Articles + Publications - Troutman Pepper Locke

Troutman Pepper Locke’s Cannabis Practice helps clients throughout their business cycle enter or expand into the cannabis space. Our team combines the resources of attorneys in areas such as licensing and taxation, regulatory compliance, corporate and transactional, intellectual property, and real estate, among others, to provide comprehensive services.

Our Cannabis Practice provides advice on issues related to applicable federal and state law. Cannabis remains an illegal controlled substance under federal law.

Cannabis Regulatory Updates

Testing Turmoil: The Legal and Business Implications of Inconsistent Cannabis and Testing Standards

By Jean Smith-Gonnell and Cole White

Cannabis businesses operating in state-legal markets face a patchwork of testing requirements that vary from one jurisdiction to another. In the absence of federal oversight, each state has developed its own testing rules, including for licensing labs, required contaminants to test for, sampling procedures, and allowable remediation of contaminated products.

Indiana AG Pushes Back on THC Legislation

By Jean Smith-Gonnell, Chris Carlson, and Nick Ramos

On April 21, Indiana Attorney General (AG) Todd Rokita issued a letter to state legislators addressing the pressing issue of legal loopholes surrounding intoxicating hemp-derived products containing delta-8 THC, delta-10 THC, or HHC. These products have garnered significant attention due to their psychoactive effects similar to Delta-9 THC, the primary compound in marijuana. In 2023, Rokita issued an official opinion concluding that these types of products are currently illegal in Indiana. Rokita’s letter discusses the proposed Senate Bill 478, which, among other things, seeks to regulate craft hemp, craft hemp flower products, and THC. Rokita concluded that the proposed bill would make these products legal, does not meaningfully regulate them, and encourages the legislature to reconsider the legislation.

This article was republished in The Global Trade Law Journal November-December 2025 issue.

On April 30, 2025, Senators Mark Kelly (D-AZ) and Todd Young (R-IN) — joined by a bipartisan group of Senate and House sponsors — reintroduced the Shipbuilding and Harbor Infrastructure for Prosperity and Security (SHIPS) for America Act (often called the SHIPS Act). This bill is designed to revitalize U.S. shipbuilding and strengthen national and economic security by rebuilding the U.S.-flag fleet and maritime industrial base. It carries strong bipartisan backing and is explicitly framed as a national security measure to counter China’s dominance in shipbuilding and global shipping.

The core provisions of the reintroduced SHIPS Act include several new penalties and requirements related to shipbuilding in China and the use of U.S. ships for key trade. In summary, the bill would:

Appoint a Maritime Security Advisor and Board. A Maritime Security Advisor would be appointed and reside in the Executive Office of the President to coordinate national maritime affairs and policy, tasked with maintaining and updating the National Maritime Strategy. The Maritime Security Advisor would also lead a newly established Maritime Security Board, which is intended to coordinate efforts related to the National Maritime Strategy and marine transportation system, including setting target numbers for the size of maritime security fleets, providing oversight of cargo preference requirements, coordinating national efforts to develop a maritime workforce, establishing national priorities for R&D of next-gen technologies in shipbuilding, guarding against cyber threats, and overseeing the Maritime Security Trust Fund.
Create a Maritime Security Trust Fund. The SHIPS Act seeks to create a dedicated source of funding for maritime security programs financed by funds collected from Customs and Border Protection duties, fees and penalties imposed on vessels in international commerce, special tonnage taxes, light money, and penalties levied on foreign-built vessels related to the Office of the United States Trade Representative (USTR) Investigation of China’s Targeting of the Maritime, Logistics and Shipbuilding Sectors, which we have previously addressed in several publications.
Impose “penalty taxes” on ships tied to Chinese shipyards: Vessels owned or operated by “foreign entities of concern” (specifically including China, Russia, Iran, and North Korea) face a $5 per net-ton penalty tax on port fees. Crucially, the same $5/ton penalty applies to non-Chinese shipping companies if a large share of their newbuild fleet is ordered from a Chinese “shipyard of concern” (initially defined to include China’s state-owned CSSC, with other foreign yards added after October 1, 2027). For example, any non-Chinese owner who has 50% or more of its vessels on order at a designated foreign yard in the next 24 months would pay the full $5/ton surcharge. Intermediate tiers apply lower surcharges ($3.50/ton if 25–49% of ships are ordered at a yard of concern, and $1.25/ton if at least half of a fleet was built or repaired at such yards in the past three years). Only the highest applicable penalty rate is levied, but these fees are in addition to the existing USTR port fees on Chinese vessels. All such fees would be directed into the Maritime Security Trust, intended to catalyze the U.S shipbuilding industry.
Maintain and increase other port-related fees: The bill retains and strengthens prior proposals to adjust U.S. tonnage taxes and lighthouse duties for foreign-owned ships. Under the SHIPS Act, a vessel owned or registered in a “foreign country of concern” (initially China) could no longer claim any suspension or discount on U.S. tonnage taxes — effectively adding roughly $1 per net-ton for Chinese ships as originally proposed. It would also apply additional taxes on Chinese-built vessels and operators (on top of the Trump‐administration’s new USTR port fees). In short, the Act boosts port fees and other charges beyond the USTR’s measures, with all proceeds funneled into the Maritime Security Trust Fund for U.S. maritime programs.
Expand U.S. cargo-preference mandates: The SHIPS Act dramatically widens cargo-preference quotas to force more cargo onto U.S.-flagged and U.S.-built ships. In addition to existing rules (which already reserve certain government cargoes), the bill creates new commercial cargo-preference requirements:
- Imports from China: Beginning five years after enactment, 1% of U.S.-bound tonnage from China must be carried on U.S.-built vessels. This quota increases by one percentage point each year, reaching 10% by the 14th year. Shippers who fail to meet these thresholds incur fines equal to the cost difference between using a compliant U.S.-built ship and a cheaper foreign vessel. This mandate effectively targets containerized imports, which comprise most U.S. cargo from China.
- Crude oil exports: For the first four years, 3% of U.S. crude oil exports must be carried on U.S.-flag tankers. Thereafter the quota steps up, requiring those shipments to be on U.S.-built tankers: 3% during years 5–7; 6% in years 8–10; 8% in years 11–13; and 10% from year 14 onward.
- LNG exports: The Act requires 2% of U.S. liquefied natural gas (LNG) exports to sail on U.S.-flag LNG carriers for the first five years. Thereafter it escalates the requirement to be on U.S.-built LNG vessels: 2% in years 6–7; 3% in years 8–9; 4% in years 10–11; 6% in years 12–13; 7% in years 14–15; 9% in years 16–17; 11% in years 18–19; 13% in years 20–21; and 15% from year 22 onward.

These percentages generally mirror the December 2024 proposal but go beyond the USTR’s final plan. The USTR had settled on a narrower LNG-only rule of 1% U.S.-flag beginning in 2028, rising to 15% by 2047. In all cases, any U.S. exporter or shipper failing to meet the quota faces stiff penalties: for example, a firm missing the China-import requirement would be fined the freight-cost difference to a compliant U.S. vessel.

Other support for U.S. shipbuilding: The bill also funds a “Strategic Commercial Fleet” of 250 U.S.-built, U.S.-flag vessels through guaranteed contracts, modernizes shipyard financing programs, and boosts maritime workforce training. Current estimates place U.S.-flag tonnage in international trade in the neighborhood of 1%, which the SHIPS Act seeks to dramatically increase. Notably, it increases the “no-fault termination” payout to 100% of costs (up from 50% in the earlier draft) if a long-term contract for these vessels is canceled, which is intended to backstop some of the risk attendant to buying and building U.S.-Flag vessels. It would also require these ships to be repaired in the U.S. and tighten conditions under which they can carry government cargoes. These and other provisions reflect the December 2024 bill’s language, carried forward into the April version.

Key Differences From Prior Versions

Compared to the December 2024 proposal, the April 2025 reintroduction is substantively similar, but with some technical refinements. For example, it splits the Senate bill into two parts (one focusing on financing), and it formalizes how USTR’s new China-ship fees are funneled into the Maritime Security Trust Fund. The cargo-quota schedules and penalty rates remain largely unchanged from December. However, the April bill expanded certain safeguards: it raises the early-termination cost guarantee from 50% to 100%, and it tightens oversight of the new fleet’s use of government cargo and repair locations. In effect, the April 2025 version doubles down on reviving shipbuilding and funding the Maritime Security Trust Fund, while clarifying administrative details.

