This article is the first in a series reviewing recent regulatory developments related to cryptoasset-related issues in the banking sector. Upcoming articles will feature legislative efforts to regulate stablecoins and the authority of banks to engage in cryptoasset-related activities.

On January 20, 2022, the Federal Reserve Board (“FRB”) released its paper on a potential U.S. central bank digital currency (“U.S. CBDC”).^[1] This article briefly reviews the FRB’s paper and related subsequent developments in the debate about a potential U.S. CBDC.

As defined by the FRB, a U.S. CBDC would be money used by consumers and businesses that would be a digital liability of the central bank (i.e., central bank money),^[2] as opposed to commercial bank deposits, which are not. The only “digital” central bank money used in the United States today is the digital balances held by commercial banks at the Federal Reserve (i.e., reserve balances). The FRB’s paper discussed the risks and benefits of a U.S. CBDC and requested comment on 22 questions; in response, the FRB received over 2,000 comments from a wide range of stakeholders.^[3] The FRB plans to publish a summary of the comments in the near future.^[4]

As a practical matter, the issuance of a U.S. CBDC may not happen for a number of years, if at all. According to the FRB, the CBDC paper was only the “first step” in a “broad [and essential] consultation with the general public and key stakeholders.” The FRB does not intend to proceed with the issuance of a U.S. CBDC unless there is clear support from the executive branch and Congress, “ideally” through a specific, authorizing law. Moreover, the FRB will only move forward with a U.S. CBDC if doing so is better than the alternatives and the benefits for households, businesses, and the economy at large exceed the risks.

The FRB outlined a number of benefits of having a U.S. CBDC in its paper. First, a U.S. CBDC could safely meet future needs and demands for payment services. A U.S. CBDC could mitigate the risks associated with the proliferation of private digital money while facilitating private-sector innovation for payments and the digital economy. Second, it could streamline cross-border payments (although the FRB noted that these improvements will require significant international coordination). Third, a U.S. CBDC also has the potential to preserve the dominant international role of the U.S. dollar, including the dollar’s status as the world’s reserve currency. Fourth, a U.S. CBDC could promote financial inclusion. Finally, a U.S. CBDC could extend public access to safe, central bank money. Cash use is declining in favor of digital payments, and a U.S. CBDC would be the safest form of a digital asset because it would carry limited credit or liquidity risk.

The FRB also discussed the potential risks and policy issues implicated by a U.S. CBDC. First, changes to the financial sector market structure—the substitution of a CBDC for commercial bank money—ultimately could reduce credit availability or increase credit costs. However, CBDC design choices, such as creating a non-interest-bearing U.S. CBDC or limiting the amount that an end user can hold, could alleviate some of these concerns. Further, there is concern for the safety and stability of the financial system. Because a U.S. CBDC would be the safest form of digital money available, runs on financial firms may be more likely during times of stress. Nonetheless, the FRB noted that the same design choices described above could alleviate this problem as well. Third, the efficacy of monetary policy implementation and interest rate control by the FRB could be impacted as a result of changes to the supply of reserves in the banking system. Moreover, the potential for substantial foreign demand could further complicate monetary policy implementation. The FRB also addressed concerns with privacy, data protection, and the prevention of financial crime. Ensuring that a U.S. CBDC has appropriate defenses against operational disruptions and cybersecurity risks could be particularly difficult because a CBDC network could have more entry points than existing payment services. However, providing for offline capability of the CBDC, if feasible, could enhance operational resilience of the digital payment system.

In June 2022, U.S. Rep. Jim Himes (D-CT, 4th District) published a white paper making the case for a U.S. CBDC.^[5] Himes believes a U.S. CBDC will keep U.S. currency and payment systems innovative and competitive and that the potential benefits meaningfully outweigh the risks.^[6] Rep. Himes commented and elaborated on many of the issues raised in the FRB’s CBDC paper, including the choice between a wholesale or retail CBDC, architectural decisions (he advocated for using a permissioned semi‑distributed system), account-based wallets, and non-bank participants. More importantly, he explicitly called for Congress to “begin the process of dialogue, education and debate that will lead to draft legislation to authorize further studies, pilot projects, and the possible creation of a U.S.‐issued CBDC.”^[7]

FRB Vice Chair Lael Brainard recently made conceptually similar points. Specifically, in a July 8, 2022, speech, she stated that “[a] digital native form of safe central bank money could enhance stability by providing the neutral trusted settlement layer in the future crypto financial system” and that the development of a U.S. CBDC could be a “natural evolution” in payments.^[8]

To summarize, the FRB’s paper has brought the discussion of a potential U.S. CBDC to the forefront. While it remains unclear what a U.S. CBDC may look like or when it could be created, the discussion is moving forward, as illustrated by Rep. Himes’s whitepaper and Vice Chair Brainard’s recent remarks.

1. Money and Payments: The U.S. Dollar in the Age of Digital Transformation, The Board of Governors of the Federal Reserve (January 2022). ↑

2. The paper briefly discussed the merits of retail versus wholesale CBDCs. The paper focuses mostly on a potential retail U.S. CBDC with banks acting as intermediaries between the FRB and the holder. However, the FRB noted that “narrower-purpose CBDCs could also be developed, such as one designed primarily for large-value institutional payments and not widely available to the public.” Id. at n. 19. ↑

3. Digital Assets and the Future of Finance: Examining the Benefits and Risks of a U.S. Central Bank Digital Currency, Vice Chair Lael Brainard, Federal Reserve (May 26, 2022). ↑

4. Id. ↑

5. Winning The Future of Money: A Proposal For A U.S. Central Bank Digital Currency, Jim Himes, U.S. Congressman (June 2022). ↑

6. Id. ↑

7. Id. ↑

8. Crypto-Assets and Decentralized Finance through a Financial Stability Lens, Vice Chair Lael Brainard, Federal Reserve (July 8, 2022). ↑

The FDA Safety and Landmark Advancements Act of 2022 (“FDASLA”), introduced in May, contains provisions regarding importing prescription drugs from Canada and the UK. After two years, the FDA could expand the FDASLA’s reach to allow the import of drugs from other Organization for Economic Co-operation and Development (OECD) countries.^[1] Although not originally included, the drug import provisions were added as an Amendment to FDASLA by the U.S. Senate Committee on Health, Education, Labor, and Pensions in June 2022.^[2] The full legislation was referred out of committee to the full Senate on July 13, 2022.

While this may seem like an important event in the ongoing debate over the benefits and risks of allowing certain prescription drugs to be imported from Canada or other foreign countries, the language within the Amendment is virtually identical to existing language within the FDA Importation of Prescription Drugs final rule effective November 30, 2020.^[3]

Multiple problems with the existing regulation were raised at the most recent NABP Task Force meeting held in September 2021.^[4] The primary issue dealt with basic supply chain issues. The representatives of Colorado’s and New Mexico’s Section 804 Importation Programs made it clear that the Programs lacked consideration of the details within supply chain logistics of moving medications from manufacturers to patients and, instead, focused on obtaining drugs from foreign sources. NABP Task Force members judged that the route from manufacturer to patient needed to be as short as possible to minimize risk. Members feared that countries like China and India provided most of the ingredients used to manufacture the drugs with “questionable oversight.” Such issues are significant and make it extremely difficult for the NABP or any state or federal agency with oversight authority to protect public health and ensure that prescription drugs are safe and effective for patients within the United States.

Concern was also raised regarding which agencies would be given enforcement responsibilities.^[5] Cases that arise could potentially involve multiple agencies in different countries worldwide. Even if issues only involved drugs manufactured in and imported from Canada, it is not clear who would be responsible for ensuring that no counterfeit or unsafe drugs were provided to patients within the United States. Multiple Task Force members questioned whether there would be any cost savings for U.S. patients who purchased prescription drugs from foreign sources.

The language within the pending (July 2022) version of FDASLA and the 2020 Importation of Prescription Drugs final rule both require state Section 804 Importation Programs to have procedures to ensure each prescription drug imported under their programs is safe and effective for its intended use.^[6] For example, the Importation Program proposed by Colorado requires authenticity testing and relabeling of the imported medication, including new National Drug Codes. Colorado will also incur costs associated with the administration of the program.^[7] The Department of Health Care Policy & Financing in Colorado, charged with administering the program, stated on its website that it was pursuing a vendor to perform supervision functions. That vendor would perform administration functions to the Foreign Seller (Canadian Wholesaler) and Colorado Importer (U.S. Wholesaler or Pharmacist), responsible for testing, relabeling, and drug distribution to participating pharmacies. With no current vendor to perform these administrative functions, it is difficult to determine actual cost savings for U.S. patients.

Issues regarding the reimbursement of imported prescription drugs were also raised by NAPB members.^[8] Would such drugs be approved by the FDA, and would the costs for those drugs be eligible for submission to federally funded programs for reimbursement? Also, would U.S. patients living outside a state with an approved Section 804 Importation Program be allowed to purchase imported prescription drugs from another state?

A concern seldom expressed within the import debate is whether Canada would have enough supply of the needed drugs as more and more states begin importing. Would such programs result in drug shortages for Canadian consumers? Under the Drug Importation Program Frequently Asked Questions section of the Colorado Department of Health Care Policy and Financing website, one of the FAQs was whether a Colorado representative had spoken to Canadian representatives about the program.^[9] The response was that the Department has had conversations with the Denver Canadian consulate and would welcome and anticipate more communication down the road.

Pharmaceutical professionals, health officials, and their legal advisors should monitor the progress of FDASLA to determine whether and how these issues are addressed as the legislation evolves.

