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With Form ADV annual updating amendments due for many investment advisers by the end of next month, advisers should consider whether to update their proxy voting policies and related disclosure in Part 2A, Item 17 in light of Form N-PX reporting requirements.

Form N-PX was adopted along with amendments to Rule 14Ad-1 of the Securities Exchange Act of 1934 (the Exchange Act) in 2022 ‎to require institutional investment managers who file Form 13F under the Exchange Act to file an ‎annual report on Form N-PX with the U.S. Securities and Exchange Commission (SEC) ‎containing their proxy voting record for executive compensation votes, or so called “say-on-pay”[1]‎ ‎matters, no later than August 31 of each year for the most recent 12-month period ended June 30.‎[2] ‎‎Pursuant to Rule 14Ad-1, every institutional investment manager must make a Form N-PX filing ‎even if the manager never voted any proxies during the reporting period. There are multiple reporting options available, as described in greater detail below, based on whether the manager exercised voting power on say-on-pay matters and if other entities are also reporting related votes.

What Is Form N-PX?

Form N-PX is a required annual filing for institutional investment managers that have exercised ‎voting power over securities for proxy votes related to say-on-pay matters. This two-part test ‎requires managers to report for a security only if the manager: (1) has the power to vote, or direct ‎the voting of, a security; AND (2) “exercises” this power to influence a voting decision for the ‎security.[3]‎ Voting power can exist or be exercised either directly or indirectly by way of a contract, ‎arrangement, understanding, or relationship. Investment managers may be considered to have ‎exercised voting power even if they abstained from voting.[4]‎ Importantly, a manager that determines ‎not to vote on a say-on-pay matter would still be exercising voting power.‎

What Type of Filing Is Required?

Depending on whether or not the filer has “exercised voting power” over any say-on-pay matters, different filings are required:

Institutional Manager Notice Report: An institutional investment manager may submit a notice filing that includes just the “Cover Page” and required signature (and omits the more detailed security by security reporting) if it can meet one of the following three criteria:
- The filer did not exercise voting power for any reportable voting matter.
- The filer has a clearly disclosed policy that it does not vote on proxies, and no proxy votes were cast.
- All proxy votes that would otherwise be reportable by the filer have been reported by another filer.

It is important to note that with respect to the first trigger, the filer not exercising voting power for any reportable voting matter, the institutional investment manager would be deemed to have exercised its voting power if it had the power to vote a proxy but determined not to vote such proxy. However, it would not be deemed to exercise its voting power if there were no “say-on-pay” votes during the period for securities over which the institutional investment manager had the power to vote proxies.

Further, it should be noted that in order for an institutional investment manager to file the “Cover Page” only notice filing in reliance on the institutional investment manager maintaining and having duly disclosed a policy that it does not vote proxies, the institutional investment manager must have had such a policy during the entirety of the period covered by the Form N-PX. As the Form N-PX covers the period running from July 1 to June 30 of each year, adopting such a policy (and disclosing the policy in the investment manager’s Form ADV) will not impact the requirement to file the more detailed Form N-PX with respect to any period containing dates prior to the implementation of the policy (which would likely include the year in which the policy was adopted). Adopting such a policy would, however, permit the investment manager to file the notice filing in subsequent years. Investment managers without existing no-vote policies who wish to implement such policies may want to adopt and disclose them in their upcoming Form ADV annual updates. This will ensure that, if they do not vote during the relevant period, they will be eligible for notice filings by Summer 2026.

Institutional Manager Voting Report: If the institutional investment manager filer is not eligible to file on the Notice Report, and none of the manager’s reportable securities are reported by another institutional manager or managers or one or more funds, then a detailed filing is required with a “Cover Page”, the “Summary Page,” and the “Proxy Voting Information” (e.g., a schedule that includes information about each say-on-pay vote).
Institutional Manager Combination Report: If institutional investment managers that are required to report proxy votes and only a portion of those reportable votes are reported by another institutional manager or managers or one or more funds then such managers must submit the “Cover Page” listing the “List of Other Persons Reporting for this Manager” and include both the “Summary Page” and the “Proxy Voting Information”.
Fund Voting Report: For a report by a fund, if the fund held one or more securities it was entitled to vote, check the box for report type “Fund Voting Report,” omit from the “Cover Page” the “List of Other Persons Reporting for this Manager”, and include both the “Summary Page” and the “Proxy Voting Information.” For a report by a fund, if the fund did not hold any securities it was entitled to vote and therefore does not have any proxy votes to report, check the box for report type “Fund Notice Report” and file the “Cover Page”, required signature, and, if applicable, the “Summary Page” information about the series.

As we have in the past, we will continue to monitor these issues and will provide future client updates. This publication is for guidance only and is not intended to be a substitute for specific legal advice. Please do not hesitate to reach out to your Troutman Pepper Locke attorneys with any questions.

[1] Reportable “say-on-pay” matters include (i) votes on executive compensation, (ii) votes on the frequency of ‎executive compensation votes, and (iii) votes on compensation tied to mergers or acquisitions, such as “golden ‎parachute” payments.‎

[2] An institutional investment manager is not required to file a report on Form N-PX for the 12-month period ending ‎June 30 of the calendar year in which the manager’s initial filing on Form 13F is due (e.g., the quarterly filing on ‎Form 13F if no filing on Form 13F was required for the immediately preceding calendar quarter).‎

[3] Note that it is possible for multiple parties to have and exercise voting power over the same securities.‎

[4] As per the final adopting release for Form N-PX and related amendments to Exchange Act Rule 14Ad-1, “A ‎manager exercises voting power when it votes (or directs another party to vote) in accordance with the manager’s ‎own guidelines or based on the manager’s own judgment, including exercising independent judgment or expertise ‎to determine how a client’s voting policies should apply to a say-on-pay vote. A manager also exercises voting ‎power when it influences the decision of whether to vote a security, such as by determining not to vote on a say-on-‎pay matter or whether to recall loaned securities in advance of a vote in order to vote the shares.”‎

This article was republished in the July–August 2025 issue of The Computer & Internet Lawyer.

The use of artificial intelligence (AI) in the film and television industry in content creation raises many legal and business issues. One key issue is the ownership of the works generated using AI and the ability to register a copyright in such works. A new report from the Copyright Office provides some clarity on the requirement for human contribution to works and offers some opportunities for production companies and studios to: (i) craft policies on how AI is used in the creative processes of production, (ii) change processes with respect to title searches and other due diligence tasks in transactions, and (iii) update language in standard agreements with respect to the use of AI that will support the goal of obtaining copyright protection.

1. How Is AI Used in the Entertainment Industry?

AI is rapidly transforming the entertainment industry and has gained significant attention for its ability to produce text, images, and videos, raising both opportunities and concerns for Hollywood and beyond. One of the key ways AI is being integrated into entertainment is through scriptwriting and content development. AI-driven tools like ScriptBook analyze scripts to predict box office success and suggest improvements, while AI-generated narratives assist in the preliminary stages of story creation. Additionally, AI is increasingly used in casting, using tools such as Cinelytic, which assesses an actor’s market value to forecast a film’s financial viability. AI also plays a growing role in pre-production, with machine learning algorithms assisting with location scouting and optimizing scheduling.[1]

During production, AI plays a crucial role in streamlining visual effects and post-production processes. Research and development are ongoing on software that enables directors to tweak actors’ expressions in post-production, and deepfake technology has been used for de-aging effects.[2] AI is also revolutionizing editing, with tools such as Adobe Sensei automating tasks like object removal and scene stabilization.

