On May 25, 2022, the US Securities and Exchange Commission (the SEC or the Commission) proposed rules that would require registered and exempt investment advisers (Advisers) as well as registered investment companies (Registered Funds) to provide standardized environmental, social, and governance (ESG) disclosures to their investors and the Commission (referred to herein as the ESG disclosures proposal). The SEC also proposed amendments to Rule 35d-1, which governs naming conventions for Registered Funds.^[1]

These proposed rules aim to enhance ESG disclosure by requiring additional specific disclosure requirements regarding ESG strategies in fund prospectuses, annual reports, and adviser brochures. They also propose to implement a layered, tabular disclosure approach for ESG funds to enable investors to compare ESG funds at a glance, as well as to require certain environmentally focused funds to disclose the greenhouse gas emissions associated with their portfolio investments.^[2] The objective of the proposed ESG strategy disclosure framework is to help investors determine whether a fund’s or adviser’s ESG marketing statements are translated into concrete and specific measures to address ESG goals and portfolio allocation. Additionally, the proposed disclosure rules will enable investors to make more informed decisions as they compare various ESG investments. The information required under the proposed rules on ESG investment strategies and disclosures should also be readily available to investment funds and advisers who consider ESG factors in their investment process, and thus is not expected to impose a heavy compliance burden. If adopted, the proposed ESG disclosure rules will mitigate the current risks related to voluntary disclosures—including greenwashing and lack of consistent, comparable, and reliable ESG data—which will boast investors’ confidence in ESG investing.

Over the years, there has been a tremendous growth in ESG investing. This is largely attributed to increasing public concern about and awareness of climate change, social inequities, and corporate accountability.^[3] According to Morningstar’s 2022 “U.S. Sustainable Funds Landscape Report,” there were 534 sustainable funds available to US investors in 2021, an increase of 36% from 2020.^[4] The money newly allocated to exchange-traded ESG investment funds also increased in 2021 according to Bloomberg, to $120 billion, which more than doubled the $51 billion invested in 2020.^[5] With this increasing demand, asset managers have continued to create and market ESG products.

Despite explosive growth, ESG investing in its current form has faced some criticism, including from politicians and regulatory entities. Some politicians have called ESG investing a “scam,” and others have expressed dissatisfaction with the ESG rating and evaluation process.^[6] Accurately marketing ESG funds is more feasible when companies in fund portfolios make relevant ESG disclosures, but when the US Government Accountability Office conducted a review of ESG disclosures and investment practices for public companies in 2020, it discovered that while public companies generally disclosed information about many ESG topics, those disclosures lacked details and consistency, potentially limiting their usefulness to investors.^[7] Additionally, the inconsistency of the voluntary ESG disclosure and reporting framework has increased investor skepticism toward ESG investments. The 2021 Edelman Trust Barometer on U.S institutional investors highlighted that 86% of US investors question the accuracy of ESG disclosures, noting that companies frequently overstate or exaggerate their ESG progress.^[8] 53% of investors doubt the accuracy of information on progress made on companies’ diversity and inclusion goals, and 52% doubt disclosures on effective management of climate risk.^[9] All this is attributed to lack of a common disclosure framework tailored to ESG investing, which has made it difficult for investors to understand the investment policies associated with specific ESG strategies to inform their investment decisions.

With these adverse trends, the implementation of the proposed ESG strategy disclosure rules will be a step forward to create a consistent standard for ESG disclosures, which will boost investors’ confidence in ESG investment and enhance sustainable development of the US economy.

In recent years, both the federal government and the private sector have taken initiatives to address ESG risks relating to climate change, social injustice, and corporate accountability. The federal government has enacted federal tax credit programs^[10] and issued executive orders on climate-related financial risks,^[11] protection of public health,^[12] and advancing equity and racial justice.^[13] Legislation such as the Fossil Free Finance Act has also been proposed.^[14] Private sector interest in ESG investing has also greatly increased. For instance, in 2021, more than $600 billion went into ESG-focused funds worldwide according to Refinitiv Lipper data,^[15] and a record $105 billion in private investments were made into clean energy assets, adding an unprecedented amount of renewable power capacity.^[16]

While progress has been made, there is still much to be done to realize the US goals of lowering greenhouse gas emissions by 50–52 percent from 2005 levels by 2030 and reaching a net-zero emissions economy by 2050 set by President Biden.^[17] Significant work also needs to be done to enhance corporate accountability, advance equity, and promote racial justice in our communities.

To realize the above goal and improve ESG investment efficiency across all sectors, the Commission should implement the proposed ESG disclosure rules as a means of exercising its mandate of investor protection and the maintenance of an orderly capital market. Investment advisers and funds play a critical role in providing investment advice and managing investment assets, which makes them an appropriate vehicle to address the current ESG disclosure challenges.

Impact

The implementation of the proposed ESG strategy disclosure rules by investment firms and advisers will improve information and allocation efficiency, which are critical for capital market growth. It will also increase confidence in the capital markets, a pivotal factor in attracting capital. This confidence may also attract capital from investors who are currently reluctant to invest due to knowledge gaps or information asymmetries. With the implementation of the proposed ESG disclosures, the Commission will be better able to promote a resilient economy and support an orderly, economy-wide transition towards the goal of net-zero emissions, social justice, and corporate accountability.

The SEC also proposed new requirements for public companies regarding climate-related disclosures in March 2022.^[18] That proposal is largely beyond the scope of this article, but ESG disclosure rules for public companies would also enable investment advisers to more accurately market ESG funds, which would likely enhance the competitiveness of US capital markets and public companies. Similarly, the proposed ESG disclosure rules for Advisers and Registered Funds and the proposed rules for public companies together could also facilitate investment in companies that support gender equality and thus promote gender equality in the workplace, resulting into a boost in the US economy. The US economy would increase by $4.3 trillion by 2025 if true equality between men and women was achieved through improvements in women’s full participation in the workforce, the share of women’s jobs that are full time, and the mix of sectors in which women work.^[19]

Despite the numerous benefits, mandatory ESG disclosures have been criticized by some who believe they will impose a significant cost burden on businesses, particularly smaller businesses, due to additional reporting requirements. Critics further assert that the cost of compliance burden may drive more companies from America’s publicly traded stock markets, which has fewer corporate listings today than in the mid-1990s.^[20] Other criticisms include the notion that mandatory ESG disclosures will diminish the importance of material industry- and company-specific disclosures and may increase the likelihood of costly plaintiff-driven securities fraud litigation.

In light of the aforementioned benefits, however, the impact of implementing the proposed mandatory disclosure rules regarding ESG will not only benefit investors seeking to invest in ESG-focused funds but also contribute to the sustainable development of the US economy. Furthermore, it will serve as a benchmark for future ESG-related legislation, as well as a guide for companies in developing their ESG strategies, a critical step in building a sustainable economy.

In conclusion, the sustainable development of the US economy requires the participation of all stakeholders. Focus should not be restricted to only positive outcomes, but address shortfalls as well to help build a more robust economy that is inclusive. The implementation of the proposed ESG disclosure rules will be a recognizable milestone that can attract more global investment funds to US corporations and drive the US economy to more sustainable development.

1. SEC, “SEC Proposes to Enhance Disclosures by Certain Investment Advisers and Investment Companies About ESG Investment Practices,” May 25, 2022. ↑

2. SEC, “Fact Sheet: ESG Disclosures for Investment Advisers and Investment Companies,” May 25, 2022. ↑

3. Morningstar, “U.S. Sustainable Funds Landscape Report,” January 31, 2022. ↑

4. Id. ↑

5. Helee Lev, Conservice ESG, “ESG funds set a new record inflow by doubling in 2021,” December 13, 2021; Tim Quinson, “The ESG Market Is Controlled by a Few Big Investors,” Bloomberg, December 1, 2021. ↑

6. Antea Group, “Navigating the Politics of ESG as a Business Leader,” November 2, 2022. ↑

7. US Government Accountability Office, “Public Companies: Disclosure of Environmental, Social, and Governance Factors and Options to Enhance Them,” July 2020. ↑

8. Edelman, “2021 Trust Barometer Special Report: Institutional Investors,” November 17, 2021. ↑

9. Id. ↑

10. Monarch Private Capital, “ESG Investment Types: Federal Tax Credits.” ↑

11. The White House, “Executive Order on Climate-Related Financial Risk,” May 20, 2021. ↑

12. The White House, “Executive Order on Protecting Public Health and the Environment and Restoring Science to Tackle the Climate Crisis,” January 20, 2021. ↑

13. The White House, “Advancing Equity and Racial Justice Through the Federal Government.” ↑

14. Office of U.S. Senator Ed Markey, “Senators Markey and Merkley Announce Legislation to Get Big Banks to Stop Financing Fossil Fuel Projects,” November 4, 2021. ↑

15. Ross Kerber and Simon Jessop, “Analysis: How 2021 became the year of ESG investing,” Reuters, December 23, 2021; Jennifer Wu, J.P. Morgan Asset Management, “ESG outlook 2022: The future of ESG investing,” January 2, 2022. ↑

16. Brian Eckhouse, “U.S. Clean Energy Draws Record $105 Billion in Private Investment,” Bloomberg Law, March 3, 2022. ↑

17. The White House, “Fact Sheet: President Biden Sets 2030 Greenhouse Gas Pollution Reduction Target Aimed at Creating Good-Paying Union Jobs and Securing U.S. Leadership on Clean Energy Technologies,” April 22, 2021; Financial Stability Oversight Council, “Report on Climate-Related Financial Risk,” 2021. ↑

18. SEC, “Proposed Rule: The Enhancement and Standardization of Climate-Related Disclosures for Investors,” March 21, 2022. ↑

19. Kweilin Ellingrud, James Manyika, and Vivian Riefberg, “How reducing gender inequality could boost U.S. GDP by $2.1 trillion,” Harvard Business Review, April 12, 2016. ↑

20. Vartika Gupta, Tim Koller, and Peter Stumpner, McKinsey & Company, “Reports of corporates’ demise have been greatly exaggerated,” October 21, 2021. ↑

Mergers and Acquisitions (M&A) attorneys representing buyers, and their private equity and strategic clients, have long felt comfortable that the courts would uphold restrictive covenants in an acquisition. Even if the restrictive covenant at hand was perhaps somewhat broader than necessary, buyers and their counsel believed that the courts would judiciously apply their “blue pencil” to reform an overbroad covenant to make it enforceable. They also believed that by picking Delaware law and Delaware courts to hear any dispute, their restrictive covenants would be upheld by a court that has a well-deserved reputation for enforcing contracts.

In a recent opinion on October 6, 2022, by the Delaware Chancery Court, Kodiak Building Partners, LLC v. Adams, Vice Chancellor Zurn ruled that the restrictive covenants imposed on a stockholder in an acquisition were overbroad and unenforceable. In addition, the court declined to apply its blue pencil to reform the overbroad restrictive covenants on the basis that to do so would not be equitable. In this article, the authors—a non-compete litigator and an M&A attorney—will discuss the background of this case, the ruling that has surprised many M&A attorneys, and some key takeaways for the future.

