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Cannabis Regulatory Updates
The Current Landscape of Texas Cannabis Policy and Laws: A 2025 Overview
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The Texas legislative session kicked off on January 14, and cannabis policy is set to be a major topic of debate. The state, known for its conservative stance on many issues, is at a crossroads with its cannabis laws, facing both calls for stricter regulations and pushes for legalization.
Weed-ing Through the Laws: A Snapshot of US Cannabis Legislation
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Marijuana legislation is continuing to evolve in the new year across jurisdictions throughout the U.S. Below, we dive into a brief survey of notable changes to marijuana legislation across the U.S. during the first three weeks of 2025.
With the annual reporting season coming up for calendar-year companies, we wanted to remind you that companies subject to U.S. Securities and Exchange Commission (SEC) reporting requirements are now required to: (i) disclose if they have an insider trading policy, or explain why they do not have such a policy, and (ii) file a copy of their insider trading polices in their annual reports filed with the SEC. Please note that this requirement not only applies to companies reporting as U.S. domestic issuers, but also applies to companies reporting as foreign issuers filing annual reports on Form 20-F (but does not apply to Canadian issuers eligible to file annual reports on Form 40-F under the Multijurisdictional Disclosure System).
The requirement stems from a rule (Regulation S-K Item 408(b)) adopted in 2022 that became effective for the “first full fiscal period beginning on or after April 1, 2023.” Thus, for calendar-year-end companies, the first annual reports requiring such disclosures will be those for the fiscal year ended December 31, 2024.
Specifically, the rule requires companies to, “Disclose whether the registrant has adopted insider trading policies and procedures governing the purchase, sale, and/or other dispositions of the registrant’s securities by directors, officers and employees, or the registrant itself, that are reasonably designed to promote compliance with insider trading laws, rules and regulations, and any listing standards applicable to the registrant. If the registrant has not adopted such policies and procedures, explain why it has not done so.” The rule also requires the filing of any insider trading policies. The rule notes that if a company’s insider trading policies are included in its code of ethics and that code is filed as an exhibit, then the filing of that code would satisfy the disclosure requirement. If that is the case for a company, the exhibit index should include a statement, “Included in Exhibit 14,” or similar, under Exhibit 19 to make clear the policy is included there.
Given the new requirement, companies should assess their insider trading policies to make sure they are “disclosure ready”; that is, their form and content is appropriate for public disclosure and the policies accurately describe insider trading rules and follow best practices. We are available to assist with reviews of insider trading policies. If a company’s insider trading policy is part of another document, or if the policy contains information in addition to that which is required to be disclosed under the SEC’s rules, companies may want to consider extracting the insider trading portions or removing other information from the document to produce a policy that complies with the SEC requirements for public filing.
As noted above, the rule applies to companies reporting as U.S. domestic issuers and most companies reporting as foreign issuers. For companies reporting as U.S. domestic issuers, the requirement is contained in Item 10 of Form 10-K and the insider trading policy must be disclosed as an exhibit marked item 19 in the exhibit index. For companies reporting as foreign issuers, the requirement is contained in Item 16J of Form 20-F. Please note that for Canadian issuers eligible to file their annual reports on Form 40-F under the Multijurisdictional Disclosure System, there is no analogous disclosure requirement nor a requirement to file an insider trading policy.
For more information on the rule’s requirements, including additional disclosure requirements applicable only to companies reporting as U.S. domestic issuers, please see our prior client alert on this matter here.
This article was originally published on January 24, 2025 on Law360 and is republished here with permission.
The U.S. Department of Commerce’s Bureau of Industry and Security has issued the final rule that will determine how its Information and Communications Technology and Services regulations will work going forward.[1]
The final rule was published in December and takes effect on Feb. 4. It finalizes the process that BIS’ Information and Communications Technology and Services, or ICTS, office will follow as it goes about restricting foreign adversary — largely Chinese — products and technologies in order to protect U.S. national security.
Part 1 of this article provided brief background about the ICTS regulations, and key insights for stakeholders that need to assess their exposure and consider how to mitigate their risk under this emerging regulatory regime.
Part 2 offers guidance on potential engagement strategies with the ICTS office for those that may be affected by these rules, how the regulatory process will play out and steps that can be taken to enhance compliance with any new ICTS rules that BIS may publish in the future.
Engaging With the ICTS Office
For technology companies with direct or indirect links to China, Russia, Iran or other designated adversaries of the U.S. — including companies that produce hardware, software or just about anything else — it is important to start thinking about whether or how the ICTS rules may affect the business and how to get ahead of that.
In many cases, the best way to engage with the ICTS office will be in the context of particular subpoenas, proposed restrictions or rulemakings, or other actions, by seeking to narrow or otherwise shape their focus.
Given how broadly BIS has defined its regulatory authority under the ICTS rules, challenging painful restrictions after the fact may not be viable. Therefore, it will often be more effective to focus on policy-level and security-based engagement at as early a stage as possible, such as showing that particular technologies, companies or whatever BIS is targeting do not pose a national security threat, that any such threat can be mitigated, that it can be targeted in a different way, etc.
In certain cases, it may be possible to begin this type of engagement before any action has been taken.
Exclusions
Indeed, the final rule states that the regulators remain “open to considering exclusions if further experience with the rule demonstrates that certain types of ICTS Transactions do not pose an undue or unacceptable risk” to national security. Such categorical exclusions may be an attractive way for particular companies, industry groups, etc. to gain some comfort and certainty in the face of this regulatory authority that is truly daunting in its breadth and potential impact.
No Licensing or Guidance Process — Yet
Beyond the exclusion process, however, certainty on a case-by-case basis may be harder to achieve at this stage, because the long-promised licensing and guidance process is still under consideration.
One can assume BIS is not confident in its ability to handle the number of requests it might receive. BIS’ authority could potentially touch the entire global technology ecosystem, which may not be something a handful of people at the Commerce Department can effectively regulate, despite their mandate to do so as best they can.
No Formal Appeals
Similarly, while the agency rejected the proposal for a formal appeals process after restrictions are imposed, it has said it will remain open to requests for reconsideration. So, this will play out at least for now with a somewhat less formal engagement process.
Notice and Comment, and Other Types of Engagement
The ICTS office has also nixed the idea of a public notice-and-comment process prior to finalizing their determinations, i.e., the specific restrictions it will impose. So the process of actually developing prohibitions on particular products, companies, etc. will largely be between the regulators and the targets, and not up for public debate. We saw this with the publication last year of the Kaspersky rules.
BIS has adopted this approach due to concerns about anticompetitive behavior if the process were more open — e.g., the risk that companies may throw competitors under the bus by claiming their products are compromised or insecure. Of course, there were also other reasons, including the massive paperwork burden that an additional notice-and-comment process would impose, as well as a desire for confidentiality in the highly sensitive back-and-forth with targets about the national security threats they may pose.
Clearly, though, there is a risk that, by keeping the determination process behind closed doors, regulators may fail to understand key market dynamics, technological issues, etc., and may misfire with some of their rulemakings. So, while there may not be a formal notice-and-comment process for ICTS determinations, stakeholders should nonetheless follow developments closely and consider effective strategies for engagement.
Tattling on Competitors — And Leads From Watchdog Groups
At the same time, companies at risk should consider how those that may have an axe to grind may unexpectedly throw them into the ring with the ICTS office.
Companies should be watchful of the possibility that competitors, nongovernmental organizations or similar watchdogs, or others may make a referral about them to BIS. The final rule states that the ICTS office “would not reject that information” if it would assist their review.
But the agency did take the opportunity to put out a bit of a warning about any such action that could be viewed as an “abuse of its processes for anti-competitive purposes.” So, far from being a free-for-all, BIS “will carefully vet information provided voluntarily by private industry.”
However, the agency declined to adopt a process for accused parties to have a chance to review and respond to reports made against them, or even any requirement for private accusers to provide a sworn affirmation that the information supplied is true and correct — although BIS noted that false statements may be penalized.
While affected parties will be able to see and respond to “the factual basis supporting” a determination once it has been proposed, the government will keep many of its cards close to its chest. Parties may not receive full disclosure of the sources of information such that their credibility or biases can be assessed.
Publication of Initial Determinations
Parties will have serious concerns about how meaningful the due process protections in these rules are, given that the government can go ahead and publish its initial determination before the full process has had a chance to play out.
BIS said, recognizing “that there may be an economic impact on parties named in those publications,” that the agency “may choose not to publish” them. Or they may publish them. Of course, for companies concerned about their reputations, or hoping for a fair process, this discretion may be deeply worrying.
Limited Confidentiality
The ICTS office underscored that it may disclose confidential information provided to it, based on a request from a non-U.S. government, if necessary for national security purposes. It also appears to have reserved the right to disclose confidential information publicly if necessary to prevent imminent harm to U.S. national security or the security and safety of U.S. persons.
So one should not have a misplaced sense of great comfort about the confidentiality of the highly sensitive information that will be extracted by the government when going through this process.
Interagency Consensus — Just a Mirage?
The final rule sets out a short timeline for other U.S. government agencies to provide input while ICTS determinations are under consideration, and creates a presumption that other agencies either agree or have no input if they do not weigh in on time. This may essentially empower BIS to move forward unilaterally in such cases.
Given the complexity of ICTS reviews, the very short two- or three-week timelines for senior-level input from other agencies may prove to be unrealistic. Even if another agency does disagree, BIS appears to take the position that it can in effect just note that and move on.
BIS says it will carefully consider any such objection. Perhaps revealing its bottom-line view, BIS notes that “E.O. 13873 does not require the Secretary to seek consensus.” So, while finding allies elsewhere in the U.S. government may absolutely help, at the end of the day it is clear where one must bend the knee.
Compliance and Risk Mitigation Pointers
The final rule provides a few important insights for stakeholders on mitigating the risk of being targeted by the ICTS office, and on promoting compliance once targeted — or otherwise affected because of a business relationship with a target.
No Individual Notice Provided
BIS acknowledged its actions when reviewing and restricting specific products may have an impact on countless parties, “many of whom cannot be individually identified.” In such cases, the rule notes that serving notice of a determination “on every party may not be feasible or may be unnecessary or inappropriate.” What this means is essentially all parties operating with a connection to U.S. persons and U.S. adversaries should try as best they can to monitor the ICTS developments in order to remain in compliance with new restrictions as they emerge.
Third Parties Can Be Penalized
Despite the lack of individual notice, the final rule states that any party can be penalized for violating restrictions established under the ICTS authorities, even for violating another party’s mitigation terms, and even if the violator was not involved in the review or other process with BIS.
However, BIS did clarify in the final rule that a knowledge requirement will apply in some cases, such as “assisting a violation” of a mitigation agreement. The “knowledge” standard here is the same as under BIS’ export control regulations. What this means in practice is that there’s an expectation to review the ICTS rules as they are published and maintain compliance with them in a reasonable, risk-based manner.
Indefinite Restrictions, Retroactivity, Recordkeeping — And Broader Implications
The final rule states that the restrictions and mitigation obligations under the ICTS regime may be imposed for an indefinite period, with no obligation on the part of the government to review the situation periodically. But the government will be allowed to change the requirements at any time. BIS said: “In some cases, a mitigation measure might be appropriate for a limited time; in other cases, a limited time frame might merely delay the realization of the identified risks or even increase them.”
But if targeted parties violate mitigation terms, a previously permitted transaction may subsequently be prohibited. These rules will be spelled out in individual determinations and mitigation agreements.
With what may be viewed as a bit of a sleight of hand, the government has stated that the “final rule does not apply retroactively to transactions that were completed prior to January 19, 2021.”
What a relief … until one looks more closely, where it states that, nevertheless, it “may review ICTS Transactions initiated, pending, or completed on or after January 19, 2021, even if they are related to a contractual or other agreement established prior to January 19, 2021.” So in essence, any ongoing activity can be targeted, and there will be little or no grandfathering. With a refreshingly forthright attitude, BIS acknowledged that “the regulations could change expectations about how parties’ multi-year arrangements would operate relative to before the rule took effect.” That may be an understatement.
