Articles by mjlst

Saving the Planet With Admin Law: Another Blow to Tax Exceptionalism

Caroline Moriarty, MJLST Staffer

Earlier this month, the U.S. Tax Court struck down an administrative notice issued by the IRS regarding conservation easements in Green Valley Investors, LLC v. Commissioner. While the ruling itself may be minor, the court may be signaling a shift away from tax exceptionalism to administrative law under the Administrative Procedures Act (“APA”), which could have major implications for the way the IRS operates. In this post, I will explain what conservation easements are, what the ruling was, and what the ruling may mean for IRS administrative actions going forward. 

Conservation Easements

Conservation easements are used by wealthy taxpayers to get tax deductions. Under Section 170(h) of the Internal Revenue Code (“IRC”), taxpayers who purchase development rights for land, then donate those rights to a charitable organization that pledges not to develop or use the land, get a deduction proportional to the value of the land donated. The public gets the benefit of preserved land, which could be used as a park or nature reserve, and the donor gets a tax break.

However, this deduction led to the creation of “syndicated conservation easements.” In this tax scheme, intermediaries purchase vacant land worth little, hire an appraiser to declare its value to be much higher, then sell stakes in the donation of the land to investors, who get a tax deduction that is four to five times higher than what they paid. In exchange, the intermediaries are paid large fees. 

Conservation easements can be used to protect the environment, and proponents of the deduction argue that the easements are a critical tool in keeping land safe from development pressures. However, the IRS and other critics argue that these deductions are abused and cost the government between $1.3 billion and $2.4 billion in lost tax revenue. Some appraisers in these schemes have been indicted for “fraudulent” and “grossly inflated” land appraisals. Both Congress and the IRS have published research about the potential for abuse. In 2022, the IRS declared the schemes one of their “Dirty Dozen” for the year, writing that “these abusive arrangements do nothing more than game the tax system with grossly inflated tax deductions and generate high fees for promoters.”

Notice 2017-10 and the Tax Court’s Green Valley Ruling

To combat the abuse of conservation easements, the IRS released an administrative notice (the “Notice”) that required taxpayers to disclose any syndicated conservation easements on their tax returns as a “listed transaction.” The notice didn’t go through notice-and-comment procedures from the APA. Then, in 2019, the IRS disallowed over $22 million in charitable deductions on Green Valley and the other petitioners’ taxes for 2014 and 2015 and assessed a variety of penalties.  

While the substantive tax law is complex, Green Valley and the other petitioners challenged the penalties, arguing that the Notice justifying the penalties didn’t go through notice and comment procedures. In response, the IRS argued that Congress had exempted the agency from notice-and-comment procedures. Specifically, the IRS argued that they issued a Treasury Regulation that defined a “listed transaction” as one “identified by notice, regulation, or other form of published guidance,” which should have indicated to Congress that the IRS would be operating outside of APA requirements when issuing notices. 

The Tax Court disagreed, writing “We remain unconvinced that Congress expressly authorized the IRS to identify a syndicated conservation easement transaction as a listed transaction without the APA’s notice-and-comment procedures, as it did in Notice 2017-10.” Essentially, the statutes that Congress wrote allowing for IRS penalties did not determine the criteria for how taxpayers would incur the penalties, so the IRS decided with non-APA reviewed rules. If Congress would have expressly authorized the IRS to determine the requirements for penalties without APA procedures in the penalty statutes, then the Notice would have been valid. 

In invalidating the notice, the Tax Court decided that Notice 2017-10 was a legislative rule requiring notice-and-comment procedures because it imposed substantive reporting obligations on taxpayers with the threat of penalties. Since the decision, the IRS has issued proposed regulations on the same topic that will go through notice and comment procedures, while continuing to defend the validity of the Notice in other circuits (the Tax Court adopted reasoning from a Sixth Circuit decision).

The Future of Administrative Law and the IRS 

The decision follows other recent cases where courts have pushed the IRS to follow APA rules. However, following the APA is a departure from the past understanding of administrative law’s role in tax law. In the past, “tax exceptionalism” described the misperception that tax law is so complex and different from other regulatory regimes that the rules of administrative law don’t apply. This understanding has allowed the IRS to make multiple levels of regulatory guidance, some binding and some not, all without effective oversight from the courts. Further, judicial review is limited for IRS actions by statute, and even if there’s review, it may be ineffective if the judges are not tax experts. 

This movement towards administrative law has implications for both taxpayers and the IRS. For taxpayers, administrative law principles could provide additional avenues to challenge IRS actions and allow for more remedies. For the IRS, the APA may be an additional barrier to their job of collecting tax revenue. At the end of the day, syndicated conservation easements can be used to defraud the government, and the IRS should do something to curtail their potential for abuse. Following notice-and-comment procedures could delay effective tax administration. However, the IRS is an administrative agency, and it doesn’t make sense to think they can make their own rules or act like they’re not subject to the APA. Either way, administrative law will likely continue to prevail in both federal courts and Tax Court, and it will continue to influence tax law as we know it.


Charged Up! the Inflation Reduction Act of 2022 and Its Impacts on Energy Storage Capacity in the U.S.

Quinn Milligan, MJLST Staffer

The Inflation Reduction Act of 2022 (the IRA) is one of the most significant steps the U.S. government has ever taken towards fighting climate change. Over a decade, the IRA dedicates nearly $400 billion to clean energy tax incentives with the aim of reducing carbon emissions and aiding the U.S. energy economy in speeding up its transition away from fossil fuel based energy generation.[1] One of the most interesting features of the IRA’s emphasis on clean energy is the energy storage industry. The IRA extends the coverage of the 30% Investment Tax Credit (ITC) to standalone energy storage projects, and creates a system by which standalone battery projects can earn up to 70% in tax credits, with additional incentives linked to involvement in low-income housing and other projects.[2]

Why is that such a big deal? At a high level, one of the main obstacles to reliance on renewable energy sources, other than nuclear power, is the variability of their supply generation. Variability is easy to understand at a cursory level: You can’t rely on solar power when it’s not sunny out or wind energy when there’s no wind. So, variability of energy production from renewable sources has long been an obstacle to the increased dispatch of renewable sources.[3] Increased transmission capacity and energy storage capacity provide a solution to the variability in generation of renewable energy sources.[4]

The manner in which the Federal Energy Regulatory Committee (FERC) regulates the Independent System Operators (ISOs) and Regional Transmission Organizations (RTOs) accentuates the impact of generation variability on the ability of renewable resources to be widely utilized. These ISOs and RTOs operate independently of the federal government to ensure that U.S. citizens have reliable access to affordable energy.[5] In essence, for huge swaths of the country, ISOs and RTOs oversee the markets wherein energy is purchased from generators and resold to retail suppliers, which provide energy to end consumers.[6] The ISOs and RTOs both forecast and plan for the energy needs of their areas of oversight, and then coordinate the purchase and sale of those contracts to fulfill the energy needs. These purchases happen at multiple different time scales, ranging from forward contracts, to day-ahead markets, and even minutes before requirement.[7] Because planning and forecasting make up such an important part of how energy is purchased, the variability of generation from renewables has historically made it very hard for ISOs and RTOs to rely on renewably sourced energy to fulfill any sort of energy need other than minutes-ahead contracts. However, that is the very problem many of the incentives in the IRA may help to solve.

The huge tax incentives given out to standalone energy storage projects are critical policy achievements that will go very far in aiding the U.S. to accomplish its lofty goal of reducing carbon emissions up to 40% below 2005 levels by 2035, as the Biden Administration claims will be accomplished with help of the IRA.[8] One huge change the IRA made to climate policies enacted under the Obama Administration was to remove the solar charging of battery storage in order to receive tax credits. Under the IRA, as opposed to prior legislation, investment in projects to create better storage will receive the IRA’s ITC regardless of what source of energy is used to fill that battery capacity.[9] This ITC for energy storage capacity pairs hand-in-hand with the tax credits extended under the IRA to renewables; for example, the IRA extends the current tax breaks for solar and wind generation for another 10 years.

The emphasis on energy storage capacity increases means ISOs, RTOs and other energy utilities will have less need to rely on fossil fuel energy sources to power their grids, as cleanly produced energy can be stored and dispatched on a longer-term basis to store power and make up for variability in generation. The other important aspect of increases in electricity storage capacity is that ISOs and RTOs can more comfortably rely on renewable energy sources to respond to fluctuations in peak demand periods than ever before.[10] Responding to changes in demand during peak demand hours has long been one of the main challenges for utilities, and one of the reasons our grid has continued to rely on fossil-fuel-based energy for so long. Its generation is reliable, cheap, established and abundant.[11] The increase in energy storage capacity resulting from the IRA’s incentive structure will help ISOs and RTOs transition more fully toward reliance on renewable energy in short-term markets, as well as the long-term capacity markets, by minimizing reliability concerns previously raised by generation variability.

