This is a summary of the Hotshot course “Indemnifiable Losses: Drafting,” a look at how loss is defined in acquisition agreements, including a discussion of buyer and seller perspectives and negotiating positions. View the course here.
Drafting the Definition of “Loss”
Buyer’s Draft
This is a typical buyer-friendly definition of “loss” that would be included in a private acquisition agreement:
“Loss” means any cost, loss, liability, obligation, claim, cause of action, damage, deficiency, expense (including costs of investigation and defense and reasonable attorneys’ fees and expenses), fine, penalty, judgment, award, assessment, or diminution of value.
It’s a comprehensive list of potential costs and expenses: “cost,” “loss,” “liability,” “obligation,” and so on.
Some of the terms, like “claim,” “cause of action,” “fine,” “penalty,” “judgment,” “award,” and “assessment” are references to third-party claims by private parties or governmental authorities.
Since it’s a buyer-friendly draft, it doesn’t limit these types of expenses to third-party claims only.
It specifically includes “costs of investigation and defense and reasonable attorneys’ fees and expenses.”
This is typically included in a buyer’s draft because the buyer wouldn’t be made whole unless the seller is required to pay these types of expenses.
For example, if the buyer had to pay $100,000 in attorneys’ fees to defend a tax audit which resulted in the assessment of $10,000 in additional taxes, and the seller only paid the taxes based on the indemnification provisions of the acquisition agreement, then the buyer would suffer a $100,000 unindemnified loss.
Two other terms worth mentioning are “deficiency” and “diminution of value.”
These terms have broad meanings which could be applied in a wide variety of situations where the buyer feels that the value of the target company or the assets is not what the buyer bargained for, and this deficiency or diminution of value can be tied to a breached rep or warranty.
“Diminution of value” is seen as particularly beneficial to the buyer.
It lets the buyer claim that any indemnified losses should be multiplied by the same multiple of earnings that was used in the calculation of the purchase price for the target company.
Seller’s Response
A seller will usually respond to a draft like this by saying that the buyer’s definition is too broad.
They’d delete “[costs of] investigation” to avoid having to pay for the buyer’s voluntary investigations to make a case against the seller.
They’d often delete “claim” and “cause of action” because this language could be read to give the buyer the right to recover losses solely based on a third-party claim being made, regardless of the underlying merit of the claim.
This issue is commonly referred to as the “claims if true” concept.
A seller’s deletion of “cost of defense” and “reasonable attorneys’ fees and expenses” would usually be coupled with an agreement by the seller to pay those costs in connection with the defense of an indemnifiable third-party action against the buyer.
This is usually dealt with in detail in the indemnification provisions of the acquisition agreement.
A related issue is whether the buyer can recover the legal fees it incurred in enforcing its indemnification rights under the agreement.
When a seller disputes an indemnification claim and the buyer incurs legal and other fees enforcing its right to indemnification, and the buyer is ultimately successful, the buyer should be entitled to recover the legal and other fees it incurred enforcing its indemnification right.
While this concept is sometimes included in the definition of “loss”, it’s usually dealt with in the indemnification provisions.
The seller will probably object to including “deficiency” and “diminution of value” in the definition to preclude a multiple-of-earnings theory.
The seller may argue:
That it has no control over or insight into how a buyer actually made its determination of the purchase price; and
That any post-closing reduction in the target company’s value should be the buyer’s risk, because the buyer, not the seller, will receive the benefit of post-closing increases in the target company’s value.
The seller may try to reduce the indemnifiable loss by any tax benefit to the buyer.
This argument is based on the fact that sometimes the buyer can deduct the costs that it seeks to be reimbursed by the seller in an indemnification claim.
The seller argues that amounts to an unfair double recovery to the buyer in the amount of the tax benefit.
Although this argument sounds reasonable, the amount and timing of any tax benefit is dependent on the buyer’s particular tax status and circumstances.
This can lead to a very complex drafting exercise to document a tax benefit provision accurately.
Because of this complexity, the offset for tax benefits is often left out of the definition.
Similarly, the seller may argue that indemnifiable damages should be net of any insurance proceeds received by buyers.
While not as complex to draft as the tax provision, buyers often object.
Usually based on timing issues, since insurance payments are often delayed and subject to disputes with insurance carriers.
They also object on the theory that premiums will be raised after receiving an insurance payment and the buyer will bear the cost of those increased premiums.
If the indemnifiable loss does end up being calculated net of insurance proceeds, the acquisition agreement often also includes an affirmative obligation on the indemnified party to use commercially reasonable efforts to seek a recovery under any insurance policy covering the loss.
Sellers often add exceptions for consequential, incidental, and punitive damages.
Their position is that compensatory or actual damages are sufficient, and other damages are too speculative and remote and could encourage conflict between the parties.
Buyers will respond that excluding consequential damages could preclude the buyer from collecting damages that are the reasonably foreseeable result of a breach.
An example of this is lost profits, which the seller tries to exclude by adding the consequential damages exception.
Sometimes sellers and buyers negotiate this issue directly, and “lost profits” is either specifically included in or excluded from the definition of Loss.
It’s worth noting that in deals in which the buyer’s right to recover on a post-closing indemnification claim is limited to representation and warranty insurance, there’s typically much less negotiation around these issues.
This is because recoverable losses will be defined by the policy.
This course also includes interviews with ABA M&A Committee members Leigh Walton from Bass, Berry & Sims and Scott Whittaker from Stone Pigman Walther Wittmann.
This is a summary of the Hotshot course “Indemnifiable Losses,” an explanation of how loss is defined in acquisition agreements, including the types of losses typically included (and excluded) from the definition. View the course here.
Defining Loss
In a typical private company acquisition agreement, the seller is required to indemnify the buyer for losses resulting from breaches of or inaccuracies in the representations, warranties, and covenants made by the seller.
The scope of the seller’s indemnification obligations is often one of the most heavily negotiated elements of the acquisition agreement.
The parties negotiate a range of issues that impact:
Whether the seller has to pay an indemnification claim; and
The types of costs the seller has to pay.
The negotiations over the types of costs the seller has to pay center on the definition of loss.
Nearly every private company acquisition agreement includes “Loss” or “Damages” as a defined term.
The term is a critical component in determining the seller’s post-closing obligations.
Buyers generally try to include a broad list of items in the definition.
Their perspective is that they negotiated a purchase price based on a certain understanding about the business, and if there’s a claim that reduces the value of the business, they want to be compensated for that.
Sellers want to protect the negotiated purchase price, and therefore argue for a narrow definition.
They believe that buyers shouldn’t have any post-closing right to recapture any of the purchase price at all.
This is consistent with the approach accepted by buyers in public-company acquisitions.
The main types of losses that are typically included are out-of-pocket amounts the buyer or target company has to pay to a third party that are related to pre-closing obligations of the target company.
These could be:
Contractual obligations;
Tort obligations; or
Obligations owed to a governmental authority (such as the IRS).
Buyers also usually try to include damages ancillary to the loss itself, including concepts like:
The payment of costs of investigation;
Attorneys’ fees; and
Interest.
In addition to these types of damages, buyers look to include matters that reduce the value of the acquired company, even if no third-party payment is made.
This is the concept of “diminution of value.”
Diminution of value.
It allows buyers to seek payment over and above any actual damage or out-of-pocket expense paid by the buyer, if the loss can be related to an item that affects the value of the target company.
