By Jesse M. ColemanEron ReidRobert B. Milligan, and Michael Wexler 

Seyfarth Synopsis: On May 3, 2024, the United States District Court for the Eastern District of Texas entered an Order staying the proceedings in Chamber of Commerce v. FTC by granting the FTC’s motion to apply the first-to-file doctrine, in which a district court should generally order “stay, transfer, or dismissal” of a second-filed action that substantially overlaps with a pending, first-filed action—in this case, Ryan, LLC v. FTC.

The Court’s Order found that the first-to-file rule required the Eastern District’s deference to the Northern District’s action in Ryan because the two cases’ procedural postures were roughly the same, “the substantial overlap between the cases and the comity factors support consolidation, and Ryan is the first-filed case.”

Although the Court found a transfer or consolidation of the two pending cases would avoid duplication of judicial effort, potentially inconsistent judgments, and piecemeal litigation, it nonetheless questioned its authority to do so. Therefore, the Eastern District elected to stay proceedings in the Chambers case to allow the Chamber of Commerce to seek either intervention or addition as parties in the Ryan case, which we expect to occur.

As a result, the remaining unexpired deadlines in the Court’s briefing schedule are lifted, and the proceedings are currently stayed. The Order also requires the Chamber of Commerce to notify the Court if its claims are accepted in Ryan, or denied.

The Northern District of Texas, meanwhile, entered an Order on May 2, 2024, requiring the FTC respond by 5:00 p.m. CT on May 7th to the Ryan Plaintiff’s emergency motion for an expedited briefing schedule for its request for a preliminary injunction and stay of the Non-Compete Rule. The FTC had previously requested 21 days to respond to Plaintiff’s motion to expedite briefing. The Ryan Plaintiff also recently amended its pleadings to elaborate on its arbitrary-and-capricious claim and seek an order vacating the Non-Compete Rule under the Administrative Procedure Act (APA), which would apply a vacatur of the Non-Compete Rule to parties and non-parties alike, if granted.

As it currently stands, we should see the FTC’s response to the Ryan Plaintiff’s motion by Tuesday, May 7, 2024, in addition to the Chamber of Commerce’s efforts to join the Ryan suit, with the Court’s schedule on Plaintiff’s request for a preliminary injunction to shortly follow.

By Ariel D. Cudkowicz and Adrienne Lee

Seyfarth Synopsis: Employees at a Cresco Labs cannabis cultivation facility in Massachusetts recently made an unexpected and significant decision: they chose to say goodbye to their union membership just shy of their first contract’s expiration in June 2024.

Back in November 2020, the gardeners, shift leads, and other agricultural workers at Cresco’s Fall River facility joined the United Food and Commercial Workers (UFCW) Local 328. But fast forward to April 2024, and the tables have turned. Out of twenty unionized employees, eighteen decided they were better off without the union and chose decertification instead of negotiating a new contract. They felt that the union dues they were paying didn’t quite match up with the modest wage increases and the benefits they were getting.

Since parting ways with the union, these employees are earning more. Gardeners are making $20 per hour instead of the $19 they were getting under the union, and gardener leads are now earning $22.50 an hour, up from $21. Plus, they’re now eligible to receive Cresco stock as part of their compensation package.

This decertification is believed to be the first of its kind in the cannabis industry. It’s a bit out of the ordinary, considering the successful growth of labor organizing over the last several years in this space. It shows that the Cresco employees thoughtfully considered their relationship with their union and decided they could accomplish more by working directly with Cresco. Seyfarth will monitor this development for further updates, including the potential consequences that such a move could have on Cresco’s and other employers’ unionized cannabis workplaces.

Seyfarth Synopsis: Seyfarth Published its 50 State Equal Pay Reference Guide – 2024 Q1 Edition (seyfarth.com) for organizations that operate in multiple states, tracking the ever-changing requirements related to equal pay issues can pose daunting challenges and the growing “ripple effect” of such requirements is being felt across industries and sectors. To simplify the process, we are pleased to provide you with our Eighth Annual 50 State Equal Pay Reference Guide:

What Employers Need to Know about US Equal Pay Laws, including a new Pay Transparency Wage Range Disclosure Compendium.

This one-stop resource provides answers to the following common questions:

  • Which classes are protected by the Equal Pay laws?
  • What are the permissible factors that explain pay differences?
  • What type of work must be compared?
  • What are the compensation disclosure requirements (including pay reporting)?
  • May employers ask about salary history?

This guide addresses laws that impact private employers and is based on a review of state laws. This guide also provides information about the life cycle of a pay equity analysis. The information contained in this booklet is purposely condensed and simplified; while it provides a convenient point of reference, always consult with your attorney before making any decisions.

For additional information, please email payequity@seyfarth.com.

By Janine E. Raduechel and Joshua A. Rodine

Seyfarth Synopsis: The California Supreme Court concluded that the “good faith” defense applies to claims seeking to impose penalties under California Labor Code section 226. An employee must show that an employer’s failure to comply with section 226(a) was both knowing and intentional in order to establish an entitlement to penalties. Naranjo v. Spectrum Security Services.

