Page 50 – Business Law Today from ABA

The U.S. Labor Union Spike

Posted on July 21, 2022 by Sampada Kapoor - Uncategorized

No industry seems untouched by the recent rise of union popularity. Recent examples include outdoor goods seller REI;^[1] the New York Times tech workers;^[2] Alphabet (parent company of Google);^[3] and more famously, retailer supergiant Amazon^[4] and coffee chain Starbucks.^[5] Several factors such as the current labor shortage, the Covid-19 pandemic, and high-profile union litigation gaining traction on social media have played crucial roles by increasing worker autonomy and contributing to one of the largest national labor movements seen in the U.S. in decades. While union membership has generally declined annually in the U.S. since 1983,^[6] labor action has not seen the same decline. Between October 2021 and March of 2022, union representation petitions filed at the National Labor Relations Board (“NLRB”) increased 57% from the same period in 2020–2021.^[7] Unique factors facing workers in recent years have caused a newfound rise of labor unions, a stark contrast to trends in recent decades.

According to data from the Bureau of Labor Statistics, a record 4.5 million U.S. workers left their jobs in November 2021,^[8] and more than 4 million workers left their jobs in every month from July 2021 through November 2021.^[9] Known as the “Great Resignation,” the ongoing event of record-breaking numbers of workers leaving their jobs has given workers the edge by creating a shortage in the labor market. In 2019, there was a high of approximately 7.5 million job openings in the United States; in 2021, there was a high of approximately 11.4 million.^[10] Possible causes of the labor shortage include wage stagnation, job dissatisfaction, burnout, and safety concerns related to the Covid-19 pandemic.^[11] The Covid-19 pandemic has driven workers to demand more from their employers—namely, better pay and better working conditions. According to Bloomberg Law’s database of work stoppages, in 2021, the final strike total reached 169, more than any year since 2012.^[12] Generally, periods of worker shortages give union members considerably more leverage as workers become harder to replace.^[13]

The social impact of the pandemic also significantly contributed to the recent spike in union involvement. In addition to accelerating the larger ongoing employee movement, the pandemic has brought work-life balance to the forefront. Further, according to a Gallup poll conducted in August 2021, 68% of Americans now approve of labor unions.^[14] Only 48% of Americans approved of labor unions in 2009, but the number has steadily increased since 2016 to reach the current highest reading measured since 1965.^[15] A recent CNBC survey found that a majority (59%) of U.S. workers across all industries indicated support for increased unionization in their workplaces.^[16] The recent uptick in labor union approval may at least partially be due to the rise of media coverage of unions. High-profile union victories that were widely reported on and broadcast on social media have assisted in increasing public awareness of the labor union movement. The first union win by employees at a Starbucks in Buffalo, New York, in December 2021 resulted in workers at 140 Starbucks in 27 states petitioning for unionization votes as of March, and today, well over 100 locations have unionized.^[17] Additionally, recently Amazon warehouse workers successfully voted to unionize an Amazon warehouse in Staten Island, New York City, NY.^[18] The historic vote came after workers at the the largest Amazon facility in Staten Island, which Amazon calls JFK8, formed an independent union called the Amazon Labor Union, which, despite the lack of ties to organized labor, succeeded in having its workers vote in favor of unionizing by a margin of almost 11 percent.^[19] Amazon is the second-largest private employer in the U.S. after Wal-Mart.^[20]

In addition to growing economic power and recent social support, the labor movement also may also flourish due to a newfound political support through the Biden Administration. For example, under the Biden Administration, in an advice memorandum released in May 2022, General Counsel of the NLRB Jennifer Abruzzo indicated that she would advise in future cases to broaden union access to public spaces.^[21] Notably, in a brief filed in April 2022 in Cemex Construction Materials Pacific, LLC, No. 28-CA-230115, General Counsel Abruzzo also advocated to reinstate the card majority rule set forth previously in Joy Silk Mills, 85 NLRB 1263 (1949), which would in most cases require employers to immediately recognize union status through the card majority rule rather than a drawn-out election.^[22]

Under the NLRB’s current standard that has been in place since it abandoned the Joy Silk standard in 1969, an employer presented with signed authorization cards indicating a union’s majority status is not required to recognize the union’s claim.^[23] Even though employers are free to recognize a union through signed authorization cards and without an election, employers frequently reject a union’s demand for recognition and instead insist on secret ballot elections.^[24] The elections also benefit employers by giving them the opportunity to lobby against unionization, and time for the union effort to lose momentum. Under Joy Silk, by contrast, in order to hold an election, an employer was required to establish a “good faith doubt” regarding the validity of the majority status; otherwise, the employer would be required to immediately recognize the union. Unions have long advocated for a card majority rule, and there is significant discussion of the impact reinstating Joy Silk would have on the prevalence of secret ballot elections.^[25] While some experts note that the reinstatement of Joy Silk would be unlikely to trigger the replacement of union elections altogether, others believe that, if sustained, the reinstatement may likely cause an increase in union organizing campaigns across the country, as unions will be able to take advantage of the newer, easier standard in recognizing union membership. ^[26]

Conclusion

While recent union wins fuel optimism for some labor activists, the Bureau of Labor Statistics reported in January that in 2021, just 10.3% of U.S. workers were in unions and just 6.1% in the private sector.^[27] Economists predict that despite the recent spike, overall, labor unions are still on the decline. One of the largest hurdles for unions is the decades of anti-union policy established in the United States.^[28] As noted above, unions need to win a highly contested election in order to have an opportunity for union representation. However, it is possible that the momentum of labor organizing continues in a significant way. A politically friendly climate, combined with skyrocketing employer profits, a tight labor market, general worker dissatisfaction, and the growth of social media attention directed towards labor organizing, has created an interesting opportunity for unions to gain lost ground from the last several decades of decline.

Why In-House Corporate Counsel Should Hire a Board-Certified Lawyer

Posted on July 20, 2022 by Steven B. Lesser - Uncategorized

Corporate counsel is often tasked with hiring outside counsel to handle important matters for the company. Finding highly specialized and talented lawyers to match up to the issues in a given case, on short notice, can be a challenge, especially when the corporation’s “go-to counsel” may not have the level of expertise required for a given matter. In narrowing down choices, corporate counsel should consider hiring a board-certified lawyer who has already been vetted for expertise and professionalism in a specialty area.

Board certification is administered by eight national private organizations with eighteen certification programs accredited by the American Bar Association. These private certification programs include specialty areas in bankruptcy, criminal trial advocacy, patent litigation, and complex litigation. Many state bar associations also administer board certification programs. For example, Florida has the largest number of certification specialty areas, at 27, which range from marital and family law to criminal law, construction, real estate, and workers’ compensation. Texas, California, North Carolina, and other states also have robust programs. There are approximately 28,000 lawyers in the United States who are board-certified specialists.

Selecting a board-certified lawyer provides an assurance of the lawyer’s expertise. Generally, all certifying programs require a lawyer to have practiced with substantial involvement in a specialty area for at least five years and to pass a rigorous examination testing their knowledge of the law in the specialty area. A board-certified lawyer must also be vetted by their peers for professionalism and ethics through a confidential peer review process. In addition, most candidates must satisfy a continuing education requirement in a designated specialty area. Typically, board-certified lawyers must apply to be recertified every five years and through that process, must demonstrate compliance with all board certification requirements.

Board-certified lawyers pride themselves on being up-to-date on current developments and legislation that impacts their legal specialties. For example, with constantly evolving business technologies and systems, lawyers who are board certified in Privacy Law by the International Association of Privacy Professionals (IAPP) are on top of emerging privacy legislation on state and global levels. In a legal landscape where, fewer cases are actually tried to verdict, lawyers board certified in Complex Litigation by the National Board of Trial Advocacy (NBTA) have, at a minimum, actively participated in one hundred contested matters, and NBTA lawyers board certified in Criminal Law have extensive jury trial experience and significant experience dealing with expert witnesses. Lawyers board certified in Business Bankruptcy Law by the American Board of Certification (ABC) must participate in at least thirty adversary proceedings or contested matters across a range of business areas. Thus, board-certified lawyers have focused legal acumen that is demonstrated and tested on a regular basis.

Selecting a board-certified lawyer has appeal for a number of other reasons beyond proven competency. First, board-certified lawyers have extensive experience in their jurisdiction and are familiar with local practices, the jury pool, and judges. Second, because these lawyers practice in a specific specialty area, they tend to know their colleagues on the opposing side. This type of knowledge and familiarity can be of assistance in amicably resolving disputes that could otherwise wind up in drawn-out, expensive litigation. Third, as board-certified specialists, these lawyers understand how to effectively manage the cost of litigation and can provide accurate budgets for use by in-house counsel when advising management. Finally, when faced with “bet the company” litigation, qualifications matter, and in-house counsel can sleep better at night knowing that board-certified counsel is capably acting in the best interest of the company.

At the very least, corporate counsel can use the board certification designation to narrow down the list of qualified candidates for consideration. On this point, corporate counsel should also consider consulting the American Bar Association Standing Committee on Specialization’s website for more information on board certification, specialty areas, and links to the national private organizations with ABA-accredited certification programs and states that run their own certification programs throughout the country. The ABA has been involved with board certification of lawyers for almost thirty years, and ABA accreditation is widely recognized as a valuable seal of approval for organizations conferring board certification. Additionally, the ABA has worked with states on incorporating ABA Model Rule 7.2 (formerly 7.4) into state ethics codes, and many states permit certified specialists to publicly disclose certification without any limitation if they are certified by a program that is accredited by the ABA.