When the purchase price is based on a multiple of earnings, this language may allow the buyer to make a post-closing indemnification claim based on a multiple of lost earnings. For example:
Assume a buyer agrees on a purchase price of $100 million, which is five times the target’s earnings of $20 million for the prior year.
The buyer discovers after closing that the earnings in the financial statements, which the seller represented and warranted were true and accurate, were in fact only $15 million, an overstatement of $5 million.
The buyer would argue that a payment of $5 million would not make it whole because the 5x multiple it used when coming up with its valuation for the target now suggests a valuation of $75 million.
Instead, they’d seek to recover $25 million, because the “diminution in value” of the target is five times the earnings overstatement.
Other types of damages that frequently come up in the negotiations over the definition of loss are consequential, punitive, and incidental damages.
Sellers will try to specifically exclude these damages from the definition on the basis that compensatory or actual damages are sufficient, and that other types of damages are too speculative and remote.
This is often negotiated between the parties.
In deals in which the buyer’s right to recover on a post-closing indemnification claim is limited to representation and warranty insurance, the issues around the definition of loss are largely moot.
This is because recoverable losses will be defined by the policy.
This course also includes interviews with ABA M&A Committee members Leigh Walton from Bass, Berry & Sims and Scott Whittaker from Stone Pigman Walther Wittmann.
Artificial Intelligence: A Popular—and Fuzzy—Label
What isn’t branded “AI” these days? The past year has seen an explosion of companies, products, and services touting their ties to artificial intelligence (AI) technology. If they’re not “AI-powered,” they’re “AI-driven” or “AI-enabled.” In fact, so many organizations are itching to add “.ai” to their web addresses that Anguilla—the island controlling the domain name—is set to reap millions in domain registration fees this year. Nor is it just new market entrants adopting the term. When the company once known as Twitter announced its rebrand in July, its CEO declared that X too would be “[p]owered by AI.”
The term has jumped into the business world’s vocabulary with a swiftness that should feel familiar. Last year “metaverse” was rolling off executives’ tongues, with the word suddenly a fixture on corporate earnings calls. “Blockchain” experienced a similar phenomenon a few years earlier, with use of the term in company press releases growing more than twentyfold in the course of a year.
Driving this most recent marketing shift is AI’s enormous perceived economic potential. A June 2023 McKinsey report predicts that in the coming years generative AI—artificial intelligence that can generate original content—will add trillions in value to the global economy. Microsoft, too, is bullish on the technology, staking billions on OpenAI and its popular chatbot ChatGPT. With its promise of bounty and investor allure, “AI” is a label that every company wants to wear.
But commercial benefits alone don’t explain the speed or scale of industry’s marketing repositioning around AI. Countless businesses have been able to quickly trumpet their AI capabilities because . . . no one can say exactly what “AI” means.
“Artificial intelligence” is “an ambiguous term with many possible definitions,” the Federal Trade Commission (FTC) observed in guidance earlier this year. The two words sweep in a host of different technologies that serve different ends—from generative AI tools that artists prompt to create fantastic imagery, to machine-learning programs that financial companies can use to predict loan risk.
As Theodore Claypoole, a partner of Womble Bond Dickinson’s Intellectual Property Practice Group, notes in a September 2023 Business Law Today article, this “lumping together of disparate functionalities into a single unmanageable term” presents a challenge for those designing rules for the technologies. Yet for a company’s marketing team, the term’s broadness and flexibility may seem a grand thing. As AI investment swells, businesses whose products involve any of these various technologies may see only upside in raising their hand and saying: “Artificial intelligence? We do that, too!”
They should pause a moment before doing so. Others—just as interested in AI as the business world is—are watching whose hands are up.
The Marketing Concern: Truth in Advertising Laws
For companies planning to market their AI skills and tools, one immediate consideration isn’t unique to AI: It’s those darn truth in advertising laws. In February the FTC reminded businesses that laws around product claims apply to today’s advanced tech just as they do to traditional goods and services. If an advertiser claims that its product is “AI-enabled,” then it needs to be; merely using AI in the product development process won’t cut it. Similarly, advertisers must substantiate performance claims and comparative claims about automated technologies, and the claims must accurately reflect the technologies’ limitations. The FTC is coupling this guidance with action. In August the agency sued Automators AI for falsely and misleadingly promising consumers financial gains from using AI.
Companies selling assets made by AI also need to consider whether the AI-generated nature of their content warrants additional disclosures. The FTC has been clear that deceptively peddling AI-generated lookalikes and sound-alikes as the work of real artists or musicians violates the law. At the state level, the California Bolstering Online Transparency Act (BOT) similarly prohibits using a bot to deceive people in a sales- or election-related context. And the FTC has even suggested that companies offering generative AI products may need to disclose to what extent their training data includes copyrighted or protected materials.
Despite the FTC’s flurry of new guidance on the topic, the agency acknowledges that “artificial intelligence” remains a nebulous phrase. And the varied and vague meanings of the term may still allow many companies to claim—lawfully—that they’re indeed AI-driven.
The Bigger Worry: A Growing Web of Laws and Regulations
With guidance from their lawyers, companies should be able to ensure that their marketing claims about AI are truthful and evidence based. But false advertising laws shouldn’t be the only considerations for organizations deciding whether to tread into the new territory. Businesses rushing toward AI’s gold-laden hills should realize that lawmakers, regulators, and others are heading to the same place.
For these other parties, the definitional fuzziness of the term “AI” isn’t a marketing opportunity; it’s a broad target. Take federal agencies, for example. In April, weeks after Bill Gates proclaimed that “[t]he Age of AI has begun,” the FTC and three other agencies—the Consumer Financial Protection Bureau, the Justice Department’s Civil Rights Division, and the Equal Employment Opportunity Commission—jointly pledged to “vigorously use our collective authorities” to monitor the emerging tech. The four agencies see their authority as extending over not just the already-expansive category of AI but across all “automated systems”—a term they use “broadly” to encompass any “software and algorithmic processes . . . used to automate workflows and help people complete tasks or make decisions.” Bottom line: If you’re doing anything involving AI or adjacent to AI, you’re on these regulators’ radar.
President Biden’s October Executive Order (EO) on artificial intelligence will only heighten the regulatory buzzing. The lengthy EO directs several agencies to propose regulations and provide guidance on AI. For instance, the Secretary of Commerce must issue guidelines and best practices for developing “safe, secure, and trustworthy AI systems”—guidance that will likely affect how private industry designs and deploys AI.
Legislators, too, have big plans for the tech. Indeed, some laws regulating AI and similar technology are already on the books. For instance, the California Privacy Rights Act of 2020 (CPRA) charges the California Privacy Protection Agency with issuing regulations on how businesses employ automated decision-making technology. The California Age-Appropriate Design Code Act, passed in 2022, likewise limits how businesses use algorithms in services and products likely to be accessed by minors. East of the Golden State, Colorado adopted a regulation effective in November that seeks to prevent life insurers from using algorithms and predictive models to racially discriminate. And across the Atlantic, the European Union’s General Data Protection Regulation (GDPR) has for years let individuals opt out of certain automated decision-making.