The Parties

As described on its website, Kodiak Building Partners, LLC (“Kodiak”) was founded in 2011 to acquire family-run businesses in the building material sales and distribution industries. It was founded by a group of investment bankers who had analyzed the construction industry and wanted to build a decentralized and entrepreneurial consolidator in the building materials industry. In the June 2, 2020, press release announcing the transaction that is the subject of the Kodiak opinion, it stated that Kodiak had acquired more than eighty-one locations in sixteen states through twenty-five acquisitions. Kodiak operates four business lines: (i) lumber and building materials which, depending on the location, may or may not include roof trusses; (ii) gypsum, which includes drywall and related supplies; (iii) construction supplies, which are primarily steel, rebar, and structural steel; and (iv) kitchen interiors, such as kitchen appliances, flooring, cabinets, and countertops.

For seventeen years, Philip Adams (“Adams”) was a general manager of a truss manufacturer, Northwest Building Components, Inc. (“Northwest”). Founded in 2004, Northwest has only one line of business, the manufacture and sale of roof trusses and other mostly lumber-based building supplies. As a general manager, Adams was responsible for the overall performance of the business unit, such as scheduling and handling certain customer accounts. What is very important to the outcome in this case is that Northwest operated out of a single location in Rathdrum, Idaho, which is approximately thirty miles northeast of Spokane, WA. Northwest’s customers are primarily located within thirty to sixty minutes of its one location.

The Acquisition

On June 1, 2020, Kodiak entered into a stock purchase agreement with Northwest and Mandere Construction, Inc. (“MCI”). MCI is an Idaho corporation that sells, manufactures, and delivers roof trusses. Kodiak acquired all of Northwest and MCI’s assets, including goodwill and Adams’ 8.33 percent interest in Northwest. Adams received approximately $900,000 for his 8.33 percent interest in Northwest, meaning that Northwest had an enterprise value of approximately $10 million. In connection with the acquisition, Kodiak entered into a restrictive covenant agreement with Adams and the three other Northwest stockholders which included non-competition and non-solicitation restrictive covenants that restricted Adams for thirty months after closing.

The Dispute

Adams resigned from Northwest on October 11, 2021. Approximately two and one-half months later, on December 27, 2021, he joined a competitor of Northwest, Builders FirstSource, Inc. (“BFS”), as its general manager. BFS supplies building materials, such as lumber, roof trusses, I-joists, and provides design services for roof trusses. BFS has two locations in Spokane, Washington, and the location Adams worked at was only twenty-four miles from Northwest’s one location in Rathburn, Idaho. On April 5, 2022, Kodiak filed a lawsuit against Adams, ultimately seeking both a preliminary injunction for Adams’ alleged violation of the non-competition and non-solicitation covenants, and damages.

The Court’s Rulings on the Restrictive Covenants

Vice Chancellor Zurn ruled that the non-competition and non-solicitation covenants were overbroad, and accordingly unenforceable. She further declined to blue pencil the restrictive covenants to make them reasonable.

To reach these rulings, Vice Chancellor Zurn first laid out Delaware law for non-competition and non-solicitation covenants:

• Delaware courts “carefully review” these covenants to ensure they are (i) reasonable in geographic scope and duration, (ii) advance a legitimate economic interest of the party seeking enforcement, and (iii) survive a balancing of the equities.
• Delaware courts have favored the public interest of competition in their review of these restrictive covenants.
• Non-competition covenants in the context of a business sale are subject to a “less searching” inquiry than if they were in an employment agreement.
• Where restrictive covenants are unreasonable, Delaware courts are hesitant to blue pencil such agreements to make them reasonable.

Vice Chancellor Zurn first focused her review of the restrictive covenants on the second prong of the Delaware standard of review, that the restrictive covenants must advance a legitimate business interest of the party seeking enforcement. In the context of a sale of a business, the buyer has a legitimate business interest to protect the assets and goodwill it acquired in the sale. Kodiak, however, went far beyond trying to protect the business that it had acquired from Northwest. Instead, the non-competition and non-solicitation Covenants extended to:

1. any member of Kodiak’s extended operating units and locations (i.e., multiple operating units with eighty-one locations), rather than the one location operated by Northwest in Rathburn, Idaho; and
2. an expanded definition of “Business” that encompassed all of Kodiak’s lines of business, rather than Northwest’s single line of business focused on roof trusses.

Kodiak argued that it had a legitimate interest in protecting not only Northwest’s goodwill, but also that of Kodiak and its extended operating units and locations. Vice Chancellor Zurn disagreed by stating that Delaware law did not recognize a legitimate business interest in protecting all of Kodiak’s goodwill that existed prior to the Northwest acquisition. Instead, she said, “Restrictive covenants in connection with the sale of a business legitimately protect only the purchased asset’s goodwill and competitive space that its employees developed or maintained.” In discovery, Kodiak admitted that only six of its operating units, including Northwest, made and sold roof trusses. Kodiak had a legitimate interest to protect the business purchased from Northwest, but that interest did not extend to restricting Northwest’s employees from competing in other Kodiak businesses unrelated to roof trusses.

Vice Chancellor Zurn then focused on the geographic scope of the non-competition and non-solicitation covenants. The non-competition covenant prohibited Adams from competing anywhere in the states of Idaho and Washington, and within a 100-mile radius of any other location outside of those states in which Kodiak or any of its operating units had sold products or services in the twelve months prior to closing. The non-solicitation covenant prohibited Adams from soliciting customers of Kodiak or any of its operating units. Vice Chancellor Zurn found that these restrictions were geographically overbroad since they restricted Adams from seeking employment in geographic areas around Kodiak’s operating units other than Northwest. Further, the non-solicitation covenant was overbroad because it covered customers of Kodiak’s operating units other than Northwest. Finally, both restrictive covenants were overbroad because the definition of “Business” encompassed more than Northwest’s industry segment of roof trusses and were unreasonable because they were broader than necessary to protect the goodwill purchased from Northwest.

Kodiak argued that the balance of equities weighed in its favor because Adams received approximately $900,000 in the sale, was a senior executive of Northwest, and went to work for a competitor only twenty-four miles away from Northwest that sold roof trusses just like Northwest. Vice Chancellor Zurn was unpersuaded, ruling that the restrictive covenants were more restrictive than Kodiak’s legitimate interests justified, so it would not be equitable “to enforce these unreasonable covenants against Adams.”

Vice Chancellor Zurn declined to apply her blue pencil even though Adams appeared to have violated the portions of the restrictive covenants that were supported by Kodiak’s legitimate business interests—he was working for a Northwest competitor only twenty-four miles away that also sold roof trusses. She stated that where non-competition or non-solicitation covenants are unreasonable, Delaware courts “are hesitant to ‘blue pencil’ such agreements to make them reasonable.” To support that statement, she approvingly cited in a footnote cases and law review articles that had argued that the discretion of courts to blue pencil an overbroad non-competition covenant creates a “no-lose” incentive for employers. They can ask for an overbroad covenant because if it goes to court, the employer will at least get a narrowed non-compete from the blue pencil process. In Kodiak, since the restrictive covenants were overbroad and unreasonable, she felt that the inherent inequities in blue penciling a non-compete did not require her to do so in this situation.

Running throughout this case seemed to be the court’s concern for the uneven power dynamic between Kodiak and Adams. Kodiak had argued that Adams was a sophisticated senior executive, who was the second in charge at Northwest and one of only four stockholders. As a result, Kodiak argued that Adams should be held to the contract that he had signed. The court was unpersuaded and noted situations in which unsophisticated parties might need protection. Vice Chancellor Zurn also noted that that the record did not reflect that Adams had been personally represented by separate counsel for either the transaction or the restrictive covenants.

Takeaways for M&A Attorneys

Injunctive relief by definition is equitable relief. The Kodiak decision is more than a cautionary tale for M&A attorneys to ensure that restrictive covenants are reasonable in order to be enforceable; rather, it reflects an unmistakable trend for courts to use their equitable power to strike down restrictive covenants unless they are narrowly tailored to protect the legitimate business interest of the requesting party. This judicial trend is also being reflected in state legislatures, which have adopted new laws to restrict the enforceability of restrictive covenants—especially non-competition agreements. Here are some takeaways for future deals.

• Restrict non-competition and non-solicitation covenants to the goodwill of the business being acquired. For Kodiak to attempt to extend its restrictive covenants to all its operating business units and multiple locations was a blatant overreach with no justification. Restrictive covenants should be narrowly tailored to the geographic locations and business of the acquired company, which is the protectable business interest of the buyer that courts will recognize.
• Consider bifurcating restrictive covenants between principal stockholders and small minority stockholders. One size does not always fit all situations or all stockholders. There is a difference between the principal stockholders who ran the business and received the bulk of the consideration, and the smaller stockholders who had more limited control of the business and received a smaller portion of the proceeds from the sale. If Kodiak had narrowly tailored the restrictive covenants for Adams to apply only to a radius around Rathburn, Idaho, or even to the states of Idaho or Washington, and only to the business of making and selling roof trusses, the court probably would have upheld them. Also likely is that Adams never would have challenged the enforceability of the restrictive covenants in the first place.
• Don’t take any comfort in the power of courts to blue pencil overbroad restrictive covenants. Courts are unlikely to take the time and effort to completely rewrite a clearly overbroad restrictive covenant. The court in Kodiak had no patience for Kodiak’s request to blue pencil the restrictive covenant, saying that to do so would be inequitable. Instead, courts would be more inclined to “tweak around the edges” of a restrictive covenant that was generally fair, but only needed minor changes to make it enforceable under the circumstances.
• Consider insisting on separate counsel for small minority stockholders. This case may have turned out differently if Adams had separate counsel to advise him on the restrictive covenants. The judge in Kodiak pointed to Adams’ lack of separate counsel as a possible factor to show that Adams was an unsophisticated party who deserved protection in a court of equity.

The legal industry has invested less, relative to other industries, in technology for day-to-day work.^[1] A variety of factors traditionally have contributed to a law firm’s hesitancy to adopt technology: security concerns, cost, fear that technology could reduce firm profits (in an industry that traditionally bills by the hour), belief that a lawyer’s work is always bespoke, and the need to build technical literacy within workforces. As a result, the role that data analytics technologies (big data, machine learning, artificial intelligence, automation, etc.) can play in many legal functions is yet to be fully explored.

