Corporate Ethics

You Can Protect Your Data . . . Once.

September 26, 2024
Corporate Ethics, Data Privacy, Internet, Litigation, Social Media

Jessica Schmitz, MJLST Staffer

We scan our face to access our phones. We scan our hands to save five minutes in the TSA line. Teslas track our eyes to ensure we’re watching the road.[1] Our biometric data is constantly being collected by private entities. Though states like California and Texas are attempting to implement new safeguards for its constituents, Illinois recently rolled back protections under its renowned Biometric Information Privacy Act (BIPA).[2] BIPA  protected consumers from private entities that deceptively or illegally collected biometric data.[3] The new rules overturned the Illinois Supreme Court ruling in Cothron v. White Castle System Inc. that allowed claims to accrue for each violation under BIPA’s provisions.[4] While tech companies and liability insurers are no doubt breathing a sigh of relief at the new reforms, litigants going forward may be left without a remedy if their biometric data is mishandled more than once. Below is a history of BIPA’s passing and impact, followed by the likely ramifications of the new reforms.

BIPA’s Passing Was an Early Victory for Data Privacy Protections

BIPA’s passing in 2008 was one of the earliest consumer protection laws for biometric data collection. At that time, major corporations were piloting finger scanning and facial recognition technology in major cities, including Chicago. The law was designed to not only provide recourse for consumers, but also prescribed preventative measures for companies to follow. BIPA’s protections are broad; companies must publish its data collection and retention policies to the public and cannot retain the information it collects for more than three years.[5] Companies must inform users that they are collecting the data, disclose what is being collected, disclose why it’s being collected, and for how long it intends to store the data.[6] Companies cannot disclose someone’s biometric data without express consent, nor can they profit from the data in any way.[7] Lastly, the data must be stored at least as well as a company stores other confidential data.[8]

Unlike laws in other states, BIPA provided a private right of action to enforce data privacy protections. Following its passage, swaths of lawsuits were filed against major corporations, including Amazon, Southwest Airlines, Google, and Facebook.[9] Under BIPA, companies could be liable for purchasing, improperly collecting, improperly storing, or disseminating biometric data, even if the data was not mishandled.[10] Plaintiffs could recover for every violation under BIPA, and could do so without stating an injury or alleging damages.[11] It is no surprise that BIPA class actions tended to favor plaintiffs, often resulting in large settlements or jury verdicts.[12] Since litigants could collect damages on every violation of BIPA’s provisions, it was difficult for companies to assess their potential liability. Every member of a class action could allege multiple violations, and if found liable, companies would owe, at minimum, $1,000 per violation. The lack of predictability often pushed corporate liability insurance policies into settling rather than risk such large payouts.

The 2023 ruling in Cothron implored the legislature to address concerns of disproportionate corporate liability, stating, “We respectfully suggest that the legislature . . . make clear its intent regarding the assessment of damages under the Act.”[13] The legislature rose to the challenge, fearing the court’s interpretation could bankrupt smaller or mid-size companies.[14] The new provisions to BIPA target the Court’s ruling, providing:

“For purposes of subsection (b) of Section 15, a private entity that, in more than one instance, collects, captures, purchases, receives through trade, or otherwise obtains the same biometric identifier or biometric information from the same person using the same method of collection in violation of subsection (b) of Section 15 has committed a single violation of subsection (b) of Section 15 for which the aggrieved person is entitled to, at most, one recovery under this Section.
(c) For purposes of subsection (d) of Section 15, a private entity that, in more than one instance, discloses, rediscloses, or otherwise disseminates the same biometric identifier or biometric information from the same person to the same recipient using the same method of collection in violation of subsection (d) of Section 15 has committed a single violation of subsection (d) of Section 15 for which the aggrieved person is entitled to, at most, one recovery under this Section regardless of the number of times the private entity disclosed, redisclosed, or otherwise disseminated the same biometric identifier or biometric information of the same person to the same recipient. (eff. 8-2-24.)”

Though not left completely without redress, Illinois constituents may now recover only once if their biometric data is recklessly or deceptively collected or disseminated in the same manner.

BIPA Reforms Mark a Trend Towards Laxing Corporate Responsibility

The rollback of BIPA’s provisions come at a time when consumers need it most. The stakes for mishandling biometric data are much higher than that of other collected data. While social security numbers and credit card numbers can be canceled and changed – with varying degrees of ease – most constituents would be unwilling to change their faces and fingerprints for the sake of _____.[15] Ongoing and future technology developments, such as the rise of AI, heightens potential fallout from BIPA violations.  AI-generated deepfakes are becoming more prevalent, targeting both major celebrities like Taylor Swift and Pokimane, and our family members through phishing schemes.[16] These crimes rely on biometric data, utilizing our voices and faces to create realistic depictions of people, and can even recreate our speech cadence and body movements.[17] For victims, recovering on a per-person basis instead of a per-violation basis means they could be further harmed after recovering against a company with no redress.

Corporations, however, have been calling for reforms for year, and believe that these changes will reduce insurance premiums and docket burdens.[18] Prior to the changes, insurers began removing BIPA coverage from litigation insurance plans and adding strict requirements for defense coverage.[19] Insurers also would encourage companies to settle to avoid judgements on a per-violation basis.[20]

Advocates for BIPA reform believe the new changes will reduce insurance costs while still providing litigants with fair outcomes. Though individual litigants may only recover once, they can still recover for actual damages if a company’s actions resulted in more harm than simply violating BIPA’s provisions.  Awards on a per-person basis can still result in hefty settlements or awards that will hold companies accountable for wrongdoing. Instead of stifling corporate accountability, proponents believe the reforms will result in fairer settlements and reduce litigation costs overall.