The real genius of the IRA’s focus on the energy storage capacity from a policy standpoint is that all battery projects put into service after December 31, 2022, receive the ITC, even if they are powered by fossil fuels.[12] Unlike many climate change policies before it, this approach means the entire U.S. energy grid, and not just the renewables sector, will be incentivized to address a critical constraint on the deployment of renewably generated electricity and subsequently ease the transition of the grid away from fossil-fuel-generated electricity.

As time goes forward, the price of renewable energy continues to go down as compared to fossil-fuel-generated energy; in fact, renewable energy today is generally cheaper than fossil fuel energy.[13] That begs the question of why most of our electricity is sourced from fossil fuels when FERC directs the ISOs and RTOs to power the grid affordably. The reliability of renewable energy generation has long been one of the obstacles standing in the way of a transition to renewable energy generation, and the IRA’s electricity storage incentives go far in setting up the U.S. to successfully build the storage capacity needed to finally make a transition away from carbon reliance.

Notes

[1] https://www.mossadams.com/articles/2022/08/inflation-reduction-act-clean-energy-credits

[2] https://www.utilitydive.com/spons/ira-sets-the-stage-for-us-energy-storage-to-thrive/635665/#:~:text=The%20Inflation%20Reduction%20Act%20(IRA,70%20percent%20with%20additional%20incentives.

[3] https://www.rff.org/publications/explainers/renewables-101-integrating-renewables/

[4] https://climatechangeresources.org/storage/

[5] https://www.ferc.gov/power-sales-and-markets/rtos-and-isos

[6] https://bestpracticeenergy.com/2020/05/21/energy101-electricity-iso/#:~:text=What%20exactly%20do%20ISOs%20and,actions%20are%20unbiased%20and%20neutral.

[7] https://www.iso-ne.com/markets-operations/markets/da-rt-energy-markets/

[8]https://crsreports.congress.gov/product/pdf/R/R47262#:~:text=The%20same%20analyses%20estimated%20that,prices%2C%20among%20other%20uncertain%20factors

[9] https://www.ny-engineers.com/blog/energy-storage-tax-credit-before-and-after-the-inflation-reduction-act

[10] https://www.ncsl.org/research/energy/energy-storage-for-a-modern-electric-grid-technology-trends-and-state-policy-options.aspx

[11] https://www.solarreviews.com/blog/fossil-fuels-pros-and-cons#fossil-fuel-pros-and-cons

[12]https://www.mossadams.com/articles/2022/08/inflation-reduction-act-clean-energy-credits “Standalone battery storage. “If placed in service after December 31, 2022, standalone battery storage qualifies for the ITC, regardless of whether it’s charged by a renewable source.”

[13] https://www.weforum.org/agenda/2021/07/renewables-cheapest-energy-source/


DNA Testing and Death: How Decades-Long Procedural Battles Determine Who Has to Die

Alexa Johnson-Gomez, MJLST Staffer

When individuals convicted of murder claim actual innocence, crime-scene DNA testing has, many times over, been dispositive in proving such innocence. Intuitively, we assume that if someone has been wrongfully convicted, DNA will be the bringer of truth. But what happens when a defendant cannot get their requested DNA testing because the State argues their claim is procedurally defaulted or barred by the statute of limitations?

Reed v. Goertz is a case in the current U.S. Supreme Court term. Petitioner Rodney Reed argues that his due process rights were violated by a refusal to complete DNA testing after he filed post conviction petitions for relief. While the facts are fairly case-specific and relate to Texas criminal procedure, the Court’s holding in this case could have important implications for when the clock starts to run on petitions for crime-scene DNA testing, as well as for death-row claims of actual innocence more generally.

Back in 1998, a Texas court convicted Rodney Reed of the murder of Stacey Stites; the evidentiary basis for this conviction was solely the presence of his sperm.[1] Reed has maintained his innocence since trial, explaining that his sperm was present because he was having a secret, long-standing affair with Stites.[2] At trial, Reed theorized that the murderer might have been the man Stites was engaged to, who was perhaps retaliating against Stites, a white woman, for having an affair with Reed, a Black man.

In 2014, Reed sought post conviction DNA testing under Chapter 64 of the Texas Code of Criminal Procedure. This provision allows a convicted person to obtain post conviction DNA testing of biological material if the court finds that certain conditions are met.[3] The state trial court denied this motion in November 2014, on the grounds that Reed failed to prove by a preponderance of the evidence that he would not have been convicted but for exculpatory results. Reed appealed the denial, and the appellate court remanded for additional fact finding. Then in September 2016, after additional fact finding was done, the state trial court denied the post conviction DNA testing yet again. The appellate court affirmed the denial in April 2017 and denied rehearing in October 2017.

At this stage, Reed filed a 42 U.S.C. § 1983 complaint against the prosecuting attorney, challenging the constitutionality of Chapter 64 both on its face and as applied to his case.[4] The district court dismissed all of Reed’s claims for failure to state a claim; the Fifth Circuit affirmed in April 2021, stating that Reed’s claim was untimely and that Reed knew or should have known of his injury in November 2014. Generally, time bars in post conviction follow a common principle: if a defendant did know or should have known of a claim, that is the point at which the clock starts running. Defense counsel argues that the clock began to run in October 2017, after Reed exhausted his post conviction appeals fully.

At oral argument on October 11, 2022, the state argued that the clock started prior to the rehearing date in October 2017. Justice Kagan reasoned that it would be simpler to acknowledge we do not know what the authoritative construction of a court of appeals is until appeals are concluded. Justice Jackson agreed, noting that if the federal clock starts while the state appeals process is still ongoing, then the federal courts would have to pause consideration to allow state courts to weigh in first. This would be untenable and overly chaotic. Defense counsel reminded the court of the mounting evidence that points at Reed’s innocence, evidence which is still under review.

While not the hottest topic of this Supreme Court term, this case could still have important implications. While the use of DNA testing to prove actual innocence has been a practice in the world of litigation for the past few decades, cases that have yet to get their post conviction DNA testing done, like Reed’s, often stand in such perilous status because of procedural bars.

A haunting example—the recent execution of Murray Hooper in Arizona. 76 years old at the time of his death, Hooper maintained his innocence until his day of execution.[5] There was never any forensic testing in Hooper’s case that proved he conclusively committed the murders. Hooper’s lawyers filed appeals to get newly discovered evidence considered and forensic testing completed,[6] yet these petitions were all denied.

In theory, post conviction and habeas relief are meant to be reserved for the most deserving of defendants. The courts do not want to allow convicted murderers chance after chance at getting a conviction or sentence overturned, and there is, of course, the presumption that any conviction was right the first time. Yet the high procedural barrier to bringing such claims is not in line with the reality of wrongful convictions. Since 1973, 190 death-row inmates have been exonerated.[7]Post conviction DNA testing is not merely allowing defendants to draw out their appeals process and stave off execution, but is an important scientific tool that can check if the trial court got it right. Preventing petitioners from accessing DNA testing just because of procedural barriers is an injustice, and hopefully the Supreme Court rules as such in Reed v. Goertz.

Notes

[1] Innocence Staff, 10 Facts About Rodney Reed’s Case You Need to Know, Innocence Project (Oct. 11, 2019), https://innocenceproject.org/10-facts-you-need-to-know-about-rodney-reed-who-is-scheduled-for-execution-on-november-20/.

[2] Amy Howe, Justices Wrestle with Statute of Limitations in Rodney Reed’s Effort to Revive DNA Lawsuit, SCOTUSblog (Oct. 11, 2022), https://www.scotusblog.com/2022/10/justices-wrestle-with-statute-of-limitations-in-rodney-reeds-effort-to-revive-dna-lawsuit/.

[3] See Tex. Code Crim. Proc. Ann. § 64.03.

[4] Reed v. Goertz, 995 F.3d 425, 428 (5th Cir. 2021).

[5] Liliana Segura, Out of Time, The Intercept (Nov. 15, 2022), https://theintercept.com/2022/11/15/murray-hooper-arizona-execution/.

[6] Associated Press, Lawyers for Murray Hooper File New Appeal as Execution Date Nears, Fox 10 (Nov. 1, 2022),https://www.fox10phoenix.com/news/lawyers-for-murray-hooper-file-new-appeal-as-execution-date-nears.

[7] Innocence, Death Penalty Information Center, https://deathpenaltyinfo.org/policy-issues/innocence (last visited Nov. 27, 2022).


Who Qualifies for the Patent Bar? Proposed Changes May Mean More Applicants With Computer Science Degrees Soon Will

Nina Elder, MJLST Staffer

Last month, the United States Patent and Trademark Office (USPTO) put out a request for comments on a proposal to amend the admission requirements for the registration examination it administers. Passing this examination, colloquially referred to as the patent bar, is required before an aspiring practitioner can practice patent matters before the USPTO. To qualify for the test, applicants must demonstrate that they have the appropriate scientific and technical training. There are three ways to qualify, but most applicants are automatically admitted under “Category A” which simply requires a degree in an approved topic. The USPTO has historically adhered strictly to its list of approved degrees; for example, “biology” is included on the list, but in the past a degree in “biological sciences” did not qualify.