Layered on top of this, rather than the previously proposed indefinite record retention requirement, there is now a — still very long — 10-year recordkeeping requirement, although BIS retains the discretion to require a longer period of record retention in particular cases. This notably goes beyond the general five-year U.S. export control recordkeeping requirement, and now matches the recently expanded 10-year U.S. sanctions recordkeeping expectation.
Beyond the challenge of implementing a 10+ year recordkeeping requirement for many organizations, not to mention how to define the scope of that for such an amorphous regulatory regime as this, it is worth stepping back and considering what the agency is conveying with these rules.
Conclusion
The ICTS regulations can essentially restrict any products or technologies brought into the U.S. or used by U.S. persons in any manner if they have some link to China or other foreign adversaries, and are viewed as presenting a national security risk.
The 10+ year record retention rule, retroactivity and other elements illustrate that generally there is no safe harbor or similar comfort that companies can obtain, even if they have been in the U.S. market for years — unless, as noted above, they can extract from the agency an exclusion that would cover them, or if they never make changes to their business following a successful review by the Committee on Foreign Investment in the U.S. In this rulemaking, the agency states that its focus areas “are not always correlated with the transaction’s scale and exist regardless of where or when the ICTS enters into the ICTS supply chain.”
The final rule presents a daunting picture for companies and other stakeholders that may be affected by the ICTS regulations. BIS has made clear that it interprets its authority under the ICTS program very broadly, and retains considerable discretion in how it will apply these rules.
Those that may fall within the ICTS office’s crosshairs, or that may be indirectly affected by this emerging regulatory regime, should develop an effective strategy for assessing and mitigating the risks they will face, as additional rules are published and as BIS begins to pursue enforcement actions.
Companies concerned about how these rules may affect them should develop current, historical and forward-looking reviews of products, security, compliance, links to foreign adversaries and other elements, with an eye on assessing and addressing any risks to their business under the ICTS rules.
[1] https://www.bis.gov/press-release/commerce-issues-final-rule-formalize-icts-program.
This article was originally published on January 23, 2025 on Law360 and is republished here with permission.
The U.S. Department of Commerce’s Bureau of Industry and Security has issued the final rule that will determine how its Information and Communications Technology and Services regulations will work going forward.[1]
The final rule was published in December and takes effect on Feb. 4. It finalizes the process that BIS’ Information and Communications Technology and Services, or ICTS, office will follow as it goes about restricting foreign adversary — largely Chinese — products and technologies in order to protect U.S. national security.
Part 1 of this article provides brief background about the ICTS regulations, and key insights for stakeholders that need to assess their exposure and consider how to mitigate their risk under this emerging regulatory regime.
Part 2 will offer guidance on potential engagement strategies with the ICTS office for those that may be affected by these rules, how the regulatory process will play out and steps that can be taken to enhance compliance with any new ICTS rules that BIS may publish in the future.
Background
This final rule from BIS on the ICTS program does not impose any additional restrictions. Rather, it sets the process that the ICTS office will follow in developing new restrictions and in enforcing the restrictions that it has promulgated, as well as general requirements such as recordkeeping.
A close look at the process formalized in the final rule reveals a great deal about how this new(ish) regulatory program will work.
The ICTS program at BIS stems initially from President Donald Trump’s 2019 Executive Order No. 13873, “Securing the Information and Communications Technology and Services Supply Chain,” which was then followed by a number of related executive orders.
The Commerce Department, throughout the latter part of the first Trump administration and the entirety of the Biden administration, has been trying to figure out how this expansive regulatory authority should be wielded.
After much engagement with industry and a number of initial rulemakings, BIS has finally issued the final rule setting out in detail how it will administer the ICTS program.
While the structure of the ICTS office and its regulations have been, until now, a work in progress, this group within BIS has already issued an initial set of restrictions, including in June 2024 on Kaspersky Lab’s antivirus and cybersecurity products, followed by a proposed rule in September 2024 on certain connected vehicle products from China or Russia.
Most recently, on Jan. 2, 2025, BIS published an advanced notice of proposed rulemaking and request for public comment on ICTS risks relating to unmanned aircraft systems, focusing on the technologies that are “most integral to [unmanned aircraft systems’] data collection and connectivity capabilities and that are most vulnerable to compromise by an adversarial actor.”
In finalizing and then enforcing these and future restrictions, BIS will follow the process set out in the ICTS program final rule.
So what should industry make of the final rule that will guide the ICTS office at BIS? It has defined its authority in an extraordinarily broad manner, with such a degree of discretion that any efforts to contest its demands or actions will be highly constrained.
The compliance expectations will be challenging for many companies to meet, and the rules highlight an array of risk areas to consider.
Scope of the Rules
We start with a brief discussion of some of the most critical takeaways regarding the scope and application of the final rule.
CFIUS Carveout (or Lack Thereof?)
The final rule raises serious questions about the real meaning or value of the much-vaunted Committee on Foreign Investment in the United States exception, which has been characterized by some as providing a safe harbor under the ICTS rules for companies that have entered the U.S. market following a successful CFIUS review.
The basic idea is that these companies have already experienced an elbow-deep U.S. government national security review, and therefore deserve a lighter touch under the ICTS regulations.
BIS has confirmed in the final rule that, for “the exception to apply, the ICTS Transaction must be the same transaction that CFIUS” previously reviewed; and that “a separate transaction, even if involving the same transaction parties subject to a CFIUS mitigation agreement, would not be subject to this exception.”
BIS added:
The mere fact that an individual or entity has participated in a CFIUS filing or is a party to a CFIUS mitigation agreement would not restrict the Secretary [of Commerce, i.e., BIS] in reviewing any ICTS Transaction to which the individual or entity is party if the ICTS Transaction is distinct from the CFIUS transaction giving rise to a mitigation agreement.
The takeaway from this would be that the value of the CFIUS exception starts to diminish on day one after the CFIUS process has concluded, even if the mitigation terms remain in effect.
Any change to a product or service or other elements may lead BIS to conclude that it is reviewing a distinct transaction, and thus the exception is not applicable.
In another departure from the norm in the CFIUS world, ICTS mitigation agreements may be made public, per the rule.
This is at the discretion of BIS if it finds it “need[s] to inform members of the public about a Final Determination to mitigate risks with the parties to a transaction even if an ICTS Transaction is not prohibited.”
These mitigation agreements may of course include highly sensitive information, so companies may contest the public disclosure of certain details.
Numerical Thresholds
The final rule has surprised many observers by doing away with the numerical limitations on personal data and product sales or users that had limited the scope of the proposed rules.
These had been set in many cases at a 1 million-plus threshold. Previously, those limitations had been one of the few ways that companies could determine whether they may be subject to ICTS restrictions.
That is now gone, so even companies with data on just a few U.S. persons can be targeted if the data is sensitive. The same is true for companies with just a few products or users among U.S. persons if they are deemed to present a significant security threat.
This reflects a similar, but even more discretionary, approach as compared to the U.S. Department of Justice‘s recently finalized “Bulk Sensitive Personal Data and U.S. Government-Related Data” regulations, which the National Security Division will administer.[2]
Broad Restrictive Authority
BIS no longer must use the “least restrictive means” in issuing ICTS prohibitions. Instead, the final rule states that “the Secretary will direct the means that the Secretary determines to be necessary to address the undue or unacceptable risk.”
So again, for parties looking for limitations on the government’s authority, keep looking (hint: there aren’t many).
Free Services and Technology Transfers
The ICTS office has underscored that even free services such as certain tax or antivirus products can be covered by these rules.
No financial transactions need to occur in order to trigger the ICTS restrictions, as some commenters had suggested. These rules can even cover technology transfers of various types, such as licensing deals and other partnerships, and even intracompany work.
Research, Testing, Standards Development and Other Nonsales Activity
In setting the scope of the term “ICTS transaction,” the government has declined to adopt any definition of the term “use” — for example, actual delivery of goods or services to U.S. customers.
Instead, seemingly any activity involving U.S. persons can trigger these rules, even unauthorized “misuses” of a product or technology.
U.S. and Non-U.S. Subsidiaries
The final rule states that, at least “in some cases, … foreign subsidiaries of U.S. companies or U.S. subsidiaries of foreign companies” may be targeted if they have the requisite nexus to a “foreign adversary.”
For a non-U.S. subsidiary of a U.S. company, this could be a simple as, according to the final rule, “being required to comply with the rules, laws, or other requirements of that foreign adversary.”
Use of Foreign Adversary Software Outside the U.S.
U.S. companies or individuals using software anywhere in the world can be subject to regulation under these rules, if there is a foreign adversary connection and a national security threat.
But the government did state that merely using software in a foreign adversary country would not trigger the rules if it was developed by a company that is not linked to a foreign adversary.
Software Development Collaboration
BIS has stated in the final rule that it can review software “if a U.S. person designed, developed, manufactured, or supplied [it] in collaboration with a foreign adversary-controlled entity” and if the government found that to present a national security risk.
Individuals From Foreign Adversary Countries
In a bit of good news (well, mixed news), the government has clarified that, for U.S. citizens or permanent residents, merely holding dual citizenship or residency in China or another so-called adversary country does not trigger these rules — as under U.S. export controls, discrimination against U.S. persons is not justifiable under these regulations and is to be avoided.
But the flip side is that any non-U.S. person, such as those in the U.S. on a visa or similar status, or third-country citizens and residents, may trigger this rule solely due to their Chinese or other adversary citizenship or residency.
That will present major challenges for the countless technology companies throughout the world that employ such individuals in key roles such as management and product development.
In the same vein, the agency stated in the final rule that “solely employing nationals of a foreign adversary country would not independently trigger an ICTS Transaction review,” unless there were “other indicia of ownership, control, or influence by a foreign adversary.” That’s cold comfort for companies with these individuals in key positions.
Due to the risk and uncertainty, companies should consider conducting a broader security review for certain key personnel, perhaps as part of an export controls screening and compliance process.
This review could be used to show the government that these individuals present no national security risk due to their roles in the company, and that the company’s products should not be subject to ICTS restrictions.
No Physical Presence or Physical Products Sold in the U.S.
For companies thinking they are in the clear because of a limited nexus to the U.S., think again. If your product is brought into the U.S. in any manner, even indirectly or purely electronically, you may be within the scope of these rules.
This applies not just to the developer or original equipment manufacturer, but potentially to anyone involved with the product or business: The final rule covers those engaged in “buying, selling, reselling, receiving, licensing, or acquiring ICTS, or otherwise doing or engaging in business involving the conveyance of ICTS.”
Macau Included
The final rule clarifies the seemingly obvious point that Macau will be treated as part of China.
Conclusion
The final rule illustrates the breadth and complexity of this emerging regulatory regime that BIS is managing.
While there are a few limitations on its scope that the final rule highlights, BIS retains sweeping authority under the ICTS program to regulate products and technologies linked to foreign adversaries.
[1] https://www.bis.gov/press-release/commerce-issues-final-rule-formalize-icts-program.
[2] Justice Department Issues Final Rule Addressing Threat Posed by Foreign Adversaries’ Access to Americans’ Sensitive Personal Data, Dec. 27, 2024, https://www.justice.gov/opa/pr/justice-department-issues-final-rule-addressing-threat-posed-foreign-adversaries-access.
Published in Law360 on January 22, 2025. © Copyright 2025, Portfolio Media, Inc., publisher of Law360. Reprinted here with permission.
In the first installment of this two-part article, state attorneys general across the U.S. took bold action in 2024 to address what they perceived as unlawful activities by corporations in several areas, including privacy and data security, financial transparency, children’s internet safety, and other overall consumer protection claims.
In 2025, we expect state attorneys general will navigate a new presidential administration while continuing to further regulate and police financial services, artificial intelligence, junk fees, and antitrust.
State attorneys general will fill the anticipated federal regulatory void in 2025.
On the campaign trail and since his election, President-elect Donald Trump committed that his second presidential administration would take a more hands-off approach to federal regulation — similar to his first term. Federal regulations regarding the environment, financial services and antitrust are the most likely candidates to either be rolled back or unenforced.
With new leaders at the helm of federal agencies who share Trump’s opinions, particular agencies, like the Consumer Financial Protection Bureau, the U.S. Environmental Protection Agency and the Federal Trade Commission, will seek to roll back or not enforce federal regulations deemed to be antibusiness.