The pandemic forced legal organizations to get past some of these fears and, out of necessity, adopt tools for remote collaboration and practice management. Not surprisingly, legal technology had a record year of investments in 2021, totaling an estimated $9.1 billion through funding or mergers and acquisitions.^[2] With the influx of money into the industry, legal technology capabilities are advancing dramatically, and their potential value to the legal industry grows ever greater. Accelerated adoption of legal technology in law firms continues as clients demand both excellent results and efficiency from their outside counsel.^[3] (In fact, the demand for efficiency at a low cost spurred, in large part, the growth of alternative legal service providers.)^[4]

Legal technology is key to allocating a firm’s resources more wisely, yielding better outcomes and lower costs for clients. If even one organization manages to leverage technology to that end, the pressure on others to stay competitive is on. Entrepreneurs and legal organizations alike have taken notice, and the opening for advanced technology in law is being targeted by small companies introducing cutting-edge capabilities.^[5]

But is the adoption of the latest technology the right choice for every organization, and, if so, how does an organization choose between the spate of new options entering the field? Fortunately, because the legal industry is one of the last to grapple with technology adoption, we can look at how other industries have dealt with the introduction of new technologies to illustrate patterns and help the legal industry navigate its own period of innovation.

In 1995, Gartner, a leading market research firm, introduced the “Hype Cycle” to represent the maturity and adoption of emerging technologies.^[6] The Hype Cycle has five phases: (1) Innovation Trigger, (2) Peak of Inflated Expectations, (3) Trough of Disillusionment, (4) Slope of Enlightenment, and (5) Plateau of Productivity. The first phase represents the introduction of new technology that generates significant publicity, though commercial viability is still unproven. In the second phase, in reaction to publicity, firms willing to innovate adopt the new technology—with some stories of great success but many more of failure. In the third phase, when results do not meet expectations, both technology providers and adopters alike shake out of the new field, and only some early adopters remain to continue investing. The fourth phase is where expectations become more realistic, technology improves in response to failures, and the potential benefits of the technology to firms is more clearly understood. In this phase, adoption of the technology restarts with only conservative organizations staying on the sidelines. The final phase is widespread adoption of the new technology, as well as broad understanding of how to differentiate between providers and incorporate the new technology into businesses for maximized benefit.

The maturity of legal technology varies by its functionality. For example, the value proposition of technology-assisted review in e-discovery is well established and mature in comparison to newer technology such as advanced contract analytics. Gartner’s own 2021 analysis of the legal tech field in relation to its Hype Cycle confirms much of our intuition: certain tools have become commonplace in law firms and are reaching their Plateau of Productivity.^[7] However, most legal technologies have yet to come down from elevated expectations—including those with potentially the largest impact. Stories of big successes (or failures) in the real world are sure to increase over the coming years as progressive organizations look to adopt technology to keep themselves on the cutting edge.

So, how do we handle the inevitable journey through the Trough of Disillusionment and keep making progress? The key is asking the right questions to ensure utility and streamline validation.^[8] As technology grows in complexity, its explainability often suffers. The potential reward becomes greater, but the risk of adoption grows in kind. For example, leveraging predictive analytics for case outcomes can have a huge impact on a firm’s bottom line by indicating which clients and matters the firm should accept, but the criteria determining the algorithm’s prediction are somewhat of a black box.^[9] Asking questions prior to adopting a technology, and having the measurements and mechanisms for validation in place, can help minimize associated risks:

• What problem does the technology solve (not only in terms of determining whether a technology works but also in terms of whether a technology works for a particular organization)?
• What is the investment, beyond investing in the technology itself, that an organization will have to make to leverage that technology?
• What are the tangible benefits that the organization hopes to achieve?
• Is the organization willing to dedicate the resources to both implement and maintain that technology successfully?^[10]

The legal technology field is likely to continue growing and shifting due to the large potential for revenue. Technologies will mature, new companies will enter the field, and law firms will have to be selective.^[11] Being able to discern between reality and hype and adopting the technology responsibly will allow innovators to push forward. The reward for doing so is significant—organizations that adopt technology early in a way that suits the business will differentiate themselves from competitors and stand to reap huge benefits. In turn, legal tech start-ups that understand how to generate real value will generate massive revenues. At this point, the limits of legal technology are limited only by our imagination.

This article is related to a CLE program that took place during the ABA Business Law Section’s 2022 Hybrid Annual Meeting. The program was presented by the Section’s Legal Analytics Committee. To learn more about this topic, view the program as on-demand CLE, free for Business Law Section members.

1. Sanjoli Jain, Prominent Barriers in Legal Tech Adoption and How to Overcome Them, CRM Jetty (July 19, 2021), https://www.crmjetty.com/blog/how-to-overcome-legal-technology-barriers/. ↑

2. Steve Lerner, Legal Tech Smashed Investment Records in 2021, Law360 (Jan. 26, 2022), https://www.law360.com/pulse/articles/1458718/legal-tech-smashed-investment-records-in-2021. ↑

3. Rob Van Der Meulen, Gartner Predicts Legal Tech Spending to Rise 200% by 2025, Gartner (Feb. 10, 2021), https://www.gartner.com/en/newsroom/press-releases/2020-02-10-gartner-predicts-legal-technology-budgets-will-increase-threefold-by-2025. ↑

4. AJ Shankar, The Pandemic Might Be the Tech Disruptor the Legal Industry Needs, Forbes (Feb. 8, 2021), https://www.forbes.com/sites/forbestechcouncil/2021/02/08/the-pandemic-might-be-the-tech-disruptor-the-legal-industry-needs/. ↑

5. CodeX Techindex, Stan. L. Sch., https://techindex.law.stanford.edu/ (last visited Nov. 14, 2022). ↑

6. Gartner Hype Cycle, Gartner, https://www.gartner.com/en/research/methodologies/gartner-hype-cycle (last visited Nov. 14, 2022). ↑

7. Gartner Legal Tech Hype Cycle 2021—Some Thoughts, Artificial Law. (July 28, 2021), https://www.artificiallawyer.com/2021/07/28/gartner-legal-tech-hype-cycle-2021-some-thoughts/. ↑

8. Daniel Linna, Evaluating Legal Services: The Need for a Quality Movement and Standard Measures of Quality and Value, LegalTech Lever (Mar. 12, 2020), https://www.legaltechlever.com/2020/03/evaluating-legal-services-the-need-for-a-quality-movement-and-standard-measures-of-quality-and-value-chapter-in-research-handbook-on-big-data-law/. ↑

9. Daniel Martin Katz, Michael J. Bommarito II & Josh Blackman, A General Approach for Predicting the Behavior of the Supreme Court of the United States, 12(4) PLoS One (Apr. 12, 2017) (e0174698), https://doi.org/10.1371/journal.pone.0174698; Masha Medvedeva, Martin Wieling & Michael Vols, Rethinking the Field of Automatic Prediction of Court Decisions, A.I. & L. (Jan. 25, 2022), https://doi.org/10.1007/s10506-021-09306-3. ↑

10. Maura R. Grossman & Rees W. Morrison, Seven Questions Lawyers Should Ask Vendors About Their AI Products, L. Prac. Mgmt. (Mar. 2019), https://www.txs.uscourts.gov/sites/txs/files/SevenQuestions-March%20NYSBA%20Journal%202019.pdf. ↑

11. Thomas Alsop, Legal Tech—Statistics & Facts, Statista (Mar. 23, 2022), https://www.statista.com/topics/9197/legal-tech/. ↑

The Centers for Medicare and Medicaid Services (CMS), a division of the Department of Health and Human Services (HHS), is responsible for administering the Medicare program. CMS has many roles, which include protecting the Medicare Trust Fund, reporting and correcting improper payments, and targeting healthcare fraud. To complete its numerous statutory requirements, CMS has established the Medicare Review and Education Program. Under this program, it uses a variety of contractors to complete medical and improper payment reviews. Targeted probe and educate (TPE) reviews, a major part of the CMS Medicare and Review and Education Program, combine claim reviews and provider education. As part of those reviews, CMS permits Medicare Administrative Contractors (MACs) to exercise wide discretion in determining the design and scope of TPE audits; the percentage decrease in billing errors required to be excused from subsequent rounds of reviews; and the benchmarks for measuring the program’s success. Each MAC independently determines those areas most vulnerable to improper payments.

Although the TPEs are intended to improve claim accuracy, their definition of claim types most vulnerable to improper payments has significant consequences for providers that are difficult to overturn. Rather than focusing appeals of MAC decisions on individual claim denials, a broader attack on the lack of oversight of MACs by CMS and HHS as a whole would be more effective. This article asserts a basis for challenging targeted probe and educate reviews by arguing that the MACs’ wide discretion to design, implement, and define the metrics of the program’s success is inconsistent with CMS’s statutory duty to oversee its provider education program.^[1]

The duties and scope of review conducted by Medicare contractors have expanded. Originally, when the process was implemented, TPE reviews were limited to home health providers and short stay hospital claims. Over time, the scope of reviews has expanded to the point where reviews now cover all Medicare services and items. The TPE review process is intended to improve the accuracy of providers’ billing and coding, through a combined claims review and education process. However, a provider’s failure to achieve a reduction in the percentage of billing errors defined by the MAC can result in administrative penalties that include pre-payment review and revocation of participation in the Medicare program.

TPE audits involve up to three rounds of review conducted by a MAC. The process may be conducted as either a pre-payment or post-payment review of a sample of twenty to forty claims. At the end of each round of reviews, providers’ billing performance is re-evaluated to determine whether their error rate has been reduced to meet the benchmark set by the MAC. A subsequent increase in their error rate above the MAC-determined acceptable rate will result in further reviews.^[2] Providers who are not compliant after three reviews are referred to CMS for further action.^[3]

The strategy currently taken to overturn adverse outcomes of the reviews takes two forms: an appeal of individual claims, or, where extrapolation of the error rate has occurred, an appeal of the individual sampling amounts to either require recalculation of the error rate or to require readjustment of the overpayment.^[4] However, the timeline for appeals of denied claims, even if pursued on an expedited basis, may not be concluded prior to administrative penalties being imposed.^[5] Additionally, there are certain areas where no appeal is permitted: the Final Results letter issued by the MAC at the end of each round of reviews, and the decision by CMS to impose pre-payment review of provider claims or revoke provider participation in Medicare. The structure of the TPE review program presents an opportunity for another strategy for appealing adverse outcomes. Challenging CMS’s lack of oversight of its MACs is an alternate strategy with potential to be more effective than appealing individual claims denials.

Although CMS has stated in a frequently asked questions (FAQ) fact sheet that favorable outcomes will be considered after referral of the provider for further action,^[6] where pre-payment review has been put in place or revocation of participation in Medicare has already occurred, there is no recognized right of appeal, and no CMS regulation or policy that provides otherwise. A provider placed on pre-payment review will be reassessed by the MAC on a quarterly basis to determine if the provider’s behavior has improved sufficiently. There is no defined standard for measuring the provider’s improvement.^[7] Revocation of a provider’s participation from the Medicare program can only be reviewed after one year from its imposition, and it can extend as long as ten years, depending on the severity of the offense. After the revocation period has ended, the provider is required to reapply to the program.^[8]

By law, the Secretary of HHS is required to provide effective oversight of its contractors’ TPE programs.^[9] The Secretary’s lack of oversight of MACs’ provider education efforts, and the manner in which MACs identify risks vulnerable to improper billing, falls short of its duties.^[10]

The article outlines a statutory challenge to the current TPE review process. The Secretary of HHS’s failure to tie the TPE activity of the MACs to measurable agency standards has resulted in an inability to assess the effectiveness of the MACs’ performance, as well as an inability to ensure agency resources are appropriately allocated to those areas most vulnerable to improper payments consistent with the agency’s education and outreach program goals. The oversight requirement applicable to the Secretary of HHS, set out in 42 USC Section 1395kk-1(b)(3)(A), requires the Secretary to “develop standards for measuring the extent to which a contractor has met the requirements” of the HHS education and outreach program. Though it is true the MACs perform an administrative function of the agency, that activity is required to meet clearly defined performance metrics, and those standards are required to be established by the Secretary of HHS, not the MACs.

