Month-In-Brief: Business Regulation & Regulated Industries

CURRENT MONTH (January 2024)

Antitrust Law

FTC Announces Annual Changes to the HSR Act’s Notification Thresholds

By Barbara Sicalides, Troutman, Pepper, Hamilton, Sanders, LLP

The Federal Trade Commission (FTC) announced the annual changes to the Hart-Scott-Rodino (HSR) Act notification thresholds on January 22, 2024. The HSR Act requires all persons contemplating certain mergers or acquisitions that meet or exceed the jurisdictional thresholds to file notification with the FTC and the Department of Justice and to wait a designated period of time before consummating such transactions. These thresholds are adjusted annually based on changes in the US gross national product (GNP). The changes are expected to become effective thirty days after notice is published in the Federal Register.

Generally, the HSR Act requires notification for mergers, acquisitions, joint venture formations, and certain exclusive pharmaceutical license agreements over a certain size among parties over a certain size. The size-of-transaction threshold will increase to $119.5 million from $111.4 million. Transactions that will result in the purchaser holding voting securities, assets, or noncorporate interests valued above that threshold will be reportable if the size-of-parties test is also satisfied and no exemptions are available.

The size-of-parties threshold will also increase. Generally, one party must have sales or assets of at least $23.9 million, and the other party must have sales or assets of at least $239 million. Unless an exemption applies, transactions valued in excess of $478 million will require premerger notification regardless of the annual sales or assets of the parties.

FTC announces changes in filing fees

In addition to announcing the new HSR thresholds, the FTC also approved publication of the new merger filing fee thresholds. There are six filing fee thresholds based on the size of the transaction, listed in the table below.

To determine reportability, parties must apply the thresholds that are or will be in effect at the time of closing. However, the applicable filing fee is based on the filing fee threshold that is in effect at the time the parties submit their HSR filings.

Summary of new HSR thresholds are as follows:

Size-of-transaction threshold:

$111.4 million will become $119.5 million

Size-of-parties thresholds:

$22.3 million will become $23.9 million

$222.7 million will become $239 million

Size-of-transaction where size-of-parties no longer relevant:

$445.5 million will become $478 million

The HSR regulations are complex and address, among other things, how to determine the size of the person and the size of transaction and whether an exemption could apply. It is important to be familiar not only with the specific thresholds but also with how the thresholds apply to your transactions.

FTC Publishes Annual Increase to Civil Penalties for Violations of the HSR Act

By Barbara Sicalides, Troutman, Pepper, Hamilton, Sanders, LLP

On January 11, 2024, the Federal Trade Commission (FTC) announced the maximum civil penalty amount for violations of the Hart-Scott-Rodino Antitrust Improvements Act would increase from $50,120 to $51,744 per day. The new penalty levels apply to civil penalties assessed after the effective date of the adjustment, including civil penalties whose associated violation predated January 10, 2024.

Noncompliance with the HSR Act continues to carry serious penalties, as fines continue to mount for each day that a party is in violation of the Act. The two most recent cases applying civil penalties for failure to make the necessary HSR filing were filed in December 2021. A restaurant chain owner and investment fund operator, Biglari Holdings Inc., was fined $1.4 million to settle charges that two acquisitions it made on March 26, 2020, of shares of restaurant operator Cracker Barrel Old Country Store, Inc. violated the HSR Act. According to the complaint, these two acquisitions, aggregated with Biglari’s prior holdings of Cracker Barrel, caused it to exceed an HSR filing threshold, triggering its obligation to file an HSR notification and wait before consummation of the transaction. Failing to do so violated the HSR Act. Similarly, the founder of a truckload carrier was required to pay a $486,900 civil penalty to settle charges that certain of his acquisitions of company stock while he was a director of the company violated the Hart-Scott-Rodino Act.

Executive compensation, failure to aggregate the value of an acquisition with the current value of holdings acquired in prior transactions, exercise of options or warrants, and late-stage changes to transaction structure are among some of the most common triggers of failure to comply with the HSR Act’s filing requirement.

