No NDA, No Trade Secret? Not Always.

Imagine this: an employee shared your company’s secret sauce in a pitch meeting or during the course of an exploratory partnership, and the idea is stolen. There’s no NDA in sight. Are you out of luck? Not necessarily. Even without a signed agreement, the law still may protect your trade secret under an implied duty of confidentiality.

Express vs. Implied: What's the Difference?

To win a trade secret case, a plaintiff must prove that the defendant had a duty of confidentiality. These come in two varieties:

· Express Duty: This is the straightforward kind—clearly stated in a written contract or NDA. It’s enforceable and predictable.

· Implied Duty: This arises from the nature of the relationship or the context in which the information was shared. Courts find an implied duty of confidentiality when “the other party has reason to know that the information was in fact confidential.” Valmarc Corp. v. Nike, Inc., No. 3:21-CV-01556-IM, 2024 WL 5056960, at *10 (D. Or. Dec. 10, 2024) (citing Carr v. AutoNation, Inc., 798 F.App’x 129, 130 (9th Cir. 2020); see also Tele-Count Eng’rs, Inc. v. Pac. Tel. & Tel. Co., 168 Cal. App. 3d 455, 466 (1985) (“The basis of the breach of confidence action is an obligation created by law for reasons of justice where no contract otherwise exists.”)

In short, even when nothing is signed, the law can and will read between the lines and recognize a confidentiality expectation based on how and why the information was shared. Both the federal Defend Trade Secrets Act (DTSA) and California’s Uniform Trade Secrets Act (UTSA) acknowledge this implied duty under the right circumstances.

When the Law Implies a Secret:

Cases involving arguments about implied duties unsurprisingly turn on their facts, but certain circumstances make a court more likely to find an implied duty.

· Oral and Written Reminders: Even absent a formal agreement, oral and written reminders to employees or vendors to keep information confidential may be enough to create an implied duty. Starship, LLC v. Ghacham, Inc, 2023 WL 5670788, at *19 (C.D. Cal. July 17, 2023); VBS Distribution, Inc. v. Nutrivita Lab’ys, Inc., 811 F. App’x 1005, 1009 (9th Cir. 2020).

· Deceptive Solicitation: Courts may impose an implied duty when a party deceptively solicits confidential information—such as a buyer coaxing a supplier into revealing product details only to steal the design. Pachmayr Gun Works, Inc. v. Olin Mathieson Chem. Corp., Winchester W. Div., 502 F.2d 802, 807 (9th Cir. 1974); Gunther-Wahl Prods., Inc. v. Mattel, Inc., 104 Cal. App. 4th 27, 36 (2002).

· Joint Venturers: Sharing confidential information to evaluate a business’s value for investment or acquisition can create an implied duty of confidentiality. Thompson v. California Brewing Co., 150 Cal. App. 2d 469, 476 (1957).

· Notice from Affiliate: If a defendant knows that the plaintiff has an NDA with the defendant’s affiliate, then that knowledge may impute a duty of confidentiality—even if the defendant wasn’t directly bound by that NDA. Valmarc Corp. v. Nike, Inc., No. 3:21-CV-01556-IM, 2024 WL 5056960, at *10 (D. Or. Dec. 10, 2024).

When Nothing Secret Is Implied:

However, courts are cautious. They won’t imply a duty of confidentiality in every situation. Here are some where they typically won’t:

· Unsolicited Disclosure: If you submit an idea to a potential business partner without any opportunity for them to reject confidentiality obligations, courts may not find a confidential relationship, even if recipient then shares the idea with a competitor. Faris v. Enberg, 97 Cal. App. 3d 309, 324 (1979).

· NDA Declined: If a recipient expressly declines to sign an NDA—but you share it with them anyway—an implied duty argument becomes a tough sell. Hooked Media Grp., Inc. v. Apple Inc., 55 Cal. App. 5th 323, 333 (2020).

· Failure to Follow NDA Strictures: If you have an NDA but don’t follow its terms (e.g., requirements to mark confidential information as such), the law will not step in to create an implied duty. Convolve, Inc. v. Compaq Computer Corp., 527 F. App’x 910, 925 (Fed. Cir. 2013).

Don't Rely on Hopes and Hunches

Courts don’t imply duties lightly. If you want to protect your secrets, the gold standard is still a well-drafted NDA. But if you forgot—or strategically skipped—an NDA, all is not lost.

To strengthen your case, show that:

· The relationship involved trust;

· The context clearly signaled confidentiality; and

· The recipient knew or should have known that the information was confidential.

And, of course, hire counsel who has experience litigating and winning such issues.

For more information regarding Alto Litigation’s litigation practice, please contact one of Alto Litigation’s partners: Bahram Seyedin-Noor, Bryan Ketroser, Joshua Korr, or Kevin O’Brien.

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Disclaimer: Materials on this website are for informational purposes only and do not constitute legal advice. Transmission of materials and information on this website is not intended to create, and their receipt does not constitute, an attorney-client relationship. Although you may send us email or call us, we cannot represent you until we have determined that doing so will not create a conflict of interests. Accordingly, if you choose to communicate with us in connection with a matter in which we do not already represent you, you should not send us confidential or sensitive information, because such communication will not be treated as privileged or confidential. We can only serve as your attorney if both you and we agree, in writing, that we will do so.

The materials on this website are not intended to constitute advertising or solicitation. However, portions of this website may be considered attorney advertising in some states.

Unless otherwise specified, the attorneys listed on this website are admitted to practice in the State of California.

Bahram Seyedin-Noor is Ranked by Chambers and Partners for Fifth Year in a Row

Alto Litigation Founder and CEO Bahram Seyedin-Noor has been recognized as a top securities litigator in California in the 2025 edition of Chambers USA. This is the fifth straight year he has been included in the rankings, a remarkable achievement given that Alto is a boutique firm and Chambers rankings are dominated by lawyers at much larger firms. 

Chambers and Partners’ annual rankings are a well-respected publication that recognizes firms and lawyers for excellence in their chosen practice areas. Chambers rankings are thoroughly vetted by hundreds of researcher analysis, and includes interviews of thousands of lawyers and clients each year. Individuals and firms demonstrate sustained excellence to be considered for the publication. 

Among the feedback provided in support of Bahram’s recognition is that, “Clients are lucky to get to work with him” and “I can't say enough positive things about working with Bahram.”

Responding to the recognition, Bahram stated, “It’s an honor to be recognized again by Chambers USA. Litigation is a team sport, and this reflects the talent, commitment, and creativity of the entire Alto team. We’re proud to stand shoulder to shoulder with our clients in high-stakes matters—and to consistently deliver results that earn their trust.”

AI Washing Revisited – Trying to Predict the Future

Yogi Berra famously observed: “It’s tough to make predictions, especially about the future.”

Predictions are having a moment, in the form of the predictive language models fueled by artificial intelligence (“AI”) which form the backbone of countless disruptive products and services. Last year we shared our thoughts on the practice of “AI washing,” or the misuse of exaggerated or untrue statements about a company’s AI capabilities to attract investors and customers. The Securities and Exchange Commission (“SEC”) and Federal Trade Commission (“FTC”) continue their enforcement efforts under the new administration, with resolutions to existing cases and new actions underway. Although Congress is on the verge of passing a 10-year moratorium on state-level regulations of AI, that ban does not appear to limit the ability of federal agencies to enforce existing laws against deceptive practices – or the rights of private actors to pursue traditional civil remedies for fraud or breaches of fiduciary duties.

Ecommerce Empire Builders

In September 2024 the FTC charged Empire Holdings Group and its principal, Peter Prusinowski, with falsely claiming that the “Ecommerce Empire Builders” tool could help consumers make up to millions of dollars in e-commerce. The civil complaint alleged that defendants promoted their program though social media channels such as Facebook, Instagram, TikTok, and YouTube, claiming that the tools they built for customers were “powered by artificial intelligence to make your life easier” and could get people “on the road to replacing your full-time income.” The Complaint went on to allege, however, that the program took many hours for clients to review, required significant time and effort to implement, and income, if any, was far from certain. The Complaint alleged five counts against defendants under the FTC Act and Consumer Review Fairness Act.

On May 9, 2025, the FTC and defendants entered a stipulated order banning Empire and Prusinowski from offering this purported business opportunity to the public and requiring the defendants to surrender assets to the FTC in order to refund consumers.

Nate, Inc.

In April 2025 the Acting U.S. Attorney for the Southern District of New York charged Albert Saniger, the former Chief Executive Officer of Nate, Inc. (“nate”), with engaging in a scheme to defraud investors by making false and misleading statements about nate’s use of proprietary AI technology. The indictment alleges that Saniger and nate brought in over $40 million in investments by representing to investors that nate’s shopping app used AI “to intelligently and autonomously complete customers’ merchandise orders across e-commerce websites.” The indictment further alleges that the nate app was not powered by unique AI capabilities, and at times, customer transactions were manually completed by contractors in the Philippines and Romania (the company eventually managed to develop “bots” to assist with some transactions). The indictment charges Saniger with securities fraud and wire fraud. The SEC filed a parallel civil complaint against Saniger, seeking civil money penalties, disgorgement of ill-gotten gains, and injunctive relief.

Possible Moratorium on State-level Regulation of A.I.

Meanwhile, the House of Representatives recently passed H.R. 1, the One Big Beautiful Bill Act (yes, that is the official short title of the bill). Section 43201(c) of the Act requires, subject to modest limitations, that “no State or political subdivision thereof may enforce any law or regulation regulating artificial intelligence models, artificial intelligence systems, or automated decision systems during the 10-year period beginning on the date of the enactment of this Act.” While this is a broad prohibition, two things are clear. First, the moratorium does not tie the hands of federal regulators, who have shown a willingness across administrations to apply time-tested civil and criminal tools against companies and their principals who are engaging in AI washing. Second, private plaintiffs continue to have at their disposal civil claims for false or misleading statements, from federal securities claims under the Securities Act of 1933 and Securities Exchange Act, to state law claims for breaches of fiduciary duties and state claims for false advertising and other consumer protections.