Other legislative changes are coming. On Capitol Hill, a bipartisan group of lawmakers is reportedly developing a “sweeping framework” to regulate AI, including licensing and auditing requirements, rules around data safety and transparency, and liability provisions. State legislatures are a step ahead of Congress, with several AI-focused laws proposed or already passed. And the EU has drafted what it calls “the world’s first rules on AI.” Its AI Act would impose comprehensive requirements—involving security, training, data governance, and transparency—on any company using, developing, or marketing “AI systems” in the EU. And while the European Parliament acknowledges industry groups’ concerns that the term “AI systems” is too wide-reaching, the EU still intends to adopt a “broad definition” to cover both current and future developments in AI technology.
In response to these changes, a new of category of “AI governance”professionals has emerged to shepherd companies through the upcoming law-making and regulation. Such roles may soon become must-haves for companies looking to commercialize AI.
Whatever one’s views on the need for state intervention into this new technology—and expectations for how effective it will be—this governmental pencil-sharpening should make any prudent company think a moment before slapping an “AI” sign on its storefront. Just as a complex and ever-growing regulatory regime governs privacy and personal data, a thicket of statutes and regulations has been sprouting around AI and anything like it. Stepping into that thicket shouldn’t be a hurried marketing move—it needs to be a calculated decision.
To Brand as “AI” or Not to Brand as “AI”
Many commentators foresee AI as the next internet or mobile phone—a revolutionary technology destined to be the bedrock of any modern business. And it may well be. Yet those predictions are made in a temporary Eden of minimal regulation. They fail to consider the horde of governmental actors poised to shake up the landscape.
For some companies, the costs of operating within a complex regulatory regime—and the risks of noncompliance—may outweigh any potential benefits from repositioning their business around AI. These companies may deliberately choose not to get into the AI game.
With the AI frenzy still in full effect, that may sound far-fetched. But it shouldn’t. Regulatory avoidance—that is, structuring one’s business to lawfully avoid laws and regulations—is common today. Many organizations choose not to operate in certain jurisdictions, for instance, or decline to process sensitive data like biometrics or minors’ personal information, so that they can limit their legal obligations and business exposures. While that may mean some lost commercial opportunities, the organizations don’t see the value as justifying the additional regulatory burden.
Conclusion
The AI wave may be inevitable, with every business forced to swim along or else sink. But companies are naive if they think the “AI” tag attracts nothing but customers—governmental bodies around the world see it, too. Before rebranding, then, smart organizations should consider not just the immediate marketing benefits of being “powered by AI” but also its long-term costs and risks.
In a shot across the bow to the digital payments industry, the U.S. Consumer Financial Protection Bureau (“Bureau”) has issued a proposed rule to expand its oversight authority to nonbank providers of consumer payment apps.[1] These apps include digital wallets, funds transfer services, and peer-to-peer apps—for both U.S. dollar payments and, surprisingly, also bitcoin and other crypto-asset payments. The Bureau anticipates that the proposal would cover about seventeen companies based on data from various sources, including information it has collected from Amazon, Apple, Facebook, and others with respect to their payment offerings.[2]
Under the proposed rule, if finalized, the Bureau would exercise the full plate of supervisory authority over “larger participants” in this market. On top of its existing rule-writing and enforcement powers, the Bureau would exercise examination powers under the Consumer Financial Protection Act (“CFPA”) over these larger participants, such as conducting on-site examinations, imposing reporting requirements, and conducting periodic monitoring.
These supervisory activities would impose new costs on nonbank providers. The more significant impact to the digital payments industry, however, is the broad line of sight that the Bureau would gain into the activities of leading market participants. Areas of potential scrutiny where the Bureau has strongly signaled interest include the novel ways that consumer financial data and behavior data are used together in “super apps” and in embedding payments within a social media feed.[3] This proposed rule comes hot on the heels of the Bureau’s proposed rule to accelerate open banking, as the Bureau is laying the groundwork for a greater role at the intersection of digital payments and data.[4]
Scope of the Proposed Rule
The proposed rule homes in on the “general-use” digital consumer payment apps market, in recognition of its tremendous growth in recent years.[5] However, the Bureau’s examination authority under the proposed rule would apply to only a subset of nonbank providers in this market—those that are deemed “larger participants.”
The CFPA grants the Bureau broad discretion to choose criteria for assessing whether a nonbank provider is a “larger participant.” Under its proposed criteria, a nonbank provider would be a “larger participant” if it satisfies the following two prongs:
Payment transaction volume prong: The nonbank provider and its affiliates, in aggregate, have an annual “consumer payment transaction” volume of at least five million transactions, and
Entity size prong: The nonbank entity would not be a small business concern as defined by the Small Business Administration size standards for its primary industry (the likely classification would be “Financial Transactions Processing, Reserve, and Clearinghouse Activities”).[6]
A key metric in determining whether a nonbank provider would be considered a “larger participant” for purposes of the proposed rule, therefore, is the volume of “consumer payment transactions” that it facilitates. To fall within that definition (and be counted toward the payment transaction volume prong of the proposed “larger participant” criteria), a transaction must be primarily for personal, family, or household purposes; purely commercial or business-to-business payments would be outside the definition.
The following table summarizes additional nuance from the proposed rule on the definition of “consumer payment transactions”:
What is a “consumer payment transaction” under the proposed rule?
What is covered?
Any payment transaction that results in a transfer of funds by or on behalf of a consumer to a third party
Focus is on the sending of a payment, not the receipt
Encompasses a consumer’s transfer of the consumer’s own funds (such as where the nonbank provider transfers the consumer’s balance or instructs the consumer’s bank, on the consumer’s behalf, to make a funds transfer)
Also encompasses the use of a consumer’s account or payment credentials to make a payment (such as digital wallet functionality to hold and transmit the consumer’s credit card information)
Digital assets, including bitcoin, that are used to make a payment by or on behalf of a consumer to a third party
What is excluded?
International payments, such as remittances
Exchange transactions (such as conversions of U.S. dollars to a different foreign currency or purchases, sales, or exchanges of digital assets)
A consumer’s payment to a marketplace or merchant for the sale or lease of goods or services from that marketplace or merchant (such as by using payment credentials stored by an online marketplace)
Consumer lending activities, such as digital apps through which a nonbank lends money to consumers to buy goods or services
Examination Authority
Under the proposed rule, the Bureau would examine for compliance with federal consumer financial protection laws, such as the CFPA’s prohibition against unfair, deceptive, and abusive acts and practices; the privacy provisions of the Gramm-Leach-Bliley Act and its implementing Regulation P;[7] and the Electronic Fund Transfer Act and its implementing Regulation E.[8] Under the proposed rule, the Bureau would notify a nonbank provider when it intends to undertake supervisory activity, and the provider would then have an opportunity to claim that it is not a larger participant.
The Bureau’s examination authority would coexist with state oversight of money transmission. While holding a state license would not shield from Bureau oversight a money transmitter that also meets the “larger participant” criteria, the proposed rule notes that the Bureau’s prioritization of supervisory activity among nonbank providers would take into account the extent of relevant state oversight and that the Bureau would coordinate with appropriate state regulatory authorities in examining larger participants.
The Bureau is inviting public comment on the proposed rule through January 8, 2024.
The Bureau characterizes “general use” by the absence of significant limitations. For example, a digital app whose payment functionality is used solely to purchase or lease a specific type of services, goods, or property (such as transportation, lodging, food, an automobile, real property, or consumer financial products and services) would not have “general use.” Similarly, a digital app that helps consumers split a bill for a specific type of goods or services (such as a restaurant) would not have “general use” for purposes of the rule. ↑
Good communication between a lawyer and their client is paramount. After all, a lawyer cannot do their job if a client hasn’t shared important details. Business lawyers work hard to resolve matters ranging from corporate tax compliance to lawsuits that make national news. There’s no room for error.