A significant development in this regulatory shift is the proposed One Agency Act, which aims to reassign antitrust responsibilities from the FTC to the U.S. Department of Justice’s Antitrust Division. This move is expected to streamline antitrust enforcement under a single agency, reflecting the administration’s intent to reduce regulatory burdens on businesses. The consolidation is anticipated to create a more business-friendly environment by potentially reducing the number of antitrust investigations and enforcement actions.
Regardless of whether this bill passes into law, this legislation demonstrates Republicans’ focus on decreasing federal agency regulatory enforcement.
We expect state attorneys general to fill this regulatory void by initiating investigations into and litigation against corporations engaging in activities that might have attracted interest from federal regulators in the Biden administration.
During the annual three-day Capital Forum in December, former Oregon Attorney General Ellen Rosenblum spoke with CFPB Director Rohit Chopra, who not only highlighted the bureau’s recent actions, but called on state attorneys general to continue to take aggressive action against financial services.[1] We expect state attorneys general will answer this call through their traditional consumer protection authority, while also looking to pass new statutes that prohibit specific conduct.
State attorneys general have already started to send a message that their traditional authority to prosecute unfair and deceptive acts and practices statutes is broad enough to cover emerging technologies.
The Oregon Attorney General’s Office released AI guidance on Dec. 24 for businesses that warned that, even though Oregon does not have a specific AI law on the books yet, several “traditional” laws may be implicated as businesses deploy AI.[2] These include Oregon’s consumer protection statute; privacy statutes such as its comprehensive consumer privacy law, the Oregon Information Protection Act; and the state’s bias and discrimination law.
The announcement follows similar pronouncements and actions from state attorneys general over the past year, including Texas and Massachusetts. This trend of utilizing traditional enforcement actions to address rapid AI proliferation will continue as state attorneys general look to address AI in the absence of specific federal legislation.
We do expect that state attorneys general will seek to expand their tool kits by passing state legislation that accords with many of the rules and regulations pushed under the Biden administration, even if those same rules are rolled back. For instance, California and Minnesota recently passed junk fee laws with other states sure to follow, while a number of states have passed laws implicating social media platforms similar to rules, regulations and legislation that stalled at the federal level.
Multistate prosecutions will have a different flavor.
For decades, state attorneys general on both sides of the aisle have come together to bring multistate prosecutions against defendants whose alleged unlawful activities involve Americans across state lines.
The multistate process was designed for efficiency, requiring fewer resources than if all 56 state attorneys general, including Washington, D.C., and territories, were to independently address a specific consumer protection issue. The executive committee of a multistate prosecution shoulders this responsibility, making day-to-day decisions on behalf of the larger multistate group.
The multistate structure has yielded key settlements, with two notable examples being the 1990s tobacco litigation and the ongoing opioid litigation.[3] But we have started to see cracks in the multistate process and expect that it will begin to be used more by politically aligned state attorneys general.
Exacerbated by the opioid litigation, small states like West Virginia and New Mexico broke from the larger group because their state attorneys general did not feel their citizens’ needs were being met by the multistate process. On the flip side, California broke from a number of other ongoing multistate investigations because it believed that a settlement’s monetary allocation should be split between the states based solely on population.
In addition, some Republican state attorneys general have expressed discomfort with pursuing large monetary settlements that are simply paid to state coffers without an emphasis on consumer restitution.
While multistate investigations continue to proceed, we have seen more states willing to break off from large groups and prosecute actions on their own when the group’s strategy and philosophy do not sync with theirs. When this occurs, companies become less likely to agree to a multistate settlement that does not offer global peace, especially when such a settlement sets a floor — not a ceiling — on the expectations of separately investigating or litigating states.
We should expect to see an increase in multistate actions over the next four years. The polarization of attorneys general will likely result in Democratic attorneys general focusing on core areas like financial services, while Republican attorneys general may see an uptick in their enforcement trends related to diversity, equity and inclusion; environmental, social and governance issues; and companies sharing information with countries like China.
However, as we saw during the first Trump administration, states found ways to come together on bipartisan efforts, resulting in an uptick in enforcement activities. The Attorney General Alliance will continue its efforts to foster a cooperative bipartisan forum, focusing on issues such as human trafficking, organized retail crime and large technology companies.
State attorneys general are more willing to litigate — and increase their use of plaintiffs counsel as outside counsel.
The increased recognition, success and expanded statutory prescriptions of state attorneys general has resulted in a loop of growth, often allowing offices to beef up the number of attorneys in consumer and antitrust units, while also creating new units to take on data privacy, civil rights and environmental laws.
For instance, the Washington Attorney General’s Office’s consumer protection attorneys quadrupled under Attorney General Bob Ferguson’s tenure. Not only have state attorneys general grown in capacity, but their attorneys are often more willing to litigate if the attorney general believes the company is not addressing the office’s concerns.
Historically, plaintiffs firms represented states against companies in securities issues to protect state investments. The tobacco and opioid litigations opened the door to more areas of consumer protection, expanding the scope of cases where states might seek outside counsel.
While many state attorney general’s offices have grown, some may continue to have less than 10 consumer protection attorneys to assess and respond to thousands of consumer complaints. The latter group is more willing to retain outside counsel to supplement their capacity and take on the complex cases that require additional staffing. For instance, in the joint consumer protection lawsuits against Meta, Arkansas, Mississippi, New Hampshire, New Mexico, Nevada and Utah retained outside counsel to bring their respective litigation in state courts.
We have seen an increase in plaintiffs firms lobbying states for work, and given the need for state attorneys general to fill the regulatory void created by the Trump administration’s expected regulatory approach, and the expected increase in state attorneys general who decide to go it alone instead of joining multistate litigation, we expect certain state attorneys general may struggle to maintain adequate staffing and funding to support the litigation they commence.
For that reason, hiring outside counsel more frequently on a contingency basis would expand an attorney general’s litigation resources without requiring legislative appropriations.
Expect state attorneys general to focus on AI, financial services and hidden fees.
Turning to substantive areas, we expect state attorneys general to take an interest in financial services, AI, hidden fees — including drip pricing and junk fees — auto-renewal programs, and antitrust enforcement.
Financial Services
As federal scrutiny by the CFPB and FTC diminishes, state attorneys general are expected to increase their efforts to regulate financial services, ensuring that consumer rights are upheld and that any gaps left by federal agencies are effectively addressed. They are likely to focus on areas such as fintech partnerships, true lender issues and the recharacterization of noncredit products as credit.
Additionally, state attorneys general may collaborate with state banking regulators to ensure comprehensive oversight. Companies in the financial services industry should be proactive in engaging with state regulators, both offensively by educating them about their products, and defensively by preparing for potential investigations.
AI
In September, Texas Attorney General Ken Paxton secured what his office called a “first-of-its-kind” settlement with Pieces Technologies, an AI healthcare technology company, in State of Texas v. Pieces Technologies Inc., in the 191st District Court of Dallas County, Texas. Paxton’s office alleged the company made a series of false and misleading statements, including those regarding a series of metrics the company created regarding the accuracy and safety of its products.
We expect state attorneys general to follow in Paxton’s footsteps and target companies that make claims about AI capabilities or deploy algorithms that are perceived to disproportionately harm vulnerable populations. For example, AI-driven lending tools that perpetuate racial or socioeconomic biases could be investigated or prosecuted under existing antidiscrimination laws, while deceptive marketing of AI-powered products may be pursued under unfair and deceptive acts and practices statutes.
Hidden Fees and Automatic Renewal Contracts
A 2024 report by the White House’s National Economic Council highlighted that Americans spend more than $90 billion annually on junk fees, i.e., hidden fees, averaging over $650 per household.[4] These fees lead to widespread consumer frustration and are especially prevalent in banking, telecommunications, travel and entertainment.
We expect state attorneys general will continue to bring the fight to the state level if they want to ban junk fees.
Additionally, during the last several years, many states have adopted or expanded state automatic renewal contract laws, driven in large part by new subscription-based contracts sold in digital distribution and contracting channels. The two primary areas on which consumer protection is focused are (1) enrolling consumers in automatic renewal contracts in the first instance, and (2) inhibiting consumers’ easy disenrollment from automatic renewal contracts through what today are referred to as “dark patterns.”
California Attorney General Rob Bonta publicly stated his belief that businesses must make it as easy to cancel subscriptions as it is to sign up for them.[5] We expect many other states will take the same posture and actively seek opportunities in 2025 to investigate and reach settlements that reinforce this expectation.
Antitrust
In recent years, state attorneys general have increasingly taken independent antitrust enforcement actions, moving away from their historical role of allowing the DOJ or FTC to lead a joint antitrust litigation. This shift began due to concerns about reduced federal enforcement under the first Trump administration, and continued through the Biden administration, with states initiating successful lawsuits involving the Kroger-Albertsons merger[6] and the NCAA,[7] reflecting their growing autonomy and proactive stance.
Historically, antitrust actions have often taken place on a bipartisan level, with both Democratic and Republican attorneys general collaborating on significant cases. However, it is important to note the initiatives led by Republican attorneys general, such as actions related to ESG and private equity.
Over the last year, legislation has percolated across several states that would implement state-level premerger notification laws. These laws have varied from blanket notification requirements of all transactions that are reported to the DOJ and FTC and above certain monetary thresholds, to more narrowly tailored premerger notifications for transactions involving private equity firms acquiring healthcare companies. Thus far, most of these bills have failed to pass.
However, these bills are supported by many state attorneys general and are seen as a way to prevent anticompetitive effects.
In September, California Gov. Gavin Newsom vetoed A.B. 3129 — which would have authorized the California attorney general to veto private equity or hedge fund acquisitions of healthcare facilities or provider groups. We expect California and other state attorneys general to press their legislatures for greater oversight of transactions occurring in their states, especially transactions involving hospitals and other healthcare providers.
We also expect that state attorneys general will enhance their focus on businesses necessary for the continued growth of AI.
In December, a coalition of nine organizations sent a letter to the National Association of Attorneys General and members of the NAAG Antitrust Subcommittee and working group urging the states to initiate an antitrust enforcement action against a major player related to alleged anticompetitive actions related to monopolizing chip markets.[8] The DOJ and FTC are already investigating various players in the AI ecosystem — however, the states have not yet publicly launched similar probes.
That is likely to change in 2025.
Conclusion
While predicting the future is a fool’s errand, we are confident that state attorneys general will intensify their focus on areas such as financial services, AI, hidden fees and antitrust enforcement, particularly in light of anticipated federal regulatory rollbacks under the new Trump administration.
Additionally, the trend of politically aligned multistate actions and the increased use of outside counsel will shape the landscape of state-led litigation, reflecting a more proactive and resourceful approach to addressing emerging legal and regulatory challenges.
[1] https://www.regulatoryoversight.com/2024/12/leadership-changes-at-naag/.
[2] https://www.regulatoryoversight.com/2025/01/oregon-ag-rosenblum-issues-ai-guidance-for-businesses/.
[3] https://www.naag.org/our-work/naag-center-for-tobacco-and-public-health/the-master-settlement-agreement/.
[4] https://www.whitehouse.gov/cea/written-materials/2024/03/05/the-price-isnt-right-how-junk-fees-cost-consumers-and-undermine-competition/.
[5] https://oag.ca.gov/news/press-releases/attorney-general-bonta-supports-ftc%E2%80%99s-effort-facilitate-cancellation-unwanted#:~:text=California%20already%20has%20in%20place,includes%20the%20automatic%20renewal%20or.
[6] https://www.regulatoryoversight.com/2024/07/a-look-at-state-ags-supermarket-antitrust-enforcement-push/.
[7] https://www.regulatoryoversight.com/2024/05/florida-new-york-and-the-district-of-columbia-join-ncaa-antitrust-lawsuit/.
[8] https://www.documentcloud.org/documents/25463078-state-ag-nvidia-letter-12-18-24/.
While artificial intelligence (AI) in some form has existed for decades, generative AI, the ability of AI systems to create new content, has only recently exploded into the public domain and become a powerful force in the global economy. Generative AI provides myriad opportunities for businesses to improve products, processes, and analytics in an efficient and cost-effective manner. Naturally, a large contingent of companies has embraced this helpful technology; however, those that do must be aware of attendant pitfalls, including regulatory exposure.
