On April 23, 2024, by a vote of 3-2 along party lines, the Federal Trade Commission (FTC) voted to approve a final rule effectively banning employers from using non-compete agreements, with a few limited exceptions. The measure reflects an unprecedented effort by the FTC to expand its rule-making authority. The final rule “shall supersede” all state laws, regulations, orders, and interpretations regarding non-competes, unless the state laws afford more protection to employees. Whether the rule will survive legal challenges remains unclear, but as the legal landscape concerning non-competes continues to shift, employers should cautiously review any non-compete clauses going forward and not make any major changes to their current practices just yet.

The rule is a sweeping ban on all new non-competes with workers of all levels. A non-compete clause is broadly defined by the FTC as “a term or condition of employment that prohibits a worker from, penalizes a worker for, or functions to prevent a worker from

1. seeking or accepting work in the United States with a different person where such work would begin after the conclusion of the employment that includes the term or condition; or

2. operating a business in the United States after the conclusion of the employment that includes the term or condition.”

The FTC stated that whether a prohibition constitutes a “non-compete clause” is a “fact-specific inquiry.” For example, a non-solicitation clause, if sufficiently broad, could fall under the FTC’s definition of a prohibited non-compete clause. The FTC did clarify, however, that a “garden leave” provision, where an employee receives the same total annual compensation while employed by the employer, is not considered a non-compete.

The application of this prohibition extends to all “workers,” which the FTC broadly defined as including employees, independent contractors, interns, and volunteers. The rule excluded from this prohibition non-competes between franchisors and franchisees, non-competes related to the sale of a business, as well as workers for non-profits, including many workers in the healthcare industry.

The FTC’s rule is scheduled to go into effect 120 days after the rule is published in the Federal Register, so the rule is not yet effective. As written, the rule allows existing non-competes to remain in place only for senior executives; however, The FTC narrowly defined a “senior executive” as a worker in a “policy-making position” earning more than $151,164 annually. Those identified in “policy-making positions” include a company’s president, CEO, or a similarly situated individual. Other officers, such as vice presidents, must hold responsibilities that afford them the final authority to make policy decisions that control significant aspects of the business. The FTC excluded from this definition individuals who have the final authority to make decisions over subsidiaries of the business but not over the business as a whole.

Should the rule become final and effective, most notably, employers will be required to provide notice to non-senior executive workers with existing non-competes stating that the non-compete agreement will no longer be enforced. This notice must be provided to both current and former workers by the effective date of the final rule.

The FTC received over 26,000 public comments when it first proposed this rule in January of 2023. So, unsurprisingly, legal challenges immediately began following the FTC’s 3-2 vote in favor of the rule. Ryan LLC, a tax service firm, filed the first legal challenge to the FTC rule on the same day it was announced, arguing the FTC lacked the authority to enact the rule. The US Chamber of Commerce, a critic of the rule from its initial proposal, filed a lawsuit the following day in Federal District Court in Tyler, Texas, along with the Business Roundtable, and other trade groups.

Employers should adopt a wait-and-see approach until there is further clarity on the rule’s legal challenges. And even if the FTC’s rule survives legal challenge, the rule’s scope will inevitably be subject to litigation that tests the contours of the rule.

Today, April 30, 2024, the U.S. Department of Energy (DOE) revised its National Environmental Policy Act (NEPA) implementing procedures to revise categorical exclusions for upgrading and rebuilding powerlines and for solar photovoltaic systems. Under the new rulemaking, environmental reviews will not automatically be required for projects related to solar installations. The rulemaking also adds a categorical exclusion for certain energy storage systems and adds flexibility for power grid powerline relocation.

A categorical exemption (“CX”) is applicable where a federal agency, including the DOE, has concluded that a proposed project or action does not have a significant effect on the human environment and for which neither an environmental assessment (EA) nor an environmental impact statement (EIS) is required.[1] Once a CX is promulgated through notice and comment rulemaking, it is added to an Appendix that includes the relevant requirements for the specific CX and other requirements applicable to all CXs.

One of the primary changes made by the rulemaking is the removal of a land area limitation currently in place for solar projects. The current CX for solar projects excludes the installation, modification, operation, and removal of solar photovoltaic (PV) systems, but only if the project is located within a previously disturbed or developed area comprising less than 10 acres.[2] However, the new rule removes this 10-acre limit, making the exclusion available to larger projects.

DOE regulations also require that projects comply with additional requirements, known as “integral elements,” in order to be eligible for a CX. These conditions apply to any CX, including the CX for solar projects. Under these additional requirements, projects must not:

  • threaten a violation of applicable environment, safety, and health requirements;
  • require siting and construction or major expansion of waste storage, disposal, recovery, or treatment facilities;
  • disturb hazardous substances, pollutants, or contaminants that preexist in the environment such that there would be uncontrolled or unpermitted releases;
  • have the potential to cause significant impacts on environmentally sensitive resources [1]; or
  • involve governmentally designated noxious weeds or invasive species, unless certain conditions are met.[3]

DOE received comments to the proposed rule raising concerns about impacts of solar projects on wildlife and habitat. In response to those concerns, DOE added a condition that a proposed project must be “consistent with applicable plans for the management of wildlife and habitat, including plans to maintain habitat connectivity” in order to qualify for a CX.

The final rule will go into effect on May 30. The full version of the final rule can be viewed here.

[1] See 40 C.F.R. § 1508.1(d).

[2] 10 C.F.R. Part 1021, Appx. B, at § B5.16, available at https://www.ecfr.gov/current/title-10/chapter-X/part-1021.

[3] 10 C.F.R. Part 1021, Appx. B.

Back in March of 2023, the U.S. Supreme Court granted cert in the case of Great Lakes Insurance SE v. Raiders Retreat Realty Co., LLC (find our coverage of that grant here). Last week, the Court released its opinion in that case, a 9-0 decision in favor of the insurer-appellant. In short, the Court put the presumption back into the presumptive enforceability of choice-of-law clauses in maritime contracts.

To briefly recap the case, Great Lakes Insurance issued a maritime insurance contract for a yacht owned by Raiders Retreat Realty Co., which has its headquarters in Pennsylvania. The parties’ insurance policy had a choice-of-law clause that selected New York law to govern any disputes arising under said contract.

Subsequently, Raiders’ yacht ran aground near Fort Lauderdale, Florida, sustaining significant damage. Great Lakes denied Raiders’ insurance claim on the grounds that the yacht’s fire-extinguishing equipment was not timely recertified or inspected and that Raiders had misrepresented the state of this equipment in the past, thereby voiding the policy.

After denying the claim, Great Lakes filed a related declaratory judgment action in federal court in Pennsylvania. In response, Raiders asserted contractual counterclaims against Great Lakes under Pennsylvania law. Great Lakes then moved to dismiss the Pennsylvania-based counterclaims because they violated the policy’s New York choice-of-law clause.

The district court agreed with Great Lakes and rejected Raiders’ counterclaims. But the Third Circuit reversed, holding that the presumptive enforceability of choice-of-law clauses must yield to a strong public policy of the state where a suit is brought.

With Justice Kavanaugh delivering the opinion, the Court reversed the Third Circuit and held that choice-of-law provisions in maritime contracts are presumptively enforceable under federal maritime law, with a few narrow exceptions that did not apply to this case.

The Court drew support for this rule of presumptive enforceability from its jurisprudence regarding forum-selection clauses, such as the classic case of The Bremen v. Zapata Off-Shore Co. Ironically, Raiders had relied on The Bremen for support based on a statement from the case that a “contractual choice-of-forum clause should be held unenforceable if enforcement would contravene a strong public policy of the forum in which suit is brought.” But as the Supreme Court pointed out, that sentence referred to a conflict between federal maritime law and a foreign country’s law.