Comparison to USTR’s Proposal

The original USTR plan (mandated by an April 2024 Section 301 investigation) had proposed some similar measures: new fees on Chinese-owned or Chinese-built vessels and phased quotas on LNG exports. However, the USTR finalized a narrower set of rules on April 17, 2025 — notably limiting cargo preference to LNG exports only (starting at 1% U.S.-flag in 2028) and not penalizing non-Chinese owners of Chinese-built ships. In contrast, the SHIPS Act goes far beyond the USTR’s scope: it forces U.S.-built tonnage for crude exports and (especially) for container imports from China, and it expressly targets non-Chinese shipowners. While USTR’s final action exempted vessels merely built or operated by foreign firms, the SHIPS Act revives the idea of penalizing foreign owners ordering at Chinese yards. In sum, the SHIPS Act imposes broader cargo preference mandates and port taxes than the USTR’s decision, on the theory that aggressive intervention is needed to “artificially create” demand for U.S.-built ships.

Impact on Shipping, Supply Chains, and Trade

If enacted, the SHIPS Act would profoundly affect container shipping and U.S.–China trade flows. Currently none of the major ocean carriers is U.S.-flagged, and only a tiny handful of containerships in the world are American-built. Forcing even 1–10% of China-bound container freight onto U.S. ships (as the Act mandates) would create enormous logistical challenges and costs. Industry analysts warn that building a large, modern containership or LNG carrier in a U.S. yard can cost multiple times what it costs in Asia. For instance, one estimate suggests a U.S.-built LNG vessel could cost two to four times a Korean-built one. These higher capital and operating costs would translate into far higher freight rates for shippers.

As a result, U.S. importers and exporters would face two main burdens: (1) higher freight costs or fines: shippers who cannot find a suitable U.S.-built/flag vessel will either pay steep fees for the privilege (the bill’s fine is pegged to the cost difference) or try to comply by overpaying; (2) reduced capacity and delays. With few U.S.-Flag ships available, meeting the quotas could cause cargo bottlenecks and rerouting to other markets. The European-American Chamber of Commerce notes that “limiting access to ships and capacity would impact U.S. companies and global supply chains”. Freight forwarders and logistics firms have already expressed confusion about how to operationalize these rules, and many predict that overall U.S.-China trade volumes would shrink if the requirements force up costs substantially.

In practical terms, businesses that rely on U.S.-China trade (e.g., retailers, manufacturers, agricultural exporters) would likely see higher import costs on containerized goods. Exports of crude oil and LNG could become less competitive if exporters must charter far more expensive U.S. tankers. Indeed, one shipping executive noted that if U.S. LNG producers must use U.S. ships at 2–4 times the cost in the international market, it could depress U.S. LNG export prices globally. In the container sector, carriers would have to adjust alliances and capacity; for example, Asian carriers might shift more empty boxes and buy U.S.-built vessels or pay the penalty. It is not yet clear how strict enforcement will be, but the language makes clear that every importer from China must meet the threshold or pay the difference.

In summary, the April 2025 SHIPS Act expands on the USTR proposal and comes over the back of the Trump administration’s Executive Order “Restoring America’s Maritime Dominance,” addressed in our April 14, 2025 publication, adding to the momentum supporting the U.S. shipbuilding and maritime operating industries. In so doing, the SHIPS Act reintroduces the December 2024 bill’s aggressive approach and expands it. It seeks to establish new federal infrastructure in the form of a Maritime Advisory, Maritime Security Board, and a Maritime Security Trust Fund. It also pairs significant new financial penalties on Chinese shipyards and vessels with mandatory cargo quotas that would steer U.S.-China trade onto U.S. ships. These measures are framed as necessary to rebuild America’s shipbuilding and defense capabilities. If passed, the SHIPS Act would represent one of the most sweeping interventions ever in maritime commerce — and corporate stakeholders in shipping and trade will need to prepare for higher costs and new compliance obligations.

This alert is intended as a guide only and is not a substitute for specific legal or tax advice. Please don’t hesitate to reach out to the authors with questions.

Our eMerge team is excited to share the following updates:

Jennifer Shea Knox Joins eMerge: Enhancing Our Growing Information Governance Advisory Practice
Spotlight on Customs Solution Team: Featuring Flywheel and Other Bespoke AI Tools
Thought Leadership: Streamlining eDiscovery with Supervised Collections and Custodial Interviews
Events and Speaking Engagements: eDiscovery, Microsoft 365, and More
Awards and Recognition: Alison Grounds Honored as a “Stand-out Lawyer”

Troutman Pepper Locke’s award-winning eDiscovery and Data Management subsidiary, eMerge, offers clients integrated technology and legal solutions to address complex data-driven problems in litigation, transactional and compliance matters, and government investigations.

Jennifer Shea Knox Joins eMerge

We are excited to announce that Jennifer Shea Knox has joined eMerge as director of information governance advisory services. Jennifer is an eDiscovery and data management strategist with extensive experience utilizing technology to solve legal, compliance, and other complex business problems. With a pragmatic approach, she delivers innovative solutions that reduce enterprise risk and operational costs for clients. Her experience spans the entire Electronic Discovery Reference Model (EDRM) and includes specialized knowledge in Microsoft 365 Purview eDiscovery and Data Lifecycle Management. Click here to learn more.

Customs Solution Team Spotlight

eMerge Custom Solutions is a dedicated team of software engineers, project managers, and data analysts focused on delivering bespoke technology solutions to our clients’ most complex data-related challenges. We develop innovative web-based applications, Relativity enhancements, and data analysis tools in support of eMerge, the firm, and our clients. Leveraging generative AI, machine learning, automation, and advanced workflows, we streamline processes, extract insights, and improve attorney efficiency. Our experience includes integrating internally developed applications with existing systems, transforming disparate data sources into review and production-ready formats, and constantly evolving to meet changing business and litigation needs.

Recent Custom Solutions Successes

AI Analysis of Noncompliant Production

A third party produced more than 500,000 pages of PDFs with no metadata. eMerge attorneys first used the active learning capabilities of Relativity’s Review Center to identify the most significant documents in the production.
eMerge then used Flywheel, our award-winning, generative AI-powered Swiss army knife application, to accurately extract essential email metadata from each of those 2,500 documents in less than 30 minutes.
The fields extracted by Flywheel, including sender, recipients, subject, and date sent, were automatically populated in Relativity, enabling the team to efficiently search, sort, and filter the production.
Flywheel also automatically summarized each document and reliably differentiated emails from attachments.
With Flywheel, eMerge provided the case team with vital insights from a 500,000-page PDF production within minutes.

Custom Script to Cull Structured Data by 98%

Upon receiving more than 85 million records exported from a client database, eMerge promptly built a custom script to distill those records to the 1.4 million most likely to contain relevant information.
This 98% reduction in record volume enabled the case team to quickly focus its analysis on the most important records, saving thousands in both attorneys’ fees and hosting charges.

These are just two of many examples of the great work of our custom solutions team.

Thought Leadership

Streamlining eDiscovery: The Case for Supervised Collections and Custodial Interviews

Despite the many technological advances in the collection, processing, and review of electronically stored information, it remains vital to conduct custodial interviews focused on data identification to confer a litigation advantage, reduce downstream costs, minimize disputes, and mitigate discovery risk. Undue reliance on back-end keyword searching or custodial self-collections can yield results that are both over- and under-inclusive, increasing the volume of irrelevant data swept into review workflows while missing key information. eMerge offers integrated collection solutions incorporating custodial interviews into remote, supervised collections for this very reason. Click here to read more.

Events and Speaking Engagements

Webinar – Microsoft 365 eDiscovery Updates: Legal and Technical Developments

Please join us for an insightful discussion focused on imminent changes to Microsoft 365 Purview’s eDiscovery solution. Our esteemed panel of attorneys and technologists will delve into the nature of those updates and preparatory steps organizations utilizing Microsoft 365 should consider taking now. The panelists will discuss key areas of common concern:

Upcoming dates for key changes to the platform.
Technical and operational impacts for legal and technology teams, specifically related to legal hold, search, and export.
Best practices for transitioning to the new unified Purview eDiscovery experience.
Tips to stay up to date on Purview eDiscovery’s roadmap and workflow implications.

The webinar will be hosted June 5 from 2-3 p.m. ET. Click here to register.