It's Like Déjà vu All Over Again

Despite a change in administrations and a likely state-level ban on A.I. regulation, federal agencies continue to take enforcement action against those who make false or misleading statements about their AI capabilities. Surely private plaintiffs will follow suit.

While AI is cutting-edge technology, companies should continue to apply traditional safeguards to claims about its capabilities. This includes truthful and precise communication, robust internal controls and oversight, and staying informed about regulatory developments and best practices.

For more information regarding Alto Litigation’s litigation practice, please contact one of Alto Litigation’s partners: Bahram Seyedin-Noor, Bryan Ketroser, Joshua Korr, or Kevin O’Brien.

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Disclaimer: Materials on this website are for informational purposes only and do not constitute legal advice. Transmission of materials and information on this website is not intended to create, and their receipt does not constitute, an attorney-client relationship. Although you may send us email or call us, we cannot represent you until we have determined that doing so will not create a conflict of interests. Accordingly, if you choose to communicate with us in connection with a matter in which we do not already represent you, you should not send us confidential or sensitive information, because such communication will not be treated as privileged or confidential. We can only serve as your attorney if both you and we agree, in writing, that we will do so.

The materials on this website are not intended to constitute advertising or solicitation. However, portions of this website may be considered attorney advertising in some states.

Unless otherwise specified, the attorneys listed on this website are admitted to practice in the State of California.

Ninth Circuit Holds that Bankruptcy Trustee Need Not Establish Injury to Creditors to Void Actual Fraudulent Transfer by Debtor

Creditors who find themselves fighting for a piece of bankruptcy pie just got a boost.  In a precedential ruling, the Ninth Circuit recently recognized in In re O’Gorman that the trustee in bankruptcy proceedings can void a pre-bankruptcy fraudulent transfer even without establishing creditor injury.  115 F.4th 1047 (2024).   

Fraudulent Transfers Under the Bankruptcy Code 

Codified at 11 U.S.C. § 548, the Bankruptcy Code’s fraudulent transfer provision in many ways parallels the Uniform Voidable Transactions Act.  Section 548(a)(1) provides that a bankruptcy trustee:  

“may avoid any transfer … of an interest of the debtor in property … that was made or incurred on or within 2 years before the date of the filing of the [bankruptcy] petition, if the debtor voluntarily or involuntarily …  

[(A)] made such transfer … with actual intent to hinder, delay or defraud any entity to which the debtor was or became, on or after the date that such transfer was made …, indebted; …” 

O’Gorman 

In O’Gorman, the bankruptcy trustee sought to set aside the debtor’s alleged fraudulent transfer of her home to an irrevocable land trust that was established by several trustees (the “Land Trustees”) to make improvements to the home and then sell it.  Id. at 1052.  The Land Trustees—who stood to profit handsomely from the sale of the home—maintained that the bankruptcy trustee lacked standing to bring a Section 548 claim because no creditors had been injured as a result of the debtor’s transfer to the land trust.  Id.   

The bankruptcy court granted summary judgment on the bankruptcy trustee’s actual fraudulent transfer claim, and the Bankruptcy Appellate Panel affirmed.   

On review, the Ninth Circuit explained that in order to have standing in bankruptcy court, the plaintiff must satisfy Article III constitutional requirements by showing that:  (i) he suffered an injury in fact that is concrete, particularized, and actual or imminent; (ii) the injury was likely caused by the defendant; and (iii) the injury would likely be redressed by judicial relief.  Id. at 1054-55.  But in O’Gorman, the only (potentially) secured creditor purportedly injured by the transfer did not have a valid claim to the property, and the unsecured creditors could be paid from the anticipated distribution of funds to the debtor.  Id.  Hence, the Land Trustees argued, the bankruptcy trustee could not meet the “injury” showing needed for Article III standing.  Id. at 1055. 

The court rejected the Land Trustees’ argument as reading too much into Article III’s injury requirement.  Id. at 1055.  According to the Ninth Circuit, the bankruptcy trustee need not demonstrate injury to a creditor, just that they have a “judicially cognizable interest” in avoiding the transfer on behalf of the estate.  Id.  To have such a judicially cognizable interest, the bankruptcy trustee was required to establish an injury to the estate—not to other creditors.  Id. at 1056.  And that showing, the court held, was easily satisfied in O’Gorman because the debtor’s transfer of her home to the Land Trustees’ trust depleted the assets in the estate.  Id.   

In reaching its decision, the Ninth Circuit looked to Fourth Circuit and Eighth Circuit holdings for guidance, including case law focusing on the debtor’s intent:  “for if a debtor enters into a transaction with the express purpose of defrauding his creditors, his behavior should not be excused simply because, despite the debtor’s best efforts, the transaction failed to harm any creditor.”  Id. at 1057 (citing Tavenner v. Smoot, 257 F.3d 401, 407 (4th Cir. 2001).   

Takeaways 

In removing “creditor injury” as a hurdle that must be cleared for a bankruptcy trustee to set aside an actual fraudulent transfer by the debtor, the Ninth Circuit has made life more uncertain for even well-meaning creditors who happen to have done business with a party within two years of that party subsequently filing for bankruptcy.  At the same time, the O’Gorman decision could be a boon to many other creditors as bankruptcy trustees increasingly void fraudulent transfers in an effort to increase overall payouts. 

For more information regarding Alto Litigation’s litigation practice, please contact one of Alto Litigation’s partners: Bahram Seyedin-Noor, Bryan Ketroser, Joshua Korr, or Kevin O’Brien.

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Disclaimer: Materials on this website are for informational purposes only and do not constitute legal advice. Transmission of materials and information on this website is not intended to create, and their receipt does not constitute, an attorney-client relationship. Although you may send us email or call us, we cannot represent you until we have determined that doing so will not create a conflict of interests. Accordingly, if you choose to communicate with us in connection with a matter in which we do not already represent you, you should not send us confidential or sensitive information, because such communication will not be treated as privileged or confidential. We can only serve as your attorney if both you and we agree, in writing, that we will do so.

The materials on this website are not intended to constitute advertising or solicitation. However, portions of this website may be considered attorney advertising in some states.

Unless otherwise specified, the attorneys listed on this website are admitted to practice in the State of California.

Multifront Legal Battles

Parties to commercial disputes typically resolve their differences in a single forum, either through a civil action or an arbitration.  In complex commercial litigation, however, parties often must attack or defend on multiple fronts simultaneously.  As discussed below, this can raise a host of procedural and strategic considerations.  

Parallel Civil Actions and Arbitrations

Arbitration requires unambiguous consent from all parties.  Thus, an overly-narrow arbitration clause in a contract may deprive an arbitrator of authority to resolve all disputes between two parties.  Even a broad arbitration clause may not reach all parties to a given dispute, where the operative agreement is between only two of several relevant parties.  Or a single dispute will involve multiple contracts, only one (or some) of which contain arbitration provisions.  All of these situations may lead to civil actions and arbitrations being filed simultaneously.

This can be problematic for several reasons. First, and most obviously, suing or being sued is costly, stressful, and time-consuming; parallel proceedings only multiply these negative effects.  Parallel proceedings also raise complicated questions of claim and issue preclusion and—in turn—proper sequencing.  A common way to mitigate these concerns is to stay one matter so that the parties may focus their attention and resources.  Of course, careful consideration must be paid to how any potential resolution of the “first” matter could or would impact the second/others.

Parallel Arbitrations

Most litigators are familiar with the concept of consolidating civil actions pending in the same court and involving common questions of fact or law.  But what happens when a group of employees or businesses have signed similar contracts (with arbitration provisions) with the same counterparty and assert similar grievances in multiple arbitrations?  Or when one party files arbitrations against several respondents based on similar issues but different agreements?

Good news:  AAA recently revised its rules to allow for consolidation of otherwise-separate arbitrations.  A related rule permits joinder of additional parties to an ongoing arbitration.  JAMS similarly allows for the consolidation of arbitrations when they have been filed by the same party, or the arbitration demand names a party already involved in a pending arbitration.  Both AAA and JAMS have also revised their rules to facilitate the more efficient resolution of mass arbitrations, giving some limited relief to businesses facing proliferating, similar claims.  
What if a dispute arises that involves separate contracts with different arbitration provisions (e.g., one AAA and one JAMS)?  Arbitrators themselves may lack the authority to consolidate or coordinate arbitrations being administered before entirely different organizations, elevating the importance of inter-party negotiation.  One potential solution is to negotiate an agreement to move one of the arbitrations so that they are all before the same tribunal.  Another is to request a stay so that the matters can be resolved sequentially—to the extent that resolution of first does not drive resolution of the second.

Parallel Books and Records Actions and Civil Actions 

Suspicious stockholders have tools to investigate possible mismanagement, including inspection demands and inspection actions.  Typically, such inspection (or “books and records”) actions precede more substantive (or “plenary”) lawsuits, but sometimes it may be necessary or advisable for a plaintiff to file them in tandem, especially since inspection actions tend to get resolved on an expedited basis.  Still, filing both at the same time may rightly or wrongly play into the corporate defendant’s argument that the shareholder is not pursuing inspection for the requisite “proper purpose.”

Takeaways

Successful navigation of parallel actions and arbitrations requires forethought, diplomacy, and a deep knowledge of all applicable rules—all things that experienced complex commercial litigation counsel can provide.  In the meantime, businesses would be wise to conduct periodic review of their contracts to ensure, among other things, that if they contain arbitration provisions, those provisions are either consistent or purposefully inconsistent with one another.  

For more information regarding Alto Litigation’s litigation practice, please contact one of Alto Litigation’s partners: Bahram Seyedin-Noor, Bryan Ketroser, Joshua Korr, or Kevin O’Brien.

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Disclaimer: Materials on this website are for informational purposes only and do not constitute legal advice. Transmission of materials and information on this website is not intended to create, and their receipt does not constitute, an attorney-client relationship. Although you may send us email or call us, we cannot represent you until we have determined that doing so will not create a conflict of interests. Accordingly, if you choose to communicate with us in connection with a matter in which we do not already represent you, you should not send us confidential or sensitive information, because such communication will not be treated as privileged or confidential. We can only serve as your attorney if both you and we agree, in writing, that we will do so.