1. FDASLA Act of 2022, S. 4348, 117th Congress (2022), https://www.congress.gov/bill/117th-congress/senate-bill/4348. ↑

2. At the time of writing, a transcript of the hearing was not available. However, video of the hearing is available on the committee’s website, at https://www.help.senate.gov/hearings/s-4348-s-958-s-4353-hr-1193-and-s-4053. ↑

3. See, 21 C.F.R. § 251.1, et seq. (2022). ↑

4. Nat’l Ass’n of Bds. of Pharmacy, Report of the Task Force on State Oversight of Drug Importation (2021), https://nabp.pharmacy/wp-content/uploads/2021/12/Report-of-the-Task-Force-on-State-Oversight-of-Drug-Importation.pdf. ↑

5. Id., at 2. ↑

6. Senate Bill 4348, at § 906, which amends the Food, Drug, and Cosmetic Act (21 U.S.C. § 384) to include the final rule’s definition of “section 804 importation program sponsor” to include “a State or Indian Tribe that regulates wholesale drug distribution and the practice of pharmacy”; cf. 21 C.F.R. § 251.2 (2022). ↑

7. Colo. Dep’t of Health Care Policy & Fin., Colorado’s Canadian Drug Importation Program: Frequently Asked Questions (2021), at 6, https://hcpf.colorado.gov/sites/hcpf/files/ Drug%20Importation%20Program%20FAQs%20Jan%202021.pdf. ↑

8. Supra note 4, at 3. ↑

9. Supra note 7, at 2. ↑

During the COVID-19 pandemic, litigants’ struggles to meet deadlines have resulted in a patchwork of local rules and general orders aimed at easing the strain on the judicial system and litigants. The CARES Act tasked the Judicial Conference of the United States with formulating amendments to the Rules Enabling Act to “address emergency measures that may be taken by the Federal courts” when a national emergency has been declared. Recognizing the need for a more centralized mechanism to expand rules deadlines in emergency situations, the Judicial Conference has proposed three new rules: Civil Rule 87, Criminal Rule 62, and Bankruptcy Rule 9038. This article highlights new Bankruptcy Rule 9038.

The Existing Landscape: Rule 9006(b)

Pursuant to Rule 9006(b), courts may expand the deadlines contained in the rules for cause if the request is made prior to the expiration of the deadline; courts may permit late action if the request is made after the deadline has passed when the failure to act was due to excusable neglect. But Rule 9006(b) is limited in its application.

First, Rule 9006(b) may not expand the deadlines for:

• filing a list of the 20 largest unsecured creditors in chapter 9 and 11 cases;
• holding the meeting of creditors and addressing the election of trustees in chapter 7 cases;
• filing a motion to amend a judgment or for additional findings; or
• requesting a new trial or relief from judgment.

Second, the Rule is still constrained by the limitations contained in other specific rules. For example, Rule 1006(b)(2) sets a hard deadline of 180 days from the petition date for the filing fee to be paid, which cannot be expanded under Rule 9006(b).

Rule 9006(b) also cannot override the requirement that an extension request be filed prior to the expiration of the following deadlines:

• the deadline to file a motion to dismiss for abuse;
• the deadline for filing a governmental proof of claim; and
• the deadlines for objecting to claimed exemptions, objecting to discharge, or objecting to the dischargeability of a debt.

Rule 9006(b) also cannot override the specific guidelines for extensions contained in the following Rules:

• Rule 8002(d) regarding the deadline to file a notice of appeal;
• Rule 9033 regarding the deadline to object to proposed findings of fact and conclusions of law; and
• Rule 1007(c) regarding the deadline to file statements and schedules.

Last, Rule 9006(b) was intended for use in specific instances, for cause. Thus, it is not helpful for district-wide deadline expansions across multiple cases such as are needed when the entire system is affected, as with a pandemic.

The Bunker: New Bankruptcy Rule 9038

Set to go into effect in December of 2023, Rule 9038 is intended to fill the gaps in Rule 9006(b). The Rule is divided into three subsections: subsection (a) contains conditions for an emergency; subsection (b) governs declaring an emergency; and subsection (c) has provisions about tolling and extending time limits.

Subsection (a) gives only the Judicial Conference the power to declare a Bankruptcy Rules emergency. The Judicial Conference may declare a Bankruptcy Rules emergency if it finds “that extraordinary circumstances relating to public health or safety, or affecting physical or electronic access to a bankruptcy court, substantially impair the court’s ability to perform its functions in compliance with these rules.”

Subsection (b) describes the procedure for declaring a Bankruptcy Rules emergency. First, the declaration must designate the affected courts and state any restrictions on the granted authority, and the duration of the emergency must be ninety days or fewer. This allows for greater flexibility if the emergency is limited to a specific region or state. Additional declarations may be issued under Rule 9038, and the Judicial Conference may terminate the declaration for one or more courts early.

Subsection (c) is the meat of the new rule. A chief judge may order the extension or tolling of a specific Bankruptcy Rule, local rule, or general order and includes directives that actions must be taken “promptly,” “forthwith,” “immediately,” or “without delay.” That power is also extended to presiding bankruptcy judges in specific cases. Such tolling ends on the later of thirty days after the date the emergency declaration terminates or the expiration of the original time period, unless the extension expires sooner than thirty days after the termination of the declaration, in which case the extended deadline applies. Such extensions may be either lengthened or shortened by a presiding judge in a specific case for cause after notice and a hearing. Last, the only deadlines excepted from tolling under the proposed rule are those contained in a statute as opposed to the rules.

Conclusion

Able to fill in the gaps left by Rule 9006(b), Rule 9038 will provide the flexibility needed to permit continued access to bankruptcy courts and the administration of their dockets during emergency situations. It is not constrained to national emergencies and only statutory deadlines are excepted from its reach. It is the doomsday bunker we hope to never use.

Imagine being denied a car insurance policy because an algorithm based on your publicly available social media posts determined that you were not a safe driver.^[1] This example highlights one of a number of difficult legal and ethical issues surrounding the data that is generated from processing of consumer data. The prediction about whether you are a safe driver is often referred to as “inferred data” to separate it from data that companies collect directly from users or indirectly from external sensors and sources (such as their public social media feed). But what exactly is inferred data, and why is it the subject of so much debate?

Users directly provide data about themselves (and others), and sensors indirectly provide data about people, often without their direct involvement (or consent). Companies and governments perform analytics on direct data to infer other characteristics of the data subjects. Inferred data is the result of this processing. There has been a huge growth of law regulating data provided directly by people and indirectly from sensors. Now, however, regulators and other legal scholars are beginning to ask whether and to what extent privacy laws and intellectual property laws ought to apply to inferred data.

It is important to understand how inferred data is created in order to ferret out whether it is the type of personal information that should be subject to different legal theories. We can think of data analytics as an input-output process in which people or sensors provide data that is analyzed to create a new output (data) that was inferred from that analysis. This analysis often occurs not based on a single input, but on large datasets using techniques like regression, classification, clustering, and machine learning. For ease of understanding, think of the process like cooking a meal. The input data is the ingredients, the analytical method is the recipe, and the actual analysis the cooking. The output—the inferred data—can be thought of as the final, cooked meal.

It is also important to understand how the analysis process works to set expectations for characterizing inferred data under different legal regimes. In one type of analysis process called machine learning, for example, an algorithm is first used to generate a machine learning model by training the algorithm with a large dataset. This training process results in a model that has a unique set of variables and weighting factors. Using the cooking analogy, you can think of the algorithm as the recipe and the model as a recipe variation that creates different outputs—like New York pizza versus Chicago pizza. Then, the machine learning model is used to analyze new input data to create inferences based on that input data. The same input data could result in different inferences depending on the version of the machine learning model used and how it was trained. This means that inferred data is often more like a prediction than a result. A model that was trained with Chicago pizza training data might interpret a set of underlying ingredients like flour, mozzarella cheese, tomato sauce, and mushrooms to predict a deep-dish pizza, while a model that was trained with New York pizza training data might predict a thin-crust pizza from the same underlying ingredients. Because of the potential for variations of models, the accuracy of inferred data is the subject of much debate.

Inferred Data as Intellectual Property

Companies have argued that inferred data is the knowledge a company generates from its processing activities and, therefore, is intellectual property that is owned by the creating company. However, inferred data can also be thought of as new data that is the output of processing. This difference is critical to intellectual property law, where data is not generally an appropriate subject for copyright or any other intellectual property protection. Under current U.S. copyright and U.S. patent law, a work can only be an original work of authorship or invention respectively if it was created by a human being.^[2] Thus, when an AI system generates an output result and the computer is considered the author or inventor of that result rather than a human being, the output cannot be given copyright or patent IP protection. However, not all countries share this view. In the United Kingdom, for example, the author of the AI program may be eligible for the copyright on the output of AI.

As a result of the current U.S. stance on IP protection for inferred data, the creators of inferred data often argue that this data is their trade secret and therefore owned by them. An analysis of whether inferred data can be considered as a trade secret would need to be done under each state’s version of the Uniform Trade Secrets Act,^[3] which states that a trade secret is essentially information that derives independent economic value from not being generally known to the public or others who might use it for economic advantage.^[4] Ownership of the inferred data would then remain with the entity that takes steps to protect it. In addition, companies that create inferred data have suggested that because it is a trade secret, it also should not be subject to privacy and other laws that would force disclosure of that information.

Inferred Data as New Data

Proponents of inferred data as new data argue that if the source data was covered by privacy laws, then this new data ought to also be covered by the same regulations as the base data from which it is derived, regardless of its IP designation. They argue that the purpose of data protection and privacy laws is to protect consumers from the misuse or publication of their personal information, and that this purpose applies as much to personal information that results from an analytics process as it does to personal information that is directly obtained. However, this means that inferred data may need to be evaluated based on the context of its use and how it is generated to determine whether that use triggers the protections that data protection and privacy laws offer.

How Inferred Data is Used Matters

Inferred data could be used to optimize internal business processes, in which case it may not have any relevance to consumers. But when inferred data is used to profile a person, it may have serious implications to that person. Because inferred data often represents predictions and not facts, the potential for harm may be greater than data provided by the person directly. In the context of profiling of individuals by identifying or predicting sensitive information about them, privacy regulations that intend to protect consumers would seem to be applicable to the inferred data. Similarly, when creditworthiness or likelihood of flight before trial are the predictions that are inferred, other consumer protection regulations would seem to apply strongly. It is important to note that there are laws that allow the input data to be corrected, such as reported credit data. But models could still produce a biased or unfair prediction based even on corrected inputs.

Furthermore, predictions based on machine learning models can be difficult to assess for accuracy because these models are trained and are often dependent on the input training dataset used to generate them. These models act like black boxes, where it is nearly impossible to understand how the unique variables and weighting factors were created. As a result, interpreting or correcting a prediction that is false or biased can be very difficult. Worse yet, these mistakes are difficult to litigate because the model cannot be cross-examined in court. Many privacy regulations, including the General Data Protection Regulation (GDPR) and the CCPA (California Privacy Protection Act) provide for a consumer right to correct data. If inferred data is subject to privacy regulations, this right of correction could be very difficult to apply.