Annual eDiscovery Updates

Our team of attorneys and technologists recently discussed practical considerations when balancing legal requirements with rapidly changing AI and other technologies, the ongoing impact of collaboration and messaging applications, and the latest developments in privilege protection and preservation. They also shared practical tips from our experience across an array of matters and industries. Click here to view the recording.

ALM | Law.com Legalweek

Principal Jason Lichter participated in a mock negotiation of an ESI protocol incorporating the use of generative AI at ALM and Law.com’s Legalweek. During his session, the panelists engaged in a debate and discussion on how generative AI, specifically aiR for Review, can be defensibly utilized for first-level document review, including provisions that parties should consider including in an ESI protocol. Click here to read more.

Awards and Recognition

Alison Grounds Recognized as Stand-out Lawyer

Thomson Reuters has recognized eMerge Managing Partner Alison Grounds and 38 Troutman Pepper Locke attorneys as “Stand-out Lawyers.” As part of Thomson Reuters‘ Sharplegal study, more than 2,000 senior legal buyers around the world are asked to nominate up to three attorneys they have worked with within the last 12 months who have stood out above all the other attorneys with whom they interact. Click here to read more.

Chambers Global Guide 2025 Recognizes Troutman Pepper Locke and Troutman eMerge

Troutman Pepper Locke and 15 attorneys are recognized in the Chambers Global Guide 2025. eMerge Managing Partner Alison Grounds is ranked in the E-Discovery & Information Governance section. Click here to read more.

Troutman Pepper Locke Celebrates Alison Grounds’ Win and Firm’s Recognition From Legalweek Leaders in Tech Law

eMerge was named a finalist for Innovations in eDiscovery Technology at Legalweek Leaders in Tech Law Awards. Additionally, eMerge Managing Partner Alison Grounds was named a winner of the Monica Bay Women of Legal Tech Award. Presented by Legaltech News, the awards honor individuals and organizations who have been at the forefront of legal innovation over the past year and across three categories: law firms, legal departments, and technology providers. Click here to read more.

This article was republished in Pratt’s Energy Law Report, Vol. 25-10, November-December 2025.

There are unprecedented risks and opportunities emerging for companies in the energy sector as the Trump administration’s priorities start to come into focus. Many of those are well-known to the industry. Here’s one that’s not: the Information and Communications Technology and Services (ICTS) rules, administered by the Commerce Department’s Bureau of Industry and Security (BIS).

Below we answer some frequently asked questions about the ICTS rules for companies in the energy sector.

What are the ICTS rules?

It’s a very broad power that BIS has, stemming from Executive Order 13873, from President Trump’s first term, tasking the agency to address risks to U.S. national security posed by ICTS (i.e., essentially any product or technology with an information/data function) that is “designed, developed, manufactured or supplied by entities under the ownership or control of, or subject to the jurisdiction or direction of, a foreign adversary,” such as China.

It essentially allows BIS to regulate any communications/data product, technology, or service that has a link to China. For more on BIS’s ICTS regulations, see their website.

Why have I never heard of these rules?

In large part, that’s because BIS is just getting started rolling them out. Over the next few years, they’ll become widely known.

Isn’t it just Chinese companies that need to worry about this?

No. If your company uses any of the technologies that come within the crosshairs of the Office of Information and Communications Technology and Services (OICTS) within BIS, you may need to eliminate that, which is often a costly and disruptive process.

(Some companies may have already experienced this with Kaspersky cybersecurity and anti-virus software and services, which BIS banned last year.)

How will this impact the energy sector?

The 2024 Technology Prioritization table from OICTS, a regularly updated list of the government’s “most critical ICTS national security risk” areas that BIS will prioritize for regulation under the ICTS framework, lists “Energy Generation and Storage” as one of just a few “high” priority areas.

It will come as a surprise to many that energy generation and storage is listed in this table of national security priorities alongside more obviously sensitive areas like sensors, robotics, and semiconductors. What’s particularly telling is that some of the other “high” priority areas called out in the table are those that OICTS has: 1) already begun regulating, such as connected vehicles (see the website for that recently announced regulatory program); 2) announced a specific intention to regulate in the near future, such as cloud services (see this regulatory agenda item); or 3) has attempted to regulate in the recent past and will likely revisit in the future, such as computing infrastructure as a service (see this 2024 proposed rule).

So, the writing is on the wall for the energy sector.

What can be done now?

We’ve already laid out a bit of a strategic framework that can serve as a guide for certain types of companies on how to engage with the government on this. The best approach will be case-specific. U.S. companies will have the easiest time getting the government’s ear and having their concerns taken seriously.

In short, an ICTS strategy will involve trying to get as much insight as possible on what the government’s concerns are, and what they may target in an effort to resolve those concerns, and then trying to shape that targeting through mutually productive engagement that helps the government hone its approach to avoid being over-inclusive or otherwise doing more harm than good to U.S. interests.

On a parallel track, companies and industry groups should be looking at their dependencies on products and technologies that are linked in some way to China or other “adversaries” as part of a vulnerability/risk analysis.

What is the current state of play?

The priority track in the OICTS table where “energy generation and storage” is listed is based on “restatements of executive branch technology priorities,” such as the National Standards Strategy and the Critical and Emerging Technologies list. OICTS then considered factors like the “degree of maturity, commercialization, and foreign adversary investment” in finalizing and tiering its priorities.

The May 2023 National Standards Strategy lists a subset of critical and emerging technologies (CET) “that are essential for U.S. competitiveness and national security,” including “Clean Energy Generation and Storage,” which is described as “critical to the generation, storage, distribution, and climate-friendly and efficient utilization of energy, and to the security of the technologies that support energy-producing plants.” That’s pretty broad and could encompass most if not all of the electrical power industry as a whole.

The National Standards Strategy also lists “specific applications of CET” that have been determined to “impact our global economy and national security,” including “Carbon Capture, Removal, Utilization and Storage” and “Automated, Connected, and Electrified Transportation.” The latter is particularly telling, because, as noted above, there is already an ICTS regulatory program in place for connected vehicles. But this CET application list is broader, also covering vehicles’ “safe and efficient integration into smart communities and the transportation system as a whole, including standards to integrate EVs with the electrical grid and charging infrastructure.”

The February 2024 CET list update from the National Science and Technology Council provides a bit more granularity on what is included within “Clean Energy Generation and Storage”:

Renewable generation.
Renewable and sustainable chemistries, fuels, and feedstocks.
Nuclear energy systems.
Fusion energy.
Energy storage.
Electric and hybrid engines.
Batteries.
Grid integration technologies.
Energy-efficiency technologies.
Carbon management technologies.

Again, this is super broad and could encompass most if not all of the energy industry’s emerging (and many legacy) technology areas.

Of course, under the Trump administration, the focus on “clean” energy may diminish, and some of these priorities will shift. President Trump has already launched the President’s Council of Advisors on Science and Technology (PCAST) to shape the administration’s CET policy, and outlined the White House’s goals and priorities in this area. However, the details of how the Trump administration will change the current course remain sparse.

Conclusion

One glimpse that the energy industry has already gotten of the government’s national security regulatory instincts in this area was Executive Order 13920 from May 2020 on “Securing the United States Bulk-Power System.” That attempt to address national security risks in this sector was based on the view “that foreign adversaries are increasingly creating and exploiting vulnerabilities in the United States bulk-power system.” It sought to mitigate the “potentially catastrophic effects” of “the unrestricted acquisition or use in the United States of bulk-power system electric equipment designed, developed, manufactured, or supplied by persons owned by, controlled by, or subject to the jurisdiction or direction of foreign adversaries.”

While ICTS regulation in this sector has not materialized yet, it likely will soon. The threat, the vulnerability, and the intent to exploit it have not gone away — they’ve only escalated. With a number of shocking recent critical infrastructure cyber intrusions, such as Volt Typhoon and Salt Typhoon, both of which the government has attributed to China, and with the Trump administration’s focus on China and related U.S. national security vulnerabilities, the smart money would be on more rather than less regulation in this area in the months and years to come.

There’s much that industry can do today to start to prepare.

