On September 26, Securities and Exchange Commission (SEC) Chair Paul S. Atkins announced a return to the SEC’s prior practice of allowing individuals and entities facing enforcement actions to request that the SEC simultaneously consider both their settlement offers and any related waiver requests. Waivers may be necessary to avoid automatic disqualifications and collateral consequences that can result from enforcement actions, such as the loss of well-known seasoned issuer status, safe harbor protections, private offering exemptions, or the ability to serve in certain regulated capacities.

Key Policy Change:

• The SEC will now evaluate settlement offers and related waiver requests together, rather than in separate, siloed processes.
• This change restores the SEC’s prior practice from 2019, which was reversed in 2021. It is intended to promote fairness, efficiency, and certainty for parties seeking to resolve enforcement matters, while ensuring comprehensive review in the best interests of investors and the markets.

Impact on Parties Facing Enforcement Actions:

• Streamlined Process: Individuals and entities can address both the enforcement action and any necessary waivers in a single, coordinated submission, potentially reducing delays and uncertainty.
• No Guarantee of Waiver Approval: The SEC retains full discretion to approve, deny, or impose conditions on waiver requests. Approval is not automatic, and the analysis will remain rigorous and focused on investor protection and market integrity.
• Decision Point: If the SEC accepts a settlement but denies a waiver, the party must promptly decide whether to proceed with the settlement as accepted or withdraw. Delays in response may jeopardize the settlement and lead to litigation.
• Comprehensive Review: The SEC will consider the facts, conduct, and consequences holistically, with input from relevant divisions, to determine whether the proposed resolution aligns with its mission.

Parties facing SEC enforcement actions should be aware of this procedural shift, which may offer greater efficiency and certainty in resolving matters. However, the considerations typically undertaken by the SEC in connection with their evaluation of a waiver will remain the same — the difference here is the timing of that consideration (jointly with the settlement proposal), not the facts and circumstances that the staff will consider. Waiver requests remain subject to thorough review, and outcomes are not guaranteed. Prompt communication with SEC staff will be critical if a settlement is accepted but a waiver is denied.

On September 4, President Donald Trump signed the executive order “Implementing the United States-Japan Agreement” (the Agreement), which clarifies the bilateral trade agreement framework announced on July 23.

Key Provisions of the Agreement

The Agreement applies a baseline 15% “reciprocal” tariff rate for most Japanese imports. If a product’s rate is already set at 15% or more by the Harmonized Tariff Schedule of the United States (HTSUS), then no reciprocal duty will apply.

Special treatment is applied to several product categories under the Agreement. Manned civil aircraft and related parts and components will be exempt from the 15% reciprocal tariff rate (as outlined in Executive Order 14257); and from the Section 232 sectoral tariffs (as outlined in Proclamations 9704 (aluminum), 9705 (steel), and 10962 (copper)).

Previously, passenger vehicles, light trucks, and specific automotive parts, including those imported from Japan, were subject to an additional 25% tariff under Section 232, pursuant to Proclamation 10908 (discussed in detail here). With the Agreement, these products will be assessed a 15% tariff rate.

Other goods will be subject to a preferential zero percent reciprocal duty. These include generic pharmaceuticals and their ingredients and chemical precursors, as well as “natural resources that are not naturally available or produced in the United States.” This aligns with the executive order released by President Trump on September 5 (discussed more in detail here), which established procedures for implementing trade agreements, including provisions establishing a zero percent reciprocal tariff on certain goods, including “products that cannot be grown, mined, or naturally produced in the United States or grown, mined, or naturally produced in sufficient quantities in the United States to satisfy domestic demand; . . . and non-patented articles for use in pharmaceutical applications.” The September 5 executive order included a list of more than 1,900 products potentially eligible for country-based tariff exemptions or reductions (potentially to zero).

The Agreement’s provisions will be applied retroactively to goods that were entered for consumption or withdrawn from a warehouse for consumption on or after 12:01 a.m. ET on August 7.

Bilateral Commitments and Economic Exchange

The Agreement states that “the Government of Japan has agreed to invest $550 billion in the United States. These investments . . . will be selected by the United States Government.”

In addition, Japan, according to the Agreement, “will provide American manufacturing, aerospace, agriculture, food, energy, automobile, and industrial goods producers with breakthrough openings in market access across key sectors.”

Japan has also committed to purchase U.S.-made commercial aircraft and defense equipment and is “working to accept for sale in Japan” U.S.-manufactured and U.S. safety-certified passenger vehicles without additional testing.

Regulatory Guidance

In light of the retroactive effect of the Agreement, U.S. Customs and Border Protection (CBP) issued interim guidance on September 5, emphasizing that products entered for consumption or withdrawn from a warehouse for consumption on or after 12:01 a.m. ET on August 7 are eligible for refunds pursuant to the protest or correction process overseen by CBP. However, the interim guidance advises the trade community not to file any protest or correction for these products until further instructions are provided.

On September 16, the International Trade Administration released its regulatory notice to implement necessary modifications to the HTSUS to reflect the changes to be made pursuant to the Agreement.

Moving Forward

With pending litigation surrounding tariffs (discussed in detail here and here), which has been accepted for review by the Supreme Court and is scheduled for oral arguments in November, stakeholders should continue to watch for changes in tariff policy.

Troutman Pepper Locke will continue to monitor CBP guidance and developments related to the Agreement, as well as other international trade developments. For questions about compliance or the impact of these changes on your business, please contact our team.

In Foley v. Session Corp., the Delaware Court of Chancery rescinded a stock cancellation agreement (SCA) and stock repurchase agreement (SPA) entered into following a dispute among several founders, holding that enforcement of the agreements amounted to conversion. This decision confirms that board approvals must strictly follow corporate formalities as outlined in an entity’s governing documents and in accordance with Delaware General Corporation Law (DGCL).