Steven B. Lesser is a Shareholder at Becker & Poliakoff and Chair of the Firm’s Construction Law & Litigation Practice. Mr. Lesser is Florida Bar Board Certified in Construction Law and Chair of the American Bar Association Standing Committee on Specialization.

Let ’Em Out! ROSCA and Changes to California’s Auto-Renewal Law

Posted on July 19, 2022 by Frank Conlon - Uncategorized

Auto-renewing arrangements are more and more ubiquitous, from TV channel subscriptions to meal-kit delivery plans—and the regulators are interested. Late last year, the Federal Trade Commission (FTC) and California took actions with respect to auto-renewing subscriptions. The FTC issued a policy statement in October 2021, and California’s governor signed into law amendments to the state’s Automatic Renewal Law (ARL) that same month. California’s ARL amendments took effect in July 2022, so now’s a good time to survey where things stand and what’s to come for businesses offering auto-renewing products or services to California consumers.

What are auto-renewing products or services?

Sometimes called “negative options,” auto-renewing products and services refer broadly to a category of transactions in which sellers or providers interpret a consumer’s failure to take an affirmative step to either reject or cancel an offer as assent to be charged for products or services.

What is required by law now?

There are at least two federal statutes implicated by auto-renewing products and services. The first is the Unordered Merchandise Act (UMA), which provides that “the mailing of unordered merchandise … constitutes an unfair method of competition and an unfair trade practice” violative of the FTC Act. Under the UMA, recipients of unordered merchandise may treat it as an unconditional gift and may use or dispose of it as they see fit. Recipients also may simply refuse delivery. Because the UMA applies only to mailed “merchandise,” courts have interpreted its coverage to reach “goods, wares,” or “any tangible item held out for sale,” but not “intangible” items such as memberships or subscriptions.

The second federal statute is the Restore Online Shoppers Confidence Act (ROSCA), which applies to “negative option” transactions, defined as “an offer or agreement to sell or provide any goods or services, a provision under which the customer’s silence or failure to take an affirmative action to reject goods or services or to cancel the agreement is interpreted by the seller as acceptance of the offer.” Under ROSCA, if a business charges or attempts to charge any consumer for goods or services online through a negative option, it must: (1) clearly and conspicuously disclose the material terms of the transaction before obtaining billing information; (2) obtain the consumer’s express informed consent before charging the consumer; and (3) provide “simple mechanisms” for a consumer to stop recurring charges.

Although different from ROSCA, California’s ARL imposes similarly rigorous information, notice, and consent requirements on businesses that make auto-renewal or continuous service offers to California consumers.

If a business is using an auto-renewal or continuous service plan that the consumer must cancel to stop automatic charges, the business must:

present the offer terms in a “clear and conspicuous” manner;
obtain consumer’s affirmative consent before charging his or her credit card; and
provide an acknowledgment including auto-renewal offer terms, cancellation policy, and details on how to cancel, including a toll-free phone number, an email or postal address, or other “easy-to-use” means for cancellation.

Additionally, the ARL requires that if a material change in auto-renewal terms occurs, the business must “provide the consumer with a clear and conspicuous notice of the material change and provide information regarding how to cancel in a manner that is capable of being retained by the consumer.”

Like the federal UMA, California’s ARL provides that if a business sends merchandise or products to a consumer under an automatic renewal of a purchase or continuous service agreement without first obtaining the consumer’s affirmative consent, the merchandise or products are deemed unconditional gifts to the consumer, and the business must bear their entire cost.

What changed?

In October 2021, the FTC issued an enforcement policy statement regarding “negative option marketing,” and the California governor signed into law amendments to the state’s ARL.

While the FTC’s policy statement neither constitutes a new rule nor binds the agency or businesses, it does signal the FTC’s intention to use its existing tools, including ROSCA and the Negative Option Rule (16 CFR Part 425), to ramp up enforcement efforts against companies using negative options to deceive consumers. The policy statement provides businesses guidance—but mostly reminders—about what is expected, including “clear and conspicuous” disclosure of offer terms; “express” and “informed” consumer consent, which the FTC says is not satisfied with a “pre-checked box”; and a simple and easy way to cancel negative option agreements. The policy statement itself does not use the term “dark patterns”—a fashionable term with a somewhat indefinite definition, which seems to generally cover user-interface designs or software that coax consumers to take some action they otherwise would not have. However, the Director of the FTC’s Bureau of Consumer Protection specifically put on notice businesses that “deploy dark patterns and other dirty tricks” to “trap” consumers into subscription services.

Separately, California’s governor signed into law Assembly Bill No. 390, which amended the state’s existing ARL. Starting July 1, 2022, the amendments’ effective date, businesses that enroll California consumers into auto-renewing or continuous service subscriptions must not only continue to comply with the current ARL requirements but also begin providing additional notices and new cancellation options to customers.

Specifically, the ARL amendments stipulate that when a business enrolls a customer in a subscription with a free trial or gift, or an initial discount period that is longer than thirty-one days, the business must provide a written or electronic notice three to twenty-one days before the expiration of the applicable period. For subscriptions with an initial term of one year or longer, businesses will have to give written or electronic notice to California consumers in a retainable form fifteen to forty-five days before the renewal date. In both cases, the notice must provide in a clear and conspicuous manner: that the subscription term will automatically renew unless cancelled by the consumer; the length and any additional terms of the renewal period; one or more methods by which the consumer may cancel prior to renewal; and the business’s contact information. If a business otherwise would be subject to both notification requirements because it offers a plan with a free trial period longer than thirty-one days and an initial term of one year or more, it must comply with only the latter notice requirement—delivering a reminder notice fifteen to forty-five days before the renewal date.

In addition, the ARL amendments provide for “immediate” cancellation online. Under the current ARL requirements, if a California consumer accepts an automatic renewal offer online, the business must allow the consumer to cancel the offer exclusively online. The amendments are more prescriptive with respect to online auto-renewals, requiring that the consumer not only be able to terminate the offer “exclusively online,” but be able to do so “at will, and without engaging any further steps that obstruct or delay the consumer’s ability to terminate the automatic renewal or continuous service immediately.” The amendments further prescribe that the online termination method must be in the form of a “prominently located direct link or button” located within a customer account or profile, device or user settings, or an “immediately accessible termination email formatted and provided by the business that a consumer can send to the business without additional information.”

What now?

Now is probably a good time for businesses offering auto-renewal services or subscriptions to re-evaluate their related policies and procedures to ensure that they comply with ROSCA, California’s new ARL requirements, and other related state laws. And in light of the new ARL requirements, businesses might give special scrutiny to any multi-step consumer flows they require consumers to complete—such as taking customer satisfaction surveys, reviewing retention offers, or taking any other additional actions—before allowing them to cancel subscriptions or services. Neither plaintiffs’ bar nor regulators have been shy about enforcing the current ARL, which has been the source of numerous enforcement actions and multimillion-dollar settlements. There is no reason to think that will slow.

Student Loans: The Future of Collections and Repayment

Posted on July 18, 2022 by Peter Maskow - Uncategorized

Many Americans are faced with repayment of outsized student loan debts. And, as each new class matriculates to college, they too join the ranks of those faced with the prospect of financing their education and repaying the amount borrowed over the course of their careers. With limited options for forgiveness and payment relief, many will struggle to repay for their college over a period of decades.

On the other hand, creditors and loan servicers face anxiety associated with collecting outstanding balances. They are tasked with complying with the Consumer Financial Protection Bureau’s new Debt Collection Rule and with navigating a regulatory environment where state attorneys general demonstrate an increased willingness to hold them accountable under state laws designed to curb deceptive acts and practices.

The Growing Problem

Many students now use student loans to pay for their college education. While these programs provide resources for students to achieve their goals of attending college, debt-saddled graduates struggle to make ends meet as they begin their careers. Increasing enrollment and a cost of education that well outpaces the growth of median household incomes means that these financial struggles are going from endemic to pandemic. These factors, further magnified by inflationary concerns, are fueling a public dialogue about how the nation is to confront this most rapidly growing sector of consumer debt.

Student loans can generally be of one of two types: private loans and federally-backed loans. Relief options for private loans, if any exist, are limited to those the loan servicer is willing to offer and vary by lender. Federal loans, on the other hand, present some unique characteristics. First, they come with a suite of repayment options, including include income-driven or income-based repayment options. Simply put, these programs derive the amount of the monthly payment on a loan from a borrower’s income (recertified annually) rather than on a traditional amortization schedule. Some of these programs offer loan forgiveness after completion of a set number of payments regardless of the amount of the unpaid balance (although a lingering problem remains in that a 1099 form may be issued for forgiven amounts, resulting an unwieldy amount of taxable income being reported for a borrower). One drawback to federal loans, however, is that the interest rate is set from inception and there is little ability to lower it absent refinancing into a private student loan—thereby losing the relief options available in the federal loan.