The materials on this website are not intended to constitute advertising or solicitation. However, portions of this website may be considered attorney advertising in some states.

Unless otherwise specified, the attorneys listed on this website are admitted to practice in the State of California.

New Law Expands Right to Third Party Discovery Under California Arbitration Act Beyond that Available Under the Federal Arbitration Act

As of January 1, 2025, whether a party can obtain prehearing documents or testimony from third parties in an arbitration depends in large part on whether the California Arbitration Act (“CAA”) or Federal Arbitration Act (“FAA”) governs their dispute.  

Recent Amendment to the CAA Permits Expansive Discovery, Including Third Party Subpoenas 

At the turn of this year, the CAA was amended to significantly broaden the scope of discovery allowed in arbitration proceedings.  Prior to this year’s amendment, Code of Civil Procedure (“CCP”) §§ 1283.05 and 1283.1(b) only allowed parties to an arbitration agreement governed by the CAA to take depositions and obtain discovery if their arbitration agreement allows it (or if they are arbitrating a personal injury or wrongful death dispute).  The new law repealed CCP § 1283.1 and amended CCP § 1283.05(a) to afford CAA arbitration participants more expansive discovery rights.   

Section 1283.05(a) as amended provides that: 

“the parties to the arbitration shall have the right to take depositions and to obtain discovery regarding the subject matter of the arbitration, and, to that end, to use and exercise all of the same rights, remedies, and procedures, and be subject to all of the same duties, liabilities, and obligations in the arbitration with respect to the subject matter thereof, … as if the subject matter of the arbitration were pending before a superior court …”  

Parties to arbitration under the CAA can even obtain the deposition testimony and documents of third parties by having a subpoena issued by the arbitrator in accordance with the procedures set forth in amended CCP § 1282.6.  Note that some restrictions remain:  The arbitrator or arbitrators must be appointed before discovery can commence (see CCP § 1283.05(a)), and depositions for discovery may not be taken unless leave to do so is first granted by the arbitrator or arbitrators (CCP § 1283.05(e)).   

The FAA’s Silence on the Issue of Discovery 

The overarching purpose of the FAA is “to ensure the enforcement of arbitration agreements according to their terms so as to facilitate informal, streamlined proceedings.”  AT&T Mobility LLC v. Concepcion, 563 U.S. 333, 131 S. Ct. 1740, 1743 (2011).  Consistent with its purpose, while some courts have recognized a right to limited discovery related to the making or alleged violation of the arbitration agreement, the FAA does not provide a mechanism for parties to obtain discovery related to their dispute.  

For that reason, parties to an arbitration agreement governed by the FAA can – and often do – expressly provide for discovery in one of two ways.   

First, parties may agree that their arbitration will be subject to an identified arbitration organization’s rules, which in turn do or may permit discovery.  For instance, the American Arbitration Association Commercial Rules (“AAA Rules”) do not expressly provide for the deposition of witnesses, but they do give the arbitrator the authority to “manage any necessary exchange of information among the parties” and to respond to “reasonable document requests.”  See AAA Rule 23(a) and (b).  And the JAMS Comprehensive Arbitration Rules & Procedures (“JAMS Rules”) provide for the “voluntary and informal exchange of all non-privileged documents and other information … relevant to the dispute or claim” and the names of all individuals they may call as a witness at the arbitration hearing.  See JAMS Rule 17(a).  The JAMS Rules allow each party to take one deposition of an opposing party or an individual under the control of the opposing party.  Id. 17(b).  Parties can take additional depositions if permitted to do so by the arbitrator based on their weighing of the reasonable need for the information, availability of other discovery options, and burdensomeness of the request.  Id.   

Second, parties may incorporate customized language into their arbitration agreement whereby they agree, for example, to arbitrate pursuant to the Federal Rules of Civil Procedure, or pursuant to another discovery process similar to that in litigation.   

Arbitrators Have No Ability to Issue Discovery Subpoenas Under the FAA 

Even where parties have incorporated the AAA Rules, JAMS Rules or custom discovery language into their arbitration agreement governed by the FAA, one question remains:  How, if at all, can a party obtain pre-hearing deposition testimony or documents from non-parties to the dispute?  The answer is that they cannot. 

The only authority given to an arbitrator under the FAA to compel the appearance of a witness or the production of documents is set forth in FAA § 7, which gives arbitrators authority to: 

“summon in writing any person to attend before them … as a witness and in a proper case to bring with him or them any book, record, document, or paper which may be deemed material as evidence in the case.” 

The Ninth Circuit in CVS Health Corp. v. Vividus, LLC, 878 F.3d 703, 706-08 (2017) addressed for the first time whether Section 7 of the FAA empowered arbitrators to order third parties to produce document for review prior to an arbitration hearing.  Based on a plain reading of Section 7, the Ninth Circuit concluded that the statute granted the arbitrator “no freestanding power to order third parties to produce documents other than in the context of a hearing.”  Id. at 706.  Other courts in California, applying the holding in CVS, have similarly recognized that the FAA does not grant an arbitrator authority to issue prehearing discovery subpoenas for documents.  See e.g., Harris v. T-Mobile US, Inc., No. EDMC204JGBPLAX, 2020 WL 4032289, at *2 (C.D. Cal. May 5, 2020); Aixtron, Inc. v. Veeco Instruments Inc., 52 Cal.App.5th 360, 404 (2020).  Although the Ninth Circuit has yet to consider whether Section 7 affords arbitrators the power to issue subpoenas for prehearing deposition testimony, it is likely that courts in this Circuit would apply the reasoning of the CVS court to find that such power is also prohibited.   

The Takeaway 

Many cases are won or lost on discovery, and third parties often have critical documents and/or testimony to give.  Laying the foundation to obtain and present the evidence one needs in litigation—even before any dispute arises—can pay dividends later on.   

For more information regarding Alto Litigation’s litigation practice, please contact one of Alto Litigation’s partners: Bahram Seyedin-Noor, Bryan Ketroser, Joshua Korr, or Kevin O’Brien.

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Disclaimer: Materials on this website are for informational purposes only and do not constitute legal advice. Transmission of materials and information on this website is not intended to create, and their receipt does not constitute, an attorney-client relationship. Although you may send us email or call us, we cannot represent you until we have determined that doing so will not create a conflict of interests. Accordingly, if you choose to communicate with us in connection with a matter in which we do not already represent you, you should not send us confidential or sensitive information, because such communication will not be treated as privileged or confidential. We can only serve as your attorney if both you and we agree, in writing, that we will do so.

The materials on this website are not intended to constitute advertising or solicitation. However, portions of this website may be considered attorney advertising in some states.

Unless otherwise specified, the attorneys listed on this website are admitted to practice in the State of California.

Delaware Reins in Stockholder Demands for Books and Records

For decades, Section 220 of the Delaware General Corporation Law (“Section 220”) has been a powerful tool for shareholders of Delaware corporations to investigate suspected wrongdoing. And as the way people communicate has changed from formal, hard-copy letters to more “informal” types of correspondence like emails and text messages, the Delaware Court of Chancery increasingly has found such informal correspondence fair game for shareholder inspection demands. Now, the Delaware legislature is pulling back on the reins.

On March 25, 2025, Section 220 of the Delaware General Corporation Law was amended to impose stricter requirements on stockholders seeking to inspect corporate books and records. These changes are meant to reduce the burdens of Section 220 demands upon corporations and to limit their use as a prelitigation tool for evidence gathering. The revisions impact both the types and vintage of records amenable to shareholder inspection demands.

Too Demanding

Section 220 has long provided stockholders a qualified right to inspect the books and records of Delaware corporations for a “proper purpose,” so long as those books and records were deemed “necessary and essential” to that purpose. Over time, courts have broadened their interpretation of these terms. Where once demands were limited to formal Board materials and minutes, stockholders more recently have been able to compel corporations to disclose a wide range of documents including even informal communications such as emails, text messages, and more. Courts acknowledged that Section 220 demands were being used as a prelitigation discovery tool and were willing to provide stockholders access to documents that could be used to evaluate their potential legal claims. Predictably, the burden and expense of Section 220 demands on corporations increased dramatically.

“Books and Records” Defined, More Narrowly

The Delaware legislature has elected to reverse this trend. Following the amendment, Section 220 specifies the types of documents that stockholders can request, in some cases specifying the permissible age limit of the documents. The new list includes:

· Certificates of incorporation and bylaws;

· Minutes of stockholder and board meetings for the past three years;

· Written communications to stockholders within the past three years;

· Materials provided to the board or committees in connection with actions taken by the board;

· Annual financial statements for the past three years;

· Certain corporate contracts with stockholders; and

· Director and officer independence questionnaires

Other Documents

If documents specified in Section 220 are unavailable, then the Court of Chancery may order the production of their “functional equivalents,” but only if they are “necessary and essential to fulfill the stockholder’s proper purpose.”

And if a stockholder wants access to other documents, beyond those specified in the new statutory definition of “books and records” (or their “functional equivalents”), then they must:

· Demonstrate a proper purpose for the request;

· Show a “compelling need” for the additional records; and

· Provide “clear and convincing evidence” that the requested documents are necessary and essential to achieve the stated purpose

Takeaways

For Delaware corporations, the changes to Section 220 highlight the importance of proper recordkeeping. In addition to other, more obvious benefits, having such materials as board and stockholder minutes, financial statements, and so forth available for provision as legally-required will reduce the possibility of needing to provide less formal, “functional equivalents” to shareholders.

For shareholders, the statutory revisions change the calculus for decisions about the expected value of taking a recalcitrant Delaware corporation to court. And for those shareholders who do move forward with inspection actions, the changes provide a roadmap for how best to fortify any request for “informal” materials.

For more information regarding Alto Litigation’s litigation practice, please contact one of Alto Litigation’s partners: Bahram Seyedin-Noor, Bryan Ketroser, or Joshua Korr.

