Dorsey Law & Policy Notebook

The concept of a regulatory sandbox is becoming a familiar one. When a recent White House executive order laid out a comprehensive legislative framework for artificial intelligence, it included a call for Congress to establish federal regulatory sandboxes, without any further explanation. Just a few years ago, such a request might have been met with a confused stare. Now, the idea of a regulatory sandbox is a recognized policy making tool. I serve on the advisory committee for Utah's General Regulatory Sandbox and am excited about the potential for sandboxes, both at the state and federal levels. Given recent developments and momentum, I decided to put together a quick post on the innovative policymaking approach, to be followed hopefully soon with a more fulsome guide for businesses. What is a Regulatory Sandbox? While you've heard the term and likely have a general sense for what is involved, here is a quick explanation. The term itself (sandbox) is borrowed from the world of software engineering, where new code is sometimes tested in an isolated environment for safety reasons before being released. Extending that concept to the policy world, a regulatory sandbox generally refers to a program run by a regulatory body where new products and solutions are allowed to be tested in the marketplace under temporary waivers or "no action letter" interpretations of regulatory restrictions. This is typically done over a limited period of time (1-2 years is typical) and in a controlled fashion, including regular check-ins with the regulator. If the test yields positive results, long-term regulatory changes might then be proposed and rolled out. How Long have Regulatory Sandboxes been a Thing? The sandbox approach originated in the heavily regulated fintech space. The first one was an initiative in the U.K. in 2015 to support fintech startups. The approach has steadily gained traction since then, with sandboxes proliferating across the U.S., Europe and Asia. Arizona gets credit for adopting the first one in the U.S., a fintech sandbox launched in 2018, followed shortly by Utah. Utah took the concept a step further in 2021 by offering a comprehensive regulatory sandbox that is not limited to financial technologies. The state also offers legal and AI sandbox programs. At the federal level, the history is more start and stop. The Consumer Financial Protection Bureau launched a fintech sandbox in 2019, which had a short life when it was shuttered under the Biden Administration. A few months ago, the SEC and CFTC launched Project Crypto, which includes as a feature a sandbox-styled initiative where companies can trial tokenized products, particularly those with DeFi applications. As mentioned, there is momentum in DC around the concept of an integrated AI sandbox across agencies. Last year, Senator Cruz proposed a bill (S.2750 - SANDBOX Act) providing for just this approach. What Sandbox Opportunities Exist Right Now? While the AI sandbox vision contemplated by Senator Cruz’s bill and the White House executive order remain policy proposals for now, regulatory sandbox opportunities already exist in various forms across the United States, both at the federal and state levels. States with sandboxes of one kind or another include Arizona, Utah, Texas, Florida, Nevada, Kansas, North Carolina, Ohio, Kentucky, Vermont, South Dakota and West Virginia. Most of these sandboxes target highly regulated sectors, such as fintech, AI or even insurtech. However, some, such as Utah's, are technology-and-sector-agnostic and are potentially open to any business. This list changes regularly. What does it Take to Participate in a Sandbox? Requirements vary, but the spirit of the sandbox concept is to promote both innovation and regulatory reform where it makes sense to do so. As such, typically a proposal needs to bring a new solution to the market. Simply saying you want to do the same thing you've always done but with less regulatory restriction generally is not a winning proposal. That said, such an approach is not necessarily out of the question if a good case can be made that a public benefit could be achieved (such as addressing housing affordability). Is participating in a Sandbox a Good Idea for My Company? Maybe! It is certainly wise to look at a sandbox approach if you have a new business product or service that would be restricted by existing rules. Otherwise, to roll out your innovation you would need to challenge the law in some fashion or await formal policy change. However, given that sandbox options at the federal level are limited and state regulatory sandboxes only provide relief from state rules, the current sandbox opportunities are likely to be helpful only if the restrictions you are focused on are state level ones. For example, state sandboxes are particularly useful for navigating licensing requirements and consumer protection statutes--but they won't help when it comes to federal permitting requirements. Another limitation of a state sandbox is that you would need to operate within the geographic limitations of the state(s) where you are granted the regulatory relief. Despite these limitations, a sandbox approach can be powerful in pioneering new products and showcasing their efficacy in the real world, providing compelling evidence both of the utility of the innovation and the appropriateness of a specific policy change. Looking Ahead Sandboxes have the potential to address significant policymaking challenges. As use of frontier technologies like artificial intelligence proliferates, we will need new regulatory frameworks that are fit for purpose to both empower customers and promote competition. Also, affordability and global competitiveness concerns have raised questions around the benefit of some legacy regulatory systems. Process-based approaches like sandboxes are appealing in both cases because they provide flexibility to move with the pace of technology, and they allow efficient ways to test existing rules. However, until we have more sandbox options at the federal level, their utility will be limited. Follow us for more law and policy updates.