Click here to read the full article in Journal of Internet Law.
Authors:
Troutman Pepper Locke: Tom Dwyer, Dan Sieck, Ethan Zook, and Emma Teman
Troutman Strategies: Lindsay Austin, Christopher Baxter, and Thomas Tilton
The only constant in Washington, D.C., is that power will periodically shift from one party to another, and back again. As a new administration and Congress begin to chart a course on a wide range of policies, it is important to understand how these changes will affect businesses and industries. In collaboration with our colleagues at Troutman Strategies, the government relations arm of Troutman Pepper Locke, the authors have put together this alert regarding potential policy changes and how they may impact M&A and venture capital (VC) transactions.
The policy goals expressed by the incoming administration — including lower corporate taxes, less government regulation, and greater government efficiency — could become tailwinds encouraging more VC investment and M&A deal flow in certain industries. Additionally, the new administration has stated that they aim to reverse some existing policies they believe to be overly burdensome to business. A unified Republican Congress may also utilize a legislative tool, the Congressional Review Act (CRA), to reverse certain regulations that fall within a procedurally specified window. Here’s what these authors expect in the VC and M&A markets during this new administration:
M&A Market Trends
Reduced Regulatory Compliance Costs
The new administration has characterized the current domestic regulatory scheme as one that limits innovation and economic growth. Their campaign promise to remove 10 regulations for every one new regulation created — a promise more ambitious than President Trump’s two-to-one goal during his first term — could translate to significant savings for companies. With reduced regulatory compliance costs, companies will have more resources to devote to acquiring assets. Specifically, any changes to the antitrust regulatory landscape could greatly improve the rate at which M&A deals close when compared to the rigorous merger review process initiated under the Biden-Harris administration. It is likely that the 2023 Merger Guidelines may be overhauled or simplified. Moreover, private equity-backed deals may face less scrutiny, potentially allowing these transactions to close more quickly and at a lower cost.
In this environment, the U.S. Department of Justice (DOJ) and the Federal Trade Commission (FTC) may be more flexible in negotiating structural remedies, like divestitures, which would allow mergers to close on the condition that certain modifications are made. We expect that with new guidance the FTC will focus on consumer welfare policies rather than using an antitrust framework when reviewing how a transaction will affect the market. The Trump-Vance administration just appointed FTC commissioner Andrew Ferguson as the new chair, replacing outgoing Chair Lina Khan. Ferguson, whose commissioner seat was initially approved by Congress in early 2024, has been vocal about reconfiguring the agency’s focus toward Big Tech and artificial intelligence (AI).
We may also see a growing dichotomy within the GOP between the more traditional, pro-business Republicans, and the increasingly populist view of suspicion toward Big Tech and anticompetitive practices. Vice President JD Vance, for example, fits well within this new GOP populist narrative. Despite being a former tech investor and venture capitalist, Vance has criticized Big Tech, supported some of the Biden administration’s related policies, and has praised the previous FTC Chair. For the FTC, Trump has nominated Gail Slater as assistant attorney general for antitrust, Ferguson as chair, and Mark Meador as a commissioner. These selections reinforce the view that the new administration may be likely to take a more aggressive approach than traditional Republican presidents, but their primary focus will likely be on big tech. Other shifts in attitude in the consideration of M&A may include a greater valuation of behavioral remedies and the effects a merger may have on consumer welfare. We expect a forthcoming willingness to work with companies involved in M&A rather than protracted legal battles.
Growth Opportunities Funded by Tax Savings
The Trump-Vance administration’s promises of a reduced corporate tax rate will assumingly increase corporate profits and provide more capital to finance acquisitions and other growth opportunities. M&A activity increased shortly after Trump’s 2017 Tax Cuts and Jobs Act (TCJA) reduced the corporate tax rate from 35% to 21%. In addition to decreasing the corporate tax rate, the first Trump administration sought to repatriate overseas capital by providing a lower tax rate on profits held abroad if the profits are brought back to the U.S. It is likely that the Trump-Vance administration will initiate similar policies so that potential tax savings can be reinvested by companies to pursue growth initiatives. Regardless of the new administration’s stance on taxes, it will be up to Congress to extend the tax rate cuts under the TCJA or to alter them further. Congressional leaders plan to use a process known as budget reconciliation, which allows the Senate to circumvent the filibuster, to accomplish this goal. The GOP will potentially take two passes at the budget reconciliation process; the first to enact policies focusing on border, defense, and energy, and the second to pass tax policy and other priorities.
A Return to Traditional Energy Sources
The new administration has promised to “unleash an oil boom” early in this presidential term, focusing on domestic energy sources like solar, wind, and nuclear, which aligns with the administration’s overall desire to create more employment opportunities for American workers and reduce independence on foreign imports. Trump’s approach to “unleashing American energy” can best described as an “all of the above approach” — where there will be simultaneous support for oil and natural gas policies as well as other forms of energy like solar, geothermal, and nuclear.
If the Trump-Vance administration seeks to repeal President Biden’s Inflation Reduction Act (IRA) — an initiative that provides $390 billion over 10 years in tax breaks, grants, and subsidies for clean energy projects, such as wind and solar power or electric vehicle battery production — we could see a significant source of capital rerouted to more traditional renewable energy sources like oil and gas or nuclear energy. Unsurprisingly, we would expect M&A activity to follow the capital. As previously mentioned, Congress is expected to use the budget reconciliation process to implement energy policy such as speeding up the process for acquiring permits and environmental reviews and expanding federal land leasing for fossil fuels. However, Congress may also attempt to use budget reconciliation to repeal portions of the IRA, which includes well-established and favored tax credits and benefits.
VC Updates
Increased Emphasis on Domestic Industries
The Trump-Vance administration has emphasized the importance of entrepreneurship as a driving force for economic growth. The first Trump administration sought to reduce many operational burdens startups face by simplifying the regulatory landscape, offering tax cuts, and reducing the overall risk of failure. Increased savings in these areas should allow startups to allocate their resources more efficiently and accelerate innovation efforts by building and scaling their companies. It is likely that the new administration will continue these policies in this second term. Increased efficiency means investors should realize a return on their investments sooner, thus spurring more capital raising and deployment of raised funds.
Consistent with its overall deregulation approach, the Trump-Vance administration plans to repeal the 2023 Biden Executive Order on AI in order to allow AI companies to self-regulate. The new administration has indicated that AI will play a significant role in his focus on U.S.-China competition, especially regarding protectionist measures designed to safeguard U.S. innovations in microchip technology. This administration may also collaborate with domestic AI companies involved in developing defense technologies. The appointment of David Sacks as the “AI and crypto czar” further emphasizes the expected shift the administration will take toward innovation and industry collaboration. Still, there could be increased market uncertainty and legal risk without the same level of government oversight and intervention in the AI space.
Investors have indicated that they foresee a significant boost in technological integration within U.S. transportation and military systems as the new administration rolls back specific regulations intended to serve as human safeguards. This deregulation is expected to pave the way for advancements in flight optimization technology and a substantial increase in drone usage. The anticipated changes are likely to enhance efficiency, improve operational capabilities, and drive innovation in these sectors, which are ripe for VC investment.
There will also be increased emphasis on developing a dynamic commercial space industry. In his first term, Trump revived the National Space Council and created both the Space Force and the Artemis program as part of an initiative to reestablish U.S. dominance in space exploration. Given Elon Musk’s involvement in the incoming administration, these efforts are likely to continue.
Embracing Digital Assets to Foster Innovation
The administration has announced a series of initiatives aimed at making the U.S. the “Crypto Capital of the Planet” by fostering innovation in the cryptocurrency industry. Some key initiatives include potentially creating a national Bitcoin reserve and forming a Crypto Advisory Council led by industry experts like Musk and Sacks. Sacks, in his role as AI and crypto czar, is expected to operate as the go-between for the White House, Securities and Exchange Commission (SEC), and Commodity Futures Trading Commission (CFTC), building a new regulatory and legislative framework for crypto. Sacks previously supported the FIT21 bill the House passed last year, the first major piece of crypto legislation to pass through the House or Senate; the bill is aimed at providing regulatory clarity and protections needed for the crypto ecosystem.
The nomination of Paul Atkins as the new chair of the SEC demonstrates the incoming administration’s commitment to embracing cryptocurrencies and other digital assets as part of its strategy to stimulate the U.S. capital markets. Atkins, a former SEC commissioner, is highly regarded among cryptocurrency advocates as someone who will provide more regulatory clarity for cryptocurrencies and other digital assets. Industry figures are hopeful that deregulation efforts will make it easier for cryptocurrency companies to access traditional banking services. Those in the cryptocurrency space can expect a departure from former SEC Chair Gary Gensler’s “regulation by enforcement” approach, as Atkins has advocated for updated rules regarding custody of digital assets. Gensler’s regulation by enforcement approach has been criticized as creating a mass sense of confusion because many of the cases brought by the SEC tested the scope of the agency’s authority over this relatively new asset.
Under new leadership, the SEC and the CFTC will first have to decide whether digital assets are securities or commodities and then create a separate regulatory framework to be implemented. While a crypto-advocate like Atkins may be hesitant to expand the SEC’s scope, enforcement actions will continue and likely focus on fraud and clear instances of bad activity — such as touting and failure to register. Ultimately, if the new administration is able to deliver regulatory clarity, then we expect digital assets to attract increased VC attention in 2025.
Reduced Regulatory Oversight Invites Greater VC Funding
VC and private equity firms are optimistic about the return of a favorable environment for investment and consolidation opportunities. The previous Trump administration implemented significant deregulation measures in favor of the VC and private equity sectors. Additionally, that administration emphasized private investment as a driver of economic growth and as such retained the carried interest tax rate which allowed VC and private equity firms to pay a reduced tax rate on qualified earnings. The Trump-Vance administration will likely implement similar policies to incentivize repatriating capital and private investment in domestic businesses.
Caveats – Tech and Health Care Beware
Although M&A activity is expected to increase in certain sectors, the incoming administration’s promise to overhaul the current regulatory landscape also creates many uncertainties — specifically for those in the technology and health care industries. Trump’s previous administration created the Technology Enforcement Division — a task force focused on reviewing unreported acquisitions by the largest technology companies — and filed complaints against Google and Meta alleging anti-competitive behavior. Additionally, the FTC challenged six health care transactions during that administration, four of which involved providers.
Recent nominations demonstrate the administration’s continued commitment to restraining Big Tech and health care. Promoting Ferguson to chair the FTC allows the Trump-Vance administration to nominate Mark Meador to fill the vacant fifth commissioner seat. Meador has previously served as an antitrust enforcer in both the DOJ’s antitrust division and at the FTC. More recently, he represented a media company in a case against Google, alleging Google’s tactics monopolize vital advertising technology.
Health care policy broadly will see dramatic shifts in both leadership and focus with full Republican control of Congress and the administration. Not only did the committees with central health care jurisdiction get new leadership, but the change in administration also fundamentally alters how health care policy is made and implemented through federal agencies. Senator Bill Cassidy (R-LA) and Congressman Brett Guthrie (R-KY), as new chairman of the Senate Health Education Labor and Pensions and House Energy & Commerce Committees, respectively, are responsible for shaping the health care agenda, and Robert F. Kennedy Jr.’s “Make America Healthy Again” platform. Kennedy’s appointment as the secretary of Health and Human Services presents future uncertainty given his views on vaccines, the food and beverage industry, and America’s obesity and chronic disease epidemics.
Relatedly, increased concerns over the interplay of technology and national security continue to present obstacles for buyers and sellers alike. This is evidenced by Biden’s recent blocking of the $14.9 billion acquisition of U.S. Steel by Japan’s Nippon Steel. Trump also promised to block this acquisition, as well as push for the Department of Commerce’s interim rules restricting exports of semiconductor manufacturing equipment. In particular, some startups may be negatively impacted by the incoming administration’s threat of tariffs and stricter immigration policies as many startups may rely on recruiting global talent and imported raw materials. Moreover, the threat of implementing tariffs could increase inflation and thus negatively impact dealmaking and related financing. Foreign investment in the U.S. may stall if tensions rise, affecting cross-border transactions as well. While the Committee on Foreign Investment in the U.S. (CFIUS) has mechanisms in place to review foreign investments for national security concerns, the antitrust agencies may give greater attention to acquisitions of U.S. businesses by foreign purchasers, ultimately further delaying some transactions.
