com)
Winston Y. Chan – San Francisco (+1 415.393.8362, wchan@gibsondunn.com)
Nicola T. Hanna – Los Angeles (+1 213.229.7269, nhanna@gibsondunn.com)
F. Joseph Warin – Washington, D.C. (+1 202.887.3609, fwarin@gibsondunn.com)

Gibson Dunn’s Workplace DEI Task Force aims to help our clients develop creative, practical, and lawful approaches to accomplish their DEI objectives following the Supreme Court’s decision in SFFA v. Harvard. Prior issues of our DEI Task Force Update can be found in our DEI Resource Center. Should you have questions about developments in this space or about your own DEI programs, please do not hesitate to reach out to any member of our DEI Task Force or the authors of this Update (listed below).

Key Developments:

On February 5, the United States Office of Personnel Management (OPM) issued a memo to the heads and acting heads of federal departments and agencies entitled “Further Guidance Regarding Ending DEIA Offices, Programs and Initiatives.” The memo provides guidance related to the federal government’s implementation of President Trump’s recent DEI-related executive orders (EO 14151, EO 14168, and EO 14173). The memo directs agencies to “terminate all illegal DEIA initiatives” and eliminate DEIA “offices, policies, programs, and practices” that unlawfully discriminate in any employment action, including “recruiting, interviewing, hiring, training or other professional development, internships, fellowships, promotion, retention, discipline, and separation.” It also prohibits employee resource groups to the extent that they “promote unlawful DEIA initiatives,” though agency heads “retain discretion” to allow affinity group, cultural, mentoring, and social activities and programs that are not limited in any way based on protected characteristics. The memo further provides that agencies should retain “personnel, offices, and procedures required by statute or regulation to counsel employees allegedly subjected to discrimination, receive discrimination complaints, collect demographic data, and process accommodation requests.” For a more detailed analysis of the memo, see our February 12 client alert.

On February 14, the Attorneys General of 16 states issued joint guidance reaffirming their position on the continued legality of certain DEI initiatives. The guidance states, “diversity, equity, inclusion, and accessibility best practices are not illegal, and the federal government does not have the legal authority to issue an executive order that prohibits otherwise lawful activities in the private sector or mandates the wholesale removal of these policies and practices within private organizations, including those that receive federal contracts and grants.” The guidance also warns that failure to implement adequate non-discrimination and fair employment policies, procedures, and trainings may be used by those states to establish violation of those states’ anti-discrimination laws. Finally, the guidance provides a list of DEI best practices, which, in the AGs’ views, include (among other things): (1) prioritizing widescale recruitment efforts to attract a larger pool of applicants from a variety of backgrounds, (2) setting standardized criteria for evaluating candidates, (3) monitoring the success of policies and practices in attracting and retaining qualified talent, (4) conducting training on topics such as unconscious bias, inclusive leadership, and disability awareness, and (5) creating clear protocols for reporting discrimination or harassment.

On February 13, 2025, the National Association of Diversity Officers in Higher Education, the American Association of University Professors, the Restaurant Opportunities Centers United and the mayor and city council of Baltimore, Maryland moved for a temporary restraining order and a preliminary injunction to prevent the Trump Administration from enforcing two executive orders, EO 14151 and EO 14173. The plaintiffs contend that the executive orders exceed presidential authority, violate the separation of powers and the First Amendment, and are unconstitutionally vague. The plaintiffs contend that they are suffering irreparable harm from the termination of “equity-related grants” and the suppression of speech relating to DEI. The plaintiffs argue that preventing “constitutional, existential, and reputational harm” is in the public’s interest. The government’s response is due February 18, and a hearing is set for February 19.

On February 11, the State of Missouri filed a lawsuit against Starbucks in the Eastern District of Missouri, alleging that Starbucks is violating state and federal anti-discrimination laws. Specifically, the complaint alleges that Starbucks unlawfully ties executive compensation to diversity-and-inclusion-related quotas and metrics; provides discriminatory advancement opportunities through race- and gender-based mentoring programs, training programs, and employee “networks”; and discriminates on the basis of race and sex with respect to its board membership. The complaint raises four claims under Title VII, including (1) unlawful hiring and firing practices, (2) unlawful training programs, (3) unlawful segregation or classification of employees, and (4) unlawful printing or circulation of discriminatory employment and training materials. The complaint also alleges discriminatory contract impairment under Section 1981 and related state-law claims. Missouri argues that it has standing to sue Starbucks in relation to these practices because Starbucks’s practices harm some Missouri residents by discriminating against them, and Missouri could otherwise address this harm through its sovereign lawmaking power. Missouri seeks a declaratory judgment, monetary damages, and injunctive relief, including an injunction prohibiting Starbucks from “unlawfully misrepresenting to job applicants and customers that it does not engage in unlawful discrimination on the bases of race, color, sex, national origin, or ancestry.”

In a February 14 article, CNN’s Nathaniel Meyerson quotes Gibson Dunn’s Jason Schwartz, who described the lawsuit as “one of the first broadside attacks against the full menu of corporate DEI programs.” Meyerson reports that although legal experts agree that “[p]rograms that are not open to all employees because of race or other criteria, any numerical goals or targets, and executive compensation tied to diversity targets” are vulnerable to legal challenge, the lawsuit goes beyond that. Schwartz described some of Missouri’s claims as a “stretch,” noting that the lawsuit “bites off more than it can chew.” Schwartz explained that the suit “paints with a broad brush, arguing that virtually every diversity program is illegal even if open to all.  This is not the law.”

On February 14, 2025, Craig Trainor, Acting Assistant Secretary for Civil Rights in the Department of Education, issued a “Dear Colleague” letter “to clarify and reaffirm the nondiscrimination obligations of schools and other entities that receive federal financial assistance from the United States Department of Education (Department).” The letter explains “the Department’s existing interpretation of federal law,” including that the SFFA decision “applies more broadly” than in the context of admissions decisions, and that federal law “prohibits covered entities from using race in decisions pertaining to admissions, hiring, promotion, compensation, financial aid, scholarships, prizes, administrative support, discipline, housing, graduation ceremonies, and all other aspects of student, academic, and campus life.” The letter states that the Department will take “appropriate measures to assess compliance” and advises “all educational institutions” to ensure compliance with existing law, to “cease all efforts to circumvent prohibitions on the use of race by relying on proxies or other indirect means to accomplish such ends,” and to cease reliance on third-party contractors, clearinghouses, or aggregators used to “circumvent prohibited uses of race.” The letter threatens a “potential loss of federal funding” for noncompliant entities.