In California, the attorney general has recently issued an opinion on the interpretation of inferred data under the CCPA.^[5] Specifically, the attorney general was asked whether a consumer’s right of access under the CCPA encompasses inferred data that a business has created about them. As is so often the case with a legal question, the answer is “it depends.” The attorney general determined that inferred data was within the definition of “personal information” under the CCPA only if it met two requirements. First, the inferred data must have been generated from specific categories of data that are identified in the statute regardless of whether that information was private or public, and regardless of how it was obtained.^[6] Second, the inferred data must have been generated for the purpose of creating a profile about a consumer that reflected their “preferences, characteristics, psychological trends, predispositions, behavior, attitudes, intelligence, abilities, and aptitudes.”^[7]

How Inferred Data is Generated Matters

Inferred data may be subject to privacy rules not only based on how it is used, but also based on how it is generated. For instance, the Federal Trade Commission (FTC) has seemed to determine through recent decisions that inferred data is sufficiently tied to the processing of input source data, even for training purposes, that if the processing is tainted by fraud, the machine learning algorithms and models that process that tainted data are also tainted, as well as any inferred data that results from the processing of that input data.^[8] In one recent decision, EverAlbum was accused of collecting input data without proper consent for its use in training a facial recognition algorithm. As part of the decision, the FTC required EverAlbum to delete the machine learning model that was trained with the faces, as well as the algorithm used to create the model, and the output data created by processing of new facial images by that tainted model. Thus, inferred data that was generated by fraud or misrepresentation was the result of misuse and protected by consumer protection laws.

In summary, inferred data is widely agreed to be data that is the output of processing, rather than data that is provided directly or indirectly from a person. That may be where the agreement ends. Issues of to what extent inferred data is subject to privacy regulations and whether inferred data can be treated as intellectual property are still undecided, as are issues of automated decision-making based on inferred data. These issues will, in all likelihood, be the subject of much discussion as the amount and uses of inferred data continue to grow. For companies whose business models depend on their ability to generate and use inferred data, the outcome of these discussions could be critical to their future.

1. Graham Ruddick, “Admiral to Price Car Insurance Based on Facebook Posts,” The Guardian, Nov. 1, 2016, https://www.theguardian.com/technology/2016/nov/02/admiral-to-price-car-insurance-based-on-facebook-posts. ↑

2. See Compendium of U.S. Copyright Office Practices, Chapter 300, pg. 307, 3rd ed., Jan. 28, 2021 (https://copyright.gov/comp3/chap300/ch300-copyrightable-authorship.pdf); see also, Naruto v. Slater, 888 F.3d 418 (9th. Cir. 2018). See also, Thaler v. Hirshfield, 2021 WL 3934803 (E.D. Va. Sep. 2, 2021) and “AI Machine Is Not an ‘Inventor’ Under the Patent Act: E.D. Va.,” Legal Update (https://us.practicallaw.thomsonreuters.com/w-032-5362). ↑

3. Uniform Trade Secrets Act With 1985 Amendments. ↑

4. Id. ↑

5. Cal. Op. Att’y. Gen. No. 20-303 (Cal. A.G.). ↑

6. Civ. Code, S 1798.140, subd. (o)(1)(A)-(K). ↑

7. Civ. Code, S 1798.140, subd. (o)(1). ↑

8. Everalbum, Inc., Docket No. C-4743, Decision and Order, F.T.C. (2021). ↑

As a lawyer business development coach, I regularly receive questions and feedback from my clients as to the efficacy of joining and participating in professional associations and board service.

Some practitioners seek to give back to the community that has created an environment for them to succeed in practicing law, while others hope the exposure will lead to new business opportunities. Still others are flattered that an organization is interested in their brainpower.

Whatever your objective (and this is definitely something you need to identify before joining any organization), I discuss below factors to take into consideration when choosing an organization to join and ways you can maximize your time and engagement.

Why get involved?

• Expand your network: New connections with professionals who can hire or refer you for the type of matters you seek is key to growing your practice. Participating in an organization should provide you with many opportunities to connect with professionals on a local, regional, national, and sometimes global level. Participating in special interest groups, sections, or discussion boards sponsored by an organization is another way to connect with people who are likeminded and/or working in the same niche you are.
  Best practice: Merely attending the quarterly board meetings will not maximize your intended exposure. Individually invite fellow members to coffee, lunch, or drinks as a way to get to know them better outside of the group environment.
• Boost your credibility and visibility: Being actively involved in your professional community can boost your credibility among your peers, your clients, and your prospects. Associations generally look to their members to share their unique expertise and their connections through their participation in the organization. Raise your hand for a leadership role to not only develop your skills as a leader but also to boost increase your visibility. Relating to other professionals who share common interests is a great way to strengthen your reputation.
  Best practice: Align your talents, personal interests, and passions with an organization’s mission and available roles and volunteer opportunities. Your service will be more fulfilling and feel less like a “chore.”
• Professional development: Joining a professional organization that directly aligns with your practice (like your practice area section at a bar association) is a great way to further your legal acumen. Organizations often offer articles, webinars, reports, white papers, courses, workshops, seminars, conferences, and certifications to keep their members current on the latest industry research, innovations, and trends.
  Best practice: Involvement in trade organizations within your client industry focus is a great way to get an in-depth and more complete understanding of your ideal client and their circumstances, and along with opening up professional opportunities, it allows you to better serve them.
• Mentorship opportunities: Finding professionals—junior and senior—who can support your growth is a huge benefit in joining a professional association. There are also meaningful rewards in mentoring others, including honing your leadership abilities, learning new perspectives and insights, and feeling a sense of contribution.
  Best practice: Just as senior professionals have extended a hand to provide you with guidance throughout your career, make sure to identify ways you can leverage your talent in assisting others to grow.
• Build a support system: Making connections outside of your firm who understand your circumstances and can offer guidance and insight is one of the most important reasons to join a professional organization. Strong bonds within professional organizations will improve your career opportunities, will help you garner more influence, and most importantly, will make work and life more fun.
  Best practice: Don’t wait until you are in need to build your support system. Make the investment into developing authentic relationships early to build a network of advocates who want to see you succeed and are happy to help as needs arise.

How to pick the right organization to join?

As is the case with any activity that takes time away from your practice, your family, or your hobbies, deciding on the right organizations to spend your time with is critical to your success and happiness.

• Get clear on your intent: What is most important to you right now? Bar associations can be effective for professionals who are interested in building their reputations and connections among professionals with a similar practice emphasis, as well as staying on the cutting edge of their specialties. On the other hand, trade organizations can provide a more direct opportunity to connect with the prospective client.
  Best practice: Ensure the organization aligns with your intended purpose. Write down your short-, mid-, and long-term professional goals, and then match associations with your objectives.
• Do your research: Spend time reviewing the online biographies of professionals in your practice area whom you admire to learn of their outside-of-the-office involvements. Find out what organizations your ideal clients and prospects are involved in. Exploring organizations and gathering information could be a great reason to reach out to these individuals directly, initiating or bolstering relationships, so that you can ask what their experience has been like and where they see the organization heading.
  Best practice: Explore the websites of organizations you are interested in to learn if their missions are congruent with your objectives. Does the organization have multiple ways to interact—various sections, committees, special interest groups, leadership opportunities, recognitions, newsletters, publications, webinars, meetings, conferences? Reach out to volunteer leadership at the organizations you are interested in to find out more.

How to get the most out of your involvement?

Once you have identified an organization of interest, be sure to maximize your gain by being proactively involved. Your return on investment (your time and dues paid) will likely be directly tied to your activity level within the organization.

• Develop relationships: Meaningful relationships take time, intention, and proactive effort. Get involved by joining a committee, volunteering for a project, planning an event… you want to get to know members on an individual basis. The better you know the other professionals in an organization, the more effective you can be as a member, and the more value you can add. Remember that the way you show up for committee or board work is the way people will assume you show up to everything.
  Best practice: Personally reach out to the individuals leading committees and those on the executive committee to set up one on one time to learn more about what they are looking to accomplish and to strategize on how you can best be of service. Then make sure you are checking in with them every few months, keeping the momentum moving forward on both your contribution to the organization and your personal relationship.
• Keep your directory profile updated with your current biography and contact information. Make it clear what you do for whom.
  Best practice: Consider adding specific representative matters into your biography to give your peers and prospective clients an idea of the challenges you have solved for clients. Set a recurring calendar reminder every six months to review and update your online profiles. (This is also a best practice for your website, LinkedIn, third-party review sites like SuperLawyers and AVVO, and anywhere else a profile of yours may pop up through a Google search.)
• Share your expertise and insights: Volunteer to write for the organization’s publication, speak at an event, provide webinar presentations, or offer to assemble a panel. Organizations look to the membership to provide the organization with learning content so raise your hand and highlight your hard won expertise. It benefits the organization and your peers and it raises your credibility and visibility as the go-to authority in your specialty.
  Best practice: Remember to make sure the topics you present on are directly associated with the ideal types of matters you seek. Thought leadership topics outside of your focus will only confuse your target audience, and you will not be memorable.

How to assess whether to stay or go?

It takes some forethought to methodically decide whether your involvement is panning out or not.

• Tracking: You can improve on what you measure. On a monthly basis, record the amount of time you are spending serving within the organization. Keep track of inbound and outbound member referrals and opportunities for visibility.
  Best practice: Calendar time to review and capture your business development activity at the same time every week or month. Make a goal to take advantage of a specific number of thought leadership opportunities per year, and track what your activity looks like on that front every month.
• Effort: You will reap what you sow. When joining any organization, determine at the outset how much time you want to spend deciding whether or not the organization is serving your needs. Before you give up, determine if you have given it your all. Is there anything else you could be doing to get more out of your involvement?
  Best practice: Without a strategy and some conscientious planning, it is easy to find yourself a passive member of an organization. Come up with a goal of how many one-on-one meetings you want to have throughout the year with people involved, and then plan exactly how and when you will do outreach to coordinate them.
• Business development: For your involvement in any organization or association to lead to new business, the following three elements must be present: clarity in your messaging (in your work, what specific value do you provide and to whom?), direct effort in building relationships (do you only attend general meetings, or have you been proactive around individual interactions?) and visibility among the members (does the membership know your name?). If you have accomplished these three elements and opportunities have yet to result, it is likely time to pull the plug and find a new group.
  Best practice: It usually takes at least eighteen months of active involvement in any organization before you start to see measurable results. Determine on the onset what you are going to do to educate the membership on your expertise. This should include some kind of visibility opportunity related to your expertise and/or one-on-one discussions. After a year and a half of consistent conversations and/or strategic thought leadership, you still are not uncovering any opportunities, it may be time to reevaluate your participation.