Conclusion
Overall, the promise of deregulation and lower corporate taxes has great potential to stimulate growth opportunities for businesses involved in M&A and VC transactions. Decreased compliance costs and a simplified regulatory landscape free up capital for businesses to pursue acquisitions in both the domestic and international markets. Coupled with increased domestic investment in innovative sectors such as AI, cryptocurrencies, and technology, the environment likely becomes more favorable for many investors. However, in some ways it is too early to tell how markets will respond to certain programs and policy proposals, for example, the tariffs Trump has promised to impose on many countries. Those in the health care and technology sectors can expect continued scrutiny — at both the federal and state level with state attorneys general stepping in to fill in any perceived gaps created by the Trump-Vance administration’s efforts to reorganize the current regulatory landscape.
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
Behind the Scenes: The Role of Senior Staff in AG Offices
By Stephen C. Piepgrass and Chuck Slemp
In this episode of Regulatory Oversight, Chuck Slemp welcomes Lacey Mase, the chief deputy attorney general (AG) of Tennessee, to explore the inner workings of an AG’s office and the pivotal role of its senior staff in driving legal and policy outcomes.
The Growing Role of State AGs in AI Regulatory & Enforcement Issues
By Brett Ashton Mason, Christopher Carlson, and Michael Yaghi
In this installment of The Good Bot, Brett Mason is joined by partners Chris Carlson and Michael Yaghi to discuss the growing role of state attorneys general in regulatory and enforcement issues around AI. They discuss the recent first-of-its-kind settlement that gives a first glimpse into what state AGs will be focusing on regarding companies’ use of this novel technology.
State AG Updates
Missouri AG Announces New Rule for Big Tech
By Troutman Pepper Locke State Attorneys General Team and Jeff Johnson
Missouri’s attorney general (AG) announced on X.com (formerly Twitter) that he is “issuing a rule requiring Big Tech to guarantee algorithmic choice for social media users.” [X.com post (January 17, 2025, roughly 3:35 p.m. EST)] He intends to use his authority “under consumer protection law,” known as the Missouri Merchandising Practices Act in that state, “to ensure Big Tech companies are transparent about the algorithms they use and offer consumers the option to select alternatives.” [x.com post] The Missouri AG touts this rule as the “first of its kind” in an “effort to protect free speech and safeguard consumers from censorship.”
New Jersey AG Platkin Announces New Guidance on AI Use
By Troutman Pepper Locke State Attorneys General Team
On January 9, New Jersey Attorney General (AG) Matthew J. Platkin and the Division on Civil Rights (DCR) launched a new Civil Rights and Technology Initiative aimed at addressing the potential for discrimination and bias associated with artificial intelligence (AI) and other decision-making technologies. The announcement is one of many recent examples of AG’s leading the development of AI regulation. The New Jersey initiative is informed by recommendations from Governor Phil Murphy’s Artificial Intelligence Task Force, which emphasized the need for public education on bias and discrimination related to AI deployment.
West Virginia AG Reaches $17M Settlement With Pfizer and Ranbaxy Over Antitrust and Consumer Protection Violation Claims
By Troutman Pepper Locke State Attorneys General Team, Melissa O’Donnell, and Kyara Rivera Rivera
West Virginia Attorney General (AG) Patrick Morrisey announced a total $17 million settlement agreement with pharmaceutical companies, Pfizer and Ranbaxy after more than a decade of litigation regarding the companies’ alleged “pay-for-delay” antitrust violations related to the cholesterol drug, Lipitor.
AG of the Week
William Tong, Connecticut
William Tong is the 25th AG to serve Connecticut. He first took office in 2019, becoming the first Chinese American to be elected AG nationwide, and is currently serving his second term.
Under Tong’s leadership, Connecticut resolved two of the most challenging, longest-running state lawsuits — committing to historic investments in educational opportunities for Hartford students to end more than 30 years of litigation and court oversight in the Sheff v. O’Neill case, and ending court oversight of the Department of Children and Families following documented, significant improvement on behalf of our state’s most vulnerable children.
Tong was recently unanimously elected to serve as president-elect of the National Association of Attorneys General (NAAG) in 2025, before assuming the role of NAAG president in 2026.
Before his tenure as AG, Tong practiced for 18 years as a litigator in both state and federal courts, first at Simpson Thacher & Bartlett LLP in New York City and then at Finn Dixon & Herling LLP in Stamford. He served for 12 years as a state representative in the Connecticut General Assembly, where he was House chairman of the Judiciary Committee as well as the Banking Committee. In 2006, he became the first Asian American elected to any state office in Connecticut history.
Connecticut AG in the News:
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On January 17, Tong led a coalition of 18 AGs filing an amicus brief in the U.S. Court of Appeals for the D.C. Circuit defending a U.S. Environmental Protection Agency rule establishing nationwide drinking water standards for certain per- and polyfluoroalkyl (PFAS) “forever chemicals” under the Safe Drinking Water Act.
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On January 16, Tong announced a coordinate crackdown on bootleg disposable e-cigarettes used by youth.
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Last month, Tong was unanimously elected president-elect of the National Association of Attorneys General (NAAG).
Upcoming AG Events
- January: RAGA | Winter National Meeting | Austin, TX
- February: DAGA | Los Angeles Policy Conference | Los Angeles, CA
- February: RAGA | Victory Fund Ski Retreat | Big Sky, MT
For more on upcoming AG Events, click here.
On Tuesday, President Trump radically changed the legal landscape for federal contractors when he revoked an executive order that had been in effect for nearly 60 years. Executive Order 11246, issued by President Johnson in 1965, prohibited federal contractors and subcontractors from discriminating against employees and applicants on the basis of their race, color, religion, sex, or national origin. It also required federal contractors to take affirmative action to employ and advance in employment qualified women and minorities. Trump issued an order on January 21 titled “Ending Illegal Discrimination and Restoring Merit-Based Opportunity,” which revokes Executive Order 11246 and related executive orders (including one that added sexual orientation and gender identity to the list of protected classes). This action will significantly impact federal contractors and subcontractors, who will be relieved of some (but not all) of their obligations under the federal contract compliance programs.
What Does Trump’s Executive Order Say?
Trump asserts that he issued the executive order to end “illegal preferences and discrimination.” The executive order he signed on January 21 purports to do this in several ways that will directly impact private companies, especially those that are federal contractors or subcontractors:
- Revocation of Executive Order 11246: Executive Order 11246 is principally known for requiring covered federal contractors and subcontractors to develop affirmative action plans if they have at least 50 employees and more than $50,000 in contracts. However, Executive Order 11246 contains a number of additional requirements, including language that must be used in a job posting, equal opportunity clauses to be included in covered subcontracts, and notices to be posted. All of these requirements are now nullified, given the revocation of Executive Order 11246. Under Trump’s new order, contractors may continue to comply with the regulatory scheme under Executive Order 11246 for a period of 90 days (i.e., until April 21).
- Limiting the Powers of the OFCCP: The Office of Federal Contract Compliance Programs (OFCCP) has been responsible for enforcing the federal contract compliance programs, including Executive Order 11246. But Trump’s new order directs the OFCCP to immediately cease (A) promoting “diversity,” (B) holding federal contractors and subcontractors responsible for promoting “affirmative action,” and (C) allowing or encouraging federal contractors and subcontractors to “engage in workforce balancing based on race, color, sex, sexual preference, religion, or national origin.” Thus, we expect that the OFCCP will immediately stop its investigation of complaints and its audits of contractors’ compliance with Executive Order 11246 (but may proceed with investigations and complaints relating to requirements under other laws, as explained below).
- Requiring Contractors to Affirm They Are Not Operating DEI Programs That Violate Anti-Discrimination Laws: Under Trump’s new executive order, the head of every federal agency is required to include requirements in every contract or grant award that the federal contractor or grant recipient “certify that it does not operate any programs promoting DEI that violate any applicable Federal anti-discrimination laws.” This requirement will likely come into play when a new contract is awarded, but also when a contract is revised or renewed. Presumably, most companies have already evaluated their diversity, equity, and inclusion (DEI) programs to ensure compliance with applicable laws, but it is likely that Trump’s administration will take a more expansive view of the DEI programs that are prohibited under the law. As a result, companies wishing to enter into or renew contracts with the federal government will have to weigh the benefit of those contracts against the benefit provided by their DEI programs, and consider the consequences of a determination by the administration that their DEI programs violate the law. It is unclear what penalties might be imposed if such a violation is found, but we expect guidance to be provided on that point.
- Encouraging the Private Sector to End DEI Programs. While the president cannot directly prohibit private companies that are not federal contractors from developing DEI programs, Trump’s new order seeks to discourage such programs by asking each federal agency to recommend ways his administration can end DEI initiatives. In addition, each agency is directed to identify up to nine public companies, nonprofits, foundations, associations, or universities that the administration should consider targeting in a compliance investigation. This part of the executive order could impact many private companies (not just federal contractors), but the impact of this provision will not be immediate. Thus, companies may wish to reevaluate their DEI programs in light of the more hostile environment for such programs under the Trump administration, to determine whether they wish to make any changes to such programs.
Are There Other Changes Federal Contractors Should Be Aware Of?
In addition to revoking Executive Order 11246, Trump also revoked Executive Order 14055 governing the nondisplacement of workers under service contracts.
What Federal Contractor Obligations Are Left Unchanged?
It is important that federal contractors realize that Trump’s January 21 order only affected one of the three main laws mandating affirmative action for federal contractors. As explained above, Executive Order 11246 required most federal contractors to develop and maintain an affirmative action plan for the benefit of women and racial/ethnic minorities. However, there are two other laws that require many federal contractors to develop and maintain affirmative action plans benefiting disabled employees and veterans. The Rehabilitation Act prohibits discrimination and requires affirmative action for disabled employees, and the Vietnam Era Veterans Employment and Reemployment Rights Act (VEVRAA) prohibits discrimination and requires affirmative action for certain types of veterans, including disabled veterans, recently separated veterans, Armed Forces service medal veterans, and active duty wartime or campaign badge veterans. Trump’s order only revoked Executive Order 11246 and not the Rehabilitation Act and VEVRAA. Consequently, federal contractors remain subject to the requirements that they have affirmative action plans for disabled employees and veterans (provided that the contractor meets certain employee and contract value thresholds). Moreover, the OFCCP will continue to enforce all of the requirements of the Rehabilitation Act and VEVRAA, including both affirmative action plans, self-identification processes, job-posting requirements, and reporting requirements.
Federal contractors also currently remain subject to other executive orders that govern minimum wage, drug-free workplaces, E-Verify, pay transparency, and paid sick leave.
If you have any questions about Trump’s January 21 executive order, please contact a member of Troutman Pepper Locke’s Labor + Employment practice group.
On January 15, the Treasury Department (Treasury) and the Internal Revenue Service (IRS) published final regulations providing further guidance on the clean electricity production credit under Section 45Y and the clean electricity investment credit under Section 48E. These final regulations follow the passage of the Inflation Reduction Act of 2022 (IRA) and the publication of proposed regulations under Sections 45Y and 48E.
The final regulations are effective January 15, the date of their publication in the Federal Register. They generally apply to qualified facilities and energy storage technologies (ESTs) placed in service after December 31, 2024, and during a taxable year ending on or after January 15, 2025, subject to later dates applicable to certain prevailing wage and apprenticeship (PWA) requirements.
Overview
Readers who want just the highlights can focus on the following summary. Subsequent sections discuss each of these items in greater detail.
- GHG Emissions. Section 45Y and Section 48E require that the greenhouse gas (GHG) emissions rate of a qualified facility not be greater than zero and provide detailed rules for measuring that rate. The final regulations specify that the following facilities have a GHG emissions rate that is not greater than zero for any year: wind, hydropower, marine and hydrokinetic, solar, geothermal, nuclear fission, fusion energy, and waste energy recovery property that derives energy from another source specified in this list.
- Units and Integral Parts. Each part of a qualified facility or EST is either a “unit” or an “integral part”. The framework has significant implications in connection with the ownership rules, the rules related to retrofitted property, and Section 48E qualification for future capital improvements.