Beyond production, AI significantly impacts marketing and distribution. Streaming platforms use AI algorithms to personalize content recommendations based on viewing history, while AI-driven sentiment analysis helps studios tailor their promotional strategies. AI chatbots, such as the one used in marketing the horror film Morgan, enhance audience engagement through interactive experiences.[3]

Despite its benefits, AI also raises concerns. The technology threatens traditional industry roles, particularly for writers, editors, and visual artists, as automation reduces the need for human labor. The Writers Guild of America has expressed concerns over AI-generated content diminishing creative originality and undermining fair compensation for artists.[4] Additionally, ethical concerns surrounding deepfake misuse further complicate AI’s adoption.

Another major concern is the protection of intellectual property rights, especially copyrights. The U.S. Copyright Office has ruled works are not copyrightable unless there is sufficient human creativity involved.[5] This has led to legal disputes over the ownership of AI-assisted creative works. Furthermore, AI-generated digital replicas, which can mimic the voice or likeness of actors without their consent, have sparked debates over ethical and legal protections.[6] The Copyright Office has recommended federal legislation to regulate unauthorized digital replicas, addressing concerns about fraud, privacy violations, and misuse in political or commercial settings.[7]

2. What Is the New Guidance From the Copyright Office on AI and Copyrights?

In early 2023, the Copyright Office announced the launch of a broad AI Initiative and issued a statement of policy providing guidance on the registration of works incorporating AI-generated material reiterating the office’s longstanding position that human authorship is an essential requirement for copyright protection in the United States.[8] The Copyright Office went on to clarify that if a work contains more than a de minimis amount of AI-generated material, the applicant for copyright registration should disclose that information and provide a brief statement describing the human author’s contribution. Since that time, the Copyright Office has registered hundreds of works that incorporate AI-generated material, with the registration covering the human author’s contribution to the work and disclaiming the AI-generated content.[9]

On January 29, Register of Copyrights and Director of the U.S. Copyright Office Shira Perlmutter published the second part of a planned three-part report on copyright and AI, this time focused on the question of copyrightability for AI-generated creative works. The first part, published in July 2024, explored the legality of so-called digital replicas of individuals’ likenesses, or “deepfakes.”

The report provides guidance and some concrete conclusions:

The use of AI tools to assist rather than stand in for human creativity does not affect the availability of copyright protection for the output.
Copyright protects the original expression in a work created by a human author, even if the work also includes AI-generated material.
Whether human contributions to AI-generated outputs are sufficient to constitute authorship must be analyzed on a case-by-case basis.
Human authors are entitled to copyright in their works of authorship that are perceptible in AI-generated outputs, as well as the creative selection, coordination, or arrangement of material in the outputs, or creative modifications of the outputs.
Prompts alone do not provide sufficient human control to make generative AI users the author of an output for copyright purposes, at least given today’s available technology (a significant caveat).

3. How Does the Copyright Office Guidance Apply to the Entertainment Industry?

The Copyright Office sought and received public comment from many organizations in the film, television, and music industries in preparing the report. Many commenters expressed concern about continuing the longstanding and growing use of computer-assisted tools in the creation process.[10] They pointed to various tasks that have been performed in creative fields for years, some of which now incorporate recent developments in AI, such as “aging” or “de-aging” actors, identifying chord progressions, and removing unwanted objects or crowds from a scene, and argued that using these types of AI should not affect the availability of copyright protection for the works created using these tools.[11] The conclusions contained in the report make it clear that the Copyright Office agrees that there is an important distinction between using AI as a tool to assist in the creation of works and using AI as a stand-in for human creativity.

Commenters were also concerned with situations where creators have begun to experiment with using AI as a brainstorming tool, such as tools used to structure or create an outline of a literary work or assist in ideation when writing a new song. Where the user is prompting a generative AI system and referencing, but not incorporating, the output in the development of her own work of authorship, the Copyright Office concludes that this should not affect the copyrightability of the resulting human-authored work.

The report specifically addresses the use of AI in filmmaking: “inclusion of elements of AI-generated content in a larger human-authored work does not affect the copyrightability of the larger human-authored work as a whole. For example, a film that includes AI-generated special effects or background artwork is copyrightable, even if the AI effects and artwork separately are not.”[12]

4. What Legal Issues Does the Report Raise for the Entertainment Industry?

The two primary legal issues raised by the report and the Copyright Office’s guidance for those in the entertainment industry are ownership and enforcement. While the Copyright Office and current law clearly state that copyright protects the original expression in a work created by a human author, even if the work includes AI-generated material, uncertainty remains: Compl., Allen v. Perlmutter, No. 1:24-cv-2665 (D. Colo. Sept. 26, 2024), Doc. No. 1. challenges the Copyright Office’s refusal to register an AI-generated output and highlights the rapidly evolving technology.

The Copyright Office emphasizes that prompts alone do not constitute sufficient human control to establish ownership of AI-generated works. This conclusion is based on current technology, suggesting that as AI technology evolves, the ownership of works created in the entertainment industry may require case-by-case assessment.

Additionally, current Copyright Office guidance mandates applicants to disclose whether AI was used in the creation of a work and specify the extent of human contribution. This requirement presents several issues. First, the threshold for what constitutes “sufficient human input” remains ambiguous, leading to uncertainty for authors who use AI as a creative tool. If a work is deemed to lack adequate human authorship, it may be denied copyright protection entirely, leaving it vulnerable to unrestricted use. This raises questions about how studios, writers, and artists can claim ownership over AI-assisted content. For example, if a studio uses AI to generate a script, who owns the final product? If an AI system assists in editing or enhancing a film, does the producer retain full ownership, or does the software provider share rights? These ambiguities create complications for work-for-hire agreements and employment contracts. Traditionally, copyright law has recognized employers as the owners of works created by employees under work-for-hire agreements, but if AI-generated content does not qualify for copyright protection, these standard contractual arrangements may need to be revisited.

The requirement to disclose AI use in the creation of works may lead to increased scrutiny during the registration process and could result in portions of the work being excluded from registration. It is unclear how this analysis will impact enforcement and whether the degree of AI involvement and the level of human control will become a strategy to defend against infringement.

Moreover, the disclosure requirement raises concerns about inconsistent enforcement. Many AI-assisted works may not be properly labeled, either due to misunderstanding or deliberate omission. Consequently, the Copyright Office may face an increased administrative burden in assessing registrations, leading to delays and potential disputes over ownership. These challenges complicate the ability of creators and studios to secure the legal protections necessary to monetize and control their work.

Proving infringement of AI-assisted content is further complicated by the fact that AI models are often trained on vast datasets that include copyrighted works. If an AI system generates an output that closely resembles an existing copyrighted work, it raises the question of whether such an output constitutes a fair use or infringement. The lack of clear legal precedents makes it difficult for those in the entertainment space to enforce their rights, creating uncertainty in the industry.

5. What Steps Can Legal Departments Take to Address These Issues?

There are steps that can be taken to create a stronger position for ownership and registration of works created using AI and to manage the risks with respect to acquisition and licensing of such works from third parties.

A. Track the use of AI in the creative process.

To establish ownership and prepare accurate applications for copyright registration, it is essential to establish a tracking system of the AI tools used and works entirely generated by AI. This may necessitate internal policies governing the use of AI, requiring disclosure of how AI was used, what elements of the work are entirely generated by AI, how those elements were accomplished (i.e., level of human control), what inputs were used to train the AI tools employed, and whether any risk of third-party claims may arise from the use of such outputs. Restrictions on the use of certain AI tools may also be necessary.

A well-structured tracking system would include several key components including:

AI Usage Logs: These logs would provide detailed records of AI’s involvement in scriptwriting, video editing, CGI, voice generation, and other creative aspects, ensuring transparency and accountability in the creative process.
Version Control and Attribution: This involves maintaining records of human contributions alongside AI-generated elements to demonstrate sufficient human authorship for copyright eligibility. By clearly delineating the roles of human creators and AI tools, producers can provide stronger evidence of human authorship when registering works with the Copyright Office.
Metadata Tagging: Embedding AI usage data in digital files can ensure transparency and assist in copyright registration and enforcement. This practice makes it easier to verify the originality of a work and reduces the risk of unintentional copyright infringement.