The Facts

Gustavo Naranjo, filed a putative class action on behalf of Spectrum employees alleging, among other things, that Spectrum had failed to pay him an additional hour of pay for each non-compliant meal period. The complaint also asserted the derivative claim that Spectrum had violated California Labor Code section 226(a) by failing to report the additional wages it owed on Naranjo’s wage statements. The complaint sought the statutory penalties prescribed for “willful[]” failure to comply with the timely payment requirements under Labor Code section 203, as well as those under Labor Code section 226(e) for the “knowing and intentional” failure to provide compliant wage statements.

The Trial Court Decision

The trial court found that Spectrum was liable for the failure to provide compliant meal periods. Despite this finding, Spectrum argued that it was not liable for the penalties Naranjo sought under sections 203 and 226 because even if it had violated an obligation to timely pay and report the additional pay owed, its failure was neither “willful” (as required by section 203) nor “knowing and intentional” (as required by section 226). These arguments were based in part on Division of Labor Standards Enforcement (DLSE) regulations, as well as governing appellate case law.

With respect to section 203 penalties, the trial court ruled in Spectrum’s favor. The court concluded that Spectrum’s defenses, if successful, would have defeated Naranjo’s claims, and that those defenses “were presented in good faith and were not unreasonable or unsupported by the evidence.” However, with respect to section 226 penalties, the court concluded that Spectrum was liable for penalties because its failure to report premium pay was “knowing and intentional and not inadvertent.”

The Court of Appeal’s Decision

Both sides appealed the trial court’s ruling. The Court of Appeal affirmed the trial court’s conclusion that Spectrum’s failure to timely pay meal period premium wages was not “willful.” This conclusion was based on a finding that substantial evidence supported the trial court’s conclusion that Spectrum had a good faith basis for believing it was not liable.

However, the Court of Appeal held that the trial court erred in finding that Spectrum’s failure to report meal premium pay on employees’ wage statements was “knowing and intentional.”

Naranjo appealed.

The California Supreme Court’s Decision

In a surprisingly straightforward interpretation and application of statutory language, the California Supreme Court held that “if an employer reasonably and in good faith believe[s] it [i]s providing a complete and accurate wage statement in compliance with the requirements of section 226, then it has not knowingly and intentionally failed to comply with the wage statement law.” In other words, the good faith defense that is written into the statute does in fact apply to section 226, and it is not limited to circumstances involving clerical error or inadvertence (as suggested by Naranjo).

Thus, when an employer establishes that it “reasonably and in good faith, albeit mistakenly, believed that it complied with section 226, subdivision (a), [the] employer’s failure to comply with wage statement requirements is not ‘knowing and intentional,’” and the employer is not subject to penalties under section 226. The Court also reaffirmed the good faith defense to claims for penalties for late payment of final wages under section 203.

What Naranjo Means for Employers

Although this decision will not make complying with the Labor Code and Wage Orders any less challenging for employers, it does provide some welcome ammunition for employers who are defending these types of claims. This is not to say that employers will get an automatic pass, as it will still be necessary to prove an absence of willfulness or knowing intent. Perhaps more importantly, the affirmation of the viability of the good faith defense will force employees’ attorneys to reevaluate the way they value claims.

By John Tomaszewski

About the Programme: In recent years, privacy and cybersecurity consistently hit the top of legal leaders’ lists of their biggest concerns. In fact, a recent Association of Corporate Counsel Chief Legal Officers Survey found that, when rating a list of items on their importance to the business, CLOs placed cybersecurity, regulation and compliance issues, and data privacy as the top three most critical issues for the business.

With that in mind, we are pleased to invite you to this exclusive, small group roundtable to discuss the practical privacy and cybersecurity issues that in-house counsel and privacy business leaders are confronting in their daily operations. Seyfarth Partner, John Tomaszewski, co-leader of the firm’s Global Privacy & Security team, will engage the group in a discussion of pressing topics, including:

  • What approaches can be used to enable compliant transfers of data and technology across borders? And what are the implications of this on companies’ global compliance programmes?
  • How are China’s evolving cybersecurity standards impacting in-house legal organisations, and how can in-house counsel most effectively meet them?
  • As workforces become increasingly mobile, both within and across borders, how do organisations protect themselves against the associated privacy and security risks?
  • How should leaders think about AI use fundamentally – what is the model for AI deployment? When should AI be used, and in conjunction with what other processes? What regulatory approach is best suited to supporting AI while mitigating risks of its use?

Following the roundtable, there will be an opportunity for networking and refreshments.

Kindly click the REGISTER HERE button below to register your attendance at this exclusive event before 17 May. We hope to see you there.

Address
Seyfarth Shaw Hong Kong Office
Suite 3701 & 3708-3710, 37F
Edinburgh Tower, The Landmark
15 Queen’s Road Central
Central, Hong Kong

Tuesday, 21 May 2024 (HKT)
8.30 – 9.00 a.m. Check-in and Breakfast
9.00 – 10.00 a.m. Roundtable
10.00 – 10.30 a.m. Refreshments
Breakfast will remain available during the roundtable

Cost
There is no cost to attend, but registration is required.

REGISTER HERE

Speaker(s)
John Tomaszewski, Partner, Seyfarth Shaw LLP

John has significant experience working with companies regarding data protection and information security throughout the Americas, Europe, and Asia. He has advised businesses in almost every market vertical, including: human resource outsourcing companies, cloud service providers, social media companies, eCommerce platforms, vehicle telematics providers, EV manufacturers, and emerging-technology clients.