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Disclaimer: Materials on this website are for informational purposes only and do not constitute legal advice. Transmission of materials and information on this website is not intended to create, and their receipt does not constitute, an attorney-client relationship. Although you may send us email or call us, we cannot represent you until we have determined that doing so will not create a conflict of interests. Accordingly, if you choose to communicate with us in connection with a matter in which we do not already represent you, you should not send us confidential or sensitive information, because such communication will not be treated as privileged or confidential. We can only serve as your attorney if both you and we agree, in writing, that we will do so.

The materials on this website are not intended to constitute advertising or solicitation. However, portions of this website may be considered attorney advertising in some states.

Unless otherwise specified, the attorneys listed on this website are admitted to practice in the State of California.

AI and Copyright Law: The Thaler Decision and Human Authorship Requirement

On March 18, 2025, the U.S. Court of Appeals for the District of Columbia Circuit affirmed the D.C. District Court's and U.S. Copyright Office's decisions, holding that a copyrighted work cannot be authored exclusively by an AI system. This decision reinforces the fundamental principle that human creativity remains central to copyright protection in the United States.  

Case Background 

Computer scientist Dr. Stephen Thaler claims to have created a generative-AI system dubbed "Creativity Machine," which Dr. Thaler says created a picture that he titled "A Recent Entrance to Paradise" (the "Artwork"). Dr. Thaler submitted the Artwork to the Copyright Office for registration, listing the Creativity Machine as the sole author of the work and himself as the work's owner, stating that the Artwork was "autonomously created by artificial intelligence." The Copyright Office denied registration because "a human being did not create the work." 

The Litigation 

Dr. Thaler sought judicial review of the Office's decision. The D.C. District Court agreed with the Copyright Office and declined to recognize copyright protection in works created solely by AI systems, holding that "[h]uman authorship is a bedrock requirement of copyright." Thaler v. Perlmutter, 687 F. Supp. 3d 140 (D.D.C. 2023). The district court also found that Dr. Thaler waived his argument that he should be regarded as the author (because he created and used the Creativity Machine), as his case presented "only the question of whether a work generated autonomously by a computer system is eligible for copyright."  

Affirming the district court's decision, the U.S. Court of Appeals for the District of Columbia Circuit rejected Dr. Thaler's reading of the Act and held that "the current Copyright Act's text, taken as a whole, is best read as making humanity a necessary condition for authorship under the Copyright Act." Thaler v. Perlmutter, No. 23-5233 (D.C. Cir. Mar. 18, 2025). It also rejected Dr. Thaler's work‑made-for-hire argument, because, the court explained, the Creativity Machine did not have authorship that could be imputed to him. 

The Court then made a crucial clarification that, contrary to Dr. Thaler's position, "the human authorship requirement does not prohibit copyrighting work that was made by or with the assistance of artificial intelligence," it merely requires that the "author" of the work be a human being—not the AI system itself. 

Implications for AI-Human Collaboration 

This ruling clarifies that works created with AI assistance can still receive copyright protection when human authors exercise sufficient creative control and input. The decision leaves open the possibility that a human who uses AI as a tool—similar to using a camera, word processor, or other technology—may claim authorship of the resulting work if they contribute sufficient creative elements. 

While this case addressed an extreme scenario where no human authorship was claimed, it sets the stage for more questions about the degree of human involvement required for copyright protection.  

Conclusion 

The Thaler case touches on the very essence of U.S. copyright law, which historically has protected the fruits of human intellectual labor for the public benefit. The law rewards the judgment, skill, and creative choices that humans exercise when creating works, recognizing the uniquely human aspects of the creative process. 

Thaler confirms that an AI system—by itself—cannot be the sole author of a copyrightable work because it does not satisfy the human authorship requirement. However, the ruling also acknowledges the reality of AI as a creative tool and preserves the copyright system's fundamental purpose of promoting human creativity while adapting to technological evolution. 

For more information regarding Alto Litigation’s litigation practice, please contact one of Alto Litigation’s partners: Bahram Seyedin-Noor, Bryan Ketroser, or Joshua Korr.

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Disclaimer: Materials on this website are for informational purposes only and do not constitute legal advice. Transmission of materials and information on this website is not intended to create, and their receipt does not constitute, an attorney-client relationship. Although you may send us email or call us, we cannot represent you until we have determined that doing so will not create a conflict of interests. Accordingly, if you choose to communicate with us in connection with a matter in which we do not already represent you, you should not send us confidential or sensitive information, because such communication will not be treated as privileged or confidential. We can only serve as your attorney if both you and we agree, in writing, that we will do so.

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Unless otherwise specified, the attorneys listed on this website are admitted to practice in the State of California.

New Developments in Crypto Litigation and Regulation

On February 26, 2025, the United States Court of Appeals for the Second Circuit affirmed the dismissal of federal securities claims against developers of a decentralized cryptocurrency exchange and their venture capital investors in Risley v. Universal Navigation Inc. The court held that these developers could not be liable under federal securities laws for alleged fraud perpetrated by third parties on their exchange.

The case involved a decentralized exchange operating through self-executing "smart contracts" that autonomously facilitate cryptocurrency trades. Plaintiffs alleged the exchange enabled trading of fraudulent "scam tokens" that constituted unregistered securities.

The Second Circuit, assuming for argument's sake that the tokens were securities, nevertheless dismissed the Securities Act claims. The court reasoned that the defendants were neither direct sellers of the tokens nor actively soliciting their sale. The court analogized the exchange's role to that of traditional exchanges like Nasdaq or NYSE, determining they were merely "collateral to the offer or sale" rather than participants in the transactions themselves.

Additionally, the court rejected Exchange Act claims, finding no rescindable contract existed between plaintiffs and defendants. However, the Second Circuit did vacate dismissal of state law claims and remanded them for consideration under diversity jurisdiction.

SEC Declares "Meme Coins" Not Securities

On February 27, 2025, the SEC's Division of Corporation Finance provided clarity on crypto regulation by declaring that "meme coins" do not fall under the definition of "security" under federal law.

The SEC defined meme coins as crypto assets inspired by internet memes, characters, or trends that attract online communities primarily for entertainment, social interaction, and cultural purposes. Since these assets don't generate yield or convey rights to future income or business assets, they don't qualify as securities under the Securities Act or Exchange Act definitions.

This determination means meme coin transactions don't require SEC registration, though the agency warned this doesn't extend to products merely labeled as "meme coins" to circumvent securities laws or those used for fraudulent conduct.

The Division also analyzed meme coins under the "investment contract" test from SEC v. W.J. Howey Co., concluding that meme coin purchasers are not making investments into enterprises, nor are their profit expectations derived from others' efforts, but rather from speculative trading and market sentiment.

SEC Moves to Drop Lawsuit Against Coinbase

In a major shift signaling the Trump administration's friendlier approach to cryptocurrency, Coinbase announced recently that SEC staff have agreed in principle to dismiss their lawsuit filed during the Biden administration. The original suit had accused Coinbase of operating as an unregistered securities broker.

The move aligns with President Trump's campaign promises to roll back strict crypto enforcement and make the United States the "crypto capital of the world." While SEC staff have, according to Coinbase, agreed to the dismissal in principle, the agency must still formally vote to drop the suit.

Conclusion

As courts continue to refine the application of securities laws to various crypto assets and activities, and with regulatory approaches evolving under the Trump administration, we will continue to monitor these rapidly developing trends in the crypto space.

For more information regarding Alto Litigation’s litigation practice, please contact one of Alto Litigation’s partners: Bahram Seyedin-Noor, Bryan Ketroser, or Joshua Korr.

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Disclaimer: Materials on this website are for informational purposes only and do not constitute legal advice. Transmission of materials and information on this website is not intended to create, and their receipt does not constitute, an attorney-client relationship. Although you may send us email or call us, we cannot represent you until we have determined that doing so will not create a conflict of interests. Accordingly, if you choose to communicate with us in connection with a matter in which we do not already represent you, you should not send us confidential or sensitive information, because such communication will not be treated as privileged or confidential. We can only serve as your attorney if both you and we agree, in writing, that we will do so.

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Ninth Circuit Dismisses Slack Technologies Securities Suit: Investors Must Trace Shares to Registration Statement

In an important decision affecting securities litigation, the U.S. Court of Appeals for the Ninth Circuit has dismissed claims against Slack Technologies, holding that investors must be able to trace their shares directly to an allegedly misleading registration statement to maintain a lawsuit under Sections 11 and 12(a)(2) of the Securities Act of 1933. 

The February 10, 2025 decision in Pirani v. Slack Technologies, Inc. comes after the Ninth Circuit's previous ruling was vacated by the U.S. Supreme Court in 2023. While the Ninth Circuit had initially affirmed the district court's denial of Slack's motion to dismiss, the Supreme Court held that Section 11 requires plaintiffs to show their securities are traceable to the particular registration statement alleged to be misleading. On remand, the Ninth Circuit reversed its earlier position and instructed the district court to dismiss the complaint in full. 

Case Background 

Slack Technologies went public in June 2019 through a direct listing, a process that differs from traditional IPOs in that the company simply lists already-issued shares rather than issuing new ones. On the first day of trading, both registered shares (118 million) and unregistered shares (165 million) became available simultaneously on the New York Stock Exchange. 

When Slack Technologies' shares subsequently lost more than a third of their value following service disruptions and disappointing financial results, investor Fiyyaz Pirani filed a class action lawsuit, alleging the company's registration statement contained material misstatements and omissions. 

The Traceability Requirement 

The critical issue in the case was whether Pirani could establish that the shares he purchased were "traceable" to the registration statement containing the alleged misrepresentations. Unlike traditional IPOs where investors can typically trace purchased shares to a specific registration statement during the lock-up period, direct listings make this virtually impossible since registered and unregistered shares trade simultaneously after the direct listing becomes effective. 

Pirani had previously conceded that he could not trace his shares to the registration statement, but later attempted to establish traceability through statistical probability, arguing that given the proportion of registered shares available (approximately 42%), it was statistically likely that at least some of his 30,000 shares were registered. 