Raiders further argued that the Court’s decision in Wilburn Boat Co. v. Fireman’s Fund Insurance Co. precluded any uniform federal presumption of enforceability for choice-of-law provisions in maritime contracts. But, as the Court pointed out, Wilburn Boat was not about a choice-of-law clause; it only determined what substantive rule applied to a party’s breach of a warranty in a marine insurance policy.

The Wilburn Boat Court held that no established federal admiralty rule controlled because states historically regulated insurance and federal courts were in no position to set a nationwide standard for insurance law. Instead, the Court determined that state law governed the warranty issue.

Distinguishing Wilburn Boat, the Court explained that here, state law had no gap to fill, because there is already a uniform federal rule on the enforceability of choice-of-law provisions. And even though states primarily regulate insurance, that responsibility does not resolve which state law applies in a case.

Finally, the Court did recognize a few instances where otherwise valid choice-of-law clauses would be disregarded, such as when the chosen law contravened a federal statute on point or an established federal maritime policy. Also, there must be a reasonable basis for the chosen jurisdiction in any choice-of-law provision, though a body of law being “well developed, well known, and well regarded” is good enough.

Justice Thomas issued a concurring opinion to further highlight how Wilburn Boat “rests on flawed premises and, more broadly, how the decision is at odds with the fundamental precept of admiralty law.” He explained that the Supreme Court has retreated from Wilburn Boat and that “[l]itigants and courts applying Wilburn Boat in the future should not ignore these developments.”

Baseball superstar Shohei Ohtani recently agreed to a 10-year, $700 million contract with the Los Angeles Dodgers.  While the headline number came as a shock to even sports business nerds like us, as always, the devil was in the details: $680 million of Ohtani’s contract is deferred until after Ohtani is no longer obligated to play for the Dodgers.    

Our last post contemplated what might happen to Ohtani’s $680 million in deferred compensation if the Dodgers filed bankruptcy in 2034 (i.e., after Ohtani no longer has to play for the Dodgers, but before Ohtani’s deferred compensation kicked in) and ways Ohtani might protect himself.  If you loved that post but were left wondering “what might happen if the Dodgers filed bankruptcy before the end of the 2033 baseball season? (i.e., while Ohtani is still required to suit up under the contract),” today is your lucky day because we take that issue head on.

Ohtani’s contract provides a unique illustration of an “executory contract,” a key term in most Chapter 11 bankruptcy cases. In essence, an executory contract is one where performance remains due on both sides of the contract.  During the contract’s first 10 years (2024-2033), Ohtani’s contract is executory because both Ohtani and the Dodgers owe performance to each other – Ohtani is obligated to play baseball for the Dodgers and the Dodgers are obligated to pay Ohtani.  After that, Ohtani’s contract is not executory because only the Dodgers owe performance to Ohtani – the Dodgers must pay Ohtani $680 million, but Ohtani owes no obligation to the Dodgers.

Thus, as discussed in our earlier post, if the Dodgers were to file bankruptcy after the 2033 season (i.e., once Ohtani’s contract is no longer executory), Ohtani would be like any other creditor to whom the Dodgers owed money.  If the Dodgers were to file bankruptcy before then, however, Ohtani is a counterparty to an executory contract with a bankrupt debtor and the Dodgers (not Ohtani) would have the option to assume-and-assign, assume, or reject Ohtani’s contract.  We will discuss those in reverse order.

Rejection: When a debtor rejects a contract, the rejection serves as a material breach of the contract by the debtor that occurred immediately before the debtor filed for bankruptcy. The debtor is no longer required to perform under the contract and the non-debtor counterparty receives a claim against the debtor’s estate for its damages from that breach.

In our scenario of a Dodgers bankruptcy while Ohtani is still playing, a rejection would mean that Ohtani would become a free agent because he would have no further obligation to play for the Dodgers.  Additionally, Ohtani would have a claim against the Dodgers’ estate for the entire amount of his contract that had not yet been paid to him ($680 million-plus).[1]

Assumption: If a debtor assumes a contract, the contract continues just as it did before bankruptcy.  A debtor must take the entire contract it is assuming — it cannot pick and choose which parts of the contract it wants and which parts it does not want.  In addition, a debtor cannot assume a contract unless it promises to promptly cure any defaults under the contract (i.e., if the debtor is two months behind on payments, it must either make those payments or promise to make them promptly before it can assume the contract).  Finally, a debtor must be able to give adequate assurance that it can promptly cure and continue to perform the contract going forward.

In our scenario of a Dodgers bankruptcy while Ohtani is still playing, to assume the contract, the Dodgers would have to: (1) agree to pay all its future obligations to Ohtani ($680 million-plus); (2) provide adequate assurance to Ohtani that it could meet all its future obligations; and (3) promptly cure any payment defaults to Ohtani under the contract.  On the other hand, if the Dodgers chose to assume the contract, Ohtani would have to continue playing for the Dodgers – he cannot get out of his contract just because the Dodgers file for bankruptcy.[2]

Assumption and Assignment: In certain circumstances, a debtor can assume a contract and assign it to another party.  This is particularly common with bankruptcy sales, where a debtor will sell its assets (instead of trying to reorganize).  Since the assets might not be worth much without the executory contracts supporting them, the Bankruptcy Code authorizes debtors to assume the executory contracts and then assign them to a third-party (usually the purchaser of the assets).  Certain contracts, including most personal service contracts, cannot be assigned without the consent of the counterparty.[3]

In our scenario of a Dodgers bankruptcy while Ohtani is still playing, the Dodgers possibly could not assign Ohtani’s contract without his consent because it is a personal services contract.[4]  Thus, if the Dodgers were sold to a third-party through bankruptcy, Ohtani would have to consent to that sale before the new Dodgers owner could guarantee fans that Ohtani would play.

At this point you might be thinking, “great summary Eric and Mack, but what happens before a debtor decides to assume or reject the contract?”  Excellent question! 

The short answer is that the debtor has no obligation to perform, but the counterparty to the executory contract must continue performing.  Although the debtor has no obligation to perform, counterparties to executory contracts are entitled to compensation from the debtor for the reasonable value of the goods and services they provide during the debtor’s bankruptcy case.  Moreover, their compensation is entitled to an “administrative priority” claim against the debtor, which means their compensation will be paid ahead of most other creditors.  In a recent bankruptcy case concerning baseball,[5] a bankruptcy judge ruled (as have most bankruptcy judges that have faced similar issues) that the “reasonable value” of the services provided by MLB teams to a media company that licensed the MLB team’s rights to broadcast MLB games was the rate provided for in the contract. 

Going back to our scenario of a Dodgers bankruptcy while Ohtani is still playing; Ohtani would be required to play for the Dodgers while they decided whether to assume or reject his contract.  That said, while the Dodgers would not have any “formal” obligation to pay Ohtani his contract rate during this time, the Dodgers would have to pay Ohtani the “reasonable value” of the services he provided, which most courts would say is his “contract rate” (circular, we know).

If you find yourself as a party to an executory contract with a bankruptcy debtor, you should contact counsel.  Team Shohei – give us a shout if the front office starts to use words like “restructuring” or “right-sizing the balance sheet” in the future.  We’d love to help you out!

[1] It is worth noting that since 1993, four MLB franchises have filed bankruptcy (the Baltimore Orioles in 1993, the Chicago Cubs in 2009, the Texas Rangers in 2010, and the Los Angeles Dodgers in 2011) and not a single player contract was rejected. 

[2] Even if his contract says he can walk away if the Dodgers file for bankruptcy, federal law says that provision in the contract is void and unenforceable.