Background

In 2017, four friends formed Session Corp. (the company), a cannabis accessories company. Camden Foley, Samual Bertain, Esther Lenoir Ramirez, and Vinh Pho (collectively, the founders) each owned 25% of the company’s shares. The company’s certificate of incorporation named Ramirez the CEO as a matter of formality; however, the founders made decisions collectively. In May 2018, Ramirez, acting by written consent as the sole director, appointed herself president and CEO. The written consent granted Ramirez the power to appoint and remove subordinate officers and employees of the company. Foley, Bertain, and Pho each held officer roles within the company. In September 2018, Bertain, Pho, and Foley formally joined the company’s board of directors. As the company grew, Ramirez proposed an equity restructuring to reflect her role as the company’s CEO and only full-time employee. Pho supported the restructuring, but Foley and Bertain opposed it.

On December 31, 2021, the founders formalized a mediation agreement regarding the equity dispute, which allocated 26.5% of shares to Ramirez, 24.5% to Pho, and 19.5% each to Foley and Bertain, with a 10% employee option pool. In 2022, following the mediation agreement, the founders each signed the SCA and SPA, under which the founders’ shares became unvested and a sixty-month vesting schedule was established. The SPA afforded the company the ability to repurchase unvested shares for nominal consideration valued at 1/1000 of a cent if any founder’s employment terminated. Ramirez acted by written consent as the purported sole member of the board to authorize the SCA and SPA, without the authorization of the remaining founders and members of the board.

In October 2022, following consecutive quarters of the company’s poor economic performance, Ramirez terminated Foley and Bertain. The company exercised its right under the SPA to repurchase Foley and Bertain’s unvested shares. Foley and Bertain each received a total of $19.50 for their shares. Foley and Bertain subsequently sued Ramirez, Pho, and the company for the conversion of their shares, among other claims.

Analysis

The court held that the company’s board failed to properly authorize the company’s participation in the SCA, SPA, or the company’s exercise of its rights under the SCA. According to the court, Delaware courts and the DGCL demand strict adherence to proper corporate formalities, particularly in transactions involving stock. Under the DGCL, any valid board action that can be taken at a meeting of the board of directors may be taken without a meeting if consented to in writing by all members of the board. A non-unanimous director consent is invalid as a matter of law.

Since each founder held a director position when Ramirez purported to act by written consent, Ramirez’s attempt was invalid.

Takeaways

This case demonstrates that corporate formalities must be strictly followed when entering any agreement or transaction, including with respect to unanimous board approval and the approval of stock redemptions and repurchases. Failure to adhere to these corporate formalities may render the underlying action invalid.

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Nick Fore also contributed to this article. He is not licensed to practice law in any jurisdiction; bar admission pending.

This article was republished by Law360 on October 7, 2025.

Faster office actions, improved prior art searches, and a more consistent application of the law — these will be hallmarks of the future of patent examination at the U.S. Patent and Trademark Office (USPTO) due to increased use of artificial intelligence (AI).[1] Applicants and patent practitioners are faced with an unprecedented challenge that could significantly change prosecution strategy in the future.

While currently aimed at augmenting the tools available to patent examiners, the USPTO is developing more advanced AI systems to help examiners deal with the growth in patent filings and the complexity of modern inventions.[2] In recent years, the USPTO has introduced several tools to aid with classification and prior art searching.[3] Specifically, the USPTO’s Search AI tool includes Similarity Search, which enables examiners to locate documents similar to a patent application by leveraging AI algorithms to sift through millions of domestic and foreign patents and publications.[4] Recently, the USPTO also introduced DesignVision, an image-based search tool that allows patent examiners to search for visually similar designs across more than 80 global databases using image inputs, which improves the identification of relevant prior art for design patents.[5] The USPTO is also developing SCOUT, a generative AI platform designed to assist examiners with analytical and drafting tasks, including reviewing incoming documents, suggesting corrections, and navigating the Manual of Patent Examining Procedure (MPEP).[6]

As a result, the USPTO is setting the stage for significant changes in how patent prosecution unfolds. Applicants and patent practitioners should consider new and evolving strategies to overcome AI-enhanced patent examination, particularly by taking a proactive approach when drafting new applications. This article extrapolates the impacts of AI on patent examination processes across several critical categories.

Prior Art Rejections Under 35 USC Section 102 and Section 103

Traditionally, examiners were constrained by time and the limitations of keyword-based search strategies, potentially missing relevant references or relying on multiple references to support obviousness rejections when other references may be more on point. With developing AI tools, examiners can access a broader and more relevant pool of prior art, leading to potentially more robust novelty (Section 102) and obviousness (Section 103) rejections. The ability to quickly identify highly similar references means examiners will have more time to develop their arguments, and applicants may face more substantial hurdles in overcoming rejections. In the future, AI may be capable of suggesting multiple logical combinations of references, potentially reducing the number of references needed to support a rejection. This could make Section 103 rejections more difficult to rebut, as the combinations may rely on fewer references and be more closely aligned with the claimed invention.

Accordingly, as AI improves the quality of prior art combinations, patent practitioners may increasingly focus their arguments on attacking the rationale for combining references, rather than disputing the features of the references. This shift may result in arguments with more nuanced legal and technical reasoning, such as following a more comprehensive Graham analysis (e.g., an increased reliance on secondary considerations).[7] Arguments may further focus on analyzing the operation of prior art and considering whether proposed modifications are actually possible or change the fundamental principles of how a prior art reference works (e.g., whether the modification of the prior art makes the prior art inoperable for its intended purpose or changes a principle of operation).[8] This also highlights an increasing need for practitioners to perform thorough prior art searches before drafting applications and to proactively tailor draft applications to emphasize any novel points among the prior art landscape.

Patentability Rejections Under 35 USC Section 101

Subject matter eligibility under Section 101 has long been a difficult area to navigate, particularly for financial and software-related inventions. The USPTO’s AI-driven tools have the opportunity to bring greater consistency and predictability to these rejections. Specifically, AI models trained on thousands of Section 101 decisions can help examiners apply eligibility standards more consistently. By providing enhanced guidance to examiners, AI tools may reduce the variability in Section 101 rejections and improve outcomes for applicants.