FTC Publishes New Thresholds for the Clayton Act’s Prohibition of Interlocking Directorates

By Barbara Sicalides, Troutman, Pepper, Hamilton, Sanders, LLP

The Federal Trade Commission and the Department of Justice, Antitrust Division, have increased enforcement under and prioritized compliance with Section 8. Under Section 8 of the Clayton Act, a person is generally prohibited from serving simultaneously as an officer or director of two “competitor” corporations if each corporation has aggregated capital, surplus, and undivided profits exceeding an annually adjusted threshold amount.

Effective January 12, 2024, the threshold that triggers this prohibition is $48,559,000. The exemption thresholds will also increase. The principal exceptions to Section 8’s prohibition apply if the competitive sales of either corporation are less than $4,855,900 or less than 2 percent of either corporation’s total annual sales, or if the competitive sales of each corporation are less than 4 percent of that corporation’s total annual sales.

FTC Investigates Artificial Intelligence Collaborations

By Barbara Sicalides, Troutman, Pepper, Hamilton, Sanders, LLP

The week of January 22, 2024, was a busy week for the effort of the Federal Trade Commission (FTC) to investigate and regulate artificial intelligence (AI). In addition to its half-day AI Tech Summit, the commission authorized the issuance of “any and all” compulsory process in aid of its 6(b) inquiry into the impact of collaborations and investments with AI providers on competition.

According to FTC Chair Lina M. Kahn, its 6(b) inquiry “will shed light on whether investments and partnerships pursued by dominant companies risk distorting innovation and undermining fair competition.” The agency sent information demands to Alphabet, Inc., Amazon.com, Inc., Anthropic PBC, Microsoft Corp., and OpenAI, Inc. Some of the theories of competitive harm identified by the agency include incumbent industry participants taking control of key inputs or adjacent markets, including the cloud computing market, in order to entrench their current power or use that power to gain control over a new generative AI market.

Some of examples of unfair methods of competition identified by the FTC are (a) market leaders foreclosing competition through bundling and tying of new generative AI applications with existing core products to reduce the value of their competitors’ standalone generative AI offerings; (b) incumbents offering a range of products and services using exclusivity or discriminatory conduct to funnel users to their own generative AI products instead of their competitors’ products; and (c) incumbents acquiring nascent competitors or critical applications and cutting off rival access to core products, or dominant firms purchasing complementary applications and bundling them together with their existing products.

The FTC’s most recent information demands directed to the five technology companies seek information regarding:

• “A specific investment or partnership, including agreements and the strategic rationale of an investment/partnership.
• The practical implications of that specific partnership or investment, including decisions around new product releases, governance or oversight rights, and the topic of regular meetings.
• Analysis of the transactions’ competitive impact, including information related to market share, competition, competitors, markets, potential for sales growth, or expansion into product or geographic markets.
• Competition for AI inputs and resources, including the competitive dynamics regarding key products and services needed for generative AI.
• Information provided to any other government entity, including foreign government entities, in connection with any investigation, request for information, or other inquiry related to these topics.”

Without doubt the antitrust agencies’ interest in AI will continue through this and into the next administration, regardless of the election results. This administration will endeavor to prevent the leading technology firms from controlling the keys to AI success. Whether government involvement, at this stage, will slow or expedite US development of the technology and its applications will not be clear for some time.

AI Under a Microscope: FTC Tech Summit

By Barbara Sicalides and Brett E. Broczkowski, Troutman, Pepper, Hamilton, Sanders, LLP

The FTC’s Office of Technology hosted a technology summit focused on the intersection of AI and competition and consumer protection. This update focuses largely on the competition discussion. The summit consisted of three panels moderated by members of FTC staff and management and including industry professionals, academics, journalists, and attorneys. The presentations covered a variety of topics, from semiconductor supply chain to household uses for AI platforms, like ChatGPT.

Concentration in the AI Tech Stack and Its Effect on Competition

While many think of AI as applications such as ChatGPT, panelists noted that underlying those applications is an AI “tech stack.” The stack’s layers include a cloud layer that hosts and maintains data and AI models, a chip layer comprised of semiconductors that make up the cloud hardware, and a chip input layer.