Without further guidance from the legislature, how the new provisions are applied will be left for state and federal courts to interpret. Specifically, the legislature left one looming question unanswered; do the restrictions apply retroactively? If litigants can only recover from an entity once, are past litigants barred from participating in future actions regarding similar violations? Or do they get one last shot at holding companies accountable? If they lost in a prior suit, can they join a new one? In trying to relieve the court system, the legislature has ironically given courts the loathsome task of interpreting BIPA’s vague new provisions. Litigants and defendants will likely fight tooth and nail to create favorable case law, which is unlikely to be uniform across jurisdictions.

 

Notes

[1] Model Y Owner’s Manual: Cabin Camera, Tesla, https://www.tesla.com/ownersmanual/modely/en_us/GUID-EDAD116F-3C73-40FA-A861-68112FF7961F.html (last visited Sept. 16, 2024).

[2] See generally, California Consumer Privacy Act of 2018, Cal. Civ. Code § 1798.100 (West 2018); Capture or Use of Biometric Identifier, Tex. Code Ann. § 503.001 (2017); Abraham Gross, Illinois Biometric Privacy Reform Eases Coverage Woes, LexisNexis Law360 (Aug. 8, 2024, 7:13 PM), https://plus.lexis.com/newsstand/law360-insurance-authority/article/1868014/?crid=debb3ba9-22a1-41d6-920e-c1ce2b7a108d&cbc=0,0,0.

[3] Biometric Information Privacy Act, 740 Ill. Comp. Stat. 14/5 (2024) [hereinafter BIPA].

[4] Cothron v. White Castle System, Inc., 216 N.E.3d 918, 924 (Ill. 2023).

[5] BIPA, supra note 3, at sec. 15a.

[6] Id. at sec. 15b.

[7] Id. at sec. 15c-d.

[8] Id. at sec. 15e.

[9] See generally, In re Facebook Biometric Info. Priv. Litig., No. 3:15-CV-03747-JD, 2018 WL 2197546 (N.D. Cal. May 14, 2018); Rivera v. Google Inc., 238 F.Supp.3d 1088 (N.D.Ill., 2017); Miller v. S.W. Airlines Co., No. 18 C 86, 2018 WL 4030590 (N.D. Ill. Aug. 23, 2018), aff’d, 926 F.3d 898 (7th Cir. 2019).

[10] BIPA, supra note 3, at sec. 15.

[11] Rosenbach v. Six Flags Ent. Corp., 129 N.E.3d 1197, 1206 (Ill. 2019).

[12] See, Lauraann Wood, $9M White Castle Fingerprint BIPA Deal Clears Final Approval, LexisNexis Law360 (Aug. 1, 2024, 2:18 PM) https://www.law360.com/articles/1864687?from_lnh=true; Lauraann Wood, BNSF’s $75M BIPA Deal With Truckers Nears Final OK, LexisNexis Law360 (June 17, 2024, 8:54 AM) https://www.law360.com/articles/1848754?from_lnh=true.

[13] Cothron, 216 N.E.3d at 929 (Ill. 2023).

[14] Updates to Illinois’ Biometric Privacy Signed Into Law Thanks to Cunningham, Office of Bill Cunningham: State Senator, https://www.senatorbillcunningham.com/news/508-updates-to-illinois-biometric-privacy-signed-into-law-thanks-to-cunningham (Aug. 2, 2024, 3:13PM).

[15] See, BIPA, supra note 3, at sec. 5c.

[16] Dan Merica & Ali Swenson, Trump’s Post of Fake Taylor Swift Endorsement Is His Latest Embrace Of AI-Generated Images, AP News (Aug. 20, 2024, 3:48 PM), https://apnews.com/article/trump-taylor-swift-fake-endorsement-ai-fec99c412d960932839e3eab8d49fd5f; Bianca Britton, They Appeared in Deepfake Porn Videos Without Their Consent. Few Laws Protect Them, NBC News (Feb. 14, 2023, 2:48 PM), https://www.nbcnews.com/tech/internet/deepfake-twitch-porn-atrioc-qtcinderella-maya-higa-pokimane-rcna69372; Charles Bethea, The Terrifying A.I. Scam That Uses Your Loved One’s Voice, The New Yorker (Mar. 7, 2024), https://www.newyorker.com/science/annals-of-artificial-intelligence/the-terrifying-ai-scam-that-uses-your-loved-ones-voice.

[17] Catherine Bernaciak & Dominic A. Ross, How Easy is it to Make and Detect a Deepfake?, Carnegie Mellon Univ.: SEI Blog (Mar. 14, 2022), https://insights.sei.cmu.edu/blog/how-easy-is-it-to-make-and-detect-a-deepfake/.

[18] Michael C. Andolina et. al., Emerging Issues and Ambiguities Under Illinois’ Biometric Information Privacy Act, Practitioner Insights Commentaries (May 21, 2020), https://1.next.westlaw.com/Document/Ib04759309b7b11eabea3f0dc9fb69570/View/FullText.html?listSource=Foldering&originationContext=clientid&transitionType=MyResearchHistoryItem&contextData=%28oc.Default%29&VR=3.0&RS=cblt1.0.