On January 10, 2025, in Spence v. American Airlines[1], a federal district court in Texas ruled that American Airlines (the company) and the committee overseeing its 401(k) plans (the committee) breached their duty of loyalty under the Employee Retirement Income Security Act of 1974 (ERISA) owed to participants in the company’s 401(k) plans, based primarily on conduct related to proxy voting of securities held in certain of the 401(k) plans’ investment funds. The court held that the company’s non-plan relationship with one of the 401(k) plans’ investment managers led the company and the committee to turn a blind eye to the investment manager’s allegedly ESG-driven proxy voting policies and activism, implemented in part (so the court found) using the assets of the company’s 401(k) plans that the investment manager managed, thereby “sacrific[ing] investment return . . . to promote benefits or goals unrelated to the interests of participants.”[2] At the same time, the court found that the company and the committee satisfied their ERISA duty of prudence with fiduciary oversight practices that not only met legal requirements, but “in many cases…exceeded the standards.”[3]

The decision is remarkable and, if ultimately upheld, potentially opens a new avenue of ERISA fiduciary litigation against 401(k) plans, which focuses not on investment returns or administrative costs, but instead on the proxy voting activities of investment managers. In this article, we explore the details around the court’s findings of fact and legal conclusions. We also look at the takeaways that 401(k) plan sponsors and their fiduciaries should consider in light of this decision.

Court’s Key Findings of Fact of the Case

The following summarizes key facts as found by the court and reported in the published decision.

The company sponsored and maintained two 401(k) plans at issue — the American Airlines, Inc. 401(k) Plan and the American Airlines, Inc. 401(k) Plan for Pilots (together, the plans) — which collectively held more than $26 billion in assets.[4] The governing plan documents for the plans established the committee as a “named fiduciary” and administrator for the plans.[5] The plans included an array of participant-directed investment choices, including a series of target date funds, a group of passively invested index funds, a group of actively managed funds, and a self-directed brokerage account alternative.[6]

The investment manager managed the passively invested index funds for the plans, which represented a significant portion of the total plan assets.[7] In addition, the court found that the investment manager owned more than 5% of the company and held about $400 million in corporate debt of the company.[8] The court highlighted that the company’s personnel notably described the company’s relationship with the investment manager as “significant”.[9] These findings of fact by the court will play an important role in the court’s decisions discussed below.

The committee — staffed by experienced personnel from various business units (including human resources and finance), as appointed by the company — held the primary fiduciary responsibility for selecting and monitoring the plans’ investment options, investment managers, and other vendors.[10] In alignment with the traditional practices of 401(k) plan fiduciaries, the committee met at least quarterly to review the performance of the investment options and maintained an investment policy statement to help guide that review.[11] The committee also engaged both internal and external investment professionals to assist in carrying out their duties.[12] The company’s internal group, called the “Asset Management Group,” was comprised of experienced financial analysts employed by the company, who regularly reviewed “detailed qualitative and quantitative information regarding the [Plans’] investment options” (including performance data and financial press regarding market developments) and met quarterly with current and prospective investment managers to “discuss any developments, changes in investment philosophy or the key personnel” to more comprehensively understand the manager’s performance.[13] The committee also engaged a highly respected and established outside consultant (the fiduciary advisor) to advise the committee about the performance of the investment options including both quantitative analysis and a review of qualitative factors regarding the various investment managers for the investment options.[14] In addition to meeting with the fiduciary advisor quarterly to review investment options and make recommendations to the committee, the Asset Management Group also regularly met with the investment advisor for the pilots’ union to get their additional feedback on the investment options and investment managers under the plans.[15] In other words, the committee, together with its advisors, conducted a rigorous process for selecting and monitoring the plans’ investment options and underlying investment managers.

Consistent with industry standards and the delegations set forth in the committee’s investment policy statement, the investment management agreements with the plans’ investment managers assigned the responsibility for proxy voting to each investment manager for any voting securities managed by that investment manager.[16] The investment managers were required to provide their applicable proxy voting guidelines to the Asset Management Group and to annually produce materials reporting on their proxy voting practices (including a summary report of how proxies were voted) to the committee each year.[17]

In that context, the investment manager’s investment management agreement specified that it would vote any proxies consistent with its proxy-voting guidelines in the “best long-term economic interests of the assets it manages”.[18] The court found that at some point, the investment manager’s proxy-voting guidelines began to expressly incorporate certain ESG considerations.[19] Additionally, there was a quarterly process that required the investment manager to attest to its adherence to its voting guidelines, although in the court’s view, this attestation process was seemingly not always followed.[20] Notably, while the fiduciary advisor’s regular due diligence included reviewing the proxy voting policies and activities of the plans’ investment managers as part of its qualitative review of such investment managers, the court found that such information rarely found its way into reports to, or discussions with, the committee.[21] As many 401(k) plan fiduciary committees are likely aware, a detailed investigation of proxy voting activities of plan investment managers is not a typical focus for fiduciary committees.

The court expressed in its findings of fact its deep skepticism that ESG investing is based on seeking improved financial performance. The court cited certain studies showing that, over a select period, certain funds focused on ESG investing underperformed broader market indices.[22] The court highlighted that ESG investing’s primary purpose is to effect societal change rather than achieve financial results.[23] While the court noted that “[i]nvesting that aims to reduce material risks or increase return for the exclusive purpose of obtaining financial benefit is not ESG investing,” the court went on to state:

… ESG investing is a strategy that considers or pursues a non-pecuniary interest as an end itself rather than as a means to some financial end. This distinction is especially key in this case. Simply describing an ESG consideration as a material financial consideration is not enough. There must be a sound basis for characterizing something as a financial benefit. Otherwise, anything could qualify as a financial interest and can serve as pretext for non-pecuniary interests.[24]

The court also found that the investment manager had engaged in what the court classified as “ESG activism,” with the court supporting this assertion with certain public statements and actions by the investment manager’s CEO and its support of various shareholder initiatives in proxy voting campaigns.[25] As one example, the court noted a contested board election for a major, publicly traded oil and energy company, that ultimately resulted in the election of three dissident directors to that company’s board. The court found that the investment manager’s vote for the dissident directors was determinative of the vote’s outcome.[26] The court observed that the oil and energy company’s stock price dropped in the immediate aftermath of that vote.[27]

Meanwhile, the court also took note of the company’s own ESG-based policies and positions, many of which the court found aligned with those for which the investment manager was supposedly advocating.[28] The court found that members of the Asset Management Group — one of whom, the court found, also oversaw the company’s business relationships with the investment manager as a key owner and debt holder — were aware of what the court termed “ESG activism” by the investment manager and potential concerns related to such activism, but failed to raise the topic with the committee.[29]

Who Is a Fiduciary?

As an initial matter, the court decided that the company itself was an ERISA fiduciary with respect to the plans, despite the fact that the governing documents of the plans expressly listed the committee as the “named fiduciary” and plan administrator.[30] The court pointed to the following areas of responsibility held by the company that made it a “functional” fiduciary with respect to the plans under ERISA:

The company held the power to appoint, retain, and remove plan fiduciaries, particularly, the members of the committee.
The company held the duty to ensure that the committee members comply with their fiduciary duties.
Finally, the company was “responsible for overseeing the [Plans’] investment managers, in addition to communicating with the [Plans’] advisors, preparing materials for [Committee] meetings, and raising any concerns or issues concerning the [Plans] with [Committee] members.”[31]

Notably, the court also highlighted that both the committee and the company signed the consulting agreement with the fiduciary advisor, and the company was listed as the named fiduciary in such agreement’s investment policy statement.[32]

The court found that these functional roles caused the company to be a defendant not merely with respect to a duty to monitor the committee.[33] In making such determination, the court noted that, while some Fifth Circuit precedent might limit ERISA exposure for individuals, (e.g., members of a board of directors) to the duty to monitor the members of a fiduciary committee, the court believed such limited liability does not apply to an entity, like the company.[34] As a result, the court considered the company to have equivalent fiduciary obligations of the committee, despite the fact that only the committee was named as a fiduciary under the terms of the plans’ governing documents.[35]

Duty of Prudence Satisfied

The court first analyzed claims that the company and the committee failed to meet ERISA’s duty of prudence, and ultimately concluded that the duty of prudence was satisfied.