Media Coverage and Commentary:

Below is a selection of recent media coverage and commentary on these issues:

The New York Times, “Fearing Trump, Wall Street Sounds a Retreat on Diversity Efforts” (February 11): Rob Copeland of The New York Times reports that Wall Street firms are retreating from their diversity initiatives. Copeland also discusses last month’s letter from 11 Republican state attorneys general to BlackRock, Goldman Sachs, JPMorgan Chase, Bank of America, Citi, and Morgan Stanley.
Wall Street Journal, “Big Banks Are Scrubbing Their Public Mentions of DEI Efforts” (February 17): WSJ’s AnnaMaria Andriotis and Gina Heeb report that U.S. banks are reducing their public support for DEI, following a trend among other large corporations scaling back their DEI efforts. Andriotis and Heep note that among certain major banks, concerns regarding DEI initiatives have intensified after President Trump’s executive order directing federal departments and agencies to investigate these programs. They report that programs exclusively serving or giving preferential treatment to certain racial groups have faced increased scrutiny and are being modified to include broader audiences. For example, the authors predict that college scholarship and recruiting programs, previously for groups historically underrepresented in the financial services industry, will likely be modified to be tied more closely to economic need and other non-demographic factors. The authors report that major banks were slower to scale back DEI initiatives compared to other industries because they have long been criticized for lack of diversity at the executive level.
Reuters, “FCC To Open Probe Into NBC-Parent Comcast Over Promotion of DEI Programs” (February 12): Reuters’ David Shepardson reports that Federal Communications Commission (FCC) chair Brendan Carr sent a letter to Comcast stating that the FCC is opening an investigation into the company’s promotion of diversity, equity, and inclusion programs. According to Shepardson, the FCC’s letter states that it will “shut[] down any programs that promote invidious forms of DEI discrimination.” The letter asserts that there is “substantial evidence” that Comcast is “engaging in the promotion of DEI” and says that the FCC is focusing on Comcast because it covers numerous sectors regulated by the FCC including cable, high-speed internet, broadcast TV stations and wireless offerings. Shepardson reports that Comcast confirmed it had received an FCC inquiry and will cooperate and answer questions. “For decades, our company has been built on a foundation of integrity and respect for all of our employees and customers,” the company said in a statement.
Bloomberg, “Steer Clear of ‘Illegal DEI’ With Leveling—Not Lifting—Programs” (February 10): Writing for Bloomberg, Kenji Yoshino and David Glasgow—professors at NYU School of Law—propose a way to distinguish between illegal and legal DEI under EO 14173. Highlighting that the administration has not defined “illegal DEI,” the professors propose that a line exists between “lifting” DEI and “leveling” DEI. They define the former as programs and policies that provide a “bump” or benefit based on group membership while defining the latter as programs that emphasize merit. To illustrate the difference between the two, the professors give the example of a symphony that wishes to increase the number of women musicians in its ranks: “lifting” efforts involved actively preferencing women in the audition process, while “leveling” efforts included requiring that all musicians audition behind a screen to prevent consideration of gender in the first place. Yoshino and Glasgow characterize “[h]iring set-asides, tiebreaker practices, and tying manager compensation to meeting diversity goals” as “lifting” programs, and say that companies engaged in these kinds of practices “risk being targeted by the new administration.”
The New York Times, “Alarmed, Employers Ask: ‘What is Illegal D.E.I.?’” (February 10): Emma Goldberg of The New York Times reports on how companies are responding to changes in DEI-related law and policy. Goldberg writes that, at least for private companies that are not federal contractors, the law on DEI has not fundamentally changed, but the “spirit of how it is interpreted” and “expected to be enforced” has. She reports that employers are trying to balance in a “grey area” requiring them to retain sufficient diversity efforts to avoid discrimination lawsuits while also avoiding investigation and litigation from opponents of DEI. In another New York Times article also published on February 10, Goldberg buckets companies’ responses to the “multilayered pressure campaign” against DEI as (a) retreating, (b) holding steady, or (c) fighting for DEI programs. She writes that for companies retreating from DEI, the “retreat began before Trump took office” but “ballooned” in the days around President Trump’s inauguration.
Law.com, “With DEI Top of Mind, Black Judges Discuss Growing Up During Segregation, Efforts to Diversify the Profession” (February 10): Ross Todd of Law.com reports on remarks by Ninth Circuit Judge Johnnie Rawlinson and U.S. District Judge Richard Jones at a Black History Month event sponsored by the Ninth Circuit Judicial Historical Society and Federal Bar Association. Judge Rawlinson relayed her experiences growing up in a segregated town and attending segregated schools until high school, when, despite graduating fourth in her class, she was offered jobs as a maid or a sweeper. Judge Rawlinson described how these experiences motivated her to attend college and law school. At the event, she said she wanted to make clear that “DEI does not mean lack of merit. That’s a false narrative.” Judge Rawlinson stated that “DEI has been mischaracterized because all it is is making sure that opportunities are available to all qualified people, and not stemming the pool.” Judge Jones, who grew up in Chicago but moved to Seattle after his father experienced hiring discrimination, was rejected from a large law firm because “the senior partners in the firm [were not] sure how [their] white clients [were] going to react to having a Black lawyer represent them.” At the event, Judge Jones encouraged lawyers to think about “pipeline opportunities” that encourage young people to “inspire and create a dream.”
NPR, “Exclusive: GM, Pepsi, Disney, Others Scrub Some DEI References from Investor Reports” (February 7): NPR’s Maria Aspan reports that a least a dozen large U.S. companies eliminated references to “diversity” and “inclusion” in their most recent annual investor reports.

Case Updates:

Below is a list of updates in new and pending cases:

1. Contracting claims under Section 1981, the U.S. Constitution, and other statutes:

Landscape Consultants of Texas, Inc. v. Harris County, Texas et al., No. 4:25-cv-00479 (S.D. Tex.): On February 5, 2025, Landscape Consultants of Texas, Inc. sued Harris County, Texas and the Harris County Commissioners Court, challenging Harris County’s Minority and Woman-Owned Business Enterprise (MWBE) Program. The plaintiff, a non-MWBE landscaping company, claims it “has been at a significant disadvantage when bidding on landscaping contracts” with the County, because a Harris County ordinance requires that the government grant a certain percentage of contracts to MWBEs. The plaintiff alleges that the MWBE Program is racially discriminatory in violation of Section 1981 and the Fourteenth Amendment because it treats companies bidding for public contracts differently based on the race of the company’s owners.
- Latest update: Defendants’ answer is due on February 27, 2025.
Mid-America Milling Company v. U.S. Department of Transportation, No. 3:23-cv-00072-GFVT (E.D. Ky. 2023): On October 26, 2023, two plaintiff construction companies sued the Department of Transportation (DOT), asking the court to enjoin the DOT’s Disadvantaged Business Enterprise Program, an affirmative action program that awards contracts to minority- and women-owned small businesses in DOT-funded construction projects, with the statutory aim of granting 10% of certain DOT-funded contracts to these businesses nationally. The plaintiffs alleged that the program constitutes unconstitutional race discrimination in violation of the Fifth Amendment. On September 23, 2024, the court granted the plaintiffs’ motion for a preliminary injunction, holding that the plaintiffs were likely to succeed on the merits because the program is not sufficiently tailored to the government’s purported interest and lacks a “logical end point.” The court also held that the plaintiffs have standing based on their allegations that they are “able and ready” to bid on a government contract in the near future. The court denied the defendants’ motion to dismiss pending the resolution of any interlocutory appeal of the injunction order.
- Latest update: The parties filed a joint motion to stay the proceedings on February 10, 2025, due to the change in the presidential administration.
American Alliance for Equal Rights v. American Airlines, No. 25-125 (N.D. Tex. 2025): On February 11, 2025, the American Alliance for Equal Rights (AAER) sued American Airlines, alleging that the company’s suppler diversity program violates Section 1981. AAER alleges that eligibility for American’s supplier diversity program unlawfully depends on race, requiring that businesses “be at least 51% owned, operated and controlled by” minorities, women, veterans, service-disabled veterans, disabled individuals, or members of the LGBTQ community. AAER claims that it has members who are ready and able to apply to the program, but do not meet the diversity eligibility requirements.
- Latest update: On February 12, 2025, American Airlines waived service of summons.