Panelists said that there are only approximately three cloud computing players and virtually only one major chip player and noted that limited access to capital makes entry into these lower-stack layers challenging. One panelist suggested regulatory solutions to this concentration, proposing structural separation of entities with significant market share in multiple stack layers, non-discrimination regulations, and greater transparency laws aimed at the process governing distribution of key AI resources and tools.

Impact of Computing Mobility and Availability on Competition

Another factor covered by the panel was the cost of switching between cloud computing service providers. Migration from one cloud provider to another can often take years and may not result in complete separation from the original provider. Also, a study conducted by a UK agency discovered additional barriers to data mobility, including cloud providers charging “egress fees” to customers who depart the platform. Some cloud providers design discounts that create incentives for customers to entrust the entirety of their cloud computing needs to a single provider.

Thus, the limited mobility and availability of computing power creates incentive for companies to remain at one provider for all of their computing needs.

Impact of Industry Factors on Competition

The summit highlighted several features of AI. The first of these is the vertical integration of players near the top of the AI Tech Stack, which provides the AI model owner with greater access to necessary data. Although data are ubiquitous, good data that are highly curated by humans, accurate, and diverse are hard to find. Accordingly, companies that already have vast datasets that can be used to train AI models could have a competitive advantage.

Another feature of AI is the tendency for open-source sharing. The term “open-source” describes a relationship whereby the developer makes the AI model and its underlying code available to the public at no cost, rather than renting or licensing the model. Open-source models are beneficial to start-ups and scholars that can then customize them. In contrast, changes in a rented third-party model could damage a use-case or render it obsolete. Free open-source models can, however, cannibalize sales of smaller AI firms hoping to rent or license their models.

No AI Exception to Federal Laws

Nearly every FTC and CFPB representative expressed the same sentiment: there is no “AI exemption” to the law. In addition to pointing out that they have the expertise, experience, and tools to oversee AI, the agencies were clear that a company’s ignorance of the underlying technology is not a defense. For example, FTC Commissioner Alvaro Bedoya suggested that, where a company employs an AI model and charges it with a decision-making function, the company cannot later exculpate itself should the model cause harm simply because either (a) the decision was made by a model and not a human or (b) the company did not fully understand the way in which the model made its decisions.

Key Takeaways

• Agencies intend to be active and view AI as squarely in their territories. They are concerned with the roles of tech market leaders in developing AI and any control they exert over or through technology.
• Although organic industry factors significantly impact data and technology mobility and competition, market participants should take care that their strategies and systems do not limit existing or new competition.
• Teams developing AI models and technology or products dependent on them should be trained on the antitrust risks that they need to avoid and must be questioned about the future effects of their strategies and developments on competitors, collaborators, and customers.
• It is important that open-source models be transparent about the data that was used to train them and the parameters surrounding their design.

Banking Law

FinCEN Update to Beneficial Ownership FAQs and Paycheck Protection Program FAQs

By Rachael Aspery, McGlinchey Stafford, PLLC

In January 2024, the Financial Crimes Enforcement Network (“FinCEN”) updated and added to its Frequently Asked Questions (“FAQs”) on the Beneficial Ownership Information Report (“BOI”) website. Additionally, on January 12, 2024, FinCEN updated its FAQs for the Paycheck Protection Program (“PPP”), which was established by section 1102 of the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”). The respective FAQs are explanatory only and do not supplement or modify any obligations imposed by statute or regulation.

Beneficial Ownership

On January 4, 2024, FinCEN updated eight FAQs—one FAQ that relates to General Questions as to who can access beneficial ownership information under the Corporate Transparency Act; four FAQs related to the Reporting Process given that FinCEN launched the Beneficial Ownership Information E-Filing website for reporting beneficial ownership information on January 1, 2024; one Reporting Requirements FAQ regarding obtaining a taxpayer identification number (“TIN”) for a new company quickly in order to file the BOI Report timely; one FAQ regarding FinCEN Identifiers and how individuals and reporting companies may request one; and one FAQ regarding Third-Party Service Providers and the use of them to submit BOI Reports.