ERISA’s duty of prudence requires a fiduciary to perform its role with “the care, skill, prudence, and diligence under the circumstances then prevailing that a prudent man acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims.”[36] After reviewing the various processes that the committee and the company followed, the court determined that “[f]atal to the prudence claim…[d]efendants’ practices did not fall short of the prevailing industry standards”[37] and that “there is no evidence that a prudent fiduciary adhering to its monitoring processes would have taken some action that [the committee] did not.”[38] In fact, the court found that the committee’s practices may have exceeded prevailing standards, including the degree to which the committee and its fiduciary advisor monitored the proxy voting activities of the various investment managers under the plans, including the investment manager’s ESG-motivated proxy voting actions.[39]

Although the court determined that the legal standards for measuring the duty of prudence mandated a finding in this case that the duty was satisfied, the court expressed criticism of what it characterized as the comparative standard nature for measuring compliance with the duty of prudence before turning to its analysis on the ERISA duty of loyalty.[40]

Duty of Loyalty Failed

The court then reviewed ERISA’s duty of loyalty, which operates separately from the duty of prudence, and which can be violated even if the fiduciaries act prudently. Thus, even if the company’s process for selecting plan investments reflected the care and diligence required of an ERISA fiduciary, an ERISA-recognized harm arises if the duty of loyalty is not separately met. As the court noted, ERISA’s duty of loyalty is “the highest known to law” and requires fiduciaries to act “solely in the interest of the participants and beneficiaries and . . . for the exclusive purpose of . . . providing benefits to participants and their beneficiaries.”[41]

In a surprising turn, the court found that the committee and the company failed to satisfy their duty of loyalty. In making its determination, the court considered the significant non-plan role played by the investment manager as an owner and debt holder of the company and the company’s ESG positions and policies, which the court found in combination influenced the company and the committee to turn a “blind eye” to the investment manager’s alleged “ESG activism.” The court also pointed to alleged quarterly proxy voting attestation reporting failures and the purported blurring of corporate and fiduciary roles of the individuals at the company who oversaw both the performance of the plans’ investments and the corporate relationship with the investment manager.[42] As the court stated:

It is this evidentiary combination – [d]efendants’ undeniable corporate commitment to ESG plus endorsement of ESG goals by those responsible for overseeing the [plans] plus the influence of and conflicts of interests with [the investment manager] plus the lack of separation between corporate and fiduciary roles that reveals the [d]efendants’ disloyalty.[43]

The court found that this combination of court-determined facts demonstrated that the committee and the company were “subordinat[ing] the interests of the participants … to other objectives” and “sacrific[ing] investment return … to promote benefits or goals unrelated to interests of the participants.”[44] The court concluded that “the evidence made clear that [d]efendants’ incestuous relationship with [the Investment Manager] and its own corporate goals disloyally influenced administration of the [Plans].”[45] This, despite the fact that none of the funds on the plan menu were themselves ESG funds.

In reaching its conclusion that the duty of loyalty was breached under these findings of fact, even in the face of clearly prudent fiduciary practices, the court took a broader swipe at the retirement savings industry as a whole, noting that:

In industries featuring oligopolist or cartel-like behavior — such as the retirement savings industry in which the largest investment managers own significant stakes in all of the relevant actors — industry norms are not enough to safeguard against breaches of loyalty. Otherwise, such a low bar would encourage collusion, cause rampant evasion of ERISA’s stringent requirements, and wreak havoc for retirement plan beneficiaries.[46]

Refresher on DOL Rulemaking About ESG Considerations for ERISA Plans

The court’s decision nowhere considers the recent rulemaking efforts of the Department of Labor (DOL) intended to address the permitted role (if any) of ESG factors for fiduciary actions related to ERISA-covered plan investments and proxy voting, other than to note a DOL warning in early 2020 about using ESG factors in such actions.

As a refresher, in 2020, the DOL under the first Trump administration issued two sets of rules that were targeted as attacks against so-called ESG investing (collectively, the 2020 rules). The first rule, titled “Financial Factors in Selecting Plan Investments,” generally required plan fiduciaries to consider only “pecuniary factors” when selecting and monitoring 401(k) plan investment alternatives.[47] The second rule, titled “Fiduciary Duties Regarding Proxy Voting and Shareholder Rights,” focused on ERISA’s duties or prudence and loyalty in connection with voting shares of stock held in ERISA-covered plans.[48] While the 2020 rules themselves do not specifically reference ESG, based on the release accompanying each of the rules, a common view is that the 2020 rules were intended to reduce the use of ESG-friendly investment funds in ERISA-covered plans and to reduce or limit the ability to support ESG activism through proxy voting of shares held as ERISA plan assets.

Subsequently, in 2022, the DOL under the Biden administration finalized its rules on “Prudence and Loyalty in Selecting Plan Investments and Exercising Shareholder Rights” (the “2022 rules”), which supersede the 2020 rules described above.[49] The 2022 rules, like the 2020 rules, do not specifically reference ESG investing, but the release accompanying the rules clearly indicates greater willingness to accept ESG investing as an economically prudent alternative. The 2022 rules — similar to the 2020 rules but with slightly different terminology — require fiduciaries to make investment decisions “based on factors that the fiduciary reasonably determines are relevant to a risk and return analysis” (similar to the concept of “pecuniary interests” under the 2020 rules), but also that “such factors may include the economic effects of climate change and other ESG considerations on the particular investment or investment course of action.”[50] The 2022 rules also added a so-called “tiebreaker” rule, which allows fiduciaries to consider collateral benefits, such as nonfinancial considerations related to ESG, in breaking the tie between two competing investment alternatives or courses of action (e.g., proxy voting) that “equally serve the financial interests of a plan over the appropriate time horizon.”[51]

The validity of the 2022 rules was subsequently challenged by the attorneys general of 26 red states and other interested parties. A district court in Texas initially rejected that challenge, largely based on an application of the Chevron doctrine deference to the rulemaking process.[52] However, the Fifth Circuit subsequently vacated that decision and remanded the case back to the district court to reconsider given that the Chevron doctrine was overruled in Summer 2024 by the Supreme Court’s decision in Loper Bright.[53] While the district court reconsidered its analysis under the relevant standards after Loper Bright, it ultimately reached the same conclusion that the 2022 rules were validly issued.[54] This decision was announced in February 2025, after the Spence decision, and it is unclear if its outcome may impact any future decisions in Spence, whether on appeal or otherwise.

What Comes Next

The court directed the parties to present evidence as to whether the participants in the plans suffered any losses as a result of the court-determined duty of loyalty breach.[55] In particular, the court asked for direct evidence linking ESG investing to financial underperformance of the plans.[56] The court stated that the defendants bear the burden of proving the absence of any loss to the participants.[57] In particular, the court directed the parties to consider the impact of the drop in stock prices for the large oil and energy company that was the subject of the 2021 contested director vote discussed in the findings of fact, including given that immediate drop in those stock prices “quickly rebounded” not long after vote.[58]

It seems likely that, at some stage in the proceedings, the court’s decision may be subject to appellate review. That review may also consider application of the 2022 rules to the findings of fact in the case, especially given the recent validation of the 2022 rules by the district court in Su.

Takeaways

Prior to Spence, much of recent prolific 401(k) fiduciary litigation has focused on issues related to fund performance and plan expenses — issues governed largely by the duty of prudence. The decision in Spence, however, highlights how an alleged failure by plan fiduciaries to fully consider proxy voting policies and activities of investment managers for 401(k) investment funds can lead to successful claims that the duty of loyalty has been breached, and at least partially opens another avenue for fiduciary attack on 401(k) plans. The decision may especially suggest a closer look at a plan’s relationships and oversight of investment managers who also hold significant economic stakes in the plan sponsor.

Notably, Spence also reminds us about the importance of not only maintaining but documenting excellent fiduciary practices and documentation in selecting and monitoring a 401(k) plan’s investment choices. Some of those best practices noted in the case include:

Having a plan committee that is staffed with individuals who have appropriate expertise;
Ensuring the committee meets regularly (e.g., quarterly) to review performance of investment managers;
Maintaining a written investment policy statement to guide investment performance reviews and acting in accordance with such policy;
Engaging third parties with appropriate financial and investment expertise to assist in the investment performance review process and appropriately monitoring such third parties; and
Maintaining good written records of meeting discussions and the information reviewed.

Finally, Spence reminds us that the parties who may be held accountable as plan fiduciaries may extend beyond those named as the plan fiduciary under the terms of the relevant plan documents. Even though the plan sponsor is not named as a fiduciary, it may nonetheless be considered a functional fiduciary. It’s important for plan sponsors to know who the plan fiduciaries are (named and functional alike) and to ensure that such fiduciaries are aware of their responsibilities and duties to the plan and its participants.