American Alliance for Equal Rights v. Southwest Airlines Co.,No. 24-cv-01209 (N.D. Tex. 2024): On May 20, 2024, American Alliance for Equal Rights (AAER) filed a complaint against Southwest Airlines, alleging that the company’s ¡Latanzé! Travel Award Program, which awards free flights to students who “identify direct or parental ties to a specific country” of Hispanic origin, unlawfully discriminates based on race. AAER seeks a declaratory judgment that the program violates Section 1981 and Title VI, a temporary restraining order barring Southwest from closing the next application period (set to open in March 2025), and a permanent injunction barring enforcement of the program’s ethnic eligibility criteria. On August 22, 2024, Southwest moved to dismiss, arguing that the case was moot because the company had signed a covenant with AAER that eliminated the challenged provisions from future program application cycles. On December 6, 2024, the court granted in part and denied in part Southwest’s motion to dismiss. The court concluded that Southwest’s covenant to eliminate the program rendered moot any claims for declaratory or injunctive relief. However, the court held that it had jurisdiction over the plaintiff’s claims for one cent in nominal damages and allowed those claims to proceed. The court rejected Southwest’s argument that Southwest mooted those claims through an “unsuccessful tender of one cent to [AAER].”
- Latest update: On February 7, 2025, Southwest Airlines answered the complaint, denying allegations of discrimination.

Californians for Equal Rights Foundation v. City of San Diego, No. 3:24-cv-00484 (S.D. Cal. 2024): On March 12, 2024, the Californians for Equal Rights Foundation filed a complaint on behalf of members who are “ready, willing and able” to purchase a home in San Diego, but are ineligible for grants or loans under the City’s Black, Indigenous and other People of Color First-Time Homebuyer Program. Plaintiffs allege that the program discriminates on the basis of race in violation of the Fourteenth Amendment. On June 18, 2024, the City of San Diego and the Housing Authority of the City of San Diego filed a motion for judgment on the pleadings, arguing that the complaint does not include any allegations against it, and instead alleges a “fictitious [agency] relationship” with the other defendants, the Housing Authority of the City of San Diego and the San Diego Housing Commission.
- Latest update: On February 6, 2025, the parties filed a joint stipulation of dismissal, stating that the city had removed the race-based condition from the First-Time Homebuyer Program. On February 7, 2025, the court dismissed the case with prejudice.
American Alliance for Equal Rights v. McDonald’s Corporation et al., No. 3:25-cv-00050 (M.D. Tenn. 2025): On January 12, 2025, the American Alliance for Equal Rights (AAER) filed a complaint against McDonald’s and International Scholarship & Tuition Services, Inc. (ISTS), alleging that defendants operate a college scholarship program that “discriminates against high-schoolers based on their ethnicity” in violation of Section 1981. AAER alleged that the HACER scholarship program, which ISTS administers on McDonald’s behalf, “is open only to Hispanics.” AAER claimed that the program “flatly” bars non-Hispanic students from applying “based on their ethnic heritage” and is therefore unlawful. AAER sought declaratory and injunctive relief barring consideration of race, ethnicity, ancestry, or nationality in consideration of scholarship applications, as well as a preliminary injunction to stop the program from closing the application window for current applicants on February 6, 2025. Gibson Dunn represented McDonald’s in this action.
- Latest update: On January 31, 2025, the parties submitted a joint stipulation of dismissal, stating that McDonald’s will no longer consider applicants’ race and will extend the application deadline until at least March 6, 2025. On February 3, 2025, the court dismissed AAER’s claim with prejudice.

2. Employment discrimination and related claims:

Diemert v. City of Seattle, No. 2:22-cv-1640 (W.D. Wash. 2022): On November 16, 2022, Joshua Diemert, a white man and former employee of the City of Seattle, sued the City, challenging its Race and Social Justice Initiative (RSJI) under the Fourteenth Amendment, Section 1983, and Title VII. He contended that trainings and programs under the RSJI created a hostile work environment with a “pervasive” focus on race. He alleged that he was discriminated against and denied opportunities for advancement as a white man. On August 16, 2024, Seattle moved for summary judgment, arguing that the plaintiff experienced no “negative personnel actions” and that RSJI programing is nondiscriminatory. Seattle also argued that it investigated concerns raised by the plaintiff.
- Latest update: On February 10, 2025, the district court granted Seattle’s motion for summary judgment, holding that a “reasonable juror could not find that the RSJI created an objectively hostile work environment.”

Missouri v. Int’l Bus. Machs. Corp., No. 24SL-CC02837 (Cir. Ct. of St. Louis Cty. 2024): On June 20, 2024, the State of Missouri filed a complaint against IBM in Missouri state court, alleging that the company violated the Missouri Human Rights Act by using race and gender quotas in its hiring and by basing employee compensation on participation in allegedly discriminatory DEI practices. The complaint cited a leaked video in which IBM’s Chief Executive Officer and Board Chairman, Arvind Krishna, allegedly stated that all executives must increase representation of ethnic minorities in their teams by 1% each year to receive a “plus” on their bonus. The complaint also alleged that employees at IBM have been fired or otherwise suffered adverse employment actions because they failed to meet or exceed these targets. The Missouri Attorney General sought to permanently enjoin IBM and its officers from utilizing quotas in hiring and compensation decisions. On September 13, 2024, IBM moved to dismiss the suit, arguing that the “plus” bonus is not a “rigid racial quota,” but a lawful means of encouraging “permissible diversity goals.” IBM also argued that Missouri failed to assert sufficient facts to show that the “plus” bonus influenced any employment decisions in the state. On November 8, 2024, the State of Missouri filed “Suggestions in Opposition” to IBM’s motion to dismiss. Missouri first argued that IBM’s arguments are merits questions that cannot yet be addressed at the motion to dismiss stage. Missouri then argued that if the court considers the merits questions, it should hold that IBM’s racial quotas are unlawful in light of the Missouri Human Rights Act and the Supreme Court decision in Students for Fair Admissions.
- Latest update: On February 10, 2025, the court granted IBM’s motion to dismiss in a one-sentence order without any explanation or reasoning. The court gave Missouri thirty days to amend its complaint.