On January 12, 2024, FinCEN added ten new FAQs—one FAQ under Reporting Company regarding whether a company created or registered in a US territory is considered a reporting company; two FAQs under Beneficial Owner regarding who to report as beneficial owner if a corporate entity owns or controls 25 percent or more of the ownership interests in the reporting company, or if ownership is in dispute; three FAQs under Company Applicant; two FAQs under Reporting Requirement regarding whether FinCEN will accept a beneficial owner or company applicant’s identification document without a photograph for religious reasons, and what residential address should be reported if the individual does not have a permanent residential address; one FAQ under Reporting Company Exemptions regarding the subsidiary exemption; and one FAQ under FinCEN Identifier on how a reporting company may use a FinCEN identifier.

FinCEN expects to publish additional guidance in the future, and FinCEN directs questions to the FinCEN Contact webpage.

Paycheck Protection Program

On January 12, 2024, FinCEN republished its FAQs relevant to the Bank Secrecy Act (“BSA”) and how lenders can meet such requirements when issuing a PPP loan. The Small Business Administration (“SBA”), in consultation with the US Department of Treasury, has been issuing FAQs regarding the implementation of the PPP. FinCEN will update the FAQs with any additional BSA-related FAQs involving the PPP. The FAQ reiterates that borrowers and lenders may rely on the guidance provided in the FAQ as the SBA’s interpretation of the CARES Act and of the PPP Interim Final Rule. The FAQ states that the US government will not challenge lender PPP actions that conform to this guidance, and to the PPP Interim Final Rule and any subsequent rulemaking in effect at the time.

Cannabis Law

The DEA is Going to Have a Hard Time Fighting Marijuana Rescheduling

By Daniel Shortt, McGlinchey Stafford PLLC.

On January 12, 2024, the Department of Health and Human Services (HHS) released the full text of its August 2023 letter to the Drug Enforcement Administration (DEA) (HHS Letter) recommending rescheduling marijuana from Schedule I to Schedule III (with the release thanks to the work of attorney Matt Zorn). Schedule I substances are deemed to have no currently accepted medical use; they include heroin and MDMA.

The HHS Letter does not presently change the status of marijuana under federal law, but it does provide hundreds of pages of data justifying marijuana’s placement as a Schedule III substance. It focuses on the following eight-factor analysis required by the Controlled Substances Act (CSA) listed in 21 USC 811(b) in determining where marijuana should be scheduled:

1. Its actual or relative potential for abuse: HHS found that marijuana has the potential to create hazards for health; however, the risk was less than for Schedule I or II substances.
2. Scientific evidence of its pharmacological effect, if known: HHS discusses how cannabinoids interact with the endocannabinoid system and lists responses to marijuana use.
3. The state of current scientific knowledge regarding the drug or other substance: The letter points out the complexity of studying marijuana due to the variable organic plant material and manufactured preparations. Marijuana comes in many forms such as flower, vapor, and edibles.
4. Its history and current pattern of abuse: HHS determined that marijuana is used extensively in the US, both medically and recreationally, but it is not as prevalent as alcohol despite being used more than other drugs scheduled under the CSA.
5. The scope, duration, and significance of abuse: HHS determined that “although abuse of marijuana produces clear evidence of harmful consequences, including substance use disorder, they are relatively less common and less harmful than some other comparator drugs.”
6. Risks, if any, to public health: One metric in this analysis was the risk of hospitalization or emergency department visits; HHS determined these negative outcomes are less than comparable drugs.
7. Its psychic or physiological dependence liability: HHS likened the withdrawal symptoms from marijuana to the withdrawal symptoms of tobacco.
8. Whether the substance is an immediate precursor of a substance already controlled: HHS determined that marijuana is not an immediate precursor of another controlled substance.

Based on the eight-factor analysis, HHS determined that marijuana has potential for abuse but less than Schedule I or II substances, it has a currently accepted medical use, and abuse may lead to moderate to low physical dependence and high psychological dependence.

Under the CSA, the HHS evaluation and recommendations with regards to scientific and medical matters are binding on the DEA under 21 USC 811(b). However, the DEA may consider “all other relevant data” in making its final determination. While the DEA does have the ability to deny rescheduling, the release of the HHS Letter makes this more challenging, as the DEA will have to justify its decision in light of the scientific and medical determinations thoroughly outlined in the HHS Letter. Accordingly, the major impact of the HHS Letter is how it will impact the DEA’s next moves on marijuana. Although nothing is certain, it seems very likely that the DEA will move forward with the rulemaking process to reschedule marijuana.

