Federal Government Signals Appeal of Order Requiring IEEPA Tariff Refunds

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On May 29, 2026, the federal government notified the court in V.O.S. Selections, Inc. v. United States, Court No. 25-00066, that it intends to appeal the U.S. Court of International Trade’s universal injunction requiring U.S. Customs and Border Protection (CBP) to issue refunds of tariffs imposed under the International Emergency Economic Powers Act (IEEPA).

The appeal could have significant consequences for importers seeking IEEPA tariff refunds, particularly those that have not filed their own lawsuits challenging liquidated tariff payments. If the government obtains a stay or prevails on appeal, importers who have not filed their own lawsuits could lose their pathway to refunds on liquidated entries.

Court of International Trade Ordered IEEPA Tariff Refunds

Several importers filed lawsuits in the Court of International Trade challenging the legality of tariffs imposed under IEEPA. On April 17, 2026, the Court entered an injunction directing IEEPA tariff refunds. The Court later expanded that relief through a universal injunction requiring CBP to reliquidate entries and issue refunds to all affected importers, including companies that had not filed lawsuits.

CBP is currently processing approximately $85 billion in refunds for tariffs on unliquidated entries, representing over half the total IEEPA tariffs paid. According to the agency, refunds are being issued in phases through its CAPE processing system because immediate full compliance is not feasible.

Federal Government Plans Appeal of Universal IEEPA Tariff Refund Order

In its recent filing, the government stated that it “intend[s] to appeal the Court’s universal injunction and to seek a stay of the injunction except as to the particular importer plaintiffs in each case in which the Court has entered the injunction.”

The government argues that the universal injunction exceeds the Court’s jurisdiction and equitable authority under Trump v. CASA, Inc., 606 U.S. 831, 839 (2025).

If the government files the appeal and obtains a stay from the U.S. Court of Appeals for the Federal Circuit, the universal refund order would be paused while the appeal is pending. Critically, the government has indicated the appeal targets only the universal scope of the injunction, relief for the named plaintiffs would remain intact.

What the Appeal Means for Importers Seeking IEEPA Tariff Refunds

The appeal creates the greatest uncertainty for importers that paid IEEPA tariffs but have not filed their own cases.

The universal injunction currently provides a mechanism for those importers to obtain refunds on liquidated entries without pursuing individual litigation. If the Federal Circuit stays the injunction, or ultimately reverses the universal relief order, importers that are not plaintiffs may no longer have access to those refunds.

By contrast, importers that are already parties to pending IEEPA tariff refund lawsuits should continue to benefit from importer-specific relief ordered by the court. This distinction makes the question of whether to file suit increasingly urgent for importers who have not yet done so.

Should Importers File an IEEPA Tariff Refund Lawsuit?

Importers evaluating whether to pursue IEEPA tariff refund claims should be aware that the Court of International Trade has established a streamlined process for new cases.

Under Administrative Order 25-02, new cases challenging tariffs based on IEEPA and the relevant executive orders are automatically stayed upon filing. No order of assignment is issued before entry of the stay, and the Clerk maintains a schedule of all stayed cases. The Court has indicated it expects to determine next steps for these cases following a final, unappealable decision in V.O.S. Selections.

As a result, filing a new IEEPA tariff refund lawsuit generally does not require immediate discovery, motion practice, or hearings. Instead, the primary benefit of filing is preserving the importer’s position while the legality of the tariffs and the scope of available funds continue to be litigated.

For importers who have paid IEEPA tariffs on liquidated entries but have not yet filed suit, initiating a case now may be the most efficient step to preserving refund rights while the appeal proceeds.

Legal Guidance for IEEPA Tariff Refund Claims

Varnum attorneys represent importers pursuing IEEPA tariff refund claims before the Court of International Trade. Businesses with questions regarding IEEPA tariffs, CBP refund procedures, tariff litigation, or potential refund eligibility should contact a member of Varnum’s Litigation Practice Team.

Estate Planning for Winery, Brewery, and Distillery Owners

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Owning a winery, brewery, or distillery is often a labor of love as much as it is a business endeavor. Whether family-owned or a newer venture, estate planning for alcohol beverage businesses must address ownership, licensing compliance, and long-term operational continuity.