Grande v. Hartford Board of Education et al., 3:24-cv-00010-JAM (D. Ct. 2024): On January 3, 2024, John Grande, a white male physical education teacher in the Hartford school district, filed suit against the Hartford School Board after allegedly being forced to attend mandatory DEI trainings. He claimed that he objected to the content of a mandatory professional development session focused on race and privilege, stating that he felt “white-shamed” after expressing his political disagreement with the training’s purposes and goals, and that he was thereafter subjected to a retaliatory investigation and was wrongfully threatened with termination. He claimed the school’s actions constitute retaliation and compelled speech in violation of the First Amendment.
- Latest update: On February 5, 2025, the defendants filed a motion for summary judgment, arguing that the plaintiff’s objections to the trainings were made in the course of his official duties as a District employee and therefore were not protected by the First Amendment. They further argued that the District’s interest in effectively administering its professional development sessions outweighed the plaintiff’s speech interests.
Steffens v. Walt Disney Co., No. 25NNCV00944 (Cal. Super. Ct. Los Angeles Cnty. 2025): On February 11, 2025, a white former executive for Marvel Entertainment sued Disney, alleging the company discriminated against him on the basis of race, sex, and age. He alleged he was denied a promotion because of his race and age, and that the Company failed to promote him as retaliation for his objection to “effort[s] to promote presidents to senior vice presidents based on their race and a memorandum that would have referred to employees with the racial signifier ‘BIPOC.’” He brought claims under California state antidiscrimination and unfair business practices laws.
- Latest update: On February 13, the court issued an order to show cause for failure to file proof of service.

3. Actions against educational institutions:

Students Against Racial Discrimination v. Regents of the University of California et al., No. 8:25-cv-00192 (C.D. Cal 2025): On February 3, 2025, Students Against Racial Discrimination (SARD) sued the Regents of the University of California, alleging that University of California schools discriminate against Asian American and white applicants by using “racial preferences” in admissions at all campuses in the UC system in violation of Title VI and the Fourteenth Amendment. SARD alleged it has student members who are ready and able to apply to UC schools but “unable to compete on an equal basis” because of their race.
- Latest update: The docket does not yet reflect that the defendant has been served.
Hooley v. Regents of the University of California et al., No. 3:25-cv-01399 (N.D. Cal. 2025): On February 11, 2025, the mother of a minor high school student sued the Regents of the University of California, alleging that UC San Francisco Benioff Children’s Hospital Oakland discriminates against white students by offering its Community Health and Adolescent Mentoring Program for Success (CHAMPS) internship only to “underrepresented minority students.” The plaintiff alleges that her daughter applied for CHAMPS and was rejected based on her race. The plaintiff challenges the CHAMPS program as violating the Fourteenth Amendment, Title VI, Section 1981, and the California Constitution.
- Latest update: The docket does not yet reflect that the defendant has been served.

4. Challenges to statutes, agency rules, executive orders, and regulatory decisions:

American Alliance for Equal Rights v. City of Chicago, et al., No. 1:25-cv-01017 (N.D. Ill. 2025): On January 29, 2025, AAER and two white male individuals filed a complaint against the City of Chicago and the City’s new casino, Bally’s Chicago, alleging that the City precluded them from investing in the new casino based on their race, in violation of Sections 1981, 1982, 1983, and 1985. Under the Illinois Gambling Act, an application for a casino owner’s license must contain “evidence the applicant used its best efforts to reach a goal of 25% ownership representation by minority persons and 5% ownership representation by women.” Plaintiffs alleged that the casino precluded them from participating in the casino’s initial public offering by limiting certain shares to members of specified racial minority groups.
- Latest update: The defendants waived service on February 3, 2025. An answer is due on March 31, 2025.
Do No Harm v. Gianforte, No. 6:24-cv-00024-BMM-KLD (D. Mont. 2024): On March 12, 2024, Do No Harm filed a complaint on behalf of “Member A,” a white female dermatologist in Montana, alleging that a Montana law requiring the governor to “take positive action to attain gender balance and proportional representation of minorities resident in Montana to the greatest extent possible” when making appointments to the twelve-member Medical Board violates the Fourteenth Amendment. Do No Harm alleged that since ten seats are currently held by six women and four men, Montana law requires that the remaining two seats be filled by men, which would preclude Member A from holding the seat. Following Governor Gianforte’s motion to dismiss, Magistrate Judge De Soto recommended that the case be dismissed for lack of subject matter jurisdiction. Magistrate Judge De Soto found Do No Harm lacked standing because it did not allege “facts demonstrating that at least one Member is both ‘able and ready’ to apply for a Board seat in the reasonably foreseeable future.” For the same reasons, the Magistrate Judge found the case unripe.
- Latest update: On February 5, 2025, the court adopted the Magistrate Judge’s findings and recommendations and dismissed the complaint without prejudice.
National Association of Diversity Officers in Higher Education, et al., v. Donald J. Trump, et al., 25-cv-333 (D. Md. 2025): On February 3, the Mayor and City Council of Baltimore, the National Association of Diversity Officers in Higher Education, the American Association of University Professors, and the Restaurant Opportunities Centers United filed a complaint in the District of Maryland challenging two recent anti-DEI executive orders. The complaint raises six constitutional claims, including claims alleging that the orders violate the First Amendment, Fourteenth Amendment, Spending Clause, and separation of powers. The complaint seeks a declaratory judgment that EO 14151 and EO 14173 are unconstitutional, as well as a preliminary injunction enjoining enforcement of these executive orders.
- Latest update: On February 13, plaintiffs filed a motion for a temporary restraining order (TRO) or, in the alternative, a preliminary injunction to prevent the administration from enforcing the two executive orders, as well as any other memoranda or policy implementing the executive orders. On February 18, the government filed its opposition, arguing: (1) plaintiffs lack standing to challenge the executive orders because they fail to identify any members of their organizations who have been injured and fail to allege a non-speculative injury, (2) plaintiffs’ claims are not ripe for review because they depend on a series of future Executive actions which may not occur as anticipated or at all, (3) plaintiffs are not likely to succeed on the merits of their claim because the executive orders do not violate separation of powers, the First Amendment, or the Fourteenth Amendment since courts have long recognized the President’s authority to regulate contracts and federal funds, and the challenged provisions are tied to federal antidiscrimination law, (4) plaintiffs failed to show irreparable injury attributable to the executive orders, and (5) the public interest weighs against granting plaintiffs’ relief because eradicating discrimination is in the interest of the public. On February 19, plaintiffs filed a reply brief, emphasizing that the President lacks authority to direct federal agencies to terminate grants and contracts simply because they are “equity-related” or to chill plaintiffs’ speech with threats of investigation.

The following Gibson Dunn attorneys assisted in preparing this client update: Jason Schwartz, Mylan Denerstein, Blaine Evanson, Zakiyyah Salim-Williams, Cynthia Chen McTernan, Zoë Klein, Cate McCaffrey, Jenna Voronov, Emma Eisendrath, Felicia Reyes, Allonna Nordhavn, Laura Wang, Maya Jeyendran, Kristen Durkan, Ashley Wilson, Lauren Meyer, Kameron Mitchell, Chelsea Clayton, Albert Le, Emma Wexler, Heather Skrabak, and Godard Solomon.