Accordingly, practitioners may benefit from focusing arguments on similarities to known USPTO examples[9] and relevant cases, as AI analysis may more easily recognize similarities to known approved elements, such as known or similar practical applications (under Step 2A, prong 2).[10] However, conversely, practitioners may have increased difficulty overcoming Section 101 through more original arguments, as AI analysis tools may not understand the nuance of more individualized arguments. The use of AI tools also increases the importance of bearing in mind Section 101 while drafting patent specifications, for example, by preemptively characterizing technologies in the proper light and setting forth technical improvements with sufficient detail.[11]

Claim Objections and 35 USC Section 112 Rejections

The USPTO’s SCOUT tool currently has the capability to identify potential Section 112 issues.[12] As AI models progress, flagging issues related to claim support, enablement, and indefiniteness will occur with greater accuracy, potentially leading to more frequent and detailed Section 112 rejections. Examiners may be able to more routinely identify vague or unsupported claims, prompting applicants to provide clearer and more robust disclosures. Automated review of applications can surface formal objections and inconsistencies that might otherwise be overlooked, streamlining the examination process and improving patent quality. As with Section 101, during the application drafting stage, practitioners should consider providing support for not only the present claims but also for any anticipated future applications, such as continuations.

Other Impacts

The integration of AI is also expected to accelerate the pace of patent examination. By automating routine tasks and enhancing search efficiency, examiners can process applications more quickly, potentially reducing pendency. With future AI-driven tools aiding in drafting office actions and analyzing applications, examiners will be able to issue responses more rapidly. As examination efficiency improves, the USPTO may be able to address its longstanding backlog of applications, benefiting applicants.[13] Furthermore, as patent examination occurs more quickly, it may result in fewer delays due to the USPTO. Accordingly, this may lead to fewer cases receiving patent term adjustment (PTA), and the amount of PTA granted to cases may be reduced.

After-final practice may also become more fruitful with the use of AI, as examiners may need less time to determine whether proposed claim amendments overcome the art. Similarly, interview practice may also become more beneficial as examiners may be able to more quickly assess, through quick AI searching, if proposed claim amendments overcome the art. This may additionally improve the speed of examination.

A Future of Stronger Patents

The increasing use of AI will empower examiners with advanced search and analytical tools, providing stronger and more thorough searches, strengthening potential rejections, and providing more consistent examination. As a result, applicants and practitioners will need to preemptively adapt their strategies to address stronger and more sophisticated rejections and should consider the future potential of the USPTO’s AI tools when drafting applications. Ultimately, the use of AI will likely result in patents that are more thoroughly vetted, better supported, and less vulnerable to post-grant challenges.

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[1] See https://www.uspto.gov/sites/default/files/documents/USPTO-HOUR-AI-June-17.pdf

[2] See id.

[3] See id.

[4] See https://www.uspto.gov/sites/default/files/documents/ai-sim-search.pdf

[5] See https://www.uspto.gov/about-us/news-updates/uspto-launches-new-design-patent-examination-ai-tool; https://www.uspto.gov/sites/default/files/documents/og-designvision-2025-07-16.pdf

[6] See https://www.uspto.gov/sites/default/files/documents/USPTO-HOUR-AI-June-17.pdf

[7] See MPEP § 2141(V)

[8] See MPEP § 2143.01(V) and (VI)

[9] See, e.g., USPTO Subject Matter Eligibility Examples, July 2024, https://www.uspto.gov/sites/default/files/documents/2024-AI-SMEUpdateExamples47-49.pdf

[10] See MPEP § 2106.04(d)(1)

[11] See MPEP § 2106.04(d)(1)

[12] See https://www.uspto.gov/sites/default/files/documents/USPTO-HOUR-AI-June-17.pdf

[13] See https://www.uspto.gov/dashboard/patents/production-unexamined-filing.html

Introduction

On July 4, 2025, H.R. 1 — the One Big Beautiful Bill Act (the OBBBA) was enacted into law. OBBBA introduces significant amendments to the Internal Revenue Code (IRC), including notable changes to sections 162(m) and 4960.[1] Section 162(m) limits the deductibility of executive compensation for publicly held corporations, and section 4960 imposes excise taxes on excess compensation and excess parachute payments paid by certain tax-exempt organizations. These measures serve to raise tax revenue from executive compensation as a partial offset to tax costs elsewhere in OBBBA. This article summarizes the key statutory changes made to sections 162(m) and 4960 by OBBBA and discusses practical implications for affected organizations.

OBBBA Changes to Section 162(m)

Pre-OBBBA Law. Section 162(m) limits the federal income tax deduction that a publicly held corporation may claim for compensation paid to any “covered employee” to $1 million per year. Covered employees include the principal executive officer, principal financial officer, and the three other highest compensated executive officers of the publicly held corporation. For years after 2026, covered employees also include the next five highest compensated employees, whether or not executive officers (the “five highest paid employees”). Anyone who was a covered employee for a year beginning after December 31, 2016, remains a covered employee for all future years, even after termination of employment (the “once covered, always covered” rule). However, the once covered, always covered rule does not apply to the five highest paid employees.

The section 162(m) limit applies to all compensation, including salary, bonuses, equity awards, and other taxable remuneration, regardless of whether the compensation is performance-based. IRS regulations require the deduction limit to apply to all compensation paid by the corporation and any members of its “affiliated group” as determined under section 1504 (excluding the provisions of section 1504(b)), and the disallowed deduction is prorated among payors. Although partnerships are not included in the section 1504 affiliated group, the section 162(m) regulations require compensation paid by a partnership to a covered employee be included as compensation subject to the deduction limit, to the extent the publicly held corporation (or other member of its affiliated group) receives an allocable share of the partnership’s tax deduction for the compensation.[2]