By implementing these measures, producers and content creators can better navigate the complexities of AI-generated content, ensuring that they maintain ownership and protect their creative works effectively.

B. Update due diligence requests when purchasing or licensing content.

The due diligence process to establish chain of title or licensing rights for acquisitions of content should be updated to reflect the novel issues raised by AI. First, it is essential to request detailed documentation on how AI was used in the creation of the works being acquired. This includes specifying the AI tools employed and the extent of their involvement in the creative process. Additionally, information on the level of human control and input in the creation of the works should be sought, including records of human contributions and oversight to ensure that the works meet the threshold for copyright eligibility.

Reviewing any third-party agreements related to the AI tools used in the creation of the works is important as well. This includes licenses, service agreements, and any other contracts that may affect the ownership or rights to the AI-generated content. Ensuring that the seller provides representations and warranties affirming that they have disclosed all AI usage and that they hold the necessary rights to grant licenses or sell the content is also necessary. This includes confirming that no third-party rights are infringed upon by the AI-generated elements.

C. Update Terms in Agreements

Standard agreements where ownership of copyright is central to the business terms, such as employment, contractor relationships, writer and composer agreements, content acquisition, and licenses of rights, should be updated to address the use of AI in creative works. These updates should include specific representations and warranties regarding AI content and usage, as well as mandatory disclosure of AI involvement. Key provisions to consider incorporating into these agreements include:

Indemnification: Agreements should include specific indemnification clauses to protect against liabilities if an AI-generated work is found to infringe on a preexisting copyright or cannot be registered or enforced due to authorship issues.

Representations and Warranties: Parties should be required to affirm that they have disclosed any use of AI in the creation of a work and that they hold the necessary rights to grant licenses or sell the content or that the work is not substantially generated through the use of AI. This ensures that all parties are aware of the extent of AI involvement and that proper rights are secured.

Actor and Creator Protections: In addition to any requirements of SAG/AFTRA, DGA, WGA, and other collective bargaining agreements, deal memos should include explicit clauses governing digital replicas, synthetic voices, and AI-generated likenesses and use of AI in writing and editing processes. These clauses should conform with internal policies and create clear expectations with respect to use of AI.

By updating standard agreements to include these provisions, businesses can better navigate the complexities of AI-generated content and ensure that all parties are adequately protected and informed.

Copyright and AI is an ever-evolving landscape of issues, especially for the creative industries. The Entertainment Group at Troutman Pepper Locke has the experience to assist you in navigating these issues.

[1] The AI Takeover In Cinema: How Movie Studios Use Artificial Intelligence, p.2.

[2] Id. p.2.

[3] Id. p.3.

[4] The Impact of Generative AI on Hollywood and Entertainment, p.3.

[5] Copyright and Artificial Intelligence, Part 2: Copyrightability. A report of the Register of Copyrights, January 2025.

[6] Copyright and Artificial Intelligence, Part 1: Digital Replicas, January 2024.

[7] Id.

[8] Burrow-Giles Lithographic Co. v. Sarony, 111 U.S. 53 (1884).

[9] Copyright and Artificial Intelligence, Part 2: Copyrightability. A report of the Register of Copyrights, January 2025.

[10] IBID p.11.

[11] IBID p.11.

[12] IBID p.27.

According to news sources, including Reuters, on Friday, February 21, the U.S. Securities and Exchange Commission (SEC) reportedly informed regional directors at its 10 regional offices that it plans to eliminate their roles as part of cost-saving measures required by the new administration. The plan to remove the regional directors has not been made public at this time, but at least two anonymous sources reportedly spoke to Reuters about the announcement made on Friday.

This news comes on the heels of President Trump’s executive order titled “Implementing The President’s ‘Department of Government Efficiency’ Workforce Optimization Initiative,” which he signed on February 11. Among other things, Trump’s executive order requires agencies to consult with the Department of Government Efficiency (DOGE) for hiring decisions and ordered agency heads to prepare to initiate large-scale reductions in force. Within 30 days, agency heads must submit a report identifying any statutes that establish the agency, or subcomponents of the agency, as statutorily required entities, and discuss whether the agency or any of its subcomponents should be eliminated or consolidated.

The SEC’s regional offices examine regulated entities in their region. They often identify and lead investigations and enforcement actions, with guidance from the regional directors. If regional directors are eliminated, it will undoubtedly impact the SEC’s investigation and enforcement efforts. Companies will likely see a reprieve on investigations and enforcement actions, at least in the short term. Cutting the regional directors’ role will likely stall decisions on whether to bring enforcement actions and slow the pace at which they are filed. It will also likely have an impact on employee morale.

It remains to be seen whether the reported plans to eliminate the regional directors’ roles will come to fruition, whether the SEC might include plans to close and/or consolidate any additional regional offices after closing its Salt Lake Regional Office in June 2024, or what other cost-saving measures the SEC could take.

If you have any questions, comments, or concerns about the potential implications of this article, Jay Dubow, Ghillaine Reid, and our other Securities Investigations + Enforcement attorneys are available to guide you through any implications and evaluate the best strategy for your business.

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.

Troutman Pepper Locke Spotlight

Troutman Pepper Locke Partner Ashley Taylor Named a ‘Go To Lawyer’ by Virginia Lawyers Weekly for Business Litigation

Ashley L. Taylor, Jr., co-leader of Troutman Pepper Locke’s nationally ranked State Attorneys General Practice, was named to Virginia Lawyers Weekly’s “Go To Lawyers” for business litigation. The program recognizes the top lawyers across the commonwealth in a given practice area based on nominations and an independent selection process.

Podcast Updates

Bipartisan Leadership and Reform at NAAG: Insights From Brian Kane

By Stephen Piepgrass and Clayton Friedman

In this episode of Regulatory Oversight, Clay Friedman, co-leader of the firm’s State Attorneys General (AG) practice, welcomes back Brian Kane, executive director of the National Association of Attorneys General (NAAG). They discuss the significant transitions and reforms at NAAG over the past two years, including the implementation of a bipartisan leadership structure and a comprehensive management review.

State AG Updates

22 AGs Challenge New York’s Climate Superfund Law

By Troutman Pepper Locke State Attorneys General Team and Warren “Jay” Myers

A coalition of industry associations and 22 state attorneys general (AG), led by West Virginia AG JB McCuskey, filed a lawsuit against the State of New York in the U.S. District Court for the Northern District of New York challenging the validity of the state’s recently enacted Climate Change Superfund Act. The complaint asserts that the act’s retroactive imposition of multibillion-dollar fines on fossil fuel companies is both preempted by federal law and violates several bedrock constitutional principles.

Minnesota AG Releases Report Detailing AI and Social Media’s Impact on Minors

By Troutman Pepper Locke State Attorneys General Team, Kyara Rivera Rivera, and Trey Smith

On February 4, the Office of the Minnesota Attorney General (AG) released its second Report on Emerging Technology and Its Effect on Youth Well-Being, outlining the effects young Minnesota residents allegedly experience from using social media and artificial intelligence (AI). The report highlights alleged adverse effects that technology platforms have on minors and claims that specific design choices exacerbate these issues.

AG of the Week

James Uthmeier, Florida

James Uthmeier currently serves as the attorney general (AG) of Florida, having been appointed by Governor Ron DeSantis in February 2025 following the appointment of former AG Ashley Moody to a vacant Senate seat. Prior to this role, Uthmeier was the chief of staff for DeSantis, where he led the executive staff and oversaw 20 state agencies and more than 100,000 employees. He also served as the governor’s general counsel, managing litigation and legal affairs for the governor and state executive agencies. Before his tenure in Florida, Uthmeier was a senior advisor and counsel to U.S. Secretary of Commerce Wilbur Ross and began his career as a litigation associate at Jones Day’s Washington, D.C. office.