Jason C. Schwartz – Partner & Co-Chair, Labor & Employment Group
Washington, D.C. (+1 202-955-8242, jschwartz@gibsondunn.com)

Katherine V.A. Smith – Partner & Co-Chair, Labor & Employment Group
Los Angeles (+1 213-229-7107, ksmith@gibsondunn.com)

Mylan L. Denerstein – Partner & Co-Chair, Public Policy Group
New York (+1 212-351-3850, mdenerstein@gibsondunn.com)

Zakiyyah T. Salim-Williams – Partner & Chief Diversity Officer
Washington, D.C. (+1 202-955-8503, zswilliams@gibsondunn.com)

Molly T. Senger – Partner, Labor & Employment Group
Washington, D.C. (+1 202-955-8571, msenger@gibsondunn.com)

Blaine H. Evanson – Partner, Appellate & Constitutional Law Group
Orange County (+1 949-451-3805, bevanson@gibsondunn.com)

New Guidance Likely to Alter the Landscape for Shareholder Engagement

On February 11, 2025, the Staff in the Division of Corporation Finance (“Staff”) of the U.S. Securities and Exchange Commission (“SEC” or the “Commission”) issued updated and new Compliance and Disclosure Interpretations (“C&DIs”)[1] that are likely to significantly impact how investors engage with public companies. These interpretations address beneficial ownership reporting on Schedule 13G vs. Schedule 13D (“13G” and “13D,” respectively), expand the nature and scope of activities the Staff views as “influencing control of the issuer” (which could deter otherwise passive investors who own more than 5% of a company’s voting securities from certain forms of engagement to avoid becoming ineligible to rely on 13G reporting), and could require groups of smaller social activist shareholders to become subject to 13D reporting. The Staff’s recent guidance underscores the agency’s increasing scrutiny of institutional investors’ corporate governance stewardship activities, particularly in the context of environmental, social, and governance (“ESG”) matters.

Key Changes to 13G Filing Eligibility Standards

Shareholders, including those acting as a group, that beneficially own more than 5% of a class of registered voting securities must report their ownership on either a 13G or a 13D. To maintain eligibility to report on 13G instead of 13D,[2] a shareholder must certify that the subject securities “were not acquired and are not held for the purpose of or with the effect of changing or influencing the control of the issuer.” A 13D requires more detailed information on a shareholder’s beneficial ownership of and transactions in a subject company’s shares, as well as its plans and proposals with respect to the company and requires prompt amendments for any material changes in the reported information.

13G Filing Eligibility and Shareholder Engagement.

In revised C&DI 103.11, the Staff reaffirmed that a shareholder’s inability to rely on the Hart-Scott-Rodino Act’s exemption from notification and waiting period requirements for an acquisition made “solely for the purpose of investment” would not affect a shareholder’s ability to report on 13G. The Staff emphasized that a shareholder’s ability to report on 13G instead depends on whether its activities suggest an intent to influence control of the company. The guidance reminds investors that such determination necessarily entails a factual analysis of the shareholder’s actions and intentions in relation to “control” as defined under Exchange Act Rule 12b-2.[3] Notably, as shown by the redline that the Staff now provides when it revises its C&DIs, the Staff withdrew its prior guidance that engagement with a company on executive compensation, environmental, social, or other public interest issues, or on corporate governance topics unrelated to a specific change of control, without more, would generally not cause a loss of 13G eligibility.

Actions Constituting a “Purpose or Effect of Influencing Control”.

In new C&DI 103.12, the Staff addresses circumstances that in its view would preclude an investor from reporting on 13G because it held securities with a disqualifying “purpose or effect of changing or influencing control of the issuer.” The interpretation makes clear that a shareholder exerting “pressure” to adopt governance measures, particularly tied to ESG or political policy matters, may be viewed as an attempt to influence control over the company.

When Does Engagement with Management Cross the Line?

The new and revised C&DIs state that engaging with a company’s management on corporate governance or other policy matters could, depending on all the relevant facts and circumstances, result in a disqualification from reporting on 13G. This is particularly relevant for investors whose activities, though intended to push for governance changes or ESG-driven policies, may be interpreted as attempts to influence control. The Staff’s recent interpretation aligns with comments made by SEC Acting Chairman Mark Uyeda, who previously stated that asset managers’ voting policies on ESG matters may qualify as attempts to exert control over management.[4] According to the Staff, investors exerting pressure on management to implement specific measures or changes to a policy would be influencing control over the company. Such examples of exerting pressure over the company include the following:

Subject Matter Engagement: Shareholders engaging with management to specifically call for control-related actions – such as a sale of the company or a significant amount of assets, restructuring, or the election of director nominees other than the company’s nominees – would be disqualified from 13G eligibility solely due to the subject matter of the discussion or communications.
Context of Engagement: Under C&DI 103.12, a “shareholder who discusses with management its views on a particular topic and how its views may inform its voting decisions, without more, would not be disqualified from reporting on a Schedule 13G.” However, “pressuring” management to adopt specific measures or tying support for directors to the adoption of certain proposals (e.g., removal of staggered boards, changes to executive compensation practices, eliminating poison pill rights plans, undertaking specific actions relating to an environmental, social, or political policy, and stating or implying during any such discussions that it will not support one or more of the company’s director nominees at the next annual meeting as a means of “pressuring” a company to adopt a particular recommendation) may also risk the loss of 13G eligibility. “Pressure” can be direct or indirect, express or implied.

SEC Guidance on 13D Group Formation

The Staff’s guidance should be read in conjunction with the SEC’s October 2023 Release,[5] which described examples of activities and/or communications that would not give rise to formation of a Section 13(d) group. According to the Commission, the following scenarios would not give rise to group formation:

Discussions in private or public forums: Meetings between two parties or an independent, free exchange of ideas among shareholders at a conference, without the intent to engage in concerted actions or agreements related to securities acquisition, holding, or disposition, are not considered group activity.
Discussions with company management: Engaging with company management and other shareholders to jointly recommend board structure and composition, without discussing individual directors, expanding the board, or pressuring the board to take specific actions, does not form a group.
Non-binding shareholder proposals: Having conversations about or submitting a non-binding shareholder proposal jointly with others does not constitute group activity.
Conversations with activist investors: Conversations, emails, phone calls, or meetings between a shareholder and an activist investor seeking support for proposals, without further coordinated actions, are not considered group activity.
Announcement of voting intentions: Announcing an intention to vote in favor of an unaffiliated activist investor’s director nominees, without further coordinated activity, does not form a group.

In contrast, a substantial shareholder sharing information with the intent of inducing others to purchase the same stock, where those purchases directly result from the information shared, could raise the possibility of group formation.

These scenarios provided by the Commission offer useful guidance for investors that may communicate with a public company and its shareholders, but do not want to inadvertently become a member of a group.