Another key feature of student loans is their (lack of) dischargeability. While federal loans do discharge upon proof of death, private loans do not. Moreover, neither private nor federal student loans are regularly dischargeable in bankruptcy. Indeed, 11 U.S.C. § 523(a)(8) provides only a limited exception for circumstances where lack of a discharge would impose an “undue hardship.” Courts have grappled with how to frame an “undue hardship.” One commonly used test, the Brunner test, looks to factors such as (1) a debtor’s ability to maintain a “minimal” standard of living if forced to repay the loan, (2) circumstances indicating that a state of affairs will continue for the life of the loans, and (3) a good faith effort to repay the loans.

More recently, courts have criticized the Brunner test as overly harsh and instead offered a more debtor-friendly analysis in considering whether failure to discharge student loans would cause an undue hardship. While borrowers may rejoice at recent overtures by courts expressing willingness to discharge loans in bankruptcy, it only compounds creditors’ frustrations in trying to collect amounts due.

Recent Relief Efforts

As part of the COVID-19 pandemic relief, payments and interest on federal student loans have been paused since March 2020. Interestingly, each passing month counts toward the number of payments to be made before loan forgiveness for those on Income Driven Repayment plans. Private student loans, however, are not affected by the pause, and payments under those programs continue to be required.

Another commonly discussed student loan relief program is the Public Service Loan Forgiveness (PSLF) program. Similar to income-driven plans, PSLF provides the opportunity for borrowers to obtain forgiveness for the balance of their federal loans after making a certain number of payments. PSLF is unique, however, in that the payment period is shorter, the forgiveness is excepted from being taxable income, and qualification is based upon employment in a public service role. And, in October 2021, the US Department of Education has provided the opportunity for borrowers to receive credit for past periods of repayment that would not have otherwise been counted toward loan forgiveness under PSLF.

Finally, an additional significant wave of student loan relief exists for borrowers who attended schools which subsequently closed. The recent relief efforts for these borrowers extends beyond students who attended classes within 120 days of closure who already had been eligible for discharge and is related to the deception on the part of the closed institutions.

Collection Issues Abound

Confronted with new loan forgiveness programs, changes in attitudes toward discharge, and political uncertainty about broader relief efforts, student loan lenders and servicers face an increasingly difficult climate. In collecting loans, servicers also must be careful to monitor new regulations, including the CFPB’s new Debt Collection Rule. Effective in November 2021, the Debt Collection Rule was created to implement the Fair Debt Collection Practices Act (FDCPA), focusing on debt collection communications, harassment or abuse by debt collectors, false or misleading representations, and unfair practices.

State attorneys general also have shown a recent inclination to police improper actions by student loan servicers and to levy penalties for such actions. For example, 39 state attorneys general announced a $1.85 Billion Settlement with student loan servicer Navient in January 2022 for practices that steered borrowers into forbearance rather than toward available payment relief programs like income-driven repayment. This settlement and the implementation of the FDCPA through the Debt Collection Rule should serve as a weathervane indicating a change on both the federal and state levels, and must be carefully monitored.

This article is based on a CLE program that took place during the ABA Business Law Section’s 2022 Hybrid Spring Meeting. To learn more about this topic, view the program as on-demand CLE, free for members.

The Rule of Law and the Importance of Disabled Voices in the Legal Profession

Posted on July 14, 2022 by Jason Goitia - Uncategorized

Speech bubbles, blank or with ellipses, in white, indigo, pale yellow, pale green, and pale blue, represent diverse voices.

“The Rule of Law and the Importance of Disabled Voices in the Legal Profession” is the tenth article in a series on intersections between business law and the rule of law, and their importance for business lawyers, created by the American Bar Association Business Law Section’s Rule of Law Working Group. Read more articles in the series.

The Law involves a great amount of problem-solving.^[1] “The Rule of Law comprises a number of principles of a formal and procedural character”^{^[2]} that guide this problem-solving process. These “formal principles concern the generality, clarity, publicity, stability, and prospectivity of the norms that govern a society.”^{^[3]} The Rule of Law, therefore, is essentially a framework for problem-solving that works to ensure more stable, predictable, and fair rules. However, stable, predictable, and fair—for whom?

There is universal agreement that the principle of equality before the law is a key component of the Rule of Law framework. Questions and conflicts abound, however, about what equality means and how it is to be achieved. Most people know that advancing the rule of law is a part of the American Bar Association’s mission. However, not many lawyers fully understand how (and even whether) including diverse voices within the legal profession advances the Rule of Law. This article gathers some perspective on the importance of empowering lawyers with disabilities, collected from the leadership of the ABA Business Law Section. It focuses on why and how including diverse voices in the legal profession, especially voices of people with disabilities, advances the rule of law.

Juan M. Sempertegui is a former chair of the BLS Lawyers of Color Subcommittee and a former president of the Hispanic Bar Association of the District of Columbia. When speaking of the importance of representation of people with disabilities within the legal profession, Mr. Sempertegui affirms that “so much about a lawyer’s job is to solve problems.” He notes that “how you solve those problems is based on your perspective towards the issues at hand. Someone with a disability, for example, has a new perspective; they look at issues and products in a different way than someone without a disability.” Moreover, Mr. Sempertegui has found that the differences in perspective held by individuals with disabilities grant them a unique problem-solving ability that is of great importance to the legal field.

Anat Maytal, a former chair of the Lawyers with Disabilities Subcommittee, views such inclusivity as benefiting not only clients, by creating a wider range of perspectives, but also fellow attorneys. Primarily she affirms that the experiences of people with disabilities contribute different, and necessary voices in the law. People who face disabilities, whether they have experienced them from birth or a young age, or have had to come to terms with them later in life, “[w]e have been exposed to many more situations where we have to deal with obstacles, where we have to advocate for ourselves, and find new solutions.” As a result, “one thing we bring to the table is that we face so many challenges and overcome them by figuring out what kind of workarounds we can get. We persevere.”

Ms. Maytal points out that in the legal field, things are not always going to go as planned. The opposing counsel is going to come at you with things you may not have anticipated, and you need to be able to think on your feet; you need to know that the normal way of doing things isn’t going to work. “For the disabled community, the regular way has never worked, so we always had to think, what’s another way that we can make this happen? You need that voice.” Furthermore, Ms. Maytal describes personal anecdotes where accommodations put in place by the disabled community also benefit able-bodied lawyers. For example one accommodation she requests in court is to have real-time captioning, or transcription of what is being said in real time. She explains that “the accommodations that we are talking about now, a lot of people who are not disabled appreciate for themselves. People who are able-bodied tell me ‘thank you’” for making them aware of those accommodations, she says, and sometimes even request it for themselves.

Ms. Maytal continues, “The pandemic has really done a lot of things for people who practice law and have disabilities, with getting people accommodations they need. If you have a mobility issue, you would still be required to come into the office… if you had a hearing disability, like me, you still had to shift to Zoom. At first, I thought it would be challenging, and it is, but I learned very quickly that I actually excel on this kind of platform where I can see everyone’s faces. On Zoom only one person can talk at a time. So, I am less likely to miss what is being said. I use Bluetooth, so I am able to hear everything directly through my hearing aid. Everything that I would want in a situation where I’m talking to a lot of people at once is right there, on Zoom, for me,” enabling a more even playing field.

Patrick T. Clendenen, of Clendenen & Shea, LLC, recognizes the importance of representation of the voices of people with disabilities within the legal profession, particularly through his work as a former BLS Chair. He notes that “the most poignant experiences that I have had around my efforts with Diversity, Equity, and Inclusion have been through my leadership in the ABA Business Law Section and seeing young lawyers—who have varying experiences—start out as fellows and blossom into full-blown Business Law Section leaders.” When speaking of the importance of Diversity, Equity, and Inclusion, he remarks, “Diversity should be viewed in the broadest possible perspective. Diversity builds its own community organically—you see your own work environment more broadly and work that new perspective into the way your clients see the world. It is important for legal service organizations to reflect the experiences and perspectives of the people that they serve. Diversity, particularly with respect to disability, builds innovation and creativity. A lot of people with disabilities have to think in different ways to solve problems including basic problems that most people don’t have to think about. Whether it’s seeing, hearing, testing their blood sugar, or getting around from place to place, so many aspects of daily life require building resilience. The resilience that different voices build within an organization gives an organization better results. Diversity brings more perspective to the table and increases an organization’s ability to solve problems because people come at things in different ways as they have encountered different things in their day-to-day lives, which is extremely valuable to legal service organizations.”

Given the strong connection between diverse voices within the legal profession and the ABA’s mission of advancing the Rule of Law, the BLS DEI Committee has worked to push the conversation on what a more inclusive legal profession might look like. The mission of the BLS’s DEI Committee is to lead the BLS’s efforts to recruit and retain (i) lawyers of color, (ii) women lawyers, (iii) lawyers with disabilities, (iv) gay, lesbian, bisexual, and transgender lawyers, (v) young lawyers, and (vi) law students (“Diverse Lawyers”) for active involvement in the work and leadership of the BLS. This approach is accomplished through four subcommittees: (1) Lawyers of Color Involvement, (2) Lawyers with Disabilities Involvement, (3) Lesbian, Gay, Bisexual and Transgender Involvement, and (4) Women’s Business Law Network.