[19] Gross, supra note 2.

[20] Id.

Whistleblowers Reveals…—How Can the Legal System Protect and Encourage Whistleblowing?

April 27, 2023
Agencies, Business Law, Corporate Ethics, Regulatory, Securities Law

Vivian Lin, MJLST Staffer

In July 2022, Twitter’s former head of security, Peiter Zatko, filed a 200+ page complaint with Congress and several federal agencies, disclosing Twitter’s potential major security problems that pose a threat to its users and national security.[1] Though it is still unclear whether  these allegations were confirmed, the disclosure drew significant attention because of data privacy implications and calls for whistleblower protection. Whistleblowers play an important role in detecting major issues in corporations and the government. A 2007 survey reported that in private companies, professional auditors were only able to detect 19% of instances of fraud but whistleblowers were able to expose 43% of incidents.[2]In fact, this recent Twitter scandal, along with Facebook’s online safety scandal in 2021[3] and the famous national security scandal disclosed by Edward Snowden, were all revealed by inside whistleblowers. Without these disclosures, the public may never learn of incidents that involve their personal information and security.

An Overview of the U.S. Whistleblower Protection Regulations

Whistleblower laws aim to protect individuals who report illegal or unethical activities in their workplace or government agency. The primary federal law protecting whistleblowers is the Whistleblower Protection Act (WPA), passed in 1989. The WPA provides protections for federal employees who report violations such as  gross mismanagement, gross waste of funds, abuse of authority, or dangers to public health or safety.[4]

In addition to the WPA, there are other federal laws that provide industry specific whistleblower protections in private sectors. For example, the Sarbanes-Oxley Act (SOX) was enacted in response to the corporate accounting scandals of the early 2000s. It requires public companies to establish and maintain internal controls to ensure the accuracy of their financial statements. Whistleblowers who report violations of securities law can receive protection against retaliation, including reinstatement, back pay, and special damages. To further encourage more whistleblowers to come forward with potential securities violations, Congress passed the Dodd-Frank           Wall Street Reform and Consumer Protection Act (Dodd-Frank) in 2010 which provides incentives and additional protections for whistleblowers. The Securities and Exchange Commission (SEC) established its whistleblower protection program under Dodd-Frank to award qualified whistleblowers for their tips that lead to a successful SEC sanction. Finally, the False Claims Act (FCA) allows individuals to file lawsuits on behalf of the government against entities that have committed fraud against the government. Whistleblowers who report fraud under the FCA can receive a percentage of the amount recovered by the government. In general, these laws give protections for whistleblowers in the private corporate setting, providing anti-retaliation protection and incentives for reporting violations.

Concerns Involved in Whistleblowing and Related Laws

While whistleblower laws in the United States provide important protections for individuals who speak out against illegal or unethical activities, there are still risks associated with whistleblowing. Even with the anti-retaliation provisions, whistleblowers still face retaliation from their employer, such as demotion or termination, and may face difficulties finding new employment in their field. For example, a 2011 report indicated that while the percentage of employees who noticed wrongdoings at their workplaces decreased from the 1992 survey, about one-third of those who called out wrongdoings and were identified as whistleblowers experienced retaliation in the form of threats and/or reprisals.[5]

Besides the fear of retaliation, another concern is the low success rate under the WPA when whistleblowers step up to make a claim. A 2015 research analyzed 151 cases where employees sought protection under the WPA and found that 79% of the cases were found in favor of the federal government.[6] Such a low success rate, in addition to potential retaliation, likely discourages employees from disclosing when they identify wrongdoings at their workplace.

A third problem with the current whistleblowing law is that financial incentives do not work as effectively as expected and might negatively impact corporate governance. From the incentives perspective, bounty hunting might actually discourage whistleblowers when not used well. For example, Dodd-Frank provides monetary rewards for people who report financial fraud that will allow the SEC impose a more than $1 million sanction on the violator, but if an employee discovers a wrongdoing that will not lead to a sanction over $1 million, a study shows that the employee will be less likely to report it timely.[7] From a corporate governance perspective, a potential whistleblower might turn to a regulatory agency for the reward rather than reporting it to the company’s internal compliance program, providing the company with the opportunity to do the right thing.[8]

Potential Changes 

There are several ways in which the current whistleblower regulations can improve. First, to encourage employees to stand up and identify wrongdoings at the workplace, the SEC’s whistleblower protection program should exclude the $1 million threshold requirement for any potential reward. Those who notice illegal behaviors that might not result in a $1 million sanction should also receive a reward if they report the potential risks.[9] Second, to deter retaliation, compensation for retaliation should be proportionate to the severity of the wrongdoing uncovered.[10] Currently, statutes mostly offer backpay, front pay, reinstatement, etc. as compensation for retaliation, while receiving punitive damages beyond that is rare. This mechanism does not recognize the public interest in retaliation cases—the public benefits from the whistleblower’s act while she risks retaliation. Finally, bounty programs might not be the right approach given that many whistleblowers are motivated more by their own moral calling rather than money. Perhaps a robust system ensuring whistleblower’s reports be thoroughly investigated and building stronger protections  from retaliation would work better than bounty programs.