February 20, 2026 started off with arguably the most economically significant Supreme Court ruling in living memory when the Court struck down the White House's use of IEEPA authority for tariffs representing roughly half of collected tariff revenue over the last year. The day ended with executive orders from an undeterred White House laying out a course for its continued tariffs strategy. What remains most uncertain is the question of refunds for IEEPA tariffs paid. The Administration's Pathway Forward Reuters reported a quote from Treasury Secretary Scott Bessent that summarizes the Administration's plans well enough: The Supreme Court has taken away the President's leverage, but in a way, they have made the leverage that he has more draconian because they agreed he does have the right to a full embargo. . . We will get back to the same tariff level for the countries. It will just be in a less direct and slightly more convoluted manner. Later in the day, in two different executive actions (here and here), the White House responded to the Supreme Court's decision by announcing specific actions: Immediate 10% tariff replacing in part the IEEPA tariffs: rescinding prior executive orders implementing the tariffs based on IEEPA but using Section 122 authority to enact a temporary 10% import duty for 150 days on most imported goods, with specific exemptions for items otherwise covered or in relation to certain trade partners. (Note: as we are writing this, President Trump reportedly  announced that the 10% will immediately be increased to 15% on most goods.) Continuing the De Minimis Exemption. Although IEEPA authority had also been used to remove the de minimis exemption for low-value shipments, the suspension of de minimis continues under IEEPA. New 301 Investigations to Come. The Administration directs the United States Trade Representative to launch unspecified Section 301 investigations into unreasonable or discriminatory foreign trade practices that restrict American commerce. It appears that Section 122 tariffs will act as a bridge between today and when the 301 tariffs can be implemented. The timeline for the new 301 tariffs is unclear, but there is a 150-day limit on the Section 122 tariffs. This could, in short, create a temporary situation where the effective tariff rate dips for several months or even most of 2026 while the 301 tariffs are completed. We also expect new 232 duties and perhaps other (as-of-today) unknown duties that will be imposed to bridge the gap. Refunds Dorsey's client update on the Supreme Court's decision explains the (hopefully temporary) uncertainty regarding a pathway to refunds. The Court’s majority opinion vindicates the plaintiffs in these cases substantively, but there remains ambiguity whether U.S. Customs and Border Protection (“CBP”) will stop collecting the IEEPA tariffs before the U.S. Court of International Trade (“CIT”) reconsiders its grant of a nationwide injunction. It is also uncertain whether CBP will issue tariff refunds to importers who have not filed their own tariff lawsuits in the CIT to challenge these tariff actions. All eyes will turn to the lower court proceedings, the Trump Administration, and CBP to see how they interpret the scope and impact of the Court’s judgment. On the assumption that importers will ultimately be able to obtain refunds of IEEPA tariffs paid, we will be providing updated advice and strategies as things develop with the CIT and CBP. For some, the pathway may be more expensive and time consuming than makes sense to pursue. In the short term, companies should be gathering data and documentation regarding tariffs paid so that they are in a strong position to make a refund claim. Follow us for more law and policy updates.