- Facility-by-Facility. Unlike Section 48 as amended by the IRA, Sections 45Y and 48E do not include the concept of an “energy project”. Instead, Sections 45Y and 48E generally utilize a facility-by-facility approach, applying credit eligibility and the increased credit amounts at the level of a qualified facility or EST rather than to an energy project as a whole. Treasury and the IRS specifically rejected requests to allow for the combination of qualified facilities and ESTs.
- Retrofitted Property. The “80/20 Rule” continues to determine whether a retrofitted unit qualifies as originally placed in service even if it contains some used components of property. As a result, the addition of new property to a unit is not eligible for a credit under Section 45Y or 48E if the 80/20 Rule is not met, unless the Incremental Production Rule is met.
- Incremental Production Rule. Under the Incremental Production Rule, a qualified facility includes new units and additions of capacity placed in service after December 31, 2024, in connection with a facility that was placed in service before January 1, 2025, and otherwise satisfies the definition of a qualified facility, but only to the extent of the increased amount of electricity produced at the facility by reason of such new unit or addition of capacity. To satisfy the rule, a new unit or an addition of capacity requires the addition or replacement of components of property (for purposes of Section 45Y) or of qualified property (for purposes of Section 48E).
- Biogas. There is no Section 48E credit for anaerobic digester and gas conditioning components because they are not part of a qualified facility.
- EST. Certain modifications of an EST are eligible for the Section 48E credit if the nameplate capacity is increased by 5kWh or more. The increase in nameplate capacity is equal to the difference between nameplate capacity immediately after the modification and nameplate capacity immediately before the modification, not taking into account potential degradation of the EST before its modification. The final regulations do not specify how to calculate the nameplate capacity for these purposes.
- Incremental Cost Rule. For purposes of the Section 48E credit, if a component of qualified property of a qualified facility or component of property of an EST is also used for a purpose other than the intended function of the qualified facility or EST, only the incremental cost of such component is included in the eligible basis. The incremental cost is the excess of the total cost of a component over the amount that would have been expended for the component if the component were not used for a qualifying purpose. This could have significant implications for rooftop and carport solar facilities.
- Qualified Interconnection Property (QIP). Consistent with the Section 48 regulations, the 5MW limitation for QIP is measured at the level of the unit of qualified facility rather than the entire project. QIP is not subject to the PWA requirements or the requirements for the bonus amounts. Section 48E credits are not available for QIP allocable to ESTs.
- Ownership. A taxpayer must directly own at least a fractional interest in the entire unit of a qualified facility or EST for a Section 48E credit to be determined with respect to such taxpayer’s interest. An integral part is eligible for the Section 48E credit only if it is owned by an owner of a unit of qualified facility or EST.
- PWA 1MW Exclusion. The final regulations apply rules similar to the Section 48 regulations to determinate whether a qualified facility or EST is exempt from the PWA requirements by virtue of having a nameplate capacity of less than 1MW. However, under an aggregation rule, if a qualified facility or EST has “integrated operations” with one or more other qualified facilities or ESTs, as applicable, then the aggregate nameplate capacity of the qualified facilities or ESTs, as applicable, is used for purposes of determining whether the 1MW exception applies.
Analysis
1. Overview of Credits
a. 45Y
The amount of the Section 45Y credit for any year is the product of the applicable amount and the kWh of electricity that is produced by the taxpayer at a qualified facility and either (i) sold by the taxpayer to an unrelated person during the year or (ii) in the case of a qualified facility which is equipped with a metering device which is owned and operated by an unrelated person, sold, consumed, or stored by the taxpayer during the taxable year. The applicable amount is either the base amount of 0.3 cents or the alternative amount of 1.5 cents. The alternative amount applies if a qualified facility (1) has a maximum net output of less than 1MW AC, (2) began construction before January 29, 2023, or (3) meets the PWA requirements. The credit amounts are annually adjusted for inflation. The credit amount is increased by 10% if a qualified facility is in an energy community and an additional 10% if the domestic content requirements are met. A facility is treated as a qualified facility during the 10-year period beginning on the date the qualified facility is originally placed in service.
b. 48E
The Section 48E credit is an amount equal to the applicable percentage of the qualified investment with respect to any qualified facility and any EST. The applicable percentage is either the base rate of 6% or the alternative rate of 30%. The alternative rate of 30% applies to any qualified facility or EST (1) with a net output of less than 1MW AC, (2) the construction of which began before January 29, 2023, or (3) that meets the PWA requirements. The applicable percentage is increased by 2% (for the base rate) or 10% (for the alternative rate) if a qualified facility or EST is placed in service in an energy community and an additional 2% or 10%, as the case may be, if the domestic content requirements are satisfied with respect to a qualified facility or EST.
The qualified investment with respect to any qualified facility for any taxable year is the sum of (i) the basis of any qualified property placed in service by the taxpayer during such taxable year that is part of a qualified facility and (ii) the amount of certain expenditures for qualified interconnection property. Qualified property is property that meets all the following requirements: (i) the property is tangible personal property or other tangible property (not including a building or its structural components), but only if such other tangible property is used as an integral part of the qualified facility; (ii) depreciation (or amortization in lieu of depreciation) is allowable with respect to the property; and (iii) either the construction, reconstruction, or erection of the property is completed by the taxpayer or the taxpayer acquires the property if the original use of the property commences with the taxpayer. Qualified interconnection property is discussed more fully below.
The qualified investment with respect to EST for any taxable year is the basis of any EST placed in service by the taxpayer during such taxable year.
2. Coordination With Other Credits
The final regulations confirm that, when a facility qualifies for more than one credit, a taxpayer generally can claim only one credit but can choose which one to claim. For instance, a solar project that began construction before 2025 and is placed in service in 2025 could qualify for credits under Sections 45, 45Y, 48, and 48E; the taxpayer could choose which one of the four credits to claim. The final regulations provide that the term “qualified facility,” for purposes of Sections 45Y and 48E, does not include any facility for which a credit determined under Sections 45, 45J, 45Q, 45U, 45Y (solely for purposes of Section 48E) 48, 48A, or 48E (solely for purposes of 45Y) is allowed under Section 38 of the Code for the taxable year or any prior taxable year. The preamble to the final regulations further clarifies that a taxpayer may generally claim a Section 45Y or 48E credit for a qualified facility that is co-located with another facility, irrespective of any credit that the co-located facility claimed.
3. Certain Topics Relating to Qualified Facilities Under Sections 45Y and 48E
a. Qualified Facility – General
The concept of the “qualified facility” is fundamental to both the Section 45Y and 48E credits. A qualified facility is generally defined as a facility (1) which is used for the generation of electricity, (2) which is placed in service after December 31, 2024, and (3) for which the GHG emissions rate (for the Section 45Y credit) or anticipated GHG emissions rate (for the Section 48E credit) is not greater than zero.
The final regulations specify that the following facilities have a GHG emissions rate that is not greater than zero: wind, hydropower, marine and hydrokinetic, solar, geothermal, nuclear fission, fusion energy, and waste energy recover property that derives energy from another source specified in this list. The final regulations provide detailed rules for measuring the GHG emissions rates for other facilities; an examination of these rules is beyond the scope of this client alert. Additionally, taxpayers may rely on the annual table published by the IRS that sets forth the GHG emissions rates for certain types or categories of facilities that is in effect as of the date a facility began construction to determine a facility’s emissions rate. The initial table was published in Revenue Procedure 2025-14.
b. Qualified Facility – Units and Integral Parts
A qualified facility includes a “unit of qualified facility,” as well as property owned by the taxpayer that is an “integral part” of the qualified facility. A unit of qualified facility includes all functionally interdependent components of property owned by the taxpayer that are operating together and that can operate apart from other property to generate electricity. Components of property are functionally interdependent if the placing in service of each of the components is dependent upon the placing in service of each of the other components to produce electricity.
A component of property owned by a taxpayer is an integral part of a qualified facility if it is used directly in the intended function of the qualified facility and is essential to the completeness of such function. For example, power conditioning equipment and transfer equipment are integral parts of a qualified facility. Power conditioning equipment includes transformers, inverters, and converters, which modify the characteristics of electricity into a form suitable for use, transmission, or distribution, plus parts related to the functioning or protection of power conditioning equipment (including switches, circuit breakers, arrestors, and hardware and software used to monitor, operate, and protect power conditioning equipment). Transfer equipment includes wires, cables, and combiner boxes used to aggregate energy generated by components of a qualified facility, and equipment that alters voltage in order to permit transfer to a transmission and distribution line.
- The rules regarding units and integral parts closely follow the corresponding rules from the final regulations under Section 48. As they function in the ownership context (discussed below), these concepts create additional hurdles that taxpayers must clear to claim the Section 45Y credit or Section 48E credit.
- The rules regarding units and integral parts create a disconnect between the definitions of “qualified facility” under Section 45 and Section 45Y. A Section 45 qualified facility is a Section 45Y unit of qualified facility, but a Section 45 qualified facility does not include Section 45Y integral parts. For instance, a wind turbine and its tower and foundation comprise a Section 45 qualified facility and presumably comprise a Section 45Y unit of qualified facility. However, the Section 45Y qualified facility would include, but the Section 45 qualified facility would not include, integral parts. This will have implications for the application of various qualification requirements (e.g., PWA, domestic content, etc.).
The preamble clarifies that an EST cannot be part of a unit of qualified facility under either the integral part or interdependence rules for purposes of Section 48E. The preamble further confirms that (1) an EST is eligible for the Section 48E credit if it satisfies the requirements of Section 48E, even if the EST is co-located with a qualified facility that has claimed the Section 45 or 45Y credits, (2) assuming all statutory and regulatory requirements are satisfied, a qualified facility owned by one taxpayer and an EST owned by another taxpayer may each be eligible for a separate Section 48E credit, and (3) from the perspective of credit eligibility, EST is not an integral part of a qualified facility.
c. Facility-by-Facility Approach
Unlike Section 48 as amended by the IRA, Sections 45Y and 48E do not include the concept of an “energy project”. Instead, Sections 45Y and 48E generally utilize a facility-by-facility approach, applying credit eligibility and the increased credit amounts at the level of a qualified facility or EST rather than to an energy project as a whole. Treasury and the IRS specifically rejected requests to allow for the combination of qualified facilities, including for the application of the PWA, domestic content, and energy community requirements.
- This final rule is a departure from the final regulations under Section 48, which apply a mandatory aggregation of energy properties in an “energy project” if certain conditions are met. Challenges could arise in negotiating PWA requirements and related substantiation with contractors and OEM providers that perform construction, alteration, and repair with respect to multiple qualified facilities or ESTs.
- As a result of the separate treatment, a taxpayer will need to separately register each creditable property for purposes of making Section 6418 credit transfer elections.
d. Facilities Used for the Generation of Electricity
Sections 45Y and 48E require that, for a facility to constitute a qualified facility, the facility must be used for the generation of electricity. The final regulations clarify that, for a facility to satisfy this electricity generation requirement, the facility must be a net generator of electricity, taking into account any electricity consumed by the facility.
e. Credit Phase-Out
The Section 45Y and 48E credits are subject to phase-out for qualified facilities or ESTs the construction of which begins during the first calendar year after the “applicable year”. Under the phase-out rule, the credit allowed is equal to the product of the otherwise allowable credit and the phase-out percentage. The phase-out percentage is 100% if construction begins during the first calendar year after the applicable year and steps down 25% each year thereafter until it reaches zero.
The applicable year is the later of 2032 and the calendar year in which the Secretary determines that the annual GHG emissions from the production of electricity in the United States are equal to or less than 25% of the annual GHG emissions from the production of electricity in the United States for calendar year 2022. The final regulations specify the relevant data sources and methodology for the determination.