In conclusion, whistleblowers play a crucial role in exposing illegal and unethical activities within organizations and government agencies. While current U.S. whistleblower protection regulations offer some safeguards, there are still shortcomings that may discourage employees from reporting wrongdoings. Improving whistleblower protections against retaliation, expanding rewards to include a wider range of disclosures, and refining the approach to investigations are essential steps to strengthen the system. By ensuring that their disclosures are thoroughly investigated and their lives are not severely impacted, we can encourage more whistleblowers to come forward with useful information which will better protect the public interest and maintain a higher standard of transparency, accountability, and corporate governance in the society.

Notes

[1] Donie O’Sullivan et al., Ex-Twitter Exec Blows The Whistle, Alleging Reckless and Negligent Cybersecurity Policies, CNN (Aug. 24, 2022, 5:59 AM EDT), https://edition.cnn.com/2022/08/23/tech/twitter-whistleblower-peiter-zatko-security/index.html.

[2] Kai-D. Bussmann, Economic Crime: People, Culture, and Controls 10 (2007).

[3] Ryan Mac & Cecilia Kang, Whistle-Blower Says Facebook ‘Chooses Profits Over Safety’, N.Y. Times (Oct. 3, 2021), https://www.nytimes.com/2021/10/03/technology/whistle-blower-facebook-frances-haugen.html.

[4] Whistleblower Protection, Office of Inspector General, https://www.oig.dhs.gov/whistleblower-protection#:~:text=The%20Whistleblower%20Protection%20Act%20 (last accessed: Mar. 5, 2023).

[5] U.S. Merit Systems Protection Board, Blowing the Whistle: Barriers to Federal Employees Making Disclosures 27 (2011).

[6] Shelley L. Peffer et al., Whistle Where You Work? The Ineffectiveness of the Federal Whistleblower Protection Act of 1989 and the Promise of the Whistleblower Protection Enhancement Act of 2012, 35 Review of Public Personnel Administration 70 (2015).

[7] Leslie Berger, et al., Hijacking the Moral Imperative: How Financial Incentives Can Discourage Whistleblower Reporting. 36 AUDITING: A Journal of Practice & Theory 1 (2017).

[8] Matt A. Vega, Beyond Incentives: Making Corporate Whistleblowing Moral in the New Era of Dodd- Frank Act “Bounty Hunting”, 45 Conn. L. Rev. 483.

[9] Geoffrey C. Rapp, Mutiny by the Bounties? The Attempt to Reform Wall Street by the New Whistleblower Provisions of the Dodd-Frank Act, 2012 B.Y.U.L. Rev. 73.

[10] David Kwok, The Public Wrong of Whistleblower Retaliation, 96 Hastings L.J. 1225.

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

November 19, 2022
Class Action, Corporate Ethics, Employment Law, Internet, Social Media

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

November 17, 2022
Agencies, Corporate Ethics, FTC, Internet, Regulatory, Social Media

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.

You Gotta Fight for Your Right to Repair

April 4, 2021
Corporate Ethics, Public Health, Regulatory

Christopher Cerny, MJLST Staffer

Last spring, as the first wave of the coronavirus pandemic hit critical heights, many states faced a daunting reality. The demand for ventilators, an “external set of lungs” designed to breathe for a patient too weak or compromised to breathe on their own, skyrocketed. Hospitals across the United States and countries around the globe clamored for more of the life saving devices. In March and April of 2020, the increasing need for this equipment forced doctors in Washington State, New York, Italy, and around the world to make heartbreaking decisions to prioritize the scarce supply. With this emergency equipment operating at maximum capacity, any downtime meant another potential life lost. But biomeds, hospital technicians who maintain these crucial medical devices, were frequently unable to troubleshoot or repair out-of-service ventilators to return them to the frontlines. This failure to fix the much-needed equipment was not due to lack of time or training. Instead, it was because many manufacturers restrict access to repair materials, such as manuals, parts, or diagnostic equipment. According to one survey released in February 2021, 76% of biomeds said that manufacturers denied them access to parts or service manuals in the previous three months and 80% said they have equipment that cannot be serviced due to manufacturers’ restrictions to service keys, parts, or materials.

While the prohibition of repairs of life support equipment highlights the extreme danger this restriction creates, the situation is not unique to hospitals and emergency equipment. As technology becomes increasingly complex and proprietary, all manner of tech manufacturers are erecting more and more barriers that prevent owners and independent repair shops from working on their products. Tesla, for example, is adamant about restricting repairs to its vehicles. The electric vehicle auto maker will not provide parts or authorize repairs if performed at an uncertified, independent repair shop or end user. Tesla has gone so far as to block cars repaired outside of its network from using its Superchargers. Apple historically also prevented end users from performing their own repairs, utilizing specialized tools and restricting access to parts. John Deere requires farmers to comply with a software licensing agreement that is in appearance designed to protect the company’s proprietary software, but in practice prevents farmers from clearing error codes to start their farm equipment without an authorized technician.

In response to these obstructions to repair, the Right to Repair movement solidified around the simple proposition that end users and independent repair shops should be provided the same access to manuals and parts that many tech companies reserve solely to themselves or their subsidiaries. This proposition is catching on and the legislatures in twenty-five states are currently considering thirty-nine bills involving the right to repair. However, of the thirty-nine bills, only three address medical technology with the bulk of the proposals devoted to general consumer products—think appliances, iPads, and smart devices—and farm equipment.