Court's Analysis 

The Ninth Circuit rejected Pirani's statistical approach, finding it both: 

1. Barred by his earlier concessions that he "did not and cannot allege that he purchased shares registered under and traceable to Slack's Registration Statement" 

2. Fundamentally flawed as a legal theory, as it conflicts with precedent requiring investors to "trace the chain of title for their shares back to the" allegedly misleading registration statement. 

The court also determined that Section 12(a)(2) of the Securities Act imposes the same traceability requirement as Section 11, citing the Supreme Court's decision in Gustafson v. Alloyd Co. (1995), which established that liability under Section 12(a)(2) applies only to securities sold in public offerings under a registration statement. 

Key Implications 

By requiring direct traceability between purchased shares and the registration statement, the ruling effectively makes it more difficult for investors to bring Section 11 and 12(a)(2) claims in the context of direct listings, where registered and unregistered shares are commingled from day one. Companies may now view direct listings as offering certain liability advantages compared to traditional IPOs, while investors will face additional hurdles in establishing standing to sue for disclosure deficiencies. 

For more information regarding Alto Litigation’s litigation practice, please contact one of Alto Litigation’s partners: Bahram Seyedin-Noor, Bryan Ketroser, or Joshua Korr.

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Disclaimer: Materials on this website are for informational purposes only and do not constitute legal advice. Transmission of materials and information on this website is not intended to create, and their receipt does not constitute, an attorney-client relationship. Although you may send us email or call us, we cannot represent you until we have determined that doing so will not create a conflict of interests. Accordingly, if you choose to communicate with us in connection with a matter in which we do not already represent you, you should not send us confidential or sensitive information, because such communication will not be treated as privileged or confidential. We can only serve as your attorney if both you and we agree, in writing, that we will do so.

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Delaware Supreme Court Eases Path to Incorporate Elsewhere

Delaware is a small state but recent decisions by Delaware courts have made it difficult to leave - if you are a company incorporated in Delaware who wants to reincorporate in another state. But the Delaware Supreme Court, in reversing a Chancery Court decision, has removed at least one major obstacle to reincorporation by holding that the entire fairness doctrine did not apply to the efforts of two affiliated companies to change their corporate domiciles from Delaware to Nevada. If the entire fairness doctrine had applied, as one commentator observed, incorporating in Delaware would be like the Hotel California – you could check in but you could never leave.

In Maffei v. Palkon, 2025 WL 384054 (Del. Feb. 4, 2025), Gregory Maffei owned 43% of the voting power of Liberty Tripadvisor Holdings, Inc., which in turn held 56% of the voting power of Tripadvisor, Inc, which operates online travel agencies and comparison-shopping website. Maffei and the other defendants did not dispute that Maffei controlled both companies.

The boards of Tripadvisor and Liberty Tripadvisor voted to reincorporate from Delaware to Nevada, because, among other things, the latter’s corporate law appeared to provide better protection from liability for companies and their officers and directors. Stockholder votes approved the reincorporation, but there was substantial opposition from minority stockholders of Tripadvisor and the reincorporation would not have been ratified if not for the votes of Maffei and Liberty Tripadvisor. Subsequently, a stockholder of Tripadvisor and another of Liberty Tripadvisor filed an action in Delaware Chancery Court against Maffei and the companies’ directors that challenged the reincorporation, arguing that it was unfair to the minority stockholders.

Vice Chancellor Travis Laster had to consider which standard under Delaware law applied in reviewing the transaction – the business judgment rule, enhanced scrutiny, or the most onerous standard, entire fairness, in which the board must show that the transaction was entirely fair to the company and its stockholders. In denying the defendants’ motion to dismiss, the Vice Chancellor agreed with plaintiffs that entire fairness applied because Maffei, as the controlling stockholder, would receive a material “non-ratable benefit,” meaning a benefit that was not shared by all the stockholders. The Vice Chancellor held that defendants had not satisfied the entire fairness standard. The Delaware Supreme Court then granted interlocutory appeal.

Reversing the lower court’s analysis, the Supreme Court held that the proper standard of review was the business judgment rule, under which there is a presumption that the directors of a corporation acted on an informed basis, in good faith and in the honest belief that the action was in the best interests of the corporation. Unless a plaintiff can rebut this presumption, a court will not second-guess the decisions of the board. Only if the presumption is successfully rebutted by a preponderance of the evidence, does the burden shift to the directors to show that the transaction was entirely fair.

The court held that the entire fairness standard was not triggered merely because a company has a controlling stockholder. There must be a showing that the control person derived a benefit that was not shared with other stockholders. Here, there was no showing that Maffei and the directors would derive a material non-ratable benefit, because there were no allegations that any particular litigation claims would be impaired or that any particular transaction would be consummated by the reincorporation in Nevada. Plaintiffs’ claims were based on nothing more than speculation concerning potential future liabilities and courts should not decide cases based on speculative litigation. Also, the principles of comity were furthered by declining to engage in a cost-benefit analysis of corporate governance in Delaware and Nevada.

Key takeaway: The Delaware Supreme Court made clear that reincorporation to another state will not be blocked merely because the other state’s law might provide greater protection from liability for a control person and the directors in potential litigation. However, reincorporation still could be prohibited if it appears that the control person and board are seeking to escape tangible actual or threatened liability or effect a specific transaction that would be unfair to minority shareholders.

For more information regarding Alto Litigation’s litigation practice, please contact one of Alto Litigation’s partners: Bahram Seyedin-Noor, Bryan Ketroser, or Joshua Korr.

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Disclaimer: Materials on this website are for informational purposes only and do not constitute legal advice. Transmission of materials and information on this website is not intended to create, and their receipt does not constitute, an attorney-client relationship. Although you may send us email or call us, we cannot represent you until we have determined that doing so will not create a conflict of interests. Accordingly, if you choose to communicate with us in connection with a matter in which we do not already represent you, you should not send us confidential or sensitive information, because such communication will not be treated as privileged or confidential. We can only serve as your attorney if both you and we agree, in writing, that we will do so.

The materials on this website are not intended to constitute advertising or solicitation. However, portions of this website may be considered attorney advertising in some states.

Unless otherwise specified, the attorneys listed on this website are admitted to practice in the State of California.

You’ve Been Served (via NFT)

Plaintiffs’ lawyers often lament the difficulty complying with service-of-process requirements when dealing with foreign—or just plain slippery—defendants. Such difficulties can be compounded when the litigation involves parties whose very identities may not even be known.

In a novel development for legal procedure in the digital age, the United States Bankruptcy Court for the Southern District of New York recently authorized the service of legal documents through non-fungible tokens (NFTs), marking one of the first decisions to directly address the use of blockchain technology for service of process.

The October 24, 2024 decision arose from adversary proceedings in the Celsius Network LLC (“Celsius”) bankruptcy case, where the litigation administrator sought to recover allegedly-misappropriated assets transferred to cryptocurrency wallets whose owners could not be identified or located.

Background and Analysis

The litigation administrator for Celsius sought to recover assets allegedly misappropriated by Jason Stone and KeyFi Inc. (“KeyFi”). While Celsius settled with Stone and KeyFi, the litigation administrator needed to serve process on subsequent transferees who received the assets - but only had their cryptocurrency wallet addresses.

So the litigation administrator filed a motion for alternative service, which sought permission to serve defendants through NFTs airdropped to their cryptocurrency wallet addresses. The NFTs would contain links to a secure website hosting the legal documents.

Expert testimony was crucial in establishing the reliability of this method. The litigation administrator’s expert from FTI Consulting Group explained that:

• The NFT airdrop process would automatically deposit tokens to specific wallet addresses

• Each NFT would contain metadata with a clear hyperlink to the legal documents

• The website would be secured against tampering and would not appear in search engines

• FTI could monitor both the wallets and website traffic to verify receipt and access

• Wallet ownership rarely changes hands, making it likely the original defendants still controlled the addresses

While non-parties raised concerns about this unconventional service method, none of the actual defendants appeared to oppose the motion. The court found the expert testimony persuasive in establishing that NFT service was "reasonably calculated" to provide notice to defendants. The court analogized NFT service to already-accepted methods like email and social media, noting

that courts have increasingly embraced technological solutions when traditional service methods are impractical.

Looking Ahead

While the S.D.N.Y. Bankruptcy Court acknowledged that the litigation administrator may face further challenges in prevailing and collecting any judgments, this decision addresses one significant procedural hurdle in pursuing claims against anonymous blockchain participants. As digital asset litigation continues to evolve, this ruling may provide a framework for other courts grappling with similar service challenges in the future.

For more information regarding Alto Litigation’s litigation practice, please contact one of Alto Litigation’s partners: Bahram Seyedin-Noor, Bryan Ketroser, or Joshua Korr.

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Disclaimer: Materials on this website are for informational purposes only and do not constitute legal advice. Transmission of materials and information on this website is not intended to create, and their receipt does not constitute, an attorney-client relationship. Although you may send us email or call us, we cannot represent you until we have determined that doing so will not create a conflict of interests. Accordingly, if you choose to communicate with us in connection with a matter in which we do not already represent you, you should not send us confidential or sensitive information, because such communication will not be treated as privileged or confidential. We can only serve as your attorney if both you and we agree, in writing, that we will do so.

The materials on this website are not intended to constitute advertising or solicitation. However, portions of this website may be considered attorney advertising in some states.

Unless otherwise specified, the attorneys listed on this website are admitted to practice in the State of California.

Delaware District Court Rules Against AI Company in Legal Research Copyright Case

In an important artificial intelligence ruling for both the legal technology and publishing industries, the U.S. District Court for the District of Delaware has largely sided with Thomson Reuters in its copyright infringement lawsuit against ROSS Intelligence.  The court held that ROSS's use of Westlaw headnotes to train its AI legal research platform infringed Westlaw’s copyrights and was not protected by fair use.

The February 11, 2025 opinion by District Judge Bibas revises his earlier 2023 summary judgment ruling and provides important guidance on how courts may analyze copyright claims involving AI training data.