- Given the dramatic reduction in GHG emissions required for the phase-out, it seems unlikely that the phase-out will be applicable in the near term.
f. Beginning of Construction
The concept of “beginning of construction” is relevant for various purposes under Sections 45Y and 48E, including determining eligibility for the domestic content or energy community bonus credits and assessing applicable credit phaseout amounts. In the preamble, Treasury and the IRS confirm that the existing “beginning of construction” notices apply for purposes of Sections 45Y and 48E.
g. Retrofitted Property
Generally, a qualified facility under either the Section 45Y credit or the Section 48E credit (or, in the case of the Section 48E credit, an EST) does not include equipment that is an addition or modification to an existing qualified facility or EST. However, the final regulations apply the so-called “80/20 Rule” to determine whether a retrofitted qualified facility or EST qualifies as originally placed in service even if it contains some used components. Under the 80/20 Rule, a qualified facility or EST may be considered originally placed in service only if the fair market value of the used components of the unit of qualified facility or unit of EST is not more than 20% of the total value of the of the unit of qualified facility or unit of EST, taking into account the cost of the new components and the value of the used components. Only expenditures paid or incurred relating to the new components are taken into account for purposes of computing the Section 48E credit. The final regulations clarify that, if a retrofitted facility satisfies the 80/20 Rule, the facility will be treated as newly placed in service even if the taxpayer also satisfies the “Incremental Production Rule” discussed further below.
- Many commenters argued that the application of the 80/20 Rule is contrary to prior law and is inconsistent with the historic investment tax credit (ITC) precedent under Section 48, which allowed a taxpayer to claim the ITC for capital improvements with respect to energy property even if the 80/20 Rule was not satisfied. Treasury and the IRS simply responded that prior guidance and regulations based on Section 48 are not binding for purposes of Section 48E.
- A facility that previously qualified for a credit under Section 45 or 48 and is later retrofitted may be eligible for the Section 45Y credit or Section 48E credit if it satisfies the 80/20 Rule.
- The preamble clarifies that unless an addition to property satisfies the 80/20 Rule (so that it qualifies for a new Section 48E credit), such addition would not be subject to the recapture rules.
- The IRS acknowledges that the 80/20 Rule is separate and distinct from the Incremental Production Rule discussed further below and that a qualified facility placed in service before 2025 that failed the 80/20 Rule may still qualify for a tax credit if the Incremental Production Rule is satisfied.
A taxpayer that satisfies the 80/20 Rule with regard to a unit of qualified facility or unit of EST can also include in its basis for purposes of the Section 48E credit any new costs for property that is an integral part of the qualified facility or EST.
4. Specific Technologies – Biogas
Because “qualified facilities” are limited to facilities used for the purpose of generating electricity, renewable natural gas and biogas facilities are generally not eligible for the Section 48E credit unless they are part of a generation facility, unlike the Section 48 credit which provided an ITC for such facilities directly. Treasury and the IRS declined to adopt comments requesting that biogas property (such as anaerobic digester and gas conditioning components) owned by the same taxpayer that owns a biogas-fueled generation facility be treated as part of the qualified facility or an integral part of such facility. Treasury and the IRS concluded that the biogas property is used to produce a fuel used by a qualified facility but is not part of the qualified facility itself. Accordingly, there is no Section 48E credit for anaerobic digester and gas conditioning components.
- This is a blow to the RNG industry, which must rely on work performed on projects prior to January 1, 2025, to be eligible for a tax credit.
5. Specific Technologies – Nuclear
Generally, buildings are not considered integral parts of a qualified facility because they are not integral to the intended function of the qualified facility; however, not all structures are considered “buildings” for purposes of this exclusion. Specifically, the final regulations provide that a structure is not considered a building for these purposes if it (1) is essentially an item of machinery or equipment, or (2) houses components of property that are integral to the intended function of the qualified facility if the use of the structure is so closely related to the use of the housed components of property therein that the structure clearly can be expected to be replaced if the components of property it initially houses are replaced. The preamble confirms that, like hydropower dams, but unlike control room buildings, nuclear containment structures are integral to the intended function of the qualified facility and may be included in the qualified facility.
6. Specific Technologies – Hydropower
The final regulations include hydropower facilities (including retrofits that add electricity production to non-powered dams, conduit hydropower, hydropower using new impoundments, and hydropower using diversions such as a penstock or channel) in the list of facilities other than combustion or gasification facilities with a GHG emissions rate that is not greater than zero, meaning such facilities may qualify for the credits provided under Section 45Y or 48E. The preamble clarifies that in the case of a hydropower facility, the qualified facility consists of a unit of qualified facility (including water intake, water isolation mechanisms, turbine, pump, motor, and generator), and the hydropower facility’s associated impoundment (dam) and power conditioning equipment are integral property to the unit of qualified facility. Although a taxpayer may not claim the Section 48E credit for any property that is an integral part of a qualified facility that is not owned by the taxpayer, the final regulations incorporate an example illustrating that integral property such as a dam being owned by a federal agency would not prevent a taxpayer that owns the hydropower facility from qualifying for a Section 45Y or 48E credit.
7. Specific Technologies – Energy Storage Technology
a. General
Pursuant to the final regulations, EST includes electrical energy storage property, thermal energy storage, and hydrogen energy storage property. Similar to the rules for a qualified facility, an EST includes a unit of EST (which includes all functionally interdependent components) as well as property owned by the taxpayer that is an integral part of the EST.
b. Electrical Energy Storage Property
Electrical energy storage property is property that receives, stores, and delivers energy for conversion to electricity, and has a nameplate capacity of not less than 5 kWh. Electrical energy storage property includes, but is not limited to, rechargeable electrochemical batteries of all types (including lithium-ion batteries), ultracapacitors, physical storage (such as pumped storage hydropower, compressed air storage, and flywheels), and reversible fuel cells.
c. Thermal Energy Storage Property
Thermal energy storage property is property comprising a system that (1) is directly connected to a heating, ventilation, or air conditioning system; (2) removes heat from, or adds heat to, a storage medium for subsequent use; and (3) provides energy for the heating or cooling of the interior of a residential commercial building. This includes equipment, materials, and parts related to the functioning of such equipment.
- The preamble clarifies that the phrase “adds heat to” should be understood to include equipment that is involved in adding, or transferring, already-existing heat from one medium to the storage medium, but not equipment involved in transforming other forms of energy into heat in the first instance. Equipment that adds (or removes) heat includes technologies, like heat pumps, that draw heat from the ambient air or other stores of heat and adds that heat to a storage medium.
Under the final regulations, property that “removes heat from, or adds heat to, a storage medium for subsequent use” is property that is designed with the particular purpose of substantially altering the time profile of when heat added to or removed from the thermal storage medium can be used to heat or cool the interior of a residential or commercial building. A safe harbor provides that if the thermal energy storage property can store energy that is sufficient to provide heating or cooling of the interior of a residential or commercial building for a minimum of one hour, it is deemed to have the purposes of substantially altering the time profile of when heat added to or removed from the thermal storage medium can be used to heat or cool the interior of a residential or commercial building.
d. Hydrogen Energy Storage Property
The final regulations remove the “end use requirement” that was included in the proposed regulations, which would have required that hydrogen energy storage property must store hydrogen that is solely used as energy and not for other purposes. Instead, the final regulations require only that the property stores hydrogen and has a nameplate capacity of not less than 5 kWh, equivalent to 0.127 kg of hydrogen or 52.7 standard cubic feet of hydrogen. This includes, but is not limited to, above ground storage tanks, underground storage facilities, and associated compressors. The final regulations clarify that integral parts of hydrogen energy storage property include hydrogen liquefaction equipment and gathering and distribution lines within a hydrogen energy storage property.
e. Modification of Energy Storage Technology
A modification of either electrical energy storage property or hydrogen energy storage property may be treated as an EST eligible for the Section 48E credit if either (1) the property was placed in service before August 16, 2022, and its nameplate capacity is increased from below 5 kWh to 5kWh or more, or (2) if the modification results in an increase in nameplate capacity of at least 5 kWh. However, the basis of any existing electrical energy storage property or hydrogen storage property before such modification is not taken into account for purposes of Section 48E.
- The preamble notes that this modification rule is applied separately from the 80/20 Rule discussed above.
- The final regulations clarify that for purposes of the modification rules, the increase in nameplate capacity is equal to the difference between nameplate capacity immediately after the modification and nameplate capacity immediately before the modification. The preamble notes that the regulations do not take into account potential degradation of the EST before its modification. In other words, as described in the preamble to the final regulations under Section 48, the regulations do “not take into account actual capacity but instead use nameplate capacity.” As a result, it appears that battery augmentations involving replacements of existing batteries of the same nameplate capacity may not qualify for a Section 48E credit. Instead, it may be necessary to replace entire units of EST (including all functionally interdependent components), retain existing batteries and add new batteries, or replace batteries with batteries of a greater nameplate capacity.
- In a perplexing oversight, the final regulations do not specify how to calculate the nameplate capacity for these purposes. In the absence of guidance specific to the 5kWh requirement, the rules governing the determination of nameplate capacity for purposes of the 1MW exception from the PWA requirements and the 5MW limitation for QIP may be useful.
- Treasury and the IRS clarified that a modification of EST is not limited by the physical space occupied by the EST before or after the modification.
8. Specific Technologies – Combined Heat and Power System Property
For purposes of the Section 45Y credit, the kilowatt hours of electricity produced by a taxpayer at a qualified facility shall include any production in the form of useful thermal energy by any combined heat and power system (CHP) property within such facility, but the amount of greenhouse gasses emitted into the atmosphere by such facility in the production of such useful thermal energy will be included for purposes of determining the GHG emissions rate for such facility.
CHP property is property comprising a system that uses the same energy source for the simultaneous or sequential generation of electrical and/or mechanical shift power in combination with the generation of steam or other forms of useful thermal energy. To be eligible for the Section 45Y credit, CHP property must (i) produce (a) at least 20% of its useful energy in the form of thermal energy which is not used to produce electrical and/or mechanical power and (b) at least 20% of its total useful energy in the form of electrical and/or mechanical power and (ii) have an energy efficiency percentage greater than 60%. The energy efficiency percentage is the total useful electrical, thermal, and mechanical power produced by the system at normal operating rates, and expected to be consumed in its normal application divided by the lower heating value of the fuel sources for the system, determined on a British thermal unit (Btu) basis.
The final regulations provide that the amount of kWh of electricity produced in the form of useful thermal energy is equal to the quotient of the total useful thermal energy produced by the CHP property within the qualified facility, divided by the heat rate for such facility. Heat rate means the amount of energy used by the qualified facility to generate 1 kWh of electricity expressed as Btus per net kWh generated. The heat rate of a qualified facility that includes CHP property that uses combustion must be calculated using the annual average heat rate (total annual fuel consumption) of the CHP property (in Btus, using the lower heating value of the fuel) during the taxable year divided by the annual net electricity generation (in kWh) of the CHP property during such taxable year.
- The IRS recognized that prior guidance did not provide sufficient clarity in calculating the energy efficiency percentage and heat rate for fuels without lower heating values (g., for fuels that are not combusted, such as in a nuclear facility). Accordingly, the final regulations provide specific rules regarding calculations for qualified facilities that used nuclear energy. The preamble notes that Treasury and the IRS will continue to consult with experts in order to develop additional approaches for other particular technologies.
9. Section 45Y – Metering Device
In the case of a qualified facility equipped with a “metering device” that is owned and operated by an unrelated person, the Section 45Y credit is available not just for electricity sold to an unrelated person but also for electricity sold to a related person and electricity consumed or stored by the taxpayer. The final regulations define a metering device as equipment owned and operated by an unrelated person for energy revenue metering to measure and register the continuous summation of an electricity quantity with respect to time. A metering device must meet certain maintenance and operating standards. The unrelated person may share network equipment, such as spare fiber optic cable owned by the taxpayer that produces the electricity, and may co-locate the network equipment in the taxpayer’s facilities.
- This rule represents an expansion from the Section 45 credit, which strictly provided that electricity must be sold to unrelated parties in order to be credit-eligible. However, the final regulations did not adopt the rule from Notice 2008-60 that provides that sales of electricity to a related person may qualify for the Section 45 credit if the related person sells the electricity to an unrelated person.
- The preamble clarifies that operation of the metering device by the unrelated person can be fully remote and the location of the metering device does not matter (g., the device can be located before energy delivery to storage or somewhere other than the point of interconnection) if all other requirements of the final regulation are met.