Massachusetts is an early adopter of right to repair laws. Its legislature passed a law in 2012 specific to motor vehicles that, inter alia, standardized diagnostic and service information, mandated its accessibility by owners and independent or third-party repair shops, and established any violation of the provisions of the act as an unfair method of competition and an unfair trade practice. This past November, Massachusetts voters approved a ballot measure that expanded the scope of the 2012 right to repair law and closed a loophole that could circumvent the requirements imposed in the earlier statute. Automakers lobbied in force to oppose the measure, spending in excess of $25 million in advertising and other efforts. Taking into account the money spent by both sides of the ballot measure, the right to repair initiative was the most expensive measure campaign in Massachusetts history. The European Union is also taking steps to broaden access to repair materials and information. The European Parliament passed a resolution aimed at facilitating a circular economy. Acknowledging the finite nature of many of the rare elements used in modern technology, the European Union is aiming to make technology last longer and to create a second-hand market for older models. The resolution expanding repair access is a part of that effort by ensuring the ease of repair to prolong the life of the technology and delay obsolescence.

Some manufacturers are making concessions in the face of the Right to Repair Movement. Apple, notoriously one of the most restrictive manufacturers, did an about face in 2019 and expanded access to “parts, tools, training, repair manuals and diagnostics” for independent repair businesses working on out of warranty iPhones. Tesla opened its repair platform to independent repair shops in the European Union after the EU Commission received complaints, but the access can be prohibitively expensive at €125 per hour for the use of diagnostics and programming software. However, these minimal efforts are stop-gap measures designed to slow the tide of legislation and resolutions aimed at broadening access to the materials needed to perform repairs to break the monopolistic hold manufacturers are trying to exert over routine fixes.

The Right to Repair movement is clearly gaining ground as the implications of this anticompetitive status quo in the repair and second-hand market was brought into stark relief by the strains imposed by the COVID-19 pandemic, which strained not only hospitals but agriculture, infrastructure, and day-to-day life. The impact of these restrictions on independent repair shops, farmers, consumers, patients, and do-it-yourselfers more than ever became an obvious impediment to health, safety, and a less extractive economy. And as shown in Massachusetts, voters are responding by expanding the right to repair, even in the face of expensive lobbying and advertising campaigns. Legislators should continue to bring additional bills, especially addressing the restrictions on repairs of emergency medical equipment and should enact the existing proposals in the twenty-five states currently considering them.

Decode 16 Tons (of Bitcoin), What Do You Get? Nevada Considers Redefining the Phrase “corporate Governance”

March 14, 2021
Corporate Ethics, Cryptocurrency, Economics, Regulatory

Jesse Smith, MJLST Staffer

On January 16, 2020, Nevada Governor Steve Sisolak, as part of his state of the state address, announced a new legislative proposal allowing certain types of private companies to essentially purchase the ability to govern as public entities. The proposal applies specifically to tech firms operating within the fields of blockchain, autonomous technology, the internet of things, robotics, artificial intelligence, wireless technology, biometrics, and renewable resources technology. Those that purchase or own at least 50,000 contiguous acres of undeveloped and uninhabited land within a single county can apply to create  “innovation zones” within the property, or self-governed cities structured around the technology the company develops or operates. The company must apply to Nevada’s Office of Economic Development and provide a preliminary capital investment of at least $250 million, along with an additional $1 billion invested over ten years. Upon approval by the state, the area would become an “innovation zone,” initially governed by a three-member board appointed by the governor, two members of which would be picked from a list provided by the company creating the zone. This board would be able to levy taxes and create courts, school districts, police departments, and other offices empowered to carry out various municipal government functions.

One of the main companies lobbying for the passage of the bill, and the likely its first candidate or adopter, is Blockchains LLC, a Nevada based startup that designs blockchain based software in the areas of “digital identity, digital assets, connected devices and a stable means of digital payment.” The company purchased 67,000 acres of largely undeveloped land near Reno in 2018 for $170 million, in pursuit of building what it calls a “sandbox city,.” There, the company would further develop and use its blockchain technology to store records and administer various public and private functions, including “banking and finance, supply chains, ID management, loyalty programs, digital security, medical records, real estate records, and data sharing.”

Natural and rightful criticism of the legislation has mounted since the announcement. Many pointed out that Jeffrey Berns, the founder of Blockchains LLC, is a large donor to both Sisolak and Democratic PACs in Nevada. Furthermore, months before the proposal was unveiled, Blockchains purchased water rights hundreds of miles away to divert to its Nevada land, prompting various outcries from water rights and indigenous activists. From a broader perspective, skeptics conjured up dystopian images of zone residents waking up to “focus group tested alarm[s]” in constantly monitored “corporate apartments.” Others reflected on the history of company-controlled towns in the U.S. and the various problems associated with them.

Proponents of the plan seem fixated on two particular arguments. First, they note that the bill in its current incarnation requires an innovation zone to hold elections for the offices it sets up once its population hits 100. This allegedly demonstrates that while any company behind the zone “retains significant control over the jurisdiction early on, that entity’s control quickly recedes and democratic mechanisms are introduced.” Yet this argument ignores the fact that there is no requirement that a zone ever reach 100 residents. Additionally, even where this threshold is met, the board still retains significant control over election administration, and may divide or consolidate various types of municipal offices as it sees fit, and dismiss officials for undefined “malfeasance or nonfeasance” (§ 20 para. 2). Such powers provide ripe opportunity for gaming how an innovation zone’s government operates and avoiding true democratic control through consolidation of various powers into strategic elected offices.