Licensing and Regulatory Compliance

Alcohol beverage businesses are heavily regulated at the federal, state, and sometimes local levels. A key estate planning issue is that alcohol licenses are often not automatically transferable upon death or incapacity and may require regulatory approval or reapplication.

Without proper planning, a business may experience operational delays or interruption while licensing authorities review new ownership or management structures. Estate plans should therefore include a strategy to maintain compliance and continuity during transitions.

Business Succession and Operational Control

Succession planning should identify who will:

  • Inherit ownership interests
  • Manage day-to-day operations
  • Oversee licensing and regulatory compliance

Trusts and business entities can help maintain continuity where ownership is divided among beneficiaries or where the beneficiaries are not active operators. It is important to define the relationship between ownership and management control to support continued operations during post-death administration, and governance documents should also address whether the business will remain family-owned, be sold, or transition over time.

Valuation and Transfer of Business Interests

Wineries, breweries, and distilleries often include a mix of real estate, equipment, inventory, intellectual property, and brand goodwill. These businesses may also have significant debt or variable cash flow, making valuation more complex.

A clear valuation strategy is important for estate tax planning, gifting, and ownership transfers. Early planning can support more efficient use of transfer techniques such as trusts or other entity structures where appropriate.

Intellectual Property, Brand Value, and Real Estate

Intellectual property, such as trademarks, trade names, and proprietary recipes, can be a significant component of business value. These assets require careful documentation and ongoing protection.

In addition, many owners seek to preserve agricultural or production land as part of their legacy. Conservation easements and similar tools may be used where consistent with broader estate and business succession goals.

Legacy and Long-Term Planning

Estate planning should reflect the owner’s long-term goals for the business, including whether it should continue operating, be sold, or be wound down over time. These intentions can be incorporated into governing documents to guide future fiduciaries and decision-makers.

Coordinated Planning Approach

Effective estate planning for alcohol beverage businesses requires coordination between estate planning counsel, business advisors, and regulatory counsel to address licensing requirements, tax considerations, and operational continuity.

If you own a winery, brewery, or distillery and would like to discuss estate planning strategies for alcohol beverage businesses, contact a member of our Hospitality and Alcohol Beverage Control Practice Team or a member of the Estate Planning Practice Team.

New USCIS Policy on Adjustment of Status Applications

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On May 21, 2026, U.S. Citizenship and Immigration Services (USCIS) issued Policy Memorandum PM-602-0199, significantly shifting how the agency evaluates adjustment of status applications, the process for obtaining a green card while present in the United States.

Key Changes to the Adjustment of Status Process

USCIS now characterizes adjustment of status as an “extraordinary” act of “administrative grace” rather than a routine step in the immigration process, and it directs officers to favor consular processing abroad as the default pathway. This marks a shift from longstanding agency practice.

Officers must consider all relevant factors, including immigration history, visa compliance, moral character, and family ties. Applicants may need to demonstrate “unusual or even outstanding equities” for approval. The memo applies to all pending applications as well as new filings, and USCIS has indicated that additional category-specific guidance may follow.

A USCIS spokesperson recently said that individuals whose roles provide “economic benefit” or are in the “national interest” will likely be permitted to remain in the United States and pursue adjustment of status domestically.

The impact of the memo will vary depending on individual circumstances, including visa category, immigration history, and family situation.

How the USCIS Policy Affects Green Card Applicants

The memo does not change the law or prohibit new Form I-485 filings. However, applicants may see increased Requests for Evidence, Notices of Intent to Deny, and longer processing times. A shift toward consular processing could also extend wait times at U.S. consulates, many of which are already experiencing staffing constraints.

Varnum immigration attorneys are closely monitoring the situation and tracking further guidance from USCIS. As implementation develops, we will review cases to assess the most appropriate path forward, whether through adjustment of status, consular processing, or supplementation of pending applications with additional evidence of favorable equities.

Bonuses, Overtime, and FLSA/OBBBA Compliance

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Varnum recently hosted a webinar addressing employee bonuses, overtime calculations, Fair Labor Standards Act (FLSA) compliance, and new reporting obligations under the One Big Beautiful Bill Act (OBBBA). The program provided practical guidance for HR professionals, payroll administrators, and employers managing wage and hour compliance obligations in 2026 and beyond.