10. Section 48E – Incremental Cost
Under the final regulations, if a component of qualified property of a qualified facility or component of property of an EST is also used for a purpose other than the intended function of the qualified facility or EST, only the incremental cost of such component is included in the eligible basis for the Section 48E credit. The incremental cost is the excess of the total cost of a component over the amount that would have been expended for the component if the component were not used for a qualifying purpose. The final regulations include an example of bifacial solar panels installed over a reflective roof. Only the incremental cost of the reflective roof over the cost of a standard roof is included in the eligible basis of the qualified facility. This rule is similar to the rule in the final regulations under Section 48.
- While not likely to have a meaningful impact in the context of utility-scale projects, the incremental cost rule could require difficult determinations to be made regarding what the incremental cost is in the context of rooftop or carport solar installations.
11. Section 48E – Qualified Interconnection Property
For purposes of the Section 48E credit, a qualified investment with respect to a qualified facility includes amounts paid or incurred for “qualified interconnection property” (QIP) in connection with a qualified facility with a maximum net output of not greater than 5 MW AC. The final regulations define “QIP” as any tangible property that is part of an addition, modification, or upgrade to a transmission or distribution system that is required at or beyond the point at which the qualified facility interconnects to the transmission or distribution system and clarify that QIP is not part of a qualified facility.
- The preamble confirms that, because QIP is not part of a qualified facility, QIP will not be taken into account in determining whether a qualified facility satisfies the PWA requirements or qualifies for the domestic content or energy communities adders.
- Read literally, Section 48E does not provide a credit for QIP with respect to an EST. Treasury and the IRS declined to expand the final regulations to permit interconnection costs for stand-alone EST but explained that in the case of hybrid systems, those expenditures paid or incurred for QIP that are properly allocated to the qualified facility may be included as part of the qualified investment for the Section 48E credit. Neither the preamble nor the final regulations provide guidance on the proper allocation of interconnection costs for this purpose.
The final regulations provide that the 5MW limitation is measured at the level of the unit of qualified facility. The nameplate capacity of any integral property is not taken into account. They further provide that, for qualified facilities which generate electricity in direct current, the taxpayer may choose to determine whether a qualified facility has a maximum net output of not greater than 5 MW AC by using the lesser of (a) the sum of the nameplate generating capacities within the unit of qualified facility in direct current, which is deemed to be the nameplate generating capacity of the unit of unit of qualified facility in alternating current; or (b) the nameplate capacity of the first component of property that inverts the direct current electricity generated into alternating current.
- This rule provides flexibility for taxpayers while ensuring that the maximum net output (in alternating current) of a qualified facility can be determined in an administrable and reasonably accurate manner for qualified facilities that generate electricity in direct current.
The final regulations explain that if the costs borne by the taxpayer are reduced by utility or non-utility payments, federal tax principles may require the taxpayer to reduce the amount treated as paid or incurred for qualified interconnection property to determine the Section 48E credit.
12. Section 48E – Normalization Opt-Out
In response to several requests for clarification, the final regulations clarify that the normalization opt-out election is available for the Section 48E credit claimed with respect to an EST without regard to the date on which construction of such EST begins.
13. Section 48E – Ownership
The final regulations apply ownership requirements that are similar to those applied by the final regulations under Section 48. If multiple taxpayers directly own a unit of qualified facility or a unit of EST (e.g., as tenants in common), the final regulations require that each taxpayer determine its eligible basis based on its fractional ownership interest in the unit.
The final regulations also provide that a taxpayer must directly own at least a fractional interest in the entire unit for a Section 48E credit to be determined with respect to such taxpayer’s interest. Furthermore, a taxpayer may claim a Section 48E credit for an integral part only if the taxpayer owns the related unit. If a taxpayer owns a unit and a second taxpayer owns property that is an integral part of that unit, this does not prevent the first taxpayer from claiming the Section 48E credit with respect to its unit, but the second taxpayer may not claim the Section 48E credit with respect to its integral part.
- In many situations, the ownership rules and the distinction between a unit and an integral part will be nonissues. However, in certain ownership structures, there could be otherwise-eligible property that fails to qualify for the Section 48E credit simply because it is owned in the wrong way.
- The preamble notes that many commenters disagreed with the application of the ownership rules. Certain commenters pointed out that this conclusion was contrary to applicable case law and other authority. The preamble argues that adopting the commenter’s recommendation that a taxpayer be able to claim the Section 48E credit for integral property alone would conflict with the application of several other provisions in the statute that apply to an entire qualified facility or EST rather than individual components of property (including the PWA, bonus credit, and QIP rules).
14. Incremental Production
a. General Rules
For purposes of Section 45Y and 48E, the term “qualified facility” includes new units and additions of capacity placed in service after December 31, 2024, in connection with a facility that was placed in service before January 1, 2025, and otherwise satisfies the definition of a qualified facility, but only to the extent of the increased amount of electricity produced at the facility by reason of such new unit or addition of capacity (Incremental Production Rule). The final regulations provide that (1) the Incremental Production Rule is applicable only to an addition of capacity or new unit that would not otherwise qualify as a separate qualified facility; (2) a new unit or addition of capacity that satisfies the Incremental Production Rule will be treated as a separate qualified facility, (3) a new unit or an addition of capacity requires the addition or replacement of components of property (for purposes of Section 45Y) or of qualified property (for purposes of Section 48E), including any new or replacement integral property, added to a facility necessary to increase capacity, and (4) for purposes of assessing the 1MW exception to the PWA requirements, the maximum net output for a new unit or an addition of capacity is the sum of the capacity of the added qualified facility and the capacity of the facility to which the qualified facility was added.
In response to comments to the proposed regulations, the preamble clarifies that there is no minimum capital expenditure necessary to satisfy the Incremental Production Rule for either a new unit or an addition to capacity. Note that, although the final regulations reject a recommendation that efficiency improvements could satisfy the Incremental Production Rule per se, the preamble clarifies that efficiency improvements that are an addition or replacement of components of property (including integral property) that result in an addition to capacity could meet the requirements of the Incremental Production Rule.
b. Measurement of Capacity
As stated above, the Incremental Production Rule is based on the increased amount of electricity produced at a facility as a result of a new unit or an addition to capacity, meaning this rule is focused on measuring the amount of the capacity increase. The final regulations require that increased capacity be measured in one of three ways: (1) modified or amended facility operating licenses from the Federal Energy Regulatory Commission (FERC) or the Nuclear Regulatory Commission (NRC), or related reports prepared by FERC or NRC as part of the licensing process; (2) the ISO conditions to measure the nameplate capacity of the facility consistent with the definition of nameplate capacity provided in 40 CFR 96.202; or (3) a measurement standard prescribed by the Secretary in guidance published in the Internal Revenue Bulletin. Taxpayers able to use the measurement standard described in option (1) above may not use the method described in option (2).
Commenters to the proposed regulations noted that manufacturer-stamped nameplate capacity is, by design, the maximum theoretical output of the facility and differs from a facility’s actual electric generating capacity. The ISO conditions generally require that this measurement be done by the manufacturer and would normally occur when the facility is originally placed in service. As a result, several commenters noted that measurement of nameplate capacity using the ISO conditions would not take into account physical depreciation, degradation, and other factors that may significantly reduce the maximum generating output and safe operating conditions of the facility over time when compared to the facility’s original nameplate capacity. In the preamble, Treasury and the IRS acknowledge that using the ISO conditions to determine nameplate capacity may limit nameplate capacity to the nameplate capacity of the facility on the original placed in service date, or to a revised nameplate capacity of the facility based on major upgrades that would result in a revised nameplate capacity rating. The preamble states that increased capacity should not be based on a measurement methodology that simply compares electricity production before the increase in capacity to electricity production after the increase in capacity because such measurement methodologies involve seasonal or other fluctuations that are too easily manipulated to show a greater increase in capacity than the actual increase.
Finally, the preamble notes that Treasury and the IRS will continue to consult with experts on potential additional measurement standards that could apply, and the final regulations reflect this continuing consideration and provide flexibility by permitting the Secretary to prescribe additional measurement standards in guidance published in the Internal Revenue Bulletin.
c. Measurement of Increased Electricity and Qualified Investment
For purposes of the Incremental Production Rule with respect to Section 45Y, to determine the increased amount of electricity produced by a facility in a taxable year by reason of a new unit or an addition of capacity, the final regulations provide that a taxpayer must multiply the amount of electricity that the facility produces during that taxable year after the new unit or addition of capacity is placed in service by a fraction, the numerator of which is the added capacity that results from the new unit or addition of capacity, and the denominator of which is the total capacity of the facility with the new unit or addition of capacity added, provided that the added capacity and resulting total capacity are measured using one of the measurement standards discussed above.
For purposes of the Incremental Production Rule with respect to Section 48E, the taxpayer’s qualified investment during the taxable year that resulted in an increased capacity of a facility by reason of a new unit or addition of capacity is its total qualified investment associated with the components of property that result in the new unit or addition of capacity. The preamble clarifies that the intention of this rule was to make the rule for an addition of capacity equivalent to that of a new unit.
d. Restarted Facilities
The final regulations revise the proposed regulations to provide that, solely for purposes of the Incremental Production Rule, a facility that is decommissioned or in the process of decommissioning and restarts can be considered to have increased capacity from a base of zero if certain conditions are met as follows: (1) the existing facility must have ceased operations; (2) the existing facility must have a shutdown period of at least one calendar year during which it was not authorized to operate by its respective federal regulatory authority (that is, FERC or NRC); (3) the restarted facility must be eligible to restart based on an operating license issued by either FERC or NRC; and (4) the existing facility may not have ceased operations for the purpose of qualifying for this special rule for restarted facilities.
15. PWA Requirements
The final regulations adopt by cross-reference the PWA requirements under Section 45(b)(7) and 45(b)(8) and the regulations thereunder, which regulations we have addressed in a prior alert. Sections 45Y and 48E incorporate these requirements by reference.
As noted above, a qualified facility with a maximum net output of less than 1MW of electricity is exempt from the PWA requirements. Consistent with the Section 48 regulations, the final regulations provide that the maximum net output is determined by the nameplate capacity of the qualified facility. The final regulations further clarify that the nameplate capacity for these purposes is the maximum electrical generating output in MW that a qualified facility is capable of producing on a steady state basis and during continuous operation under standard conditions, as measured by the manufacturer and consistent with the definition of nameplate capacity provided in 40 CFR 96.202. If applicable, taxpayers must use the ISO conditions to measure the maximum electrical generating output of a qualified facility. For qualified facilities that generate electrical output in direct current, the maximum net output (in alternating current) of each unit of qualified facility is the lesser of: (1) the sum of the nameplate generating capacities within the unit of qualified facility in alternating current; or (2) the nameplate capacity of the first component of property that inverts the direct current electricity into alternating current.
The final regulations introduce an aggregation rule. If a qualified facility or EST has “integrated operations” with one or more other qualified facilities, then the aggregate nameplate capacity of the qualified facilities is used for purposes of determining whether the 1MW exception applies to the qualified facilities. Solely for these purposes, the final regulations clarify that a qualified facility or EST is treated as having integrated operations with any other qualified facility of the same technology type or EST, as applicable, if they are: (1) owned by the same or “related taxpayers”, (2) placed in service in the same taxable year, and (3) transmit electricity through the same point of interconnection or, if they are not grid-connected or are delivering electricity directly to an end user behind a utility meter, are able to support the same end user. Related taxpayers are members of a group of trades or businesses that are under common control (as defined in Treasury Regulation Section 1.52-1(b)).
- This aggregation rule is contrary to the approach taken for the QIP 5MW rule and to the facility-by-facility application of the PWA, domestic content, and energy community requirements. The preamble does not persuasively justify the discrepancy.
Conclusion
Given the many complex issues raised by the statutory framework, Treasury and the IRS should be commended for issuing the final regulations under such a compressed timeframe, although some of the rules adopted may have benefited from further consideration and a more prolonged engagement with industry.
Although the final regulations were effective upon their publication in the Federal Register on January 15, 2024, it remains to be seen whether the Trump administration could assert that the regulations are subject to the regulatory freeze issued on January 20, 2025, or whether Congress will exercise its ability to overturn the final regulations pursuant to the Congressional Review Act.
In the meantime, please feel free to reach out to us with questions.