Involvement in professional organizations provides value and opportunity for lawyers at every stage of practice if it is done with purpose and intention. As the world transitions more and more towards virtual and hybrid environments, finding opportunities to authentically connect with people requires a bit more effort than it may have in the past. But these human connections are what makes work and life fulfilling and enjoyable, so this focused intention and energy is well worth it.

“How General Counsels Battle the Weaknesses in the United States Rule of Law” is part of 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.

Most discussions about the Rule of Law (“ROL”) in the United States focus on either the criminal legal system or how the U.S. ROL is a goal to be attained by developing nations. Less attention is given to evaluating how the fundamental structures of the United States legal system impact its ROL strength. While the ROL in the United States is a standard, I have found in my practice as a General Counsel (“GC”) that the U.S. ROL is not the gold standard.^[1] Further, the current state of the U.S. ROL is not an inherent side effect of a developed legal system; rather, it is a product of choices we have made about how to structure the U.S. ROL.^[2]

A country with a healthy ROL “requires the law be: validly made and publicly promulgated, of general application, stable, clear in meaning and consistent, and ordinarily prospective.”^[3] As a GC, I have found that certain features of the U.S. ROL make it harder for businesses to uphold the ROL. For example, instead of an independent government body in charge of legislative language and drafting, we have chosen the collaborative, and often adversarial, process of having statutes born out of political parties’ compromises and deal-making.^[4] This process does not ensure clear, concise, and coherent statutes that the public can easily understand but instead tends to produce convoluted and incoherent statutes that are the product of so much give and take that by the time they reach the president’s desk, the entire point of drafting the law in the first place may be lost. Another example is that instead of having a judicial system that encourages trials and frequent judicial opinions, our system encourages settlements and plea deals, thus reducing how often the law is applied to new facts.^[5] While settlements and plea deals are efficient, they limit the public’s ability to learn how the law will apply to different facts and scenarios to help guide the public on what can and cannot be done. While the ROL in the U.S. has many healthy features, its struggles with indeterminacy and a new shift toward inconsistency weaken the ROL and play a large role in the challenges I face as a GC.

How the ROL Impacts My Practice

The above-stated design choices make it difficult for GCs to advise business clients trying to scale their operations. Our clients’ customers expect their businesses to follow them all over the country as seamlessly as information travels across the internet. Our clients also expect their GCs to advise them on exactly how to meet client and customer expectations while operating within the confines of applicable laws. However, the deficiencies in the U.S. ROL make this job an extraordinary challenge by: (1) increasing how much time GCs must spend with our clients explaining why they must try to be compliant, because it discourages them that total compliance is impossible in many areas; (2) increasing the difficulty of translating the law to our business stakeholders clearly and concisely, since our ROL is neither clear nor concise; and (3) increasing the difficulty in advising businesses on legal strategy because legal outcomes are unpredictable.

Time Spent Convincing the Business Impossible Compliance is Worth its Time and Money

ROL principles concerning the generality, clarity, publicity, stability, and prospective nature of the norms that govern a society^[6] offer significant value and benefits to business. Rarely do business stakeholders intend to operate their business outside of the confines of the law. However, their motivation to put effort into ensuring compliance is decreased by uncertainty that full compliance is even possible within the U.S. legal system. These compliance challenges become magnified when businesses operate across state lines, as: (1) following the law in one jurisdiction does not ensure compliance with another jurisdiction; (2) it may be unclear which laws apply to the business; and (3) the lack of uniform enforcement makes it appear as though some businesses are allowed to operate outside of the law while others are not.^[7] This creates a challenge for GCs, who constantly have to start compliance programs by convincing our clients that compliance, even while elusive, is worth the effort and resources. We must spend time and energy convincing them that it is better to try to comply rather than to ignore and deal with the consequences later. When the law is unclear or impossible to fully follow, unhelpful questions leak into the compliance discussion. Our clients start to wonder, what is the probability of enforcement? Are any of my competitors also following this law? The lack of clarity in the U.S. ROL fills my day with keeping business stakeholders motivated to try to become compliant, even when full compliance is not attainable.

Translate the Law to Business Stakeholders Clearly and Concisely

As in-house attorneys, we often get questions about the law in a format where the business stakeholder wants to know just enough law to legally run their business, but not so much as to become experts in the legal field. However, due to the complexity of the ROL, it is a constant challenge to successfully translate the law in a way that will be understood—and understood in a way that fosters compliant behavior. We try to come up with phrases that are easy to remember and simple to perform. One method of communicating the law to increase compliance is to pick the strictest state law and apply that policy requirement across all business operations across the country. The drawback of that approach, however, is that it gives local businesses a potential advantage because a local business does not have to comply with the laws of stricter states. We are often battling how much to rely on these cheat codes for communicating legal concepts to our clients because they come with legal and business risks.

At the core of why translating the law to our clients is so difficult, is that if you tell your clients everything they need to know and do to become compliant, they will not be able to internalize it and are therefore unlikely to follow the law (which is the ultimate goal). I see my job as a GC as one that entails not simply the act of informing the business about the law, but rather informing the business in a way that moves stakeholders’ behavior toward compliance. A good example of this dilemma is the length of employee handbooks. It is generally accepted that as the length of employee handbooks increases, the likelihood that employees will read them decreases. This catch-22 would not exist if there was more consistency in employment laws across the country. Playing the balancing act—providing just enough information to make sure the business is advised, but not so much information the individuals who implement the advice feel overwhelmed and ignore all guidance—feels like walking a tightrope on the best of days. As the internet inevitably pushes business across borders, a simplified legal system that is consistent across state lines would mitigate how much legal information is required for a business to simply sell its widgets and services across the country and thus limit the legal communication gymnastics required of a GC.

Advising the Business When Legal Outcomes Are Unpredictable

As stated above, the structure of the ROL in the United States makes it especially difficult to predict how a judge or regulator will interpret specific facts due to how infrequently guidance and decisions are issued. However, it is our job to give our client the likelihood of legal outcomes to help the business allocate resources and decide on business strategy. Recently, fast-changing political and legal regimes have made it even harder to predict where a court or regulator will land on a legal issue. Because more laws and policies, no matter how generic, are now interpreted in ways that have more to do with the personal and local politics of the government adjudicator than their text, there is even less predictability for legal outcomes.

As a GC, I experience the negative impacts of local unwritten rules when we go to court in jurisdictions all over the country. Some local courts prefer local attorneys. It is not a written rule, but it is the local ROL. How do you advise your client on the winnability of a case if an unwritten local rule is going to play a larger role in the success of your case than the written law and the facts? As a GC, I have to spend time investigating whether unwritten home rules could impact our case in certain jurisdictions. This is a breakdown in one of the main ROL principles, which is that laws must be public. Local unwritten ROL is often discussed in the context of business risk in developing nations, but it is very much a feature of the U.S. ROL that needs far greater attention.^[8]

How GCs Can Support the ROL

GCs must advocate for clear, coherent, and consistent laws that apply across the country. We should push our clients to see the long-term benefits of moving lobbying away from advocating for confusing loopholes that benefit our clients in the short term and toward lobbying for laws that increase the determinacy of our ROL. To be clear, this is not a call for “de-regulation.” I don’t believe in that approach because I have found no difference in the complexity of a statute advertised as “de-regulated” versus “regulated.” I have to read them both, and a “de-regulated” statue still requires me to train staff on what they must do to get the benefit of the “de-regulation.” A better framework is to focus on what our clients actually need, clarity. Our clients need clarity in both their legal obligations and the advice they receive from their GC so that they can make the best business decisions possible. Most of all, our clients need to focus as much of their time as possible on providing the best products or services to their customers, not on state-specific compliance training.

As in-house attorneys, we should always remember that we play an active role in creating or damaging the ROL in the United States. Every time we advise our clients, advocate to regulators, and go before a judge, we ask for a certain type of ROL to exist in the country. The question is, will our request improve or damage the ROL we seek in the U.S.?

1. The World Justice Project Rule of Law Index 2021 ranks ROL in the United States as 27^th in the world, with an overall score of 0.69 out of 1. Denmark was ranked 1^st in the world with an overall score of 0.90. https://worldjusticeproject.org/sites/default/files/documents/WJP-INDEX-21.pdf ↑

2. See James R. Maxeiner, Legal Indeterminancy Made In America: U.S. Legal Methods and the Rule of Law, 41 Val. U. L. Rev.522, 520 (2007). ↑

3. James R. Maxeiner, Legal Indeterminancy Made in America: U.S. Legal Methods and the Rule of Law, 41 Val. U. L. Rev. 522 (2007). ↑

4. Id. 534. ↑

5. Id. 552. ↑

6. https://plato.stanford.edu/entries/rule-of-law/. ↑

7. According to the World Justice Project’s Rule of Law Index for 2021, the United States is ranked 109^th out of 139 nations when it comes to ensuring equal treatment and absence of discrimination. Additionally, the U.S. is ranked 122^nd out of 139 nations when it comes to the question of whether civil justice is free of discrimination, https://worldjusticeproject.org/rule-of-law-index/country/2021/United%20States/Fundamental%20Rights/; https://worldjusticeproject.org/rule-of-law-index/country/2021/United%20States/Civil%20Justice/. ↑

8. Relatedly, the World Justice Project ranks the US as 41^st out of 139 nations with respect to the strength of ROL in the US civil justice system. Under this category, the US is ranked 126^th out of 139 nations for the access and affordability of the civil justice system. Finally, the US is ranked 41^st out of 139 nations when it comes to the absence of improper government influence on the civil justice system, https://worldjusticeproject.org/rule-of-law-index/country/2021/United%20States/Civil%20Justice/. ↑

On June 21, 2022, President Biden signed a bill into law that retroactively raises the cap on debt for eligibility for subchapter V status. In the author’s opinion, the legislation falls under the category of “better late than never.”