In addition to his experience in private practice, John was the first chief privacy officer for CheckFree (now FISERV), where he created internal and external global privacy programmes for the online bill payment pioneer. In his role as general counsel at TRUSTe, the most successful privacy Trustmark in the world, he ensured that privacy certification programmes were recognised as best-in-class on an international scale.

John has been a co-author of several information security and privacy publications and has also provided input to the drafting of various security and privacy laws around the world, including the APEC Cross-Border Privacy Rules system. He is a frequent speaker globally on the topics of cloud computing, Self Regulatory Organizations (“SROs”), cross-border privacy schemes, and secure e-commerce.

If you have any questions, please contact Anne Marie Lau at alau@seyfarth.com and reference this event.

By Rachel V. See and Annette Tyman

Seyfarth Synopsis: On April 29, 2024, the Department of Labor published extensive guidance on the use of artificial intelligence in hiring and employment. While the guidance is addressed to federal contractors, all private-sector employers using or considering using artificial intelligence should pay attention. The guidance makes clear that long-standing nondiscrimination principles fully apply to AI and outlines “Promising Practices” designed to mitigate AI risks in employment, including the risk of unlawful bias from the use of AI. While not a binding standard, the Department of Labor’s issuance of these “Promising Practices” demonstrates regulators’ evolving expectations surrounding employers’ use of AI.

President Biden’s comprehensive Executive Order on AI, issued in October 2023, directed multiple federal agencies to issue AI-related guidance.[1] As part of this “whole of government” approach, the Department of Labor was specifically tasked with publishing guidance for federal contractors on “nondiscrimination in hiring involving AI and other technology-based hiring systems.”

The April 29 AI guidance issued by the Department of Labor’s Office of Federal Contract Compliance Programs (OFCCP) consists of two parts: (1) a Q&A section addressing how OFCCP will apply existing nondiscrimination laws to AI tools, and (2) a list of “Promising Practices” for the development and use of AI in employment.

While the Department of Labor’s guidance is specifically addressed to federal contractors, it has far-reaching implications for employers generally, not just federal contractors. Consistent with the EEOC’s position, the guidance makes clear that long-standing nondiscrimination principles fully apply to AI, and the “Promising Practices” represent OFCCP’s attempt to capture best practices for mitigating AI risks in employment, drawing from the prior work of stakeholders in the responsible AI ecosystem. While not a binding standard, OFCCP’s issuance of these “Promising Practices” represents a significant marker of the evolving expectations surrounding employers’ use of AI.

Applying Existing Laws to AI: OFCCP Reinforces Foundational Principles

In the Q&A portion of the guidance, OFCCP makes clear that federal contractors are fully responsible for affirmatively ensuring their AI tools comply with existing nondiscrimination laws. The agency also emphasizes federal contractors’ obligations to maintain records related to AI tools, and reminds contractors that their obligation to provide reasonable accommodations extends to the contractor’s use of automated systems. OFCCP also explains how it will use its existing authorities to investigate federal contractors’ use of AI in employment decisions. Key takeaways include:

  • AI tools can constitute “selection procedures” subject to OFCCP’s existing regulations. Consistent with prior statements from OFCCP in 2019[2] and the EEOC in May 2023,[3] OFCCP again emphasizes and confirms that AI-based tools used to make employment decisions can be “selection procedures” under the Uniform Guidelines on Employee Selection Procedures (UGESP) from 1978, and validation processes required under UGESP.
  • Reasonable accommodations obligations fully apply. Federal contractors must make reasonable accommodations to ensure individuals with disabilities have equal access to jobs, including in the contractor’s use of AI-based selection procedures.
  • Employers are responsible for their AI tools, whether they developed them themselves or if they are using an AI vendor. OFCCP unambiguously warns that federal contractors cannot delegate or avoid their nondiscrimination and affirmative action obligations by using third-party AI products. During an OFCCP audit, contractors must be able to provide the information and records needed for OFCCP to assess compliance, including information about the impact and validity of AI-based selection procedures. In addition, information regarding the design of tool as well as information regarding whether alternative approaches were considered and tested for adverse impact may be requested during audits.  

While these principles are not new, OFCCP’s firm stance serves as a call-to-action for employers to proactively examine their use of AI. As OFCCP Acting Director Michelle Hodge recently warned, federal contractors “can’t just pull something off the shelf and decide to use it” without ensuring compliance with OFCCP regulations. Just like federal contractors should not rely solely on an affirmative defense of, “I thought my AI vendor was handling that,” private-sector employers should be mindful of these evolving standards and how these defenses may be received if accusations of unlawful bias from the use of AI arise. Now is an excellent time for employers using AI – whether or not they are federal contractors – to work closely with trusted legal counsel to develop a comprehensive approach to AI risk management.

OFCCP’s “Promising Practices” Reflect an Evolving Consensus on AI Risk Management

The “Promising Practices” portion of OFCCP’s guidance outlines recommendations to help federal contractors “avoid potential harm to workers and promote trustworthy development and use of AI.” These recommendations span the AI lifecycle, from development to deployment and monitoring, and include “big picture” concepts like the creation of internal AI governance frameworks. Many of the practices identified in the “Promising Practices” closely align with concepts from the National Institute of Standards and Technology’s AI Risk Management Framework.