In 2021, the USPTO made its first major change to the admission requirements in years by expanding the degrees accepted under Category A to include advanced degrees and 14 new undergraduate majors. Though it did not officially announce it, the USPTO also edited its Frequently Asked Questions to reflect that it no longer requires that an applicant’s degree match a Category A degree title exactly, but instead evaluates any degree that is similar to an approved degree to determine if they are equivalent. However, even after these improvements there was still a clear lack of approved computer science-related degrees, and many attorneys felt the USPTO needed to do more. The USPTO’s new proposal at least partially addresses this issue and suggests several more changes, a key one being removing the certification requirement for computer science degrees.

Currently, computer science degrees only qualify under Category A if they are certified by either the Computing Accreditation Commission or the Accreditation Board for Engineering and Technology. This is the only degree accepted under Category A that requires extra certification. Qualifying under either of the alternative routes—Category B or C—may be nearly impossible for many students with computer science degrees. Category B requires an applicant establish they have the necessary training by showing they have a certain number of credits in particular scientific topics. However, the coursework needed for a computer science degree typically does not align with the subjects required for Category B such as physics, chemistry, and biology. Under Category C an applicant can prove they have practical training by taking the Fundamentals of Engineering test, but once again the information covered for a degree in computer science may not prepare a student for such a test. 

As of November 2022, there are only 368 schools in the US with a qualifying certified computer science program. Many highly respected schools, including Stanford, UC Berkeley, and Carnegie Mellon, do not have the required certification for their computer science programs. Considering there appear to be more than 700 four-year schools that offer computer science degrees, there are likely hundreds of computer science students graduating every year that do not qualify to take the patent bar under Category A and may have difficulty qualifying under Category B or C. Even if a school becomes accredited, any student that received a degree before that accreditation does not qualify.

The certification requirement may be excluding the “best and brightest” computer practitioners, and is contributing to the lack of practitioners with relevant experience in a heavily patented area. There is a huge disconnect between the number of patents related to software and the number of practitioners with a relevant background. As of 2010, less than 5% of patent practitioners trained in a computer science-related field. While decisions such as Alice Corp v CLS Bank International have limited what software can be patented, a growing number of patents at least include some element relating to computers and more than 60% of utility patents issued in 2019 related to software. There is clearly an increasing need for competent patent attorneys with experience in software and, if adopted, the USPTO’s current proposal would increase that pool.

It has also been suggested that altering patent bar requirements may improve diversity in patent law. Despite women making up more than 37% of attorneys in the US, only 17% of patent attorneys are women. Less than 15% of patent practitioners with a background in computer science are women. The picture is even more striking when we examine racial diversity—less than 7% of all patent attorneys and agents are minorities. Shockingly, there are more male patent practitioners named Michael than women of color. The USPTO’s broadening of the accepted degrees last year was spurred by a journal article written by a law student, Mary Hannon, suggesting that changes to patent bar admission may help address the low number of women in patent law. While she acknowledged that removing the computer science certification requirement would not close the gender gap since the majority of computer science graduates are men, she pointed out that by allowing more individuals with computer science degrees to take the patent bar the overall number of women admitted to the exam may increase

Many have been pushing for changes to the patent bar admission requirements for years, and while it is promising to see progress being made, there is still more that can be done. Organizations such as the American Intellectual Property Law Association have suggested Category A be broadened even further to include degrees such as data science and mathematics. The USPTO has not only shown willingness to continue updating these requirements, as evidenced by the fact it is proposing to regularly consider and add new Category A degrees, but also that it is responsive to comments. For example, environmental engineering was added to the list of accepted degrees at least partially in response to a comment. Kathi Vidal, USPTO’s current director, explained the goal is to ensure the USPTO remains dynamic by recognizing the new types of degrees being awarded as society and technology evolve. In its recent request for comments, the USPTO asked commenters to weigh in on its new proposals and to submit general suggestions on updating the scientific and technical requirements for admission to the patent bar. Comments close on January 17th, 2023—if you have thoughts about the degrees the USPTO should accept under Category A, go comment!



The Crypto Wild West Chaos Continues at FTX: Will the DCCPA Fix This?

Jack Atterberry, MJLST Staffer

The FTX Collapse and Its Implications

Over the last few weeks, the company FTX has imploded in what appears to be a massive scam of epic proportions. John Ray III, the former Enron restructuring leader who just took over FTX as CEO in their bankruptcy process, described FTX’s legal and bankruptcy situation as “worse than Enron” and a “complete failure of corporate control.”[1] FTX is a leading cryptocurrency exchange company that provided a platform on which customers could buy and sell crypto assets – similar to a traditional finance stock exchange. As of this past summer, FTX was worth $32 billion and served as a platform that global consumers trusted enough to deposit tens of billions of dollars in assets.[2]

Although FTX and its CEO Sam Bankman-Fried (“SBF”) engaged in numerous questionable and likely illegal business practices, perhaps the greatest fraudulent activity was intermingling customer deposits on the FTX exchange platform with assets from SBF’s asset management firm Alameda Research. Although facts are still being uncovered, preliminary investigations have highlighted that Alameda Research was using customer deposits in their trading and lending activities without customer consent – now customers face the unpleasant reality that their assets (in excess of $1 billion on aggregate) may never be returned.[3] While many lessons in corporate governance can be learned from the FTX situation, a key legal implication of the meltdown is that crypto has a regulatory problem that needs to be addressed by Congress and other US government agencies.

Current State of Government Regulation

Crypto assets are a relatively new asset class and have risen to prominence globally since the publishing of the Bitcoin white paper by the anonymous Satoshi Nakamoto in 2009.[4] Although crypto assets and the business activities associated with them are regulated in the United States, this regulation has been inconsistent and has created uncertainty for businesses and individuals in the ecosystem. Currently, the US Securities and Exchange Commission (“SEC”), state legislatures, the US Treasury, and a host of other government agencies have acted inconsistently. The SEC has inconsistently pursued enforcement actions, state governments have enacted differing digital assets laws, and the Treasury has banned crypto entities without clear rationale.[5] This has been a major problem for the industry and has led companies (including now infamously FTX) to move abroad to seek more regulatory certainty. Companies like FTX have chosen to domicile in jurisdictions like the Bahamas to avoid having to guess what approach various state governments and federal agencies will take with regard to its digital asset business activities.

Earlier in 2022, Congress introduced the Digital Commodities Consumer Protection Act (“DCCPA”) to attempt to fill gaps in the federal regulatory framework that oversees the crypto industry. The Digital Commodities Consumer Protection Act amends the Commodity Exchange Act to create a much-needed comprehensive and robust regulatory framework for spot markets of digital asset commodities. The DCCPA would enable the Commodity Futures Trading Commission (“CFTC”) to require digital asset commodity exchanges to actively prevent fraud and market manipulation, and would provide the CFTC regulatory authority to access quote and trade data allowing them to identify market manipulation more easily.[6] Taken as a whole, the DCCPA would implement consumer protections relating to digital asset commodities, ensure oversight of digital asset commodity platforms (such as FTX, Coinbase, etc.), and better prevent system risk to financial markets.[7] This regulation fills in a necessary gap in federal crypto regulation and industry observers are optimistic of its chances in getting passed as law.[8]

Digital Asset Regulation Has a Long Path Ahead

Despite the potential benefits and strong congressional regulatory action that the DCCPA represents, elements of the bill have been criticized by both the crypto industry and policy experts. According to the Blockchain Association, a leading crypto policy organization, the DCCPA could present negative implications for the decentralized finance (“DeFi”) ecosystem because of the onerous reporting and custody requirements that elements of the DCCPA would inflict on De-Fi protocols and applications[9]. “De-Fi” is a catch-all term for blockchain-based financial tools that allow users to trade, borrow, and loan crypto assets without third-party intermediaries.[10] The DCCPA attempts to regulate intermediary risks associated with digital asset trading whereas the whole point of De-Fi is to remove intermediaries through the use of blockchain software technology.[11] The Blockchain Association has also criticized the DCCPA as providing an overly broad definition for “digital commodity platform” and an overly narrow and ambiguous definition of “digital commodity” which could create future unnecessary turf wars between the SEC and CFTC.[12] When Congress revisits this bill next year, these complexities will likely be brought up in weighing the pros and cons of the bill. Besides the textual contents of the DCCPA, the legislators pushing forward the bill must also deal with the DCCPA’s negative association with Sam Bankman-Fried, the former FTX CEO. The former FTX CEO and suspected fraudster was perhaps the greatest supporter of the bill and lobbied for its provisions before Congress several times.[13] While Bankman-Fried’s support does not necessarily mean anything is wrong with the bill, some legislators and lobbyists may be hesitant to push forward a bill that was heavily influenced by a person who perpetrated a massive fraud scheme severely hurting thousands of consumers.