In August 2019, when Congress amended the Bankruptcy Code to create a new subchapter V for small business debtors, the cap for eligibility to file under that subchapter was $2,725,625 in total noncontingent, liquidated, secured and unsecured debt. Like many provisions of the Bankruptcy Code, that number was subject to adjustment every three years to reflect consumer price index changes.^[1]

Then, in 2020, COVID-19 arrived. Among the many legislative responses to the crisis, Congress passed and the President signed into law the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”). The CARES Act raised the cap on eligibility for bankruptcy under subchapter V to $7.5 million, with an expiration date of one year from its enactment: March 27, 2021. As COVID-19 continued to burden the economy, in early 2021 the increased cap was extended to March 27, 2022, by the COVID-19 Bankruptcy Relief Extension Act. Despite the late March expiration of the increased cap, Congress as a whole failed to act until June 2022, even though the bill had bipartisan support. The President signed the bill (S. 3823, Bankruptcy Threshold Adjustment and Technical Corrections Act) into law on June 21, 2022.^[2] The law addresses four subjects: subchapter V, eligibility for Chapter 13, the definition of “small business debtor” applicable to small business cases, and the United States Trustee System Fund. Here are the amendments:

Subchapter V. The Bankruptcy Threshold Adjustment and Technical Corrections Act reinstates the $7.5 million cap for two years and applies the revised cap to any cases filed on or after March 27, 2020, and pending on or after June 21, 2022. This enlarged cap is scheduled to sunset two years after the June 21, 2022, effective date of the amendment.

Chapter 13. The Bankruptcy Threshold Adjustment and Technical Corrections Act also makes a major temporary change to the eligibility requirements of Chapter 13. Before the amendment, eligibility was capped at $1,395,875 in secured debt and $465,275 in unsecured debt, for a total of no more than $1,861,150. The June amendment gets rid of the distinction between secured and unsecured debt and sets the cap for noncontingent, liquidated debts at less than $2,270,000. Unlike the changes related to subchapter V, the change only took effect on June 21, 2022. It will also, however, expire two years after its effective date (June 21, 2024) unless Congress acts to extend it.

Other Less Dramatic Changes. The definition of subchapter V “debtor” in Code section 1182 has also been narrowed somewhat to only exclude any debtor or affiliate of any debtor that is subject to the reporting requirements under section 13 or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m, 78o(d)).^[3] This amendment as written also sunsets two years after the amendment’s effective date, but because at the time of the sunset the ongoing definition of “small business debtor” will apply to subchapter V cases, and because that definition was also amended to incorporate the same restriction, the restriction will continue to apply to subchapter V debtors.

Moreover, the law modifies the feasibility requirement for confirmation of a subchapter V plan. Before the amendment, the Bankruptcy Code stated that in order to confirm a subchapter V plan without the consent of all impaired classes, any the plan had to be “fair and equitable” to all impaired, non-consenting classes. “Fair and equitable” was defined in section 1191(c)(3) to require, among other things, that the debtor show:

(A) (i) The debtor will be able to make all payments under the plan; or
      (ii) there is a reasonable likelihood that the debtor will be able to make all payments under the plan; and

(B) the plan provides appropriate remedies, which may include the liquidation of nonexempt assets, to protect the holders of claims or interests in the event that the payments are not made.

Thus, as written, it appeared that even if the debtor established by a preponderance of the evidence that it would be able to make all payments under the plan, the plan had to incorporate provisions to protect holders of claims and interests “in the event that the payments are not made.” That apparently was a glitch, and the provision, as renumbered, makes it clear that the plan must include the “remedies” only if the debtor has not proven it would be able to make all payments under the plan. This change also applies to any case filed on or after March 27, 2020, and pending on or after June 21, 2022. It does not sunset.

In addition, Bankruptcy Code section 1183 is amended to provide that a subchapter V trustee may be authorized to operate the business of a subchapter V debtor that is removed from being a debtor-in-possession. Before the amendment, the Code provided for the removal of a debtor-in-possession but did not specify that the subchapter V trustee needed authorization to operate the business of the debtor. This change also applies to any cases filed on or after March 27, 2020, and pending on or after June 21, 2022. It, too, does not sunset.

Small Business Cases. Notwithstanding the introduction of subchapter V for small business debtors, there remain special provisions for small business debtors that elect not to reorganize under subchapter V. These debtors, which are subject to the rules for “small business cases” rather than subchapter V cases, are subject to tight deadlines for plan submission and confirmation and do not have subchapter V trustees appointed in their cases. The definition for debtors in these cases had excluded “any debtor that is a corporation that is an affiliate of an issuer (as defined in section 3 of the Securities Exchange Act of 1934 (15 U.S.C. 78c).” Now the exemption is narrower: entities that may not be “small business debtors” only include any debtor or affiliate of any debtor that is subject to the reporting requirements under section 13 or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m, 78o(d)). This amendment also applies to any cases filed on or after March 27, 2020, and pending on or after June 21, 2022. It, too, does not expire.

U.S. Trustee System Fund. The Bankruptcy Threshold Adjustment and Technical Corrections Act also makes technical corrections to the law regarding the United States Trustee System Fund. These amendments are effective “as if enacted on October 1, 2021” and do not sunset.

Clearly, Congress has had a great deal of issues to address, including war in Europe, climate change, and inflation. That being understood, it is unfortunate that Congress failed to act more quickly: subchapter V has proven to be extremely popular and leaving the matter in limbo may well have led to confusion, additional restructuring costs, and additional stress on potential debtors. Between COVID-19, inflation, and supply chain problems, small businesses had already undergone too much stress in the last few years.

These changes were implemented too late for inclusion in the recently published 2022 edition of The Portable Bankruptcy Code & Rules, which contains changes to the Bankruptcy Code through March 2022. All these changes will be set forth in the 2023 edition of The Portable Bankruptcy Code and Rules, which will also feature the many amendments to the Bankruptcy Rules that are expected to become effective in December.

1. 11 U.S.C. § 104(a). ↑

2. The text of the bill is available at https://www.congress.gov/bill/117th-congress/senate-bill/3823. ↑

3. For an in-depth discussion of this change, see In re Phenomenon Mktg. & Entm’t, LLC, No. 2:22-bk-10132-ER, 2022 Bankr. LEXIS 2105, 2022 WL 304241 (Bankr. C.D. Cal. Aug. 1, 2022). ↑

The Pride Parades were back this summer—after a two-year hiatus because of COVID—and the large crowds and enthusiasm demonstrated acceptance and support of the LGBTQ community in our society. Many business law firms are committed to serving and supporting LGBTQ staff, clients, and initiatives as part of their diversity programs.

Below is a sampling of how five business law firms have institutionalized their approach to LGBTQ inclusion through policies, working groups, and programs.

Cassels Brock & Blackwell LLP 

The 2SLGBTQ+ Affinity Group at Cassels Brock & Blackwell LLP exists to ensure that 2SLGBTQ+ firm members are enabled and motivated to succeed to their maximum potential, while being comfortable bringing their full and complete selves to work. The Group works to support the recruitment, retention, and promotion of 2SLGBTQ+ talent to and within the firm. All firm members who identify as 2SLGBTQ+ and allies are welcome to attend the Group’s monthly meetings and events to support one another’s career development and discuss issues particular to the 2SLGBTQ+ community.

For 2022, the Group is kicking off Pride season with its second annual virtual drag show featuring a dynamic and diverse cast of local drag queens and a drag king who will dance, lip sync, and discuss everything surrounding drag, gender expression, allyship, and queerness. The Group will also be attending Pride runs and walks in Toronto and Vancouver to raise funds for local 2SLGBTQ+ community spaces and resources. In addition, the Group has recently announced that it is in the process of establishing an independent peer support group to better provide more well-rounded support to firm members who identify as 2SLGBTQ+. In recent days, the Group has begun exploring the possibility of hosting, together with the Parents of Young Families Affinity Group, a recurring drag story-time.

Finally, the Group has been working closely with the firm’s larger Inclusion and Diversity Committee to bring in speakers to address topics such as pronouns and gender/sexual identities, the progressive pride flag, and court challenges to anti-2SLGBTQ+ legislation.

Cleary Gottlieb Steen & Hamilton LLP

Cleary Gottlieb believes that fostering interactions among lawyers with similar affinities, as well as those with diverse experiences and perspectives, makes the firm a more welcoming and supportive place—and one that is better positioned to serve the firm’s clients and support the Cleary community. Cleary’s affinity groups collaborate with firm leadership, conduct continuing legal education programs, raise awareness about topics relevant to the members of their respective groups, identify culturally relevant pro bono matters and potential partnerships, and organize networking activities. Affinity groups are empowered to be active participants in the firm’s efforts to achieve greater inclusion.

Cleary is pleased to support the LGBTQ+ Affinity Group and the Pride Professionals’ Affinity Network. These groups were created to connect LGBTQ+ associates and professional staff across the firm, and they have grown from the firm’s efforts to highlight the unique experiences of LGBTQ+ individuals. These groups cultivate an inclusive culture, where the values, voices, and perspectives of Cleary’s LGBTQ+ professionals are celebrated and reflected. Cleary is proud to host impactful and robust programming, including cultural events and talks with LGBTQ+ activists and trailblazers, to raise awareness about the issues these individuals face and the contributions they make to our communities. We regularly invite provocative and dynamic speakers to engage with our community, and we endeavor to showcase and highlight intersectionality, especially across racial/ethnic identities.

Additionally, Cleary Gottlieb engages and partners with leading LGBTQ+ stakeholders inside and outside of the legal industry. Cleary advances these efforts with national organizations and minority bar associations to demonstrate its solidarity with the LGBTQ+ community and showcase and reinforce its dedication to supporting this community.