[3] See 11 U.S.C. § 365(c)(1).  This exception is one of the many arcane nuances to executory contracts in bankruptcy, which is partly why, despite their outsize importance in bankruptcy, executory contracts have been called the most “psychedelic” area of bankruptcy law.  See Jay Lawrence Westbrook, A Functional Analysis of Executory Contracts, 74 Minn. L. Rev. 227, 228 (1989). 

[4] We say possibly because most MLB contracts explicitly require the player to agree that the contract can be freely assigned (without such a clause, trades would be impossible).  Ohtani, however, has a full “no-trade” (i.e., no assignment) clause in his contract

[5] In re Diamond Sports Group, LLC, et al. (Bankr. S.D. Tex. 23-90116). 

The sports world is buzzing about Shohei Ohtani’s record-setting $700 million dollar contract with the Los Angeles Dodgers.  As bankruptcy lawyers, we are abuzz thinking about the bankruptcy implications of Ohtani’s contract.  Today’s blog post will discuss what type of claim Ohtani might have if the Dodgers file for bankruptcy (again).  In the near future, another blog will discuss how contracts like Ohtani’s are treated by the Bankruptcy Code.  

In case you haven’t seen the specifics of Ohtani’s contract with the Dodgers, it obligates Ohtani to play baseball for the Dodgers for the next 10 years (2024-2033).  Over the 10 years Ohtani plays for the Dodgers, the Dodgers will pay Ohtani $2 million per year.  The Dodgers are then supposed to pay Ohtani $68 million per year for the 10 years after he’s turned 40 and has no further obligation to show up and play for the Dodgers (2034-2043).[1]   

We say he is supposed to continue receiving $68 million per year through his 40’s because things to do not always work out as planned.  Serious Dodger fans and sports-business nerds will remember that the Los Angeles Dodgers filed a chapter 11 bankruptcy petition in June 2011.  The Dodgers filed because they were on the verge of running out of cash to pay salaries. According to court filings, the three biggest drivers to the Dodgers’ 2011 bankruptcy were: (1) a decline in attendance, (2) Major League Baseball rejecting a proposed media deal with Fox Sports, and (3) a mere $20 million in deferred compensation owed to players.  In 2034, the Dodgers will owe $832 million in deferred compensation (more than 40 times the number they owed when they filed in 2011): $680 million just to Ohtani and another $152 million to other players.[2] That deferred compensation number is expected to increase as the Dodgers try to attract more high-quality players with deferred-compensation-heavy contracts to help them win now and pay later.

So, what happens if the Dodgers organization finds itself in a cash crunch again in a few years and has to file bankruptcy in 2034?  Do they have to keep paying $68 million per year to a 40-year old, presumably retired Ohtani?

Not necessarily. If the Dodgers file bankruptcy in 2034 (or later years), Ohtani will have the right to file a claim in the bankruptcy case for the amount that he is due, just like all other creditors.  In most bankruptcy cases, secured claims (i.e., claims backed by collateral) get paid in full, and unsecured claims (i.e., claims by creditors who do not have collateral) get whatever is left over.  Sometimes unsecured claims are paid in full, but more often they are paid pennies on the dollar of what the creditor is owed.

Thus, from the bankruptcy lawyer’s perspective, we are particularly interested in what collateral, if any, Ohani received to secure his deferred compensation. Ohtani and the Dodgers have been quiet about the details of the contract other than the headline dollar amounts, leaving us to wonder whether Ohtani got a mortgage on Dodger Stadium (or some other real estate)[3] to secure his $700 million dollar contract?  And if he did get a mortgage, did the current mortgage holders agree to subordinate to Ohtani?  Unlikely!  Did Ohtani get personal guarantees from each member of the Dodgers’ owner, Guggenheim Baseball Partners, for his pro-rata share of the $680 million to be paid to Ohtani during his 40s?  Again, unlikely!  Did he get any collateral, or is he at risk of having an unsecured claim for $680 million dollars after spending ten years as the anchor of the Dodgers’ line up (and maybe rotation)?  And if he didn’t get collateral, did he get a very clear memo from his agent/legal team explaining the payment risk that he accepted in his contract? (Their malpractice carriers certainly hope so!)

Ohtani could also reduce payment risk by means other than getting a security interest in the Dodgers’ property.  For example, according to Forbes, the Dodgers are required to fund the “present value” of their deferred compensation obligations to Ohtani by July 1, 2026.  Forbes estimates that would require the Dodgers to fork over $297 million today.  If the Dodgers were to put that $297 million into an annuity to be paid directly to Ohtani, the annuity would likely belong to Ohtani – no matter whether the Dodgers filed bankruptcy and even though the Dodgers funded the annuity.  On the other hand, if the Dodgers simply bought treasury bonds or an annuity for themselves, Ohtani would be like every other unsecured creditor with payment risk – potentially left holding an empty bag in the event of a bankruptcy.  

[1] Shohei Ohtani’s Dodgers deal and deferred money, explained (mlb.com)

[2] The Dodgers owe two of their other superstars –Mookie Betts and Freddie Freeman –significant deferred compensation.  The Dodgers owe Betts $120 million in deferred compensation starting in 2034 (the same year as Ohtani) and owe Freeman $57 million in deferred compensation starting in 2028. 

[3] The Dodgers’ owner – Guggenheim Baseball Management LLC – owns hundreds of acres of prime Los Angeles real estate surrounding Dodger Stadium. 

In today’s legal landscape, jury awards to personal injury plaintiffs are trending upwards.  Studies show that “nuclear verdicts” are increasing in prevalence as jurors grow more critical of corporate defendants and are increasingly persuaded by provocative trial tactics from plaintiff attorneys.  However, recent decisions from Louisiana and Texas show that some courts are bucking the trend by scrutinizing and, in some instances, curtailing these excessive awards.  The analysis below examines three such cases—Gregory v. Chohan (Texas Supreme Court),[1] Warner v. Talos ERT LLC (Western District of Louisiana),[2] and Henry Pete v. Boland Marine and Manufacturing Company, LLC (Louisiana Supreme Court)[3]—and focuses on the courts’ rationales for reducing the award of damages in each case.

I. Texas Supreme Court: Gregory v. Chohan (2023)

At the outset, it is important to note that the Chohan case is an important development in the law on awards of noneconomic damages, but it does not have the same precedential effect of decisions from a majority of the Texas Supreme Court.  This is because three justices did not participate in the decision, and as a result no more than four justices joined in any section of the lead opinion.  Thus, the requisite five justices did not join to deliver a majority opinion of the court.  Instead, Chohan represents a plurality opinion whose rationale will no doubt prove persuasive to lower courts throughout Texas, but the decision is not technically binding.

The main issue discussed in Chohan was whether the evidence presented at trial was legally sufficient to support the award of noneconomic damages, such as mental anguish or loss of companionship.  Because there was no majority on this question, the kind of proof and the amount needed to support an award of noneconomic damages remain partially undetermined.  But the judgment reached in Chohan—reversing an award of $15 million in noneconomic damages—is one lower courts will no doubt keep in mind when faced with similar awards.

The Chohan case arose from a fatal accident on an icy, unlit stretch of Interstate 40 near Amarillo, Texas.  An 18-wheeler driven by Sarah Gregory for her employer New Prime, Inc. jackknifed across multiple lanes of traffic.  Afterwards, six tractor-trailers and two passenger vehicles crashed into Gregory’s truck or each other, causing four fatalities and numerous injuries.

Gregory and New Prime settled with all the plaintiffs except the wife and family of Bhupinder Deol, one of the drivers killed in the accident. At trial, the jury awarded just over $15 million to Deol’s wife and family for mental anguish and loss of companionship.