Below are key takeaways regarding overtime pay requirements, nondiscretionary bonuses, and OBBBA reporting obligations.

Why Bonus and Overtime Compliance Matters

Many employers use bonuses to support employee retention, productivity, and performance goals. However, under the FLSA, certain bonuses must be included in an employee’s regular rate of pay when calculating overtime compensation.

At the same time, the OBBBA introduces new payroll reporting requirements related to qualified overtime compensation and qualified tips for tax years 2025 through 2028. Employers should review payroll systems and compensation practices now to reduce compliance risks.

FLSA Overtime Rules and the Regular Rate of Pay

The FLSA requires nonexempt employees to receive overtime pay at one and one-half times their regular rate of pay for hours worked over 40 in a workweek. A workweek is typically a fixed and recurring period of 168 hours. Compensable time may include work performed at home, travel time, waiting time, training, and probationary periods.

The regular rate of pay is not always the same as an employee’s hourly wage. Under the FLSA, the regular rate generally includes most forms of compensation and is calculated by dividing total included compensation by the total hours worked during the workweek.

Because the regular rate affects overtime calculations, employers should carefully evaluate whether bonuses and incentive payments must be included.

Discretionary vs. Nondiscretionary Bonuses

Whether a bonus must be included in the regular rate calculation depends on whether it is discretionary or nondiscretionary.

Discretionary Bonuses

Discretionary bonuses, where the employer retains genuine discretion over both the fact and amount of payment, are excluded from the regular rate. Examples include employee-of-the-month awards, severance bonuses, and bonuses for extraordinary efforts not tied to pre-established criteria.

Nondiscretionary Bonuses

Nondiscretionary bonuses generally must be included in overtime calculations because they are tied to measurable expectations or communicated in advance to employees. Common examples include production, attendance, quality, and safety bonuses.

The Department of Labor considers bonuses nondiscretionary when they are intended to encourage employees to work more steadily, rapidly or efficiently, or to remain employed.

Labels alone are not determinative. A bonus described as “discretionary” may still qualify as nondiscretionary if employees expect payment based on established criteria, prior practice, or other communications from the employer.

How Bonuses Affect Overtime Calculations

When a nondiscretionary bonus applies to a single workweek, the employer must include the bonus in the employee’s regular rate calculation for that week to determine whether additional overtime compensation is owed.

More complex issues arise when bonuses cover multiple workweeks, such as quarterly or annual bonuses. In those situations, the bonus generally must be allocated across the workweeks in which it was earned using a reasonable and equitable method. Employers may then owe additional overtime compensation for weeks in which overtime was worked.

If overtime is paid before the final bonus amount is known, the employer may initially calculate overtime without the bonus. Once the bonus amount is finalized, however, the employer must recalculate overtime and issue any additional overtime pay owed.

Employers cannot avoid overtime obligations simply because a bonus is paid later.

OBBBA Reporting Requirements

The OBBBA created new federal tax deductions for qualified overtime compensation and qualified tips for tax years 2025 through 2028.

The updated 2026 Form W-2 includes new Box 12 reporting instructions related to these deductions. Employers should confirm payroll systems are configured to separately track and report qualifying compensation.

Qualified overtime compensation does not include all overtime pay. In general, it includes only the premium half-time portion required under Section 7 of the Fair Labor Standards Act for hours worked over 40 in a workweek.

Qualified overtime compensation generally does not include:

  • Overtime paid under collective bargaining agreements
  • Overtime required solely by employer policy
  • Contract-based overtime arrangements
  • Overtime paid under more generous state or local standards

Employers with Michigan employees should review Michigan House Bill 4961, a recent law which applies a similar “no tax on overtime and tips” concept to Michigan state income tax for tax years 2026 through 2028.