Effective lawyer and client communications should be a priority. Without it, you run the risk of:
Making your client feel ignored or devalued
Your client forgetting important information
Relationships between you and your client falling apart
Less room to negotiate with clients
Losing out on future work with that client or business
But it’s not as simple as just telling your team to “communicate better.” Effective communication takes time, effort, and learning a unique skill set. Of course you should listen to your client. Of course you should communicate with them regularly. But what does that really mean?
It means more than just being a good listener. Improving client communication means building a framework that standardizes your communication process. Once that framework is in place, you can refer back to it time and time again. And if you review the tools you use each day with that in mind, you can make great communication easier than ever.
In this article, we’ll discuss the best practices for improving client relationships, and how you can start to build them.
Establish clear communication channels
Do you prefer to communicate by email? What about your client? Would they rather you just give them a call?
Establishing clear communication channels takes communication, and different conversations require different channels. An open conversation requires a meeting or call, but a quick update may just need an email or text.
Discuss preferred channels of communication up front, and establish when those channels are appropriate. If you send regular updates by email, make sure your client is happy to receive them, and make sure your team has the tools to streamline that process. Consider software that will let you send updates automatically. If you find your office is overwhelmed by incoming calls, consider contact center AI solutions to get queries and messages to where they need to be.
Practice active listening skills to comprehend client concerns
Source: Pexels.
Being a good listener is easier said than done. Lawyers deal with so many clients that it can often feel like you’ve heard everything. And therein lies the problem. Switching off, making assumptions, or jumping to conclusions is tempting, but every person, client, business, and case is unique. If you don’t make clients the center of your world, you miss a crucial piece of information.
Active listening is a skill set that takes more than just words into consideration. It involves:
Maintaining good eye contact (even on a video call!)
Looking for non-verbal cues, like physical signs of anxiety, sadness, or anger, and using those cues to offer appropriate support
Asking open-ended questions to gain more information and express genuine interest
Paraphrasing the talker’s words and reflecting them back to demonstrate close attention
Active listening helps you better understand the client’s thoughts and emotions. Being an active listener helps your client feel more comfortable, encouraging them to trust you, open up more, and ultimately help you serve them better.
Simplify complex legal terms for client comprehension
Legal jargon can seem impenetrable, even for seasoned professionals, so think of how your clients feel when you’re spouting complex legal terms at them. Jargon might make communication more efficient between lawyers, but after smiling and nodding through a meeting, clients can leave feeling belittled, confused, and less confident in your genuine desire to help them.
Source: Pexels.
Use simple language to describe legal concepts. Explain legal processes thoroughly in a way your client will understand, and don’t be afraid to ask if they understand something.
Establish a communication schedule for updates
Every client thinks their case or transaction is the most important in the world. To them, it is.
For you, though, their matter is just one of many important responsibilities. Lawyers are busy, and it’s impossible to stay in constant contact with every single client. Creating realistic expectations from the beginning is the key to avoiding resentment down the line.
However, a client might be anxious or impatient. It’s important to have frank discussions up front about what is and is not practical.
Define what counts as an essential update and guarantee contact when said update occurs.
Create a realistic timeframe for email, call, or message replies. For example, guarantee a reply within one or two business days.
Schedule regular conversations with clients to set aside time for updates, concerns, or simply touching base.
Don’t set yourself up for failure by promising clients the world and then disappointing them.
Your clients want to feel kept in the loop, but you don’t want to be inundated. Setting realistic expectations and communication schedules can help avoid clients chasing you for updates.
Maintain detailed records of client communications
Your case is missing a vital piece of information. The client swears they told you over the phone a few weeks ago. You’re sure they didn’t, but now you’re doubting yourself.
Keeping detailed communication records is another thing that sounds like common sense, but it can be overlooked when so much information is flying back and forth.
Record phone and video calls when appropriate, keep email and messaging records, and record or take detailed notes during in-person conversations. There are CRM tools, cloud storage solutions, and virtual assistant tools to help keep everything recorded and stored securely.
If something is overlooked, you can prove to your client that it wasn’t your negligence that caused it and maintain a good level of trust.
Seek feedback from clients
Being receptive to feedback is one of the easiest and most effective ways to improve your skills. After all, most people are happy to give feedback when asked.
Positive feedback can help boost confidence and allow you to stick to the things you’re doing right. Negative feedback is even more valuable, if a little intimidating. Constructive criticism helps us to learn, grow, and improve on our weaknesses.
Asking for feedback is a double win: it shows your clients that you care, and you’ll gain valuable insight into your own work. As a bonus, if you ask for feedback publicly, potential clients looking for a good lawyer will be able to see it.
Improving your firm’s client communications
Lawyers only have so much time and energy. Being a law professional often means long hours and stressful workloads.
Creating clear, realistic, and empathetic lines of communication between yourself and your clients is paramount to easing both your and your clients’ stresses. Improving lawyer and client communication makes your job easier, facilitating honest and open discussion, building trust, and ultimately leading to wins.
As we reflect on the sixtieth anniversary of the assassination of President John F. Kennedy this month, consumer finance lawyers may take interest in a little-noticed bit of history. The assassination delayed Congressional consideration of the Truth in Lending Act (TILA). A Boston field hearing on TILA that fateful day was abruptly halted upon news of the tragedy. The hearing continued two months later, in early 1964, but momentum for the law, which had been increasing over recent years, began to wane dramatically. As the country reeled and new political realities set in, lawmakers’ focus drifted elsewhere. TILA would have to wait another five years until its eventual passage in 1968.
On the morning of November 22, 1963, while the president traveled to Dallas, a Senate Committee on Banking and Currency subcommittee convened in the president’s home state of Massachusetts, in Boston, for the first of what would have been two days of hearings on S. 750, an early version of the legislation that eventually became TILA. The Boston hearing followed similar field hearings that year in New York, Pittsburgh, and Louisville, as well as several other hearings on the legislation dating back to 1960. Senator Paul H. Douglas (D-IL) chaired the hearing, as he did in the other cities. In Boston, just one other senator, Wallace F. Bennett (R-UT), joined him.
The two heard from several proponents of the legislation during the morning session, which began at 10:00 a.m. eastern time. (The president was in Houston then, preparing to fly to Dallas.) The first witness was the governor of Massachusetts, Endicott Peabody, who expressed support for the bill and welcomed a federal solution to the “incongruous hodgepodge of laws” governing consumer credit in Massachusetts and other states. Other witnesses included the state’s commissioner of banks, three state representatives, and several banking and retail industry representatives.
The hearing adjourned at 1:07 p.m. for lunch, with an announced resumption time of 2:30. The president was now in Dallas, where it was 12:07 p.m. central time. He was seventeen minutes into his motorcade route through the city, on his way to a luncheon at the Dallas Trade Mart. While the senators in Boston began their break, Kennedy may have been shaking hands with a supporter or chatting with a nun during one of two impromptu stops along the way. Twenty-three minutes later, at 12:30, the president was shot.