In addition to his governmental roles, Uthmeier is a professor at Florida State University College of Law. He and his wife, Jean, co-teach religious education classes at the St. Thomas More Co-Cathedral in Tallahassee. Uthmeier grew up in Destin, FL, and graduated from the University of Florida, where he was a varsity track and cross-country athlete for the National Champion Gators. He also holds a law degree from Georgetown Law.

Florida AG in the News:

On February 20, Uthmeier and America First Legal filed a class-action lawsuit against Target Corporation, alleging the company misled and defrauded investors by concealing financial risks.
On February 19, Uthmeier announced his transition team that will provide advice and related feedback to the AG as he organizes the office.

Upcoming AG Events

March: AGA | Women’s Empowerment Summit | Del Mar, CA
March: RAGA | Spring Golf Retreat | Pinehurst, NC
April: NAAG | AG Symposium | Nashville, TN

For more on upcoming AG Events, click here.

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

Virginia’s Path to a Regulated Marijuana Market: Legislative Advances and Political Hurdles

By Jean Smith-Gonnell and Chuck Slemp

The Virginia General Assembly has once again advanced legislation to establish a regulated market for recreational marijuana sales. Virginia is unique in that it allows personal possession of cannabis but bans retail sales outside of medical marijuana dispensaries. The legislation, HB 2485 sponsored by Delegate Paul Krizek, D-Fairfax County, and SB970 by Senator Aaron Rouse, D-Virginia Beach, passed the Democratic-controlled legislature on a party-line vote (53-46 in the House and 21-19 in the Senate). The bills now move on to Virginia’s Governor Glenn Youngkin.

Missouri Legislature’s Proposals to Regulate Hemp-Derived Consumable Products

By Jean Smith-Gonnell and Nick Ramos

Last year, we wrote about the former Missouri governor’s efforts to curb the availability of intoxicating hemp products to Missouri consumers by executive order. There are now several proposed bills in the Missouri legislature that seek to regulate hemp-derived consumable products in the state, a few of which we summarize below. In general, the proposed legislation addresses issues related to youth access, licensing, taxation, advertising and marketing, testing, and labeling. This type of proposed legislation is worth monitoring in Missouri, and other states, as states take more aggressive action to prohibit or regulate the availability of such products to consumers in the absence of a coherent, federal regulatory framework.

This article was originally published in The Legal Intelligencer on February 25, 2025 and is republished here with permission.

On Jan. 21, 2025, Mark T. Uyeda, the acting chairman of the U.S. Securities and Exchange Commission (SEC), announced the launch of a cryptocurrency task force. This task force, led by SEC Commissioner Hester Peirce, with Richard Gabbert serving as chief of staff and Taylor Asher as senior policy adviser, aims to establish a comprehensive and clear regulatory framework for cryptocurrency. On Feb. 4, 2025, Peirce outlined 10 key priorities for the task force. One of the task force’s main priorities is to clarify the application of federal securities laws to digital assets, which is a question that has led to much uncertainty in the cryptocurrency industry. The task force and its determination to develop clear guidelines marks a significant shift from the SEC’s recent reliance on enforcement actions to make policy regarding cryptocurrency to a more structured regulatory approach.

The demand for clearer guidelines has been a recurring theme in the cryptocurrency world, including in securities enforcement actions. This was highlighted by the U.S. Court of Appeals for the Third Circuit in a recent decision that ordered the SEC to explain how and when securities laws apply to cryptocurrency. In Coinbase v. SEC, Coinbase petitioned the SEC to promulgate rules clarifying how and when securities laws apply to cryptocurrency. Coinbase argued that the existing securities laws do not account for the unique attributes of digital assets, making compliance with the laws economically and even technically infeasible. According to Coinbase, the SEC increased these difficulties by failing to articulate a clear and consistent position on whether digital assets are considered securities and therefore subject to securities laws.

In response, the SEC denied Coinbase’s rulemaking petition, stating in a single paragraph that it disagreed with Coinbase’s concerns, had higher priority agenda items, and preferred to gather more information before engaging in rulemaking. Coinbase then petitioned the Third Circuit to review the SEC’s denial. The Third Circuit found the SEC’s explanation for denying Coinbase’s rulemaking petition to be insufficiently reasoned. According to the court, the SEC’s single paragraph disagreeing with Coinbase’s petition failed to explain whether and how it considered Coinbase’s workability objections. The SEC did not adequately explain which other regulatory efforts it was prioritizing and why, and while courts typically defer to an agency’s allocation of resources and ordering of priorities, that explanation must still be sufficiently reasoned. Finally, the Third Circuit said that the SEC can proceed by incremental rulemaking or adjudication, but if it chooses this route, it must explain why it prefers to proceed this way.

Though the Third Circuit agreed with Coinbase that the SEC’s denial was insufficiently reasoned, it did not agree with Coinbase that the appropriate remedy was to order the SEC to promulgate rules. Only in extreme circumstances can a court overturn an agency’s judgment not to institute rulemaking, and the primary economic interests at stake here did not constitute such circumstances. Instead of ordering the SEC to promulgate rules, the Third Circuit remanded the case to the SEC and ordered it to provide a sufficiently reasoned disposition of Coinbase’s petition.

As the case now returns to the SEC, all eyes will be on how the SEC justifies its rejection of Coinbase’s rulemaking petition. The SEC’s explanation could either leave lingering questions or signal a shift towards rulemaking that benefits the cryptocurrency industry through clearer and more supportive regulations. However, given the recent launch of a cryptocurrency task force, and public statements regarding cryptocurrency regulation by current SEC commissioners and Paul Adkins, who has been nominated to become the chair of the SEC, the latter seems increasingly likely.

The Regulation of Digital Assets Is Inconsistent and Unclear

For years, the SEC has relied on enforcement actions rather than clear guidelines to regulate the digital asset industry. Since the first enforcement action in July 2013, the SEC has brought over 200 cryptocurrency-related enforcement actions, peaking in 2023. This approach has led to inconsistencies in the regulation of digital assets. Many of these cases have found that digital assets were securities and were required to be registered pursuant to the federal securities laws.

A notable inconsistency arose in the Southern District of New York, where two courts reached opposite conclusions regarding whether digital assets sold on secondary markets qualify as investment contracts under securities laws. In SEC v. Ripple Labs, U.S. District Court Judge Analisa Torres of the Southern District of New York held that Ripple’s direct sales of digital tokens to sophisticated individuals and entities constituted securities transactions, but sales to public buyers through secondary trading platforms did not. Ripple argued that the sales did not meet the investment contract criteria set forth in the seminal Supreme Court decision establishing the definition of a security, SEC v. W.J. Howey, which are an investment of money, into a common enterprise, and an expectation of profits to be derived solely from the efforts of others. Furthermore, Ripple contended that investment contracts require three additional “essential ingredients,” including a contract establishing the investor’s rights to an investment, post-sale obligations by the promoter for the investor’s benefit, and a contract granting the investor a share in profits.

The court rejected Ripple’s essential ingredients test, explaining that it imposed more requirements than the Supreme Court required for investment contracts. It explained that Ripple’s sales of digital tokens to sophisticated individuals and entities constituted investment contracts because buyers invested money in exchange for the digital tokens, Ripple pooled the proceeds from the sales and used them to fund its operations, and buyers had a reasonable expectation of profits derived from Ripple’s efforts. The court said the sales on secondary trading platforms, however, did not constitute investment contracts since they were blind bid/ask transactions that eliminated any reasonable expectation of profits. Therefore, the court found that whether digital assets qualify as investment contracts under securities laws depends on the circumstances of the sale.