[1] Spence v. Am. Airlines, Inc., No. 4:23-CV-00552-O, 2025 WL 225127, at *2 (N.D. Tex. Jan. 10, 2025).

[2] Id., at *27.

[3] Id., at *23.

[4] Id., at *6.

[5] Id., at *8.

[6] Id., at *7.

[7] Id., at *13.

[8] Id.

[9] Id., at *26.

[10] Id., at *8.

[11] Id., at *8.

[12] Id., at *8-9.

[13] Id.

[14] Id.

[15] Id.

[16] Id., at *10.

[17] Id.

[18] Id., at *11.

[19] Id.

[20] Id.

[21] Id.

[22] Id., at *11.

[23] Id.

[24] Id., at *12.

[25] Id., at *13.

[26] Id., at *15.

[27] Id.

[28] Id., at *17.

[29] Id. at *16.

[30] Id., at *19-20.

[31] Id., at *20.

[32] Id.

[33] Id., at *19.

[34] Id.

[35] Id., at *20.

[36] Id., at *20 (citing 29 U.S.C. § 1104(a)(1)(B)).

[37] Id., at *21. See also Id., at *11 (stating that “. . . the [Committee’s] processes for addressing the voting of proxies during the Class Period were consistent with and, in many respects exceeded, the processes of other fiduciaries.”).

[38] Id., at *24.

[39] Id., at *22-24.

[40] Id., at *24.

[41] Id., at *25.

[42] Id., at *25-31.

[43] Id., at *31.

[44] Id., at *27 (citing 29 C.F.R. § 2550.404a-1(c)(1)).

[45] Id., at *31.

[46] Id.

[47] 85 Fed. Reg. 72846.

[48] 85 Fed. Reg. 81658.

[49] 87 Fed. Reg. 73822.

[50] See Employee Benefits Security Administration Fact Sheet, Final Rule on Prudence and Loyalty in Selecting Plan Investments and Exercising Shareholder Rights, available here.

[51] Id.

[52] See Utah v. Walsh, 2:23-CV-016-Z, 2023 WL 6205926 (N.D. Tex., Sept. 21, 2023). See also Chevron U.S.A. Inc. v. Natural Resources Defense Council, Inc., 467 U. S. 837 (1984).

[53] See Utah v. Su, 109 F.4th 313 (5th Cir. 2024). See also Loper Bright Enterprises v. Raimondo, 603 U.S. 369 (2024).

[54] See Utah v. Su, N.D. Tex., No. 2:23-cv-00016, opinion and order issued 2/14/25.

[55] Spence, at *31-32.

[56] Id.

[57] Id., at *19.

[58] Id., at *31.

The U.S. government is pushing to redomesticate the manufacturing of pharmaceutical, biotech, gene therapy, and medical device products, both to bolster U.S. manufacturing generally and to address continuing shortages of these life-saving drugs and devices. While much attention has been given to the pending tariffs on pharmaceutical products, particularly active pharmaceutical ingredients (API), the federal government has other tools at its disposal, including the Bayh-Dole Act (the act).

Many commercial drugs, biologics, and devices were developed using federal funds, whether through federally funded research labs at U.S. colleges and universities or through the receipt of federal grants, including from the National Institutes of Health (NIH), the U.S. Small Business Administration (SBA), or the U.S. Department of Defense (DOD).

These drugs, biologics, and devices are considered federally funded “inventions” under the act, and are subject to certain federal government use, supervision, and reporting obligations. Specifically, the act requires that a federally funded invention must be “manufactured substantially in the U.S.” Failure to meet this requirement can lead to a number of consequences, including the government exercising so-called “march-in rights” and taking title to the invention. The government also has the right to force a license to a third party, granting them rights to commercialize the invention.

Until now, the interpretation and enforcement of the “manufactured substantially” requirement has been left to the various federal funding agencies. But with the Trump administration’s renewed focus on domestic manufacturing, life sciences organizations should prepare for the possibility of an overhaul to the current administration’s approach and be ready to pivot.

What Is “Manufactured Substantially in the U.S.”?

The meaning of “manufactured substantially in the U.S.” is not a defined term under the act, nor is there significant guidance as to its meaning. Furthermore, enforcement of the manufacturing requirement —which has been minimal — is generally within the purview of the funding agency, creating potential policy inconsistencies across agencies.

However, the requirement is on lawmakers’ radar. In 2023, the Senate introduced the bipartisan bill Invent Here, Make Here Act of 2024, which proposed defining “manufactured substantially” to mean “manufactured substantially from all articles, materials, or supplies mined, produced, or manufactured in the United States.”

The definition was ultimately struck from the bill before it died in Congress, but it could have significantly impacted organizations that rely on certain materials produced outside the U.S. Therefore, if the bill is reintroduced once again, this more detailed definition could create additional challenges for universities and life sciences organizations that are developing and commercializing federally funded inventions.

Reporting Requirements and Government Visibility

On July 28, 2023, the Biden administration issued Executive Order 14104, which tasked agencies with requiring funding recipients to report the names of licensees and manufacturing locations of the applicable subject inventions on an annual basis (a new, government-wide requirement). Reports for unclassified inventions are generally made in the iEdison system, which is operated and overseen by the National Institute of Standards and Technology (NIST) and accessible to funding agencies. Under the order, agencies must transition all unclassified invention reporting to iEdison by December 31, 2025. Classified subject inventions will continue to be reported through agency-specific secure channels.

These reports inevitably increase potential visibility of manufacturing compliance, but it remains to be seen whether the administration’s focus on domestic manufacturing will result in increased scrutiny. Much of the auditing functions under the act are performed by the grantor agencies, not NIST, meaning agency resources will potentially be a factor in enforcement. With many agencies experiencing extensive layoffs and budget cuts, staff resources may be spread thin and enforcement may depend largely on agency priorities.

Manufacturing Waiver

While subject inventions must be substantially manufactured in the U.S., it is important to note that there is an exemption available in circumstances where domestic manufacture is not commercially feasible or when reasonable (but unsuccessful) efforts have been made to grant licenses on similar terms to potential licensees likely to manufacture substantially in the U.S.

Once again, uncertainty surrounding the manufacturing requirement and eligibility for the waiver may make pursuing a waiver more challenging in the current political climate. However, Executive Order 14104 called upon agencies to improve and streamline the waiver process, in addition to requesting that the NIST develop additional guidance for agencies to consider when assessing whether domestic manufacturing is commercially infeasible and develop common waiver-application questions for all agencies. To date, the draft interagency waiver-request form is available for comment, while the detailed guidance on “commercial feasibility” has not yet been issued.

Potential pharmaceutical tariffs complicate the determination, as both foreign and domestic manufacturing operations could arguably become commercially infeasible, depending on the particular circumstances. For example, on the current version of the Interagency Domestic Manufacturing Waiver Request Form, factors considered include the cost of foreign manufacture and how long it would take to make U.S. commercial manufacturing feasible. While potential pharmaceutical tariffs could act as a catalyst to make domestic production more attractive, it would require significant time and investment. Companies (both the owner of the drug, biologic, or device and the contract manufacturers) would need to allocate substantial resources to build or upgrade facilities, train workforce, and navigate regulatory requirements — all of which could extend the timeline for achieving substantial U.S. manufacturing capabilities.

Conclusion and Recommendations

Universities and licensees of federally funded inventions should have an action plan in place to prepare for increased scrutiny of the act’s manufacturing requirements. This includes assessing whether there are any aspects of the current manufacturing process that have a foreign component, in addition to evaluating and documenting whether the invention can meet the current conditions for a waiver.

For organizations licensing or acquiring technology and inventions, it’s also essential to conduct robust diligence and contract for necessary warranties and indemnities to prepare for potential legal uncertainties with respect to any nondomestic aspect of the manufacturing process.