The four subcommittees listed above meet jointly during the BLS meetings to demonstrate to the legal profession the benefit of an inclusive approach and the common experiences shared by business lawyers with different experiences. The shared approach is enhanced through joint meetings that show the legal profession that characterizing a person using one narrow characteristic fails to capture the entire person. Through these and other activities, BLS actively works to unlock talent and perspectives that value active involvement of diverse lawyers in the work and leadership of the BLS. Outreach is accomplished by insisting on a diversity of voices and viewpoints, including from first-generation lawyers, first-generation college students, lawyers of color, lawyers with disabilities, women lawyers, LGBTQ+ lawyers, and other diverse attorneys in BLS work and leadership. The key effort is also to go beyond these labels and to recognize that we all exist in and across our differences—and this tapestry of difference is what creates a vibrant, engaged, responsive, and stable legal community.

Finally, while there is much work to be done with respect to making the legal profession a community capable of holding and valuing diverse voices, this work will be left unfinished if law schools—the training grounds for our future colleagues—are not prepared to change how they see (and what they expect from) their entering first-year law students. The Paper Chase stereotype of law school as a cutthroat rat race where only the fittest survive continues to impact how law schools are run, how law students are trained, and what they are told about what this profession expects from them. The pipeline of talent that builds the legal profession, therefore continues to be at risk—when a “Paper Chase culture” lifts only certain kinds of voices.

It is only years after law school that many of us start to learn that the legal profession can also be a space of friendship, cooperation, mutual accommodation, and courtesy. Today, these values are most clearly reflected in those arenas where the legal profession provides its most healthful and meaningful contributions. So, why are we still training our lawyers on a model that we know will no longer serve them?

People with disabilities have had the right to a free and equal education since 1975, with the passing of the Education for All Handicapped Children Act. “The law opened the doors for those students to receive accommodations throughout their education.”^{^[4]} In 1990, Congress passed the Americans with Disabilities Act that prohibits discrimination against people with disabilities in all areas of public life, providing people with disabilities the right to accommodations in school and work settings such as legal offices. However, the advancements in the law and the rights they create have yet to be fully realized, as disabled lawyers struggle, from the first day of law school onwards, for a space in the legal profession.

A 2019 article in the Yale Daily News provides several examples of how by design, even the most thoughtful law school activities can leave out disabled law students. Sarah Huttenlocher, a 2021 graduate, describes that challenge she faced with the no laptop policy in first-year lectures because her attention deficit hyperactivity disorder and Tourette’s syndrome, in addition to Ehlers-Danlos syndrome, made it difficult for her to sit still and focus for hours in large lecture classes: “When her attention begins to slip, it makes her body feel ‘intense,’ which causes her to ‘tic,’ or produce compulsive motions, such as nodding her head or moving her shoulders. When that happens in class, she tries to make the tic inconspicuous, but she fears other students will notice.” Her ability to focus in her first-year classes might have been improved if she could play a simple computer game, which in the past had “relieved some of her hyperactive impulses in other classroom settings.”^{^[5]}

The article recognizes that “[s]tudents with mental illness in particular face discrimination for their disability and might be afraid to disclose it,” and the traditional approach to legal education is not suited to affording discreet accommodations. While professors “are not supposed to know which students receive testing accommodations for what disabilities…they might need to know a student’s disability if a reasonable accommodation is required, such as refraining from randomly calling on the student during class.”^{^[6]} It should come as no surprise that the classic law school right of passage, the cold call, does not necessarily bring the best out of the brightest, as it might pose difficulties for students who have trouble focusing because of an anxiety disorder or a learning disability. The common answer that law schools provide in persisting with these methods is that they are preparing their students for the real world, for offices, courtrooms, and other settings that will not accommodate them. And this is a hard argument to defeat.

Ultimately, law schools are designed to ensure that the students who graduate find suitable employment—and business lawyers and their firms are the most prominent, powerful, and aspirational employers for most law schools. These same groups also hold considerable influences over both the bench and the bar. By changing the expectations within the profession of the profile of a “successful” law student, by valuing diverse voices and rewarding the kind of creativity and perseverance it takes to make it through an institution that was designed against you—by helping to build a professional environment that celebrates and champions difference, the business law community can have a significant impact on the texture of the legal profession and the structure of legal education, for years to come.

In so doing, they also uphold the rule of law because ensuring a variety of voices within the profession bolsters the necessary work of achieving—for individuals, firms and for the profession at large—the highest quality framework for legal problem-solving.

Thanks to Sophia Stoute for her support in conducting interviews and for research support. ↑
Jeremy Waldron, “Rule of Law” Stanford Dictionary of Philosophy, available at https://plato.stanford.edu/entries/rule-of-law/ ↑
Id. ↑
Sara Tabin, “Thinking Differently,” Yale Daily News, May 19, 2019 https://yaledailynews.com/blog/2019/05/19/thinking-differently/ ↑
Id. ↑
Id. ↑

Raincoat or Slicker Suit? An MBCA Director Shield Keeps Board Members Dry in a Going Private Merger

Posted on July 13, 2022 by Matthew G. Doré - Uncategorized

Although Elon Musk’s offer to acquire Twitter is still garnering headlines, another “going private” development also merits attention: Meade v. Christie,^[1] an Iowa Supreme Court decision dismissing shareholder class action claims against directors who approved a going private merger. The Meade dismissal was based on a director liability shield patterned on the Model Business Corporation Act (“MBCA”) template. As interpreted and applied in Meade, the MBCA shield is more protective than the comparable Delaware provision. Equally important, Meade answers procedural questions that aren’t fully resolved by the MBCA shield text, illustrating key pleading requirements for corporate litigants when director shield defenses apply.

The MBCA Director Liability Shield

The Iowa director shield statute at issue in Meade, sometimes also called a “director raincoat,” is patterned on MBCA Section 2.02(b)(4), which authorizes corporations to include in their articles of incorporation:

[a] provision eliminating or limiting the liability of a director to the corporation or its shareholders for money damages for any action taken, or any failure to take action, as a director, except liability for any of the following: (i) the amount of a financial benefit received by a director to which the director is not entitled; (ii) an intentional infliction of harm on the corporation or the shareholders; (iii); a violation of section 8.32 [a provision limiting distributions to shareholders when the corporation would become insolvent as a result]; or (iv) an intentional violation of criminal law.^[2]

These or similar shield laws, in effect in nearly every state, are designed to allow corporate directors to take business risks without worrying about negligence lawsuits. Directors are poor risk-bearers, the argument goes; their role is to manage the corporation, not to insure against losses.

Exceptions from Exculpation, Including “Intentional Infliction of Harm”

Although raincoat provisions protect directors from damage claims for ordinary “due care” violations, listed exculpation exceptions in shield laws prevent corporations from sheltering directors from damage exposure for more serious misconduct. And the Iowa director liability shield, like its MBCA counterpart in effect in at least 20 states, forbids exculpation for claims based on “intentional infliction of harm on the corporation or the shareholders.”^[3] A key holding in Meade is that this exception does not encompass claims against directors for “conscious disregard” or “intentional dereliction” of duty, an issue no appellate court in Iowa—and no reported opinion from any state that has adopted the MBCA director liability shield—had previously considered.

“Conscious Disregard” and “Intentional Dereliction of Duty” Distinguished

To put the interpretative issue in context, Delaware’s shield law forbids exculpation of directors for “acts or omissions not in good faith or which involve intentional misconduct.”^[4] In 2006, the Delaware Supreme Court, construing the “not in good faith” portion of this exclusion in In re Walt Disney Co. Derivative Litigation, stated that non-exculpable acts include both “conduct motivated by an actual intent to do harm” (subjective bad faith) as well as lesser forms of bad faith, like a director’s “conscious disregard for … responsibilities” or “intentional dereliction of duty.”^[5]

The distinctions drawn in Disney proved critical to the Iowa Supreme Court’s interpretation of the “intentional infliction of harm” shield exclusion in Meade. Reversing the trial court ruling that the Iowa shield law excluded claims for “conscious disregard” or “intentional dereliction” of duty, the Iowa Supreme Court noted: “In contrast to Delaware’s statute, Iowa’s director shield statute includes no exception enabling liability for ‘acts not in good faith.’”^[6] And as the court recognized, it is the “not in good faith” exclusion that forms the statutory predicate for the “conscious disregard” and “intentional dereliction of duty” shield exceptions Disney and other Delaware decisions have recognized.

The Meade court also found support in the MBCA’s Official Comments discussing the “intentional infliction of harm” standard, which the court quoted:

The use of the word ‘intentional,’ rather than a less precise term such as ‘knowing,’ is meant to refer to the specific intent to perform, or fail to perform, the acts with actual knowledge that the director’s action, or failure to act, will cause harm … .^[7]

Applying this standard to the alleged director misconduct in Meade, the Iowa Supreme Court concluded that the allegations in Meade’s petition were “insufficient”:

The bulk of the allegations … recite failures to perform duties or incompetent performance, none of which suffices. … The statute, in short, requires a plaintiff to show a director’s specific intent to harm the corporation or its shareholders, as opposed to recklessness or dereliction in performing (or failing to perform) their duties.^[8]

Policy Justifications for Meade’s Interpretation

In this Author’s view, the Iowa Supreme Court properly recognized that the intent standard contemplated by the MBCA’s “intentional infliction of harm” exception is more protective of directors than Delaware’s “not in good faith” standard. The latter, like corporate and securities law scienter standards generally, can be satisfied by a showing of recklessness or conscious disregard on a director’s part.^[9] The MBCA drafters, however, crafted the statute’s director raincoat in Section 2.02(b)(4) with the Delaware shield law as an obvious model but omitted the “not in good faith” exception and a similarly broad Delaware exclusion for director “duty of loyalty” violations. As one commentator has explained, the apparent concern was that creative litigants could easily re-cast claims based on honest errors in director oversight or decision-making (appropriately exculpable duty of care claims) as breaches of open-ended duties like good faith or loyalty.^[10]

And in MBCA jurisdictions, there is good reason to draw exculpation lines precisely. To the extent Delaware shield exceptions are vague or ambiguous, a constant stream of corporate litigation in chancery and appellate courts will inevitably clarify the contours of director exculpation. Outside of Delaware, however, few director liability claims are litigated, and even fewer reach appellate courts. If director exculpation is to achieve its intended purpose in these jurisdictions—to provide flexibility for director decisions without unreasonable liability risks—clear lines are needed.