A report issued by the Government Accountability Office (GAO) in March 2017^[11] first raised the argument that CMS failed to provide effective oversight of MACs’ efforts involving TPE audits. It determined that CMS’s decision to avoid being “overly prescriptive regarding MACs’ provider education efforts” was inconsistent with its duty to oversee its provider education program and address areas vulnerable to improper payments.^[12]

CMS’s oversight of targeted probe and educate reviews is limited, with MACs exercising a wide range of discretion and control over the design and implementation of the audits. The MACs determine which provider/suppliers to target for TPE review; the appropriate percentage decrease in claims denials that is required before a provider is excused from further review; and the metrics for assessing the success of its audits.^[13]

Physicians are targeted for TPE audits based on MACs’ error rate calculation. TPEs target those providers who have a high rate of claim denials, unusual billing practices, or bill with greater frequency those codes that CMS has determined are more likely to be improperly billed.^[14]

Each MAC independently identifies the risks that render their jurisdiction vulnerable to a higher rate of improper payments.^[15] Rates are calculated by MAC, by service, and by provider type.^[16] There is no requirement that the twelve Part A/B MACs^[17] be consistent in their method of calculating improper payment rates. The sources of data the twelve MACs use to calculate the error rate, and the weight they give each particular data source, is not subject to any standard.^[18]

MACs exclusively determine the percentage decrease in billing errors providers must meet to be excused from further rounds of one-on-one educational sessions. CMS does not disclose how that percentage is determined. It states in Chapter 3 of the Medicare Program Integrity Manual, “A provider/supplier may be removed from TPE after any round if they demonstrate low error rates or sufficient improvement in error rates, as determined by the MAC.” The MAC sets the percentage rate decrease required, and in Chapter 7 of the Medicare Program Integrity Manual, CMS admits that it does not establish or set improvement rate goals.^[19]

CMS’s failure to oversee the benchmarks independently set by MACs for the reduction of denied claims has a significant impact on providers whose denial rates fail to meet the MAC-determined rate. If providers continue to have high error rates after the three rounds of review, they may be referred to CMS for 100% pre-payment review, extrapolation of their error rates, and/or referral for revocation of enrollment in the Medicare program.^[20] Lack of alignment of MAC-implemented rate reductions creates inconsistency in remedies imposed on providers.

The measure of the success of MAC activity is reflected in the annual Improper Payment Reduction Standards (IPRS) reports MACs must submit to CMS.^[21] They report the savings achieved through claims denial rates, charge denial rates, and provider denial rates.^[22] While the IPRS reports identify program savings, they provide insufficient detail to CMS and the Secretary of HHS to determine whether the education efforts of each MAC are focused on those areas most vulnerable to improper payment. CMS’s assessment is made more difficult because of the discretion exercised by each MAC in designing and implementing audits, and evaluating the success of their own programs. The validity of this framework is subject to challenge as part of a broader challenge based on CMS’s failure to exercise oversight of its contractors conducting TPE reviews.

Given the increased scope and impact of these reviews, providers should move beyond a defensive strategy of appealing specific claim denials, and consider a broader argument focused on CMS’s inadequate oversight of the TPE review.

1. Following 42 U.S.C. Section 1395hh(a)(2), the Medicare Act requires the Secretary to follow a notice-and-comment procedure for any “rule, requirement, or other statement of policy that establishes or changes a substantive legal standard governing… the payment for services.” Azar v Allina Health Services 139 S Ct 1804(2019); Agendia v. Becerra, ___F 4th​__ , 2021 WL 3011482 (9^th​​ Cir. 2021), cert. den’d ___US __(2022). The MACs, as part of the TPE process, are not carrying out an administrative function based on an agency defined controlling legal standard. The MACs define their own performance metrics and the design and implementation of the reviews. By statute, CMS is required to develop the performance requirements of its contractors. 42 USC 1395kk-1(a)(4), (b)(1)(C), and (b)(3)(A). ↑

2. https://www.bakerdonelson.com/medicare-target-probe-and-education-audits-require-immediate-and-full-attention-from-providers/suppliers ↑

3. Chapter 3, Section 3.1, 3.2.1, and 3.2.5, Medicare Program Integrity Manual. ↑

4. Chapter 8, Medicare Program Integrity Manual, Section 8.4.9.1–8.4.9.2. ↑

5. MACs are permitted to commence a new round of targeted probe and educate reviews forty-five days after each post-probe session, at the earliest. The Medicare appeals process permits a provider appealing denied claims or extrapolation of overpayments to reach federal district court, assuming expedited appeals, six months after the initiation by a provider of their filing of appeal. Medicare Parts A and B Appeals Process, MLN 006562 (August 2022). ↑

6. www.cms.gov, FAQs on TPEs. This fact sheet states that CMS has discretion to suspend its review of the provider, where the provider is successful on all appeals, before CMS takes action. It also removes all program penalties imposed, where the provider wins all appeals after the imposition of administrative penalties. CMS’s discretion, it concedes, is outside the appeals process and grants relief from decisions that are not appealable. It is only outlined in a fact sheet. It does not appear in any Medicare Program Integrity Manual, Claims Processing Manual, or any CMS regulation. The relief granted is an after-the-fact attempt to reverse the results of a TPE process that was established contrary to the requirements of 42 USC Section 1395kk-1(b)(3)(A). It is the direct result of CMS’s failure to acknowledge and perform its regulatory duty to design, implement, and establish standards for the TPE process. A direct challenge to CMS’s lack of oversight not only relieves providers successful on appeals from incurring the expense of multiple appeals, it also protects those providers who cannot meet the MACs’ standards from administrative program penalties that arise from decisions that are currently not subject to appeal. ↑

7. Medicare Program Integrity Manual, Chapter 3, section 3.2.2.1(A). ↑

8. 42 CFR section 424.535. ↑

9. Government Accountability Office (GAO), Standards for Internal Control in the Federal Government, The Green Book, 2017. (GAO-14-704G), Washington, D.C. 2017. Internal control is a process effected by an entity’s oversight body, management, and other personnel that provides reasonable assurance that the objectives of an entity will be achieved. See also OV2.15, p. 12; external auditors and the Office of Inspector General (OIG) are not considered part of CMS’s internal controls. “While management (CMS and the Secretary of HHS) may evaluate and incorporate recommendations from external auditors and the OIG, responsibility for an entity’s internal control system resides with management (CMS and the Secretary of HHS).” ↑

10. 42 USC Section 1395kk-1(a)(4) and (b)(1)(C), (b)(3)(A)(i)-(iv). “The Secretary shall develop contract performance requirements to carry out the specific requirements applicable under this subchapter to a function described in subsection (a)(4) and shall develop standards for measuring the extent to which a contractor has met such requirements. Such requirements shall include specific performance duties expected of a medical director of a Medicare administrative contractor.” See also, 42 USC Section 1395kk-1(A)(iii)-(iv). ↑

11. GAO Report to the Chairman, Committee on Finance, US Senate, Medicare Provider Education, Oversight of Efforts to Reduce Improper Billing Needs Improvement (March 2017). ↑

12. Id, at pp. 13–15. ↑

13. Chapter 3, Medicare Program Integrity Manual, section 3.2.5. ↑

14. Chapter 3, Medicare Program Integrity Manual, section 3.2.1. The Secretary of HHS provides the MACs with a list of improper payments identified by the Recovery Audit Contractor (RAC) within the MAC’s region. While the scope of the education program is determined by the MAC (42 USC Section 1395kk-1(h)(4)), it must be consistent with clearly defined performance metrics, so that the outcome of the activity is consistent with the Secretary of HHS’s program goals. See 42 USC Section 1395kk-1(b)(3)(A) (requiring the Secretary to “develop standards for measuring the extent to which a contractor has met the requirements” of the HHS education and outreach program). ↑

15. Medicare Program Integrity Manual, Chapter 3, section 3.2.5. “The MACs shall target their efforts at error prevention to those services and items that pose the greatest financial risk to the Medicare program and that represent the best investment of resources. This requires establishing a priority setting process to assure MR (medical review) focuses on areas with the greatest potential for improper payment. The MACs shall develop a problem-focused, outcome-based medical review (MR) strategy and Strategy Analysis Report (SAR) that defines what risks to the Medicare trust fund the MAC’s MR programs will address and the interventions that will be implemented during the fiscal/option year. The MACs shall focus their edits where the services billed have significant potential to be non-covered or incorrectly coded.”

    The MACs have the discretion to select target areas because of:

    – high volume of services;

    – high cost;

    – dramatic change in frequency of use;

    – high risk problem-prone areas; and/or,

    – Recovery Auditor, Comprehensive Error Rate Testing, OIG, or GAO data demonstrating vulnerability. ↑

16. GAO Report, pp. 6-8, Chapter 3, Medicare Program Integrity Manual, 3.2.B. (pre-payment edit capabilities). ↑

17. Twelve MACs perform Part A/B audits, and of those twelve, four audit home health and hospice providers. An additional four audit DME suppliers. ↑

18. Unlike MACs, Medicare Recovery Auditors (RACs) and Unified Program Integrity Auditors (UPICs) are required to use a strict random sampling methodology as part of their post-payment claims reviews to ensure that the universe selected is appropriate. Chapter 8, Medicare Program Integrity Manual, Sections 8.4.1.1–8.4.1.5; Sections 8.4.2–8.4.4.3. In TPE audits, the claims designated to be audited are the result of a data-driven selection process, with the attributes of the audit determined by data selected on a problem-focused risk basis. Though the probe itself is subject to a medical review of the sample claims, it is intended to validate the data-driven findings.

    In instances where overpayments are identified by data analysis alone, Chapter 8 specifically states that “the contractor shall consult with its Contracting Officer’s Representative COR/Business Function Lead (BFL) as defined in the PIM Chapter 4, Section 4.7-Investigations. In addition, if CMS approves the data driven overpayment, the contractor shall also consult with its COR/BFL on whether statistical sampling and extrapolation are necessary to identify the overpayment.” Chapter 8, Section 8.3.3.2, Medicare Program Integrity Manual. ↑

19. Medicare Program Integrity Manual, section 7.1.2.4. ↑

20. Chapter 3, Medicare Program Integrity Manual, Section 3.2.5. D. ↑

21. Each MAC is required to submit annually an IPRS report to CMS, to identify the results of its medical review activities, including provider outreach, targeted probe and educate reviews, and other payment interventions. Chapter 7, Medicare Program Integrity Manual, section 7.1.1.-7.1.2; section 7.2.4. ↑

22. Id. ↑

“Who, Me? Yes, You! The Role of Business Lawyers in Advancing the 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.