Key Holdings

The court granted partial summary judgment to Thomson Reuters, finding that ROSS had infringed copyrights in 2,243 Westlaw headnotes. The court found that Westlaw's headnotes contained sufficient creativity to merit copyright protection, comparing the editorial process of creating headnotes to sculpture - choosing which parts of an opinion to highlight demonstrates creative expression.

Notably, the court rejected ROSS's fair use defense after analyzing the four traditional fair use factors. While acknowledging that ROSS's use was "intermediate" - converting headnotes into training data rather than displaying them to users - the court found this use was still primarily commercial and non-transformative since ROSS aimed to compete directly with Westlaw.

The court particularly emphasized market harm, noting that both the current legal research market and potential future market for AI training data could be impacted. The opinion distinguished this case from Google v. Oracle, where copying was permitted in part because programmers relied heavily on the specific programming interface at issue. Here, in contrast, ROSS could have created its own original legal summaries without needing to copy Westlaw's existing content, as there was no similar technical or practical necessity to use its specific expression.

Implications for AI Development

This ruling suggests companies developing AI systems should carefully evaluate their training data sources and may need to:

1. Obtain licenses for copyrighted training materials rather than assuming fair use will apply

2. Develop original training data rather than copying existing protected content

3. Consider whether their use truly transforms the copyrighted material in a way that serves a different purpose from the original

The court noted it was only addressing non-generative AI in this case, leaving open questions about how copyright law might apply to generative AI systems.

For more information regarding Alto Litigation’s litigation practice, please contact one of Alto Litigation’s partners: Bahram Seyedin-Noor, Bryan Ketroser, or Joshua Korr.

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Disclaimer: Materials on this website are for informational purposes only and do not constitute legal advice. Transmission of materials and information on this website is not intended to create, and their receipt does not constitute, an attorney-client relationship. Although you may send us email or call us, we cannot represent you until we have determined that doing so will not create a conflict of interests. Accordingly, if you choose to communicate with us in connection with a matter in which we do not already represent you, you should not send us confidential or sensitive information, because such communication will not be treated as privileged or confidential. We can only serve as your attorney if both you and we agree, in writing, that we will do so.

The materials on this website are not intended to constitute advertising or solicitation. However, portions of this website may be considered attorney advertising in some states.

Unless otherwise specified, the attorneys listed on this website are admitted to practice in the State of California.

Arbitration & Injunctive Relief: Practice Pointers for Judicial Relief in California Superior Court

As more and more commercial agreements incorporate arbitration provisions, it is increasingly common for business disputes to be subject to arbitration.  However, sophisticated parties often want seasoned judges to decide their right to injunctive relief even though they want the efficiencies that arbitration has to offer.  For that reason, it is fairly typical for an arbitration provision to include a “carve out” that allows the contracting parties to seek injunctive relief in Court.  For example, an arbitration agreement might provide: 

“Any dispute arising out of or in connection with this Agreement shall be referred to and finally resolved by arbitration before a single arbitrator.  The foregoing, however, shall not preclude the parties from applying to a court for any preliminary or injunctive relief to preserve the status quo.”

When a party to such an agreement wants to have its substantive dispute heard in arbitration but seek injunctive or other provisional relief from a California state court, there are a few practical considerations to keep in mind.

First, a complaint is not required if a party filed an arbitration demand first.  The California Arbitration Act (“CAA”), codified at Code of Civil Procedure (“CCP”) §§ 1280-1294.4, allows a party to an arbitration agreement to file a complaint in state court or an arbitration demand and then seek a provisional remedy from the Court.  If the party chooses to file its arbitration demand first, it need only file an application for provisional relief in the court in the county in which the arbitration proceeding is pending.  See CCP § 1281.8(b).  The application must be accompanied by a copy of the arbitration demand and any response to it.  Id.  

Second, guard against the risk of waiver of the right to arbitrate.  If a party decides to file a complaint along with their application for provisional relief, they should take several safeguards to ensure they do not waive their right to arbitration.  These include:

• File a statement pursuant to CCP § 1281.8(b) that indicates they are reserving their right to arbitrate.

• File a motion to stay all other proceedings in the action (other than the application for provisional relief) pending the arbitration of any “issue, question, or dispute which is claimed to be arbitrable” and which is “relevant to the action pursuant to which the provisional remedy is sought.”  See CCP § 1281.8(d).  Failure to file a motion to stay contemporaneously with the complaint and application for provisional relief is not a waiver on its own, but it is a factor a court can consider in finding waiver if prejudice to the other party has occurred because the court action was not stayed.  See Simms v. NPCK Enterprises, Inc., 109 Cal.App.4th 233, 240-241 (2003) (no waiver despite parties’ failure to include a request for stay with their application for provisional relief). 

• If you are certain you can arbitrate all of the substantive claims in the dispute, be careful how you approach your request for a jury trial both in the complaint and in your case management statement.  Consider using conditional language that requests a jury trial as to any claims or issues not subject to arbitration.

• Only plead causes of action that are necessary to the request for injunctive relief.  Adding claims beyond the limited set you wish the court to adjudicate may cause further confusion regarding whether your client intends to arbitrate those claims or litigate them in court.  

Third, confidentiality must be safeguarded.  keep in mind that arbitration proceedings are, by their nature, confidential.   Confidential information can be included in an arbitration demand without the need to seek special protection.  But a party who files a copy of a confidential arbitration demand concurrently with their application for provisional relief, should evaluate the need to file under seal any confidential portions of the arbitration demand. 

For more information regarding Alto Litigation’s litigation practice, please contact one of Alto Litigation’s partners: Bahram Seyedin-Noor, Bryan Ketroser, or Joshua Korr.

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Disclaimer: Materials on this website are for informational purposes only and do not constitute legal advice. Transmission of materials and information on this website is not intended to create, and their receipt does not constitute, an attorney-client relationship. Although you may send us email or call us, we cannot represent you until we have determined that doing so will not create a conflict of interests. Accordingly, if you choose to communicate with us in connection with a matter in which we do not already represent you, you should not send us confidential or sensitive information, because such communication will not be treated as privileged or confidential. We can only serve as your attorney if both you and we agree, in writing, that we will do so.

The materials on this website are not intended to constitute advertising or solicitation. However, portions of this website may be considered attorney advertising in some states.

Unless otherwise specified, the attorneys listed on this website are admitted to practice in the State of California.

Noteworthy Limitations on Claims for Stolen Property Under Penal Code Section 496

Civil litigators typically assert civil claims based on civil statutes.  But in Siry Investment, L.P. v. Farkhondehpour, 13 Cal.5th 333 (2022) (“Siry”), the California Supreme Court held that the fraudulent diversion of funds can sometimes give rise to a claim for stolen property under Penal Code Section 496 (“Section 496”).  Since then, there has been a marked increase in civil plaintiffs asserting Section 496 claims alongside civil fraud claims.  More recent cases, however, have pared back the statute’s reach in important ways.

Section 496 Explained

Section 496(a) makes the receipt, concealment, or withholding of stolen property a criminal offense.  Specifically, the statute imposes criminal liability on 

“[e]very person who buys or receives any property that has been stolen or that has been obtained in any manner constituting theft or extortion, knowing the property to be so stolen or obtained, or who conceals, sells, withholds, or aids in concealing, selling, or withholding any property from the owner, knowing the property to be so stolen or obtained …”

To establish a claim for receipt of stolen property under Section 496, a plaintiff must prove: “(1) the property was stolen; (2) the defendant knew it was stolen; and (3) the defendant had possession of it.”  In re Anthony J., 117 Cal.App.4th 718, 728 (2004).  “Although it is not a specific intent crime, a necessary element of the offense of receiving stolen property is actual knowledge of the stolen character of the property.”  People v. Rodriguez, 177 Cal.App.3rd 174, 179 (1986).   

The kicker?  Subsection (c) of the statute allows any person injured by a violation of Section 496(a) to bring an action for three times the amount of actual damages, costs of suit, and reasonable attorney’s fees.

Plaintiff Must Both Plead and Prove Defendant’s Knowledge that the Funds Were Stolen

Two post-Siry cases emphasize that a Section 496 plaintiff must plead and prove the defendant’s knowledge that the property they received was stolen.  

LA Tech and Consulting, LLC v. American Express Company involved a dispute over money that was withdrawn from the plaintiff’s account by third-party Doe Defendants without plaintiff’s approval.  Case No. SA CV 22-01213-DOC-KES, 2022 WL 17350939 (C.D. Cal. Nov. 28, 2022), at *1, aff’d on this issue by LA Tech and Consulting, LLC v. American Express Company, No. 22-56221, 2023 WL 8166780 (9th Cir. Nov. 24, 2023).  Allegedly, AMEX’s online payment system improperly allowed the Does to transfer money from plaintiff’s account to the Does’ AMEX credit line.  Id. at *1.  AMEX moved to dismiss the Section 496 claim, arguing that the operative pleading insufficiently alleged that AMEX “knowingly received, withheld, or concealed stolen property.”  Id. at *2.  

Plaintiff countered that it need not plead knowledge that the funds were stolen, as that issue is best left to the jury to decide, and in any event, it had sufficiently pled AMEX’s knowledge that it received stolen funds because it alleged that (1) AMEX designed a system that only require a cardholder to obtain someone’s check to link their checking account and authorize payment, and (2) AMEX falsely represented that it was authorized by plaintiff to transfer funds to itself in plaintiff’s name.  Id. at *3. 

The court rejected both of plaintiff’s arguments, noting first that “failure to plead facts sufficient to establish requisite knowledge under Section 496 is fatal at the pleading stage.”  Id. at *4 (citing Freeney v. Bank of Am. Corp., No. CV 15-2376-JGB-PJWX, 2016 WL 5897773, at *12 (C.D. Cal. Aug. 4, 2016), judgment entered sub nom. Freeney v. Bank of Am. [C]orp., No. EDCV152376JGBPJWX, 2017 WL 382228 (C.D. Cal. Jan. 25, 2017) (dismissing Section 496 claim because plaintiffs did not plausibly allege that defendant had actual knowledge that the transfers associated with the accounts involved stolen money).  The court further recognized that the fact AMEX had allegedly designed a system that made third-party fraud a “mere possibility” – without more – was not sufficient to meet the knowledge requirement.  Id.