Implications and Possible Impact of the Staff’s Interpretations

The Staff’s views expressed in the C&DIs foreshadow stricter scrutiny on passive investors’ 13G status and create new risks for investors (or groups of investors) when communicating with management and boards at public companies. The new C&DI introduces the concept of “pressure,” which will be difficult to administer in practice and is, ultimately, a subjective standard. Investors should be mindful of the risk that, if a company believes the investor has crossed the line to “pressure” the company, it may contact the Staff to question whether the investor should be filing on a 13D and provide more details on its beneficial ownership and related transactions, as well as its intentions, including any plans or proposals, with respect to the company. The only example of “pressure” that is provided in the C&DIs is conditioning support for the company’s director nominees at the next election of directors.

While these interpretations should rein in the minority of 13G filers who campaign on various ESG issues subject to a threat of voting against directors, they will likely influence the actions of large institutional investors who in recent years have sought to address ESG matters through their own “board accountability” voting policy standards (which those institutions have in recent years increasingly relied on in lieu of supporting shareholder proposals on such issues). The interpretations also raise the possibility that groups of investors that collectively own more than 5% of a company’s stock, including smaller social activist investors that individually hold less than 5% of a company’s stock, could be viewed as forming a 13D group if they coordinate to urge companies to adopt specific climate-change, diversity, equity and inclusion, or other ESG policies, particularly if backed by pressure through a “vote no” campaign.

The updated C&DIs should prompt investors who are reporting on 13G, as well as smaller activist investors who are not 13D or 13G filers but have signed on to various ESG letter-writing and other campaigns, to reassess their strategies. Passive investors who have traditionally filed on 13G despite pushing for governance or ESG-related changes should now assess whether their actions could be seen as attempts to exert “pressure” and may need to change their approach to protect their 13G eligibility. While it is theoretically possible for investors reporting on 13G to temporarily opt to report on 13D, many mutual funds and other investors face institutional or practical restrictions that make 13D reporting unrealistic. As a result, those investors may seek to avoid or minimize any communications that could be viewed as exerting “pressure” or attempts to exert control. Passive investors who chose to migrate from 13G to 13D in situations where communications relate to control-related issues or rise to the level of “pressure” may be able to revert back to 13G reporting once the shareholder engagement is completed and a vote taken on the matter at hand.

There are other notable collateral, and possibly unintended, consequences of the Staff’s revised interpretations. For example, companies engaged in a proxy contest may find it more difficult to engage with their largest institutional investors, as those investors may be concerned that expressing views on issues arising in the contest could be viewed as pressuring company management and, therefore, triggering 13D reporting. Ironically, if faced with less transparency from their large institutional shareholders, companies may become more reliant on engaging with and attempting to sway the major proxy advisory firms. Even outside of the context of an actual proxy contest, another unintended consequence may be a stifling of dialogue between large institutional investors and companies, a decrease in transparency on how these investors intend to vote, and possibly an increase in abstentions.

Practical Considerations for Investors and Companies

The Staff’s updated guidance on 13G eligibility risks chilling the type of routine engagement that many companies have sought to foster and believe better positions them with their investors to help ward off proxy contests and other forms of traditional activism. With respect to the upcoming proxy season, we understand that some investors have already begun canceling or delaying long-scheduled engagements with companies as they assess the implications of the Staff’s guidance. As a result, companies may need to consider enhancing their disclosures and considering alternative additional solicitation strategies to ensure they are effectively communicating their key messages to investors.

Nevertheless, while the determination of whether an investor is acting with a control purpose or intent will depend on all the relevant facts and circumstances, there are some guideposts that investors and companies should bear in mind:

The C&DI expressly states that a shareholder who discusses with management its views on a particular topic and how its views may inform its voting decisions, without more, generally would not be disqualified from reporting on a 13G.
Discussions around non-binding proposals, such as votes on management’s say-on-pay proposals and discussions with non-proponents regarding shareholder proposals, should present less risk of being viewed as applying pressure on management or attempting to influence control of the company.
Investor responses to company-initiated inquiries regarding the investor’s views on a particular issue, and investor references to other companies’ practices or disclosures that the investor views as favorable, without more, should present less risk of being viewed as applying pressure on management or attempting to influence control of the company. As a result, companies will need to be more proactive in requesting engagement with investors and asking questions about key topics during those engagements.
Companies and investors may explore additional steps to foster productive discussions that avoid creating a mis-impression that an investor is seeking to apply pressure when that is not the investor’s intent. For example, when applicable, some investors might seek to clarify with a company that voting decisions are made on a case-by-case basis, by a committee, or by individual portfolio managers, and therefore that the investor’s engagement team should not be viewed as representing how the investor will vote on a particular matter.
The C&DI notes the context in which an engagement occurs is highly relevant in determining whether a shareholder is holding securities with a disqualifying purpose or effect of “influencing” control of the company and, as such, off-season engagements may present less risk of losing 13G eligibility.

Ultimately, the latest C&DIs are likely to chill institutional investors’ willingness to engage with companies as candidly as in recent years and could lead to unexpected negative votes on director elections, say on pay, or other matters. As a result, companies and boards will need to stay highly attuned to investor sentiment as expressed through other means, such as voting policies and public statements, and seek to maintain open channels of communication year-round to avoid these risks and ensure alignment on key governance and ESG matters. Companies and boards are encouraged to review their shareholder engagement activities, and consult with outside counsel as needed, on specific situations considering the Staff’s new guidance.

Conclusion

The Staff’s latest guidance signals a more stringent approach to shareholder activism, with a new emphasis on engagement as a factor that may cause a shareholder to lose its 13G eligibility. Shareholders who have traditionally been viewed as passive should be more mindful of how their actions (overt or implicit) and communications with management and boards may be seen as constituting “pressure,” particularly with respect to governance, environmental, social, and political policy matters. In many instances, views as to what amounts to “pressure” may be in the eye of the beholder. As a result, we recommend training, clarifying ground rules between parties, and avoiding one-on-one communications between companies and shareholders.

[1] Specifically, the Staff revised Question 103.11 and issued a new Question 103.12 under “Exchange Act Sections 13(d) and 13(g) and Regulation 13D-G Beneficial Ownership Reporting.”

[2] Rule 13d-1(b) and Rule 13d-1(c) require the shareholder to certify that the securities were not acquired and are not held with a disqualifying purpose or effect. Any person who acquired beneficial ownership before a company’s voting securities were registered under the Exchange Act can report on 13G pursuant to Rule 13d-1(d) regardless of control over the company.

[3] Exchange Act Rule 12b-2 defines “control” (including the terms “controlling,” “controlled by” and “under common control with”) as “the possession, direct or indirect, of the power to direct or cause the direction of the management and policies of a person, whether through the ownership of voting securities, by contract, or otherwise.”

[4] U.S. Securities & Exchange Comm., Nov. 17, 2022, https://www.sec.gov/news/speech/uyeda-remarks-cato-summit-financial-regulation-111722 (remarks of Comm. Uyeda at Cato Summit on Financial Regulation).