Advancing the rule of law should be every lawyer’s business, and it’s a lawyer’s ethical responsibility to do so as well. But too often, business lawyers may not see the connections between their work and the rule of law. “Who, me?” they may ask— “how could my corporate law practice possibly have a role in advancing the rule of law?”

I understand that question—and I appreciate where it comes from. For many years, I was a Wall Street litigator, as a partner and associate at two prominent New York and even global firms. My practice included defending cases around the country, conducting internal investigations around the country and sometimes around the world, and every other kind of big problem that a big enterprise might encounter where the law could be part of a productive resolution to a situation. And that wasn’t all. My practice also included, from the first day I began as a junior litigator in a large-firm litigation practice, the pro bono representation of individuals and entities—even the City of New York—that were unable to hire a firm like mine to represent them. Many had strong and viable claims. Others, perhaps not as much. But they all had a powerful, even urgent, need to have their voice heard in a courtroom, loudly and clearly and with the assistance of a lawyer.

Still, was that “rule of law” work?

After some twenty years in private practice and nearly as many on the bench in the United States Bankruptcy Court, I’m no longer in doubt as to the answer to that question—absolutely yes. And I’m no longer in doubt as to whether business lawyers have a role in advancing the rule of law. They do—or should I say, as a judge who sits in a court that hears matters concerning businesses, families, and individuals facing financial distress, we do. And if you are a business lawyer, you do, too.

Listen to your colleagues who are engaged in all kinds of representation—and listen closely. When senior business lawyers advise their clients on how to comply with disclosure requirements, they are advancing the rule of law. When they recommend best practices for meeting fiduciary duties, or complying with anti-money laundering regulations, or environmental rules and restrictions, they are advancing the rule of law. And when they fill that most challenging role of the trusted professional who gives the advice not to go down a particular path because it would not comply with the applicable legal standards or best practices, they are advancing the rule of law. Aspirationally, in their practices and in mentoring their colleagues, these senior and influential voices routinely share their experiences and perspectives, and they provide concrete examples of how business lawyers can meet their professional and ethical responsibilities to incorporate and influence the rule of law in their work.

Listen to your most junior colleagues, too. So many new lawyers come into the profession with the highest aspirations to make a difference. We need to learn from them and to remind them that their work can affect the rule of law, in both obvious and unanticipated ways. Every time they take on a pro bono matter, and let a poor person or microbusiness know that they, too, have an advocate, they advance the rule of law. And every time they bring their best professional effort to work that seems mundane, like document review for attorney-client privilege, or conforming a deal document, or sitting with a new client who just isn’t as organized as you wish they were, they also advance the rule of law. These are practical and real-world circumstances, and the impact on the rule of law is real. Maybe that’s not so clear when these tasks go smoothly. But imagine the damage that could occur if these smaller pieces of the rule of law mosaic fell apart. A mosaic with missing pieces just isn’t the same—and eventually, the picture that it creates will disappear.

So, what are some practical, real-world aspects of the rule of law in a business lawyer’s practice? Why should it be important to a business lawyer and their business clients, too? Here’s one reason: attention to the rule of law is an ethical obligation of all lawyers under the ethics rules. But what does that mean? The rule of law, as defined by the World Justice Project, is “a durable system of laws, institutions, norms, and community commitment” that delivers accountability, just law, open government, and impartial justice. Different organizations measure and study the rule of law in different ways, but most agree that it can provide constraints on government powers; minimize corruption; promote open government, fundamental rights, and order and security; advance regulatory information; and encourage civil and criminal justice.

The rule of law is also essential for businesses across the world. Why? The answer is simple: the business world requires stable, reliable, and predictable legal systems and laws, and the rule of law anchors such systems. And according to the World Justice Project, the presence (or absence) of the rule of law has a correlation with economic development throughout the world, as well as socio-political development.

So, by listening to our colleagues, both senior and junior, and recognizing these matters, are we done? Well, not quite. Some, including the World Justice Project, report a disturbing trend of the decline of the rule of law all over the world, including in the United States, even though people and business require the rule of law to sustain themselves, grow, and thrive.

In fact, according to the World Justice Project 2022 Rule of Law Index, for the fifth year in a row, more countries declined than improved in terms of the measure of the rule of law. To be sure, there are bright spots. According to the Index, in the United States, current areas of strength include civil justice that is free of corruption; government that is open; laws and government data that are publicized and publicly available; the right to information; the existence of complaint mechanisms; and effective systems of criminal investigation. But there are current areas of concern for the rule of law in the United States as well. These include confidence in the transition of power subject to the law; civic participation; fundamental rights; due process of the law and the rights of the accused; freedom of opinion and expression is effectively guaranteed; freedom of belief and religion is effectively guaranteed; civil justice is free of improper government influence; and criminal investigation system is effective. And sadly, there are some areas in which the rule of law in the United States has consistently faced significant challenges. These include equal treatment and the absence of discrimination; administrative proceedings that are conducted without unreasonable delay; accessible and affordable civil justice; and civil justice that is free of discrimination.

More generally, the rule of law is part of what defines us as a profession. It’s in our professional DNA. The American Bar Association Rules of Professional Conduct and various states’ rules of professional conduct point the profession in the direction of the rule of law. Business lawyers can promote and champion the rule of law.

Business lawyers can promote the rule of law through taking professional responsibility by adhering to ethical rules, laws, policies, and guidelines governing the legal profession and by helping clients uphold the rule of law. They also promote the rule of law through engaging in civic education such as supporting public education initiatives and through promoting rule of law principles through professional organizations, as well as encouraging engagement with the legal system across different sectors of society. Business lawyers can—and do—play a role in filling justice gaps.

So, what does this mean for business lawyers? “Who, me?” you may ask. Yes, you! It means many things. Listen—listen to the wise senior person down the hall, across the counsel table in the courtroom or the boardroom, on that Zoom screen. But don’t stop there—listen to the law student intern, the new lawyer, the midlevel colleague. And don’t just listen—share your own thoughts. Give yourself permission to remember your own aspirations to make a difference, and recognize that when you do that, you advance the rule of law, too. Look in the mirror—see a person whose job it is to advance the rule of law. And let’s get to work!

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

Hon. Elizabeth S. Stong is a United States Bankruptcy Judge for the Eastern District of New York, sitting in Brooklyn.

Earlier this year, President Biden nominated his first judicial nominee who has a disclosed disability, Jamal N. Whitehead. Whitehead is a litigator in Seattle. He also uses a prosthetic leg. Although 26 percent of the United States’ population has some type of disability,^[1] the number of legal professionals with disabilities, including judges, is much lower. There are many reasons for low numbers of disabled judges, including implicit and explicit bias, pipeline issues, stigma associated with having and disclosing a disability, and an overall lack of data. Indeed, people with disabilities are sometimes termed “the forgotten minority,” despite being the nation’s largest minority.^[2] Fortunately, more organizations are beginning to recognize disability as an integral part of the diversity, equity, and inclusion movement. This article discusses why disability diversity is important in the judiciary and how disability diversity is currently tracked (if at all), and it provides the first-ever attempt at publishing a list of judges with disabilities.

A judiciary that reflects its population is an important goal,^[3] and disability is part of our nation’s populace. Among the sixty-one million adults who have some type of disability in the United States, disabilities are wide-ranging.^[4] Although the typical symbol for disability is a person in a wheelchair, disabilities can be visible or invisible. The Americans with Disabilities Act (ADA) defines disability as a physical or mental impairment that substantially limits one or more major life activity. Unfortunately, in our inaccessible society, disability can have a detrimental effect on an individual’s health, social status, employment, and living situation.

Judges have an important role in deciding cases based on disability-related laws. They interpret the ADA, the Rehabilitation Act of 1973, the Individuals with Disabilities Education Act of 1990 (IDEA), the Affordable Care Act, disability benefits laws such as Social Security Disability Insurance, and state laws related to disability. The millions of adults living with disabilities are therefore dependent on a judiciary in which only a small percentage of judges may have a lived understanding of disability.

Although the number of judges with disabilities is small, the exact number is not entirely clear. For federal judges, the Federal Judicial Center keeps data on race, ethnicity, and gender but not disability.^[5] There does not appear to be any data on the number of judges with disabilities in state court, either. As the Center for American Progress notes, the “virtual absence of information on disabled [] judges is problematic and deserves more attention.”^[6] Indeed, it is difficult to measure progress if it is not tracked.

As an important concession, even if the judiciary tracked the number of judges with disabilities, the number likely would not be accurate. Many individuals do not disclose their disabilities. Stigma continues to exist surrounding disability, and judges who face reelection or reappointment may be wary to disclose.

Still, there are judges that have publicly disclosed disabilities. The following list represents the first known attempt to create a comprehensive list of current and former judges with disabilities in the United States. Some of these judges have retired or have passed away. The author would be grateful to receive any additional names to add to this list and apologizes for any omissions.

The list provides certain takeaways. Notably, most of the types of disabilities on this list are visible. It is likely many judges with invisible disabilities, including mental health issues, have not publicly disclosed them. Indeed, research notes that many judges experience depressive symptoms due to the unique nature of their positions,^[7] but the number of judges who have disclosed mental health issues is nearly zero. The main takeaway is simply how few disabled judges there are. As an example, there are only a handful of current federal judges with disabilities on the list, yet there are approximately nine hundred authorized federal judgeships.^[8] If Whitehead is confirmed, this number will grow by one, and hopefully this number will continue to grow to create a judiciary that better reflects its citizens.

Note: This list was last updated on December 29, 2022.