Covington & Burling LLP

Covington’s LGBT+ Affinity Group has a global presence and invites the participation of the firm’s lawyers and staff. The affinity group leads work closely with Covington’s Diversity & Inclusion (D&I) Team to implement strategic initiatives in response to the needs of the LGBT+ community within the firm. Most recently, the group developed its first-ever strategic action plan focused on belonging, retention, and development of affinity group members. Their plan objectives will be accomplished through multiple activities, including hosting regular affinity group meetings; implementing inclusionary practices to support all LGBT+ colleagues in the workplace; and creating more visibility opportunities with key clients for LGBT+ lawyers. Covington’s LGBT+ Affinity Group also provides mentoring, learning, and development opportunities for its members and promotes intersectional efforts by collaborating on programs and events with the firm’s six other affinity groups.

In an effort to be more inclusive of individuals across the spectrum of gender and gender identity, the LGBT+ Affinity Group championed the firm-wide use of pronouns in email signatures. Words matter, and the use of pronouns in email signatures sends a clear message of solidarity and support to future and current Covington colleagues, as well as clients. In alignment with this initiative, the affinity group collaborated with the D&I team to develop a reference guide to instruct colleagues on how to modify their email signature blocks.

This year, Covington celebrated Pride in a big way, supporting the LGBT+ community in Brussels and Frankfurt (May), the U.S. (June), and London (July). These events encouraged Covington colleagues to learn about and reflect on the achievements and diverse identities of members of the LGBT+ community. These events included:

• Participation in the London 2022 Pride March wearing an exclusive Pride Month T-shirt that was distributed to members in the U.S. and London offices.
• A conversation with Amy Schneider, the most successful woman ever to compete on Jeopardy! This engaging discussion touched on her being the first openly transgender contestant to qualify for the Tournament of Champions, her role in amplifying trans voices, and how everyone can act as an ally for trans rights.
• A discussion in partnership with UCLA’s Williams Institute on federal policy under President Biden, state legislation targeting LGBT+ youth, and what the Supreme Court’s recent decision on abortion rights could mean for the LGBT+ community.
• An educational workshop on LGBTQI+ awareness that included colleagues in Brussels and Frankfurt.

White & Case LLP

White & Case’s LGBT+ affinity group—Spectrum—has three affinity networks, one of which is available for all U.S.-based colleagues, both lawyers and business services staff. These groups provide ongoing peer support and regular networking opportunities, making the firm a more attractive prospect for potential LGBT+ recruits by demonstrating that diversity is valued, and facilitating professional networking opportunities with clients’ and other law firms’ LGBT+ networks.

White & Case has joined the community of organizations that support and adhere to the UN Standards of Conduct for Business Tackling Discrimination against Lesbian, Gay, Bi, Trans, and Intersex People. The UN Standards contain five principles aimed at helping businesses improve LGBT+ equality and inclusion. White & Case is working closely with its Spectrum LGBT+ Networks to translate this support into actionable goals. For example, the firm rolled out a new gender pronoun signature template globally in 2021 to show those who wish to share their pronouns that doing so is supported by White & Case. This was accompanied by ongoing onboarding and global educational materials, such as videos and FAQs, to encourage all colleagues to increase their understanding of the use of pronouns.

White & Case is a long-term sponsor of the Lavender Law Conference & Career Fair, the largest LGBT+ legal conference in the country, as well as other LGBT+ initiatives, such as the Lambda Liberty Awards National Dinner. Its lawyers also staff the LGBT Bar Association of Greater New York’s monthly legal clinic, which provides assistance for low­-income members of the LGBT+ community in need of brief legal advice on a range of topics. As part of the firm’s Global Citizenship initiative, its Pro Bono legal services are the centerpiece, with White & Case being one of the largest providers of pro bono legal services in the world. Many cases relate to LGBT+ issues, including immigration and asylum challenges for LGBT+ people. Whitman-Walker Health is a common pro bono partner for the firm, and we also sponsor and participate in the organization’s annual Walk to End HIV. Most recently in 2022, White & Case partnered with one of its key clients to refresh the IGLYO’s Inclusive Education Report across forty-five countries. IGLYO is a nonprofit organization that builds the skills and experience of LGBT+ youth to become leaders within the LGBT+ and human rights sectors. The firm’s LGBT+ lawyers continue to achieve peer and community recognition, such as the 2020 40 Under 40 Awards from the LGBT Bar, which recognized two firm LGBT+ lawyers as having distinguished themselves in their field and demonstrated a profound commitment to LGBT+ equality. Other awards have included 2020 Asian Law Alliance Diversity Award.

In addition, White & Case hosts annual Pride celebrations and events across multiple offices in the U.S. The firm organizes educational events to discuss diversity and inclusion issues specific to the LGBT+ community. In the most recent event, “An Audience with Olympic Champion Tom Daley,” the Olympic champion in diving discussed how he triumphed over negativity and bias throughout his career, covering a range of issues including homophobia and challenges with mental health.

White & Case also conducts personalized outreach to law school LGBT+ affinity groups, and previous panel and speaker sessions have included law school professors discussing Supreme Court cases and decisions around LGBT+ diversity issues.

Holland & Knight LLP

Holland & Knight proudly supports the LGBTQ community and has long welcomed and encouraged the celebration of Pride Month. Throughout Pride Month 2022, as in years past, the firm offered an array of information, resources, and additional ways to show support, including a feature on the front page of the firm’s website, as well as a social media graphic and special Pride Month email signatures for use by employees. Other Holland & Knight efforts and outreach included:

Social Media Pride Profiles: Holland & Knight’s social media channels provided “Pride Profiles” featuring members of the firm’s Pride Planning Committee, including Associates Amy O’Brien and Cameron Rivers. Partner Jessica MacAllister and Associates Brian Goodrich and Fernando Tevez also were highlighted. In addition to posting on LinkedIn, the firm shared the profiles on its Twitter, Facebook, YouTube, and Instagram accounts. As Ms. MacAllister stated in her profile, Holland & Knight’s LGBTQ Affinity Group “has served as a safe space for me to share in our communities’ successes and disappointments” and “is a place where empathy meets action. I am proud to be a member of a group that works tirelessly towards equality and inclusion in both our workplace and in our communities.”

Going Beyond the Pride Flag: On June 22, the firm hosted a webinar for employees and clients titled “Beyond the Pride Flag: Breaking Barriers as an Openly Gay Executive,” featuring Habitat for Humanity Vice President for Individual Giving Jeremy Kraut-Ordover. Mr. Kraut-Ordover discussed the challenges he faced growing up, the importance of being an advocate, and how he ended up thriving in his role as a high-ranking executive of a Christian organization as an openly gay and Jewish man.

Charitable Fundraiser: Holland & Knight’s LGBTQ Affinity Group sponsored a Pride Month fundraiser, with donations shared between the Equality Florida Institute and Equality Texas Foundation. These organizations work to secure full equality for LGBTQ+ individuals in Florida and Texas—two strongholds of the firm. Donations, which topped more than $11,000, were accepted through the Holland & Knight Charitable Foundation’s donation portal and payroll deduction.

Holland & Knight’s support of the LGBTQ community doesn’t end with Pride Month. Throughout the year, through its representation on the firm’s Diversity Council, the LGBTQ Affinity Group works to ensure that Holland & Knight remains a leader among law firms with regard to its LGBTQ-friendly policies and initiatives. Externally, members of the LGBTQ Affinity Group participate in various pro bono and community service efforts to improve the lives and rights of the LGBTQ community. These include furnishing essential services to LGBTQ youth, providing outreach and support to families impacted by HIV/AIDS, and participating in name and gender marker change clinics for transgender individuals.

A ruling in In re Multiplan Corp. Stockholder Litigation accepting the relevance of misstatements in a Special Purpose Acquisition Company (“SPAC”) transaction continues to highlight the role of information disclosure in corporate financing. SPACs are blank-check public companies whose purpose is to acquire a privately held company within a given time period. This business combination (known as the “de-SPAC”) effectively allows the private company to become publicly traded.^[1] In denying motions to dismiss, the Delaware Chancery Court considered the allegation that the SPAC’s fiduciaries (including its sponsor and board of directors) misstated certain information about the business combination. The SPAC investors, the Court argued, would have been “substantially likely to find this information important when deciding whether to redeem [their shares ahead of a proposed acquisition].”^[2] As I will explain further below, the redemption right alluded to by the Court is a typical feature of SPACs.

The Chancery Court’s decision is related to commentary and research on the role of information disclosure in SPACs. Some have argued that an advantage of SPACs over IPOs stems from the view that the Private Securities Litigation Reform Act (“PSLRA”) safe harbor for forward-looking statements applies to SPACs as opposed to IPOs.^[3] The logic is that under this safe harbor protection, SPACs are able to provide forward-looking statements to investors that make the business combination more attractive, compared to IPOs.^[4]

However, even if this perceived advantage did contribute to the rise in SPACs in 2020–21, others are skeptical about such advantage. Among them is the SEC’s former Acting Director of the Division of Corporation Finance John Coates, who, in a statement delivered while in office, argued that “liability risks for those involved [in SPACs] are higher, not lower, than in conventional IPOs.”^[5] Mr. Coates went on to contend that this is particularly true due to “the potential conflicts of interest in the SPAC structure.”^[6] A March 2022 SEC proposal along the same lines would require companies to increase disclosure related to conflicts of interest, compensation, and dilution costs related to SPAC transactions.^[7]

This article provides economic and financial insight to help frame the role of information in SPAC transactions.

Information Asymmetries in Corporate Finance

Information disclosure serves a clear economic purpose, which is to help alleviate the asymmetry of information between investors and company insiders. Nobel prize recipient George Akerlof used the term “market for lemons” in the used car sales market to illustrate the harm that information asymmetries cause to the market.^[8] Akerlof argued that sellers of used cars have more knowledge about the quality of a used car than potential buyers. Because buyers cannot tell cars’ quality apart, the price at which these cars sell must be the same irrespective of true quality. But then the seller of a good quality car cannot receive the true value of the car. He concludes that “bad cars drive out the good because they sell at the same price as good cars.”^[9] If left unattended, the market breakdown caused by asymmetric information results in less commerce.