In contrast, Judge Jed Rakoff in SEC v. Terraform Labs declined to follow Torres’s reasoning in Ripple. Rakoff was faced with the same question of whether digital tokens qualified as investment contracts and were therefore subject to securities laws. Like in Ripple, the Terraform court found there to be an investment of money and a common enterprise. However, when addressing the reasonable expectation of profits, the Terraform court refused to differentiate between digital assets based on their manner of sale since the Supreme Court never made such a distinction. Additionally, whether a purchaser bought the digital assets directly from the defendants or in a secondary transaction had no impact on whether a reasonable person would view the defendants’ actions and statements as demonstrating a promise of profits based on their efforts. Therefore, the court held that Terraform’s digital assets qualified as investment contracts and were subject to securities laws.

The Need for Clarity Is Urgent

Shortly after the Ripple decision in 2023, Chairman of the House Financial Services Committee Patrick McHenry and Chairman of the House Agriculture Committee Glenn Thompson issued a statement urging Congress to provide clear guidelines for the digital asset industry. The statement also emphasized that the SEC cannot continue to regulate digital assets through enforcement, as this approach harms investors and results in too much uncertainty.

This sentiment is echoed in ongoing enforcement actions, where defendants argue that the SEC needs to provide clarity on how and when securities laws apply to digital assets. In 2023, the SEC initiated a separate enforcement action against Coinbase, alleging that its platform operates as an unregistered securities exchange. Coinbase moved for judgment on the pleadings, arguing that digital assets do not qualify as investment contracts under securities laws and that the application of securities laws to digital asset transactions represents a significant question that Congress has not authorized the SEC to address with broad regulatory authority. The Southern District of New York denied Coinbase’s motion, and Coinbase urged the Second Circuit to hear its interlocutory appeal, arguing that users of digital asset trading platforms, cryptocurrency companies, the SEC, and lower courts “badly need clarity on what the federal securities laws require.”

The Second Circuit agreed with Coinbase and certified the interlocutory appeal, explaining that the conflicting decisions regarding whether digital assets qualify as investment contracts necessitated appellate guidance. The court noted that the conflict between Ripple and Terraform demonstrates a “fundamental difficulty” of applying Howey to digital assets, which is a “difficult legal issue of first impression for the Second Circuit.” The certification of Coinbase’s interlocutory appeal is significant because it will be the first time a federal appellate court assesses whether cryptocurrency transactions qualify as investment contracts and are therefore subject to securities laws.

The Future of Digital Assets and Securities Laws Is Rapidly Changing

The SEC’s newly established cryptocurrency task force, along with a 30% decline in enforcement actions in 2024, signals a significant shift toward establishing comprehensive regulatory guidelines for cryptocurrency. This change is further underscored by President Donald Trump’s pledge to securing America’s position as the world’s leader in the digital asset economy. In support of this pledge, Trump recently signed an executive order, “Strengthening American Leadership in Digital Financial Technology.” The executive order emphasizes the objective of achieving regulatory clarity and certainty in the digital asset industry and establishes a working group tasked with developing a regulatory framework for digital assets. The SEC will be represented in the working group, which includes the chairman of the SEC among its members.

Overall, the federal government, including the SEC, appears to be moving toward a more structured regulation of cryptocurrency, much to the relief of the cryptocurrency industry. However, this shift is unfolding rapidly, so readers are encouraged to stay tuned for further developments as the SEC’s approach continues to evolve.

On February 20, 2025, the U.S. Departments of State and the Treasury designated eight Latin American drug trafficking cartels as Foreign Terrorist Organizations (FTOs) and Specially Designated Global Terrorists (SDGTs), in response to President Trump’s Executive Order 14157. The designated cartels are Tren de Aragua, Mara Salvatrucha (MS-13), Cartel de Sinaloa, Cartel de Jalisco Nueva Generación, Cartel del Noreste (formerly Los Zetas), La Nueva Familia Michoacana, Cartel de Golfo, and Carteles Unidos.

The move signals a seismic shift in U.S. regulatory risk, particularly for business in Mexico, but also throughout Latin America and globally where these cartels have a presence. Companies that previously relied on traditional sanctions compliance strategies must now navigate the far more challenging legal framework applicable to FTOs.

What’s Really New Here?

All of these groups, except Carteles Unidos, were already subject to U.S. sanctions, having been previously listed by Treasury’s Office of Foreign Assets Control (OFAC) as Specially Designated Nationals (SDNs). So there was already a broad prohibition in place on direct or indirect transactions or dealings with these organizations or their interests in property, including any entity of which they own 50% or more, to the extent U.S. persons were involved, along with a requirement to block their property within U.S. jurisdiction and file reports of such blocked property with OFAC. The new SDGT designation is another SDN list authority that does not materially change the picture.

However, the designation of these cartels as FTOs introduces profound new legal and compliance consequences for both U.S. and non-U.S. persons. The jurisdictional reach of the FTO statute is much broader than OFAC’s sanctions, and the government has tended in the past — and this administration has signaled a particularly strong intent going forward — to pursue an aggressive enforcement strategy against activity involving these cartels. Moreover, unlike in the sanctions context, there is little guidance, no licensing mechanism, and generally no regulatory structure built up around the FTO statute, making compliance more of a challenge, and leading many stakeholders to take a more risk averse posture due to the very high risk and lack of clarity.

It is a crime under the U.S. Antiterrorism Act, 18 U.S.C. § 2339B, to provide material support or resources to designated FTOs, including financial services, tangible or intangible property, equipment, training, and personnel. While medicine and religious materials are excluded from the FTO restrictions, they may be included within the SDN/SDGT restrictions. FTO material support crimes are subject to severe criminal penalties, including large fines and up to 20 years in prison.

Additionally, the Antiterrorism Act, 18 U.S.C. § 2333, allows victims of acts of international terrorism that were “committed, planned, or authorized” by an FTO to bring civil lawsuits against ‎”any person who aids and abets, by knowingly providing substantial assistance, or who conspires with the person who committed such an act of international terrorism.” This could result in significant financial liability for ‎those that may be entangled with designated cartels, although the applicability of this provision may be in doubt as, despite the FTO designation, it is not clear that these cartels actually engage in “acts of international terrorism.”‎ There are also limitations to sovereign immunity for foreign governments and state-owned entities in this context. While these aiding and abetting and conspiracy theories have been limited to some degree by recent court cases, such as Taamneh v. Twitter, 598 U.S. 471 (2023), the liability risks remain significant to the extent terrorist acts occur.

The marginal impact of these FTO designations may not be very significant in Venezuela, where Tren de Aragua is based, because Venezuela is already subject to broad sanctions risk, with the entire government “blocked” by OFAC and many key organizations and individuals on the SDN list. In El Salvador, where MS-13 has been based, the current government has reportedly “decimated” the group through recent law enforcement actions.

So the really critical impacts here are in Mexico. Most of these FTO cartels are based in Mexico, where previously the U.S. sanctions risks were not very high. There have been few OFAC enforcement actions involving Mexico over the years, beyond designations of cartels and their businesses and individual leaders, and related money laundering organizations, on the SDN list, along with prosecutions of cartel leadership and key supporters.

These FTO designations amp up the risks to a new level for normal business in Mexico. Executive Order 14157 itself states that, in certain parts of Mexico, these cartels “function as quasi-governmental entities, controlling nearly all aspects of society.” Similarly, a resolution introduced in Congress by then-Senator Marco Rubio among others states that “Mexican cartels now control 30 to 35 percent of Mexican territory.” These may be telling indications of how the Trump administration views the pervasiveness of the cartels in Mexico, which may feed into the administration’s enforcement strategy. Accordingly, businesses should consider incorporating this perspective into their compliance approaches.

Impact on Businesses and Compliance

As an initial point, it is important to understand that this FTO risk is not limited to U.S. companies. The FTO statute has broad extraterritorial application, covering not only U.S. nationals or permanent residents anywhere in the world, and any person acting even in part within the United States, but also non-U.S. persons that are “brought into or found in the United States.” U.S. federal courts have generally upheld this nearly limitless extraterritorial jurisdictional scope, on the theory that an FTO designation inherently includes a connection to the United States due to the terrorist threat. So foreign subsidiaries of U.S. companies, joint ventures, and even companies based outside the United States will need to incorporate FTO compliance into their Mexico business strategy.