[5] See SEC Release Nos. 33-11253; 34-98704 (Oct. 10, 2023).

The following Gibson Dunn lawyers prepared this update: Ron Mueller, Jim Moloney, Aaron Briggs, Beth Ising, Tom Kim, Brian Lane, Lori Zyskowski, Mickal Haile, and Matt Staugaard.

Gibson Dunn’s lawyers are available to assist with any questions you may have regarding these developments. To learn more about these issues, please contact the Gibson Dunn lawyer with whom you usually work, or any of the following lawyers in the firm’s Securities Regulation and Corporate Governance, Capital Markets, Mergers and Acquisitions, or Private Equity practice groups:

Securities Regulation and Corporate Governance:
Aaron Briggs – San Francisco (+1 415.393.8297, abriggs@gibsondunn.com)
Elizabeth Ising – Washington, D.C. (+1 202.955.8287, eising@gibsondunn.com)
Thomas J. Kim – Washington, D.C. (+1 202.887.3550, tkim@gibsondunn.com)
Brian J. Lane – Washington, D.C. (+1 202.887.3646, blane@gibsondunn.com)
Julia Lapitskaya – New York (+1 212.351.2354, jlapitskaya@gibsondunn.com)
James J. Moloney – Orange County (+1 949.451.4343, jmoloney@gibsondunn.com)
Ronald O. Mueller – Washington, D.C. (+1 202.955.8671, rmueller@gibsondunn.com)
Michael A. Titera – Orange County (+1 949.451.4365, mtitera@gibsondunn.com)
Geoffrey E. Walter – Washington, D.C. (+1 202.887.3749, gwalter@gibsondunn.com)
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The Court of Appeal judgment means that States can be prevented by the doctrine of issue estoppel from relitigating state immunity issues before the English courts if those issues have already been decided in another forum. As such, the judgment provides a potential shortcut through otherwise lengthy and expensive proceedings on questions of state immunity.

Executive Summary

On 12 February 2025, the UK’s Court of Appeal issued an important ruling in the area of judgment and arbitral award enforcement: Hulley Enterprises Ltd & Ors v The Russian Federation [2025] EWCA 108 (the CA Judgment).

The CA Judgment affirms the High Court’s earlier decision (the HC Judgment)[1] that the doctrine of issue estoppel can apply to arguments on state immunity. The decision is especially important in the field of judgment and award enforcement because, according to the CA Judgment, those seeking to enforce against a State can rely upon prior decisions—including those of foreign courts—in deciding issues that underpin a claim for state immunity. That is subject to establishing (i) the standard common law requirements for an issue estoppel,[2] and (ii) the requirements for recognition of a foreign judgment issued against a foreign State set out in s. 31 of the Civil Jurisdiction and Judgments Act 1982 (the CJJA).[3]

The CA Judgment means States will be prevented from relitigating certain state immunity issues before the English courts so that an English court can base its decision as to the existence of state immunity on an issue estoppel arising from the decision of a foreign court. As such, it provides a potential shortcut through otherwise lengthy and expensive proceedings on questions of state immunity.

Relevant Background

The claimants in the case (the Hulley Claimants) obtained three materially identical arbitral awards (the Awards) against Russia in 2014. The Awards ordered Russia to pay damages exceeding USD 50 billion (plus interest) for Russia’s violations of the Energy Charter Treaty stemming from Russia’s unlawful expropriation of Yukos Oil Company in which the Hulley Claimants were majority shareholders. Following the issuance of the Awards, a sprawling set of set-aside and enforcement proceedings has unfolded across multiple jurisdictions.

As to the set-aside proceedings: in 2014, Russia applied to set the Awards aside in the courts of the arbitral seat, the Netherlands. The Awards were set aside at first instance by the Hague District Court in 2016 on jurisdictional grounds because it found that there was no binding arbitration agreement between the Hulley Claimants and Russia.[4] However, the Hulley Claimants successfully appealed that decision, and the Awards were re-instated by the Hague Court of Appeal in 2020.[5] Russia then appealed that decision to the Dutch Supreme Court,[6] which, in 2021, upheld most of the Hague Court of Appeal’s findings but remitted one issue to the Amsterdam Court of Appeal for further consideration.[7] According to the CA Judgment, while the Amsterdam Court of Appeal has ruled in the Hulley Claimants’ favour on the outstanding issue, a further appeal to the Dutch Supreme Court remained pending as of the date of the CA Judgment.[8]

Meanwhile, in 2015, before the Hague District Court had set the Awards aside, the Hulley Claimants had applied for recognition and enforcement of the Awards in the UK. Those proceedings were then stayed by consent following the set-aside decision of the Hague District Court in 2016.[9] After the Dutch Supreme Court judgment was handed down in 2021, the stay was lifted partially and solely for the purpose of resolving Russia’s state immunity defence (emanating from jurisdictional issues). Directions were given by Mr Justice Butcher for determination of certain preliminary issues centred around whether Russia was precluded, by reason of an issue estoppel arising out of the Dutch courts’ judgments, from arguing that the arbitral tribunal did not have jurisdiction.

The core of the Dutch courts’ jurisdictional finding was that, contrary to Russia’s submissions, there was a binding arbitration agreement between the Hulley Claimants and Russia. Consequently, in the English proceedings considering these preliminary jurisdictional issues, the Hulley Claimants argued that the Dutch courts’ determination on jurisdiction also resolved the question of whether the arbitration exception under s. 9 of the UK State Immunity Act 1978 (the SIA)[10] applied; Russia counterargued that that question had to be the subject of further consideration de novo by the English courts.[11]

The High Court Judgment

The preliminary jurisdictional issues were the subject of a two-day hearing before Mrs Justice Cockerill DBE on 4–5 October 2023, and the HC Judgment was handed down on 1 November 2023.

Cockerill J ruled in favour of the Hulley Claimants in reliance of the Dutch courts’ jurisdictional determinations. She held that the SIA is subject to procedural and substantive common law rules, including issue estoppel, and there was no principle of law that issue estoppel could not arise in the context of public international law (such as in relation to the interpretation of an international treaty).[12] She also held that, in order for an issue estoppel to arise from a foreign judgment issued against a foreign State, the requirements for recognition of such judgments, contained in s. 31 of the CJJA, must also be satisfied.[13]

Applying those principles, Cockerill J found that the Dutch Supreme Court’s 2021 decision—dismissing Russia’s challenge to the Awards and finding a binding agreement to arbitrate—created an issue estoppel. Russia was therefore estopped from re-arguing before the English courts the question of whether it had agreed to submit the dispute to arbitration. Consequently, Cockerill J dismissed Russia’s challenge to the jurisdiction of the English courts on the grounds of state immunity.

The Court of Appeal Judgment

Russia appealed the HC Judgment to the Court of Appeal on five grounds,[14] which were distilled down to a single primary issue: when a foreign court has decided that a State has agreed in writing to submit a dispute to arbitration, and the usual conditions for the application of issue estoppel are satisfied, can: (a) the English court treat that decision as giving rise to an issue estoppel, or (b) must it determine the issue for itself (i.e., de novo) without regard to the decision of the foreign court?