In Boston, Senators Douglas and Bennett were presumably just sitting down for lunch. All three major TV networks dispensed with their normal programming that afternoon, but it was on CBS where Walter Cronkite delivered the command performance that lives on in popular memory. The network initially cut into its daytime programming to cover the shooting at 1:40 p.m. eastern time, with the first report stating only that the president was shot and wounded. The two senators were no doubt informed immediately and may have watched the unfolding broadcast on CBS or elsewhere. Cronkite relayed wire service updates as they were handed to him, each more grim than the prior, culminating in his enduring proclamation: “From Dallas, Texas, the flash apparently official—President Kennedy died at 1 p.m. central standard time, two o’clock eastern standard time, some thirty-eight minutes ago.”
Senator Douglas immediately reconvened the hearing:
“Ladies and gentlemen, the President of the United States is dead. The country and the world has suffered a great loss. The hearings will be adjourned. Those who wish to submit statements will send them to Washington to be filed. I am going to ask that we all stand and observe a minute of silent prayer and then I am going to ask Father McEwen to lead us in prayer.”
Rev. Robert J. McEwen was chair of the Boston College economics department and slated to testify in support of the bill the next day. After a moment of silence was observed, he recited the Lord’s Prayer, which is noted in the record. According to the hearing transcript, the subcommittee adjourned for good at 2:37 p.m. The slight timing difference between Cronkite’s announcement and the hearing’s adjournment may be explained by out-of-sync clocks, or Senator Douglas may have received some reliable confirmation of Kennedy’s death just prior to the Cronkite report (ABC is said to have broken the news just before CBS). In any event, the hearing adjourned, and the senators returned to Washington.
On January 11, 1964, the hearing resumed in Boston. Senators Douglas and Bennett were joined this time by Senator Milward Simpson (R-WY) Chairing the hearing, Senator Douglas acknowledged “the tragic and terrible assassination” and expressed his desire to complete the aborted hearing. Witnesses in favor (including Father McEwen) and against the legislation alternated throughout the morning and afternoon sessions. When the January hearing concluded, it would be the last TILA hearing for more than three years, a marked break from the increasing drumbeat of hearings that had started in 1960 and gained momentum in the following three years.
The assassination permeated and disrupted every aspect of life in the United States that day. It tinged the course of history in countless ways, large and small, including the development of consumer credit regulation. While the sudden cancellation of the Boston field hearing on TILA on November 22, 1963, is a minor historical footnote to a devastating day in America, it’s also a reminder of the unsparing reach of tragedy.
In the halls of justice and chambers of law, the narrative of women has evolved from whispers to powerful testimonials of achievement and ambition. The legal system, renowned for its rigorous traditions, has historically been a bastion of male dominance. Nevertheless, through perseverance, talent, and a fierce commitment to justice, women have slowly but surely carved out a place of honor and respect within its esteemed corridors. This article aims to trace the journey of women in the legal profession, from trailblazing pioneers of yesteryear to contemporary advocates striving for equal representation and rights. Leveraging insights from prominent legal luminaries—Monika McCarthy, Danielle Hall, Valerie Hletko, Jonice Gray Tucker, and Lynette Hotchkiss—at the panel discussion titled “See Her, Hear Her: Historical Evolution, Advocacy, and the Path Ahead” at the American Bar Association’s Business Law Fall Meeting in Chicago on September 8, 2023, this article explores women’s challenges, milestones, and future prospects in the legal domain, framed against the broader canvas of societal change and the enduring quest for gender parity.
Historical Context
“Women belong in all places where decisions are being made. It shouldn’t be that women are the exception.” —Ruth Bader Ginsburg
The legal profession boasts a rich history marked by pioneering achievements of women. From the 1600s through today, women have consistently forged paths, shattered traditional barriers, and claimed their deserving space in a field once predominantly ruled by men.
Pioneers in the Legal Arena
Margaret Brent stands out as America’s first woman lawyer in 1648. A significant figure in Maryland, her achievements set the stage for more to come. Following in her footsteps was Arabella Mansfield, the first woman to be admitted to a state bar in the United States in 1869. Diversity further expanded with Charlotte E. Ray becoming the first African American woman lawyer and the first woman admitted to the bar in the District of Columbia in 1872. The twentieth century witnessed milestones like Florence E. Allen becoming the first woman to serve on a state supreme court in 1920 and Pauli Murray, known for her invaluable contributions to civil and women’s rights, becoming the first African American recipient of a JSD from Yale Law School in 1965. Fast-forward to recent times: Sandra Day O’Connor became the first female justice to serve on the U.S. Supreme Court, appointed by President Ronald Reagan in 1981, and Paulette Brown stands tall as the first African American woman to ascend to the ABA presidency in 2014.
However, it is essential to zoom out beyond these individual stories of triumph and resilience and examine the broader progression.
The Ebb and Flow of Women in Law: 1951–2022
Data spanning over seven decades paints an intriguing picture for women in law. While the 1950s witnessed a mere trickle of female representation, the percentage of legal practitioners that are women increased to 38 percent by 2022.[1] The 1970s, in particular, marked a dramatic uptick.[2] Yet, the last decade’s modest growth suggests that the journey to equality is far from over.[3]
Delving into the world of legal academia, the trends are equally riveting. While the turn of the millennium saw more women entering law schools, there is an alarming drop-off in the transition from law school to professional attorney. However, the last two decades have seen a surge in female law school deans, hinting at a changing leadership landscape.
Women as a Percentage of All Law Students: 2000–2021[6]
But what about the labyrinth of law firms? While women make up 47 percent of associates in law firms, the numbers drastically decrease further up the hierarchy.[8] Only 22 percent of equity partners and 12 percent of managing partners are women.[9] And the gender pay gap? It further widens this divide.
However, it is not just about representation in law firms’ highest echelons; delving into firm policy perceptions offers more nuanced insights. For instance, 88 percent of male attorneys believe that their law firm acknowledges gender diversity as a priority, while only 54 percent of their female peers shared this sentiment.[10] This disparity in perception permeates other areas, from leadership promotions to retention policies.
To truly grasp the dynamics at play, however, one must look beyond these corporate metrics to consider the lived daily experiences of female attorneys. At the panel discussion at the American Bar Association’s Business Law Fall Meeting, panelists McCarthy, Hall, Hletko, Tucker, and Hotchkiss highlighted these day-to-day experiences.
McCarthy shared her initial experiences in a small law firm where she was the only female attorney. From male colleagues not knowing how to act around her to learning about sports to fit in, her narrative painted a picture of the unique challenges faced by women in male-dominated settings. She also highlighted the discomfort of working closely with a partner who smoked cigars in his office, revealing the distinct professional challenges of the time.
Hall emphasized that while her firm had several female partners offering mentorship, there remained an evident disconnect. Casual discussions, often centered on sports, sometimes left her feeling out of the loop, even if broader strides were being made.
Hletko traced the evolution of law firms, spotlighting her time at a firm. She observed an early commitment to gender inclusivity and the presence of influential female partners who shaped the firm’s culture.
Tucker delved into the pressures of managing work and family life and pay equity challenges. Her narrative of working beyond committed hours yet receiving only 80 percent of the salary that her male counterparts received resonated as a stark example of gender disparities in compensation.
Hotchkiss recounted the dual pressures of work and motherhood while practicing in Anchorage, Alaska, in the 1980s. Her stories of gender biases in courtrooms and often being mistaken for a secretary unveiled the subtler, daily challenges that women in law endure.