Congress uses section 162(m) as a tax revenue raiser to offset costs in other legislation and has extended the deduction limit over time. For example, before 2018, the section 162(m) deduction limit did not apply to certain “performance-based compensation,” but the Tax Cuts and Jobs Act of 2017 removed this exception starting in 2018 (subject to certain grandfather rules). Removing the performance-based compensation exception from section 162(m) meant that publicly held corporations were much more likely to have deductions for executive compensation limited. The changes to section 162(m) as part of the Emergency Economic Stabilization Act of 2008 and Patient Protection and Affordable Care Act in 2010,[3] as well as the addition of the five highest paid employees as covered employees starting in 2027 under the American Rescue Plan Act of 2021,[4] all represent further expansions of the section 162(m) deduction limit. The OBBBA changes to section 162(m) discussed below can be viewed as a continuation of this trend.[5]

OBBBA Changes. For tax years beginning after December 31, 2025, OBBBA requires the section 162(m) deduction limit to apply to a publicly held corporation and all members of that corporation’s “controlled group” under sections 414(b), (c), (m), and (o), instead of the “affiliated group” under section 1504 as currently required by the section 162(m) regulations. This change means that publicly held corporations must consider compensation paid to employees by all members of the controlled group, both for identifying the covered employees and for determining the amount of compensation received by those covered employees subject to the section 162(m) deduction limit.

The terms “controlled group” under sections 414(b), (c), (m), and (o) and “affiliated group” under section 1504 are both used to aggregate related entities for various federal tax purposes, but they have distinct definitions, requirements, and applications. As explained below, a “controlled group” is the broader concept of the two.

An “affiliated group” is defined in section 1504(a) as one or more chains of includible corporations connected through stock ownership with a common parent corporation, which is itself an includible corporation. The affiliated group applies primarily to determine the group of corporations that may file consolidated federal income tax returns. Noncorporate entities are not included in the affiliated group.[6]

A “controlled group,” by contrast, describes a group of related entities treated as a single employer for various employee benefit plan purposes, such as the rules applicable to tax-qualified retirement plans. The definition picks up not only a controlled group of corporations but also certain trades or businesses (whether or not incorporated) under common control, as well as certain “affiliated service groups.” The controlled group rules apply family ownership and other attribution rules that generally do not apply in determining an affiliated group.

The following chart highlights the key differences between affiliated groups and controlled groups:

*  Per the section 162(m) regulations, these exclusions do not apply for purposes of applying the pre-OBBBA section 162(m) limit.

Section 162(m) as amended by OBBBA includes rules for allocating any lost tax deductions among the controlled group members in proportion to the compensation paid to the covered employee by each controlled group member, similar to rules in the section 162(m) regulations for allocating lost tax deductions across the affiliated group.

Practical Implications. The primary impact of the changes to section 162(m) will be for publicly held corporations that include partnerships or other noncorporate entities in their controlled group that are not otherwise included in their affiliate group. The difference matters only to the extent those noncorporate entities pay compensation to employees. The impact may especially hit publicly held corporations with operating partnerships, such as so-called “UPREIT” and “Up-C” business structures.

For example, consider an UPREIT structured as a publicly held corporation with an 80% ownership interest in an operating partnership. The operating partnership pays compensation to a covered employee of the publicly held corporation for services rendered by the covered employee to the partnership. Under the pre-OBBBA rules, the publicly held corporation’s 80% distributive share of the partnership’s compensation tax expense related to that compensation would be required to be treated as remuneration that is subject to the section 162(m) deduction limit. With the OBBBA change, however, the partnership will be part of the publicly held corporation’s controlled group, resulting in 100% of that compensation being included for purposes of the deduction limit.

For those companies with a broader controlled group compared to their affiliated group, such as publicly traded UPREITs or other Up-C structures, the OBBBA change will also likely have a significant impact on the determination of the five highest paid employees who are subject to section 162(m) starting in 2027.

Section 162(m) does not present any significant tax planning or mitigation opportunities, especially after the elimination of the performance-based compensation exception in 2018. The human resources, legal, tax, and accounting teams for publicly held corporations will need to coordinate to ensure that the controlled group is properly identified beginning with the 2026 tax year. Additional implementation details may become available if Treasury and the IRS issue updated regulations for the new rules.

OBBBA Changes to Section 4960

Pre-OBBBA Law. Section 4960 imposes an excise tax on certain tax-exempt organizations (referred to as “applicable tax-exempt organizations” or ATEOs)[7] that pay excessive compensation or excess parachute payments to their executives. The tax is designed to loosely mirror the limitations on executive compensation deductions for publicly held corporations under sections 162(m) and 280G but applies to tax-exempt entities and is structured as an excise tax rather than a deduction disallowance.

The excise tax under section 4960 is at the top corporate tax rate (currently 21%) based on either of the following:

• Remuneration paid by the ATEO to any “covered employee” over $1 million in a taxable year, or
  
• Any “excess parachute payment” paid in connection with an involuntary termination of employment for any covered employee of the ATEO. An excess parachute payment refers to certain payments contingent on the covered employee’s separation from service that exceed the covered employee’s “base amount” (which is the covered employee’s average W-2 taxable wages from the ATEO over the preceding five years, or shorter period of employment if applicable), but only if the aggregate amount of those payments equals or exceeds three times the base amount.

Remuneration for purposes of section 4960 broadly includes any taxable wages under section 3401(a) (excluding designated Roth contributions), and specifically includes amounts required to be included as taxable wages under section 457(f). The rule is generally understood to include base wages (i.e., salary) when actually or constructively received, and other amounts, like benefits under a section 457(f) plan or nongovernmental section 457(b) plan, at the time of vesting (i.e., when any applicable “substantial risk of forfeiture” as defined under section 457(f) lapses).[8] Vested earnings on previously vested amounts are also considered section 4960 remuneration, but may be potentially offset by losses on such vested benefits. Remuneration excludes amounts paid to licensed medical professionals for the performance of medical or veterinary services. Section 4960 also covers compensation paid to covered employees by the ATEO’s related organizations, which are entities that control, are controlled by, or are under common control with the ATEO, as well as certain supported/supporting organizations under section 509.[9]

Importantly, the covered employees applicable under pre-OBBBA section 4960 are limited to the five highest compensated employees of the organization for the taxable year. This is the feature of section 4960 that OBBBA changes, as discussed below. An individual who was a covered employee for any taxable year beginning after December 31, 2016, remains a covered employee for all future years, including after termination of employment, similar to the “once covered, always covered” rule under section 162(m).