Common Wage and Hour Compliance Mistakes

HR and payroll teams should remain alert to several common FLSA compliance risks, including:

  • Excluding nondiscretionary bonuses from overtime calculations
  • Failing to recalculate overtime after deferred bonus payments
  • Misclassifying all overtime pay as qualified overtime compensation under the OBBBA
  • Failing to coordinate among HR, payroll, finance, and legal teams
  • Relying on bonus labels instead of analyzing actual payment structure and employee expectations

Next Steps for Employers

Employers should review bonus structures, overtime calculation procedures, and payroll reporting systems to confirm compliance with the FLSA and OBBBA requirements.

For questions regarding overtime compliance, bonus structures, or OBBBA reporting obligations, please contact a member of Varnum’s Labor and Employment Practice Team.

Understanding Certified Questions Before the Michigan Supreme Court

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This advisory summarizes an article by Neil Youngdahl, originally published in the Michigan Appellate Practice Journal. To read the full article, please visit the Michigan Appellate Practice Journal Spring 2026.

Lawsuits filed outside of Michigan can sometimes raise complex and unresolved questions of Michigan law. Rather than attempting to predict how the Michigan Supreme Court would rule on an issue of first impression, federal courts, tribal courts, and appellate courts from other states may certify a legal question directly to the Michigan Supreme Court for guidance.

Under Michigan Court Rule 7.308(A)(2)(a), a court may certify a question when Michigan law could resolve the issue, and there is no controlling Michigan Supreme Court precedent. The Michigan Supreme Court then has discretion to either answer the certified question or decline to answer it under MCR 7.308(A)(5).

Although certified questions are an important procedural tool for resolving unsettled issues of Michigan law, they remain relatively uncommon before the Michigan Supreme Court.

What Is a Certified Question in Michigan?

A certified question is a procedural mechanism that allows a non-Michigan court to request an authoritative interpretation of Michigan law from the Michigan Supreme Court. Certification is most often used when:

  • A federal court is deciding a case involving Michigan law
  • There is no controlling Michigan Supreme Court precedent
  • The legal issue is outcome-determinative
  • Existing Michigan case law appears unsettled or unclear

The certification process helps promote consistency in the interpretation of Michigan law and reduces the likelihood that federal courts will incorrectly predict how Michigan courts would rule on a legal issue.

Michigan Court Rule 7.308 and Certified Questions

Michigan Court Rule 7.308 governs certified questions presented to the Michigan Supreme Court. The rule provides that certification may occur when a federal court, tribal court, or another state’s appellate court encounters a question of Michigan law that lacks controlling precedent.

Unlike applications for leave to appeal, however, the Michigan Court Rules provide very little guidance regarding when the Michigan Supreme Court should accept or answer a certified question. The absence of formal criteria has contributed to uncertainty surrounding the certification process.

How Often Does the Michigan Supreme Court Answer Certified Questions?

Certified questions are relatively rare in Michigan appellate practice. Since 2000, the Michigan Supreme Court has received approximately 19 certified questions and answered only eight of them.

Although the answer rate is significantly higher than the Court’s typical grant rate for leave-to-appeal applications, the statistics still show that the Court frequently declines certification requests.

Between 2007 and 2016, the Michigan Supreme Court answered five out of six certified questions, making that period one of the most active eras for certified-question jurisprudence in Michigan. More recently, however, the Court has declined several certified questions in a row, signaling a more restrictive approach.

The Court last answered a certified question in October 2020 during litigation involving the Governor’s emergency powers and the COVID-19 pandemic.

Why Certified Questions Matter in Michigan Litigation

Certified questions can play a significant role in complex litigation involving unsettled issues of state law. They allow federal courts and other jurisdictions to obtain authoritative guidance directly from the Michigan Supreme Court instead of relying on predictions about how Michigan law may evolve.

Supporters of certification argue that the process:

  • Preserves Michigan’s authority to interpret Michigan law
  • Promotes uniformity in legal decisions
  • Strengthens principles of federalism and judicial comity
  • Reduces inconsistent interpretations between state and federal courts

Beaubien v. Trivedi and the Future of Certified Questions

The Michigan Supreme Court recently revisited the certified-question process in Beaubien v. Trivedi, a case involving the constitutionality of Michigan’s noneconomic damages cap in medical malpractice litigation under MCL 600.1483.

The United States District Court for the Eastern District of Michigan certified the constitutional question after concluding that prior Michigan Supreme Court precedent appeared to conflict with later appellate decisions and evolving constitutional analysis.