The same issue arises in corporate finance. Investors typically know less about the quality of a given asset compared to those who manage it. To solve information asymmetries and alleviate their cost, a host of contractual solutions, economic institutions, and regulations exist. For example, the IPO underwriting process provides a certification role that entices investors to participate in the IPO even when they have less information than the company insiders.^[10] Similarly, in the context of mergers and acquisitions, the acquiring company conducts exhaustive due diligence before completing the acquisition of its target. Finally, regulation and government agencies establish disclosure requirements and monitoring aimed at alleviating the cost of information asymmetries.^[11]

Information asymmetries are relevant because the two sides of the trade have different objectives. Going back to Akerlof’s example of a used car, its seller wants to obtain the highest price whereas a prospective buyer wants to pay the lowest price possible. Investors and company insiders might have misaligned incentives as well. For example, CEOs might undertake extravagant investments or engage in self-dealing behavior.^[12] This is why a CEO’s compensation package often includes stock options. A CEO only benefits from public stock options when the company’s stock reaches a certain level. To the extent that shareholders prefer a higher stock price, stock options can contribute to aligning CEO and shareholder incentives.^[13] I next explain how misalignments between investors and company insiders might apply in the context of SPACs, specifically between SPAC sponsors and investors.

The Role of Information Disclosure in SPACs

SPACs are not immune to the asymmetry of information and diverging interests that exist in financial markets. First, SPAC investors likely have less information about acquisition prospects in general, and the ultimate target company specifically, compared to SPAC sponsors.^[14] This is so because the SPAC target is a privately held company often in a nascent industry. And this is more likely to be true if investors are relatively “unsophisticated” (i.e. retail investors compared to institutional investors). Partly because of this, investors can redeem their shares (at the price paid, plus interest) before the completion of the acquisition. This redemption right provides a hedge against pre-acquisition risk as it allows the SPAC investor to cash the shares and recover the full investment irrespective of the market price of the SPAC share at the time. Furthermore, a recent feature of the last wave of SPACs decouples the acquisition vote from the redemption decision. That is, the SPAC investor can redeem her shares and vote “yes” to the acquisition, if she wishes to do so. Klausner et al. report an average redemption rate of 58% for their 2019–20 merger cohort, indicating that a majority of SPAC shares are redeemed before the acquisition is completed.^[15]

Second, existing literature posits that conflicts of interest between SPAC sponsors and SPAC investors are also likely to exist.^[16] Initially, SPAC sponsors typically hold 20% to 30% of the SPAC’s equity (the “promote”) in the form of common shares. However, they pay less than SPAC investors for these common shares.^[17] While having skin in the game typically helps alleviate differing interests between investors and SPAC insiders (as I have argued above with the use of stock options in publicly traded companies), the fact that SPAC sponsors acquire their equity stake at a significantly lower price than SPAC investors can create conflicts. Two observations are worth mentioning here. First, if the SPAC finds no acquisition target, the SPAC is liquidated and the funds raised in the SPAC’s IPO, which sit in a trust, are returned to investors (with interest). Because the promote has no redemption rights, SPAC sponsors can only make a profit if the business combination is completed. Second, because SPAC sponsors pay less (per share) than SPAC investors, there is a range of acquisition prices for which SPAC investors earn negative returns whereas SPAC sponsors’ returns are positive. The evidence provided below indicates that this scenario might not be uncommon.

Thus, in the presence of information asymmetries and diverging interests, the role of (credible) information disclosure can play an important role. The safe harbor debate introduced at the beginning of this article can be analyzed in this context. Any credible information about the acquisition proposed by SPAC sponsors is likely to help investors decide to vote in favor of or against the business combination, and whether to redeem the SPAC shares. Forward-looking projections provided in the acquisition prospectus are part of this information set. The evidence summarized below indicates that indeed this information is relied upon by those investors more likely to suffer a bigger information gap vis-à-vis SPAC sponsors.

What Do Current Studies Tell Us About SPACs and the Role of Information Disclosure?

Several studies have calculated annualized returns, a common measure of performance, for SPACs. For purposes of this article, I focused on studies that include the latest wave of SPAC transactions.^[18] Table 1 below provides average returns reported in three studies. These returns correspond to common shares and do not include returns stemming from any warrants or rights.^[19] Moreover they are adjusted by the returns on a comparable basket of securities, that is, they are calculated as the SPAC’s excess return over a comparable index.

As shown in Table 1, all studies show that pre-de-SPAC returns are on average positive. In contrast, these studies show average negative de-SPAC returns. In other words, a SPAC investor who redeemed their shares before the acquisition would have more than recovered their investment (consistent with SPAC’s redemption rights), whereas an investor holding onto their common shares past the completion of the acquisition would have, on average, lost money during the first year.

Table 1. Summary of SPAC Performance, by SPAC Period and Study^[20]

The averages above paint only part of the picture as variation across transactions exists. For example, Gahng et al. found that:

• More reputable lead underwriters are associated with higher SPAC and de-SPAC returns;
• deals with more potential dilution (based on warrants and rights present in each unit) perform relatively worse in terms of de-SPAC returns; and
• high redemption rates and longer timelines to close the business combination are both associated with lower subsequent de-SPAC returns.

Turning now towards the issue of information disclosure, studies on SPAC’s disclosure of forward-looking statements report that a majority of de-SPACs provide at least one financial projection. Dambra et al. found that 85% of their sample of SPACs provided revenue forecasts in their investor presentations.^[21] Blankespoor et al. found that 80% of the transactions in their sample provided at least one financial projection, with revenue and EBITDA being the most common forms.^[22]

Furthermore, Dambra et al. draw several conclusions from their study. First, they found evidence that revenue forecasts are biased overall. Second, they found that “SPAC investors respond favorably to merger announcements as a function of the revenue CAGR disclosed in the investor presentations.”^[23] Indeed, returns around the time of the investor presentations are larger the higher the revenue growth disclosed in that presentation.^[24] Third, they found that retail investors engage in more trading when revenue growth forecasts are higher, but they did not find the same pattern when institutional investor trading was analyzed.^[25] They interpret this result to suggest that such disclosures get the attention of relatively less sophisticated investors.

In summary, economic research performed so far indicates that the average poor performance of de-SPAC transactions highlights the importance of information disclosure to investors, particularly retail investors. Thus, changes in regulation in that regard will most likely dictate the course and popularity of SPACs going forward. The debate generated around the recent SEC proposal is testimony of that.^[26] Stay tuned.

Econ One Research, 550 South Hope Street, Suite 800, Los Angeles, CA, 90071, USA. E-mail correspondence: [email protected].

1. For a summary of SPAC features, see Gahng, M., Ritter, J., and Zhang, D., “SPACs,” SSRN Working Paper, January 29, 2021; and Klausner, M., Ohlrogge, M., and Ruan, E., “A Sober Look at SPACs,” Yale Journal of Regulation, January 2022. ↑

2. In re Multiplan Stockholders Litigation, consolidated case number 2021-0300 (Delaware Court of Chancery, January 3, 2022) at p. 56. See also, Jacques, F., “The Evolving Landscape of SPACs,” Business Law Today, February 7, 2022. ↑

3. Blankespoor, E., Hendricks, B., Miller, G., and Stockbridge, D., “A Hard Look at SPAC Projections,” Management Science, March 24, 2022. ↑

4. Ryan, V., “SPACs – They’re back,” CFO, December 3, 2020. ↑

5. Statement of John Coates, “SPACs, IPOs and Liability Risk Under the Securities Law,” April 8, 2021. ↑

6. Id. ↑

7. Securities and Exchange Commission, File No. S7-13-22. ↑

8. Akerlof, G., “The Market for ‘Lemons’: Quality Uncertainty and the Market Mechanism,” Quarterly Journal of Economics, vol. 84, no. 3, Oxford University Press, 1970, pp. 488–500. ↑

9. Id. at p. 490. ↑

10. For a general discussion, see Tirole, J., The Theory of Corporate Finance, Princeton University Press, 2006, at p. 246. ↑

11. Tirole at p. 246. ↑

12. Tirole at pp. 16-17. Some also argue that CEOs might be overconfident. See Kaplan S., Sørensen, M., and Zakolyukina, A., “What is CEO overconfidence? Evidence from executive assessments,” Journal of Financial Economics, 2021. Whatever a CEO’s objective might be, the implication is that they may undertake actions that are not in the best interest of shareholders unless there are proper incentives in place. ↑

13. Id. at pp. 20-25, where problems with the design of stock options are also discussed. ↑

14. In turn, as in most acquisitions, SPAC sponsors might also have less information about the target company than the target management in place at the time of the acquisition. ↑

15. See Klausner et al. at p. 19. Gahng et al. report a 37% average redemption ratio (p. 57). ↑

16. See Klausner et al. at p. 23. Additionally, the SEC argues that there can be conflicts between non-redeeming shareholders and redeeming shareholders holding onto warrants. See SEC File No. S7-13-22, p. 172. ↑

17. As explained in Gahng et al., “[t]ypically, the units purchased by investors include Class A shares that can vote on a merger and are redeemable. The sponsors purchase Class B shares that do not have voting privileges and are not redeemable but will convert into Class A shares, which will be subject to lockup restrictions, when a merger is completed. The sponsors typically pay a total of $25,000 for 5,000,000 or more Class B shares, a price of about 0.5 cents per share.” (p. 1). On the other hand, SPAC investors typically pay $10 a unit. ↑

18. For earlier studies, see Kolb, J., and Tykvová, T., “Going public via special purpose acquisition companies: Frogs do not turn into princes,” Journal of Corporate Finance, volume 40, 2016, pp. 80-96. See also, Dimitrova, L., “Perverse incentives of special purpose acquisition companies, the ‘poor man’s private equity funds,’” Journal of Accounting and Economics, volume 63, issue 1, 2017, pp. 99-120. These studies found de-SPAC underperformance, as explained further below. ↑

19. See Gahng et al. for returns on warrants. ↑

20. Gahng et al.; Klausner et al.; Dambra, M., Even-Tov, O., and George, K., “Should SPAC Forecasts be Sacked?” SSRN Working Paper, January 24, 2022. ↑