The defendants appealed the size of the noneconomic damages award to the Dallas Court of Appeals.  The court decided the case en banc and affirmed the jury’s award, holding that the award was not “flagrantly outrageous, extravagant, and so excessive that it shocks the judicial conscience.”  The defendants then raised the same issue before the Texas Supreme Court.

Justice Blacklock announced the Texas Supreme Court’s plurality opinion, joined by Chief Justice Hecht and Justice Busby, and by Justice Bland in part.  The key issue before the court was whether the plaintiffs had demonstrated a rational connection, grounded in the evidence, between the injuries suffered and the dollar amount awarded. This rational connection had to support not only the existence of a compensable injury, but also the amount awarded in compensation.

The court held that the plaintiffs had not provided such connection as to the amount of the damages awarded, namely, $15 million.  The court explained that counsel for plaintiffs had not presented any evidence that would justify the amount awarded, and instead provided arguments to the jury that had nothing to do with how to calculate the proper amount of compensation.

For example, counsel referred to the value of a Boeing F-18 fighter jet ($71 million) and a Mark Rothko painting ($186 million).  Another argument presented to the jury was to give the defendants their “two cents worth” for every one of the 650 million miles that New Prime’s trucks drove during the year of the accident.

The court noted that these arguments had nothing to do with compensating the plaintiffs for their injuries, and instead spoke more to punitive concerns than compensatory ones.  The kind of evidence that is relevant on this point is “direct evidence supporting quantification of an amount of damages, such as evidence of the likely financial consequences of severe emotional disruption in the plaintiff’s life.” Direct evidence is not required, and precise, mathematical certainty is not possible.  Nevertheless, some rational basis must underly the amount of damages, the court noted.

At trial, Deol’s wife testified extensively as to the effect of her husband’s death on herself, her three children, and Deol’s parents.  The court determined that this testimony no doubt gave the jury ample evidence regarding the existence of compensable mental anguish, but it did not serve as evidence to justify the amount awarded.

The Dallas Court of Appeals erred by simply reviewing whether the amount awarded “shocked the conscience” or arose from bias or prejudice.  “Passion, prejudice, or improper motive” remains an independent basis for reversal, as does the “shock the conscience” standard.  But an appellate court must also determine whether there is a rational connection between the amount awarded and the injuries suffered.  Because no such rational connection existed in this case, the Texas Supreme Court reversed the award of noneconomic damages.

While the Chohan court did not reach a majority opinion, a majority of the justices appeared to agree that the arguments presented by plaintiffs’ counsel at trial were improper and could support reversal of the damages award.  This suggests that lower courts will be more willing to scrutinize arguments that have improper or ulterior motives besides helping the jury arrive at a proper figure for compensation.  Defendants should be ready to move for a new trial and/or a remittitur in the event plaintiffs fail to provide some rational connection between the injuries and damages requested.

II. Western District of Louisiana: Warner v. Talos ERT LLC (2023)

On the topic of courts reversing excessive damages awards, the Western District of Louisiana recently did just that in the case of Warner v. Talos ERT LLC.  The case involved a 2018 workplace accident on an oil and gas production platform operated by Talos ERT, LLC in the Gulf of Mexico.  The plaintiffs were the family members of an offshore worker who suffered fatal injuries when the rope he was using to move heavy pipe failed and caused the pipe to fall.

After trial, the jury awarded $20 million in general damages to the decedent’s minor son, and Talos filed multiple post-trial motions, including a motion seeking a remittitur on the issue of general damages.  Under Louisiana law, a court may intrude into the province of a jury “only when the award is, in either direction, beyond that which a reasonable trier of fact could assess for the effects of the particular injury to the particular plaintiff under the particular circumstances.”

The court held that the evidence did not substantiate an award of $20 million.  Under the Seventh Amendment, the court had to offer the plaintiff the alternative of a lower award or a new trial.  In trying to determine the proper amount of damages, the court applied the Fifth Circuit’s “maximum recovery rule,” under which verdicts are permitted so long as they are 150% of the highest inflation-adjusted recovery in an analogous, published decision. 

The court identified a case from 2013 in which a child living with the non-decedent custodial parent won $2,500,000 in wrongful death damages.  Applying the maximum recovery rule, the court adjusted this award for inflation and then multiplied it by 150%. Thus, the figure came out to $4,955,350.67. Because Talos was allocated 88% fault, the final award was $4,360,708.59.

The Warner decision reveals that the Western District of Louisiana is not reluctant to enforce Louisiana law prohibiting awards “beyond that which a reasonable trier of fact could assess.”  This is a promising trend as plaintiffs’ attorneys seek higher and higher jury awards.

IIILouisiana Supreme Court: Henry Pete v. Boland Marine and Manufacturing Company, LLC, et al. (2023)

Like in Chohan and Warner, the Louisiana Supreme Court recently reduced an alarming general damages award in Henry Pete v. Boland Marine and Manufacturing Company, LLC, et al.  

The plaintiff, Henry Pete, worked as a longshoreman in the Port of New Orleans from 1964 to 1968 before eventually becoming a practicing chiropractor.  After being diagnosed with mesothelioma in 2019, he filed suit against his former shoreside employers in the Civil District Court in New Orleans.  The jury rendered a verdict in favor of the plaintiff against one of the defendants, Ports America Gulfport, Inc., awarding the plaintiff $9.8 million in general damages.

The Louisiana Fourth Circuit Court of Appeal upheld the verdict, rejecting Ports America’s assignment of error as to the excessiveness of the general damage award.  In its decision, the Fourth Circuit noted that Ports America failed to make a showing that the $9.8 million general damages award “shocked the conscience” when considering the pain and suffering caused by the plaintiff’s condition.  Therefore, the court noted, the evidence did not support a finding that the jury abused its discretion.

The Louisiana Supreme Court granted certiorari to weigh in on the quantum issue.  Like the Chohan and Warner courts, the Boland Marine court found the general damages award excessive. But the Boland Marine court’s analysis was distinguishable and is thus noteworthy.  Writing for the majority, Justice McCallum noted that Louisiana Civil Code article 2324.1 vests the jury with “much discretion” in determining the amount of general damages, an inquiry which is speculative in nature and contingent on the facts and circumstances of each particular case. 

Justice McCallum then questioned the effectiveness of Louisiana’s “clear abuse of discretion” standard of appellate review for general damages, dubbing it “redundant and unnecessary” for courts to scrutinize the fact finder’s seemingly boundless discretion.  In other words, appellate judges speculating on top of the jury’s speculation only compounded the issue. 

The Boland Marine court then announced its solution: appellate courts must consider awards of general damages in similar, prior cases to add objectivity to the “abuse of discretion” analysis.  If an abuse of discretion is found, the court must use the prior awards as guideposts and amend the general damages award to the highest point that is reasonably within the trial court’s discretion.  The court cautioned that its revised standard of review did not displace the prior analysis; courts must still consider the facts and circumstances unique to each particular case.  The additional consideration of precedent cases serves to add much-needed objectivity and neutrality to the review process.  

The Boland Marine court applied its new analysis to the facts before it.  It first reviewed the record evidence and testimony about the plaintiff’s condition, then surveyed nine Louisiana state court mesothelioma cases dating back to 2015, in which awards of general damages ranged from $1.5 million to $3.8 million.  The court noted that the plaintiff’s significant mental and physical trauma warranted a substantial general damages award, but it could not reconcile the trial court’s $9.8 million award with those from prior cases—noting that “the record evidence of Mr. Pete’s injuries is not so dissimilar to these other cases to warrant an award so greatly exceeding the range of these cases.”  Thus, the court found that the trial court abused its discretion and reduced the $9.8 million general damages award to $5.0 million, which it found to be the highest reasonable award within the jury’s discretion.