Our team published new content and podcasts to the Consumer Financial Services Law Monitor throughout the month of April. To catch up on posts and podcasts you may have missed, click on the links below:

In keeping with President Donald Trump’s affinity for issuing executive orders (EO) — 139 in total, Nos. 14147–14285, between Jan. 20, 2025, and April 24, 2025 — he recently issued EO 14265, “Modernizing Defense Acquisitions and Spurring Innovation in the Defense Industrial Base.” In a nutshell, the Department of Defense (DoD) is directed to take aggressive steps to deregulate the procurement process and to exploit existing reform initiatives to achieve a more efficient and nimble procurement process. The order focuses on four major deregulatory priorities, the collective effect of which will, in theory, constitute a “comprehensive overhaul” of the current defense acquisition system. In no particular order, the four priorities are:

Priority One: Acquisition Process Reform. DoD is to utilize existing authorities to expedite acquisitions, including a first preference for commercial solutions and a general preference for (i) Other Transactions Authority application, (ii) Rapid Capabilities Office policies, or (iii) any other authorities or pathways to promote streamlined acquisitions under the Adaptative Acquisition Framework.

Priority Two: Acquisition Workforce Reform, Right-sizing and Reeducation. DoD is to reduce the size of the workforce to reflect the greater efficiency and expediency under the reformed procurement process set forth in Priority One and to reeducate the remaining acquisition workforce (i.e., contracting officers, specialists, technical representatives, agency attorneys, staff, and paralegals, among many others) needed to support those streamlined acquisition processes.

Priority Three: Deregulation. DoD is to conduct a review of existing DoD procurement regulations, akin to what is already taking place government-wide, to eliminate procurement-related regulations identified as unnecessary or supplemental.[1]

Priority Four: Program Review. DoD is to review existing major acquisition programs for potential cancellation.

EO 14265, like many others issued during 2025, is sparse on details while sweeping in its intended goals, objectives, and mandates. Nonetheless, as drafted EO 14265 puts a jackhammer to the entire DoD procurement process — not to mention its bedrock regulatory foundation.

In this commentary, we will address each of the four priorities, suggest where and how DoD might in fact deregulate the procurement process, and contemplate how contractors can plan ahead to leverage anticipated changes to their own benefit.

Priority One: Exploiting Existing Acquisition Streamlining Authorities

According to the EO, the current defense acquisition system “does not provide the speed and flexibility our Armed Forces need to have decisive advantages in the future.”[2] The EO instructs DoD contracting personnel to focus efforts on expanding the use of several already-existing and arguably more streamlined contracting methods: Other Transaction Authority (OTAs), Adaptive Acquisition Framework (AAF), Rapid Capabilities Office (RCO) policies and procedures, and a preference for commercial solutions (CSOs). Each of these is briefly described below.

Other Transaction Authority

Although OTAs have been around since 1958, DoD has historically used OTAs in connection with research and development (R&D). In the 2016 National Defense Authorization Act (NDAA), Congress expanded DoD’s authorization to allow it to use OTAs not only for research purposes, but also for prototype and production purposes. So, instead of using a FAR-based procurement contract, DoD can avoid entirely the FAR (and DFARS) to obtain prototype solutions and thereafter, production of same. See 10 USC §§ 4021 and 4022. Neither the FAR nor the Competition in Contracting Act (CICA) apply to OTAs — although the statute does require some degree of competition.

Even though OTAs are not governed by the FAR, DoD buying activities will nonetheless include selected FAR provisions as terms and conditions of performance. Accepting a FAR clause in an OTA, however, does not subject the OTA as a whole to the FAR. There is a difference between having to “comply” with a FAR-mandated clause, versus satisfying a term or condition that is contractually implemented through an established FAR clause. The good news for contractors is that the OTA awardee at least has some opportunity to negotiate terms and conditions, unlike the typical FAR-covered procurement contract. DoD’s draft form of OTA, however, may require more time and effort for the contractor to negotiate the final form of agreement while ensuring appropriate and equitable protections.

Commercial Solutions

CSOs, first established in 2017, provide another avenue for streamlining DoD’s procurement process, usually in connection with fixed-price contracts. Under 10 USC § 3458, DoD may use CSO procedures only for innovative commercial products, technologies, and services. Contracts can be awarded either as an OTA agreement or a more traditional FAR-covered contract.[3]

The EO also refers to a preference for “industry solutions funded by private investment that meet military needs.” It may be that DoD will seek more partnerships with privately funded entities that can front the costs of development without need for significant government funding. Not unexpectedly, any time that DoD contracts for supplies, services, and technology developed exclusively at private expense, it likely will be saddled with higher prices precisely because the end product or service is proprietary. Similarly, as between a small business and a large business, the latter is far more likely to have access to the financial resources needed to privately fund these types of development efforts. Should DoD pivot more heavily toward acquisition of industry solutions, smaller government contractors may find fewer viable opportunities in which they can compete.

Adaptive Acquisitions Framework

DoD officially adopted the Adaptive Acquisition Framework (AAF) in January 2020, the details of which are outlined in DoD Instruction 5000.02. The primary objective of AAF is to provide a more flexible and agile approach to acquiring goods and services, thereby realizing more expedient delivery of end products and services to the warfighter. AAF is one of several initiatives developed to implement DoD’s broader acquisition reforms aimed at streamlining processes and enhancing DoD’s ability to acquire innovative technologies. AAF establishes six acquisition pathways to enable acquisition personnel to tailor strategies to deliver better solutions faster. The six pathways are: (1) urgent capabilities acquisition, (2) middle tier acquisition, (3) major capability acquisition, (4) software acquisition, (5) defense business systems acquisition, and (6) services acquisition. To illustrate, procuring a prototype end product via the middle tier acquisition pathway could be the optimal pathway if the targeted time frame for delivery is less than five years. Depending on the chosen pathway, the procurement team may be subject to a reduced level of regulatory oversight. According to the GAO, as of December 2024, the Army, Navy, and Air Force had each developed at least some AAF policies. Even so, the pace of policy development arguably suggests that the branches have been pre-occupied with higher priority objectives. EO 14265 may cause DoD to reshuffle its priorities and move AAF closer to the top of the stack.

Rapid Capabilities Offices and Configuration Steering Board

The EO also mentions streamlining via increased utilization of the Rapid Capabilities Offices (RCOs) of the various DoD branches, and the Configuration Steering Board. The RCOs have been operating within the branches for more than a few years already. For example, the Air Force RCO was first activated in April 2003, and the Army’s RCO has been operational since August 2016. With its establishment, the Army’s RCO’s primary focus areas were (and still are) cyber, electronic warfare, survivability and positioning, and navigation and timing and although it is flexible in its capability, the RCO is directed at high-priority, threat-based projects with the objective to deliver an operational effect within one to five years.

In short, without explicitly saying so, the EO seems to be suggesting that DOD has not done enough to exploit the procurement reform initiatives adopted by DoD long before the current Administration issued the EO. The administration clearly expects and requires DoD to get busy figuring out how to migrate planned and even pending acquisitions to one of the existing streamlining mechanisms already available to DoD.

Priority Two: Reform, Right-size, and Re-train the Acquisition Workforce

Section 3(b) of the EO requires DoD to conduct various reviews and evaluations of contracting personnel and tasks to “eliminate unnecessary tasks, reduce duplicative approvals, and centralize decision-making.” These objectives are much easier said than done, especially regarding centralization of decision-making. For many years, DoD’s warranted contracting officers have operated in a very decentralized environment with considerable autonomy in conducting procurements and awarding contracts. Additionally, Section 5 directs DoD to develop and submit a plan to “reform, right-size, and train the acquisition workforce” including restructuring of performance evaluation metrics, analysis of required workforce, establishment of field training teams, and other policies to incentivize acquisitions personnel to “in good faith, utilize innovative acquisition authorities and take measured and calculated risks.” Taken literally, DoD’s procurement workforce will soon be getting smaller, perhaps alarmingly smaller.

While light on details, Sections 3(b) and 5 are directed at creating a need for retraining of acquisition personnel following a reduction in workforce and a rewrite of the acquisition process, which will likely include mandates to utilize the existing streamlining authorities described above.

Priority Three: Deregulation Through Elimination

The EO next calls for elimination or revision of procurement regulations, along with a requirement that no new regulation may be proposed unless 10 regulations are identified for elimination (the “ten-for-one” mandate). DoD instructions, implementation guides, and manuals related to acquisition are also subject to review. This comprehensive and extensive review aligns with one of the administration’s principal objectives: deregulation. See, e.g., EO 14219 and EO 14192. The administration has signaled that it intends to simply cancel or stop enforcing regulations rather than seeking to formally repeal through the traditional regulatory process. By way of example, contracts already awarded may include clauses and associated compliance obligations which will be the subject of nonenforcement, whereas future contracts will simply not include those same provisions. Whether the informality of such an approach will withstand legal scrutiny if and when challenged is a big question.