Similarly, in Tu Le v. Prestige Community Credit Union, defendant credit union Prestige moved for summary judgment on a Section 496 claim, arguing that plaintiffs had failed to present facts suggesting that Prestige knew a non-profit church account holder (“Church”) was stealing investor funds.  Case No. 8:22-cv-00259-JVS, 2023 WL 9689133 (C.D. Cal. Nov. 6, 2023).  Plaintiffs argued that Prestige knew, or should have known, about the Church President’s financial fraud convictions.  Id. at *11.  The court found otherwise as plaintiffs had failed to show how knowledge of that conviction resulted in Prestige’s knowledge that the Church obtained its money by false pretenses.  Id.

One-Year Statute of Limitations Applies to Recovery of Treble Damages Under Section 496

Want to take advantage of treble damages under Section 496?  Better move fast.

In both the Tu Le case discussed above, and May v. Google LLC, the plaintiffs argued that the three-year statute of limitations set forth in CCP § 338(a) should apply to a Section 496 treble damages claim.  2023 WL 9689133 at *9; Case No. 24-cv-01314-BLF, 2024 WL 4681604, *8 (N.D. Cal. Nov. 4, 2024).  In both cases, the plaintiff lost, and the courts applied a one-year statute of limitations instead.

As the Tu Le court explained: “[T]he settled rule in California is that statutes which provide for recovery of damages additional to actual losses incurred, such as double or treble damages, are considered penal in nature[], and thus governed by one-year period of limitations stated in [CCP] § 340[a].”  2023 WL 9689133 at *9.  See also May, 2024 WL 4681604 at *8 (same).  The May court was unpersuaded by dicta in Siry because the Siry court did not address the statute of limitations for treble-damages claims under Section 496.  

The Presumption Against Extraterritoriality May Bar a Section 496 Claim

A pair of post-Siry decisions lay the groundwork for dismissal of a Section 496 claim where the receipt, withholding or concealment of stolen property occurs outside of California.  

Penal Code § 27(a)(1) restricts criminal liability in California to those “persons who commit, in whole or in part, any crime within th[e] state.”  California has a presumption against extraterritoriality, under which a state statute is considered inapplicable to “occurrences outside the state, ... unless such intention [of the statute’s extraterritoriality] is clearly expressed or reasonably to be inferred from the language of the act or from its purpose, subject matter or history.”  Sullivan v. Oracle Corp., 51 Cal.4th 1191, 1207 (2011).

The court in Dfinity USA Rsch. LLC v. Bravick, expressly considered the extraterritorial reach of Section 496 and held that “the state legislature did not intend for [Section 496(a)] to broadly reach other conduct in other states.”  No. 22-cv-03732-EJD, 2023 WL 2717252, at *4 (N.D. Cal. Mar. 29, 2023).  Accordingly, the Dfinity court dismissed plaintiff’s Section 496 against a Michigan resident defendant who failed to return equipment belonging to his employer Dfinity (a Delaware company based in California) that he was originally given while working for the company in California.  Id. at *5.  Similarly, in Scosche Industries, Inc. v. S & T Montgomery Distributing, Inc., the Court considered whether defendants’ preparation of fraudulent bills in Alabama that were sent to a corporation located in California could serve as the basis for a Section 496 Claim.  Case No. 2:22-cv-09030-SVW-MAA, 2024 WL 4003894 (C.D. Cal. June 5, 2024).  Because the alleged fraudulent act itself occurred outside the state, the Court reasoned that Section 496 could only apply if defendants’ direction of fraudulent bills created out of state to a corporation located in California could be “considered a more than de minimis preparatory act which occurred in California.”   Id. at *4.  

For more information regarding Alto Litigation’s litigation practice, please contact one of Alto Litigation’s partners: Bahram Seyedin-Noor, Bryan Ketroser, or Joshua Korr.

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Disclaimer: Materials on this website are for informational purposes only and do not constitute legal advice. Transmission of materials and information on this website is not intended to create, and their receipt does not constitute, an attorney-client relationship. Although you may send us email or call us, we cannot represent you until we have determined that doing so will not create a conflict of interests. Accordingly, if you choose to communicate with us in connection with a matter in which we do not already represent you, you should not send us confidential or sensitive information, because such communication will not be treated as privileged or confidential. We can only serve as your attorney if both you and we agree, in writing, that we will do so.

The materials on this website are not intended to constitute advertising or solicitation. However, portions of this website may be considered attorney advertising in some states.

Unless otherwise specified, the attorneys listed on this website are admitted to practice in the State of California.

Four Alto Attorneys Write Chapter for Chambers and Partners’ 2025 Litigation Global Practice Guide

We are thrilled to announce that four Alto Litigation attorneys contributed a chapter on trends in California litigation for Chambers and Partners’ prestigious 2025 Litigation Global Practice Guide. The contributing attorneys, whose insights on trends in California securities litigation are featured, are Bahram Seyedin-Noor, Joshua Korr, Jared Kopel, and Monica Eno.

The 2025 Litigation Global Practice Guide features 70 jurisdictions. It provides the latest legal information on litigation trends, funding, initiating a lawsuit, pre-trial proceedings, discovery, injunctive relief, trials and hearings, settlement, damages and judgment, appeals, costs, and alternative dispute resolution (ADR), including arbitration.

The topics that Bahram, Josh, Jared, and Monica address and analyze include: 

1. California courts’ adoption of Delaware’s Caremark standard of liability for directors asleep at the wheel

2. How “down rounds” are precipitating shareholder actions

3. Plaintiffs include state securities fraud claims in federal complaints

4. California continues to be a hotbed of litigation concerning cybersecurity breaches

5. “AI Washing” and securities claims

6. The SEC continues to go after California crypto-companies

If you’re looking to stay abreast of trends and developments in California securities litigation, we encourage you to read this chapter, which can be found here. Many of the insights shared are based on real-world experience and expertise gained by our attorneys working at the forefront of important securities litigation cases in California. 

We appreciate Chambers and Partners calling upon us to address these important issues!

Alto Litigation Elevates Kevin O'Brien to Partner

Alto Litigation is pleased to announce the elevation of Kevin O'Brien to Partner. A skilled litigator with extensive experience in complex commercial and intellectual property matters, Kevin has successfully represented clients across multiple industries including biotechnology, clean energy, financial services, and telecommunications.

Since joining Alto Litigation, Kevin has established himself as a key member of the firm's litigation practice, handling high-stakes disputes for the firm’s sophisticated clients. His expertise spans trade secret litigation, patent disputes, unfair competition, and complex commercial litigation, where he has consistently demonstrated his ability to navigate cases from initial filing through trial.

"I've had the privilege of working closely with Kevin, and his elevation to Partner is a testament to both his exceptional legal talent and his unwavering commitment to our clients," said Bahram Seyedin-Noor, founder and managing partner of Alto Litigation. "He embodies the hard-working, innovative and client-focused approach that defines our firm."

Prior to joining Alto Litigation, Kevin served as Counsel at WilmerHale LLP in Palo Alto and clerked for the Honorable Richard G. Andrews of the United States District Court for the District of Delaware. He earned his J.D., summa cum laude, from the University of California, Hastings College of the Law, where he served as Symposium Editor of the Hastings Law Journal. He received his B.A. in English Literature from the University of California, Santa Barbara.

D.C. Circuit Upholds SEC’s Denial of Whistleblower Award to Attorney Who Reported Client Misconduct

Corporate in-house and outside counsel routinely handle their clients’ most sensitive and confidential information, so the idea that a “trusted advisor” would turn whistleblower—particularly given the potential for substantial monetary awards for blowing the whistle—is a concern for companies. But can lawyers be paid whistleblower awards? In a recent decision addressing the intersection of attorney ethics and whistleblower incentives, the U.S. Court of Appeals for the D.C. Circuit, in Doe v. SEC, 114 F.4th 687 (D.C. 2024), upheld the Securities and Exchange Commission’s denial of a whistleblower award to an in-house attorney who reported suspected misconduct by his client.

Legal Framework

The SEC’s whistleblower program, established by the Dodd-Frank Act of 2010, permits the Commission to provide monetary awards to whistleblowers who voluntarily provide original information leading to successful enforcement actions with monetary sanctions exceeding $1 million. However, SEC Rule 21F-4(b)(4)(ii) limits attorneys’ eligibility for such awards when the information was obtained through client representation. Under this rule, attorneys may only receive awards if their disclosure was permitted by applicable state attorney conduct rules or SEC attorney conduct regulations.

The SEC’s adoption of Rule 21F-4(b)(4)(ii) reflected a careful balancing of competing policy interests. On the one hand, the SEC recognized that attorneys, particularly those serving in-house roles, are uniquely positioned to detect securities law violations due to their access to sensitive corporate information. On the other hand, the SEC sought to preserve the sanctity of attorney-client communications and avoid creating incentives that might undermine clients' ability to seek candid legal advice. The rule attempts to strike this balance by allowing attorney whistleblowers to receive awards only when their disclosures would be permitted under existing ethical frameworks.

Case Background

In Doe v. SEC, an unidentified in-house counsel ("John Doe”) discovered information suggesting that funds from his employer's securities offering were being misappropriated. Doe submitted a tip to the SEC, stating that an individual was misappropriating investors' funds and requesting that the SEC act to protect investors. The SEC’s subsequent investigation resulted in judgments against multiple parties, including Doe’s client company.

When Doe applied for a whistleblower award, he primarily relied on two Florida Rules of Professional Conduct: Rule 4-1.6(b), which requires attorneys to reveal confidential information necessary to prevent a client from committing a crime, and Rule 4-1.6(c)(1), which permits disclosure of confidential information necessary to serve the client’s interests. Doe argued his disclosure served his client’s interests by preventing further misappropriation and potentially enabling completion of the project the offering was meant to fund.