Critically, director exculpation does not remove director decisions from judicial scrutiny in going private merger litigation. Such cases also typically include claims against controlling shareholders for failure to pay “fair value” for the public share stake. Under Delaware’s MFW decision, courts review the merger terms with business judgment deference, but only if disinterested and independent directors properly approved the transaction and provided appropriate disclosure when obtaining disinterested shareholder approval.^[11] In MBCA jurisdictions, Section 13.40(b)(3) requires similar approval by independent directors and by informed, disinterested shareholders before appraisal remedies become exclusive, or nearly so, for “interested shareholder” transactions.^[12] Shielding directors from liability will encourage their participation in the authorized disinterested approval processes. The controlling shareholder, who potentially benefits from any failure by directors to carry out appropriate measures, can remedy any process defects by proving the terms of the merger transaction were fair.

Key Procedural Rulings, Including a New “Heightened Pleading” Standard for Shield Exclusions

Meade is also noteworthy for novel procedural issues the Iowa Supreme Court addressed concerning the MBCA raincoat provision. In Delaware, directors must plead and prove the applicability of a liability shield as an affirmative defense,^[13] while in MBCA states like Iowa, a shareholder or corporate plaintiff who seeks damages from directors must establish that no shield defense “precludes liability.”^[14] Meade helpfully clarifies that, despite this proof burden, plaintiffs aren’t required to initially plead one or more shield exceptions when suing corporate directors because the MBCA expressly requires directors to “interpose” a shield defense.^[15] But the Iowa Supreme Court confirmed that directors can interpose the shield defense in a motion to dismiss prior to filing an answer. That ruling is significant because, as Meade also holds, once corporate directors have “interposed” a shield defense, an opposing corporate litigant must allege an applicable shield exception through “heightened” pleading.^[16] What does that mean?

In federal court, where heightened pleading rules have traditionally applied in certain civil cases, judges require pleading with “particularity” or “specificity”—a detailed “who, what, when, where, and how” description establishing all necessary elements of a claim.^[17] But as applied by the Iowa Supreme Court in Meade, heightened pleading in director litigation apparently entails something less demanding: the court must evaluate whether the corporate or shareholder plaintiff pled facts showing claims against directors that fall within one of the MBCA’s exceptions to exculpation. Meade’s petition did not show the directors’ “specific intent to harm the corporation or its shareholders,” the court held, but only “failures to perform duties or incompetent performance, none of which suffices.”^[18] If all the petition’s allegations show there is no such claim, the Meade court concluded, the case can be dismissed even before discovery begins.^[19]

The heightened pleading standard Meade endorses is, without question, more onerous than traditional state court “notice” pleading requirements that permit most cases to reach the discovery phase. But the MBCA shield exceptions are narrowly drawn, and corporate litigants have access to information about potential director misconduct from corporate and securities law sources outside of litigation discovery. And as the Meade court acknowledged, by protecting directors not only from paying damages, but also from the burdens of pretrial litigation over shielded claims, the new pleading standard advances the purpose of raincoat provisions: to reduce fiduciary litigation risks for directors and thereby encourage board service. If other MBCA jurisdictions embrace Meade’s procedural template, the “director raincoat” moniker might need to change—director “slicker suits” perhaps?

Professor Doré has authored an expanded version of this article that will be published in a forthcoming issue of the Drake Law Review. A copy of that article is currently available on SSRN.

Matthew G. Doré, Richard M. and Anita Calkins Distinguished Professor, Drake University Law School.

Meade v. Christie, 21-0098 (Iowa Sup. Ct., May 27, 2022). ↑
MODEL BUS. CORP. ACT § 2.02(b)(4) (2016). The comparable Iowa provision is IOWA CODE § 490.202(2)(d). ↑
States using the MBCA model director shield language, or something quite close to it, include Alabama, Arizona, Colorado, the District of Columbia, Hawaii, Idaho, Iowa, Maine, Michigan, Mississippi, Montana, Nebraska, New Hampshire, South Dakota, Utah, Vermont, Washington, West Virginia, Wisconsin, and Wyoming. ↑
DEL. CODE ANN. TIT. 8 § 102(b)(7). ↑
In re Walt Disney Co. Derivative Litig., 906 A.2d 27, 62-68 (Del. 2006) (emphasis supplied). ↑
Meade v. Christie, 21-0098, *17 (Iowa Sup. Ct., May 27, 2022). ↑
Id., citing MODEL BUS. CORP. ACT § 2.02, cmt. E. (2016). ↑
Id. ↑
See Matrixx Initiatives, Inc. v. Siracusano, 536 U.S. 27, 48 (2011). ↑
See Bryn R. Vaaler, 2.02(B)(4) Or Not 2.02(B)(4): That is the Question, 74 LAW & CONTEMP. PROBS. 79, 83-84 (2011). ↑
Kahn v. M&F Worldwide Corp., 88 A.3d 635 (Del. 2014). ↑
MODEL BUS. CORP. ACT § 13.40(b)(3). ↑
See, e.g., Emerald Partners v. Berlin, 726 A.2d 1215, 1224 (Del. 1999). ↑
MODEL BUS. CORP. ACT § 8.31(a)(1)(i) (2016); IOWA CODE § 490.831(1)(a)(1). ↑
Meade v. Christie, 21-0098, *12-14 (Iowa Sup. Ct., May 27, 2022). ↑
Id. at *18-19. ↑
Summerhill v. Terminix, Inc., 637 F.3d 877, 880 (8^th Cir. 2011). ↑
Meade, 21-0098, *18 (Iowa Sup. Ct., May 27, 2022). ↑
Id. at *19-20. ↑

Canada’s First AI Act Proposed

Posted on July 13, 2022 by Lisa R. Lifshitz - Uncategorized

On June 16, 2022, Canada’s Minister of Innovation, Science and Industry (“Minister”) tabled the Artificial Intelligence and Data Act (the “AI Act”), Canada’s first attempt to formally regulate certain artificial intelligence systems as part of the sweeping privacy reforms introduced by Bill C-27.^[1]

The avowed purpose of the AI Act stems from a desire to regulate certain types of AI systems and ensure that developers and operators of such systems adopt measures to mitigate various risks of harm and avoid biased output (as such term is defined in the Act).^[2] The AI Act also establishes prohibitions related to the possession or use of illegally obtained personal information for the purpose of designing, developing, using or making available for use an AI system if its use causes serious harm to individuals.

The AI Act applies to artificial intelligence data processors, designers, developers, and those who make available artificial intelligence systems that are designated by regulation (to follow) as “high-impact systems.” The AI Act broadly defines an “artificial intelligence system” as a technological system that, autonomously or partly autonomously, processes data related to human activities through the use of a genetic algorithm, a neural network, machine learning, or another technique in order to generate content or make decisions, recommendations, or predictions.

Interestingly, the proposed AI Act does not apply to various Canadian federal government institutions or their AI systems, including products, services, or activities that are under the direction or control of certain Canadian government departments, including:

the Minister of National Defence;
the Canadian Security Intelligence Service, Canada’s domestic intelligence agency;
the Communications Security Establishment (Canada’s equivalent organization to the NSA); or
other federal or provincial departments or agencies as will be further defined in the regulations.

Under the AI Act, a person (which includes a trust, a joint venture, a partnership, an unincorporated association, and any other legal entity) who is responsible for an AI system must assess whether an AI system is a “high-impact system.” Any person who is responsible for a high-impact system then, in accordance with (future) regulations, must:

Establish measures to identify, assess, and mitigate risks of harm or biased output that could result from the use of the system (“Mitigation Measures”);
Establish measures to monitor compliance with the Mitigation Measures;
Keep records in general terms of the Mitigation Measures (including their effectiveness in mitigating any risks of harm/biased output) and the reasons supporting whether the system is a high-impact system;
Publish, on a publicly available website, a plain language description of the AI system and how it is intended to be used, the types of content that it is intended to generate, and the recommendations, decisions, or predictions that it is intended to make, as well as the Mitigation Measures in place and other information prescribed in the regulations (there is a similar requirement applicable to persons managing the operation of such systems); and
As soon as feasible, notify the Minister if use of the system results or is likely to result in material harm.

It should be noted that “harm” under the AI Act means physical or psychological harm to an individual; damage to an individual’s property; or economic loss to an individual.