OFCCP’s guidance acknowledges that these “Promising Practices” are “not expressly required,” and that it is “not an exhaustive list but rather an initial framework” and further cautions that “the rapid advancement and adoption of AI in the employment context means that these practices will evolve over time.”

Despite their non-mandatory nature, employers should not ignore OFCCP’s guidance. In that regard, the impact of OFCCP’s April 29 “Promising Practices” on employer behavior may follow a trajectory similar to the EEOC’s 2017 “Promising Practices” for preventing harassment, which had a significant impact on the way employers thought about harassment prevention. By 2017, some proactive employers had already implemented policies and procedures aligned with the EEOC’s recommendations. But with the #MeToo movement contemporaneously gaining momentum in late 2017, increased public awareness of harassment and demand for action prompted further employer action. This provided the impetus for some employers to re-evaluate and revise their harassment policies and training programs to align with the EEOC’s recommendations. The ultimate goal was to prompt the implementation of more proactive, comprehensive, and systemic approaches to preventing harassment, rather than relying solely on reactive measures like complaint reporting and investigations.

OFCCP may be hoping that its “Promising Practices” on AI will follow a similar trajectory. Like the EEOC’s 2017 effort on harassment, OFCCP’s AI “Promising Practices” did not emerge from thin air; they reflect principles identified by various stakeholders, contain similar themes articulated in the White House’s recently issued guidance to federal agencies, emphasizing the need for “stakeholder engagement, validation and monitoring, and greater transparency” in the federal government’s own use of AI, and closely align with NIST AI RMF, which has gained significant traction as a foundational resource for organizations seeking to manage AI risk.

Key themes and recommendations in OFCCP’s “Promising Practices” include:

  • Transparency and notice to employees and applicants. OFCCP advises federal contractors to provide clear notice about their use of AI, what data is being collected, and how employment decisions are being made.
  • Stakeholder engagement. OFCCP advises federal contractors to consult with employees and/or their representatives in the design and deployment of AI systems.
  • Fairness assessments and ongoing monitoring. OFCCP advises federal contractors to analyze AI tools for discriminatory impact before use, at regular intervals during use, and after use. Where issues are identified, OFCCP advises employers to take steps to reduce adverse impact or consider alternative practices. While some of this advice may sound obvious to those experienced in AI risk management, OFCCP’s inclusion of these concepts emphasizes their importance.  Likewise, OFCCP also advises employers to ensure meaningful human oversight of AI-based decisions. While OFCCP does not provide greater clarity regarding how it might be defining “meaningful human oversight,” the inclusion of this concept in OFCCP’s “Promising Practices” invites contractors and employers to examine and consider how human oversight mechanisms may or may not be present in their existing AI processes.
  • Documentation and recordkeeping. OFCCP advises federal contractors to retain information about the data used to develop AI systems, the basis for decision-making, and the results of any fairness assessments or monitoring.
  • Vendor management. OFCCP advises federal contractors to carefully vet AI vendors. Among other things, OFCCP’s “Promising Practices” discuss the desirability of verifying the source and quality of the data being collected and analyzed by the AI system, the vendor’s data protection and privacy policies, and critical information about the vendor’s algorithmic decision-making tool, such as the screening criteria, the predictive nature of the system, and any differences between the data used for training and validation and the actual candidate pool. OFCCP also discusses the desirability of having access to the results of any assessment of system bias, debiasing efforts, and/or any study of system fairness conducted by the vendor and cautions that relying on vendor assurances alone is not enough – emphasizing the importance of being able to verify key information about the vendor’s practices.
  • Accessibility for individuals with disabilities. OFCCP advises federal contractors to ensure AI systems are accessible, allow for reasonable accommodation requests, and accurately measure job-related skills regardless of disability.

As federal contractors or other employers consider whether changes to their AI risk management practices are warranted in light of OFCCP’s issuance of these “Promising Practices”, contractors and employers should be mindful of legislative activity mandating or otherwise incentivizing employers to implement an AI risk management framework similar to the “Promising Practices” described in OFCCP’s guidance.  OFCCP’s “Promising Practices” are not mandatory, but aspects of them may soon be mandatory under future legislative or regulatory efforts.[4]

Implications for Employers

Federal contractors and private-sector employers should expect continued coordination between OFCCP, EEOC and other enforcement agencies on AI issues. While OFCCP’s April 29 AI guidance is addressed to federal contractors, OFCCP’s “Promising Practices” reflect progress toward regulatory consensus regarding AI risk management, and their issuance invites both federal contractors and other employers to evaluate their existing AI risk management practices and to consider whether further proactive processes may be warranted or desirable.

We will continue to monitor these developing issues. For additional information, we encourage you to contact the authors of this article, a member of Seyfarth’s People Analytics team, or any of Seyfarth’s attorneys.