Though the goal of the DCCPA is to establish CFTC authority over crypto assets that qualify as commodities, the crypto ecosystem will still be left with several unanswered regulatory issues if it is passed. A key question is whether digital assets will be treated as commodities, securities or something else entirely. In addition, another key looming question is how Congress will regulate stablecoins—a type of digital asset where the price is designed to be pegged to another type of asset, typically a real-world asset such as US Treasury bills. For these unanswered questions Congress and the SEC will likely need to provide additional guidance and rules to build on the increased certainty that could be brought about with the DCCPA. By passing an amended version of the DCCPA with more careful attention paid to the De-Fi ecosystem as well as clarified definitions of digital commodities and digital commodity platforms, Congress would go a long way in the right direction to prevent future FTX-like fraud schemes, protect consumers, and ensure crypto innovation stays in the US.

Notes

[1] Ken Sweet & Michelle Chapman, FTX Is a Bigger Mess Than Enron, New CEO Says, Calling It “Unprecedented”, TIME (Nov. 17, 2022), https://time.com/6234801/ftx-fallout-worse-than-enron/

[2] FTX Company Profile, FORBES, https://www.forbes.com/companies/ftx/?sh=506342e23c59

[3] Osipovich et al., They Lived Together, Worked Together and Lost Billions Together: Inside Sam Bankman-Fried’s Doomed FTX Empire, WSJ (Nov. 19, 2022), https://www.wsj.com/articles/sam-bankman-fried-ftx-alameda-bankruptcy-collapse-11668824201

[4] Guardian Nigeria, The idea and a brief history of cryptocurrencies, The Guardian (Dec. 26, 2022), https://guardian.ng/technology/tech/the-idea-and-a-brief-history-of-cryptocurrencies/

[5] Kathryn White, Cryptocurrency regulation: where are we now, and where are we going?, World Economic Forum (Mar. 28, 2022), https://www.weforum.org/agenda/2022/03/where-is-cryptocurrency-regulation-heading/

[6] https://www.agriculture.senate.gov/imo/media/doc/Testimony_Phillips_09.15.2022.pdf

[7] US Senate Agriculture Committee, Crypto One-Pager: The Digital Commodities Consumer Protection Act Closes Regulatory Gaps, https://www.agriculture.senate.gov/imo/media/doc/crypto_one-pager1.pdf

[8] Courtney Degen, Washington wants to regulate cryptocurrency, Pensions & Investments (Oct. 3, 2022), https://www.pionline.com/cryptocurrency/washington-wants-regulate-crypto-path-unclear

[9] Jake Chervinsky, Blockchain Association Calls for Revisions to the Digital Commodities Consumer Protection Act (DCCPA), Blockchain Association (Sept. 15, 2022), https://theblockchainassociation.org/blockchain-association-calls-for-revisions-to-the-digital-commodities-consumer-protection-act-dccpa/

[10] Rakesh Sharma, What is Decentralized Finance (DeFi) and How Does It Work?, Investopedia (Sept. 21, 2022), https://www.investopedia.com/decentralized-finance-defi-5113835.

[11] Jennifer J. Schulpt & Jack Solowey, DeFi Must Be Defended, CATO Institute (Oct. 26, 2022), https://www.cato.org/commentary/defi-must-be-defended

[12] Jake Chervinsky, supra note 7.

[13] Fran Velasquez, Former SEC Official Doubts FTX Crash Will Prompt Congress to Act on Crypto Regulations, CoinDesk (Nov. 16, 2022), https://www.coindesk.com/business/2022/11/16/former-sec-official-doubts-ftx-crash-will-prompt-congress-to-act-on-crypto-regulations/


Emptying the Nest: Recent Events at Twitter Prompt Class-Action Litigation, Among Other Things

Ted Mathiowetz, MJLST Staffer

You’d be forgiven if you thought the circumstances that led to Elon Musk ultimately acquiring Twitter would be the end of the drama for the social media company. In the past seven months, Musk went from becoming the largest shareholder of the company, to publicly feuding with then-CEO, Parag Agrawal, to making an offer to take the company private for $44 billion, to deciding he didn’t want to purchase the company, to being sued by Twitter to force him to complete the deal. Eventually, two weeks before trial was scheduled, Musk purchased the company for the original, agreed upon price.[1] However, within the first two-and-a-half weeks that Musk took Twitter private, the drama has continued, if not ramped-up, with one lawsuit already filed and the specter of additional litigation looming.[2]

There’s been the highly controversial rollout and almost immediate suspension of Twitter Blue—Musk’s idea of increasing the reliability of information on Twitter and simultaneously helping ameliorate Twitter’s financial woes.[3]Essentially, users were able to pay $8 a month for verification, albeit without actually verifying their identity. Instead, their username would remain frozen at the time they paid for the service.[4] Users quickly created fake “verified” accounts for real companies and spread misinformation while armed with the “verified” check mark, duping both the public and investors. For example, a newly created account with the handle “@EliLillyandCo” paid for Twitter Blue and tweeted “We are excited to announce insulin is free now.”[5] Eli Lilly’s actual Twitter account, “@LillyPad” had to tweet a message apologizing to those “who have been served a misleading message” from the fake account, after the pharmaceutical company’s shares dipped around 5% after the tweet.[6] In addition to Eli Lilly, several other companies, like Lockheed Martin, faced similar identity theft.[7] Twitter Blue was quickly suspended in the wake of these viral impersonations and advertisers have continued to flee the company, affecting its revenue.[8]

Musk also pulled over 50 engineers from Tesla, the vehicle manufacturing company of which he is CEO, to help him in his reimagining of Twitter.[9] Among those 50 engineers are the director of software development and the senior director of software engineering.[10] Pulling engineers from his publicly traded company to work on his separately owned private company almost assuredly raises questions of a violation of his fiduciary duty to Tesla’s shareholders, especially with Tesla’s share price falling 13% over the last week (as of November 9, 2022).[11]

The bulk of Twitter’s current legal issues reside in Musk’s decision to engage in mass-layoffs of employees at Twitter.[12] After his first week in charge, he sent out notices to around half of Twitter’s 7500 employees that they would be laid off, reasoning that cutbacks were necessary because Twitter was losing over $4 million per day.[13] Soon after the layoffs, a group of employees filed suit alleging that Twitter violated the Worker Adjustment and Retraining Act (WARN) by failing to give adequate notice.[14]

The WARN Act, passed in 1988, applies to employers with 100 or more employees[15] and mandates that an “employer shall not order a [mass layoff]” until it gives sixty-days’ notice to the state and affected employees.[16]Compliance can also be reached if, in lieu of giving notice, the employee is paid for the sixty-day notice period. In Twitter’s case, some employees were offered pay to comply with the sixty-day period after the initial lawsuit was filed,[17] though the lead plaintiff in the class action suit was allegedly laid off on November 1st with no notice or offer of severance pay.[18] Additionally, it appears as though Twitter is now offering severance to employees in return for a signature releasing them from liability in a WARN action.[19]

With regard to those who have not yet signed releases and were not given notice of a layoff, there is a question of what the penalties may be to Twitter and what potential defenses they may have. Each employee is entitled to “back pay for each day of violation” as well as benefits under their respective plan.[20] Furthermore, the employer is subject to a civil penalty of “not more than $500 for each day of violation” unless they pay their liability to each employee within three weeks of the layoff.[21] One possible defense that Twitter may assert in response to this suit is that of “unforeseeable business circumstances.”[22] Considering Musk’s recent comments that there is the potential that Twitter is headed for bankruptcy as well as the saddling of the company with debt to purchase it (reportedly $13 billion, with $1 billion per year in interest payments),[23] it seems there is a chance this defense could suffice. However, an unforeseen circumstance is strongly indicated when the circumstance is “outside the employer’s” control[24], something that’s arguable given the company’s recent conduct.[25] Additionally, Twitter would have to show that it has been exercising “commercially reasonable business judgment as would a similarly situated employer” in their conduct, another burden that may be hard to overcome. In sum, it’s quite clear why Twitter is trying to keep this lawsuit from gaining traction by securing release waivers. It’s also clear that Twitter has learned its lesson in not offering severance but they may be wading into other areas of employment law with recent conduct.[26]

Notes

[1] Timeline of Billionaire Elon Musk’s to Control Twitter, Associated Press (Oct. 28, 2022), https://apnews.com/article/twitter-elon-musk-timeline-c6b09620ee0905e59df9325ed042a609.

[2] Annie Palmer, Twitter Sued by Employees After Mass Layoffs Begin, CNBC (Nov. 4, 2022), https://www.cnbc.com/2022/11/04/twitter-sued-by-employees-after-mass-layoffs-begin.html.