The Michigan Supreme Court declined to answer the certified question.

Chief Justice Megan Cavanagh’s Concurring Opinion

In a concurring opinion, Chief Justice Megan Cavanagh emphasized that the certified-question process is intended to resolve genuinely unsettled questions of Michigan law, not to revisit issues already decided by the Michigan Supreme Court.

Chief Justice Cavanagh explained that prior Michigan Supreme Court decisions upholding the constitutionality of Michigan’s medical malpractice damages cap remained controlling precedent, regardless of ongoing criticism or disagreement.

She also noted that the Michigan Court of Appeals had repeatedly rejected the same constitutional arguments raised in Beaubien.

The Role of Michigan Court of Appeals Decisions in Certification

One of the most notable aspects of Chief Justice Cavanagh’s concurrence was her discussion of the Michigan Court of Appeals’ role in determining whether certification is appropriate.

Although only Michigan Supreme Court decisions constitute binding precedent under MCR 7.308, Chief Justice Cavanagh suggested that consistent Court of Appeals decisions interpreting Supreme Court precedent may still demonstrate that Michigan law is sufficiently settled to make certification unnecessary.

This reasoning could influence how federal courts evaluate future requests for certified questions involving Michigan law.

Key Takeaways on Certified Questions in Michigan

Certified questions remain an important but infrequently used component of Michigan appellate practice. While the procedure allows federal and out-of-state courts to seek guidance on unresolved questions of Michigan law, the Michigan Supreme Court continues to exercise significant discretion in deciding whether to answer those questions.

Recent opinions, including Chief Justice Cavanagh’s concurrence in Beaubien v. Trivedi, suggest that the Court may view certification as a narrow tool intended to clarify unsettled law rather than reopen established precedent.

As a result, litigants considering certification should carefully evaluate whether a legal issue is truly unresolved under existing Michigan Supreme Court and Michigan Court of Appeals authority before seeking review.

Estate Planning for Patent Holders

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For inventors, engineers, entrepreneurs, and business owners, patents are often among the most valuable assets. In addition to their financial value, patents may represent years of innovation, technical development, and personal legacy. Effective estate planning for patent holders should address how intellectual property assets will be maintained, managed, transferred, and monetized over time.

Understanding Patent Assets in Estate Planning

Patents are time-sensitive intellectual property assets with strict legal and administrative requirements. In the United States, the two primary categories of patents are:

  • Utility patents, which protect how an invention is structured, functions, or is used
  • Design patents, which protect the ornamental appearance or visual design of a product

Utility patents generally remain in effect for up to 20 years from their earliest effective filing date, while design patents last 15 years from issuance. Utility patents also require regular maintenance fees to remain in force. Missing these deadlines can result in the loss of patent rights and a significant reduction in estate value.

For patent owners with international intellectual property portfolios, estate planning should also account for foreign patent registrations, renewal deadlines, and jurisdiction-specific filing requirements.

Organizing Patent Documentation and Ownership Records

Estate planning documents should clearly identify all patents, pending patent applications, licensing agreements, royalty streams, and joint ownership arrangements. Pending applications may also hold significant business value and should not be overlooked during planning.

If a patent is co-owned, the estate plan should address how shared control, decision-making, or potential buyout rights may continue after death. If a patent is licensed, whether exclusively or non-exclusively, those agreements should be reviewed to determine whether they continue after death and how related income will be handled.

Planning for Business-Owned Patents

Some inventors hold patents personally, while others assign them to a business entity. If the patents are owned by a company, but the estate includes ownership interests in that business, the plan should account for how control of both the company and the underlying intellectual property will transfer.

It is also important to confirm that ownership records and prior patent assignments are properly documented to avoid disputes or complications during estate administration. In situations where patents are valuable but not actively commercialized, a fiduciary, trust beneficiaries, or heirs may eventually decide to sell or license the rights, which may require guidance from experienced legal and tax professionals.

Preserving an Inventor’s Legacy

Estate planning for patent holders may also involve personal considerations. Many inventors feel a strong connection to their innovations and want to help shape how those inventions are used in the future. Even if those preferences are not legally binding, they can often be expressed through trust provisions or written guidance to fiduciaries.