If the Minister has reasonable grounds to believe that the use of a high-impact system by an organization or individual could result in harm or biased output, the Minister has a variety of remedies at their disposal, including:

Ordering persons responsible for AI systems (i.e. designers, developers or those who make available for use the artificial intelligence system or manage its operation) to provide records as described above;
Conducting an audit of the proposed contravention or engage the services of an independent auditor to conduct the audit (and the person who is audited must provide the Minister with the audit report and pay for the audit);
Ordering persons responsible for AI systems to implement measures to address anything referred to in the audit report; and
Ordering persons responsible for AI system to cease using it or making it available for use if the Minister has reasonable grounds to believe that the use of the system gives rise to a serious risk of imminent harm.

Seeking to balance the desire for increased transparency regarding artificial intelligence systems (and avoid the so-called “black box” phenomenon) against protecting/promoting business interests, the Minister can also order the publication of certain information regarding the AI system but is not allowed to publish the confidential business information of a person and the Minister must take measures to maintain the confidentiality of persons’ business confidential information.^[3]

That being said, the AI Act contains a number of exemptions that allows the Canadian Federal Government to share and disclose confidential business information regarding a particular AI system, including with specific government departments (including the federal Privacy Commissioner and the Canadian Human Rights Commission) and provincial counterparts. Additionally, the Minister may publish information related to an artificial intelligence system on a publicly available website, without the consent of the person to whom the information relates and without notifying that person, if the Minister has reasonable grounds to believe that the use of the system gives rise to a serious risk of imminent harm; and the publication of the information is essential to prevent the harm. The AI Act again provides that no confidential business information can be published through this method.

In keeping with the other reforms proposed under Bill 27, the AI Act introduces very stiff penalties for non-compliance, which are much higher than those currently available in Canada. Firstly, there will be administrative monetary penalties (“AMPs”) that will be levied for non-compliance, but the amounts for these will be determined under forthcoming regulations (the AI Act notes that the purpose of AMPs is “to promote compliance with this Part and not to punish”).

The AI Act also imposes fines for persons who violate Sections 6-12 of the Act (which contains obligations related to assessment, monitoring mitigation activities, etc. discussed above) or who obstructs—or provides false or misleading information to—the Minister, anyone acting on behalf of the Minister, or an independent auditor in the exercise of their powers or performance of their duties or functions. If the person is an individual, the person is liable on conviction on indictment to a fine at the court’s discretion, or on summary conviction to a fine of up to $50,000 CAD. If the person is not an individual, the person is liable on conviction on indictment to a fine of up to the greater of $10 million CAD or 3% of the person’s gross global revenues in its financial year before the one in which the person is sentenced. On summary conviction, a person that is not an individual is liable to a fine of up to the greater of $5 million CAD or 2% of the person’s gross global revenues in the person’s financial year before the sentencing.

The AI Act also establishes general offences regarding AI systems for misuse of personal information (which is defined under Bill C-27 as “information about an identifiable individual”).

A person commits an offence if, for the purpose of designing, developing, using, or making available for use an artificial intelligence system, the person possesses or uses personal information, knowing or believing that the information is obtained or derived, directly or indirectly, as a result of the commission in Canada of an offence under an Act of Parliament or a provincial legislature; or an act or omission anywhere that, if it had occurred in Canada, would have constituted such an offence.

Moreover, it is also an offence if the person, without lawful excuse and knowing that or being reckless as to whether the use of an artificial intelligence system is likely to cause serious physical or psychological harm to an individual or substantial damage to an individual’s property, makes the artificial intelligence system available for use and the use of the system causes such harm or damage; or with intent to defraud the public and to cause substantial economic loss to an individual, makes an artificial intelligence system available for use and its use causes that loss.

Every person who commits an offence under the above provisions of the AI Act risks even more severe fines and possible jail time. If the person is an individual, the person is liable on conviction on indictment to a fine at the court’s discretion or imprisonment up to five years less a day, or both. If the person is not an individual, the person is liable on conviction on indictment to a fine of up to the greater of $25 million CAD or 5% of the person’s gross global revenues in the person’s financial year before sentencing. If the person is an individual, the person is liable on summary conviction to a fine of up to $100,000 CAD or imprisonment up to two years less a day, or both. If the person is not an individual, the person is liable on summary conviction to a fine of up to the greater of $20 million CAD or 4% of the person’s gross global revenues in the person’s financial year before sentencing.

While drafted at a high level with much detail to follow in forthcoming regulations, there is no doubt that the AI Act represents an absolute sea change in the proposed regulation of certain artificial intelligence systems in Canada. Until now, there has not been any attempt to have a targeted statute focusing on the mitigation of bias in Canadian artificial intelligence systems per se and to date, Canadians have instead relied on a patchwork of existing privacy, human rights, and employment legislation and various ethical guidelines and model codes established by diverse institutions, such as the Montreal Declaration for a Responsible Development of Artificial Intelligence spearheaded by the Université de Montréal,^[4] to protect their interests. While the AI Act is currently only in its first reading, this Act represents a significant change in how Canadian developers and operators of certain AI systems must begin to proactively address certain harms and unintended consequences that this dynamic technology may inadvertently bring or otherwise face significant consequences.

An Act to enact the Consumer Privacy Protection Act and the Personal Information and Data Protection Tribunal Act and to make consequential and related amendments to other Acts, also known as the Digital Charter Implementation Act, 2022 (First Session, Forty-fourth Parliament, 70-71 Elizabeth II, 2021-2022, First Reading, June 16, 2022). Bill 27 is comprised of three parts: Part 1 will enact the Consumer Privacy Protection Act and is intended to repeal Part 1 of Canada’s federal private sector Personal Information Protection and Electronic Documents Act; Part 2 will enact the Personal Information and Data Protection Tribunal Act, which establishes an administrative tribunal to hear appeals of certain decisions made by the federal Privacy Commissioner under the Consumer Privacy Protection Act; and Part 3 will enact the Artificial Intelligence and Data Act. ↑
The AI Act defines “biased output” to mean content that is generated, or a decision, recommendation or prediction that is made, by an artificial intelligence system and that adversely differentiates, directly or indirectly and without justification, in relation to an individual on one or more of the prohibited grounds of discrimination set out in section 3 of the Canadian Human Rights Act, or on a combination of such prohibited grounds. It does not include content, or a decision, recommendation, or prediction, the purpose and effect of which are to prevent disadvantages that are likely to be suffered by, or to eliminate or reduce disadvantages that are suffered by, any group of individuals when those disadvantages would be based on or related to the prohibited grounds. ↑
“Confidential business information” is defined in the AI Act as business information that (a) is not publicly available; (b) in respect of which the person has taken measures that are reasonable in the circumstances to ensure that it remains not publicly available; and (c) has actual or potential economic value to the person or their competitors because it is not publicly available and its disclosure would result in a material financial loss to the person or a material financial gain to their competitors. ↑
For a more detailed discussion of the existing patchwork of AI laws and model codes in Canada, see, Lisa R. Lifshitz and Myron Mallia-Dare, “Artificial Intelligence in Canada,” chapter 25 of The Law of Artificial Intelligence and Smart Machines, Theodore F. Claypoole, editor, American Bar Association, 2019. ↑

Risk in the Supply Chain: Proposed Laws Seek Unprecedented Transparency

Posted on July 12, 2022 by Elaine Wood - Uncategorized

Aerial view of a container ship passing beneath a suspension bridge as a semi truck with a pink cargo container crosses above.

Less than two decades ago, “the concept of supply chain transparency was virtually unknown” and it was commonplace for managers to be unaware of a supplier only two steps upstream in the production process.^[1] This narrow approach to global production, where companies were only conscious of their direct suppliers, has gradually been replaced as consumers and regulators demand companies widen their purview into their operations. Two new proposed laws may force companies in the US and EU to provide unprecedented transparency into their production partnerships and account for impacts incurred throughout their supply chain. Never has it been more important to “Know-Your-Supply-Chain.”

In January, two members of the New York State government, backed by a coalition of fashion and sustainability non-profits, unveiled the Fashion Sustainability and Social Accountability Act (or “Fashion Act”). If passed, this law would make New York the first state to “effectively hold the biggest brands in fashion to account for their role in climate change.”^[2] The Fashion Act does not only pertain to climate impacts but also seeks to address ethical sourcing and due diligence in supply chains. Similar legislation with broader implications has been proposed in Europe—a year prior to the announcement of the Fashion Act, the European Union unveiled its directive on Mandatory Human Rights, Environmental and Good Governance Due Diligence (the “EU Directive”).

Recent legislation governing the fashion industry in the US tells a story of ad hoc protections: California’s Garment Worker Protection Act and Federal Uyghur Forced Labor Prevention Act were designed to address specific labor-related concerns. In the absence of comprehensive regulations, companies have been tasked with addressing Environmental, Social, and Governance (ESG) matters independently.^[3] While a number of EU Member States, notably France and Germany, have implemented targeted laws relating to modern slavery and human rights, these, similarly, do not address the larger social and environmental impacts of the apparel sector.^[4],^[5]

Both the Fashion Act and the EU Directive aim to be more comprehensive, acknowledging gaps in existing regulation while focusing on the risks that stem from suppliers and third-party vendors. Lawmakers on both sides of the Atlantic are finally acknowledging complexities of global supply chains, and for the first time holding companies accountable for the environmental and societal impacts at each stage of the production process, even in segments that are not under their direct control.