The key question then is how much due diligence will suffice to get comfortable that your business does not involve FTO cartel-linked activity. Unlike in the OFAC context, there is minimal guidance from the U.S. government about how to comply with the criminal FTO statute. So one can begin with the dual mens rea element of the FTO material support crime: the government must prove both that the defendant knew what it was providing, and that it was providing it to a designated FTO. In theory at least, this is in contrast to sanctions enforcement, which operates on a “strict liability” basis in the civil context, so OFAC does not need to show any knowledge, intent, etc. in order to charge a violation. However, in practice OFAC does tend to reserve enforcement for situations of culpability. In light of the weight of an FTO designation and the high level of risk involved, one should not take too much comfort from this dual knowledge element — one does not want to find oneself seeking to persuade a jury that the business was unaware that it was dealing with a terrorist-designated cartel.

Ultimately, if there are indications of cartel involvement, the government may be able to establish adequate knowledge. Therefore, companies operating in higher-risk areas should incorporate due diligence and training about the FTO law throughout the relevant parts of the business so that any concerns about potential cartel involvement are quickly escalated. In practice, this will often involve similar processes as for pre-existing sanctions compliance and anti-corruption compliance programs. However, because of the breadth of the material support statute, more stringent controls may be needed where significant FTO risks are present.

Whereas U.S. persons may apply for a license from OFAC to engage in otherwise prohibited transactions with an SDGT, such as humanitarian activities, or potentially even extortion or other emergencies, there is no comparable licensing mechanism for FTOs. Therefore, at least for now, the only option appears to be to refrain from the activity in question, even if that may not appear to be feasible under the circumstances while also keeping the business operating normally.

The Road Ahead

FTO and SDGT designations have historically been reserved for organizations like Al-Qaeda and ISIS that were not involved in any significant way in international business activity. This shift to include cartels within the FTO framework marks an historic expansion of U.S. counterterrorism policy, redefining these organizations as national security threats and exposing those who engage with them to the same severe legal, financial, and reputational consequences as traditional terrorist groups.

It appears that the government is backing up this new policy with real muscle. Attorney General Pamela Bondi recently outlined an aggressive strategy for the Department of Justice to focus U.S. law enforcement and prosecutorial resources on the “total elimination” of these cartels. This new strategy came with an explicit shift of resources away from other areas, as we recently explained here, such as Foreign Corrupt Practices Act cases that do not have a connection to cartels or similar criminal organizations. With FBI agents and prosecutors presumably now facing an expectation to make cartel-related cases as part of their key metrics, and a whole-of-government focus on this area, one can expect highly active investigation and enforcement efforts.

Following the Trump administration’s designations, Canada also listed seven of these cartels as terrorist entities. So stepped-up international cooperation may also play into this. It remains to be seen what the Mexican government’s approach will be.

While there have been many FTO support cases against individuals in the recent past, there have been very few against companies. The landmark case was in 2022, when Lafarge S.A. pled guilty to conspiring to provide material support to designated FTOs in Syria and paid nearly $800 million in fines and forfeiture. That case involved payments through intermediaries for things like purchasing supplies, checkpoint clearance, and even “taxes” based on production volume. This illustrates the diverse types of exposure that can give rise to an FTO crime.

As the administration pursues this unprecedented strategy, companies would be well-advised to be vigilant and proactive in their compliance efforts. With potential criminal penalties, civil liability, and reputational risks on the line, businesses cannot afford to take a wait-and-see approach, and preparedness is now a strategic necessity for those with significant exposure.

On February 14, the U.S. Department of Education Office for Civil Rights (DOE) issued a Dear Colleague Letter (DCL), which calls for educational institutions to immediately cease race-conscious practices in student programming, resources, and financial aid.

Citing the Supreme Court’s decision in Students for Fair Admissions, Inc. (SFFA) v. President and Fellows of Harvard College, 600 U.S. 181 (2023), the DCL purports to “clarify and reaffirm the nondiscrimination obligations of schools and other entities that receive federal financial assistance from the United States Department of Education,” and explain the DOE’s position on the “legal requirements” under Title VI of the Civil Rights Act of 1964, the Equal Protection Clause of the U.S. Constitution, and other relevant authorities. DCL at 1.

In SFFA, the Supreme Court found race-based admissions programs employed by two universities violated the Equal Protection Clause of the Fourteenth Amendment because they were race-based and failed to withstand strict scrutiny. 600 U.S. at 213, 230. Specifically, the Court held that the programs were unconstitutional because their means were insufficiently tailored to their ends,[1] reaffirming that “‘outright racial balancing’ is ‘patently unconstitutional,'” id. at 223 (quoting Fisher v. Univ. of Texas at Austin, 570 U.S. 297, 311 (2013)), and that achieving “meaningful representation and meaningful diversity,” 600 U.S. at 221, and “remedying the effects of past societal discrimination,” id. at 210 (quoting Regents of Univ. of California v. Bakke, 438 U.S. 265, 362 (1978)), are insufficient purposes to justify making admission decisions on the basis of race. 600 U.S. at 230.

The SFFA decision, however, did not prohibit all consideration of race in university admissions processes. Rather, the Court expressly stated:

nothing in this opinion should be construed as prohibiting universities from considering an applicant’s discussion of how race affected his or her life, be it through discrimination, inspiration, or otherwise. … A benefit to a student who overcame racial discrimination, for example, must be tied to that student’s courage and determination. Or a benefit to a student whose heritage or culture motivated him or her to assume a leadership role or attain a particular goal must be tied to that student’s unique ability to contribute to the university. In other words, the student must be treated based on his or her experiences as an individual — not on the basis of race.

Id. at 230–31. However, the Supreme Court made clear that “universities may not simply establish through application essays or other means the regime we hold unlawful today. … [W]hat cannot be done directly cannot be done indirectly.” The Supreme Court added that “[t]he Constitution deals with substance, not shadows,” and the prohibition against racial discrimination is “levelled at the thing, not the name.” Id. (citation omitted).

The DCL broadly interprets the SFFA decision to mean that “[i]f an educational institution treats a person of one race differently than it treats another person because of that person’s race, the educational institution violates the law.” DCL at 2. This interpretation extends the SFFA ruling beyond admissions to encompass all facets of academic and campus life, including “hiring, promotion, compensation, financial aid, scholarships, prizes, administrative support, discipline, housing, graduation ceremonies, and all other aspects of student, academic, and campus life.” Id.

Moreover, the DCL emphasizes that schools may not use proxies to make decisions based on race, reinforcing the principle that race-based decision-making, whether direct or indirect, is unlawful. See id. at 2–3. The DCL elaborates on this by explaining that even programs that appear neutral on their face may be motivated by racial considerations. Id. Thus, “a school may not use students’ personal essays, writing samples, participation in extracurriculars, or other cues as a means of determining or predicting a student’s race and favoring or disfavoring such students.” Id. at 2–3. The DCL further states that any race-neutral policy which could serve as a proxy for racial consideration, such as eliminating standardized test score requirements to achieve racial diversity, is unlawful. Id. at 3. Finally, and perhaps most significantly, the DCL broadly proclaims that “[o]ther programs discriminate in less direct, but equally insidious, ways. DEI programs, for example, frequently preference certain racial groups and teach students that certain racial groups bear unique moral burdens that others do not. Such programs stigmatize students who belong to particular racial groups based on crude racial stereotypes. Consequently, they deny students the ability to participate fully in the life of a school.” Id.