Consumer Finance Law

Bureau Files Amicus Brief on FDCPA False Statements

By Eric Mogilnicki and Graves Lee, Covington & Burling LLP

On January 2, the Consumer Financial Protection Bureau (“CFPB”) filed an amicus brief in Carrasquillo v. CICA Collection Agency, Inc., a case pending before the US Court of Appeals for the First Circuit. Carrasquillo arose from a 2021 lawsuit alleging that a collection agency violated numerous provisions of the Fair Debt Collection Practices Act (“FDCPA”), including 15 U.S.C. § 1692e, which prohibits debt collectors from “us[ing] any false, deceptive, or misleading representation or means in connection with the collection of any debt.” The plaintiff alleged that the collection agency falsely claimed that a debt that had been included in the plaintiff’s bankruptcy filing was due and payable, and that the collection agency could commence a lawsuit against the plaintiff. The trial court dismissed the lawsuit, holding that section 1692e “was intended to prohibit only knowing or intentional misrepresentations” and crediting the collection agency’s assertion that it was unaware of the plaintiff’s bankruptcy proceeding.

In its brief, the CFPB argued that the First Circuit should reverse the trial court because it wrongly interpreted section 1692e to include a scienter requirement. The Bureau pointed to the plain language of section 1692e, which contains no express scienter requirement, to other sections of the FDCPA that contain scienter requirements, and section 1692k, which provides for a bona fide error defense to FDCPA liability only if a violation was unintentional and resulted from a bona fide error notwithstanding the maintenance of procedures reasonably adapted to avoid any such error. The Bureau noted that the trial court’s conclusion contravenes precedent from the seven other circuit courts to have addressed the issue, and that it relied almost entirely on a thirty-year-old, out-of-circuit district court decision. Additionally, the Bureau argued that the US Bankruptcy Code should not be read to bar the plaintiff’s claims under Section 1692e.

In a blog post announcing the amicus brief, CFPB General Counsel Seth Frotman stated, “Congress made clear in the Fair Debt Collection Practices Act that debt collectors must tell the truth to consumers. It also empowered consumers to act when debt collectors break the law. We will continue working to ensure that federal consumer financial protection laws are applied as Congress intended so that companies follow the law and meet their responsibilities.”

CFPB Issue Spotlight Examines Resumption of Federal Student Loan Repayments

By Eric Mogilnicki and Graves Lee, Covington & Burling LLP

On January 5, the CFPB published an issue spotlight entitled “Federal Student Loan Return to Repayment.” The issue spotlight describes the experiences of consumers who have begun repaying federal student loans following the extended repayment pause amid the COVID-19 pandemic. The Bureau observed that many borrowers who attempted to contact their servicers faced extended call hold times (at one point in late 2023, an average of seventy-three minutes), that applicants for income-driven repayment plans faced substantial processing delays, and that servicers sometimes issued inaccurate billing and disclosure statements to borrowers.

In an accompanying statement, CFPB Director Rohit Chopra noted, “If student loan borrowers are unable to successfully enroll in payment plans or obtain accurate information about their accounts, this can have a domino effect on the rest of their financial lives. Given these high stakes, the CFPB will continue to carefully watch loan servicers and work with federal and state agencies to hold accountable those that violate laws protecting borrowers.”

CFPB Issues Advisory Opinions on Background Check Reports and Credit File Disclosures

By Eric Mogilnicki and Rye Salerno, Covington & Burling LLP

On January 11, the CFPB released in tandem two advisory opinions applicable to consumer reporting agencies (“CRAs”) under the Fair Credit Reporting Act (“FCRA”). The first advisory opinion highlights the obligation of CRAs, pursuant to Section 607(b) of the FCRA, to follow reasonable procedures to assure the accuracy of the information they report. With regard to background checks, the opinion states that CRAs must have reasonable procedures in place to:

• “prevent duplicative information from being reported” so that reports “do not inaccurately suggest that a single event occurred more than once”;
• “check for any available disposition information and to ensure that such information is included” when reporting court proceedings; and
• remove arrest and conviction records once they have been expunged, sealed, or otherwise legally restricted from public access.