Second is the more traditional argument that these zones will attract new businesses to the state and bestow an influx of money and jobs upon the citizens of Nevada. Setting aside various studies and arguments that question this assumption, this argument is yet another tired talking point that ignores the damage large businesses already wreak on the local communities they take over. Many overuse the limited resources of various departments. Others use the “value” that big businesses supposedly bring to communities to pit local governments against each other in bidding wars to see who can offer more tax breaks and subsidies to bring the business to their town, money and revenue that could and likely should be used to fund other local programs. Thus, the ability to actually govern appears to be the logical end in a progression of demands big businesses expect from the cities they set up shop in. Perhaps the best argument in favor of innovation zones is also the saddest, in that they allow big businesses to, as is said in corporate speak, “cut out the middleman” by directly collecting the tax dollars they already consume by the billions and directly controlling the municipal resources they already monopolize.

Sisolak, Berns, and other proponents of the proposal fight back against the idea that innovation zones will become the equivalent of “company towns” and argue that it will make Nevada a tech capital of the world by attracting the businesses specified in the bill. They would be well suited to remember two maxims that summarize the criticism of their idea: that history repeats itself and the road to hell is paved with good intentions. There is a reason these phrases are overused cliches. Last week’s MJLST blog post left us with the sweet sounds of Billy Joel to close out its article. As suggested by Tony Tran of “The Byte,” I’ll end mine with the classic, yet unknowingly cyberpunk ballad “16 tons” (the Tennessee Ernie Ford version), and leave the reader thinking about the future plight of the Nevada Bitcoin miner, owing her or his uploaded cloud soul to the company store, aka Blockchains LLC, in their innovation zone job.

Robinhood Changed the Game(Stop) of Modern Day Investing but Did They Go Too Far?

February 21, 2021
Antitrust, Class Action, Corporate Ethics, Economy, Financial Law, Internet, Litigation, Trade, Video Games

Amanda Erickson, MJLST Staffer

It is likely that you have heard the video game chain, GameStop, in the news more frequently than normal. GameStop is a publicly traded company that is known for selling, trading, and purchasing gaming devices and accessories. Along with many other retailers during the COVID-19 pandemic, GameStop has been struggling. Not only did COVID-19 affect its operations, but the Internet beat the company’s outdated business model. Prior to January 2021, GameStop’s stock prices reflected the apparent new reality of gaming. In March 2015, GameStop’s closing price was around $40 a share, but at the beginning of January 2021, it was at $20 a share. With a downward trend like this, it might come as a shock to learn that on January 27, 2021, GameStop’s closing price was at $347.51 a share, with the stock briefly peaking at $483 on the following day.

This dramatic surge can be accredited to a large group of amateur traders on the Reddit forum, r/WallStreetBets, who promoted investments in the stock. This sudden surge forced large scale institutional investors, who originally bet against the stock through short positions, to buy the stock in order to hedge their positions. Short selling involves “borrowing” shares of a company, and quickly selling the borrowed shares into the market. The short seller hopes that these shares will fall in price, so that they can buy the shares back at a potentially lower price. If this happens, they can return the shares back that they “borrowed” and keep the difference as profit. The practice of short selling is controversial. Short selling can lead to stock price manipulation and can generate misinformation about a company, but it can also serve to check and balance the markets. The group on Reddit knew that short sellers had positions betting against GameStop and wanted to take advantage of these positions. This caused the stock price to soar when these short sellers had to repurchase their borrowed shares.

This historic scene intrigued many day traders to participate and place bets on GameStop, and other stocks that this Reddit group was promoting. Many chose to use Robinhood, a free online trading app, to make these trades. Robinhood introduced a radical business model in 2014 by offering consumers a platform that allowed them to trade with zero commissions, and ultimately changed the way the industry operated. That is until Robinhood issued a statement on January 28, 2021 announcing that “in light of recent volatility, we restricted transactions for certain securities,” including GameStop. Later that day, Robinhood issued another statement saying it would allow limited buying of those securities starting the next day. This came as a shock to many Robinhood users, because Robinhood’s mission is to “democratize finance for all.” These events exacerbated previous questions about the profitability model of Robinhood and ultimately left many users questioning Robinhood’s mission.

The first lawsuit was filed by a Robinhood user on January 28, 2021, alleging that Robinhood blocked its users from purchasing any of GameStop’s stock “in the midst of an unprecedented stock rise thereby depriv[ing] retail investors of the ability to invest in the open-market and manipulating the open market.” Robinhood is now facing over 30 lawsuits, with that number only rising. The chaos surrounding GameStop stock has caught lawmakers’ attention, and they are now calling for congressional action. On January 29, 2021, the Securities and Exchange Commission issued a statement informing that it is “closely monitoring and evaluating the extreme price volatility of certain stocks’ trading prices” and expressed that it will “closely review actions taken by regulated entities that may disadvantage investors.” Robinhood issued another statement on January 29, 2021, stating they did not want to stop people from buying these stocks, but that they had to take these steps to conform with their regulatory capital requirements.