The Fashion Act would apply to apparel and footwear companies operating in New York State with global revenues of at least $100 million. These companies would be required to map a minimum of 50% of their supply chain and, importantly, to identify where in this chain the largest social and environmental impact is made. Companies which fail to adhere to these disclosure requirements could face fines of up to 2% of annual revenue over $450 million, which will be paid to a community fund administered by the New York Department of Environmental Conservation. The Fashion Act also provides for the creation of a public list of noncompliant companies to be published by the New York Attorney General’s office.

Similarly, the goal of the EU Directive is to address the fragmentation of regulations in the region. Until now, as in the US, there has been a lack of harmonization between legal frameworks, and countries have been tasked with developing their own guidelines. For example, the Corporate Duty of Vigilance Law was adopted by France’s Parliament in 2017 and applies to companies with more than 5,000 employees operating in the country.^[6] But other EU Member States have not developed national rules related to corporate sustainability, including Finland, Austria, and Belgium.^[7]

In comparison to the Fashion Act, the EU Directive applies more broadly, though the requirements are currently opaque. Specifically, the EU Directive applies to all EU companies with more than 500 employees and turnover of €150 million (approximately $163 million), unless the company is involved in an industry where the risk of exploitation is higher, like fashion or agriculture, in which case it applies to companies with more than 250 employees and turnover of €40 million (approximately $43.5 million). The EU Directive asks companies to integrate due diligence procedures to identify adverse human rights and environmental impacts and develop programs to monitor the effectiveness of those procedures. Companies will also be mandated to establish a procedure for processing complaints, and “publicly communicate due diligence.”

Compliance with the EU Directive will be overseen by national administrative bodies appointed by EU Member States. Penalties for noncompliance appear more severe than those laid out in the Fashion Act, and include fines, exclusion from public tendering and procurement opportunities, import bans, and other administrative sanctions or civil liabilities.

The differences between the two pieces of legislation highlight some of the challenges in defining and developing rules when it comes to ESG. The scope of the EU Directive, for example, is larger and more encompassing, applying to companies both inside and outside the fashion industry. In contrast with the Fashion Act, the EU Directive does not specify the standards it seeks to protect, instead referencing international treaties like the Paris Agreement, the Universal Declaration of Human Rights, and International Labour Organization’s core conventions.^[8] This means that “companies must take appropriate measures to prevent, end or mitigate impacts on the rights and prohibitions included in international human rights agreements, for example, regarding workers’ access to adequate food, clothing, and water and sanitation in the workplace” and are required to take measures to “prevent, end or mitigate negative environmental impacts that run contrary to a number of multilateral environmental conventions.”^[9] The EU Directive does not explicitly entail a mapping component, but it can be argued that adherence with the terms of the Directive will require at least some mapping by covered companies.

Both the Fashion Act and the EU Directive are likely at least a year away from implementation. Currently, the Fashion Act is with the New York Senate’s Consumer Protection Committee, but it must pass both houses of the state’s legislature and be signed by the Governor before becoming law. Similarly, the EU Directive is currently circulating as a draft and still needs to be approved by the European Parliament and the European Council. This gives companies time to implement new controls in expectation of these laws’ passage so that they are not scrambling to remain in compliance with complex due diligence and disclosure requirements. Businesses affected by either or both of these proposed laws should begin developing third-party due diligence programs that incorporate three important components: supply chain transparency, identification and management of country and sector risks, and monitoring through data analytics.

Beginning to enact these programs now will be critical as once the Fashion Act is signed into law, companies will have only one year to satisfy the mapping mandates and 18 months to meet the disclosure requirements. It is unclear what the implementation timeframe looks like for the EU Directive, but it is expected that the Directive will be adopted in late 2022 or early 2023. Typically, countries have up to two years to transpose EU directives into national law, which means companies could see binding legislation enter into force as early as 2023.^[10]

In a deeply interconnected world, unknown risks within a firm’s global supply chain or network partnerships can hinder even the best-intentioned internal ESG strategies and lead to legal and regulatory ramifications due to evolving rules regarding labor conditions, corruption, and environmental protections. In this way, both the Fashion Act and the EU Directive are emblematic of growing public and regulatory interest, and it would be wise for companies, regardless of their size and industry, to begin to take steps to understand the impacts associated with their supply chain, as we can be sure that these pieces of legislation represent the beginning of a movement towards transparency and informed choices.

By Elaine Wood, VP Risk, Investigations & Analytics Practice at Charles River Associates; Brad Dragoon, Principal Risk, Investigations & Analytics Practice at Charles River Associates; Emily Butler, Consulting Associate at Charles River Associates; Dave Curran, Co-Head of ESG at Paul Weiss; and Madhuri Pavamani, Director of Sustainability & ESG at Paul Weiss.

Top 5 Legal Technology Trends You Need to Know

Posted on July 11, 2022 by Grace Lau - Uncategorized

For emerging technologies, labor-intensive industries were an ideal early market. In customer service, for instance, contact centers applied tools with AI-enabled features, like call coaching, right out the gate.

The legal profession, in contrast, is no stranger to the accusation of being stuck in its ways. Unfairly, say we! Jennifer Mnookin, chancellor of the University of Wisconsin-Madison and former dean of UCLA’s law school, believes that law firms are now “thinking more like businesses than they did a generation ago.” She goes on to say that a lot of the work that was normally performed by first- and second-year law associates is now outsourced, at least in part, due to technological developments.

To some, the most advanced legal technology is overhyped. According to others, current trends will radically disrupt the profession. What’s abundantly clear is that many legal tech solutions are already making a real difference in lawyers’ lives.

Law firms are hungry to invest in technology to overcome the challenges of increased workflows and productivity demands on smaller budgets. The Future Ready Lawyer 2021 report shows that as of the past year, 84% of legal departments plan to increase their technology spending.

Legal tech is not a silver bullet. And yet, organizations that have already integrated legal technology into their operations report increased profitability.

Meanwhile, another report indicated that only 19% of partners at major law firms felt assured working in the digital economy.

In an industry known for traditional ways of working, change is afoot. It’s never been more important to know your audiovisual conferencing from your automation.

In this post, we explore five top legal technology trends shaping the industry.

1. Automation

Lawyers have historically pored over troves of documents. Fortunately, mundane and routine tasks are now ripe for automation that streamlines their work.

Automation is already being used in:

Legal research
E-discovery (searching for digital evidence to be used in court)
Document review

And the possibilities to move beyond what can be achieved already are immense.

Legacy software modernization, such as those for document automation, is becoming standard practice. Simplifying the drafting of high-frequency, low-complexity contracts and allowing clients to sign them digitally can save lawyers time.

Good technology can transform the routine but vital admin tasks and workflows that law practices must grapple with daily. For example, this can include:

Organizing and tracking progress and regulatory changes
Data collection
Reporting
Communication

Manual processes can never be as efficient as automation at simple, repetitive tasks. This includes many elements in corporate transaction work.

And legal departments are finding the most efficiency gains in these areas where they can standardize processes.

2. Artificial intelligence

Artificial Intelligence (AI) and automation often get used interchangeably, but they’re slightly different.

Whereas automation broadly refers to tech replacing human labor to perform predictable, rote work, AI substitutes for more complex interpersonal duties, such as problem-solving, perception, and human planning. AI complements human intelligence much like your project management triangle.

AI hasn’t yet had the promised transformative effect in the legal industry. Yet there’s no inherent reason why the sexier applications won’t become mainstream.

Today’s artificial intelligence systems can keep learning. Machine learning is a subset of AI that can:

Digest vast volumes of text and voice conversations
Identify patterns
Carry out impressive feats of predictive modeling

As well as finding privileged documents, AI can analyze contracts to check for missing terms, for example.

AI enables lawyers to extract powerful insights from data that can uncover critical evidence for case building and litigation strategies.

A metal statue of Lady Justice, a blindfolded woman in a dress, holding out scales of justice (a two-tray scale or balance).

Source: Unsplash.

Technology is maturing; people are still figuring out how best to apply machine learning to the sector.

AI is transforming B2B marketing, allowing companies to optimize their customer experiences. And the legal industry can also leverage AI to create better client experiences.

Another use case is supporting law firms with investigations and detecting red flags and anomalies to mitigate risks.

3. Cloud-native solutions

Along with big data, cloud-based solutions help lawyers and clients share files and data across disparate platforms rather than relying solely on emails.

Firms migrating their data to the cloud (carefully) can enjoy significant benefits.

In fact, from hyper-automation, through the use of collaborative tools like virtual whiteboards, to using machine learning to get the most out of databases of historical information, most legal technology trends rely on the cloud.

Firms can modernize their office phone systems, for example, by investing in voice over internet protocol, or VoIP telephone systems with sophisticated features.

Softphones enable distributed workforces to manage their legal proceedings and communicate with each other and clients from anywhere.

Flexible, cloud-native systems also support crucial integrations between different tools.

Their widespread adoption will allow organizations to hook up their practice management systems with their unified communications platforms and meet the demands of clients for scalability.

4. Virtual legal assistants

As they get more sophisticated, Virtual Legal Assistants (VLAs) are being implemented by more and larger law firms and organizations.

VLAs are AI-powered chatbots that build on basic neural network computing models to harness the power of deep learning.

VLAs not only improve average response times, but they also free up real assistants from handling a good deal of the frequent internal questions legal departments face to work on the high-value tasks that require a human touch.