[3] Siladitya Ray, Twitter Blue: Signups for Paid Verification Appear Suspended After Impersonator Chaos, Forbes (Nov. 11, 2022), https://www.forbes.com/sites/siladityaray/2022/11/11/twitter-blue-new-signups-for-paid-verification-appear-suspended-after-impersonator-chaos/?sh=14faf76c385c; see also Elon Musk (@elonmusk), Twitter (Nov. 6, 2022, 5:43 PM), https://twitter.com/elonmusk/status/1589403131770974208?s=20&t=bkkh_m5EgMreMCU-GWxXrQ.

[4] Elon Musk (@elonmusk), Twitter (Nov. 6, 2022, 5:35 PM), https://twitter.com/elonmusk/status/1589401231545741312?s=20&t=bkkh_m5EgMreMCU-GWxXrQ.

[5] Steve Mollman, No, Insulin is not Free: Eli Lilly is the Latest High-Profile Casualty of Elon Musk’s Twitter Verification Mess, Fortune(Nov. 11, 2022), https://fortune.com/2022/11/11/no-free-insulin-eli-lilly-casualty-of-elon-musk-twitter-blue-verification-mess/.

[6] Id. Eli Lilly and Company (@LillyPad), Twitter (Nov. 10, 2022, 3:09 PM), https://twitter.com/LillyPad/status/1590813806275469333?s=20&t=4XvAAidJmNLYwSCcWtd4VQ.

[7] Mollman, supra note 5 (showing Lockheed Martin’s stock dipped around 5% as well following a tweet from a “verified” account saying arms sales were being suspended to various countries went viral).

[8] Herb Scribner, Twitter Suffers “Massive Drop in Revenue,” Musk Says, Axios (Nov. 4, 2022), https://www.axios.com/2022/11/04/elon-musk-twitter-revenue-drop-advertisers.

[9] Lora Kolodny, Elon Musk has Pulled More Than 50 Tesla Employees into his Twitter Takeover, CNBC (Oct. 31, 2022), https://www.cnbc.com/2022/10/31/elon-musk-has-pulled-more-than-50-tesla-engineers-into-twitter.html.

[10] Id.

[11] Trefis Team, Tesla Stock Falls Post Elon Musk’s Twitter Purchase. What’s Next?, NASDAQ (Nov. 9, 2022), https://www.nasdaq.com/articles/tesla-stock-falls-post-elon-musks-twitter-purchase.-whats-next.

[12] Dominic Rushe, et al., Twitter Slashes Nearly Half its Workforce as Musk Admits ‘Massive Drop’ in Revenue, The Guardian (Nov. 4, 2022), https://www.theguardian.com/technology/2022/nov/04/twitter-layoffs-elon-musk-revenue-drop.

[13] Id.

[14] Phil Helsel, Twitter Sued Over Short-Notice Layoffs as Elon Musk’s Takeover Rocks Company, NBC News (Nov. 4, 2022), https://www.nbcnews.com/business/business-news/twitter-sued-layoffs-days-elon-musk-purchase-rcna55619.

[15] 29 USC § 2101(a)(1).

[16] 29 USC § 2102(a).

[17] On Point, Boston Labor Lawyer Discusses her Class Action Lawsuit Against Twitter, WBUR Radio Boston (Nov. 10, 2022), https://www.wbur.org/radioboston/2022/11/10/shannon-liss-riordan-musk-class-action-twitter-suit (discussing recent developments in the case with attorney Shannon Liss-Riordan).

[18] Complaint at 5, Cornet et al. v. Twitter, Inc., Docket No. 3:22-cv-06857 (N.D. Cal. 2022).

[19] Id. at 6 (outlining previous attempts by another Musk company, Tesla, to get around WARN Act violations by tying severance agreements to waiver of litigation rights); see also On Point, supra note 17.

[20] 29 USC § 2104.

[21] Id.

[22] 20 CFR § 639.9 (2012).

[23] Hannah Murphy, Musk Warns Twitter Bankruptcy is Possible as Executives Exit, Financial Times (Nov. 10, 2022), https://www.ft.com/content/85eaf14b-7892-4d42-80a9-099c0925def0.

[24] Id.

[25] See e.g., Murphy supra note 22.

[26] See Pete Syme, Elon Musk Sent a Midnight Email Telling Twitter Staff to Commit to an ‘Extremely Hardcore’ Work Schedule – or Get Laid off with Three Months’ Severance, Business Insider (Nov. 16, 2022), https://www.businessinsider.com/elon-musk-twitter-staff-commit-extremely-hardcore-work-laid-off-2022-11; see also Jaclyn Diaz, Fired by Tweet: Elon Musk’s Latest Actions are Jeopardizing Twitter, Experts Say. NPR (Nov. 17, 2022), https://www.npr.org/2022/11/17/1137265843/elon-musk-fires-employee-by-tweet (discussing firing of an employee for correcting Musk on Twitter and potential liability for a retaliation claim under California law).

 


Twitter Troubles: The Upheaval of a Platform and Lessons for Social Media Governance

Gordon Unzen, MJLST Staffer

Elon Musk’s Tumultuous Start

On October 27, 2022, Elon Musk officially completed his $44 billion deal to purchase the social media platform, Twitter.[1] When Musk’s bid to buy Twitter was initially accepted in April 2022, proponents spoke of a grand ideological vision for the platform under Musk. Musk himself emphasized the importance of free speech to democracy and called Twitter “the digital town square where matters vital to the future of humanity are debated.”[2] Twitter co-founder Jack Dorsey called Twitter the “closest thing we have to a global consciousness,” and expressed his support of Musk: “I trust his mission to extend the light of consciousness.”[3]

Yet only two weeks into Musk’s rule, the tone has quickly shifted towards doom, with advertisers fleeing the platform, talk of bankruptcy, and the Federal Trade Commission (“FTC”) expressing “deep concern.” What happened?

Free Speech or a Free for All?

Critics were quick to read Musk’s pre-purchase remarks about improving ‘free speech’ on Twitter to mean he would change how the platform would regulate hate speech and misinformation.[4] This fear was corroborated by the stream of racist slurs and memes from anonymous trolls ‘celebrating’ Musk’s purchase of Twitter.[5] However, Musk’s first major change to the platform came in the form of a new verification service called ‘Twitter Blue.’

Musk took control of Twitter during a substantial pullback in advertisement spending in the tech industry, a problem that has impacted other tech giants like Meta, Spotify, and Google.[6] His solution was to seek revenue directly from consumers through Twitter Blue, a program where users could pay $8 a month for verification with the ‘blue check’ that previously served to tell users whether an account of public interest was authentic.[7] Musk claimed this new system would give ‘power to the people,’ which proved correct in an ironic and unintended fashion.

Twitter Blue allowed users to pay $8 for a blue check and impersonate politicians, celebrities, and company media accounts—which is exactly what happened. Musk, Rudy Giuliani, O.J. Simpson, LeBron James, and even the Pope were among the many impersonated by Twitter users.[8] Companies received the same treatment, with an impersonation Eli Lilly and Company account writing “We are excited to announce insulin is free now,” causing its stock to drop 2.2%.[9]This has led advertising firms like Omnicom and IPG’s Mediabrands to conclude that brand safety measures are currently impeded on Twitter and advertisers have subsequently begun to announce pauses on ad spending.[10] Musk responded by suspending Twitter Blue only 48 hours after it launched, but the damage may already be done for Twitter, a company whose revenue was 90% ad sales in the second quarter of this year.[11] During his first mass call with employees, Musk said he could not rule out bankruptcy in Twitter’s future.[12]

It also remains to be seen whether the Twitter impersonators will escape civil liability under theories of defamation[13] or misappropriation of name or likeness,[14] or criminal liability under state identity theft[15] or false representation of a public employee statutes,[16] which have been legal avenues used to punish instances of social media impersonation in the past.

FTC and Twitter’s Consent Decree

On the first day of Musk’s takeover of Twitter, he immediately fired the CEO, CFO, head of legal policy, trust and safety, and general counsel.[17] By the following week, mass layoffs were in full swing with 3,700 Twitter jobs, or 50% of its total workforce, to be eliminated.[18] This move has already landed Twitter in legal trouble for potentially violating the California WARN Act, which requires 60 days advance notice of mass layoffs.[19] More ominously, however, these layoffs, as well as the departure of the company’s head of trust and safety, chief information security officer, chief compliance officer and chief privacy officer, have attracted the attention of the FTC.[20]

In 2011, Twitter entered a consent decree with the FTC in response to data security lapses requiring the company to establish and maintain a program that ensured its new features do not misrepresent “the extent to which it maintains and protects the security, privacy, confidentiality, or integrity of nonpublic consumer information.”[21] Twitter also agreed to implement two-factor authentication without collecting personal data, limit employee access to information, provide training for employees working on user data, designate executives to be responsible for decision-making regarding sensitive user data, and undergo a third-party audit every six months.[22] Twitter was most recently fined $150 million back in May for violating the consent decree.[23]

With many of Twitter’s former executives gone, the company may be at an increased risk for violating regulatory orders and may find itself lacking the necessary infrastructure to comply with the consent decree. Musk also reportedly urged software engineers to “self-certify” legal compliance for the products and features they deployed, which may already violate the court-ordered agreement.[24] In response to these developments, Douglas Farrar, the FTC’s director of public affairs, said the commission is watching “Twitter with deep concern” and added that “No chief executive or company is above the law.”[25] He also noted that the FTC had “new tools to ensure compliance, and we are prepared to use them.”[26] Whether and how the FTC will employ regulatory measures against Twitter remains uncertain.