Day-to-day interactions and experiences, often unseen in broader statistics, can significantly shape an attorney’s sense of self and career direction. From missed assignments and overlooked promotions to demeaning encounters and identity mix-ups, female attorneys face numerous daily challenges.
Female Equity Partners in Law Firms: 2006–2020[11]
From Corporate Legal Departments to Courtrooms: A Mixed Bag
Beyond law firms, the in-house and judiciary landscapes present a mix of progress and stagnation. The promising 67 percent of general counsel roles occupied by women contrasts sharply with the subdued representation in the judiciary, especially at the federal level.[19]
The surge in women general counsels can be attributed to a couple of factors. Firstly, over the last couple of decades, corporate environments have increasingly recognized diversity’s value at decision-making levels. Companies believe that diverse leadership brings varied perspectives, promoting innovative solutions and better decision-making.[20] Secondly, corporate mentoring programs and initiatives to foster female talent have become more commonplace. Such programs and initiatives provide women the necessary resources, guidance, and opportunities to ascend to top legal positions within companies.[21] And, in good news for women, industries are increasingly inclined to hire general counsels with experience: 41 percent of externally hired general counsels in 2020 had experience; since then, that percentage has jumped to 60 percent.[22]
However, while the corporate world may be progressing, it’s evident that the judiciary still has some catching up to do. The disparity in representation at the federal level can be attributed to various historical, institutional, and societal factors that have traditionally limited opportunities for women in the judiciary.[23]
The tale of women in law is a saga of relentless determination, marked triumphs, and persistent challenges. The landmarks are many, but the journey to comprehensive gender parity remains ongoing. It is not just about achieving numerical equality but forging a future that ensures fair work distribution, equitable pay, and an inclusive environment for all.
Advocacy and Activism
“Each time a woman stands up for herself, without knowing it possibly, without claiming it, she stands up for all women.” —Maya Angelou
In the intricate tapestry of the legal profession, the need for gender equality remains pressing. Advocacy, activism, and allyship stand at the forefront of this evolving narrative. This section sheds light on the pivotal role of these pillars, focusing on the strategies that women can employ to advocate for themselves and their counterparts. Furthermore, it emphasizes men’s integral role as allies, advocating for and alongside their female colleagues. By merging the forces of self-advocacy, collective activism, and intentional allyship, we aim to guide the legal community toward a landscape that not only is equitable but also thrives on collective strength and unity.
Allyship
Historically, the legal sphere has been dominated by men. However, women have established their rightful place through consistent advocacy and persistence. Today, it is vital to recognize the crucial role men play as allies, working in tandem with women to cultivate an ethos of mutual respect and collaboration.
For men seeking to be proactive allies, here are some actionable steps:
Celebrate Achievements: Actively acknowledge and appreciate the accomplishments of female peers.
Promote Equitable Distribution: Move beyond gendered expectations and ensure fair delegation of responsibilities.
Champion Safe Spaces: Advocate for settings where open and unbiased dialogues can thrive.
Facilitate Networking: Guarantee that female colleagues have equivalent access to pivotal career opportunities.
Encourage Feedback: Understand that being an ally is an evolving commitment; remain receptive to change.
Invest in Mentorship and Sponsorship: Harness your influence to propel the careers of female colleagues.
This topic was another focal point during the panel discussion at the American Bar Association’s Business Law Fall Meeting. McCarthy emphasized the vital nature of allyship, touching upon persistent biases that women face and urging active countermeasures against such biases. Hletko brought forward the nuanced strategy employed by some male allies of tactfully steering conversations back to their female colleagues when someone attempts to direct questions and comments to the male attorney. Tucker illuminated potential biases that women might harbor against one another, emphasizing that advocacy against gender discrimination should transcend individual perspectives, and noted the intersectional nature of the challenges that many female attorneys face.
Genuine gender parity in the legal domain requires comprehensive allyship. This entails dismantling entrenched biases and fostering a genuinely equitable work environment. As we further delve into the intricacies of women’s experiences in the legal realm, it becomes evident that mentors play a pivotal role in shaping these journeys.
The Transformative Influence of Mentors
Mentorship is a beacon in the maze of professional journeys, guiding and molding individuals’ trajectories. The essence of mentorship transcends mere knowledge transfer; it encapsulates confidence-building and perspective-sharing. A paradigm shift is imperative for meaningful mentorship: firms and senior attorneys must move away from delegating rudimentary tasks to women. The emphasis should be on equipping mentees, especially those from diverse backgrounds, with the requisite tools to navigate specialized fields like law.
Hall candidly shared, “As a first-generation college and law student, I have been blessed with both formal and informal mentorship throughout my journey. One of the biggest game changers is having a mentor who gets where you’re coming from, understand[s] those knowledge gaps, and provid[es] insights without always waiting for you to ask.”
Hotchkiss reflected on her early career, stating, “The term ‘mentor’ wasn’t familiar to me early on. However, in the late eighties, I had the privilege to work with leading banking and consumer finance attorneys across the country. They mentored me in ways they probably weren’t aware of. Most were males, yet they were supportive, encouraging, and accepting. Throughout my career, I’ve been told by many women that they see me as a mentor—often, it was unbeknownst to me. The ABA has offered me numerous opportunities, and I always urge women to engage, especially within the Consumer Financial Services Committee. It’s essential to identify one’s passion, skills, and aptitudes and foster them. Whether it’s organizing, speaking, or writing, everyone has a unique contribution to make. Tailoring mentorship based on individual skills and passions is the most effective way forward.”
Grasping the difference between mentorship and sponsorship is crucial in the legal world. Both offer distinct advantages: mentors provide guidance and share wisdom, while sponsors directly influence an individual’s career. The complex law landscape further highlights the need for mentors and sponsors, particularly as advocates for visibility and representation. The ripple effects of a sponsor or mentor’s visibility and accessibility are profound. Channeling and amplifying one’s strengths under such guidance can shape a lasting legacy. Ultimately, mentorship and sponsorship are not just tools but essential forces, driving representation and advocacy and instilling a responsibility to uplift the coming generation of professionals.
Additionally, in the demanding environment of the legal profession, there is a compelling argument to be made for the significance of professional coaching. McCarthy’s experience serves as a poignant testament to this. She remarked, “Being in-house, I was very blessed in my career to work for a large company and had the privilege of having a professional coach for seven years. While some might raise an eyebrow at the fact that he was an older white male, he proved to be an invaluable coach.” Emphasizing the sheer pace and pressure of juggling various roles, from professional duties to personal responsibilities such as parenting or caregiving, McCarthy said, “In such times, a professional coach becomes indispensable. They guide you, helping outline and stick to your short-term and long-term goals.” McCarthy’s unequivocal endorsement of the coaching approach underscored its transformative potential: “I highly recommend it.”
The dynamics among advocacy, activism, and allyship are crucial for reshaping and refining professional trajectories in the legal profession. As we have delved into the transformative impact of mentorship and sponsorship, it is evident that these instruments are not just about climbing the professional ladder but about building more robust, more inclusive rungs. Both male allies in the legal field and mentors of all genders have the power to redefine industry norms, ensuring that every voice is heard, every accomplishment acknowledged, and every bias actively addressed. In embracing these roles, we challenge the status quo and set a precedent for future generations. The insights shared by respected professionals like McCarthy, Hletko, Tucker, Hall, and Hotchkiss serve as a testament to this evolution. As the legal field continues to evolve, each professional must champion these ideals, fostering an environment where growth is collective and individualized. In doing so, we create a legacy that outlives our careers, pushing the legal profession into a more inclusive and progressive future.