In addition, the opinion highlights the restrictions of Section 605(a)(5) of the FCRA on the inclusion of obsolete information in background check reports and other consumer reports.

The second advisory opinion clarifies aspects of CRAs’ obligation to disclose consumer files upon consumer request. First, the opinion explains that a consumer does not need to use specific language in their request (such as “file” or “complete file”) in order to trigger the file disclosure obligation under Section 609(a) of the FCRA—they only need to make a request and provide proper identification. Second, the opinion emphasizes that file disclosures must be “clear, accurate, and complete” so that a consumer can understand the information and identify any inaccuracies. Finally, the Bureau opines that the requirement that CRAs disclose the source of consumer information requires the reporting of not only the original source of the information (e.g., a county clerk), but also any vendors who actually provided the information.

Southern District of Florida Denies Motion to Stay CFPB Enforcement Action Pending Supreme Court Decision

By Eric Mogilnicki and Rye Salerno, Covington & Burling LLP

On January 12, the US District Court for the Southern District of Florida denied Freedom Mortgage Corporation’s motion to stay the CFPB’s enforcement action against it pending a decision by the Supreme Court in Consumer Financial Protection Bureau et al. v. Community Financial Services Association of America, Ltd. et al. This case is an appeal from the Fifth Circuit’s ruling that the funding structure of the CFPB is impermissible under the Appropriations Clause of the Constitution, and a decision is expected in the first half of 2024.

The Southern District of Florida, in denying Freedom Mortgage’s motion to stay, noted the “inherent discretion” that district courts have in determining whether to stay a case pending the resolution of related proceedings in another forum, and determined that Freedom Mortgage had not made a clear showing of hardship or inequity if the case moves forward, or that an adverse Supreme Court ruling would necessarily result in dismissal of the enforcement action. In support of allowing the action to proceed, the court pointed out that “[f]or now, the Plaintiff is a valid agency that is entitled to enforce the consumer finance laws” and “the public has a strong interest in vigorous enforcement of consumer protection laws.” 

Senate Fails to Override Veto and Nullify CFPB Small Business Lending Rule

By Eric Mogilnicki and Rye Salerno, Covington & Burling LLP

On January 10, in a 54–45 vote, the Senate failed to override President Biden’s veto of the joint Congressional resolution disapproving of the CFPB’s small business lending rule under the Congressional Review Act (if the Senate override had been successful, a corresponding House override would still be needed). The small business lending rule requires covered financial institutions to report data on credit applications by businesses with $5 million or less in gross revenue; banks and nonbank lenders are covered if they originate one hundred or more loans to such businesses annually. The rule has a phased compliance schedule, with an initial compliance date of October 1, 2024, for financial institutions that originate more than 2,500 covered loans per year. However, as previously reported, the rule is currently enjoined pending the Supreme Court’s decision in Consumer Financial Protection Bureau et al. v. Community Financial Services Association of America, Ltd. et al. 

CFPB Settles Employee Discrimination Claims

By Eric Mogilnicki and Rye Salerno, Covington & Burling LLP

On January 19, the District Court for the District of Columbia gave its final approval to the August 2023 settlement agreement reached between the CFPB and a class of eighty-five Black or Hispanic current and former employees of the CFPB. The suit accused the agency of a biased culture in which minority employees received lower performance ratings and pay, and fewer promotions. Under the settlement, the Bureau does not admit to any wrongdoing, but will pay $6 million into a settlement fund for the class members, and will provide “Programmatic Relief” for three years that is “designed to ensure Class Members are aware of their rights regarding complaints about race discrimination and retaliation.” Class counsel will receive $1.5 million in attorney fees from the settlement fund.