The Arguments and Analysis

Doe’s primary argument rested on Florida Rule 4-1.6(c)(1), contending that his disclosure served his client’s interests in multiple ways. He asserted that preventing further misappropriation of funds would benefit the company by preserving its assets and that completing the intended project would fulfill the company’s obligations to investors. He also initially attempted to characterize his client as a potential victim of the misappropriation rather than a perpetrator.

However, Doe's own subsequent statements to the SEC undermined these arguments. In a sworn declaration, he acknowledged that when making his tip, he "fully expected” and "intended" to trigger an SEC investigation of his client. He admitted that his "goal" was to prevent his client "from committing a crime" and that he intended for the Commission to investigate the entire securities offering, including his client’s role.

The SEC denied Doe’s application, finding that his disclosure was not authorized by either Florida rule. The Commission emphasized that Doe’s own statements indicated he suspected his client was already implicated in wrongdoing when he made the tip, rather than seeking to prevent future crimes. Moreover, the SEC found that subjecting one’s client to an SEC investigation could not reasonably be viewed as serving the client's interests.

The D.C. Circuit agreed with the SEC’s analysis. Writing for the court, Judge Wilkins emphasized that while preventing misappropriation might have provided some benefit to the company, Florida Rule 4-1.6(c)(1) requires that disclosure be "necessary" to serve the client’s interests. Given that Doe’s tip foreseeably subjected his client to an investigation and enforcement action, the court found it could not have been "necessary" to serve the client’s interests.

The court also rejected Doe’s argument that only his contemporaneous tip, which he claimed portrayed his client as a victim, should be considered in evaluating his motives. Instead, the court found the SEC properly considered Doe’s subsequent statements, including his sworn declaration acknowledging that he "fully expected" and "intended" his tip to trigger an investigation of his client.

Conclusion

The court’s ruling reinforces that attorneys’ ability to profit from whistleblower awards remains sharply limited when the disclosure involves client information. It suggests that attorneys cannot receive whistleblower awards when they report suspected client misconduct, even if they attempt to characterize their disclosure as serving the client’s interests. The case also establishes that the SEC and courts may look beyond the content of the initial whistleblower tip to evaluate an attorney's true motives and intentions in making the disclosure.

The case underscores that while the SEC’s whistleblower program has become an important tool for detecting securities violations, attorneys’ fundamental duties to their clients remain paramount and cannot be overcome by the prospect of monetary awards.

For more information regarding Alto Litigation’s litigation practice, please contact one of Alto Litigation’s partners: Bahram Seyedin-Noor, Bryan Ketroser, or Joshua Korr.

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Disclaimer: Materials on this website are for informational purposes only and do not constitute legal advice. Transmission of materials and information on this website is not intended to create, and their receipt does not constitute, an attorney-client relationship. Although you may send us email or call us, we cannot represent you until we have determined that doing so will not create a conflict of interests. Accordingly, if you choose to communicate with us in connection with a matter in which we do not already represent you, you should not send us confidential or sensitive information, because such communication will not be treated as privileged or confidential. We can only serve as your attorney if both you and we agree, in writing, that we will do so.

The materials on this website are not intended to constitute advertising or solicitation. However, portions of this website may be considered attorney advertising in some states.

Unless otherwise specified, the attorneys listed on this website are admitted to practice in the State of California.

Benchmark Litigation 2025 Rankings Recognize Alto Litigation and Three of its Attorneys Among the Top in California

Benchmark Litigation, described as “the definitive guide to the market’s leading firms and lawyers,” recently released its 2025 rankings, and Alto Litigation and its attorneys received several honors.

Alto Litigation was ranked a Recommended Firm in California. Benchmark also recognized both founding partner Bahram Seyedin-Noor and partner Bryan Ketroser as a “Litigation Star,” and partner Joshua Korr as a “Future Star” (40 and under). 

Rankings are based on extensive interviews with clients and peers. Benchmark’s analysis noted that Alto Litigation is known as “a powerhouse litigation boutique based in San Francisco representing some of Silicon Valley’s most coveted companies and entrepreneurs in high-stakes litigation and regulatory matters, ranging from securities litigation, investment disputes, and SEC investigations to trade secrets and general commercial disputes.” 

Bahram, a graduate of Harvard Law School, has tried cases before judges and juries in California and Delaware, and was a law clerk to Judge James Ware in the U.S. District Court for the Northern District of California. Over the last twenty-five years, Bahram has achieved dozens of victories in securities class actions, derivative lawsuits, arbitrations, trade secrets, and fiduciary duty disputes. In 2021 and 2019, Benchmark Litigation named Bahram the “San Francisco Attorney of the Year” and nominated him for “California Securities Litigation Attorney of the Year” alongside only three other attorneys in the State in multiple years. Chambers & Partners ranks Bahram among California’s top securities litigation practitioners. During Benchmark’s evaluation, a peer noted, “Bahram has it all – the drive, the hunger, the right amount of aggression – but he also knows when to play it cool and sit back and pay attention, turning observations into his advantage.”

Bryan, a graduate of Yale Law School, concentrates his practice on securities litigation, complex commercial litigation, and SEC investigations. He represents technology companies, entrepreneurs, officers, directors, employees and shareholders in high-stakes matters in California, Delaware, and other courts throughout the United States. Benchmark Litigation has recognized Bryan as a Litigation Star since 2021 and, before that, repeatedly included him in its “40 & Under Hot List.”

Josh is an experienced attorney, well-practiced in litigating a broad range of business disputes in California state and federal courts, and in arbitrations with JAMS and AAA. His areas of expertise include securities litigation, general business disputes, internal and government investigations, trade secrets, high-net-worth family law and Marvin actions, and appellate litigation. He graduated in the top of his class at the University of California, Hastings College of the Law. “He’s [Josh’s] a real ‘right-and-left brain’ person. He’s a brilliant writer – he writes these pithy and sometimes funny complaints,” a peer said in Benchmark’s assessment. 

Benchmark’s full analysis of Alto Litigation can be found here.

SEC: Separation Agreements Cannot Require Waiver of Whistleblower Awards

The Securities and Exchange Commission (SEC) just delivered a message to corporations: don’t interfere with whistleblowing, even indirectly.

Whistleblowers are an extremely valuable tool in enabling the SEC and other government agencies to combat corporate fraud.  Accordingly, the Dodd-Frank Reform and Consumer Protection Act of 2010 (Dodd-Frank) created financial awards as an incentive to encourage whistleblowers to report violations of the federal securities laws. Dodd-Frank also authorized the SEC to issue rules protecting whistleblowers.  Thus, the SEC adopted Rule 21F-17, providing in relevant part that “No person may take an action to impede an individual from communicating directly with the Commission staff about a possible securities law violation, including enforcing, or threatening to enforce a confidentiality agreement” that would prohibit such a communication.

Prior SEC actions were directed at companies that required current or departing employees to sign confidentiality agreements that expressly prohibited the employee from reporting possible violations to the government.  See In the Matter of CBRE, Inc., (Admin. Proc. File No. 3-21675, Sept. 19, 2023) (company required departing employee to represent that the employee had not filed a complaint or charges against the company with a court or government agency); In the Matter of D.E. Shaw & Co., L.P. (Admin. Proc. File No. 3-21775, Sept. 29, 2023) (company required new employees to sign agreement stating that they would not voluntarily provide confidential information to government agencies and departing employees to sign releases before they could receive payments when such releases required representation that no complaints had been made to a government agency).  The SEC has brought more than 20 such actions for violations of Rule 21F-17 based on a company’s use of a restrictive confidentiality agreement.

Now, the SEC has gone further.  On September 9, 2024, the SEC brought settled administrative proceedings against seven companies whose agreements required employees to waive any claim to the whistleblower bounties awarded by the SEC. (Several of the affected companies also forced contractors to sign agreements prohibiting them from reporting violations, which the SEC made clear violated Rule 21F-17.)  Although the SEC stated that it was unaware of any instance in which the companies sought to enforce these agreements, their existence constituted an “impediment” to whistleblowing and thus violated Rule 21F-17—because the provisions obviously eliminated the major incentive for would-be whistleblowers to report violations in the first place.  Each of the companies agreed to entry of a cease-and-desist order barring them from committing or causing future violations of Rule 21F-17, and to pay a civil monetary penalties of amounts ranging from $19,500 to $1.386 million. The SEC’s Orders noted that the companies cooperated with the SEC and agreed to take remedial action. 1

The lesson is clear, and arguably extends even beyond the whistleblower context:  Think twice before trying to get cute with the SEC by doing indirectly that which you clearly cannot do directly.

For more information regarding Alto Litigation’s litigation practice, please contact one of Alto Litigation’s partners: Bahram Seyedin-Noor, Bryan Ketroser, or Joshua Korr.

1  In the Matter of a.k.a. Brands Holding Company, (Admin. Proc. File No. 3-22078, Sept. 9, 2024); In the Matter of Acadia Healthcare Company, Inc., (Admin. Proc. File No. 3-22079, Sept. 9, 2024); In the Matter of App.Folio, Inc., (Admin. Proc. File No. 3-22080, Sept. 9, 2024); In the Matter of Idex Corporation, (Admin. Proc. File No. 3-22081, Sept. 9, 2024); In the Matter of LSB Industries, Inc., (Admin. Proc. File No. 3-22082, Sept. 9, 2024); In the Matter of Smart Life, Inc., (Admin. Proc. File No., 3-22083, Sept. 9, 2024); In the Matter of TransUnion, (Admin. Proc. File No. 3-22084, Sept. 9, 2024).

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Disclaimer: Materials on this website are for informational purposes only and do not constitute legal advice. Transmission of materials and information on this website is not intended to create, and their receipt does not constitute, an attorney-client relationship. Although you may send us email or call us, we cannot represent you until we have determined that doing so will not create a conflict of interests. Accordingly, if you choose to communicate with us in connection with a matter in which we do not already represent you, you should not send us confidential or sensitive information, because such communication will not be treated as privileged or confidential. We can only serve as your attorney if both you and we agree, in writing, that we will do so.

The materials on this website are not intended to constitute advertising or solicitation. However, portions of this website may be considered attorney advertising in some states.

Unless otherwise specified, the attorneys listed on this website are admitted to practice in the State of California.