[1] The Department of Labor is one of several federal agencies directed by President Biden to issue AI-related guidance, and the White House’s April 29 statement summarizes the federal government’s progress towards meeting the various deadlines set forth in President Biden’s executive order. Seyfarth attorneys have written about the Wage Hour Division’s Field Assistance Bulletin addressing the application of the Fair Labor Standards Act to use of artificial intelligence and other automated systems in the workplace, also issued on April 29. See https://www.wagehourlitigation.com/2024/05/dol-issues-guidance-on-wage-hour-risk-posed-by-artificial-intelligence/

[2] See https://www.dol.gov/agencies/ofccp/faqs/employee-selection-procedures

[3] See https://www.eeoc.gov/laws/guidance/select-issues-assessing-adverse-impact-software-algorithms-and-artificial

[4] For instance, the version of Connecticut SB2 passed on April 24, 2024 by the Connecticut Senate specifically requires deployers of “high-risk” AI systems to implement a risk-management policy and program, and makes specific reference to the NIST AI RMF. Likewise, legislation introduced in California (AB 2390), New York (S5641A), Illinois (HB 5116), Rhode Island (H 7521), Washington (HB 1951) contain similar language mandating AI deployers to implement a governance program that contains reasonable administrative and technical safeguards to map, measure, manage, and govern the reasonably foreseeable risks of algorithmic discrimination – concepts that are core to the NIST AI RMF. Additionally, on May 3, 2024, Colorado SB 205, a bill with similar legislative language, passed the Colorado Senate. 

By Yumna Khan, Jesse M. Coleman, and Brandon L. Bigelow

Seyfarth Synopsis: On April 26, 2024, the Federal Trade Commission (“FTC”) announced it had finalized changes to modernize the Health Breach Notification Rule (the “HBNR”) by clarifying its applicability to health and wellness apps and other similar technologies—effectively expanding the information Covered Entities must provide to consumers when notifying them of a breach.

Key changes include:

  • Revising the definition of “PHR identifiable health information” to underscore the HBNR’s applicability to health and wellness websites, apps, and other similar technologies as well as information inferred from non-health-related data;
  • Revising the definition of “Breach of Security” to include disclosures unauthorized by the consumer—such as a voluntary disclosure made by the PHR vendor if a consumer did not provide affirmative express consent to such disclosure;
  • Clarifying the scope of the term “PHR Related Entity” which provides only entities who access or send unsecured PHR identifiable health information to a personal health record —rather than entities that access or send any information to a personal health record —qualify as PHR Related Entities.
  • Clarifying what it means for a personal health record to draw PHR identifiable health information from multiple sources;
  • Expanding the use of email and other electronic means as methods of providing clear and effective notice to consumers of a breach;
  • Expanding the content requirements of notice to consumers to include, among other things, the identity—or a description where providing the full name or identity would pose a risk to individuals or the entity providing notice—of any third parties who acquired unsecured PHR identifiable health information as a result of a breach;
  • Modifying the timing requirements for the FTC to be notified for breaches involving 500 or more individuals to the same time Covered Entities send notices to affected individuals—which must occur no later than 60 calendar days after the discovery of a breach;

Although most digital health and wellness companies offer privacy protections in the terms and conditions for use of their product or services, many are not subject to the strict privacy and security regulations under the Health Insurance Portability and Accountability Act (“HIPAA”). This is because they are not “Covered Entities” under HIPAA since they do not submit electronic claims for insurance billing purposes like most traditional health care providers. Thus, the FTC’s announcement signifies its remained focus on protecting consumers’ sensitive health data with the increasing use of health and wellness apps and connected devices.

Indeed, this is not the first time the FTC has cracked down on health and wellness apps for sharing consumer’s personal information and data. Specifically, the FTC has recently taken action against digital health and wellness companies for violating the HBNR by imposing hefty civil penalties ranging from $100,000 to $1.5 million for their alleged unauthorized disclosure of consumers’ personal health information to companies such as Facebook and Google for advertising purposes.

The FTC’s announcement is also timely considering the U.S. Department of Health and Human Services (“HHS”) April 22, 2024 announcement of its final rule, HIPAA Privacy Rule to Support Reproductive Health Care Privacy, which aims to protect patient confidentiality and prevent medical records from being used against people for providing or obtaining “lawful reproductive health care.”

Based on the foregoing, and assuming the Final Rule survives any legal challenge, the new modernized version of HBNR—which will go into effect 60 days after its publication in the Federal Register—means digital health and wellness companies will face even greater scrutiny from the FTC for sharing consumer’s personal information and data than they have experienced in the past. As such, digital health and wellness companies should work closely with health care and data privacy counsel to ensure compliance and avoid hefty civil penalties which would hurt their financials and goodwill.

By Amy AbeloffLauren Gregory Leipold, and Owen Wolfe

Seyfarth Synopsis: In the wake of several Congressional hearings over the past year on AI and intellectual property, Representative Adam Schiff (D-California) has introduced the Generative AI Copyright Disclosure Act of 2024 (H.R. 7913).  The proposed law addresses concerns over lack of transparency in the data sets used to train generative AI models by requiring submission of a notice to the United States Copyright Office regarding all copyright-protected works used to train a particular AI system prior to the release of that system.  Although the bill has almost no chance of gaining traction in Congress, it showcases concerns that current U.S. copyright law may not adequately address new generative AI technologies.