It is said that two’s a coincidence, three’s a trend.  ChohanWarner, and Boland Marine exemplify a discernable pattern in which recent Louisiana and Texas courts have scrutinized and reduced excessive damages awarded to personal injury plaintiffs.  These cases mark a positive development in today’s climate, in which “nuclear verdicts” are becoming increasingly prevalent. 

[1] 670 S.W.3d 546 (Tex. 2023).

[2] No. 18-CV-01435, 2023 WL 6340422 (W.D. La. Sept. 28, 2023).

[3] 2023-00170 (La. 4/18/23); 359 So. 3d 498.

As a blended family, you face a unique set of challenges when it comes to estate planning. There are often emotional complexities, such as feelings of sadness, resentment, or jealousy that come from combining individuals from multiple families. There are also financial obligations and responsibilities to consider for children from different relationships. Recognizing these challenges, this article will discuss estate planning strategies for blended families and provide practical tips that can be implemented now and in the future.

Before we dive into estate planning strategies for blended families, let us first take a look at some common mistakes to avoid:

  • Not having an estate plan. This is the biggest mistake that blended families can make. Without an estate plan, the State of Texas has laws that will dictate how your assets are distributed after your passing. This could lead to a number of problems, such as your children not inheriting what you wanted them to have, or your estate being tied up in a lengthy probate process.
  • Not updating your estate plan. It is important to update your estate plan regularly, especially after major life events such as marriage, divorce, or the birth of a child or grandchild. Doing so regularly will ensure that your plan reflects your current wishes and goals.
  • Not being clear about your intentions. When drafting your estate plan, it is important to be as clear as possible about your intentions. This includes specifying who you want to inherit your assets, who you want to be the guardian for your minor children, and who you want to make decisions about your medical care if you become incapacitated.
  • Not involving your family in the planning process. It is important to involve your family in the estate planning process, especially if you have children from multiple relationships. Doing so will help avoid any unpleasant surprises or conflicts after your death.
  • Overlooking the challenges associated with estate distribution. Overlooking the complexities in how you distribute your estate may lead to unforeseen consequences. Here are some examples of what to watch out for:
    1. Giving Everything to Your Surviving Spouse, Otherwise to Your Children:
      • Issue: If you leave everything to your surviving spouse without any conditions or restrictions, your surviving spouse might change their will after your death to exclude or reduce the share of your children’s inheritance.
    2. Using a Trust for Lifelong Support of Your Surviving Spouse, with a Delayed Inheritance to Your Children:
      • Issue: If your surviving spouse can freely use money from a trust, there’s a risk they might deplete its assets, leaving little to nothing for your children. Feelings of resentment may occur because your children not only have to wait until your surviving spouse passes away for their inheritance but also face the possibility of inheriting less than expected.

To avoid these problems, you should talk to an estate planning attorney. They can suggest ideas, such as setting restrictions on how the money can be used or giving a portion of your children’s inheritance upfront.

  • Not seeking professional advice. As alluded to above, estate planning can be complex, so it is important to seek professional advice from an experienced estate planning attorney. An attorney can help you create a plan that meets your family’s needs and can also help you avoid making common mistakes.
  • Not being clear about joint representation. Avoid the mistake of not clearly communicating with your spouse about whether your estate planning attorney represents both you and your spouse. Make sure to establish clarity with your spouse and the attorney upfront to prevent misunderstandings and ensure a shared understanding of the representation arrangement.

In addition to avoiding the most common estate planning mistakes, it is important to understand the various estate planning strategies that can be tailored to meet the unique needs of your blended family.

Estate Planning Strategies for Blended Families

Mediation and family agreements. Mediation can be a helpful tool for blended families to confront conflicts and develop a plan that works for everyone. A neutral mediator can facilitate communication and help families reach a consensus on important issues such as asset distribution and guardianship arrangements.

Trusts. Trusts can be a valuable tool for blended families, especially for those who want more control over the disposition of their estate. Trusts can ensure that all children are treated fairly and provide protection for children with disabilities. Trusts can also provide valuable financial protection by minimizing estate taxes, providing protection from creditors for the surviving spouse, and reducing delays associated with probate and the distribution of assets. Trusts can also be crafted to safeguard your estate in case your surviving spouse remarries, providing you with the ability to specify alternative beneficiaries.

Life estates. A life estate can be a good option for blended families with a family home. By granting spouses a secure period of residence in the family home, life estates offer stability and continuity, addressing both the practical need for shelter and the emotional ties individuals have to their homes. Life estates also offer a seamless transition of the property to designated heirs after the specified period, helping maintain family harmony.

Pre and postnuptial agreements. Beyond asset protection, a pre or postnuptial agreement can be a helpful way to foster open communication and address conflicts over property rights and inheritance. Pre and post-nuptial agreements ultimately promote transparency within the relationship by facilitating open communication, financial clarity, and the preservation of assets, contributing to the long-term stability and success of the blended family.

Limited partnerships. Limited partnerships have emerged as a highly advantageous tool for effective asset management and wealth transfer. Limited partnerships can further provide tax advantages and a structured framework for family governance.

Life insurance. Life insurance can be an important part of any estate plan, but it is especially important for blended families. It serves as a helpful tool to cover potential financial gaps and protect the interests of all family members. Life insurance proceeds can be used to cover ongoing financial needs, provide income for surviving family members, and help maintain the family’s standard of living.

Practical Tips for Blended Families

In addition to the strategies listed above, there are a few other practical tips that blended families should keep in mind when planning their estates:

  • Make sure you have your estate planning documents in order. This includes a will, medical power of attorney, financial power of attorney, living will, and a declaration of guardian. These documents require execution to be enforceable, so be sure to have them signed.
  • Talk to your spouse and children about your estate plan. It is important to let your family know what your wishes are and why you have made the decisions you have made.
  • Review your estate plan regularly. As your circumstances change, you may need to update your estate plan.
  • Work with an experienced estate planning attorney. An estate planning attorney can help you develop a plan that meets your specific needs and goals.

By following these tips, blended families can overcome the challenges of estate planning and create a plan that will protect their loved ones and ensure their financial well-being. Ultimately, creating an estate plan is not just a responsible decision, but a meaningful way to provide your loved ones with the gift of a secure and peaceful future.

The recent U.S. Supreme Court decision in Sackett v. EPA significantly narrows the definition of “waters of the United States” (“WOTUS”) as applicable to wetlands and other adjacent bodies of water under the Clean Water Act (“CWA”). By extension, Sackett has broad impacts to wetlands delineation and mitigation requirements for section 404 permits issued by the U.S. Army Corps of Engineers (“Corps”).[1] Sackett will affect whether section 404 dredge and fill or other CWA permits[2] are required for wetlands and the extent to which mitigation of wetland impacts is required.[3] Under Sackett, wetlands that do not have a “continuous surface connection” to a perennial traditional waterway will no longer be subject to CWA jurisdiction (and section 404 permitting).

On September 8, 2023, the EPA amended the WOTUS regulatory definition to conform with the Sackett decision.[4] However, the change is only in effect in states where the 2023 rule is not being challenged. In those states, including Louisiana and Texas, the pre-2015 rule is in effect in conformity with the Sackett decision. This presents many potential complications because the pre-2015 rule provides more jurisdiction over wetlands than the holding of Sackett allows. Additionally, without the certainty of the final rule change, the Corps, who makes determinations on wetland delineations, could be hesitant to make new jurisdictional determinations until pending litigation is resolved and the new rule can be applied.