Future of the Legal Profession
“The question isn’t who’s going to let me; it’s who’s going to stop me.” —Ayn Rand
The modern legal landscape is considerably more inclusive than a century ago, yet the work is far from done. The legal profession is undergoing transformative shifts as technology, globalization, and societal values evolve. Women lawyers today are not merely active practitioners but also innovators, thought leaders, and influencers. In exploring the trajectories of women in law, the panelists shared their insights and predictions for the future.
Hall emphasized the importance of recognizing and addressing the distinct experiences of women of color and their white counterparts. In the evolving legal environment, it is imperative to advance, notice, and genuinely understand these nuances, relentlessly propelling women of color forward.
Hletko’s voice added a layer of urgency, raising concerns about potential challenges facing diversity, equity, and inclusion (“DEI”) programs, especially in the wake of specific lawsuits and decisions. Given the indispensable value these programs bring, she noted that there is a critical need for firms to unite in ensuring that DEI initiatives are defended and strengthened.
Tucker’s journey further enriched the discussion. Her discussion of her unexpected appointment as an independent director for a major corporation shed light on the significance of women expanding their horizons and the importance of representation in diverse boards and platforms. Her story underscored the value of mentorship and sponsorship, showcasing how key figures can open unforeseen doors.
Highlighting another facet of the discussion, Hotchkiss drew attention to an alarming inconsistency: the gap between the number of women in law schools and those in active practice. Understanding the reasons behind this disparity is as crucial as developing strategies to eliminate these barriers, she said. Moreover, she pointed to the rise of remote work, catalyzed by COVID-19, as a possible game changer. This shift in how we work offers a renewed perspective on work-life balance, which could significantly reshape women’s roles in the legal realm.
The future of the legal profession, while challenging, holds promise. Guided by mentorship, strengthened by representation, and backed by progressive workplace dynamics, women are poised not just to navigate but to lead tomorrow’s legal world. The journey ahead, while demanding, offers views of unparalleled opportunities and achievements for women in law.
Conclusion
The march of women through the archives of the legal profession is a story of a tenacious battle against established norms, yet it also heralds a promise of a more democratic future. The women chronicled in this article symbolize individual victories and collective strides toward breaking barriers and forging a path paved with equity, respect, and opportunity. As we reflect on history and anticipate the future, it is imperative to recognize the shared responsibility of the entire legal community, irrespective of gender, to ensure that the scales of justice balance the letter of the law and the spirit of inclusivity and fairness. While significant progress has been made, the journey ahead requires continued vigilance, relentless advocacy, and an unwavering commitment to ensuring that every voice within the legal profession is both seen and heard. The stories of these remarkable women serve not just as inspiration but as a clarion call for collective action, urging us to build upon the foundations they have laid and push forward toward a more inclusive legal horizon.
Jaline Fenwick, Esq., serves as vice president and assistant general counsel at JP Morgan Chase Bank, N.A. The views expressed herein are those of the author; they do not reflect the views of JP Morgan Chase Bank, N.A.
Nearly everyone is on the generative AI bandwagon, and understandably so. But we are starting to hit some bumps in the road, rattling confidence and dampening enthusiasm. As legal professionals, we shouldn’t be deterred. Instead, we must take a measured and conscientious approach to tool selection and implementation.
The problem is that while we haven’t necessarily uncovered generative AI’s ideal application, AI-powered products are flooding the market. Some are useful; others not so much. Legal professionals must consider several key factors when selecting an AI-powered legal technology product.
How does it use our data?
Legal practice is deeply rooted in confidential and private information. When exploring a legal tech solution, legal teams must ask these essential questions:
How will the platform process and use our information?
Any legal tech solution must be built with privacy in mind from the ground up. Period. Peek behind the curtain to understand the underlying algorithm and its confidentiality implications. Without this insight, you cannot rely on a tool to protect your clients’ information or ensure that your organization is compliant with privacy laws and regulations.
Is it designed for our use case?
The legal field contains countless nuances. You wouldn’t task a person who has no legal background with reviewing contracts. Follow the same principle for AI.
An effective legal tech solution based on a large language model (LLM) requires customization. LLMs trained on general datasets lack the specific knowledge necessary to complete legal tasks effectively and accurately. Without a custom model, the algorithm’s knowledge base is too broad; it can miss critical context, resulting in contracts that do not apply to the circumstance, deviate from established best practices, or are unenforceable.
Legal teams need an LLM trained specifically on legal content; many tools are simply an interface for a general LLM. Once again, legal professionals need insight into a platform’s training data and use cases to understand if it aligns with their needs.
Does it help us improve workflows and performance?
Any legal technology tool must be built with human-centered AI. This design leverages the strengths of human critical thinking, creativity, and empathy while incorporating AI capabilities to automate repetitive tasks and free human bandwidth for high-value tasks.
When evaluating a tool’s fit for your team, consider:
What tasks does it accomplish?
Do its capabilities address pain points?
Does it streamline processes or add additional steps?
Each organization’s needs are different. The right solution will augment your people’s work, not impede it.
Generative AI alone is not enough
Generative AI is a piece of the puzzle, not the solution. The technology works best as part of a robust workflow involving a tech stack of established tools like rule-based AI. This form of AI functions on a set of predetermined rules to make decisions and solve problems, so its results are more predictable than generative AI. Examples of everyday use of rule-based AI include email spam filters, which rely on specific keywords and sender email addresses to flag potential spam, and e-commerce recommendations, which are powered by parameters such as products that are often purchased together.
Ideally, your chosen solution should be accessible from your team’s primary workspace, which for many legal professionals is Microsoft Word. Cumbersome, inconvenient solutions that require application toggling do not foster adoption. And if nobody uses the legal tech, no one benefits.
No matter how powerful AI becomes, technology can’t replace people. Your team possesses originality, experience, situational comprehension, and critical thinking that no machine will ever replicate. Any tool you select should support—not appropriate—legal professionals’ work.
The benefits of AI-powered legal tech
AI can deliver many advantages when leveraged correctly. Some of these benefits include:
Enforcement of best practices AI makes it possible to universally enforce best practices. Algorithms trained on a company’s or client’s legal playbooks can review contracts and replace language deviations with company-specific standardized definitions, preferred negotiation positions, and best practices, eliminating variations between contract writers and ensuring documents meet expectations.
Accelerated review Legal teams can leverage AI to review lengthy, complex contracts in just minutes. Automated processes reduce time-consuming manual tasks and errors and streamline redlining, resulting in faster negotiations and approvals.
Enhanced risk assessment and mitigation AI-powered reviews can assess contract risks and flag problematic language, uncovering potentially overlooked issues and allowing lawyers to prioritize high-urgency tasks.
Reduced workloads Completing repetitive, low-level tasks drains creativity and creates frustration. Lawyers want to make a positive impact, not push papers. AI platforms can bear some of the administrative burden, decreasing human workloads and empowering legal professionals to spend more time on high-value, rewarding activities like building client relationships.
Legal teams should consider embracing generative AI, as long as they are mindful of the risks. While many people may jump off the AI bandwagon as it bumps along the rough road, riding through its inevitable stops and slow progress ensures a faster arrival at the ultimate destination of mature technology.