Conclusions

The fate of Twitter is by no means set in stone—in two weeks the platform has lost advertisers, key employees, and some degree of public legitimacy. However, at the speed Musk has moved so far, in two more weeks the company could likely be in a very different position. Beyond the immediate consequences to the company, Musk’s leadership of Twitter illuminates some important lessons about social media governance, both internal and external to a platform.

First, social media is foremost a business and not the ‘digital town square’ Musk imagines. Twitter’s regulation of hate speech and verification of public accounts served an important role in maintaining community standards, promoting brand safety for advertisers, and protecting users. Loosening regulatory control runs a great risk of delegitimizing a platform that corporations and politicians alike took seriously as a tool for public communication.

Second, social media stability is important to government regulators and further oversight may not be far off on the horizon. Musk is setting a precedent and bringing the spotlight on the dangers of a destabilized social media platform and the risks this may pose to data privacy, efforts to curb misinformation, and even the stock market. In addition to the FTC, Senate Majority Whip, and chair of the Senate Judiciary Committee, Dick Durbin, has already commented negatively on the Twitter situation.[27] Musk may have given powerful regulators, and even legislators, the opportunity they were looking for to impose greater control over social media. For better or worse, Twitter’s present troubles could lead to a new era of government involvement in digital social spaces.

Notes

[1] Adam Bankhurst, Elon Musk’s Twitter Takeover and the Chaos that Followed: The Complete Timeline, IGN (Nov. 11, 2022), https://www.ign.com/articles/elon-musks-twitter-takeover-and-the-chaos-that-followed-the-complete-timeline.

[2] Monica Potts & Jean Yi, Why Twitter is Unlikely to Become the ‘Digital Town Square’ Elon Musk Envisions, FiveThirtyEight (Apr. 29, 2022), https://fivethirtyeight.com/features/why-twitter-is-unlikely-to-become-the-digital-town-square-elon-musk-envisions/.

[3] Bankhurst, supra note 1.

[4] Potts & Yi, supra note 2.

[5] Drew Harwell et al., Racist Tweets Quickly Surface After Musk Closes Twitter Deal, Washington Post (Oct. 28, 2022), https://www.washingtonpost.com/technology/2022/10/28/musk-twitter-racist-posts/.

[6] Bobby Allyn, Elon Musk Says Twitter Bankruptcy is Possible, But is That Likely?, NPR (Nov. 12, 2022), https://www.wglt.org/2022-11-12/elon-musk-says-twitter-bankruptcy-is-possible-but-is-that-likely.

[7] Id.

[8] Keegan Kelly, We Will Never Forget These Hilarious Twitter Impersonations, Cracked (Nov. 12, 2022), https://www.cracked.com/article_35965_we-will-never-forget-these-hilarious-twitter-impersonations.html; Shirin Ali, The Parody Gold Created by Elon Musk’s Twitter Blue, Slate (Nov. 11, 2022), https://slate.com/technology/2022/11/parody-accounts-of-twitter-blue.html.

[9] Ali, supra note 8.

[10] Mehnaz Yasmin & Kenneth Li, Major Ad Firm Omnicom Recommends Clients Pause Twitter Ad Spend – Memo, Reuters (Nov. 11, 2022), https://www.reuters.com/technology/major-ad-firm-omnicom-recommends-clients-pause-twitter-ad-spend-verge-2022-11-11/; Rebecca Kern, Top Firm Advises Pausing Twitter Ads After Musk Takeover, Politico (Nov. 1, 2022), https://www.politico.com/news/2022/11/01/top-marketing-firm-recommends-suspending-twitter-ads-with-musk-takeover-00064464.

[11] Yasmin & Li, supra note 10.

[12] Katie Paul & Paresh Dave, Musk Warns of Twitter Bankruptcy as More Senior Executives Quit, Reuters (Nov. 10, 2022), https://www.reuters.com/technology/twitter-information-security-chief-kissner-decides-leave-2022-11-10/.

[13] Dorrian Horsey, How to Deal With Defamation on Twitter, Minc, https://www.minclaw.com/how-to-report-slander-on-twitter/ (last visited Nov. 12, 2022).

[14] Maksim Reznik, Identity Theft on Social Networking Sites: Developing Issues of Internet Impersonation, 29 Touro L. Rev. 455, 456 n.12 (2013), https://digitalcommons.tourolaw.edu/cgi/viewcontent.cgi?article=1472&context=lawreview.

[15] Id. at 455.

[16] Brett Snider, Can a Fake Twitter Account Get You Arrested?, FindLaw Blog (April 22, 2014), https://www.findlaw.com/legalblogs/criminal-defense/can-a-fake-twitter-account-get-you-arrested/.

[17] Bankhurst, supra note 1.

[18] Sarah Perez & Ivan Mehta, Twitter Sued in Class Action Lawsuit Over Mass Layoffs Without Proper Legal Notice, Techcrunch (Nov. 4, 2022), https://techcrunch.com/2022/11/04/twitter-faces-a-class-action-lawsuit-over-mass-employee-layoffs-with-proper-legal-notice/.

[19] Id.

[20] Natasha Lomas & Darrell Etherington, Musk’s Lawyer Tells Twitter Staff They Won’t be Liable if Company Violates FTC Consent Decree (Nov. 11, 2022), https://techcrunch.com/2022/11/11/musks-lawyer-tells-twitter-staff-they-wont-be-liable-if-company-violates-ftc-consent-decree/.

[21] Id.

[22] Scott Nover, Elon Musk Might Have Already Broken Twitter’s Agreement With the FTC, Quartz (Nov. 11, 2022), https://qz.com/elon-musk-might-have-already-broken-twitter-s-agreement-1849771518.

[23] Tom Espiner, Twitter Boss Elon Musk ‘Not Above the Law’, Warns US Regulator, BBC (Nov. 11, 2022), https://www.bbc.com/news/business-63593242.

[24] Nover, supra note 22.

[25] Espiner, supra note 23.

[26] Id.

[27] Kern, supra note 10.


Behind the “Package Insert”: Loophole in FDA’s Regulation of Off-Label Prescriptions

Yolanda Li, MJLST Staffer

FDA Regulation of Drug Prescription Labeling and the “Package Insert”

Over the recent years, constant efforts have been made towards regulating medical prescriptions in an attempt to reduce risks accompanied with drug prescriptions. Among those efforts is the FDA’s revision of the format of prescription drug information, commonly known as the “package insert”.[1]

The package insert regulation, effective since 2006, applies to all prescription drugs. The package insert is to provide up-to-date information on the drug in an easy-to-read format. One significant feature is a section named “highlights”, which provides the most important information regarding the benefits and risks of a prescribed medication. The highlights section is typically half a page in length providing a concise summary of information including “boxed warning”, “indications and usage”, and “dosage and administration”.[2] The highlights section also refers physicians to appropriate sections of the full prescribing information. In this way, the package insert aims to draw both the physicians’ and the patients’ attention to the prescription of a drug, consequently accomplishing the ultimate purpose of managing medication use and reducing medical errors. Mike Leavitt, the Health and Human Services Secretary of the FDA commented that the package insert “help[s] ensure safe and optimal use of drugs, which translates into better health outcomes for patients and more efficient delivery of healthcare.”[3]

FDA Regulation of Off-Label Prescription and the Emergence of a Loophole

The FDA’s regulations relating to the labeling of prescription drugs, although systematic in its form, are cut short to a certain extent due to its lack of regulation on off-label prescriptions. Off-label prescriptions do not refer to a physician prescribing non-FDA approved drugs, a common misunderstanding by the public. Rather, off-label prescriptions are those that do not conform to the FDA-approved use set out in the FDA-approved label.[4] More specifically, off-label prescription generally refers to: “(1) the practice of a physician prescribing a legally manufactured drug for purposes other than those indicated on that drug’s FDA mandated labeling; (2) using a different method of applying the treatment and prescribing a drug, device, or biologic to patient groups other than those approved by FDA; and (3) prescriptions for drug dosages that are different from the approved label-recommended dosage or for time periods exceeding the label-recommended usage.”[5] For example if Drug A’s use, as mandated by the FDA, is to treat chronic headaches, and a physician prescribes it to treat a patient’s sprained ankle, that is an off-label prescription. However, such practice is common as estimated by the American Medical Association (AMA).[6]

The commonly approach is that the FDA and courts do not to interfere with physicians’ off-label uses.[7] Thus, when the FDA regulates the labeling of approved uses but does not regulate prescriptions for off-label uses, a loophole is formed. Andrew von Eschenbach, M.D., claims that because the FDA’s package insert regulation makes it easier for physicians to get access to important information about drugs, including drug safety and benefits, this regulation helps physicians to have more meaningful discussions with patients.[8] However, physicians’ discretion in prescribing off-label prescriptions would offset the proposed benefit of the FDA regulation because the regulation remains as guidance without force of law once physicians choose to go off from FDA’s approved uses of drugs. The easy-to-understand feature of the package insert and its benefit for a patient’s understanding of the drug becomes futile when physicians exercise discretion and prescribe drugs for uses not written on the inserts. In sum, when a patient receives an off-label prescription, the insert provides them little benefit as it addresses benefits and risks related to a different use of the drug.