Act Particulars

The Act’s notice requirement would apply to those who create or significantly alter “a training dataset,” which the bill defines as “a collection of individual units of material (including a combination of text, images, audio, or other categories of expressive material, as well as annotations describing the material) used to train a generative AI model” and build a generative AI system.  The notice would need to include a “sufficiently detailed summary” of any and all copyrighted works—whether registered or not—used in the training dataset or to alter the training dataset.  Moreover, if the dataset is publicly-available when the notice is submitted, the notice would need to include the URL where the dataset appears.  If a required notice is not submitted pursuant to certain deadlines set forth in the Act, violators would be a subject to a civil penalty of at least $5,000.  The Act would take effect within 180 days of enactment, and would require the U.S. Copyright Office to issue implementing regulations within that same timeframe.  The Copyright Office would also need to establish a publicly-accessible online database consisting of each notice filed.

Stakeholders’ Perceptions

The interests of those creating or altering the generative AI datasets are no doubt at odds with those of copyright owners.  We predict that, generally, copyright owners’ perceptions of the Act will be very positive, while generative AI companies will have a very negative reaction.  This is not surprising given the challenges generative AI companies would face in tracking down individual rights holders, and then, once the rights holders are on notice of what is going on, likely having to obtain formal licenses and pay them royalties before incorporating their works in training datasets.  Such requirements could be viewed as chilling technological growth and promoting AI monopolies, since, for example, smaller or niche companies would likely be unable to pay the requisite costs.  The effects could also have a negative spillover effect on rightsholders because any royalties paid to them would be very low even for financially successful AI models, given that the royalties would need to be spread among millions of creators.  Moreover, AI companies may focus on compensating larger copyright holders, not only because they own the rights to a large volume of works, but also because their rights are likely more well-known or easily discovered by generative AI creators or editors.  As a result, individual creators’ rights may be overlooked, even if generative AI companies make good faith efforts to identify and pay them for use of their protected works.   

On the other hand, many rightsholders currently feel as though AI companies are unfairly profiting from their works without permission and without compensating the rightsholders, despite copyright protections being enshrined in the U.S. Constitution.  As early decisions in AI-related copyright litigation indicate (see our prior coverage here), copyright owners may have a difficult time preventing the unauthorized use of their works to train AI models under the current version of the U.S. Copyright Act.  Accordingly, many content creators and rights owners seem to be embracing the bill as a step in the right direction to avoid unfair infringement and provide protection that may be otherwise difficult to achieve.  From the perspective of copyright owners, protecting their works encourages the creation of new works—after all, if you create a work, and then someone can copy it and profit it from it, without paying you, why spend the time to create a new work?  This, they argue, is the reason that copyright protection exists in the first place. 

What Does the Future Hold?

While strong opinions have been voiced on both sides of this issue, it bears noting that the Act has no co-sponsors to date and is unlikely to receive much consideration in Congress.  Even so, the bill reflects the fact that there is significant public support, particularly among writers, artists, and other creatives, for copyright protections that address the advent of generative AI.  But it also highlights the thorny issues that come with attempting to regulate new technologies, including the possibility that regulations could inadvertently stifle new technological development.  This is a debate that will continue not only in Washington, D.C., but throughout the country.

In the meantime, it remains to be seen how courts addressing AI-related issues will decide.  Those cases may provide guideposts for Congress to further draft and propose an AI act that would better suit the involved parties.

By Matthew J. Gagnon

Seyfarth Synopsis: In its seminal decision, Bostock v. Clayton County, Georgia, the Supreme Court held that discrimination on the basis of sexual orientation or gender identity is tantamount to discrimination on the basis of sex. Employers are just beginning to grasp the wide-ranging impact that decision will have on the American workplace. The reasoning of this decision: that to treat an employee differently because of the sex of the person they are married to, for example, is necessarily the same as treating that person differently because of their sex, is turning out to have important implications for other areas of the law, including equal pay claims. Just one more thing for employers to beware of as they attempt to navigate the modern, culturally-charged workplace.

***

This is the second in a series of posts examining the new and developing trends in equal pay litigation identified in Seyfarth’s yearly publication, Developments in Equal Pay Litigation, 2024 Update.

In order to state a viable equal pay claim, a plaintiff need not show they were paid less in strictly monetary terms. Any discrepancy with respect to compensation or benefits can support such a claim. For example, one recent case turned on the fact that one senior executive was denied the use of a company car while others were not. The court in that case held that those facts were sufficient to state a prima facie equal pay violation, even though the complaining executive earned the same base salary as her comparators. See Pate v. Med. Diagnostic Labs. LLC, No. 7:19-cv-126-FL, 2021 WL 965906 (E.D.N.C. Mar. 15, 2021).

But when a disparity in benefits forms the basis of a gender discrimination claim, it is critical that a plaintiff establish their right to those benefits. This issue potentially puts equal pay litigation on a collision course with some of those most culturally contentious issues of the day. In Bostock v. Clayton County, Georgia, 590 U.S. 644 (2020) the Supreme Court held that Title VII prohibits discrimination on the basis of sexual orientation or gender identity because those forms of discrimination are tantamount to discrimination on the basis of sex. That decision has rendered many workplace issues newly relevant, including the question of who qualifies for spousal benefits. That, in turn, threatens to give rise to whole new categories of equal pay violations.