The frenzy has since calmed down but left many Americans with questions surrounding the legality of Robinhood’s actions. While it may seem like Robinhood went against everything the free market has to offer, legal experts disagree, and it all boils down to the contract. The Robinhood contract states “I understand Robinhood may at any time, in its sole discretion and without prior notice to Me, prohibit or restrict My ability to trade securities.” Just how broad is that discretion, though? The issue now is if Robinhood treated some users differently than others. Columbia Law School professor, Joshua Mitts, said, “when hedge funds are going to lose from a trading suspension, they don’t face any lockup like this, any suspension, any halt at the retail level, but when retail investors find themselves locked in, they find themselves unable to exit the trade.” This protective action by Robinhood directly contradicts the language in the Robinhood contract that states that the user agrees Robinhood does not “provide investment advice in connection with this Account.” The language in this contract may seem clear separately, but when examining Robinhood’s restrictions, it leaves room to question what constitutes advice when restricting retail investors’ trades.

Robinhood’s practices are now under scrutiny by retail investors who question the priority of the company. The current lawsuits against Robinhood could potentially impact how fintech companies are able to generate profits and what federal oversight they might have moving forward. This instance of confusion between retail investors and their platform choice points to the potential weaknesses in this new form of trading. While GameStop’s stock price may have declined since January 28, the events that unfolded will likely change the guidelines of retail investing in the future.

 

“Football Is a Microcosm of America”

February 13, 2021
Class Action, Corporate Ethics, Neuroscience, Sports Law

Emily Moss, MJLST Staffer

Sunday’s Super Bowl LV had a notably different tone than in any other year. Cardboard cutouts and masked fans filled the stadium, there was no audience on the field during The Weeknd’s halftime performance, and the NFL aired an anti-racism commercial that opened with the line “football is a microcosm of America.” This commercial, which NPR dubbed the “worst hypocrisy from a sports league,” is the most recent in the NFL’s string of racial justice focused actions. Yet the league where Colin Kaepernick has not played since he knelt in protest of police brutality and racial inequality is unwilling to reckon with its own racial injustices. Days before this year’s atypical Super Bowl aired, ABC News reported on emails it obtained, suggesting that clinicians doing evaluations as part of the NFL’s concussion settlement program were required to use different cognitive scales for Black and White players.

Th ABC News report stemmed from a long line of litigation over NFL players’ head injuries. In 2014, faced with growing research about the effects of professional football on players’ brains and a long list of players who committed suicide in a pattern related to brain injuries, the NFL and a class of “roughly 18,000 retired players and their beneficiaries” entered into a settlement agreement. Plaintiffs’ attorneys Sol Weiss and Christopher Seeger stated that the agreement was “an extraordinary settlement for retired NFL players and their families—from those who suffer with neurocognitive illnesses today, to those who are currently healthy but fear they may develop symptoms decades into the future.” Some plaintiffs, however, expressed concern, calling the settlement a “lousy deal” for players whose symptoms would not meet the compensation requirements.

On August 25, 2020, Black NFL retirees Kevin Henry and Najeh Davenport, on behalf of themselves and all others similarly situated, sued the NFL. The complaint claims that “the [NFL concussion] Settlement Agreement is marred by an unacceptable flaw: the National Football League and NFL Properties, LLC (collectively, ‘the NFL’) have been avoiding paying head-injury claims under the Settlement Agreement based on a formula for identifying qualifying diagnoses that explicitly and deliberately discriminates on the basis of race.” Pursuant to the settlement, in order to establish a player’s cognitive function decline, clinicians compare players to a baseline. When determining the baseline, doctors can consider a number of factors, including age, education, and, significantly, race. A scale that uses such “race-norming” assumes that Black players start out with a lower cognitive function baseline than White players. The result is that a Black player may be denied compensation for the same cognitive function that would trigger compensation for a White player. This scheme “is particularly insidious because it presumes Black retirees to be less intelligent than their non-Black fellow retirees.” The complaint thus alleges deprivation of equal rights under 42 U.S.C. § 1981.

The NFL moved to dismiss for failure to state a claim on November 2, 2020. The motion argues that (1) the use of “race-norming” is contemplated by the 2014 judicially-approved settlement to which the plaintiffs were given notice and an opportunity to object, (2) the plaintiffs failed to establish intent to discriminate as required by § 1981, and (3) the plaintiffs failed to establish but-for causation as required by § 1981. The plaintiffs filed a reply in December but the judge has yet not ruled.

In a statement responding to Henry and Davenport’s suit, NFL commissioner Roger Goodell claimed that “[t]he federal court is overseeing the operation and implementation of that settlement, and we are not part of selecting the clinicians, the medical experts, who are making decisions on a day-to-day basis.” However, when Davenport applied for compensation based on a determination from a clinician who did not apply race-norming standards, the NFL appealed his application, claiming “his neuropsychological test scores may have been calculated with improper demographic norm adjustments.” And while the NFL maintains that the settlement program does not require race-norming, according to a recent ABC News report, a neuropsychologist who evaluated NFL players for the settlement program claimed that, in his experience, “when clinicians deviate from the algorithm, there are multiple inquiries levied at them.” Another clinician stated that assessment was “right on target.”

The ABC News investigation supports the lawsuit’s claim that the NFL compensates White and Black players based on different standards. As one clinician put it “[b]ottom line is that the norms do discriminate against Black players . . . [s]o now what? In this time of reckoning, like many professions, I think we need to look closely at the expected and unexpected ramifications of our practices.” While the NFL has not released its settlement statistics, the ramifications of this practice is clear. Black retirees will be denied compensation more than White retirees. In a country where medical racism is prevalent, the NFL is indeed a “microcosm of America.”