• Sonia Sotomayor, United States Supreme Court Justice: Type I diabetes^[9]
• Bruce M. Selya, Senior United States Circuit Judge of the United States Court of Appeals for the First Circuit: legally blind^[10]
• David S. Tatel, Senior United States Circuit Judge of the United States Court of Appeals for the D.C. Circuit: blind, has a service dog^[11]
• Ronald Gould, United States Circuit Judge of the United States Court of Appeals for the Ninth Circuit: multiple sclerosis and uses a wheelchair^[12]
• Myron H. Thompson, Senior United States District Judge of the United States District Court for the Middle District of Alabama: polio survivor^[13]
• Vanessa Lynne Bryant, Senior United States District Judge of the United States District Court for the District of Connecticut: legally blind^[14]
• Robert W. Gettleman, Senior United States District Judge of the United States District Court for the Northern District of Illinois: polio survivor^[15]
• Donovan W. Frank, Senior United States District Judge of the United States District Court for the District of Minnesota: addiction recovery^[16]
• Eric N. Vitaliano, Senior United States District Judge of the United States District Court for the Eastern District of New York: blind^[17]
• Richard C. Casey, United States District Judge of the United States District Court for the Southern District of New York: blind^[18]
• Anne M. Burke, Illinois Supreme Court Justice: dyslexia^[19]
• Richard Bernstein, Michigan Supreme Court Justice: first blind justice on his court^[20]
• Richard B. Teitelman, Missouri Supreme Court Justice: blind^[21]
• Peter J. O’Donoghue, New York State Supreme Court: blind^[22]
• Grace Helen Whitener, Washington Supreme Court Justice: disabled^[23]
• Michael J. Murphy, Illinois Appellate Court Judge: addiction recovery^[24]
• Charles Susano, Tennessee Appeals Court Judge: paralysis, wheelchair user (longest-serving Tennessee appellate judge)^[25]
• Richard S. Brown, Wisconsin Court of Appeals Judge: late-deafened or hard-of-hearing^[26]
• Tony Cothren, Jefferson County Circuit Judge (Alabama): blind^[27]
• Charles W. Ray Jr., Superior Court Judge for the Fourth Judicial District of Alaska: late-deafened or hard-of-hearing^[28]
• Andi Mudryk, Sacramento County Superior Court Judge (California): osteogenesis imperfecta (also notably the first openly transgender person in California history to be appointed to serve on California State Court)^[29]
• Rita F. Lin, San Francisco County Superior Court Judge (California): hearing disability^[30]
• Tim Fall, Yolo County Superior Court Judge (California): anxiety and depression^[31]
• Patricia A. Broderick, Senior Judge of the Superior Court of the District of Columbia: paralysis^[32]
• Louis Corbin, Fourth Circuit Duval County Judge (Florida): blind (appointed in 1972)^[33]
• Meenu Sasser, Palm Beach County (Florida) Circuit Judge: cancer survivor^[34]
• Daniel Monaco, Collier County (Florida) Circuit Court Judge: polio survivor^[35]
• Rachel Krause, Fulton County Superior Court Judge (Georgia): paralysis, wheelchair user^[36]
• Nicholas T. Pomaro, Associate Circuit Judge of Cook County (Illinois): blind (appointed in 1976)^[37]
• David Holton, Jefferson County District Judge (Kentucky): Kentucky’s first blind judge^[38]
• Thomas Dawson, Nelson County District Judge (Kentucky): polio survivor, wheelchair user^[39]
• Duncan Beagle, Genesee County (Michigan) Circuit Court judge: paralysis, wheelchair user^[40]
• Patrick Flanagan, Washoe District (Nevada) Court Chief Judge: paralysis, wheelchair user^[41]
• Robert Pipia, District Court of Nassau County (New York) Judge: muscular dystrophy, wheelchair user^[42]
• Howard Sturim, District Court of Nassau County (New York) Judge: Type II diabetes, uses a service dog^[43]
• Ed Follis Jr., Lincoln County Justice Court Judge (Texas): polio survivor^[44]
• Jacob Frost, Dane County (Wisconsin) Circuit Court Judge: spinal muscular atrophy, first judge with a disability on his court^[45]
• Mary Beth O’Connor, Federal Administrative Law Judge: addiction recovery^[46]
• Ralph K. “Tripp” Anderson, III, Chief Judge, South Carolina Administrative Law Court: paralysis, wheelchair user^[47]
• Cathy Sellers, Administrative Law Judge, Florida Division of Administrative Hearings: cancer survivor^[48]
• Azeema Akram, Administrative Law Judge for Illinois Human Rights Commission: deaf^[49]

1. “Disability Impacts All of Us,” Centers for Disease Control and Prevention. ↑

2. “Diverse Perspectives: People with Disabilities Fulfilling Your Business Goals,” U.S. Department of Labor Office of Disability Employment Policy. ↑

3. Nancy Scherer, “Diversifying the Federal Bench: Is Universal Legitimacy for the U.S. Justice System Possible?” Northwestern University Law Review 105 (2) (2011): 587–634. ↑

4. “Disability Impacts All of Us,” Centers for Disease Control and Prevention. ↑

5. Ayanna Alexander and Madison Alder, “Judge Pick With Disability Raises Hopes for a Group Often Unseen,” Bloomberg Law, October 7, 2022. ↑

6. Danielle Root, Jake Faleschini, and Grace Oyenubi, “Building a More Inclusive Federal Judiciary,” Center for American Progress, October 3, 2019. ↑

7. Debra Cassens Weiss, “Judges are stressed by their decisions, and 20% have at least one depressive symptom, survey finds,” ABA Journal, January 7, 2021. ↑

8. “Authorized Judgeships,” Administrative Office of the U.S. Courts. ↑

9. Samantha Balaban, “‘Just Ask!’ Says Sonia Sotomayor. She Knows What It’s Like To Feel Different,” Weekend Edition, NPR, September 1, 2019. ↑

10. Ayanna Alexander and Madison Alder, “Judge Pick With Disability Raises Hopes for a Group Often Unseen,” Bloomberg Law, October 7, 2022. ↑

11. Ann E. Marimow, “Judge David Tatel’s lack of eyesight never defined him, but his blindness is woven into the culture of the influential appeals court in D.C.,” Washington Post, July 8, 2021. ↑

12. “Pathways to the Bench: U.S. Court of Appeals Judge Ronald M. Gould,” U.S. Courts. ↑

13. Gary Banks, “Myron H. Thompson, Life and Times of a Renowned Federal Court Judge,” United States District Court for the Middle District of Alabama, July 29, 2020. ↑

14. Ayanna Alexander and Madison Alder, “Judge Pick With Disability Raises Hopes for a Group Often Unseen,” Bloomberg Law, October 7, 2022. ↑

15. Judge Robert W. Gettleman, “Commentary: A polio survivor’s unique prism into the value of social distancing,” Chicago Tribune, July 17, 2020. ↑

16. Patrick Krill and Bree Buchanan, “Speaking Out to End Stigma,” American Bar Association Commission on Lawyer Assistance Programs. ↑

17. Mamadi Corra, “Disability and Access Perspectives from Judiciary Personnel on Issues of Accessibility,” The Judges Journal 59 (2), American Bar Association Judicial Division, May 13, 2020. ↑

18. Richard C. Casey, “A Jurist Who Happens to Be Blind in the Federal Courts,” Braille Monitor 41 (11), National Federation of the Blind, December 1998. ↑

19. “Success Stories: Anne M. Burke, Illinois Supreme Court Justice,” The Yale Center for Dyslexia & Creativity. ↑

20. “Justice Richard Bernstein,” Michigan Courts. ↑

21. Doron Dorfman, “The Blind Justice Paradox: Judges with Visual Impairments and the Disability Metaphor,” Cambridge Journal of International and Comparative Law 5 (2) (2016): 272–305. ↑

22. Doron Dorfman, “The Blind Justice Paradox: Judges with Visual Impairments and the Disability Metaphor,” Cambridge Journal of International and Comparative Law 5 (2) (2016): 272–305. ↑

23. Mark Joseph Stern, “Washington State Now Has the Most Diverse Supreme Court In History,” Slate, April 17, 2020. ↑

24. Judge Michael J. Murphy, “My Story: Judge Michael J. Murphy,” Supreme Court of Ohio & the Ohio Judicial System, 2008. ↑

25. John North, “Charles Susano, 86, retired longtime Tennessee appeals court judge, dies,” WBIR 10 News (Knoxville, TN), May 10, 2022. ↑

26. Mamadi Corra, “Disability and Access Perspectives from Judiciary Personnel on Issues of Accessibility,” The Judges Journal 59 (2), American Bar Association Judicial Division, May 13, 2020. ↑

27. Doron Dorfman, “The Blind Justice Paradox: Judges with Visual Impairments and the Disability Metaphor,” Cambridge Journal of International and Comparative Law 5 (2) (2016): 272–305. ↑

28. Mamadi Corra, “Disability and Access Perspectives from Judiciary Personnel on Issues of Accessibility,” The Judges Journal 59 (2), American Bar Association Judicial Division, May 13, 2020. ↑

29. Vicki Gonzalez, “Interview: Sacramento County Superior Court Judge Andi Mudryk on her historic appointment,” CapRadio (Sacramento, CA), April 14, 2022. ↑

30. James Arkin, “GOP Sens. Question Judge Picks On Crime, 2nd Amendment,” Law360 Pulse, November 30, 2022. ↑

31. Kaiser Health News, “A Judge Takes His Mental Health Struggles Public,” HealthLeaders, November 9, 2021. ↑

32. “Patricia A. Broderick,” 15^th Biennial IAWJ Conference Program & Speakers, International Association of Women Judges, May 2021. ↑

33. Doron Dorfman, “The Blind Justice Paradox: Judges with Visual Impairments and the Disability Metaphor,” Cambridge Journal of International and Comparative Law 5 (2) (2016): 272–305. ↑

34. Jane Musgrave, “Judge Sasser fights off cancer, remains committed to court innovation,” Palm Beach (FL) Post, August 23, 2018. ↑

35. Marv Cermak, “Cermak: Schenectady’s Dan Monaco overcomes childhood polio on way to judgeship,” Times Union (Albany), December 8, 2015; Naples Daily News Staff Report, “Judge lauded at retirement party,” Naples Daily News (Florida), December 15, 2008. ↑

36. Drew Jubera, “Shooting for More than Normal,” Shepherd Center, January 24, 2019. ↑

37. Doron Dorfman, “The Blind Justice Paradox: Judges with Visual Impairments and the Disability Metaphor,” Cambridge Journal of International and Comparative Law 5 (2) (2016): 272–305. ↑

38. Shay McAlister, “State’s first blind judge retires, leaves powerful legacy in the court system,” WHAS11 (Louisville, KY), September 26, 2017. ↑

39. Dennis George, The Kentucky Standard, “Despite childhood polio, former judge lived full life,” News-Enterprise (Elizabethtown, KY), November 7, 2021; “Obituary: Judge Thomas Clark Dawson, 74,” Nelson County Gazette, November 1, 2021. ↑

40. Tim Jagielo, “Feeling ‘Blessed’: Wheelchair bound Judge Duncan Beagle positive through disability,” Tri-County Times (Fenton, MI), March 24, 2012. ↑

41. Marcella Corona, “Longtime Reno judge Patrick Flanagan dies,” Reno Gazette-Journal, October 6, 2017. ↑

42. Maggie Callahan, “The Year of Independence,” Muscular Dystrophy Association, May 4, 2022. ↑

43. Laura Blasey, “Diabetic-alert dog is judge’s courtroom companion,“ Newsday (Melville, NY), September 16, 2018. ↑

44. Ray Westbrook, “The A-J Remembers: Polio slowed, but never stopped, Judge Ed Follis,” Lubbock (TX) Avalanche-Journal, July 31, 2016. ↑

45. Ed Treleven, “Know Your Madisonian: Mock trial of Christopher Columbus set Dane County’s first disabled judge on career path,” Wisconsin State Journal, September 19, 2020. ↑

46. “Program Announcement: From Junkie to Judge; Overcoming Addiction and Maintaining Wellness and Recovery,” New Jersey Attorney General’s Advocacy Institute, 2022. ↑

47. “Living with a Disability in the Profession,” American Bar Association Judicial Division Program Library, 2021. ↑

48. “Living with a Disability in the Profession,” American Bar Association Judicial Division Program Library, 2021. ↑

49. Azeema Akram, “The power of my hearing loss,” My Path to Law, ABA Journal, October 1, 2020. ↑

By now, those in the financial services, vendor management, and consumer protection spaces have heard of Hunstein v. Preferred Collection & Management Services, Inc. and that case’s rare three trips to a federal appellate court in an effort to answer this question: Does the federal Fair Debt Collection Practices Act (“FDCPA”)^[1] apply to prohibit the very routine communications between a debt collector and its vendors? Unfortunately, none of the opinions ultimately provides an answer to this apparent question of first impression, though they imply one.