Sackett v. EPA Decision

Prior to the Sackett decision, the WOTUS definition and Corps rules were based on the decision in Rapanos v. U.S.[5] In that case, the Court could not reach a majority on its holding, and a total of five opinions were entered in the case. Thus, the definition of WOTUS was based on Justice Anthony Kennedy’s concurring opinion. The Kennedy concurrence provided two standards: a wetland could be considered a “water of the United States” if it had either a “continuous surface connection” to a traditional navigable water or if it had a “significant nexus to “waters of the United States.” Wetlands could be subject to CWA jurisdiction even when there was no indication of surface water present, no high-water table, and no saturated soil. Jurisdictional determinations could be based on the presence of certain soil characteristics and vegetation (factors that were widely used in the “significant nexus” test).

In Sackett, the Court eliminated the use of the “significant nexus” test, but retained the continuous surface connection standard. The Sackett Court also established a two-step analysis to determine whether wetlands or other adjacent waters are subject to CWA requirements:

  1. Does the adjacent body of water constitute “waters of the United States” (a relatively permanent body of water connected to traditional interstate navigable waters) within the meaning of the CWA?
  2.  If so, does the wetland or secondary water at issue have a “continuous surface connection” with that traditional water?[6]

Effects on CWA Approved Jurisdictional Determinations

The Sackett decision’s two step “continuous surface connection” test will necessarily affect jurisdictional determinations for pending permits primarily in the following four key ways:

  1. “Perennial” bodies of water, such as the Mississippi River or other rivers and lakes in Louisiana, will be classified as a traditional navigable body of water, passing “step 1” of the Sackett test.[7]
  2. Wetlands and other water bodies, such as drainage canals, that have a direct connection to perennial waters will pass “step 2” of the Sackett test. These wetlands and waterbodies will still be subject to CWA jurisdiction.
  3. Wetlands and water bodies where the surface connection to a traditional perennial waterway is interrupted by land or another barrier, such as a levee or road,[8] may no longer be classified as jurisdictional wetlands based on Sackett, but will require the two-step analysis to make that determination.
  4. Wetlands and areas that have a continuous surface connection that is interrupted periodically due to factors such as low tides, seasonal changes, or drought conditions, but that exists for at least some time during a year, may still be under CWA jurisdiction.[9]

September 2023 Conforming Rule

After the Sackett decision was released by the Court, the Corps halted all approved jurisdictional determinations (“AJDs”)[10] until the U.S. Environmental Protection Agency (“EPA”) could amend the WOTUS rule in conformity with the Court’s decision (“the Conforming Rule”). On August 29, 2023, the EPA released a revision to the January 2023 rule to conform with the Sackett decision, which became effective on September 8.[11] The new rule revised the 2023 rule in conformity with the Sackett decision. Namely, the new rule made the following changes:

  • Removed the phrase “including interstate wetlands” from 40 CFR 120.2(a)(1)(iii) and 33 CFR 328.3(a)(1)(iii).
  • Removed the significant nexus standard from the tributaries provisions in 40 CFR 120.2(a)(3) and 33 CFR 328.3(a)(3).
  • Removed the significant nexus standard from the adjacent wetlands provisions in 40 CFR 120.2(a)(4) and 33 CFR 328.3(a)(4).
  • Removed the significant nexus standard and streams and wetlands from the provision for intrastate lakes and ponds, streams, or wetlands not otherwise identified in the definition contained in 40 CFR 120.2(a)(5) and 33 CFR 328.3(a)(5).
  • Removed the term “significantly affect” and its definition in its entirety from 40 CFR 120.2(c)(6) and 33 CFR 328.3(c)(6).
  • Revised the definition of “adjacent” under 40 CFR 120.2(c)(2) and 33 CFR 328.3(c)(2).[12]

Dueling Regulatory Standards

Importantly, the Conforming Rule only applies in states where the January 2023 definition was enjoined, or became final (see map below). In the remaining 27 states, including Louisiana and Texas, the January 2023 rule was challenged in court and is subject to injunction. For these states, the EPA has stated that the pre-2015 WOTUS definition will apply along with the holding of the Sackett decision “until further notice.”[13]

The EPA has not clarified how this “modified” pre-2015 definition differs from the conforming rule, which is especially concerning since the purpose of the Conforming Rule was to implement the Sackett decision. While there is no question that Sackett necessarily affects jurisdictional determinations rendered by the Corps, the EPA has not specified exactly how it will modify the pre-2015 standard. Specifically, the pre-2015 standard provided for CWA jurisdiction over all interstate wetlands.[14] Perhaps the best illustration of this point is that the case giving rise to the Sackett decision itself involved a jurisdictional determination made in 2007 using the pre-2015 rule.

Figure 1: Map Created by the U.S. Environmental Protection Agency (epa.gov)

Post-Sackett WOTUS Outlook

While Sackett significantly clarifies the process for wetland delineation, the decision still contains gray areas. For one, the Court stopped short of defining a “continuous surface connection.” Instead, it characterized it as a connection “making it difficult to determine where the water ends and the wetland begins.”[15] Second, the majority opinion noted that there could be exceptions where the connection does not exist for a portion of the year, but the connection would still be viewed as continuous. (“We also acknowledge that temporary interruptions in surface connection may sometimes occur because of phenomena like low tides or dry spells.”[16]) So, if a wetland is connected only seasonally or intermittently to relatively permanent waters, AJDs will still require a case-by-case determination.

The Conforming Rule incorporates the key holdings of Sackett, but stops short of discussing “gray areas” where the decision lacks specificity. Notably, the EPA did not allow an opportunity for comment on the final rule, using the “good cause” provision of the Administrative Procedure Act (“APA”) to justify the move because the Conforming Rule “does not impose any burdens on the regulated community.”[17] And the Biden Administration stated in its initial response to the decision that it intends to use other legal authorities to fill the alleged regulatory gap.[18] Without clarity in the Conforming Rule on areas such as the degree of surface connection, the EPA and Corps could use other regulatory devices, such as guidance documents, to add requirements where the Sackett decision is silent.

Effects on Section 404 Permitting

The Corps has stated and that it is willing to reconsider prior AJDs based on the new standards in the Sackett decision[19] and that it will resume issuing AJDs now that the new Conforming Rule has been issued.[20] But the dueling regulatory standards between states could result in continued delays for AJDs in states where the Conforming Rule isn’t in effect. At least one effected Corps district has placed all AJDs on indefinite hold.[21] And, even in states where the Conforming Rule is in effect, there is currently no regulatory test or guidance on how the factors such as what degree of continuity in a surface connection will be sufficient for CWA jurisdiction under the Conforming Rule.  As a result, permit applicants may continue to experience delays on wetland AJDs for permit applications until litigation on the January 2023 rule can be resolved.

[1] CWA Section 404 requires permits for the discharge of dredged or fill material into waters of the United States, including wetlands. Activities regulated under this program include fill for development, water resource projects (such as dams and levees), infrastructure development (such as highways and airports), and mining projects. A permit from the Corps is required before dredged or fill material may be discharged into a water of the United States, unless the activity is exempt from Section 404 (such as certain farming and forestry activities). U.S. Env’t Prot. Agency, “Permit Program under CWA Section 404” (March 31, 2023), available at https://www.epa.gov/cwa-404/permit-program-under-cwa-section-404.

[2] The WOTUS rule also affects permitting under the following CWA sections and programs: Section 303(c), Water Quality Standards; Section 303(d), Impaired Waters and Total Maximum Daily Loads (TMDLs); Section 311, Oil Spill Prevention and Preparedness; Section 401 Certification; and Section 402, National Pollutant Discharge Elimination System (NPDES).