It is undisputed that drug manufacturers have less discretion regarding drug labeling than physicians. If a manufacturer included an off-label use on a drug’s label, and promoted the off-label use of the drug, the drug would be considered misbranded. The manufacturer would then be subject to liability[9] as manufacturing a misbranded product in interstate commerce is prohibited.[10] However, the effect of regulations on manufacturers still fail to eliminate the loophole in off-label prescription: in response to the regulations, the manufacturer usually receives FDA approval for only a few drug uses and then relies on physicians prescribing off-label uses to ensure their profitability.[11] In this way, the manufacturer avoids liability under regulation and furthers the loophole in off-label prescription by encouraging physicians to prescribe more off-label uses in order to expand the manufacturer’s market.[12]

Why are Off-Label Prescriptions Difficult to Regulate?

One of the main reasons behind the lack of regulation of off-label prescriptions is the FDA’s objective in ensuring effective delivery of health care. Physicians are encouraged to use discretion and judgment in order to tailor prescription to patients’ individual conditions.[13] Another reason is to increase efficiency in treatments by avoiding the lengthy FDA approval process.[14] Aspirin was widely prescribed to reduce the risk of heart attack long before it was FDA-approved for this purpose; off-label prescriptions have also been proven effective in treatment of cancer, and off-label therapies have prolonged the lives of AIDS patients.[15] Another concern is drug prices in the United States, and promoting off-label uses has been found to help reduce drug prices as increased sales volume enables drug companies to lower their prices.[16] Indeed, off-label prescription has become a mainstream of medicine: “the FDA has long tolerated off-label drug use and has disclaimed any interest in regulating physicians’ prescribing practices.”[17] Today it is unclear whether the agency even has jurisdiction to regulate off-label prescription of drugs.[18]

In sum, there is clear guidance on the labeling of prescription drugs as a result of FDA regulation. However, because of difficulties in enforcement, the custom and widely accepted practice of off-label prescriptions and the inherent benefit of off-label prescription, the effects of the regulation are not as effective as what was firstly planned and proposed.

Notes

[1] The FDA Announces New Prescription Drug Information Format, U.S. Food & Drug Adm’ (Dec. 04 2015) https://www.fda.gov/drugs/laws-acts-and-rules/fda-announces-new-prescription-drug-information-format.

[2] Id.

[3] Id.

[4] Margaret Z. Johns, Informed Consent: Requiring Doctors to Disclose Off-Label Prescriptions and Conflicts of Interest, 58 Hastings L.J. 967, 968 https://plus.lexis.com/document?crid=35364c11-2939-4e58-bceb-dab7ae8f0154&pddocfullpath=%2Fshared%2Fdocument%2Fanalytical-materials%2Furn%3AcontentItem%3A4P0W-GY20-00CW-906B-00000-00&pdsourcegroupingtype=&pdcontentcomponentid=7341&pdmfid=1530671&pdisurlapi=true.

[5] Lisa E. Smilan, The off-label loophole in the psychopharmacologic setting: prescription of antipsychotic drugs in the nonpsychotic patient population, 30 Health Matrix 233, 240 (2020), https://plus.lexis.com/document/?pdmfid=1530671&crid=367cf8ad-295e-4f14-97fa-737618718d61&pddocfullpath=%2Fshared%2Fdocument%2Fanalytical-materials%2Furn%3AcontentItem%3A64BT-RR31-JWBS-61KV-00000-00&pdworkfolderid=5506aeec-9540-4837-89f0-5a1acfd81d8b&pdopendocfromfolder=true&prid=1d42abd0-b66e-43af-a61a-0d1fb94180f5&ecomp=gdgg&earg=5506aeec-9540-4837-89f0-5a1acfd81d8b#.

[6] Supra note 4.

[7] Sigma-Tau Pharms. v. Schwetz, 288 F.3d 141, 148, https://plus.lexis.com/document?crid=7d2a2b00-13ad-4953-968e-82a28724aa00&pddocfullpath=%2Fshared%2Fdocument%2Fcases%2Furn%3AcontentItem%3A45RF-5H50-0038-X1PB-00000-00&pdsourcegroupingtype=&pdcontentcomponentid=6388&pdmfid=1530671&pdisurlapi=true.

[8] Supra note 1.

[9] 21 CFR 201.5, https://plus.lexis.com/document/?pdmfid=1530671&crid=e02a99fb-be65-4525-b83c-a167f3e21b93&pddocfullpath=%2Fshared%2Fdocument%2Fadministrative-codes%2Furn%3AcontentItem%3A603K-BXD1-DYB7-W30Y-00000-00&pdcontentcomponentid=5154&pdworkfolderlocatorid=NOT_SAVED_IN_WORKFOLDER&prid=ff2b7e20-9dab-49b0-8385-627c16ee0ba2&ecomp=vfbtk&earg=sr2.

[10] 21 CFR 801.4, https://plus.lexis.com/document/?pdmfid=1530671&crid=721a586d-52a4-4228-b0c3-c464a77d6e6a&pddocfullpath=%2Fshared%2Fdocument%2Fadministrative-codes%2Furn%3AcontentItem%3A638R-X4S3-GXJ9-32FV-00000-00&pdcontentcomponentid=5154&pdworkfolderlocatorid=NOT_SAVED_IN_WORKFOLDER&prid=ff2b7e20-9dab-49b0-8385-627c16ee0ba2&ecomp=vfbtk&earg=sr6.

[11]  Supra note 4.

[12] Id.

[13]   Supra note 7.

[14]   Supra note 4.

[15]  Id.

[16] Supra note 4, at 981.

[17] ​​Kaspar J. Stoffelmayr, Products Liability And “Off-label” Uses Of Prescription Drugs, 63 U. Chi. L. Rev. 275, 279, https://plus.lexis.com/document?crid=a2181ffc-7f3e-4bce-b82e-08ba9111194f&pddocfullpath=%2Fshared%2Fdocument%2Fanalytical-materials%2Furn%3AcontentItem%3A3S3V-4CF0-00CV-K03W-00000-00&pdsourcegroupingtype=&pdcontentcomponentid=7358&pdmfid=1530671&pdisurlapi=true.

[18]  Id.


Target Number One, the Consequences of Being the Best

Ben Lauter, MJLST Staffer

The World of Chess

Since 2013, Norwegian Magnus Carlsen has been the reigning World Champion in chess. This achievement was not shocking to many; Magnus has been an elite chess prodigy and Grandmaster since the age of thirteen (nine years before his eventual champion title). Many regard Magnus as the best chess player ever, surpassing the legend of Fischer and Kasparov[1], two former great world champions. During Kasparov’s reign, he drew, or tied, Magnus in a classical game[2] of chess when Magnus was just thirteen. With this being said, it seems impossible to quantify the talent and genius that Magnus possesses and continues to refine in chess. However, that is exactly what the ELO rating system intends to do.

An ELO rating is a calculation of a chess player’s current skill level. Magnus boasts the highest classical ELO rating ever to be retained: 2882. Along the way to receiving this all-time high was a period of time spanning nearly two and a half years where Magnus did not lose a single classical game, winning 125 straight. All of this is to say, Magnus Carlsen is an unstoppable force in chess. However, on September 4th, 2022, Magnus played a game that would snap his then current 53 game winning streak. On that date he lost to a 19-year-old American at the St. Louis based Sinquefield Cup Tournament, Hans Niemann, a San Francisco born prodigy currently ranked as the 49th best player in the world with an ELO rating of 2688.

The Match

This match had anything but a quiet result, despite the silence in the interviews afterwards. All that was said from the reigning World Champion was a tweet stating that Magnus would be withdrawing from the tournament, a measure that is near unprecedented from a World Champion at such a major world tournament. With that tweet, a clip was attached of the famous soccer (football) manager, Jose Mourinho, saying “If I speak, I will be in big trouble.” The chess world speculated that this was Magnus’s informal way of accusing the teenage Hans of cheating in an “over the board” chess match. A conjecture of which the chess world has not yet made peace, with article after article, interview after interview, and Grandmaster after Grandmaster giving their two cents.