Along with EO 14275, which separately calls for a systematic overhaul of the FAR, this priority facially aligns with the Office of Management and Budget’s (OMB) recent announcement that it would rewrite the FAR to create what is often referred to as FAR 2.0, with the overarching goal of simplifying and easing the compliance burden. While OMB has authority to influence revisions to the FAR, however, it does not actually revise it; its role is limited to ensuring consistency and alignment of the FAR with broader federal procurement policies. The FAR is primarily maintained by the FAR Council, which is consists of representatives from General Services Administration (GSA), DoD, and the National Aeronautics and Space Administration (NASA).

Nonetheless, when one marries up the deregulation objectives set forth in EO 14265 and 14275, the key takeaway is that the FAR and all of its agency supplements are on the verge of being purged of any “nonessential” regulations. What is nonessential? EO 14275 instructs that “the FAR should contain only provisions required by statute or essential to sound procurement, and any FAR provisions that do not advance these objectives should be removed.” Translation: any regulation that is promulgated on the basis of a statutory mandate is probably safe, but may still be subject to revision. If a regulation is not the product of a statute, it is a candidate for elimination, subject to a collateral judgment by some unnamed agency official (whether OMB, DOGE, or some other agency altogether) as to whether such regulation is “essential” to sound procurement.

Priority Four: Major Defense Acquisition Program Review

Finally, the EO calls for a comprehensive review of all Major Defense Acquisition Programs (MDAPs) by July 8, 2025, with a review of all other major systems to follow. MDAPs are essentially large-scale procurement programs intended for military projects of significant importance to national security and military success. MDAPs are already subject to significant oversight due to the high costs involved, complexity of the programs, and the often-innovative nature of the technology at issue.

MDAPs that have not met specific milestones specified in the EO (fifteen percent behind schedule, fifteen percent over cost, unable to meet “key performance parameters,” or “unaligned” with current mission priorities) will be included on a list to OMB for review and possible cancellation. While the timing and scope of DoD’s review of “all remaining major systems” likely will not take shape for a while, progress and decisions made with regard to MDAPs will provide a decent road map as to what to expect once other major systems programs come under review.

Contractor Considerations and Planning

Contractors have plenty to keep in mind while awaiting further guidance from the defense agencies in response to EO 14265 and any related executive orders or other presidential actions. Among these, consider the following:

Refamiliarize yourself with the various acquisition authorities — OTAs, CSOs, AAFs — and when they might be appropriate for use.
Confirm agency contact information for existing contracts, including an alternate or designee should your primary point of contact become unavailable.
When solicited under an OTA, recognize that FAR and DFARS provisions may be included as arms-length terms and conditions — be prepared to negotiate these provisions and any others to achieve equitable treatment of intellectual property, disputes, changes, termination, remedies, flow-downs, accounting system requirements, reporting obligations, and flow-down requirements — all of which will have a material impact on performance.
Plan ahead for disputes — evaluation, selection, and award decisions, as well as performance disputes. Know the filing deadlines, and forum jurisdictions, for each kind of legal challenge.
MDAP contractors — monitor cost overruns and be vigilant in tracking your performance against the 15% cut-off limit. Do not wait until the end of the contract or the performance period to assert and submit claims and requests for equitable adjustment in order to increase the approved budget and raise the cost overrun threshold.
Prepare proposals to focus on efficiency and innovation, and to leverage state-of-the-art commercial solutions.
While deregulation often reduces government oversight of contractor performance, it also spawns additional certification and self-policing obligations by the contractor. And, of course, contractors should not lightly submit certifications to upstream customers — invest the necessary due diligence to make sure the certifications are being executed and submitted in good faith. Contractors should be particularly attentive to the risks of false certification.

[1] On April 15, 2025, President Trump issued EO 14275, “Restoring Common Sense to Federal Procurement,” which provides further direction as to revision and streamlining of the Federal Acquisition Regulation (FAR). That order, ostensibly, is expected to impact the procurement processes adopted by civilian agencies and is viewed as the counterpart to the instant EO which is directed solely at DoD.

[2] No mention is made of the March 2024 PALT Report issued by the Government Accountability Office (GAO) reflecting therein GAO’s findings and recommendations concerning DoD’s “procurement administrative lead time” as measured from solicitation to contract award.

[3] Trump’s subsequent order, EO 14271, “Ensuring Commercial, Cost-Effective Solutions in Federal Contracts,” mandates a similar preference for commercial solutions across all federal agencies.

On April 25, Attorney General (AG) Pam Bondi issued an internal memorandum to Department of Justice (DOJ) employees, changing the DOJ’s policy on obtaining information from, or records of, members of the news media. Under this new policy, the DOJ will again use compulsory legal process, such as subpoenas, court orders, and search warrants, to compel the production of information from the news media, including when investigating government leaks.

The DOJ’s use of compulsory legal process to obtain information from the news media has evolved over the years, generally involving some form of a balancing test of First Amendment protections and government interests. In 2021, then-AG Garland changed DOJ policy to prohibit the DOJ from using compulsory legal process to obtain information within the scope of newsgathering activities, with only certain narrow exceptions.

Bondi’s new policy changes course and rescinds the prior administration’s policy. The memorandum explains that the DOJ will no longer preclude compelling information from the news media. However, according to the memorandum, the DOJ will continue to employ procedural protections to limit the use of compulsory legal process. For instance, the Bondi policy states that members of the news media will be presumptively entitled to advance notice of such investigative activities, subpoenas should be narrowly drawn, and warrants must include protocols designed to limit the scope of intrusion into potentially protected materials or newsgathering activities.

The memorandum also indicates that DOJ leadership or the AG herself will be involved in approving certain “techniques” involving the news media. In so doing, DOJ leadership will consider whether:

“[T]here are reasonable grounds to believe that a crime has occurred and the information sought is essential to a successful prosecution;”
“[P]rosecutors have made all reasonable attempts to obtain the information from alternative source;” and
“[A]bsent a threat to national security, the integrity of the investigation, or bodily harm, the government has pursued negotiations with the affected member of the news media.”

The DOJ’s updated policy appears to focus on prosecuting government employees who leak information, not the news media. The memorandum sends a clear message that the DOJ “will not tolerate unauthorized disclosures that undermine President Trump’s policies, victimize government agencies, and cause harm to the American people,” and signals that in certain instances “[a]ccountability, including criminal prosecutions” of government employees who leak information may be forthcoming. But the memorandum also mentions “efforts to question or arrest members of the news media,” which Bondi must approve.

News media organizations and journalists should be cautious when considering how to approach classified, grand jury, and/or other confidential information from a source and should ensure their actions cannot be viewed as aiding and abetting illegal activity on the part of government or other leakers. Additionally, with the rise in alternative media platforms, companies and individuals engaged in alternative media should consider reviewing their policies, procedures, and practices now to avoid potential issues in the future.

Consider engaging counsel skilled in First Amendment and state Shield law issues and government investigations now to be prepared for potential issues and field questions as they arise. If you have any questions, comments, or concerns about the potential implications of this article, we are available to evaluate the best strategy for you.

The energy industry, and particularly those participating in renewables, battery storage, and electric mobility, and their supply chain (solar panels, wind turbines, battery components, etc.), are facing possible disqualification for Inflation Reduction Act (IRA) tax benefits due to their reliance on China for the equipment and components to operate those energy storage systems.

Click here to read the full article in POWER Magazine.

Energy

Financial Services

Health Care + Life Sciences

Insurance + Reinsurance

Private Equity

Real Estate

Innovation

plus

Pro Bono

Alumni Network

Emerge

The Pepper Center

Learn + Connect

BLOG, Microsite + Podcast HUB

ACHIEVEMENTS

Cannabis Regulatory Updates

Testing Turmoil: The Legal and Business Implications of Inconsistent Cannabis and Testing Standards

Indiana AG Pushes Back on THC Legislation

Jennifer Shea Knox Joins eMerge

Customs Solution Team Spotlight

Recent Custom Solutions Successes

Thought Leadership

Events and Speaking Engagements

Awards and Recognition

Banking

Consumer Financial Protection Bureau (CFPB)

Consumer Financial Services

Cryptocurrency + FinTech

Debt Buyers + Collectors

Regulatory Enforcement + Compliance

Telephone Consumer Protection Act

Podcasts

Newsletters

Smarter in your world deeper in your sector