Working With Estate Planning and Intellectual Property Counsel

As with other complex intellectual property assets, involving experienced legal and tax professionals is important when structuring trusts, business entities, or licensing arrangements involving patent rights. Careful planning can help avoid unintended income or estate tax consequences while preserving the long-term value of intellectual property.

For assistance planning for patents and other intellectual property, contact your Varnum attorney or a member of Varnum’s Estate Planning or Intellectual Property Practice Teams.

How Not to Use AI with Your Lawyer

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A Client’s Guide to the AI Habits That Can Backfire

Artificial intelligence is transforming the way businesses operate, so it’s no surprise that clients are bringing it into their legal matters. As the Chair of Varnum’s AI Task Force, which advises the firm on optimal usage of AI and led to our adoption of Harvey, I can attest that these tools are impressive, the instinct to use them is understandable, and in many contexts, AI genuinely helps. Nevertheless, in the lawyer-client relationship, a handful of common AI habits can quietly work against you, driving up costs, creating legal exposure, and in some cases stripping away legal protections that would otherwise apply by default.

The following scenarios represent the most prominent use cases that my colleagues and I most often observe, with practical takeaways designed to inform clients on how they should think about their use of AI. 

The “AI Draft” That Costs More Than It Saves

Many clients come to us having already asked ChatGPT, Claude, or another AI tool to draft a contract, letter, or business document. The reasoning is sound: get a head start, save attorney time, and save money. In practice, it usually works the other way.

General-purpose AI drafts tend to be both overinclusive and underinclusive at the same time. They may produce a simple vendor agreement with overly complicated structures designed for multinational transactions, while missing a straightforward concept that is standard in your industry. They can surface theoretical risks and gloss over practical ones. The result is a document that looks polished and complete but is built on assumptions that do not reflect your deal or your circumstances.

An experienced attorney already has a head start: tested templates built for the transactions and matters we handle every day. Analyzing and revising a misaligned AI draft often takes more time than starting fresh, because we inevitably end up comparing it to a form that we already know works. The better approach is to let us set the foundation, then focus your time and ours on the issues that require judgment and experience.

Feeding Legal Documents to a Chatbot

This is perhaps the most consequential AI habit for clients to reconsider. Attorneys routinely send clients privileged work product that is protected from disclosure in litigation, such as draft agreements, legal memos, and strategy summaries. When a client drops that material into a consumer AI platform to generate a plain-English summary or a list of questions for their attorney, they may be inadvertently handing it to a third party with no obligation of confidentiality.

In July 2025, OpenAI CEO Sam Altman stated plainly that, unlike conversations with a therapist, lawyer, or doctor, there is no legal privilege for what you share with ChatGPT, and that OpenAI could be required to produce those conversations in litigation. “We haven’t figured that out yet for when you talk to ChatGPT,” Altman said during a podcast, calling the absence of any equivalent of attorney-client confidentiality “very screwed up.” (TechCrunch, July 25, 2025)

Courts have only begun to grapple with the legal fallout. Earlier this year, in United States v. Heppner, a federal judge in the Southern District of New York ruled that documents that a criminal defendant generated using a consumer AI platform were not protected by the attorney-client privilege or the work product doctrine. Because the platform’s privacy policy disclosed that user inputs could be used for model training and shared with third parties, the court found there was no reasonable expectation of confidentiality in the defendant’s exchanges with the platform. The decision made two points clear: material that lacks privilege when created does not acquire it later, and privileged information does not stay privileged once shared with an AI platform that operates like a third party. This area of law is evolving rapidly, and while Heppner is unlikely to be the last word, clients should proceed with extreme caution until the issue is settled.

The practical takeaway is that if you receive a document from us and want to understand it better, call or email us. That conversation is exactly what we are here for: breaking complicated concepts into digestible pieces, while keeping your confidential information protected.

The AI Notetaker in the Room

Many businesses now invite AI notetaking apps, such as Otter.ai, Fireflies, and Zoom’s AI Companion, into meetings as a matter of routine. The instinct is reasonable, and the efficiency benefits are clear. But when those tools are present on calls with your attorney, they may be processing, storing, and potentially exposing conversations that would otherwise be protected.