There were many aftershocks to Magnus’s tweet, but it seems that the legal ones, namely a defamation case for slander or libel, may be the worst for Magnus. For the past several weeks Hans Niemann has been put under the magnifying glass. He has faced harassment, attacks on his character, and irreparable reputational damage. Yet, Magnus has still failed to present any evidence as to why he withdrew or sent that tweet out to the world and has not yet clarified or disclaimed any of the rumors that shadow Hans.
For a while, it looked like Hans would simply have actions and innuendos as his evidence in a slander or libel case. Then, after an online chess tournament that both Magnus and Hans were participants in, Magnus put out his official position on the matter. Magnus declared that on top of cheating in his match in St. Louis, Hans was a serial chess cheater and should be punished proportionately to the crime he committed. In Magnus’s declaration, he said that he believed his accusation whole-heartedly and would never participate in an invitational event in which Hans plays again. Throughout the rest of the statement Magnus provided zero evidence of the alleged cheating and stated he could not release his evidence without the approval of the player that he accused.

Consequences

There are two massive consequences likely to result from Magnus’s statement. The first is that Han’s professional career will likely be in ruins. Invitationals are a priority for top ranked chess professionals, allowing them to play in official matches and record status for their rating in addition to receiving prize money. If an invitational is going to have to choose between a candidate for the best player of all time, Magnus, and a rising teenager, Hans, there might not be a long discussion. The second consequence is that because no evidence has been released to validate the statements that Magnus made based on his gut feeling, Hans may have a case for slander or libel.

There are four elements to prove in a slander case. The plaintiff must show that there was a false statement made purporting to be fact, a publication of that statement to a third person, fault amounting to at least negligence, and damages incurred. Two of these elements are quite clear and likely provable; there was publication of a statement and there were damages to Han’s reputation. The other two elements require further analysis. The third element related to fault asks one to look to Magnus’s state of mind when he made his statements and find evidence that he did so to tarnish Han’s name, or was at the very least negligent in making the statements, to fulfill a prima facie case for slander. This standard is notoriously hard to prove and will undoubtedly act as a roadblock to a slander case. However, it will likely be even harder for Hans to prove the first element, that the statement was false purporting to be fact. This element causes an issue because of the difficulty in proving that something that didn’t happen, didn’t happen. Specifically, Hans would have to show that he did not cheat in order to prove that Magnus’s cheating accusation was false.

Further complicating the issue is surfacing evidence from other sources making Magnus’s claim of cheating more believable. Statistical analysis of Han’s performances show that he has been playing games with computer moves 90% of the time or more, compared to the likes of Fischer, Kasparov, or Magnus who are only around 70% during their all-time peaks, and to traditional 2700 ELO rated Grandmasters who average between 50%-60%. Reports indicate that based on Han’s last 18 months of performance the chance that he played games at the rate he had without computer assistance is one in over 60,000. Without being able to prove that Magnus’s statements are at the least unlikely true, Hans will likely fail to prove slander and his career will likely be derailed after the events of September.

Notes

[1]  Kasparov is the longest reigning World Champion to date.

[2] A “Classical Game” is a time format of chess that allows for 120 minutes of play per person for the first forty moves; it allows for the deepest level of consideration on every move. As a result, classical games of chess are an incredibly accurate and sound measure of a player’s talent. They are used to determine the World Champion every two years.


Electric Vehicles: The Path of the Future or a Jetson-Like Fantasy?

James Challou, MJLST Staffer

Last week President Biden contributed to the already growing hype behind electric vehicles when he heralded them as the future of transportation. Biden touted that $7.5 billion from last year’s infrastructure law, Public Law 117-58, would be put toward installing electric vehicle charging stations across the United States. This mass rollout of electric vehicle chargers, broadly aimed to help the US meet its goal of being carbon neutral by 2050, constitutes an immediate effort by the Biden administration to tackle pollution in the sector responsible for the largest share of the nation’s greenhouse gas emissions: transportation. The administration’s short-term goal is to install half a million chargers by 2030. However, not all are as confident as President Biden that this movement will be efficacious.

The “Buy America” Obstacle

Despite President Biden’s enthusiasm for this commitment to funding widespread electric vehicle charging stations, many experts remain skeptical that supply can keep up with demand. Crucially, Public Law 117-58 contains a key constraint, dubbed the “Buy America” rule, that mandates federal infrastructure projects obtain at least 55% of construction materials, including iron and steel, from domestic sources and requires all manufacturing to be done in the U.S.

Although labor groups and steel manufacturers continue to push for these domestic sourcing rules to be enforced, other groups like automakers and state officials argue that a combination of inflation increasing the cost of domestic materials and limited domestic production may hamstring the push towards electric vehicle charging accessibility altogether. One state official stated, “A rushed transition to the new requirements will exacerbate delays and increase costs if EV charging equipment providers are forced to abruptly shift component sourcing to domestic suppliers, who in turn may struggle with availability due to limited quantities and high demand.”

Proponents of a slower implementation offer a slew of different solutions ranging from a temporary waiver of the Buy America rules until domestic production can sustain the current demand, to a waiver of the requirements for EV chargers altogether. The Federal Highway Administration, charged with oversight of the EV charger program, proposed an indeterminate transitional period waiver of the Buy America rules until the charger industry and states are prepared to comply with requirements.

Domestic Manufacturer Complications

Domestic manufacturers are similarly conflicted about the waiver of the Buy America rules, with some thinking they may not be able to meet growing demand. While many companies predict they can meet Buy America production requirements in the future, the Federal Highway Administration specified in its waiver proposal that a mere three manufacturers, all based in California, presently believe they have existing fast charger systems that comply with Buy America requirements.

Predictably, the waiver proposal is divisive amongst domestic manufacturers. Some companies are onboard with the waiver and requested even more flexibility. This includes automakers like Ford and General Motors, who say that a process of moving all supply chains to the US demands more time, particularly at the scale necessary to match the surge in federal funding. This is largely seen as the most stakeholder friendly move as it offers companies the opportunity to use the duration of the waiver to see if a clear competitive market materializes which in turn benefits stakeholders.

Contrarily, others have asked for the waiver period to be shortened to allow them to quickly recoup their investments into Buy America compliant manufacturing upgrades. Some companies are even more aggressive; they oppose the waiver altogether and argue that the waiver would disadvantage manufacturers that intentionally put money into meeting the Buy America requirements. These companies posit that domestic manufacturing provides immediate benefits like augmenting supply chain security and electric-vehicle cybersecurity and warn against dependency on foreign governments for electrical steel needs. They further add that the Buy America rule will fuel growth in the US market and create manufacturing jobs. Labor groups and some lawmakers have adopted this stance as one lawmaker from Ohio commented, “[f]ederal agencies should implement the new Buy America provisions as quickly as possible to give American companies the certainty they need to move forward with investments.”

Other Implementation Difficulties

 The inclusion of the Buy America rule in this legislation is not the only aspect of the EV charging project that has generated considerable debate. Regional challenges pose more of an issue than originally anticipated. Although many states reported common potential hurdles like vandalism, range anxiety, supply chain, and electricity challenges, unique geographic problems have also arisen. For example, Nebraska reported in its plan that a shift to electric vehicles could decrease revenue collection from gas tax. Iowa aired out concerns about stations being hit by and damaged by snow plows. Michigan cited rodent damage as a potential concern. Finally, Oklahoma flagged political opposition to the chargers as a problem that could be both pervasive and fatal to the overall electric charging process.

Moreover, the law caught a substantial amount of flak for a curious decision to skip interstate rest stops when installing the EV charging stations. Although at first glance this would appear to be a pivotal oversight, it stems from a 1956 law that restricts commercial activity, in this case including electric car charging, at rest stops. The Federal Highway Administration, to alleviate these concerns, issued guidance that says electric vehicle chargers should be “as close to Interstate Highway Systems and highway corridors as possible” and generally no more than one mile from the exit. Furthermore, some of the older rest stops are excluded from the 1956 guidance. However, this is not enough to sate critics as many continue to fight for the 1956 law to be changed. They claim that the existence of the restriction drastically inconveniences drivers, planners, and vehicles while potentially creating a wealth disparity by forcing low-income families, who traditionally rely more on public rest areas, to avoid purchasing electric vehicles.

Conclusion

President Biden deserves to be lauded for his ambitious plan for electric vehicles which attempts to square combating the effects of climate change with preserving American manufacturing while simultaneously improving infrastructure. It is worth questioning whether the law would be more effective if it simply focused its efforts on one of these areas. As a commentator at the Cato Institute noted, “The goal of infrastructure spending should be better infrastructure — and if you’re trying to pursue policies to mitigate climate change, well that should be the overall goal … Anything that hinders that should be avoided.”  Only time will reveal the answer to this question.