[3] Sackett v. Envtl. Prot. Agency, 598 U.S. 651, 143 S. Ct. 1322 (May 25, 2023).

[4] 88 Fed. Reg. 61964 (September 8, 2023).

[5] Rapanos v. U.S., 547 U.S. 715 (2006).

[6] 143 S. Ct. at 1341.

[7] See Envtl. Prot. Agency, National Hydrography Dataset: Streams and Waterbodies in Louisiana (January 19, 2021), available at https://19january2021snapshot.epa.gov/sites/static/files/2014-09/documents/louisiana.pdf.

[8] Sackett, 143 S. Ct. at 1368 (J. Kavanaugh, concurring): “For example, the Mississippi River features an extensive levee system to prevent flooding. Under the Court’s ‘continuous surface connection’ test, the presence of those levees (the equivalent of a dike) would seemingly preclude Clean Water Act coverage of adjacent wetlands on the other side of the levees, even though the adjacent wetlands are often an important part of the flood-control project.”

[9] Id. at 1341 (“[w]e also acknowledge that temporary interruptions in surface connection may sometimes occur because of phenomena like low tides or dry spells”).

[10] AJDs are determinations made by the Corps on whether a reviewed area is subject to CWA jurisdiction. 33 C.F.R. 331.2.

[11] 88 Fed. Reg. 61964 (September 8, 2023).

[12] Id. See also “Regulatory Text Changes to the Definition of Waters of the United States at 33 CFR 328.3 and 40 CFR 120.2” (Aug. 14, 2023), available at https://www.epa.gov/system/files/documents/2023-08/Regulatory Text Changes to the Definition of Waters of the United States at 33 CFR 328.3 and 40 CFR 120.2.pdf.

[13] Envtl. Prot. Agency, Pre-2015 Regulatory Regime, available at https://www.epa.gov/wotus/pre-2015-regulatory-regime.

[14] 40 C.F.R. § 230.3(s)(2) (2015).

[15] Sackett, 143 S. Ct. at 1341.

[16] Id.

[17] 88 Fed. Reg. 61965 (September 8, 2023), citing 5 U.S.C. § 553(d)(3).

[18] The White House, Press Release, Statement from President Joe Biden on Supreme Court Decision in Sackett v. EPA, (May 25, 2023), available at https://www.whitehouse.gov/briefing-room/statements-releases/2023/05/25/statement-from-president-joe-biden-on-supreme-court-decision-in-sackett-v-epa/.

[19] Lewis v. United States Army Corps of Engineers, No. CV 21-937, 2023 WL 3949124, at *1 (E.D. La. June 12, 2023).

[20] U.S. Army Corps of Eng’rs Headquarters, Press Release, EPA and the Army Issue Final Rule to Amend 2023 Rule (September 8, 2023), available at https://www.usace.army.mil/Media/Announcements/Article/3520843/8-september-2023-epa-and-the-army-issue-final-rule-to-amend-2023-rule/.

[21] U.S. Army Corps of Eng’rs, Chicago District, Approved Jurisdictional Determinations, available at https://www.lrc.usace.army.mil/Missions/Regulatory/Jurisdictional-Determinations/ (last visited September 22, 2023).

The digitization of our economy has streamlined company operations but has brought with it persistent, ongoing cyberattacks. Successful attacks disrupt business operations, are costly to remediate, and can compromise confidential and personal information—including client and employee information. These compromises can significantly impact revenue and trust in the company and often result in stock prices dropping. While publicly traded companies typically report incidents to investors, reporting is not always consistent or is buried in quarterly reports made well after the fact.[1]

Effective as of September 5, 2023, the Securities and Exchange Commission (SEC) has finalized its proposed rule requiring publicly traded companies to promptly report “material” cybersecurity incidents and report annually on cybersecurity risk management and governance. This Rule addresses the need for disclosure of data incidents and preparedness to better inform investors with timely and reliable information.

I. Form 8-K Item 1.05: Cybersecurity Incident Reporting

The Final Rule is for the benefit of investors and focuses on streamlining and standardizing disclosures regarding data incidents and cybersecurity risk management, strategy, and governance.[2] New Form 8-K Item 1.05 requires companies to determine whether a cybersecurity incident is material without unreasonable delay after discovery of the incident. So long as a company does not intentionally delay a materiality determination to avoid timely disclosure, it will not likely be found to be in violation of the Rule.  Once a company determines that the incident is material, it has 4 days within which it must disclose the incident, including a description of the nature, scope, and timing of the incident and material impact or reasonably likely impact of the incident.[3] Registrants are not required to disclose the remediation status of the incident, technical information about planned responses, or whether data was compromised. To evaluate materiality, registrants should consider qualitative factors such as harm to company’s reputation, customer or vendor relationships, competitiveness, and potential for litigation or regulatory investigations. Cybersecurity incidents comprise “unauthorized occurrence, or a series of related unauthorized occurrences, on or conducted through a registrant’s information systems that jeopardizes the confidentiality, integrity, or availability of a registrant’s information systems or any information residing therein.”

II. Regulation S-K Item 106: Annual Reporting on Cybersecurity Risk Management, Strategy, and Governance

Registrants much also now disclose in their annual reporting their risk management practices, strategy, and governance. New S-K Item 106 requires companies to describe their processes, if any, for dealing with material risks from cybersecurity threats in enough detail that a reasonable investor would be able to understand it. Ideally, these disclosures will provide investors with material information to better inform their investment decisions, while avoiding the potential issue of a company’s being forced to disclose sensitive information that might further compromise the company’s security.[4] Item 106 reports must also include a description of the company’s governance structure and policies pertaining to cybersecurity and data protection, including which management positions are responsible for assessing and managing the risks, the expertise of the people in those positions, how those persons monitor security and compliance, and whether the risks are reported to the board of directors. The SEC also amended Form 20-F and Form 6-K to require similar disclosures in foreign private issuers’ annual reports.

A. Risk Management Disclosures

Proper compliance with the risk management practices disclosures entails disclosing information that would be material to the investment decisions of potential investors. These disclosures do not need to be so detailed that they would compromise the security of the company providing the disclosures. Indeed, in direct response to commenters’ concerns about the security risk presented from these disclosures, the SEC amended the Final Rule to appropriately account for the potential security vulnerability created by a detailed description of risk management practices or strategy by only requiring disclosure of “processes” instead of “policies and procedures”. Other deletions from the Rule as proposed include removal of the list of risk types (e.g., intellectual property theft, fraud, etc.) and removal of certain disclosure items, include the entity’s activities undertaken to prevent, detect, and minimize the effects of cybersecurity incidents and the business continuity and recovery plans in the event of a data incident.

B. Governance Disclosures

In compliance with S-K Item 106, registrants must also disclose governance of their cybersecurity policies, ideally identifying the management positions or committee responsible for managing cybersecurity risks and detailing the extent and nature of their expertise. Expertise can include prior work experience in cybersecurity, any relevant degrees or certifications, or any knowledge, skills, or other background in cybersecurity. The disclosure should further detail how the manager or committee is informed about cybersecurity threats or incidents and how they prevent, detect, mitigate, and remediate these incidents. Lastly, the company should disclose whether reports by either management or a committee are submitted to the board of directors or a subcommittee of the board. Having dedicated employees in management positions or having a committee whose primary responsibility is cybersecurity will become increasingly important to investors, who will likely exercise increasing scrutiny of such measures.