OBBBA Changes. OBBBA makes a simple statutory change to section 4960 by removing the five-employee limit to the number of covered employees. As result, an ATEO will need to consider any employee who has been employed by the ATEO and its related organizations after 2016 as a potential covered employee for tax years beginning after 2025. This change impacts application of both potential triggers under section 4960 – i.e., both the $1 million excess compensation and excess parachute payment triggers.

Practical Implications. For ATEOs with more than five employees receiving over $1 million in section 4960 remuneration, the OBBBA changes will obviously result in greater section 4960 excise taxes. But there are additional, more subtle potential implications to consider.

First, the definition of section 4960 remuneration is complicated. Some amounts are included when paid, others when amounts are vested even though not yet paid. Vested earnings on deferred compensation are included but can be offset by deferred compensation losses. If the ATEO has related organizations that pay compensation, these determinations are made taking into account that related organization compensation and properly allocated among the various entities. Applying these rules has been challenging when the covered employees were limited to the top five paid employees. With a more expanded list of potential covered employees — that is, all employees of the ATEO — the tracking and documentation of section 4960 remuneration will become that much more burdensome beginning in 2026.

Next, ATEOs should look closely at the design of their section 457(f) plans or other arrangements that can create large “clumps” of compensation under section 4960, especially when amounts first become vested. For example, a supplemental executive retirement plan for an ATEO that vests benefits upon attainment of a specified retirement age may create a large amount of one-time compensation under section 4960 for a participant upon attainment of that retirement age. This “clumpy” vesting event, together with other compensation, may cause the individual to have section 4960 remuneration that exceeds $1 million. ATEOs may want to consider new designs for their deferred compensation plans that better spread out section 4960 remuneration upon vesting, such as with graded vesting schedules, although any design changes likely can be applied only on a prospective basis.

Finally, ATEOs should take a fresh look at their severance plans and agreements to consider the potential for excise taxes due to excess parachute payments. Even plans or agreements that pay out amounts at less than three times compensation can trigger excess parachute payments due to the peculiar math that applies to those rules (thanks to section 280G). For example, a relatively newly hired employee who also has electively deferred compensation and has not received significant bonuses may have a relatively low “base amount” under those rules. If severance benefits are based on current salary and target annual incentives and include accelerated vesting of any benefits, the total severance will likely exceed the base amount, and if the severance equals or exceeds three times the base amount, the excess parachute payment excise tax will be triggered. Under the OBBBA changes to section 4960, this analysis will need to be considered for every employee who terminates employment with a severance benefit, not just the five highest paid employees.

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[1] For purposes of this article, all section references are to sections of the IRC, unless otherwise noted.

[2] See Treas. Reg. §1.162(m)-33(c)(3)(ii).

[3] In 2008 in connection with the global financial crisis, the Emergency Economic Stabilization Act of 2008 (EESA) established the Troubled Assets Relief Program (TARP). EESA added a new section 162(m) deduction limit applicable to financial institutions that received financial assistance under TARP. The deduction limit was set at a lower level ($500,000) with no performance-based compensation exception and continued applicability to compensation earned in a covered year that is deferred and payable in a later year. This rule no longer applies now that the TARP program is over. Then, in 2010 in connection with the Patient Protection and Affordable Care Act (ACA), section 162(m) was amended to add a $500,000 compensation deduction limit applicable to certain covered health insurance providers, structured like the TARP limit, i.e., without a performance-based compensation exception and applicable to compensation earned in a given year even if deferred and payable in a later year. This ACA limit continues to apply.

[4] See our January 2025 Alert, “IRS Issues Proposed Regulations on the Expanded Definition of ‘Covered Employee’ Under Code Section 162(m)” (here).

[5] Per the estimated revenue effects of OBBBA calculated as of July 1, 2025, by the Joint Committee on Taxation (JCX-34-35, available here), the changes to section 162(m) are estimated to increase tax revenues over the next 10 years by $15.7 billion, and the changes to section 4960 are estimated to increase tax revenues over the next 10 years by $3.8 billion.

[6] However, as noted above, the section 162(m) regulations require compensation paid by a partnership to a covered employee be included as compensation subject to the deduction limit, to the extent the publicly held corporation (or other member of its affiliated group) receives an allocable share of the partnership’s tax deduction for the compensation, even though the partnership is not part of the affiliated group.

[7] An ATEO is an organization that is (i) exempt under section 501(a), (ii) a farmers’ cooperative under section 521(b)(1), (iii) has income excluded under section 115(1), or (iv) a political organization under section 527(e)(1).  See section 4960(c).

[8] A Chief Counsel Advice issued in April 2025 (CCA 202515014) clarifies that employee elective deferrals under a section 403(b) plan and employee elective contributions under a section 125 cafeteria plan should not be considered remuneration for purposes of section 4960, even though the statutory text and IRS regulations are otherwise silent on these items.

[9] See section 4960(c)(4)(A). The statute may apply when a covered employee receives no compensation from the ATEO but is compensated by a related taxable organization. This issue may impact corporate controlled private foundations where employees of the related taxable organization that funds the foundation are also employees of the foundation but receive no compensation from the foundation. The section 4960 regulations, however, establish a safe harbor that allows certain employees to be disregarded for purposes of the statute. See Treas. Reg. §53.4960-1(d)(2)(ii). Generally, an individual is disregarded if the individual performed services as an employee of the ATEO and all related ATEOs for no more than 10% of the total hours the individual worked as an employee of the ATEO and any related organization during the applicable tax year. An individual is automatically treated as having performed services of no more than 10% of the total hours if the employee performed no more than 100 hours of service as an employee of the ATEO and all related ATEOs during the applicable year. The section 4960 regulations also establish a nonexempt funds exemption when a taxable organization related to the ATEO primarily compensates the employee and the employee does not primarily work for the ATEO or any controlled taxable affiliate. See Treas. Reg. §53.4960-1(d)(2)(iii).