CFPB’s Proposed Amendments to Regulations Z and E Aim to Limit Overdraft Fees and Save Consumers Billions

By Olivia (Liv) Lawless, Pilgrim Christakis LLP

In January 2024, the CFPB proposed a new rule that would require “very large financial institutions” to comply with Regulations Z and E when charging consumers certain overdraft fees. While Regulation Z, which implements the Truth in Lending Act (TILA), currently exempts overdraft fees from its regulations pertaining to “finance charges,” the proposal aims to include such fees within that definition. The amendment would apply only to overdraft fees that exceed a financial institution’s cost of providing coverage for that fee, an amount referred to in the proposal as an “above breakeven overdraft credit.” Under the proposal, financial institutions would have a choice between calculating their own costs and losses to determine the “breakeven” amount or instead relying on a benchmark fee set by the CFPB, which is currently under advisement at either $3, $6, $7, or $14. The inclusion of overdraft fees in TILA’s governance of open-ended credit would require financial institutions to comply with disclosure obligations including the associated interest rate.

The proposal would also amend Regulation E, which implements the Electronic Fund Transfer Act (EFTA), and its “compulsory use prohibition” to prohibit financial institutions from requiring consumers to repay overdraft fees with an automatic transfer from the consumer’s account. Instead, consumers would be able to choose a method of repayment, and financial institutions could not condition the provision of overdraft credit on a consumer’s agreement to automatic debits from their checking accounts. The proposal sets out to save consumers more than $3.5 billion annually and is part of the CFPB’s overall initiative to reduce “junk fees” launched in early 2022.

Insurance Law

Will 2024 Be the Year That AI Breaches the Insurance Market?

By Lauren Ybarra, McGlinchey Stafford, PLLC

As we have seen the rise of broader use of artificial intelligence (“AI”) with the launch of ChatGPT in November 2022 and the use of other platforms to create images, text, and even legal precedence that does not exist, it raises the question, how will the insurance market respond to the use of AI?

All states have enacted laws to protect against the insurance industry unfairly discriminating against policyholders from a protected class, but only a few have introduced such laws as applicable to AI, and only one state, Colorado has passed a law to directly address AI (Colo. Rev. Stat. § 10-3-1104.9). More recently, states have utilized bulletins or circular letters to convey warnings against use of data as a pretext for or with the effect of causing discriminatory practices. The Connecticut Insurance Department issued a circular advising insurers to be sensitive to the impact of “Big Data utilized as a precursor to or as a part of algorithms, predictive models, and analytic processes” on discriminatory practices.

Colorado’s 2021 law bars insurers from using algorithms or predictive models to discriminate on the basis of “race, color, national or ethnic origin, religion, sex, sexual orientation, disability, gender identity, or gender expression.” The term algorithm is defined to mean a computational or machine learning process that informs human decision-making in insurance practices. In 2023, the Colorado Division of Insurance introduced regulation to implement the 2021 law as applicable to life insurance underwriting for unfair discriminatory outcomes (3 CCR 702-10). Pennsylvania also has introduced similar laws as applicable to health insurers.

On January 17, 2024, the New York Department of Financial Services issued a circular letter applicable to life insurers regarding the use of data, which advised that the New York DFS had the right to investigate “an insurer’s underwriting criteria, programs, algorithms, and models, including within the scope of regular market conduct examinations, and to take disciplinary action, including fines, revocation and suspension of license, and the withdrawal of product forms.” California is also at the forefront of issuing these notices: its insurance commissioner put forth a bulletin warning both insurance companies and licensed insurance entities to be aware of the impact of big data and avoid discrimination and bias, even if unintentional.

Though regulation and state-mandated guidance surrounding the use of AI is inevitable, it is currently left up to the legislature in each state. While AI will breach the insurance market through insurance companies themselves or InsurTech providers, we can expect the National Association of Insurance Commissioners (“NAIC”) will also play a vital role in helping states shape how they will regulate use of big data, algorithms, and predictive models like AI, even if used by third parties.

Intellectual Property Law

AI, the Right of Publicity and Copyright Law Face Off

By Emily Poler, Poler Legal LLC

In April 2023, Kyland Young—a finalist in season 23 of CBS’s Big Brother — filed an action against NeoCortext, Inc., which makes an app called Reface. According to the complaint, Reface is an AI-powered “deep-fake software that allows users to swap their faces with individuals they admire or desire in scenes from popular shows, movies, and other viral short-form internet media.” Users can select from a library of images and videos that includes photos of Young from his appearance on Big Brother. According to the complaint, the app’s inclusion of photos of Young violates his right of publicity, as well as the right of publicity of a class of California residents including musicians, athletes, celebrities, “and other well-known individuals” who have had their “name, voice, signature, photograph, or likeness” displayed in Reface.