The appeal was heard on 15 January 2025 and the CA Judgment was handed down on 12 February 2025. Lord Males, Lord Lewison, and Lord Zacaroli unanimously dismissed Russia’s appeal, with Lord Males delivering the lead judgment.

The Court of Appeal noted that, while the SIA sets out comprehensively the exceptions to state immunity (in ss. 2 to 11 of the SIA), it does not prescribe how the English court should decide whether any of the exceptions applies in any given case.[15] That question must be decided by applying the ordinary principles of English law—both substantive and procedural—and those principles include the principle of issue estoppel.[16]

Thus, when Cockerill J had decided to give effect to an issue estoppel arising from the Dutch Supreme Court’s 2021 judgment, she had not (as Russia had maintained) declined to determine whether Russia had agreed to submit the underlying dispute to arbitration. Instead, the Judge had determined that Russia had so agreed, applying the substantive principle of issue estoppel. In short: the relevant question had been determined by the previous decision of a court of competent jurisdiction (i.e., the Dutch Supreme Court in 2021), which the Court of Appeal confirmed to be conclusive on the issue in question.[17]

The Court of Appeal also rejected Russia’s arguments that issues of state immunity and/or treaty interpretation constituted “special circumstances” militating against the application of issue estoppel in any event. In doing so, the Court of Appeal noted that to give effect to the issue estoppel arising from such a judgment would be in the interests of justice as it would: (i) avoid putting the Hulley Claimants to the trouble and expense of litigating the relevant issue again, and (ii) be in accordance with the important public policy that arbitral awards, even against sovereign States, “should be honoured without delay and without the kind of trench warfare seen in the present case”.[18]

Comment

The CA Judgment is significant. It confirms that determinations of foreign courts—in particular, of the courts of the arbitral seat—can give rise to an issue estoppel when English courts are deciding the same issues within the context of a sovereign immunity defence. In practice, it is often the case that the set-aside proceedings at the seat of the arbitration will settle the question of whether the tribunal in question had jurisdiction (i.e., effectively the very same question that arises under s. 9 of the SIA as to whether the arbitration exception applies). The CA Judgment, thus, paves the way for award creditors to rely upon such final determinations of foreign courts to cut short a State’s assertion of adjudicative immunity in enforcement proceedings before the English courts.

Accordingly, the CA Judgment means that: (i) the timeline for obtaining an enforceable recognition and enforcement order against a State (entitling the award creditor to start the execution process against the State’s assets) can be much shorter, and (ii) the additional costs and expenses of re-running complex and already-decided jurisdictional arguments before the English courts can be avoided.

On the whole, the CA Judgment is positive news for parties looking to enforce awards against foreign States in the UK and re-affirms the UK’s pro-enforcement stance in accordance with other recent decisions.[19]

We note that the CA Judgment may be subject to a further appeal to the UK Supreme Court.

[1] Hulley Enterprises Ltd & Ors v The Russian Federation [2023] EWHC 2704 (Comm).

[2] Being that (i) the judgment (which is alleged to form the basis of the issue estoppel) must have been given by a foreign court of competent jurisdiction; (ii) the judgment (which is alleged to form the basis of the issue estoppel) must be final and conclusive and on the merits; (iii) there must be identity of parties; (iv) there must be identity of subject matter (i.e., the issue decided by the foreign court must be the same as the one arising in the English proceedings); and (v) “special circumstances”, militating against the application of issue estoppel, must not exist (see CA Judgment, paras. 36, 41).

[3] Being that (i) the judgment (which is alleged to form the basis of the issue estoppel) would be recognised and enforced if it had not been given against a State; and (ii) that the foreign court would have had jurisdiction in the matter if it had applied rules corresponding to those applicable to such matters in the UK in accordance with ss. 2–11 of the State Immunity Act 1978 (see CA Judgment, paras. 23, 72–76).

[4] CA Judgment, para. 8.

[5] CA Judgment, para. 9.

[6] Raising challenges as to the conduct of the arbitration alongside its jurisdictional objections.

[7] CA Judgment, para. 11. The one issue that had been remitted to the Amsterdam Court of Appeal was whether the Awards were vitiated by fraud as a result of the Hulley Claimants having (allegedly) effectively bribed a witness to give evidence in their favour and failed to disclose key documents.

[8] CA Judgment, para. 15.

[9] CA Judgment, paras. 7–8.

[10] Section 9(1) of the SIA provides that “[w]here a State has agreed in writing to submit a dispute which has arisen, or may arise, to arbitration, the State is not immune as respects proceedings in the courts of the United Kingdom which relate to the arbitration”.

[11] CA Judgment, para. 12.

[12] HC Judgment, paras. 19–40, 53–55.

[13] HC Judgment, paras. 41–48.

[14] The five grounds of appeal advanced by Russia were: (1) issue estoppel is not applicable in respect of a foreign judgment against a state, not least on an issue of state immunity; (2) there is no scope for issue estoppel to apply when determining whether state immunity is available under the SIA; (3) s. 31 of the CJJA is not available as an “overlay” for a common law issue estoppel determination; (4) special circumstances militate against the application of issue estoppel in any event because of (i) the extant fraud challenge wherein the Awards are liable to be set aside; (ii) the existence of a potential reference to, and determination by, the Court of Justice of the European Union that there was no jurisdictional basis for the Awards; and (iii) the primacy which ought to be given to the exceptional nature of state immunity; and (5) the requirement for an English court to identify the true and proper construction of a treaty itself militates against the application of issue estoppel on such a matter (see CA Judgment, para. 49).

[15] CA Judgment, paras. 3, 57.

[16] CA Judgment, paras. 3, 57.

[17] CA Judgment, para. 56.

[18] CA Judgment, paras. 77–84.

[19] See further our client alerts on the decisions in Infrastructure Services Luxembourg SARL & Anor v Kingdom of Spain and Border Timbers Ltd & Anor v Republic of Zimbabwe [2024] EWCA Civ 1257 (here); Infrastructure Services Luxembourg SARL & Anor v Kingdom of Spain [2023] EWHC 1226 (Comm) (here); and Micula & Ors v Romania [2020] UKSC 5 (here).

The following Gibson Dunn lawyers prepared this update: Piers Plumptre, Ceyda Knoebel, Theo Tyrrell, and Dimitar Arabov.

Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding these issues. Please contact the Gibson Dunn lawyer with whom you usually work, any member of the firm’s International Arbitration, Judgment and Arbitral Award Enforcement, or Transnational Litigation practice groups, or the authors in London:

Piers Plumptre (+44 20 7071 4271, pplumptre@gibsondunn.com)
Ceyda Knoebel (+44 20 7071 4243, cknoebel@gibsondunn.com)
Theo Tyrrell (+44 20 7071 4016, ttyrrell@gibsondunn.com)
Dimitar Arabov ( +44 20 7071 4063, darabov@gibsondunn.com)