State attorneys general increasingly impact businesses in all industries. Our nationally recognized state AG team has been trusted by clients for more than 20 years to navigate their most complicated state AG investigations and enforcement actions.

State Attorneys General Monitor analyzes regulatory actions by state AGs and other state administrative agencies throughout the nation. Contributors to this newsletter and related blog include attorneys experienced in regulatory enforcement, litigation, and compliance. Also visit our State Attorneys General Monitor microsite.

Contact our State AG Team at StateAG@troutman.com.

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Troutman Pepper Locke Spotlight

Compliance and Enforcement in Consumer Financial Services: Navigating the Changing Landscape of Federal and State Oversight

By Troutman Pepper Locke State Attorneys General Team

Register Here
Wednesday, October 29 | 1:00 – 3:10 p.m. ET

Mike Yaghi and Lane Page, members of Troutman Pepper Locke’s State Attorneys General practice, along with Stefanie Jackman, Chris Willis, and Caleb Rosenberg from the Consumer Financial Services practice, will participate in an upcoming CLE webinar with myLawCLE. They will analyze the evolving roles and enforcement priorities of federal and state regulatory agencies, focusing on their impact on consumer financial services.

Read more

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State AG News

Massachusetts AG Sues Kalshi, Highlighting Unresolved Questions About Predictive Market Contracts

By Troutman Pepper Locke State Attorneys General Team

Massachusetts Attorney General (AG) Andrea Joy Campbell recently filed a lawsuit in Suffolk Superior Court against KalshiEX LLC (Kalshi), an online prediction market platform, alleging that the platform runs an illegal sports wagering operation without an appropriate license in Massachusetts. The complaint asserts that Kalshi offers Massachusetts consumers the equivalent of sports betting under the guise of “event contracts,” letting users wager yes-or-no options on sporting outcomes just like traditional bets. In the AG’s view, these contracts closely resemble sports wagers offered by licensed sportsbooks, and Kalshi actively promoted its sports products via TV and social media in the Commonwealth while allowing trades through third-party apps like Robinhood. Because Kalshi asserts that its event contract business does not constitute gaming, Kalshi never obtained a license from the Massachusetts Gaming Commission to engage in gaming-related activities.

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AG of the Week

Anthony Brown, Maryland

Anthony Brown has served as Maryland’s 47th attorney general (AG) since January 3, 2023. He previously represented Maryland’s 4th Congressional District from 2017 to 2023, served as lieutenant governor from 2007 to 2015, and held roles as vice chairman of the Judiciary Committee and majority whip in the Maryland House of Delegates from 1999 to 2007.

Since taking office as AG, Brown established the Office of Equity, Policy, and Engagement to promote fairness in Maryland’s civil, criminal, and administrative justice systems. In October 2023, he partnered with Maryland Public Defender Natasha Dartigue to launch the Maryland Equitable Justice Collaborative, an initiative aimed at reducing incarceration and addressing disparities in Maryland’s correctional facilities. His work has focused on improving access to justice, enhancing public safety, and promoting equity across legal systems.

During his time as lieutenant governor and in Congress, Brown concentrated on issues such as criminal justice reform, public safety measures, voting access, environmental protection, and support for veterans, children, and victims of domestic violence.

Brown earned a bachelor’s degree from Harvard College and a law degree from Harvard Law School. He clerked at the U.S. Court of Appeals for the Armed Forces and practiced law at prominent firms before entering public service. A retired Army Reserve colonel, Brown served as an aviator and judge advocate general for three decades, earning the Legion of Merit and Bronze Star, including for service in Iraq.

Maryland AG in the News:

• Brown joined a coalition of 23 AGs in submitting a comment letter opposing the Environmental Protection Agency’s proposed rescission of its landmark 2009 finding that greenhouse gas emissions, including from motor vehicles, drive climate change and endanger public health and welfare. The finding is known as the Endangerment Finding.  
• Brown announced the guilty plea of a former financial services provider charged with felony theft scheme and securities fraud.  
• Brown co-led a coalition of 22 AGs in filing an amicus brief supporting District of Columbia AG Brian Schwalb’s lawsuit challenging the deployment of National Guard troops to Washington, D.C.

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Upcoming AG Events

• October: AGA | Human Trafficking Conference | Oxford, MS  
• October: RAGA | Senior Staff Retreat | Kiawah Island, SC  
• November: DAGA | Scottsdale Policy Conference | Scottsdale, AZ  

For more on upcoming AG Events, click here.

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Troutman Pepper Locke’s State Attorneys General team combines legal acumen and government experience to develop comprehensive, thoughtful strategies for clients. Our attorneys handle individual and multistate AG investigations, proactive counseling and litigation, and manage ancillary regulatory issues. Our successful approach has been recognized by Chambers USA, which ranked our practice as a leader in the industry.

The Forced Labor Enforcement Task Force (FLETF), an interagency task force that includes the U.S. Department of Homeland Security (DHS), the Office of the U.S. Trade Representative, and the U.S. Departments of Labor, State, the Treasury, Justice, and Commerce, released the 2025 updates to the Uyghur Forced Labor Prevention Act (UFLPA) Strategy. These updates build on previous efforts to combat the importation of goods produced using forced labor in China, particularly from the Xinjiang Uyghur Autonomous Region (XUAR). These updates are mandated annually under the UFLPA to ensure the strategy remains current and effective in addressing forced labor concerns.

The UFLPA

Enacted in December 2021, the UFLPA aims to prevent the importation of goods mined, produced, or manufactured, wholly or in part, with forced labor in the People’s Republic of China. The law establishes a rebuttable presumption that all goods mined, produced, or manufactured wholly or in part in the XUAR, or produced by entities on the UFLPA Entity List, are presumed to be made with forced labor, and therefore, these goods are banned from entry into the U.S. unless an importer can provide “clear and convincing” evidence to the contrary. To support enforcement, the FLETF, chaired by DHS, was tasked with developing and annually updating a strategy that includes:

• An updated UFLPA Entity List identifying entities determined by the government to be involved in forced labor.
• A list of products associated with these entities.
• Plans for enforcement actions.
• Designation of high-priority sectors for enforcement.
• Coordination and collaboration with appropriate nongovernmental organizations (NGOs) and private-sector entities.