  President Trump is imposing new tariffs effective on Tuesday, February 24, under Section 122 of the Trade Act of 1974 (“Section 122”). The Section 122 tariffs replace the tariffs imposed under the International Emergency Economic Powers Act (“IEEPA”), and that the Supreme Court on Friday found unlawful. Does a solid legal footing exist for the Section 122 tariffs? Given the amount of money at issue for U.S. businesses, it is not hard to imagine a new wave of litigation attacking Section 122, and again seeking refunds of Section 122 duties collected. Section 122 is a blank slate. President Trump is the first president to impose tariffs under Section 122, and indeed the first president to take any action under Section 122 according to the Congressional Research Service.[1] No court opinions thus exist that have examined executive action under Section 122. As discussed below, however, the court opinions relating to the IEEPA tariffs indicate that trade deficits are a valid basis for temporary tariffs under Section 122. Whether Section 122 will survive closer scrutiny is, ultimately, impossible to predict given the lack of any precedent or past practice as to Section 122’s scope. Basis for New Section 122 Tariffs. The new Section 122 tariffs and the prior IEEPA tariffs identified longstanding, persistent, and large trade deficits as justifying action. In particular, President Trump issued an executive order under IEEPA to address the longstanding U.S. trade deficit, and to authorize the global reciprocal tariffs.[2] Section 122 allows the imposition of tariffs “to deal with large and serious United States balance-of-payment deficits” or to “prevent an imminent and significant depreciation of the dollar in foreign exchange markets.”[3] In issuing his proclamation on Friday evening imposing Section 122 tariffs, President Trump cited the longstanding and persistent deficit as justifying the action. Thus, “[r]estricting imports through the surcharge imposed in this proclamation is required to address the fundamental international payments problems within the meaning of section 122 that I have found to exist.”[4]   Section 122 Discussion in IEEPA Litigation. In the IEEPA litigation, the Court of International Trade (“CIT”) relied heavily on Section 122 to find that the IEEPA tariffs were unlawful. The CIT found that Section 122 “removes the President’s power to impose remedies in response to balance-of-payments deficits, and specifically trade deficits” from IEEPA’s scope of authority.[5] Section 122 is a “non-emergency statute with greater limitations”[6] compared to IEEPA.  The CIT, accordingly, said that Section 122 effectively displaced any tariff authority that might be read into IEEPA, at least with respect to trade imbalances. “Trade deficits…can be directly impacted by mechanisms such as import quotas and tariffs, as authorized by Section 122.”[7] The U.S. Court of Appeals for the Federal Circuit (“CAFC”) affirmed the CIT judgment, and also used Section 122 as context for interpreting IEEPA. The CAFC majority opinions cited Section 122 for the proposition that Congress delineated tariff authority carefully, and subject to procedural and durational limits.[8] The majority opinions of the Supreme Court said nothing particularly about Section 122, except to say that numerous U.S. trade statutes place limits on the duration, amount, and scope of tariffs.[9] While the Supreme Court majority opinions did not reference Section 122 at all, Justice Kavanaugh’s dissent did. He cited Section 122, along with other statutes, as providing “expansive” power to the President to impose tariffs.[10] Justice Kavanaugh also cited Section 122 to diminish the importance of the Supreme Court’s IEEPA decision: “with respect to tariffs in particular, the Court’s decision might not prevent Presidents from imposing most if not all of these same sorts of tariffs under other statutory authorities.”[11] Thus, from Justice Kavanaugh’s perspective, Section 122’s broad authority created an alternative to IEEPA that could be used to implement global tariffs. Whether Section 122 is Vulnerable to Lawsuit. All of the above is to say that IEEPA litigation suggests Section 122 is a basis to impose global tariffs to remedy trade deficits.[12] Not a lot more can be said than this, as of today. Any reviewing court of Section 122 tariffs would have to confront a dearth of authority on Section 122. There is no existing Section 122 practice, nor are there any cases directly reviewing executive action under Section 122. A reviewing court presumably would have to afford the President at least some discretion in determining the circumstances under which Section 122 is appropriately used. President Trump’s Section 122 proclamation cites to findings of the executive branch as to the scope, severity, and impact of trade deficits. It is unlikely that a reviewing court would meaningfully subject those findings to judicial review. President Trump’s Section 122 proclamation exempts certain goods from tariffs. A potential plaintiff might argue this framework does not provide a uniform “surcharge” in the words of Section 122. The Section 122 tariffs apply to goods from all countries,[13] including those for which the United States has a trade surplus.  This might be argued to be a “surcharge” in excess of what is necessary. Section 122 does allow, but does not seem to require, the President to exempt countries from tariffs if they have large and persistent trade surpluses.[14] Conclusion. To conclude, the Section 122 tariffs are novel, as were the tariffs under IEEPA. However, unlike the IEEPA tariffs, a potential plaintiff will have to go deeper than saying the statute does not permit tariffs. Section 122 explicitly permits tariffs. The CIT, CAFC, and Supreme Court discussion of Section 122 in the IEEPA litigation suggest that Section 122 is an avenue for President Trump to impose global tariffs to address the U.S. trade deficit. Whether that authority is lawfully exercised remains to be seen.