So, what message do the Hunstein opinions send to companies that regularly transmit personal and potentially sensitive information to third-party vendors?

Brief Procedural History

In Hunstein 1,^[2] a three-judge panel of the U.S. Court of Appeals for the Eleventh Circuit first unanimously held that a debt collector’s transmission of a debtor’s private data to a dunning vendor was actionable under the FDCPA.^[3]

In Hunstein 2,^[4] the same panel then sua sponte vacated and superseded Hunstein 1 (to address the intervening Supreme Court opinion of TransUnion LLC v. Ramirez^[5]) but ultimately reached the same conclusion, 2-1, although over a vociferous dissent.

The Eleventh Circuit then granted rehearing en banc and on September 8, 2022, issued its Hunstein 3^[6] opinion vacating Hunstein 2 and remanding to the district court with instructions to dismiss the case without prejudice, finding that the plaintiff failed to properly allege his claim. In doing so, the Hunstein 3 court considered but ultimately did not make a ruling on the pivotal question—that is, whether the FDCPA prohibits a debt collector from sending a consumer’s private data to a dunning vendor.

Background

Section 1692c(b) of the FDCPA provides, in pertinent part, that “without the prior consent of the consumer given directly to the debt collector, . . . a debt collector may not communicate, in connection with the collection of any debt, with any person other than the consumer.” In Hunstein, the plaintiff’s son received medical care, and the plaintiff allegedly did not pay the bill, which was then placed for collections with the defendant. The defendant, Preferred Collection, then sent certain information (including the plaintiff’s status as a debtor, the exact balance of the debt and the entity to which it was owed, the fact that the debt concerned the plaintiff’s son’s medical treatment, and the plaintiff’s son’s name) to its dunning vendor, Compumail, to issue dunning letter(s) to the plaintiff.

The issue in all three Hunstein opinions was not whether this communication of information was prohibited by § 1692c(b) but whether the plaintiff had alleged a “concrete harm” such that he had standing to bring the claim (i.e., whether the courts had a case or controversy sufficient to confer jurisdiction). Concrete harm is normally alleged by showing an injury in fact—some tangible harm to a person’s body or property. In cases of a bare statutory violation unaccompanied by an injury in fact, however, the plaintiff must show an “intangible harm.”^[7] Intangible harm is a relatively illusory concept, but one way that courts assess it is by “compar[ing] [the intangible harm] to a harm redressed in a traditional common-law tort.”^[8]

In his complaint, Hunstein alleged that Preferred Collection’s communication with Compumail in connection with debt collections was comparable to the common-law tort of public disclosure of private facts (“public disclosure”), which requires showing, among other things, the “publicity” of private information.

The Majority Opinion

The Hunstein 3 majority ultimately punted on whether the plaintiff had shown standing, ruling that Hunstein had failed to even allege publicity in his complaint and thus had failed to state a prima facie case for concrete harm.

According to the majority, publication—“to communicate a fact concerning the plaintiff’s private life to a single person or even to a . . . group of persons”—is insufficient to show a public disclosure.^[9] Publicity, on the other hand, “requires either actual public disclosure or a substantial certainty that the disclosed information will reach the public at large.”^[10] This was not present in Hunstein’s complaint, the court reasoned, because “Hunstein did not even allege that a single [Compumail] employee ever read or understood the information about his debt.”^[11] Thus, the court remanded for dismissal without prejudice because “Hunstein did not allege any publicity at all.”^[12]

The majority relied heavily on the Supreme Court’s 2021 decision in TransUnion, where the Court considered whether the plaintiffs (a class) had alleged concrete injury in their claims that TransUnion, the defendant credit reporting agency, failed to use reasonable procedures to ensure the accuracy of their credit reporting so as not to include inaccurate Office of Foreign Assets Control data labeling the plaintiffs as potential terrorists.^[13] In order to determine if the plaintiffs alleged concrete injury from a bare statutory violation (i.e., unaccompanied by an injury in fact), the Court compared the plaintiffs’ alleged harm to defamation, which traditionally requires publication (which, unlike publicity, can be a private communication) of a false statement. The Court ultimately concluded that the 1,856 class members whose credit reports had been disseminated to third parties (mainly creditors or potential creditors doing credit checks) had alleged a sufficient intangible injury to confer standing, whereas the 6,332 class members whose credit reports were never disseminated did not:

In cases such as these where allegedly inaccurate or misleading information sits in a company database, the plaintiffs’ harm is roughly the same, legally speaking, as if someone wrote a defamatory letter and then stored it in her desk drawer. A letter that is not sent does not harm anyone, no matter how insulting the letter is.^[14]

In reaching its conclusion in Hunstein, the majority reasoned that Hunstein effectively claimed that Preferred Collection sent Hunstein’s information to Compumail, where it “[sat] in a company database.”^[15]

So where does that leave us? Technically, Hunstein 3 is nothing more than a guide on how to (and how not to) plead an FDCPA claim. Some value can be gleaned, however, from the majority’s dicta, in which it suggested that it would not have found standing even if Hunstein had alleged that Compumail’s employees read or understood the information because this would have been publication but not publicity.

In drawing the distinction between public (publicity) and private (publication) communications, the court reasoned that “any publication in a newspaper or a magazine, even of small circulation, or in a handbill distributed to a large number of persons, or any broadcast over the radio, or statement made in an address to a large audience, is sufficient to give publicity.”^[16] On the other hand, “[w]hen a trade secret is communicated to thousands of new employees after a merger, for example, it does not become public information.”^[17]

So, was Preferred Collection’s transmission of Hunstein’s personal information publication or publicity? The court ultimately did not answer this question, but its approach in dicta strongly implies that it would have characterized the communication as a private disclosure, and thus the transmission of information would be insufficient to establish a concrete injury under the comparison to public disclosure:

• “All that to say, nowhere does Hunstein suggest that Preferred Collection’s communication reached, or was sure to reach, the public. Quite the opposite—the complaint describes a disclosure that reached a single intermediary, which then passed the information back to Hunstein without sharing it more broadly.”^[18]
• “Under even the most generous reading of [Hunstein’s] complaint, one company sent his information to another, where it was ‘populated’ into a private letter that was sent to his own home. That is simply not enough.”^[19]
• “So Preferred [Collection] did indeed disclose information to the mail vendor’s agents, but the complaint describes the same automatic process that the Supreme Court explained does not constitute an injury.”^[20]

The Concurrence

The concurrence echoed the majority’s holding but went further to draw a second distinction between Hunstein’s claims and another element of the comparator tort of public disclosure—that the information communicated was “highly offensive.”^[21]

Even if there was publicity, the concurrence reasoned, it would not be an actionable public disclosure because the information communicated may have caused personal offense (which is not sufficient) but was not “a kind highly offensive to the ordinary reasonable man.”^[22]

The Dissent

The dissent started off by calling into question the majority’s “refusing to give Hunstein’s complaint an appropriately charitable reading and, worse, just flat disregarding its express allegations.”^[23] The dissent quoted the complaint where it says, “Preferred [Collection] violated [the FDCPA] when it disclosed information about Mr. Hunstein’s purported [medical] debt to the employees of an unauthorized third-party . . . in connection with the collection of the Debt.”^[24] Moreover, the dissent raised “the eminently reasonable inference that the flesh-and-blood individuals to whom that information was disclosed read it.”^[25]

The dissent also called into question the majority’s reliance on the Supreme Court’s decision in TransUnion because that case was decided on the merits and appealed postjudgment, whereas the Hunstein 3 opinion was decided at the pleading stage on a motion to dismiss, at which point the plaintiff’s claims are read in the light most favorable to the plaintiff, indulging every inference in the plaintiff’s favor. Under this more forgiving light, the dissent concluded, Hunstein stated a prima facie case for an intangible injury as compared to public disclosure.

Conclusion

The Hunstein case on its face is a little bit of much ado about nothing. Hunstein advanced a relatively novel theory that the FDCPA acts as a consumer-privacy statute, and the Hunstein 1 and 2 panels tacitly approved by finding standing—only to have the en banc Eleventh Circuit effectively overrule and dismiss on the basis that Hunstein failed to adequately allege one of the elements of public disclosure. The court dodged the substantive question, and the ruling ultimately does little more than provide rudimentary-level guidance on how to plead a claim.

But, to the extent that the Eleventh Circuit decision (and potentially that of another circuit) comported with the Hunstein 3 dicta, the conclusion would seemingly be that the FDCPA does not confer standing to bring consumer-privacy claims on the basis of a debt collector’s transmission of a consumer’s information to a dunning vendor. And, of course, the concurrence raises the question not reached: Even if there was publicity, was the information conveyed the type of “highly offensive” disclosure that is actionable in public disclosure? The concurrence concluded that it was not.

This is almost certainly not the final word on the machination of consumer-privacy claims under the FDCPA. Indeed, we may even see Hunstein refile his complaint with the magic missing language. Or Hunstein may decide to appeal the decision up to the Supreme Court for a final resolution on the issue of standing.

Takeaway

Until then, with little to nothing in the way of precedent from the Eleventh Circuit to date, debt collectors and lenders who meet the definition of a debt collector in all jurisdictions need to take affirmative steps to implement policies and procedures to avoid (or at least mitigate) class-action FDCPA cases based upon a defendant’s continued (and prior) use of third-party debt-collection vendors. Even if your company is not a debt collector and would not be subject to the FDCPA, the facts in Hunstein should give you pause if you regularly transmit personal and potentially sensitive information regarding consumers to third-party vendors. What can your company do to avoid a similar suit?

Consumer privacy is a huge concern for regulators of all kinds. This is nothing new. But the focus on vendor management (or lack thereof) and how it contributes to the violation of consumer privacy is relatively new. Whenever your company is negotiating with a vendor that will be touching consumer information, make certain that vendor will be contractually obligated to maintain that information in the strictest confidence. Because Hunstein was decided on a motion to dismiss, we did not get to see what facts Preferred Collection had in its defense. Perhaps its agreement with Compumail restricted access to debtor information to a small group of Compumail employees tasked with preparing its dunning letters. That would certainly have been a fact in favor of showing that there was no publication, let alone publicity, of Hunstein’s information.