The Federal Reserve Board has proposed a new rule for public comment that would significantly lower the cap on interchange fees that debit-card-issuing banks (issuers) may charge a merchant’s bank (an acquiring bank) for processing debit card transactions. Importantly, the proposal also includes a formula that would periodically adjust the interchange fee cap based on data voluntarily reported to the Board by debit card issuers. If adopted, this formulaic approach would result in automatic revisions to the amount of the interchange fee cap every two years, without any public comment.
Significantly, an exemption to the interchange fee cap for small issuers, defined as debit card issuers with consolidated assets of less than $10 billion, would remain intact. Fintech companies that partner with these small issuers, such as neobanks and digital wallets, can breathe a sigh of relief.
Debit cards are a vital component of the payments ecosystem, remaining the most popular form of noncash payment. Interchange fees are a key source of revenue for banks and their fintech partners. In 2021, interchange fees across all debit card transactions totaled $31.6 billion, a 19.1 percent increase from 2020. Market distortions inevitably result from price regulation, and this proposed rule, which would amend Regulation II, is no exception. Ramifications from this proposed rule, if adopted, will reverberate across the payments and banking industries.
Background
The Board first adopted debit card interchange fee standards in 2011, as mandated by Congress in the statutory provision known as the Durbin Amendment. Specifically, the statute requires the Board to establish standards for assessing whether the amount of any interchange fee received by a debit card issuer is “reasonable and proportional” to the cost incurred by the issuer with respect to the debit card transaction, while allowing for an adjustment to account for the costs incurred by the issuer to prevent fraud.
Under the current rule, each interchange fee received by a debit card issuer for a debit card transaction can be no more than the sum of 21 cents plus a small ad valorem component keyed to the amount of the debit card transaction and a small fraud prevention adjustment. The proposed rule would lower the cap of the base component to 14.4 cents per transaction such that, for example, the maximum permissible interchange fee for a $50 debit card transaction would be 17.7 cents under the proposal, down from 24.5 cents under the current rule.
Additionally, the proposal includes a mechanism that will, every other year, automatically adjust all three components of the interchange fee cap based on data reported to the Board in a voluntary survey of large debit card issuers. These future updates to the interchange fee cap would not be subject to public comment and would be published by March 31 of odd-numbered years, with the new amounts taking effect on July 1 and remaining in effect for two years until the next update.
Ramifications for Industry Participants and Consumers
Interchange fees are a zero-sum game between issuing banks and acquiring banks, with the latter tending to pass their costs on to merchants. Interestingly, the Board has noted (citing a study conducted by Board staff) that the introduction of the interchange fee cap in 2011 resulted in covered issuers increasing customer fees on checking accounts more than they otherwise would have, presumably to offset the lost revenue.
Although the proposed rule would apply only to large issuers, i.e., those with more than $10 billion in assets, small issuers exempt from the rule “do not exist in a vacuum” and could potentially indirectly face fee pressure in operating debit card programs, as Governor Michelle W. Bowman noted in a strong dissent. The impact of the proposed rule across the payments ecosystem may also be exacerbated by the Board’s recent revisions to debit card transaction routing rules for card-not-present transactions, which came into effect in July.
The Board is inviting public comment on the proposed rule until February 12, 2024.
In June 2023, the Connecticut legislature passed amendments to the Small Loan Lending and Related Activities Act. On September 11, 2023, the Connecticut Department of Banking (“Department”) subsequently issued related guidance on the scope of the Act and its requirements (“Guidance”). The amendments to the Act, which became effective on October 1, 2023, have potential implications for a wide range of financial services providers.
In addition to requiring the calculation of the annual percentage rate (“APR”) in accordance with the method prescribed by Military Lending Act, instead of by the method prescribed by federal Truth-in-Lending Act as had previously been done, the amendments broadened the scope of the Small Loan Lending and Related Activities Act in a number of ways. First, the amendments raised the dollar limit threshold for application of the Act from $15,000 to $50,000. The amendments also expressly imposed licensing on persons acting as agents, service providers, or in another capacity for persons who are exempt from licensure (such as a bank) under certain circumstances. Finally, the amendments simplified the definition of “small loan” in a manner that is arguably more inclusive.
The Department Guidance confirmed that imposing licensing on certain agents of exempt entities was designed to “codif[y] existing common law ‘true lender’ principles… to require licensure of partners to banks when the following conditions are met”:
Such person holds, acquires, or maintains, directly or indirectly, the predominant economic interest in a small loan;
such person markets, brokers, arranges, or facilitates the loan and holds the right, requirement, or right of first refusal to purchase the small loans, receivables, or interests in the small loans; or
the totality of the circumstances indicates that such person is the lender and the transaction is structured to evade the licensing requirements.
Inclusion of the predominant economic interest standard, consistent with similar recent legislation in other states (including Illinois, Maine, and New Mexico), would potentially require licensing of many fintech providers, as the nonbank partner in a bank partnership will often retain a greater financial interest in the transaction than the bank partner. The Department Guidance also confirms that the Department will consider the true lender factors set forth above, in addition to case law precedent construing such factors, to determine whether loans made on and after October 1, 2023, must comply with the provisions of the Act as amended, including its APR limitations. Additionally, those who service loans made by a bank pursuant to a “true lender” arrangement on and after October 1, 2023, will need to obtain licensure.
The amendments also changed the definition of a covered “small loan” to “any loan of money or extension of credit, or the purchase of, or an advance of money on, a borrower’s future potential source of money, including, but not limited to, future pay, salary, pension income or a tax refund” that was within the amount (now $50,000) and above the rate (12% APR) thresholds under the Act. The Act previously defined a covered “small loan” as “any loan of money or extension of credit, or the purchase of, or an advance of money on, a borrower’s future income” that met the amount and rate thresholds under the Act. The Act also previously defined “future income” to mean “any future potential source of money, [which] expressly includes, but is not limited to, a future pay or salary, pension or tax refund.”
The Department Guidance provided examples of nontraditional loan products that are generally covered by the Act as amended, when within the Act’s amount and rate thresholds. These include but are not limited to lawsuit settlement advances, inheritance advances, earned wage access advances, and income share agreements. While the Guidance conceded that applicability of the Act must be evaluated on a case-by-case basis, the Guidance also noted that “an advance of money on an individual’s future potential source of money of $50,000 or less with an APR greater than 12% will likely be covered by the Small Loan and Related Activities Act.” The Guidance further explained that an earned wage product, or an advance of money on future wages or salary that have been earned but not yet paid, will generally be covered by the Act as amended when the amount is $50,000 or less and the APR exceeds 12% when considering any finance charges. Notably, the Guidance states that “[i]n substance, the revised definition remains the same as the previous iteration concerning the types of transactions considered [covered small loans]” and simply “streamline[d] the small loan definition by removing this intermediary definition [of future income].” Accordingly, although the new definition of covered “small loans,” which is not limited by the term “future income,” may appear broader than the prior iteration, the Department’s position appears to be that the nonloan products identified in the Guidance as subject to the Act were also potentially subject to the Act before the amendments.
The Guidance also expresses a No-Action Position stating that the Department will not take enforcement action alleging unlicensed activity against a person that newly requires licensure for small loan activities under the Act as amended if the person filed an application for licensure by October 1, 2023.
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