The DCL states that DOE will issue “legal guidance … in due course” and will “take appropriate measures to assess compliance with the applicable statutes and regulations based on the understanding embodied in this letter beginning no later than 14 days from [February 14, 2025], including antidiscrimination requirements that are a condition of receiving federal funding.” Id.

Implications for Educational Institutions

Although the DCL itself does not have the force of law,[2] it has raised significant concerns in the higher education community. It makes sweeping assertions that go well beyond the holdings in the SFFA decision, and effectively asserts that any DEI initiative may be found unlawful. It also threatens consequences including the loss of federal funding if the DOE’s interpretation is not followed.

The DCL appears designed to push the envelope on the scope of Title VI, perhaps in the belief that some institutions may simply take the most conservative approach to pulling back on even likely legal DEI programs to avoid the risks of an investigation. It should be noted that Title VI requires that the government first give an institution the opportunity to come into compliance before revoking federal funding, and schools are entitled to due process before any such decision is made. But the threat of an investigation and being required to prove a position, perhaps in court, can itself be daunting.

Each higher education institution will need to conduct its own assessment to determine a path forward in light of the threatened actions outlined in the DCL. Schools should start by conducting a thorough assessment and inventory of policies, procedures, and programs that may contain preferences based upon race, color, or national origin. This analysis is fact-specific and should be governed by the institution’s strategic plan, tolerance for risk, and the importance of the policy, procedure, and program in question. There is no one-size-fits-all approach. However, schools are well served to create a risk matrix that identifies each policy, procedure, or program that may be considered race-based, the application of such policy, procedure or program by the institution during the academic year, and the risk that the policy, procedure, or program could be considered to violate the DOE’s interpretation of the law if not modified (i.e, high, medium, low). The matrix should be created by or under the direction of the institution’s general counsel or institution’s outside counsel so that legal issues and legal advice can be considered as part of the assessment. A sample template for a risk matrix is below:

Policy/Program/Procedure	Application by the Institution (Significant, Moderate, Immaterial)	Risk Level (High, Medium, Low)	Ability to Modify	Modified Language
Admissions Policy
XYZ Scholarship

The goal of the risk matrix is to have a careful assessment to mitigate the risk of a DOE investigation or legal challenges. Where an institution lands on whether to eliminate, keep in place, or modify a policy, procedure, or program, will depend on factors particular to each institution.

In assessing policies, procedures, and programs, some recent cases provide guidance on what could constitute an impermissible preference and what likely does not. While it is unclear how the OCR will interpret the law, programs which are open to all, regardless of race, color, or national origin, are generally considered acceptable under the law, provided that any decisions concerning same are not being made on the basis of race. As noted above, the Supreme Court in SFFA made clear that a benefit or award can be made available by a university based on a student’s demonstrated experiences as an individual, and not based on a membership in a particular racial group. 600 U.S. at 230–31 (“A benefit offered to a student who overcame racial discrimination … must be tied to that student’s courage and determination . . . [or their] unique ability to contribute to the university. In other words, the student must be treated based on his or her experiences as an individual — not on the basis of race.”) (emphasis in original).

Following SFFA, the Eleventh Circuit in American Alliance for Equal Rights v. Fearless Fund Mgmt., LLC, 103 F.4th 765, 769 (11th Cir. 2024), addressed an “entrepreneurship funding competition open only to businesses owned by black women.” While the competition at issue was unlawfully discriminatory because it was open only to Black females, the Court noted it was not per se unlawful for the defendant to pursue a “‘commitment’ to the ‘[b]lack women-owned’ business community,” which it likened to protected speech. Id. at 779 (citing 303 Creative LLC v. Elenis, 600 U.S. 570 (2023)). A funding program that is open to all applicants, irrespective or race, but is based on a demonstrated commitment to a cause or a community, would, consistent with SFFA, be permissible.

The SFFA and American Alliance for Equal Rights decisions support the conclusion that DEI initiatives are not per se unlawful. What is unlawful is making admission, employment, or other decisions based upon a person’s race, color, or ethnicity or based upon a facially neutral criterion which is, in fact, a proxy for race, color, or ethnicity. If admission or other opportunities are open to all qualified persons, regardless of race, color, or ethnicity — both in word and in fact — current case law suggests that these opportunities are not unlawful discrimination in violation of Title VI, provided that decisions concerning same are not made on the basis of race.

There also is hope that additional guidance will be provided in the future as some of the statements in the DCL raise substantial First Amendment questions, including some issues that were recently addressed in the District of Maryland’s recent decision in Nat’l Ass’n of Diversity Officers in Higher Educ., et al. v. Trump, No. 1:25-CV-00333-ABA, 2025 WL 573764, 2025 U.S. Dist. LEXIS 31747 (D. Md. Feb. 21, 2025). In Nat’l Ass’n of Diversity Officers in Higher Educ., the District of Maryland entered a preliminary injunction blocking enforcement of Presidential executive orders that sought to eliminate DEI programs. See id. at 2025 WL 573764 at *2, 2025 U.S. Dist. LEXIS 31747 at *4. The District of Maryland found, among other things, that certain provisions in the executive orders are likely vague and violate the First Amendment by chilling the exercise of free speech by private sector members because they “threaten[] to initiate enforcement actions against Plaintiffs (in the form of civil compliance investigations) for engaging in protected speech.” Id. at 2025 WL 573764 at *23, 2025 U.S. Dist. LEXIS 31747 at *69–70.

If you have questions or need assistance with conducting an inventory and assessment of your policies, procedures, and programs, Troutman Pepper Locke’s deep bench of higher education attorneys are available to assist.

[1] The SFFA Court found the programs at issue were not time-limited, failed to define measurable and attainable goals, and employed racial stereotyping. 600 U.S. at 230.

[2] See, e.g., Christensen v. Harris Cty., 529 U.S. 576, 587 (2000) (holding federal agency’s interpretation in opinion letter, similar to interpretations in policy statements, agency manuals, and enforcement guidelines, lacked the force of law); Csutoras v. Paradise High Sch., 12 F. 4th 960, 968 (9th Cir. 2021); J.M. v. Dep’t of Educ., State of Haw., 224 F. Supp. 3d 1071, 1086 (D. Haw., 2016).

You put in the hard work to conceive and design your product, choose a trademark, and build your customer following, but taking your product brand to the next level and attracting an equity investment based in large part on the value of the trademarks and goodwill associated with your consumer product requires other skill sets. Not only must you protect your trademarks by way of registration, but you also need to protect your brand identity by complying with the many consumer protection, privacy, advertising, and consumer product laws. This compliance is important to build trust with customers, manage legal risk, and improve your chances of that equity investment.

Based on our experience of counselling clients in the consumer products space, these are 10 legal risks that threaten the value of a consumer product brand:

1. Failure to clear and protect your trademark.

Clearance searches and strategy with expert advice.

Using comprehensive search and analysis, a trademark attorney can help you determine whether your trademarks can be registered or if there are risks for registration or use due to pre-existing trademarks or other issues.

Trademark registrations in the U.S. and jurisdictions where expansion in the next five years is likely.

Trademark protection is jurisdictional, so knowing where your key markets are now and will be in the next five years will help to inform your filing strategy and provide opportunities to leverage international treaties to lower the costs of trademark protection.

2. Online sales practices that use dark patterns, junk fees, negative options, or other practices contrary to consumer protection laws.

State and federal laws.

Many states have strict consumer protection and privacy laws. Along with these state laws, the Federal Trade Commission (FTC) Act governs the activities of businesses selling goods and services online, such as the regulation of dark patterns (deceptive design tactics used in an online environment that subtly manipulates the end user’s decision), fees added to prices for goods or services that offer no value (also known as junk fees), automatic renewal unless a consumer opts out (negative option practices), and click-to-cancel requirements for subscription-based purchases. If you are selling to consumers in other countries, similar or stricter foreign laws and regulations may also apply.