This was the issue in one recent case, Doe v. Catholic Relief Services, 618 F. Supp. 3d 244 (D. Md. 2022). In that case, the plaintiff worked for a religiously aligned organization. He alleged he was underpaid compared to his peers because certain health benefits were denied to his spouse, another man, even though they were provided to the opposite-sex spouses of others in the same position. He claimed this was a violation of Title VII and the EPA (among other laws) because it amounted to providing health benefits to women employees, which covered their male spouses, while denying those benefits to male employees who also happen to have male spouses. Some would argue this reasoning shares some affinity with the reasoning underlying Justice Gorsuch’s opinion in Bostock, i.e., that treating someone differently because of their sexual orientation (or gender identity) is really the same thing as treating them differently because of their sex.

The religious organization employer argued that it retained its religious character by, among other things, maintaining a code of conduct and administering its employee benefits program consistently with its religious values. It argued that those values prevented it from providing spousal benefits to employees’ same-sex spouses. Referencing the Bostock decision, the court held: “When an employer discriminates against an employee based on sexual orientation, ‘it necessarily and intentionally discriminates against that individual in part because of sex. And that is all Title VII has ever demanded to establish liability.’” Id. at 252 (quoting Bostock, 590 U.S. at 665).

The court then had to delve into the complicated relationship between anti-discrimination statutes and religious rights, which is not usually an issue in equal pay litigation. The employer tried several different arguments to escape the reasoning of Bostock. First, it argued that it fell within Title VII’s exception for religious entities. But the court held that the relevant provision, § 702(a), was meant to allow religious organizations to hire only individuals of the same religion; it did not provide blanket protection for religious organizations to discriminate against those who do not share particular beliefs or standards tied to its religious identity. “A plain reading of § 702(a) reveals Congress’s intent to protect religious organizations seeking to employ co-religionists, but the reading urged by [employer] would cause a relatively narrowly written exception to swallow all of Title VII, effectively exempting religious organizations wholesale.” Id. at 253.

The employer also argued that it was protected by the Religious Freedom Restoration Act (“RFRA”). That statute provides that “a person whose religious exercise has been burdened in violation of this section may assert that violation as a claim or defense in a judicial proceeding and obtain appropriate relief against a government.” 42 U.S.C. § 2000bb-1(c)). The Doe court noted that the Supreme Court had not given clear guidance regarding Title VII’s interaction with the RFRA. However, the court held that the plain language of RFRA was directed at restricting activities of the government that might substantially burden the free exercise of religion; it was not directed at private parties. “This court finds as a matter of law that RFRA restricts the government rather than private parties, and so [employer] may not assert RFRA as an affirmative defense against [plaintiff’s] claims.” Id. at 254.

Finally, the court held that both Title VII and the EPA were generally applicable laws that did not selectively burden religiously motivated conduct while exempting comparable secularly motivated conduct, and so did not violate the Free Exercise clause of the First Amendment. The court concluded: “Our Constitution’s solicitousness of religious exercise is not carte blanche for any religious institution wishing to place itself beyond the reach of any neutral and generally applicable law.” Id. at 256. But, in a move that demonstrates the novelty of these issues, the court certified two questions for decision by the Maryland Supreme Court: whether the Maryland Equal Pay for Equal Work Act (“MEPEWA”) prohibits discrimination on the basis of sexual orientation, and whether the Maryland Fair Employment Practices Act (“MFEPA”) allows certain religious organizations to discriminate because of sexual orientation. See Doe v. Catholic Relief Servs., No. 20-cv-1815, 2023 WL 155243 (D. Md. Jan. 11, 2023).[1]

Implications For Employers

This is only one case defining Bostock’s impact on the American workplace. And it does not even address what is arguably the most fundamental question in this context; namely, does the EPA prohibit discrimination in pay on the basis of sexual orientation or gender identity? If such discrimination is always tantamount to sex discrimination, then, arguably, the EPA would sweep within its ambit instances where LGBTQ individuals are paid more or less than their non-LGBTQ comparators for equal work. But some might argue that the language of the EPA—which specifically prohibits disparities in pay between “employees of the opposite sex”—is not as conducive to this type of interpretation as the “because of sex” or “on the basis of sex” language found in Title VII and some other statues. Nevertheless, as the Doe case demonstrates, such an interpretation may not even be necessary to raise issues regarding coverage under the EPA. Bostock remains a critically important decision that all employers should monitor with care.

These and other trends impacting equal pay litigation are discussed in much greater detail in Seyfarth Shaw’s yearly report, Developments in Equal Pay Litigation, 2024 Update. We highly recommend that report to any employer facing equal pay litigation, or to those who just want to know more about it so they can avoid such lawsuits in the future or keep abreast of changes in the law. We look forward to continuing to share our analysis of these issues.


[1] While beyond the scope of this article, the Maryland Supreme Court answered on August 23, 2023, holding that “the prohibition against sex discrimination in MFEPA does not prohibit discrimination on the basis of sexual orientation. MFEPA prohibits sexual orientation discrimination based on its specific enumeration of ‘sexual orientation’ as a protected class,” that “[a]dding sexual orientation as a protected category in MEPEWA will require . . . legislative action,” and that that “the General Assembly intended to exempt religious organizations from these kinds of MFEPA claims brought by employees who perform duties that directly further the core mission (or missions) of the religious entity.” Doe v. Catholic Relief Servs., 484 Md. 640, 660-61, 664, 667 (Md. 2023).