21. Dambra et al., p. 3. ↑

22. Blankespoor et al., p. 2. ↑

23. Dambra et al., pp. 18-19. ↑

24. Id. pp. 19-20. ↑

25. Id. pp. 20-22. ↑

26. Zanki, T., “SEC’s proposed SPAC crackdown meets industry resistance,” Law360, June 22, 2022. ↑

Antitrust in labor markets remains a hot topic for government, business, and labor. Consistent with the Biden administration’s “Executive Order on Promoting Competition in the American Economy,” the antitrust enforcement agencies continue to push the use of the antitrust laws to enhance the mobility and bargaining power of employees. On July 26, 2022, the U.S. Department of Justice’s Antitrust Division and the National Labor Relations Board (NLRB) entered into a memorandum of understanding (MOU) to strengthen the agencies’ partnership through greater coordination in information sharing, investigations and enforcement activity, training, education, and outreach.^[1] Similarly, on July 19, the U.S. Federal Trade Commission entered into a separate MOU with the NLRB “outlin[ing] ways in which the Commission and the [NLRB] will work together moving forward on key issues such as labor market concentration, one-sided contract terms, and labor developments in the ‘gig economy.’”^[2]

Developments in litigation related to antitrust considerations in labor markets have also been significant, as state and federal courts continue to work through the recent spate of filed cases that challenge no-hire provisions. In June 2022, McDonald’s obtained a judgment on the pleadings, ending the antitrust litigation challenging the legality of the no-hire restraint in its franchise agreements. McDonald’s convinced the court that its previous inclusion of no-hire clauses within its franchise agreements did not violate Section 1 of the Sherman Act. Ultimately, the court’s decision turned on the application of the rule of reason, as opposed to per se treatment or quick-look, which the plaintiffs argued were the proper standards to apply to the no-hire clauses. The court also rejected the plaintiffs’ argument that the relevant geographic market for analyzing McDonald’s market power was limited to only McDonald’s-branded restaurants nationally. The decision reaffirms the application of traditional antitrust principles in buy-side labor markets, despite the considerable pressure from politicians, government enforcement agencies, and the U.S. Plaintiffs’ Class Action Bar to apply heightened antitrust scrutiny to these restraints.

Deslandes v. McDonald’s USA LLC

On June 28, 2017, plaintiff Leinani Deslandes, a McDonald’s employee, filed a class-action complaint against McDonald’s in Illinois federal court, alleging that the company violated Section 1 by including a no-hire provision in its franchise agreements. In 2019, a nearly identical class-action complaint was filed by plaintiff Stephanie Turner in the same court, and the cases were combined for litigation.^[3] Both plaintiffs sought to represent former and current employees of McDonald’s who allegedly suffered from wage suppression and limited competition as a result of the no-hire clauses.

Until 2017, McDonald’s franchise agreements contained no-hire clauses that prohibited franchisees from employing or seeking to employ individuals who worked for other McDonald’s restaurants. These restraints applied to all other McDonald’s restaurants, including restaurants owned and operated by McDonald’s corporation or its subsidiaries. The plaintiffs alleged the restrictions limited the employment opportunities available to McDonald’s employees, which resulted in suppressed wages.

Court Grants McDonald’s Motion for Judgment on the Pleadings

On June 28, 2022, the court granted McDonald’s motion for judgment on the pleadings.^[4] Having previously partially granted McDonald’s motion to dismiss and having denied the plaintiffs’ motion for class certification, the only claims remaining before the court were plaintiff Deslandes and plaintiff Turner’s individual claims against McDonald’s for violation of Section 1.^[5]

McDonald’s argument for judgment on the pleadings relied heavily on the court’s previous denial of the plaintiffs’ motion for class certification in which the court held the rule of reason, as opposed to quick-look analysis, applied to the no-hire provisions.^[6] McDonald’s argued that the plaintiffs had failed to plead the relevant markets in which they sold their labor, let alone that McDonald’s had market power in the relevant markets, and therefore, the plaintiffs could not prove their claims as a matter of law.

In response, the plaintiffs alleged that while the court had rejected the application of quick-look analysis, the no-hire provision could still be found to be per se illegal. The plaintiffs also argued that they were not required to plead legal theories and therefore, were not required in their complaints to define the relevant markets. Lastly, the plaintiffs argued that employment by McDonald’s constituted its own market, and therefore, the relevant market was the national market of McDonald’s restaurants.

The court rejected each of the plaintiffs’ arguments in turn. The court found that the plaintiffs’ claims “‘presumptively’ call for rule of reason analysis” based on the Supreme Court’s recent decision in NCAA v. Alston,^[7] and because the plaintiffs specifically alleged the restraint was part of a franchise agreement. Therefore, it was ancillary to an agreement that was output enhancing.^[8]

Next, the court rejected the argument that the plaintiffs were not required to plead the relevant market.^[9] The court acknowledged that the plaintiffs did not need to plead legal theories but ruled they did need to plead sufficient facts to support a judgment in their favor, and by failing to plead the relevant market, the plaintiffs could not show that the noncompete clauses were unlawful.^[10]

Lastly, the court rejected as implausible the plaintiffs’ contentions that the relevant market was the national market of McDonald’s restaurants.^[11] The court instead accepted McDonald’s argument that the relevant market was the market for quick-service food employees in the immediate area (within ten miles) in which the plaintiffs lived.^[12] The court noted that unlike certain high-level positions, such as chief executive officers, companies do not undertake national searches for candidates to fill the positions at local fast-food establishments, and therefore, the relevant labor market could not be a national market.^[13]

Although the court had rejected all of the plaintiffs’ arguments, it did not stop there, ruling that even if it were inclined to grant the plaintiffs’ request for leave to amend their pleadings, the amendment would be futile.^[14] The court stated that because the relevant market was the local labor market in close proximity to where the plaintiffs reside, the plaintiffs could not possibly allege that McDonald’s had market power in the relevant markets.^[15] The court cited to the undisputed fact that 517 quick-service restaurants were within ten miles of plaintiff Deslandes’s home, and 253 quick-service restaurants were within ten miles of plaintiff Turner’s home.^[16] This undisputed evidence established conclusively that the plaintiffs could not prove that McDonald’s had significant market power within the relevant market for either plaintiff.^[17]

The plaintiffs filed a notice of appeal of the order dismissing their claims on July 27, 2022.

Conclusion

The court’s ruling in McDonald’s is good news for franchisors and, more generally, firms that use ancillary restraints, such as no-hire or no-poach provisions. First and foremost, the McDonald’s ruling reinforced the viability of the ancillary restraint doctrine and that courts remain open to considering, on a case-by-case basis, whether no-hire provisions are ancillary to the broader agreement. Parties that want their no-hire provision to be deemed ancillary should take the time to document their legitimate business interest for the provision and the relationship between that interest and the lawful, beneficial goals of the parties’ overarching agreement.

Second, the McDonald’s ruling reinforced the traditional rule that ancillary restraints are presumptively evaluated under the rule of reason. This was particularly notable in McDonald’s, which addressed no-hire provisions in the franchise context and where the defendant has company-owned stores that compete against its franchisees. Despite the plaintiffs’ arguments that the court should apply the quick-look or subject the noncompete clauses to per se treatment, the court maintained and ultimately dismissed the litigation on the application of the rule of reason. The court’s consistent application of the rule of reason is notable because like the plaintiffs, federal antitrust enforcement agencies and legislators have been advocating for heightened scrutiny of restraints in labor markets that, they argue, tend to suppress wages and employee mobility. The court’s application of the rule of reason helps allow franchisors to protect themselves and their interests with no-hire clauses, provided the clauses are ancillary to franchise agreements.

Lastly, this decision shows how difficult it will be for employees to claim that buy-side restraints caused them harm. Determinations as to the relevant market and the market power within the relevant market are fact-specific determinations unique to each plaintiff. By ruling that the relevant market in McDonald’s was quick-serve restaurants, as opposed to just other McDonald’s restaurants, the plaintiffs could not claim that the restraints prevented them from working. And, because the relevant market was not the national market, but instead a more local market near the plaintiffs’ residence, the nationwide class claims failed.

The decision of a single court will not deter the federal and state agencies in their effort to improve the bargaining position and mobility of the U.S. workforce. In fact, civil litigants who have sought to rely on the McDonald’s decision in unrelated cases have been met with DOJ intervention and pushback.^[18] Similarly, we would expect the DOJ and perhaps other agencies to seek to participate in the appeal of the McDonald’s decision.

1. “Justice Department and National Labor Relations Board Announce Partnership to Protect Workers” press release, available at https://www.justice.gov/opa/pr/justice-department-and-national-labor-relations-board-announce-partnership-protect-workers. ↑

2. “Federal Trade Commission, National Labor Relations Board Forge New Partnership to Protect Workers from Anticompetitive, Unfair, and Deceptive Practices” press release, available at https://www.ftc.gov/news-events/news/press-releases/2022/07/federal-trade-commission-national-labor-relations-board-forge-new-partnership-protect-workers. ↑

3. Deslandes v. McDonald’s USA, LLC, No. 1:17-cv-4857 (N.D. Ill. June 28, 2017); Turner v. McDonald’s USA, LLC, 19-cv-5524 (N.D. Ill. August 15, 2019). ↑

4. The parties cross moved for summary judgment, and McDonald’s also moved for judgment on the pleadings. Deslandes v. McDonald’s USA, LLC, No. 1:17-cv-4857, at 1-2 (N.D. Ill. June 28, 2022). ↑

5. Deslandes v. McDonald’s USA, LLC, No. 1:17-cv-4857, at 18 (N.D. Ill. June 25, 2019); Deslandes v. McDonald’s USA, LLC, No. 1:17-cv-4857, at 27 (N.D. Ill. July 18, 2021). ↑

6. Deslandes v. McDonald’s USA, LLC, No. 1:17-cv-4857, at 7-12 (N.D. Ill. July 18, 2021). ↑

7. __U.S. __, 141 S. Ct. 2141 (2021) ↑

8. Id. at 8. ↑

9. Id. at 10. ↑

10. Id. ↑

11. Id. ↑

12. Id. at 11-12. ↑

13. Id. ↑

14. Id. ↑

15. Id. ↑

16. Id. ↑

17. Id. ↑

18. See https://www.law360.com/articles/1515579/doj-says-mcdonald-s-no-poach-win-inapplicable-to-davita?te_pk=8622ad0e-b03b-42cd-96c7-6ed3ceef2dc8&utm_source=user-alerts&utm_medium=email&utm_campaign=tracked-entity-alert. ↑