Failure to comply with the relevant legislation may result in investigations, claims, and fines, all of which are likely to be made public and could damage the reputation of your brand and your customer relationships. Past investigations or ongoing claims may also adversely impact equity investment or value for acquisition when investors discover these issues during due diligence.

3. Making environmental, performance, or quality claims about your product that are misleading or unsubstantiated.

Truth in advertising.

The underlying principle of the federal law is that ads must be truthful, not misleading, and, when appropriate, backed by scientific evidence. These principles apply to all forms of advertising and labelling. The FTC enforces these rules and is particularly focused on claims that could impact consumers’ health, claims about food, over-the-counter drugs, dietary supplements, alcohol, and tobacco, as well as conduct related to high-tech products and the internet.

Environmental and health claims.

The FTC has issued Green Guides to assist companies in crafting accurate and not misleading claims with respect to the environment and the consumer. The U.S. Food and Drug Administration (FDA) partners with the FTC to monitor health and fitness claims, such as claims of weight loss, disease prevention, or impact on cognitive abilities, and frequently acts against companies making unsubstantiated claims.

The numerous guides, cases, and advisory opinions on these issues can be overwhelming to navigate, and knowledge of the guidance and applying it to your business is essential to avoiding action by the FDA, FTC, or consumers that could result in recalls, re-packaging, fines, damages, reputational losses, and negative impact on brand value.

4. Inadequate or noncompliant packaging and labeling.

Federal law.

The federal law on packaging and labeling, the Fair Packaging and Labeling Act, is enforced by the FTC and FDA. In addition to the standard requirements, certain products have specific regulations both at the federal and state level.

Multijurisdictional.

If you plan to export your product outside the U.S. or establish manufacturing in other countries, counsel on the specifics of the requirements in those countries is essential and may impact your package design in the U.S.

Prop 65 and other warnings.

In addition to standard requirements, certain jurisdictions such as California have specific warning requirements alerting consumers to risks such as exposure to cancer-causing chemicals.

Managing the design and marketing priorities for your package and label with the legal requirements that are often changing requires expert advice and can reduce the risk of consumer lawsuits and requirements to re-label products, among other legal risks.

5. Lack of diligence in advertising, including by influencers and other endorsers.

FTC guidelines.

The FTC has issued excellent guidance on advertising claims and in particular the role influencers or brand ambassadors play in advertising law compliance. Staying within the law requires vigilance in reviewing endorsements as well as in the drafting of advertising and influencer agreements to require compliance.

Reviews and endorsements.

The numerous opportunities for consumers to review and comment on your company products and services, along with the many platforms such as Yelp and Amazon that employ consumer reviews, can often lead brands to manufacture reviews or manage poor reviews ineffectually. Genuine reviews not only comply with the law but also can contribute positively to brand value.

Product-specific laws.

Be aware of product-specific laws, such as those for cannabis, tobacco, alcohol, and state regulations that could restrict methods of advertising, access to websites by age, or require that products not be shown in association with certain activities in advertising.

For both startup and well-established businesses, social media posts, partnering with brand ambassadors, and other forms of advertising require specific knowledge and consistent review. It is easy to fall afoul of laws and regulations, so incorporating legal compliance into any advertising campaign plan is essential.

6. Not having a privacy policy or not following company policies on privacy.

Although there is no federal law governing the protection of personal information (other than health information), there is a network of state laws as well as laws in other jurisdictions that could apply to U.S. companies. Cybersecurity breaches and failure to have policies and follow them can all lead to significant legal and reputational risks. Investors and purchasers are more frequently expecting to review policies and security plans and requiring representations and warranties with respect to privacy compliance, and it will pay off in the long run to establish policies and enforce them internally as early as possible.

7. Poorly drafted commercial agreements with manufacturers and suppliers.

Many businesses, especially at startup, place very little value on the quality of agreements with manufacturers and suppliers; however, these agreements can be a key tool for protecting your trademark through proper licensing language, setting and enforcing quality standards, requiring legal compliance with the regulations we have highlighted in this article, and managing product liability risks. In the due diligence process for acquisition or investment, these agreements will be scrutinized for these terms and any restrictions on transfer or change of control, and issues with key agreements can sideline transactions, so it is well worth the investment in well-drafted agreements with key business partners.

8. Inadequate terms and conditions for sale or your website.

Every business website should have current website terms and conditions, and e-commerce sites should also have comprehensive terms governing the sale of goods or services. These terms will form the basis for your relationship with consumers and are regulated primarily by state consumer protection laws. Failure to comply with state regulations may lead to claims, and more commonly, unclear terms on returns, refunds, and shipping costs can lead to issues with customers resulting in reputational or customer loss.

9. Not regularly monitoring your trademark and enforcing your rights.

Ensuring your trademark is used properly internally and by licensees is essential to preserving your trademark rights and brand value. This can be accomplished through internal policies that are routinely enforced and license agreements that allow for periodic review of trademark use and quality of goods and services and include the right to terminate for breaches. In addition, it is important to ensure your trademark is not used without permission. There are many tools available to monitor the internet for such unauthorized use as well as the trademark registers in any country where you have trademark rights. Taking action to stop such infringement, whether by issuing cease and desist letters, opposing trademark applications, or taking other legal action, will be important to preserving your trademark rights.

10. Lack of customer service.

Customer complaints, if handled well, can mitigate risk of claims and complaints to regulators. A proactive approach to customer relations as well as a savvy social media strategy can be the difference between a brand building and losing value.

Managing these risks may significantly improve your trademark value and position your company for acquisition or investment by creating a strong brand, and customer relationships and minimizing claims by regulators and others that could negatively impact brand value.

The Consumer Products and Intellectual Property groups at Troutman Pepper Locke have the experience to assist you in managing these risks and to guide your consumer products company for successful business growth.

This article was originally published in the Consumer Financial Services Law Monitor on February 12, 2025 and republished in insideARM on February 20, 2025.

As discussed here, on February 9, the National Treasury Employees Union (NTEU), which includes members employed by the Consumer Financial Protection Bureau (CFPB or Bureau), filed a lawsuit in the District Court for the District of Columbia. The lawsuit challenges the actions of Acting Director Russell Vought, arguing that his efforts to “shut down” the CFPB are unconstitutional and violate the Congressional mandate outlined in the Dodd-Frank Act. Since then, President Trump has nominated Jonathan McKernan to be the new Director of the CFPB (discussed here). If confirmed by the Senate, McKernan will replace Acting Director Vought, who also serves as the head of the Office of Management and Budget.

On February 14, the court issued an agreed order in response to the NTEU’s motion for a temporary restraining order. The court, presided over by Judge Amy Berman Jackson, held a scheduling conference and issued several key directives to maintain the status quo until the resolution of the plaintiffs’ motion, which has been deemed a motion for a preliminary injunction with the parties consent.

Key Provisions of the Order:

Preservation of CFPB Records: The court ordered that defendants, including their officers, agents, servants, employees, and attorneys, must not delete, destroy, remove, or impair any data or other CFPB records covered by the Federal Records Act. This includes any data stored on CFPB premises, physical media, cloud servers, or other storage systems.
Employment Protections: Defendants are prohibited from terminating any CFPB employee, except for cause related to the specific employee’s performance or conduct. Additionally, no notices of reduction-in-force may be issued to any CFPB employee.
Financial Restrictions: The court ordered that defendants must not transfer money from the CFPB’s reserve funds, relinquish control or ownership of these funds, return any money to the Federal Reserve or the Department of Treasury, or take any steps to reduce the amount of money available to the CFPB below the amount available as of 4:00 PM on February 14, except to satisfy ordinary operating obligations.

Next Steps:

The court has scheduled a hearing on the plaintiffs’ motion for a preliminary injunction for March 3 at 10:00 AM. Defendants must file any opposition to the motion by February 24 and plaintiffs must file their reply by February 27.

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