By Shamim Mohandessi and Michael A. Herbst

Seyfarth Synopsis: Last week on April 23, 2024, the FTC adopted a final rule that would effectively ban non-compete agreements in the context of employment relationships when the rule becomes effective on September 4, 2024, absent a stay or injunctive relief.  The rule would render unenforceable a broad array of employment-based non-competition agreements.  It would also require that employers provide notice to workers that certain non-competition agreements already entered into will not be and cannot be enforced.  Not surprisingly, before the weekend, at least three different lawsuits had been initiated challenging the validity of the FTC’s final rule as adopted. For firms engaged in M&A activity, investors and their advisors, they should carefully track whether the rule is struck down as it may impact standard buyer protection strategies with key employees of the target.

What the Rule Says

The core of the rule is found in 16 CFR 910.2(a), which states that it is an unfair method of competition under the Federal Trade Commission Act for an employer to enter into, attempt to enter into, enforce or attempt to enforce a non-compete clause against a worker.  The term “worker” is defined as a natural person who works for the employer and the term expressly includes independent contractors.  The term “non-compete clause” is defined very broadly as a term or condition of employment that prohibits a worker from, penalizes a worker for, or functions to prevent a worker from, seeking or accepting employment after conclusion of employment or from operating a business in the United States after conclusion of employment.  Workers defined as “senior executives” are treated differently: while it is still an unfair method of competition to enter into a non-competition agreement with a senior executive after the effective date of the rule, employers are permitted to enforce non-compete clauses entered into with a senior executive before the effective date of the rule.

Limited Impact in M&A

As a general matter, the FTC’s final rule does not apply to non-compete arrangements entered into by a person pursuant to a bona fide sale of a business entity, sale of the person’s ownership interest in the business entity or sale of all or substantially all the assets of a business entity’s operating assets. 16 C.F.R. § 910.3(a). The language of the rule is unclear whether “sale of a business entity” requires sale of 100% of the interests in the business entity or whether a smaller stake, perhaps a mere majority interest, is sufficient to qualify as a “sale of a business entity”.  Despite this ambiguity, firms engaged in M&A activity can expect that non-compete  clauses will continue to be enforceable against sellers of business entities, at least, in the regular course, which among other things allows for allocation of purchase price to the non-compete for tax purposes. Seasoned corporate practitioners may raise an eyebrow to the use of the term “bona fide” in describing the exemption from the rule. Ostensibly the FTC seeks to limit employers from engaging in a “sham transaction” of a business interest to secure the benefit of the exemption in the proposed rule  Buyers of businesses will need to undertake due diligence around the enforceability of non-compete clauses purporting to bind key employees of the target company; some of those non-compete clauses may have been rendered unenforceable and constitute violations of the new rule. .

Major Impact in Capital Markets

While the FTC’s final rule may be of modest impact to those engaged in M&A work, those engaged in deploying growth capital will have a more complicated road ahead in connection with the FTC’s new rule. There is no exemption for non-compete clauses entered into as a condition for investing capital into early stage and growth companies. While sales of businesses are priced on established multiples or other well-understood pricing mechanisms, venture capital investors, private equity investors deploying growth equity, and other capital providers often find themselves betting on a prospective portfolio company’s management team to execute on business plans and pro forma projections. Accordingly, the human capital risk is heightened, and in the absence of a secondary liquidation of equity interests of the management team, investors who usually condition their capital on the management team members entering into non-compete arrangements will find that this tool is no longer available to them when it comes time to protect their investment

A Reprieve for Non-Competes with Senior Executives

In a change from the FTC’s initial proposed rule, the final rule does not impact existing   non-compete arrangements with “senior executives” who meet certain duty and remuneration thresholds, but this is not a solution for prospective non-compete arrangements with senior executives after the effective date. 16 C.F.R. § 910.1.

Near Term Mitigations

While venture capital and private equity investors will invariably be waiting to see how the litigation filed immediately on the heels of the FTC’s announcement shakes out, it is perhaps more important than ever to begin considering whether transaction terms protect capital providers.

  1. A common-place exercise in the venture capital world, asking members of an operating team to “re-vest” their equity, will likely creep upmarket as a regular term in any investment transaction that does not include a liquidation of existing ownership interests.
  2. In later-stage transactions wherein capital providers are providing capital in tranches, we will likely begin to see more covenants regarding the operating team continuing their employment with the issuer at the time of each tranche of capital is disbursed, more akin to private credit arrangements.
  3. The FTC rule incentivizes the  use of confidentiality clauses and trade secrets protection language to limit unfair competition by departing members of the management team and may result in an uptick litigation for such breaches, but less certainty compared to non-compete enforcement.

A Need for Vigilance and New Thinking

Broader in title than it is in fact, the FTC’s final rule on non-competes certainly gives rise to concern for those engaged in corporate transactional matters and more for those involved in emerging growth and middle-market capital formation. For capital providers the specter of allocating capital to an issuer or borrower who subsequently loses some or all its differentiating operating team is real.

Perhaps more than ever before, financial incentives for retention, perfection of intellectual property rights, and culture must be revisited and enhanced.


To learn more about the FTC’s final rule on non-competes and its implications, join us for our webinar on Friday, May 3, 2024.