NeoCortext moved to dismiss the complaint on grounds that Young’s claim was preempted by the Copyright Act and on grounds that the app’s output was sufficiently transformative that it is protected by the First Amendment. The District Court disagreed, concluding that because the modified photos included a “made with reface app” watermark, NeoCortext was using Young’s image in advertising. Therefore, the District Court found that Young’s claim was not preempted by the Copyright Act. The District Court also found that, at least at this early stage of the litigation, NeoCortext had not shown that the modified photos, which “still depict[ed] the rest of Young’s body in the setting in which he became a celebrity” were sufficient to make its use transformative as a matter of law. Reface has appealed this decision to the Ninth Circuit.

In deciding this appeal, the Ninth Circuit will have to grapple with whether the app-generated photos that include NeoCortext’s watermark are advertisements for the paid version (as Young argues) or merely reproductions of the underlying photos (as NeoCortext contends). To decide this issue, the Ninth Circuit will have to consider whether the inclusion of the watermark is enough to distinguish Young’s claim from one under the Copyright Act. This may provide useful guidance for lawyers trying to figure out whether a right of publicity claim is likely to be preempted by the Copyright Act (or not). The Court will also have to contend with whether this is an issue that can be decided on a motion to dismiss. Given that this is a putative class action, this lawsuit could be very costly for NeoCortext if it goes past the motion to dismiss stage.

In addition to presenting interesting legal issues for the Ninth Circuit, this case is a great reminder for practitioners that AI presents legal issues beyond copyright infringement and fair use, and small changes to a platform can make a difference in whether a potential plaintiff has a claim or not. Moreover, it’s an excellent prompt for companies creating AI-based platforms that consulting an experienced litigator before releasing a product can help avoid potentially costly lawsuits and years of litigation.

Labor & Employment Law

Does Your Nondisclosure Agreement Chill Would-Be SEC Whistleblowers? A Potentially $10 Million Question

By Taylor Graham, Boulette Golden & Marin L.L.P.

As part of a settlement of administrative proceedings before the Securities and Exchange Commission (SEC), a hedge fund agreed to a $10 million fine for requiring its employees to sign a nondisclosure agreement that the SEC determined chilled would-be whistleblowers through provisions designed to limit disclosure of confidential information and compel disclosure of the employee’s filings with government agencies. See In re D. E. Shaw & Co, S.E.C., Administrative Proceeding File No. 3-21775 (Sept. 29, 2023).

The SEC alleged violations of rule 17 C.F.R. § 240.21F-17, which prohibits any action “to impede an individual from communicating directly” with the SEC regarding “possible securities law violation, including enforcing, or threatening to enforce, a confidentiality agreement.” The hedge fund’s agreements included a confidential information agreement for onboarding employees that prohibited employees from disclosing confidential information to anyone outside of the hedge fund unless authorized by the hedge fund. The hedge fund’s confidential information provision included a carveout to allow disclosure “as may be required by any applicable law or by order of a court of competent jurisdiction, a regulatory or self-regulatory body, or a governmental body.” The SEC further called out provisions in the hedge fund’s agreements for departing employees, which some employees were induced to sign with conditional financial incentives, that required employee representations including that the departing employee had not filed any complaints, charges, or lawsuits or otherwise commenced any proceeding against any member of the hedge fund with any governmental agency, department, or official. The SEC also highlighted another provision in departing employee agreements that reminded departing employees that their confidential information obligations remained in full force and effect after the employee’s termination date.

Because the confidential information clauses survived beyond the employee’s employment, imposed obligations to notify the hedge fund before disclosure of confidential information, and conditioned post-employment compensation on the employee’s past and future compliance, the SEC concluded the hedge fund’s confidential information policies “raise[d] impediments” to employees from whistleblowing, doing so confidentially without notice to the hedge fund, and without incurring a financial penalty. The SEC also focused on the fact that the types of employees required to sign the offending agreements were managers or professional analysts who would have greater access to information of interest to the SEC in an investigation.

This settlement and administrative order has not been reviewed by a court.