Key Developments in the 2025 UFLPA Strategy

1. Expansion of the UFLPA Entity List

The UFLPA Entity List has been significantly expanded, now including 144 entities, up from 66 in 2024. This expansion reflects a concerted effort to identify and target organizations contributing to forced labor in global supply chains.

2. Introduction of New High-Priority Sectors

The 2025 strategy introduces five new high-priority sectors for enforcement: caustic soda, copper, lithium, jujubes (red dates), and steel. These sectors are now subject to increased scrutiny due to the heightened risk of forced labor within their supply chains. This brings the total number of high-priority sectors to 13, including previously identified sectors such as aluminum, apparel, and cotton products.

3. Strengthened Enforcement Actions

U.S. Customs and Border Protection (CBP) has intensified enforcement efforts under the UFLPA. In the first half of 2025, CBP detained 6,636 shipments, surpassing the total of 4,619 detained throughout 2024. Notably, 82.8% of these detentions involved goods from China, with a significant portion related to the automotive sector. The percentage of detained shipments that are later successfully cleared has decreased, indicating stricter enforcement and reduced opportunities to dispute CBP’s findings.

4. Enhanced Collaboration With Stakeholders

The FLETF has strengthened its partnerships with NGOs, private-sector entities, and foreign government counterparts. These collaborations aim to improve supply chain transparency, share best practices, and bolster due diligence efforts among businesses. Targeted engagements and sector-specific webinars have been conducted to address challenges in compliance and enforcement.

Conclusion

The 2025 updates to the UFLPA Strategy signify a robust escalation in the U.S. government’s commitment to eradicating forced labor from global supply chains. Through expanded entity listings, the identification of new high-priority sectors, intensified enforcement actions, and strengthened collaborations, the U.S. aims to create a more transparent and ethical trade environment. At the same time, importers face a heightened risk that shipments will be detained if their supply chains cannot be fully traced or documented, particularly when sourcing from complex or opaque networks. The UFLPA’s strict rebuttable presumption means that, without clear evidence proving a good was not produced in XUAR or by Entity List parties, even in part, entries may be delayed or blocked, potentially causing disruption to operations, inventory flow, and market delivery timelines. This underscores the critical importance for businesses to implement robust and proactive due diligence and supply chain verification processes to mitigate exposure under the UFLPA.

In a policy statement issued by the Securities and Exchange Commission (SEC) on September 17, 2025, the agency announced that companies seeking to go public will be permitted to include an issuer-investor mandatory arbitration provision — which would require investors to resolve claims of fraud, false statements, or other investor claims through arbitration rather than in court litigation — without impact on the acceleration of the effectiveness of the registration statement. The SEC has traditionally declined to approve bylaw provisions that allow companies to avoid securities class action litigation by requiring claims to be submitted to arbitration. This change in policy stance observes judicial attitudes regarding the Federal Arbitration Act (FAA) and indicates that initial public offering (IPO) investors should prepare to be required to arbitrate investor claims in the imminent future.

Overall Impact on Investors and Prospective IPOs

In his open meeting statement for the SEC’s vote on the policy statement and apparent shift on the appropriateness of mandatory arbitration provisions, SEC Chairman Paul S. Atkins stated, “[w]hile many people will express views on whether a company should adopt a mandatory arbitration provision, the Commission’s role in this debate is to provide clarity that such provisions are not inconsistent with the federal securities laws.” Despite the SEC’s efforts to clarify that the policy statement is not an active endorsement of arbitration provisions and that the SEC will not take a position on whether such arbitration provisions should be adopted, Reuters reports that some commentators believe the policy statement will have the effect of “open[ing] the floodgates” to mandatory arbitration. This would reduce the number and impact of securities class action litigation by requiring claims to divert to arbitration before a class can be certified. However, another school of thought is that many companies may decline to adopt mandatory arbitration provisions, as investors may opt to avoid investments in companies with such provisions.

In addition to the possible impact on securities class action litigation, the new policy eliminates a potential obstacle to IPO registration. The SEC’s decision on whether to accelerate the registration process for a prospective IPO company will no longer be affected by inclusion of mandatory arbitration provisions. Rather, the SEC’s focus will be on whether the issuer-investor mandatory arbitration provisions are adequately disclosed.

Further Considerations Related to Implementation

Prospective IPO companies and investors should ensure that any mandatory arbitration provision is adequately disclosed, as the policy statement expressly states the disclosure of such an arbitration provision will be a focus of the SEC’s staff. While the SEC has issued its official stance relying on prior judicial interpretation of the FAA, it is important for prospective IPO companies and investors to also consider the applicable state law of the company’s state of incorporation. State law on the issue may vary from state to state, potentially impacting the ability of prospective IPO companies to implement mandatory arbitration provisions. Such companies should still ensure that their bylaw provisions comply with the applicable state law. Lastly, the SEC’s statement is silent as to current public companies, and it is yet undetermined whether a current public company would be permitted to seek an amendment to include an issuer-investor mandatory arbitration clause. If a current public company desired to have such mandatory provisions, it would likely require shareholder approval to implement.

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Abrianna T. Harris also contributed to this article. She is not licensed to practice law in any jurisdiction; bar admission pending.

The Pennsylvania Court of Common Pleas deemed a design-build construction contract void for failure to comply with a provision of the Architects Licensure Law that requires a design-build contract to name the architectural firm responsible for architectural services.[1]

In Sinclair v. Marco Polo Real Estate, Inc.,[2] the design-build contract did not name the architect. After the design-build entity quoted a sizable increase in construction costs for the project, the owners gave notice of their intent to terminate the contract.

The owners filed suit seeking a declaratory judgment. They argued that the design-build entity’s failure to comply with the Architects Licensure Law rendered the parties’ contract void. The design-build entity argued that the owners were aware of the architect and had met with the architect on various occasions, and thus the contract could be performed without violating the statute.

