USA Trends and Developments Contributed by: Paul M “Tad” O’Connor III, Joshua D Fulop, Daniel J Koevary and Matthew B Stein, Kasowitz Benson Torres LLP
The conflicting decisions that led up to the ultimate decision of the US Supreme Court in June 2024 highlight the importance and poten- tial impact of the decision on large Chapter 11 cases. In the short term, for Purdue Pharma LP, the decision puts at risk the whole settlement framework that was the cornerstone of the plan and the source for creditor distributions. And yet, the impact is potentially far greater with regard to those cases that are yet to come, in the fol- lowing ways. • First, the decision fundamentally alters the strategic considerations to commence a Chapter 11 case – especially those involving mass tort litigation – and directly limits not only the extent to which claims related to the debtor’s business can be resolved but also limits the extent of recoveries for distributions to creditors. If third-party releases are limited, those third parties will not contribute to fund distributions under a Chapter 11 plan. • Second, given that the decision dealt only with non-consensual releases, there remains an open question as to whether consensual releases remain viable and – if so – what conditions will courts require to enforce such provisions. Specifically, there is the open question of whether those plans that provide for third-party releases that creditors can opt out of rather than opt into remain consensual and confirmable. • Third, it is unclear whether courts will use the rationale prohibiting third-party releases to limit extensions of the automatic stay to litiga- tion against non-debtors, finding that such relief is now outside of the jurisdiction of the court. • Fourth, it remains to be seen whether courts will use the rationale prohibiting third-party releases to limit exculpation provisions in plans that shield the debtors and key bank-
ruptcy participants from claims arising in the bankruptcy case itself. • Fifth, there is the question of whether courts will restrict third-party releases in favour of non-debtors where the plan provides for the full satisfaction of claims against non-debtors. All these issues will impact strategic decisions and the extent of relief that a Chapter 11 plan can implement. FTC bans non-compete agreements; matter now with courts Non-compete agreements, which restrict the ability of workers to compete with their former employees, are ubiquitous. Approximately 30 million (or one in five) workers in the USA are subject to a non-compete agreement. Tradition- ally, non-compete agreements have been justi- fied as a means for employers to protect their goodwill, the investment they have made in workers, and their confidential information. However, the walls have recently been closing in on the enforceability of non-competes. Some recent studies have found that non-competes are overused and abused and harm the labour market by depressing competition and limit- ing the pool of qualified applicants. The Biden Administration has made limiting the reach of non-competes a priority for the Federal Trade Commission (FTC). Prior to 2024, the enforcement of non-compete agreements was traditionally left to the states. A few states banned non-compete agreements entirely. Most others set limiting conditions on their enforceability, such as income-based, industry-based, time-based, and geographic- based restrictions. However, in 2024, federal intervention reshaped this paradigm. In April 2024, the FTC declared that non-compete agree-
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