When intelligent law bots can’t address a particular claim, they pass it to a suitable department.

Gartner predicts VLAs can answer one-quarter of internal requests made to legal departments. This extends the operational capacity of in-house corporate teams.

5. Data privacy and cybersecurity

Privacy rules and regulations are also trending, with Gartner forecasting a federal privacy law covering personal information may be coming down the pike.

With the right tools, firms can securely share encrypted data both within their organization and externally with clients, witnesses, and courts, all while maintaining compliance.

Data is becoming ever more integral to legal practice operations that require tools spanning different platforms and rely on both private and public clouds.

Because of this, the ability to anticipate future risks, protect sensitive client information, and recover mission-critical operations after a cyberattack is becoming ever more of a necessity.

Legal professionals should be cognizant of the alarming rise in cyberattacks and the potential for reputational damage.

The American Bar Association reported in its annual Profile of the Legal Profession that 29% of lawyers dealt with security breaches at their firms in 2021.

Organizations must be prepared to withstand malicious attacks, such as ransomware and malware.

Mitigating their risk of exposure also means updating data loss prevention and governance policies to keep up with an ever-evolving landscape of threats.

Firms already take precautions in the office, for example, by forbidding devices like Google’s Assistant and Alexa to ward off surreptitious eavesdropping by bad actors.

Secure data sharing and policies around acceptable use, privacy, and security are even more critical considering the shift to remote work.

Your honorable mentions

A wooden gavel rests on a wooden sound block. It casts a shadow on a white background.

Source: Unsplash.

The above are the most important legal technology trends you need to know, but here are a few honorable mentions.

First, firms will continue to hire hybrid profiles. This is about increasing cognitive diversity, closing the gap between professionals with knowledge of legal matters and those with enough legal tech expertise to manage the digitization and automation of workflows.

Today, we probably won’t be surprised by a developer’s need to moonlight in public relations—managing app store ratings and reviews.

On the other hand, some lawyers who understand coding are even developing applications themselves. For example, they may develop an application to run insider trading checks.

Second, employee satisfaction, a driver of the Great Resignation, is worth mentioning.

For law firms looking to attract and keep the best talent, technology can enable opportunities for professional development and make organizations more inclusive. Flexible working could also help.

Third, consumers are already opting for convenience across the economy (Uber, Shopify). Similarly, clients expect attorneys to answer their questions and ease anxieties round the clock.

Law firms can use technology to deliver seamless experiences, hiring partners who can be there for clients when they can’t.

It’s the surest way to increase the quality of their cases in the coming years.

A white typewriter with paper in it bearing the words "ARTIFICIAL INTELLIGENCE" in black font.

Source: Unsplash.

All set to raise the bar?

About AI research, Stephen Pinker once said that the hard problems are easy and the easy problems are hard. It so happens that the similarly paradoxical-sounding challenge law firms face is doing more with less.

Technology can build meaningful reports to measure how profitable different practice areas are for more analytical decision-making.

Those in the camp making a case for legal AI point to the fact that the abilities of computers are theoretically compatible with the nature of much legal work.

Algorithms can yield more accurate results with a lot less effort at rule-based tasks.

AI can already manage the complex variables that might go into personal injury claims assessments. And autonomous cars are successfully driving on the road in defiance of many early AI skeptics.

Other legal work, though, remains ill-suited to computerization. And, for the tech-wary, the jury is still out.

The key to success is not getting caught up in the hype, but rethinking how technology can serve you and your clients.

When you realize that your people and processes are just as important as your tools, you can start by taking the boring stuff off their plate. Why wait?

The Myriad Approaches to ESG Data & How to Use Your Data to Report Reliably

Posted on July 11, 2022 by Diane Holt - Uncategorized

ESG Reporting & Data Are Trending Risks

While corporations are enthusiastically touting their positive environmental, social, and governance (ESG) contributions, corporate general counsels are nervous. In a recent survey,^[1] in-house counsel identified ESG issues as one of the principal risks they are monitoring. One survey respondent said:

I am increasingly worried about ESG. Data privacy is the top risk, but ESG is the top trending risk and rising rapidly because of exposure in the future for corporations.

And this risk is complicated further by the fact that, for U.S. companies, there are no national ESG disclosure principles and no consensus around the key data points that ought to be reported. A recent analysis by Bloomberg Law^[2] indicates, for example, that reporting companies are increasingly categorizing their compliance with data privacy regulations and norms as ESG matters. And ESG risks do not merely pose legal challenges for in-house counsel: they may also lead to significant reputational problems.

Supply Chain ESG Risks Are Not Just Legal

While ESG principles may play a role in all areas of business activity, they are perhaps somewhat more developed in supply chains. One article found that “[b]y 2019, most Fortune 250 firms in the United States established various ESG goals ranging from greenhouse gas emissions to worker safety, transparency, and responsible procurement.”^[3] And supply chain revelations, perhaps more than other areas, have given rise to significant reputational risks, particularly when the public learns of human rights violations by the multinationals that source their products abroad.^[4]

Funds Have a Longer History, and More Commitment, to ESG Goals

Financial institutions and investment funds have been taking up the challenge to offer their clients opportunities to select investments based on ESG criteria for a while. At least since Kofi Annan’s 2004 initiative challenging financial institutions to contribute to sustainable development, they and the investment services industry more broadly have taken the lead in identifying ESG opportunities, encouraging ESG investments, and developing data that would support these goals.^[5] And the financial services industry continues to be more broadly committed to ESG strategy than any other industry.^[6]

Challenges Include Definitional Issues, Marketing and Reporting Standards, and Data

The pressure to market ESG metrics combined with the lack of consistent standards and the range of liability from misreporting exacerbate ESG reporting risks. It’s possible that the development of regulatory and auditing standards in this area could in theory quantify this risk—but the ad hoc nature of available data, whether developed internally or obtained from expert sources, may prove a challenge, even if rules are made explicit.

According to a 2021 Thompson Hine study, U.S. public companies are still divided in the ESG standards they utilize: 38% selected the Sustainability Accounting Standards Board (SASB); 27% selected the Global Reporting Initiative (GRI); and 25% selected the Task Force on Climate-Related Financial Disclosures (TCFD).^[7] Even so, many (but not all) companies in that survey said they were going to use quantitative data: 73% of public companies that planned to make public disclosures said that they planned to use quantitative metrics in their disclosures, while 53% of private companies in that position said they would do so. Looking further, the main metrics disclosed were board diversity data and workforce diversity data—which of course can be calculated from internal information.

In the meanwhile, the U.S. Securities and Exchange Commission continues to struggle to define its standards. Specifically, the SEC’s priority has been to focus on disclosures concerning climate change, human capital, and board and employee diversity.^[8] Thus far, the concerns about ESG disclosures have further delayed SEC action: work to issue a rule defining climate change-related disclosures has produced conflict within the SEC, particularly around what kinds of disclosures can be required and whether to require auditor sign-offs.^[9] However, the SEC’s Spring 2022 Unified Agenda of Regulatory and Deregulatory Actions indicates that it expects to provide final action on climate change and human capital management during October of this year.

FTI Consulting and Relativity, “Leading with Endurance: The Widening Risk Landscape.” ↑
Peter Karalis, Bloomberg Law, “ANALYSIS: Is Privacy an ESG Win? SEC Filing Trend Says Yes,” Dec. 8, 2021. ↑
Tinglong Dai & Christopher S. Tang, “Integrating ESG Measures and Supply Chain Management: Research Opportunities in the Post-Pandemic Era,” pre-print, Oct. 10, 2021. ↑
Kishanthi Parella, Washington & Lee University School of Law, “Improving Human Rights Compliance in Supply Chains,” Vol. 95, No. 2, Dec. 2019. ↑
The Global Compact, IFC, “Who Cares Wins: Connecting Financial Markets to a Changing World,” 2004. ↑
Thompson Hine, “AN ESG SNAPSHOT: Survey Confirms Companies Are Responding to Increasing Expectations,” 2021. ↑
Ibid. ↑
Preston Brewer, Bloomberg Law, “ANALYSIS: ESG, SPACs, and Proxies—A 2022 Forecast for SEC Action,” Nov. 1, 2021. ↑
Robert Schmidt and Benjamin Bain, Bloomberg News, “SEC Bogs Down on Climate Rule, Handing White House Fresh Setback,” Feb. 8, 2022. ↑

Conclusion

What are auto-renewing products or services?

What is required by law now?

What changed?

What now?

The Growing Problem

Recent Relief Efforts

Collection Issues Abound

The MBCA Director Liability Shield

Exceptions from Exculpation, Including “Intentional Infliction of Harm”

“Conscious Disregard” and “Intentional Dereliction of Duty” Distinguished

Policy Justifications for Meade’s Interpretation

Key Procedural Rulings, Including a New “Heightened Pleading” Standard for Shield Exclusions

1. Automation

2. Artificial intelligence

3. Cloud-native solutions

4. Virtual legal assistants

5. Data privacy and cybersecurity

Your honorable mentions

All set to raise the bar?

ESG Reporting & Data Are Trending Risks

Supply Chain ESG Risks Are Not Just Legal

Funds Have a Longer History, and More Commitment, to ESG Goals

Challenges Include Definitional Issues, Marketing and Reporting Standards, and Data

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