Unlike a paralegal or outside consultant working under attorney supervision, an AI notetaking application is not an agent of your attorney. It operates under its own terms of service, which may permit the vendor to access, store, or otherwise use the data it captures. That exposure can give an opposing party grounds to challenge the confidentiality of the meeting, and it creates a lasting, potentially discoverable record of discussions that previously would have existed only in notes or memory.

Therefore, before inviting any recording or notetaking tool into a sensitive meeting or call with your lawyer, check with them first. It can make a meaningful difference.

AI as a Sounding Board: It Tells You What You Want to Hear

Some clients use AI to stress-test legal advice or size up their negotiating position, asking a chatbot whether a contract term is standard, whether a deal structure is sound, or whether their attorney is missing something. The appeal is obvious. The problem is that AI is structurally inclined to agree with you.

A March 2026 study published in the journal Science and covered by the New York Times found that leading AI models were highly sycophantic, siding with users in interpersonal disputes far more often than human respondents did, even when the users were clearly in the wrong. The researchers found that a single conversation with a sycophantic model made participants significantly less likely to reconsider their own position.

This pattern shows up in business negotiations with real consequences. We have seen deals stall or even fall apart because a client came to the table with an inflated sense of their leverage after running their position through an AI that validated their assumptions rather than challenging them. AI does not know your counterparty, the deal’s history, the dynamics in the room, or what the market will bear. It knows how to sound confident and keep you engaged.

An experienced lawyer’s job is to give it to you straight, even when that’s not what you want to hear. That is not something AI is built to do.

Where AI Adds Value in the Legal Context

None of this is an argument against AI, nor is it an attempt to gatekeep the legal industry or scare clients away from using these tools. Varnum uses AI tools extensively in our own practice, and through our AI Task Force, we have spent considerable time thinking through where these tools add genuine value and where they introduce risk.

Broadly speaking, it helps to think about client use of AI on a spectrum. On the safer end are tasks like organizing background materials, summarizing public filings or other non-privileged documents, conducting preliminary market or industry research, and preparing agendas, talking points, or questions in advance of a meeting with counsel, in each case, making sure anything you disclose to AI is anonymized. Using AI to explore an unfamiliar legal concept or to pressure-test your own thinking before a conversation with your lawyer can also be productive. The critical factor is to treat AI as a starting point rather than a substitute, and to keep confidential or privileged information out of the prompt.

The uses to avoid are those where AI is asked to make or validate the actual legal decision. For example, you should not ask AI to help you interpret a contract you are about to sign, choose between deal structures or litigation postures, decide how to respond to a demand letter, or second-guess whether your lawyer’s advice is “right.” Those judgments turn on facts, history, and context that the model does not have, and as discussed above, the model’s instinct is to agree with you rather than push back.

AI is genuinely exciting, and it holds real promise for the practice of law. But like any powerful tool, its usefulness depends on knowing where it helps and where it does not. When in doubt, talk to us before you talk to the bot.

Eric Post is a partner in Varnum’s Corporate Practice Team and chair of the firm’s AI Task Force. He advises startups, private and family-owned businesses, and multinational corporations on mergers and acquisitions, commercial transactions, and a broad range of business matters.

Dilution 101: A Guide for New Startup Investors

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Varnum Viewpoints

  1. Dilution is inevitable in startup investing, but manageable with the right strategy.
  2. Structural dilution reduces your ownership percentage, while economic dilution can also reduce value.
  3. Anti-dilution protections and pro-rata rights must be negotiated, they’re not automatic.
  4. Option pools, SAFEs, and convertible notes often cause more dilution than expected.
  5. Strong diligence, thoughtful negotiation, and experienced legal counsel are critical to protecting your investment.

What Is Dilution?

Dilution occurs when a company issues additional shares, reducing an existing investor’s percentage of ownership and, in some cases, the value of the shares.

A simple way to think about dilution is to imagine a pizza cut into 100 slices. If the company later cuts the same pizza into 120 slices, each slice becomes smaller. You still own the same number of slices, but your percentage of ownership decreases. The smaller slice has two main consequences: a smaller share of future profits or exit proceeds, and reduced voting power and influence over company decisions if voting is tied to share count.