The court held that the Architects Licensure Law required strict compliance, pointing to the legislature’s intent to protect the public by requiring strict compliance with contracting provisions for design-build services. Because the statute required the contract to name the architectural firm contractually responsible to the design-build entity,[3] and it did not do so, the design-build contract violated the law and was void.

The Superior Court dismissed the design-build entity’s interlocutory appeal. Two other claims remain pending in the trial court and the design-build entity did not establish a basis for the Superior Court to take up the interlocutory appeal.[4]

Takeaways

With no current binding appellate authority on the issue, expect challengers across Pennsylvania to look to Sinclair. For now, Sinclair serves as a warning that design-build professionals must ensure strict compliance with applicable licensure laws. As evidenced by Sinclair, even express knowledge of the architect will not overcome the failure to name the architect in the design-build agreement as required by the Architect Licensure Law.

Although Sinclair arose in the residential construction context, the court did not limit its holding to only residential projects. Nor did the court limit its holding to solely naming the architect in the agreement. The Architects Licensure Law contains various other requirements, which may similarly be strictly enforced. Design-build professionals should carefully review their contracts to ensure strict compliance with the Architects Licensure Law or risk a voided contract.

Troutman Pepper Locke attorneys continue to monitor developments and are well-positioned to advise clients regarding their design-build agreements and compliance with applicable laws.

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[1] 63 Pa. Cons. Stat. § 34.15(9). As the court noted, effective December 30, 2024, the Architects Licensure Law, § 34.1, et seq., is now 63 Pa. Cons. Stat. § 34.101, and § 34.15 was renumbered to 63 Pa. Cons. Stat. § 34.508.

[2] No. 2024-03139 (C.P. Bucks June 30, 2025).

[3] 63 Pa. Cons. Stat. § 34.15(9)(iv). Specifically, Section 9(iv) of the Architects Licensure Law provides: “The contract between the design-build entity and the client shall set forth the name of the architectural firm which will be contractually responsible to the design-build entity for providing architectural services.”

[4] Sinclair v. Marco Polo Real Estate, Inc., No. 1364 EDA 2025 (Pa. Super. Ct. Aug. 20, 2025).

New insights gathered by law firm Troutman Pepper Locke reveal a sector bruised but buoyant amid regulatory and tariff uncertainty

NEW YORK – The U.S. energy storage sector remains optimistic after a turbulent year marked by increased regulatory and tariff-related risks, according to findings from law firm Troutman Pepper Locke.

Its latest industry report, “Brave New World: What’s Next for US Energy Storage After OBBBA and Amid Continued Tariff Risk?“ highlights how developers, investors, and lenders across the Battery Energy Storage Systems (BESS) landscape have prepared to face escalating risk profiles in 2025, and why they remain confident about the sector’s overall growth trajectory.

Co-author and Troutman Pepper Locke partner Vaughn Morrison said, “Energy storage’s versatility of use cases has untethered it from the fate of wind and solar to a meaningful degree.”

Across the shifting U.S. energy landscape, the strategic value of storage is widely recognized. It is seen as much as a service for grid resilience and power price stability as it is for decarbonization. Andrew Waranch, CEO of Spearmint Energy, points to this as a source of industry confidence: “So much of the power market and power price is set by expensive and old generators that only need to operate during ramp times in the morning and evening. In contrast, batteries can solve that quickly and cheaply with extremely high reliability.”

As the implications of the One Big Beautiful Bill Act (OBBBA) and tariffs become clearer, the report finds that project owners expect to be better placed to plan for risks and move their projects forward.

John Leonti, partner and chair of the Energy Department at Troutman Pepper Locke, said, “Although the impact of the OBBBA on energy storage is less severe than some feared, the ambition to onshore battery component manufacturing and the attendant Foreign Entities of Concern (FEOC) provisions issue significant supply challenges for the industry moving forward. The most prepared in the sector have acted nimbly to restructure supply chains, and key stakeholders are strengthening their close working relationships to share risk and collaboratively revise strategies.”

Many see reasons for continued optimism. While the energy storage sector navigates supply strain, demand for its services is set to rise sharply due to the country’s exploding load growth and aging grid infrastructure. The burgeoning data center industry requires high uptimes and short- and long-term reliability from energy providers in order to grow, making energy storage an increasingly essential solution.

However, the report also emphasizes that uncertainty remains one of the primary barriers to progress and attracting investment.

Market actors report a complicated and tumultuous chapter in the ongoing rollout of utility-scale energy storage, with a number of critical obstacles unresolved.

Foremost among these are the tariff hikes on China — the source of the majority of the world’s battery components — and compliance with FEOC rules, which exclude entities linked to adversarial nations, particularly China, from the benefits of U.S. energy tax incentives. Investors underlined the difficulty of forecasting scenarios given that the supply chain capacity needed for U.S. energy storage currently far exceeds what can realistically be manufactured domestically. Tom Cornell, CEO of BESS supplier Prevalon, described the FEOC rules as “handicapping the industry pretty significantly.”

Still, tailwinds such as robust demand for grid flexibility, supportive federal incentives, and growing bipartisan recognition of the strategic value of energy storage are helping the sector push forward. Its clear value proposition for grid reliability, economic development, and national security has meant energy storage retains an integral role in the U.S.’ energy future. For these reasons, energy storage has — and will continue to — march on.

To read the full report, visit: “Brave New World: What’s Next for US Energy Storage After OBBBA and Amid Continued Tariff Risk?”

Troutman Pepper Locke’s market-leading energy practice helps clients with their most important and complex matters throughout the U.S. and beyond. Whether electric power, oil and gas, or emerging technologies, the cross-discipline team is equipped to handle any related matters, drawing on the depth of the firm’s knowledge in the market. Troutman Pepper Locke regularly advises electric utilities, independent power producers, banks, upstream and midstream companies and service companies, private equity funds, and other public and private corporations. Learn more at energylawinsights.com.

About Troutman Pepper Locke

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