Nineteen Eighty Fortnite

October 3, 2020
Antitrust, Corporate Ethics, Internet, Litigation, Video Games

Valerie Eliasen, MJLST Staffer

The Sixth and Seventh Amendments affords people the right to a trial by jury. Impartiality is an essential element of a jury in both criminal and civil cases. That impartiality is lost if a juror’s decision is “likely to be influenced by self-interest, prejudice, or information obtained extrajudicially.” There are many ways by which a juror’s impartiality may become questionable. Media attention, for example, has influenced the jury’s impartiality in high-profile criminal cases.

In cases involving large companies, advertising is another way to appeal to jurors. It is easy to understand why: humans are emotional. Because both advertisement perception and jury decisions are influenced by emotions, it comes as no surprise that some parties have been “accused of launching image advertising campaigns just before jury selection began.” Others have been accused of advertising heavily in litigation “hot spots,” where many cases of a certain type, like patent law, are brought and heard.

A recent example of advertising launched by a party to a lawsuit comes from the emerging dispute between Apple Inc. and Epic Games Inc. Epic is responsible for the game Fortnite, an online “Battle-Royale” game, which some call the “biggest game in the world.” Epic sued Apple in August for violation of the Sherman Antitrust Act of 1980 and several other laws in reference to Apple’s practice of collecting 30 percent of every App and in-App purchase made on Apple products. When Epic began allowing Fortnite users to pay Epic directly on Apple products, Apple responded by removing Fortnite from the App Store. The App Store is the only platform where users can purchase and download applications, such as Fortnite, for their Apple products. In conjunction with the lawsuit, Epic released a video titled Nineteen Eighty Fortnite – #FreeFortnite. The video portrays Apple as the all-knowing, all-controlling “Big Brother” figure from George Orwell’s 1984. The ad was a play on Apple’s nearly identical commercial introducing the Macintosh computer in 1984. This was an interesting tactic given the majority of Fortnite users were born after 1994.

Most companies that have been accused of using advertisements to influence jurors have used advertisements to help improve the company image. With Epic, the advertisement blatantly points a finger at Apple, the defendant. Should an issue arise, a court will have an easy time finding that the purpose of the ad was to bolster support for Epic’s claims. But, opponents will most likely not raise a case regarding jury impartiality because this advertisement was released so far in advance of jury selection and the trial. Problems could arise, however, if Epic Games continues its public assault on Apple.

Epic’s ad also reminds us of large tech companies’ power to influence users. The explosion of social media and the development of machine learning over the past 10 years have yielded a powerful creature: personalization. Social media and web platforms are constantly adjusting content and advertisements to account for the location and the behavior of users. These tech giants have the means to control and tailor the content that every user sees. Many of these tech giants, like Google and Facebook, have often been and currently are involved in major litigation.

The impartial jury essential to our legal system cannot exist when their decisions are influenced by outside sources. Advertisements exist for the purpose of influencing decisions. For this reason, Courts should be wary the advertising abilities and propensities of parties and must take action to prevent and control advertisements that specifically relate to or may influence a jury. A threat to the impartial jury is a threat we must take seriously.

 

 

 

 

 

Corporate Cheat Codes: When Does Video Game Hype Become Securities Fraud?

February 6, 2019
Corporate Ethics, Internet, Securities Law

By: Alex Karnopp

As production consolidates around a few key players, larger economic growth in the video game industry masks underlying corporate concerns of securities fraud. Last year, the video game industry reached an important milestone, earning the title of “world’s favorite form of entertainment.” In 2017, the video game industry generated $108.1 billion, more than TV, movies, and music. While other entertainment industries saw revenue decline, the game industry increased 10.7%. This drastic jump in revenue has made investors happy. In 2017, most companies producing hardware or software for the industry easily beat the broader market. NVIDIA, a popular graphic card producer, jumped up 80% over the year. Nintendo, similarly, saw an 86% increase. Even more drastically, Take-Two Interactive shot up 117%.

Red flags in the industry, however, indicate changes are needed to sustain growth. For one, production costs and technological innovations hinder profitability as games take longer and cost more to bring to market. Making matters worse, game fatigue remains high, meaning an audience remains focused on a game only for a small window. High development risk has led to a pattern of mergers and acquisitions – large, publicly traded companies either acquire publishing rights or development teams altogether to diversify holdings and increase profitability.

This consolidation has had interesting impacts on video game development. Publicly traded companies face tremendous pressure from investors to uphold profitability – to the frustration of developers. Developers are constantly faced with unrealistic deadlines from executives looking to maximize profit, ultimately leading to the release of low-quality games. As large game publishers learn to deal with the interplay between profit and content, they may also face legal consequences.

What may seem like “corporate optimism” to some, looks more like fraudulent misstatements to investors. In 2014, the “disastrous launch” of Battlefield 4 (which was rushed to hit the release of the PS4 and Xbox One) sent Electronic Art’s stock plummeting. As both executives and producers claimed the title would be a success, investors brought lawsuits, claiming they relied on these false statements. Similarly, the recent split between developer Bungie and Activision has led to rumors of lawsuits. Constant frustrations over sales and content finally led to a split, dropping Activision stock by more than 10%. Investors claim Activision committed federal securities law by failing to “disclose that the termination of Activision-Blizzard and Bungie Inc.’s partnership … was imminent.” As large, publicly traded publishers begin dealing with the effects of a consolidated market on content and profits, it will be interesting how courts interpret executive actions trying to mitigate missteps.

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