Dilution often takes two forms:

  1. Structural Dilution: when your ownership percentage decreases because more shares are issued.
  2. Economic Dilution: occurs when new shares are issued at a lower price than you originally paid, reducing the value of your investment, which is most common in a down round.

Key Startup Investment Terms

Understanding dilutions starts with a clear grasp of common startup financing terms:

  • Pre-Money Valuation: the company’s value immediately before a new investment round.

  • Post-Money Valuation: the company’s value after the new investment is added. This number determines your initial ownership percentage.

  • Fully Diluted Share Count: the total shares that would exist if all convertible securities, such as stock options, warrants, SAFEs, and convertible notes, converted to equity.

  • Option Pool: shares reserved for employees and advisors. Expanding the option pool is one of the most common sources of investor dilution.

  • Down Round: a financing round at a lower price per share than a prior round, often resulting in significant dilution.

Common Startup Dilution Scenarios

New Equity Financings
Each equity financing round creates new shares. The impact can be significant, particularly if valuations decline or option pools are expanded as a part of the round.

SAFEs and Convertible Notes
SAFEs and convertible notes convert into equity, often at a discount or subject to a valuation cap, creating additional shares on conversion. Because they may not initially appear as stock on the cap table, many first-time investors underestimate the dilution they will cause.

Equity Compensation and Option Pools
Option pools allow startups to hire and retain talent, but every option granted today becomes a share tomorrow.

Managing Dilution Risk

Anti-Dilution Protections

Anti-dilution provisions, typically included in preferred stock terms, help protect investors in down rounds. These provisions must be negotiated at the time you invest. The two classic formulas are:

  1. Full Ratchet Resets your conversion price to the lowest price of a subsequent round, increasing your share count. While highly protective, it is less common because it can deter future investors. Seasoned investors seldom demand them unless a company is in serious distress.
  2. Weighted Average Adjusts the conversion price based on both the size and price of the new issuance. This approach is more common and balances investor protection with company flexibility. There are two variations:

    1. Broad-based uses the fully diluted share count, resulting in a smaller adjustment.
    2. Narrow-based uses a smaller share count, resulting in a larger adjustment.

Certain issuances, such as equity granted under a board-approved option plan, are typically excluded from triggering anti-dilution adjustments.

Pro Rata (Participation) Rights

Pro rata rights allow you to invest in future rounds in proportion to your existing ownership, allowing you to maintain your percentage stake. These rights are valuable but require additional capital, so planning ahead is essential.

For example, suppose you invest $250,000 at a $2.25 million pre-money valuation, yielding $2.5 million post-money valuation and 10% ownership on a fully diluted basis. A year later, a new round doubles the fully diluted share count, and if you do not participate, your ownership may drop to roughly 5%. Exercising pro-rata rights can help maintain your 10% ownership, but requires an additional corresponding investment.

Option Pool Considerations

Be mindful of the “option pool shuffle”: when a company expands its option pool immediately before closing your investment round. This can shift dilution to existing investors rather than new ones.

Practical Tips for Startup Investors

Conduct Thorough Diligence: Review the cap table, all convertible instruments, and the board-approved option plan. Model potential dilution scenarios before investing.

Plan for Follow-On Investments: If maintaining ownership is important, negotiate pro rata rights and budget for future rounds.

Balance Protection for Growth: Overly aggressive anti-dilution terms can hinder future fundraising. Long-term value often depends on the company’s ability to raise capital on favorable terms.

Work with Experienced Advisors: Small differences in deal terms can have a significant financial impact. Experienced legal and financial advisors can help identify risks and negotiate effectively.

Stay Engaged: Monitor company performance, track dilution over time, and review the cap table regularly.

Next Steps

Dilution is a normal part of startup investing, but it does not have to be a surprise. With a clear understanding of the mechanics, careful planning, and well-negotiated terms, investors can better protect both ownership and value.

If you have questions about a specific investment or upcoming financing, contact Varnum’s Venture Capital and Emerging Companies Practice Team to evaluate risks, structure terms, and make informed decisions.