C. Compliance Considerations

Regulation S-K Item 106 and Form 20-F disclosures begin with annual reports for fiscal years ending on or after December 15, 2023. Form 8-K Item 1.05 cybersecurity incident disclosures must be compliant by the later of ninety (90) days after the date of publication in the Federal Register or December 18, 2023. Smaller reporting companies have an additional 180 days and must begin complying with Form 8-K 1.05 by the later of 270 days from the effective date of the rules or June 15, 2024. While each company will have its own individual considerations, here are some general recommendations to prepare for compliance and additional reporting:

  • Review and update the cyber incident response plan. Every company should have a cyber incident response plan that lays out how the company will respond to a suspected or confirmed data incident, the persons responsible for the incident response, and associated documentation procedures. Companies should update their plans to incorporate the new Form 8-K reporting requirements, including establishing a framework for evaluating materiality to ensure prompt reporting.  Considering that very limited circumstances allow for notification delay, companies should presume they will not be granted an extension unless they regularly interact with agencies of the U.S. government responsible for national security.  Once the policies and procedures are updated, companies should promptly train the appropriate employees on the new process.
  • Review and, if needed, update third party contract terms to include incident disclosure requirements. Cyber incidents often originate from a company’s vendor that has access to the company networks or the company’s data. The Rule requires disclosure of cyber incidents, regardless of where they originate. Companies should ensure that vendors with access to their data or networks are bound by clear, prompt incident notification requirements.
  • Assess possible updates to board assignments and committee responsibility. The SEC rules make clear that management of cybersecurity considerations just be a specifically designated job, and not an afterthought. Public companies should clearly assign cybersecurity oversight responsibilities, which may require updating committee assignments and charters.
  • Prepare the new disclosures for the company’s annual report. In addition to preparing to report on the company’s cybersecurity risk management, governance, and strategy, now is an excellent time to evaluate the effectiveness of the company’s overall cybersecurity posture and whether any gaps exist. The Rule clearly identifies that the person responsible for the cybersecurity oversight should be qualified with appropriate training or experience. If the company presently does not have someone with the appropriate qualifications, the company should consider hiring additional support or supporting a current employee’s training or certification.

While this Final Rule from the SEC will create new challenges for companies, it is worth emphasizing that the disclosure of this information to investors is not only imperative in the present moment but will become increasingly significant in the future. Cybercrime is proliferating, with professional groups organizing attacks on high level business at an ever-increasing rate. How well a company is equipped to deal with cybersecurity threats, and how well it addresses incidents that occur, is something investors will consider more and more as our reliance on technology to function grows. The Final Rule ensures that investors will become more effective in their ability to understand how prepared a company is for these events in the present and future.

[1] Special thanks to Christopher Malon, South Texas College of Law Class of 2025, for his assistance in researching and drafting this article.

[2] Securities and Exchange Commission, “Final Rule: Cybersecurity Risk Management, Strategy, Governance, and Incident Disclosure” (available at https://www.sec.gov/files/rules/final/2023/33-11216.pdf).

[3] Securities and Exchange Commission, “FACT SHEET: Public Company Cybersecurity Disclosures; Final Rules”, (available at https://www.sec.gov/files/33-11216-fact-sheet.pdf). In situations where disclosure would pose a substantial risk to national security or public safety, the SEC allows delaying disclosure if the Attorney General determines that the disclosure would indeed pose such a risk. This delay may be extended by the Attorney General so long as the risk to national security or public safety remains.

[4] See id. at 61 (noting that the revised formulation from the proposed amendment helps avoid levels of detail that would go beyond what was relevant to investors and addresses commenters concerns about details that would make companies vulnerable to cyberattacks).

This blog is an update to “Legal Issues with Using AI to Create Content – Written with Help from AI” by Devin Ricci on April 28, 2023

On August 18th, the United States District Court for the District of Columbia issued an opinion stating that Artificial Intelligence (AI) generated artwork lacks “human authorship,” thus it cannot be the subject of a valid copyright claim. This decision raises many issues regarding copyright ownership that will require further court involvement and/or policy reform.

The primary challenge arising from AI-generated artwork pertains to copyright existence and ownership. Copyright law traditionally assigns authorship to individuals who create original works. However, in the case of AI, determining authorship becomes complex. Some argue that since AI systems are essentially tools programmed by humans, the programmers should retain authorship rights. Others believe that if AI can autonomously create something new without direct human intervention, it should be granted certain rights. This debate challenges the very essence of copyright law, which is built around the concept of human creativity.

Case Summary

The plaintiff, Stephen Thaler, used the “Creativity Machine,” a generative AI technology, to generate a piece of artwork. Thaler was unsuccessful with obtaining a copyright registration for the AI-generated artwork. In the copyright application, Thaler identified “Creativity Machine” as the author. The United States Copyright Office (“USCO”) denied the application because the work “lack[ed] the human authorship necessary to support a copyright claim.” Thereafter, Thaler filed a complaint in the D.C. District Court against the USCO and its director requesting the refusal be set aside and the AI-generated artwork be registered.

Thaler filed a motion for summary judgment arguing that AI-generated work is copyrightable because the Copyright Act provides protection to “original works of authorship.” This argument was premised on Thaler’s assertion that “author” is not explicitly defined in the Copyright Act and that the ordinary meaning of “author” encompasses generative AI. Ultimately, the D.C. District Court disagreed. The Court held the Copyright Act plainly requires human authorship. As explained by the Court, an “author” is “an originator with the capacity for intellectual, creative, or artistic labor,” which is necessarily a human being.

Implications and Considerations

This decision raises a host of questions and demonstrates that a more comprehensive legal framework is required as AI generated content becomes more sophisticated and prevalent. AI has revolutionized various industries, and the realm of creative expression is no exception. AI-generated artwork has gained significant attention in recent years, raising fascinating questions about the intersection of technology, creativity, and intellectual property rights. As AI systems create artwork independently, it becomes imperative to analyze the implications of this emerging trend on copyright, ownership, and the very definition of creativity. The legal framework is continually evolving and there are many issues that content creators, artists, and marketing companies need to be cognizant of as the legal framework develops.

If this ruling is upheld, a work created solely by AI theoretically is not susceptible to copyright protection at all. Because copyright law is preemptive, meaning it exclusively governs the subject matter of claims that fall within the purview of the Copyright Act, this could severely limit the ability to prevent infringement of an AI-generated work. In theory, because the work would not be protectable, there is no property right to infringe and may not be a legal basis to prevent third party use of the material. 

It is important to note that this recent decision may not stretch to underlying works created by a human, or to the extent a human could be considered a co-author of AI-generated content. In any event, it does implicate works where AI is fully creating the work with little to no human involvement. For example, if you use a program similar to the Creativity Machine and type into the program: “create a picture of Santa getting run over by a reindeer with cookies flying everywhere and a dog laughing,” the resulting image would not be protectable under this decision. In particular, advertising companies should be aware that AI-generated advertisements may not be subject to copyright protection.

However, there must be some middle ground between complete human authorship and complete AI-generated content. AI might be utilized in developing a work, but if there is enough human involvement it should be fair to say there is human authorship. Perhaps a photographer snaps a photograph and uses an AI editing tool to filter/edit the photo. Is the photographer’s involvement enough to make the edited photo a human-authored work? How much human involvement is required to constitute authorship? Courts will have to wrestle with the intersection of AI’s involvement in creative works to sort out these questions. Otherwise, it will be up to Congress to create a new framework for addressing AI generated or augmented works.


AI-generated artwork represents a groundbreaking fusion of technology and creativity that challenges established norms in the art and legal worlds. The complex questions it raises about copyright, authorship, and the essence of creativity underscore the need for collaborative efforts among legal experts, artists, programmers, and policymakers. Balancing the rights of human creators and the capabilities of AI will shape the future landscape of artistic expression and intellectual property rights.