Use this opportunity to review your company’s contracts with its vendors and ensure that the confidentiality provisions restrict access to sensitive data. Even if Hunstein was ultimately much ado about nothing, it is a powerful reminder of the risk associated with vendor management.

1. 15 U.S.C. § 1692. ↑

2. Richard Hunstein v. Preferred Collection & Mgmt. Servs., Inc. (Hunstein 1), 994 F.3d 1341, 1344 (11th Cir. 2021), opinion vacated & superseded on reh’g, 17 F.4th 1016 (11th Cir. 2021), reh’g en banc granted & opinion vacated, 17 F.4th 1103 (11th Cir. 2021), and reh’g en banc, No. 19-14434, 2022 WL 4102824 (11th Cir. Sept. 8, 2022). ↑

3. To read more about Hunstein 1, see our prior Client Alert, Eleventh Circuit Renews the FDCPA as a Consumer Privacy Statute; Deals Major Blow to Debt Collection Services, ADAMS & REESE (Apr. 29, 2021). ↑

4. Richard Hunstein v. Preferred Collection & Mgmt. Servs., Inc. (Hunstein 2), 17 F.4th 1016, 1020 (11th Cir. 2021), reh’g en banc granted & opinion vacated, 17 F.4th 1103 (11th Cir. 2021), and reh’g en banc, No. 19-14434, 2022 WL 4102824 (11th Cir. Sept. 8, 2022). ↑

5. TransUnion LLC v. Ramirez, 141 S. Ct. 2190 (2021). ↑

6. Richard Hunstein v. Preferred Collection & Mgmt. Servs., Inc. (Hunstein 3), No. 19-14434, 2022 WL 4102824 (11th Cir. Sept. 8, 2022). ↑

7. See TransUnion, 141 S. Ct. at 2205 (“[U]nder Article III, an injury in law is not an injury in fact. Only those plaintiffs who have been concretely harmed by a defendant’s statutory violation may sue that private defendant over that violation in federal court.”). ↑

8. Hunstein 3, 2022 WL 4102824, at *1. ↑

9. Id. at *9 (quoting and citing RESTATEMENT (SECOND) OF TORTS § 652D cmt. a (AM. L. INST. 1977)). ↑

10. Id. at *8. ↑

11. Id. ↑

12. Id. at *10. ↑

13. TransUnion LLC v. Ramirez, 141 S. Ct. 2190, 2205 (2021). ↑

14. Id. at 2210; see also id. n.6 (publication (and, according to the Hunstein 3 majority, therefore publicity) “generally require[s] evidence that the document was actually read and not merely processed” (citations omitted)). ↑

15. Hunstein 3, 2022 WL 4102824, at *11 (citing and quoting TransUnion, 141 S. Ct. at 2210). ↑

16. Id. ↑

17. Id. at *7. The keen observer might question whether an emerging company’s disclosure of its own trade secrets would be a relevant comparator to public disclosure of private facts. The dissent pointed this out, see id. at *28 n.12, to which the majority responded, see id. at *7 n.7. ↑

18. Id. at *8. ↑

19. Id. ↑

20. Id. at *13 (citing and quoting TransUnion, 141 S. Ct. at 2210 n.6 (requiring that “the document was actually read and not merely processed” (emphasis added)). ↑

21. Id. at *15. ↑

22. Id. at *14 (quoting and citing RESTATEMENT (SECOND) OF TORTS § 652D cmt. c (Am. L. Inst. 1977)) (emphasis omitted). ↑

23. Id. at *26. ↑

24. Id. at *27 (citing and quoting the complaint, ¶ 5) (emphasis omitted). ↑

25. Id. at *19. ↑

On March 9, 2022, the Securities and Exchange Commission (SEC) proposed amendments to its rules that would, it hopes, “enhance and standardize disclosures regarding cybersecurity risk management, strategy, governance, and incident reporting by public companies.” These proposed new rules augment the current guidance covering certain cyber incidents that need to be reported by public companies. Among the proposed changes are periodic reports on (1) policies and procedures concerning cybersecurity risks, (2) the entity’s board of directors’ oversight of cyber risks, and (3) management’s ability to assess and respond to cyber risks.

As Jay H. Knight, chair of the American Bar Association Business Law Section’s Federal Regulation of Securities Committee noted in the committee’s comment, “[i]nvestors only benefit when there is decision-useful information that can be provided.” In the early minutes, hours, or even days of a cyber incident, “decision-useful” information may be hard to come by as firms, businesses, and organizations work to address the failure, assess the vulnerability, and implement a response. Having the infrastructure necessary for an effective response to a cyber incident was important before the SEC’s proposed amendments—should they be implemented, that infrastructure will quickly become a necessity.

What does all of this mean? It may be too early to tell as the final rule has yet to be published, but there are steps that organizations can take to minimize the risks that more stringent reporting requirements may impose. The ABA Cybersecurity Legal Task Force (Task Force) recently published the third edition of The ABA Cybersecurity Handbook (hereinafter Cybersecurity Handbook), which combines data, expertise, and experience from professionals across industries to educate lawyers, law firms, and business professionals. While this new book focuses on all key aspects of cybersecurity, several topics addressed in the book are especially important to consider in light of the proposed SEC rule.

Cyber Training

First, public companies should consider cyber training in the context of the company as a culture, rather than as a one-time or annual check-the-box action. Insider threats (e.g., accidental data loss and malicious data exfiltration) have increased 47 percent between 2018 and 2020, accounting for nearly a quarter of security incidents. In the United Kingdom, 88 percent of data breaches were caused by human error, with malicious activity accounting for a mere 12 percent. A culture of responsibility that prioritizes data security and emphasizes the importance of everyone in the organization is an opportunity to drastically decrease the number of adverse events that you or your client’s organization will encounter.

A culture of accountability and security requires that individuals in every role understand how they fit into a security scheme and the importance of their role. As Ruth Hill Bro, a former chair of the Task Force, and Jill Rhodes, an editor of the third edition of the Cybersecurity Handbook, wrote, organizations should “Get SMART on Data Protection Training.” SMART training consists of five steps: (1) Start training on hiring, (2) Measure what you do, (3) Always train, (4) Raise awareness and provide updates continually, and (5) Tailor training by role. Each of these steps is important in its own right, but organizations should especially take note of raising awareness and providing continual updates. Ongoing updates ensure that your entire organization is aware of current threats; response plans; and legal, ethical, and organizational requirements in the event of an incident.

Technology and bad actors are constantly evolving, and a response plan should similarly adjust in response to new and emerging threats. Ensuring that all members of your organization are aware of threats and understand their role within the response schema will provide a strong foundation from which you can respond to whatever reporting requirement the SEC implements.

Risk Management

Equally important is that public companies have and practice a proactive plan to address incidents, whenever and however they may arise. Risk management is nothing new to businesses, but hybrid working environments, increased reliance on networks, information as a service, and other considerations have exposed organizations to a threat landscape almost unrecognizable from the prepandemic environment.

In the Cybersecurity Handbook, Claudia Rast—the practice department chair of the Intellectual Property, Cybersecurity and Emerging Technology Group at Butzel Long and current cochair of the Task Force—and John DiMaria, an assurance investigatory fellow and research fellow with the Cloud Security Alliance, identified national and international authorities and standards that can help guide organizations creating or updating their cyber infrastructure. These authorities include domestic executive action, such as the Executive Order on Improving the Nation’s Cybersecurity; actions by the European Union Agency for Cybersecurity; and nongovernmental organizations, including the International Organization for Standardization. Rast and DiMaria distilled the numerous authorities and standards down to four steps: (1) establish your team, (2) understand your capabilities and risks, (3) develop a plan, and (4) implement and test the plan. These steps connect the security culture that you have created with an organized chain of command that, coupled with actionable procedures, will allow your organization to respond to “decision-useful” information and distinguish it from distractions.

Whatever the reporting requirements that the SEC decides to implement, they will be a small part in the larger response plan that your organization implements. A response plan must also include state, federal, international, and public relations considerations, as well as any other considerations deemed important.

Conclusion

The cyber-threat environment is constantly changing, but actions by regulators like the SEC can give insight into how the threat landscape is changing, where new threats could arise, and how to best respond to them. SEC guidance today already requires publicly traded companies to disclose material cyber incidents, but that responsibility will increase in a way as yet undefined. Whatever the SEC’s final rule looks like, organizations will have to adjust their cybersecurity infrastructure and response plans to adjust to the new requirements. While it is impossible to know with certainty today the specifics of the final SEC rule, these changes are an opportunity for organizations to evaluate and adjust their training, response plans, and cyber infrastructure.

The ABA Cybersecurity Handbook (third edition) can help with that evaluation and adjustment—and, in general, help lawyers prepare for the upcoming new terrain of cybersecurity reporting. You can save 20 percent with the code ABACYBER20 through February 28, 2023.

We often look to the federal judiciary as the gold standard of American jurisprudence. State courts frequently find federal opinions persuasive. Confirmation hearings for federal judges are televised. Indeed, the federal judiciary is even enshrined in Article III of the U.S. Constitution. And while we can expect that opinions issued by federal judges interpreting statutes and laws may differ somewhat across the nation’s districts and circuits, lawyers, businesses, and the public at large have come to expect—and rely upon—a degree of consistency in the federal judiciary’s decisions. However, when it comes to the rapidly evolving cannabis industry, the federal judiciary has been anything but consistent.

For example, federal courts have ruled that Title VII of the Civil Rights Act of 1964 (“Title VII”) prohibits cannabis employers from discriminating against employees.^[1] Additionally, federal agencies will hold cannabis employers accountable for discrimination in the workplace.^[2] Instead of addressing the legality of the workplace in the first place, or the legality of plaintiffs’ own conduct by working in the state-legal-but-federally-prohibited marijuana industry, the federal courts squarely focus on the factors that a plaintiff must necessarily allege in order to set forth a case for retaliation under Title VII and wholly ignore the fact that cannabis is and continues to be classified as an illegal substance under the Controlled Substances Act (“CSA”).

Likewise, federal courts have ruled that the Fair Labor Standards Act (“FLSA”), which regulates minimum wage, overtime pay, record keeping, and youth employment standards, also applies to the cannabis industry. For example, in Kenney v. Helix TCS, Inc., the U.S. Court of Appeals for the Tenth Circuit ruled that the context of the FLSA is clear that employers are not excused from complying with federal wage and hour laws just because their business practices may violate federal law, and therefore the FLSA applies to a marijuana worker even though marijuana is deemed illegal by the CSA.^[3]

Between Title VII and the FLSA, the federal courts’ analysis ignores the illegality of the cannabis industry and instead focuses on whether the actual law itself is being violated. However, this approach directly contradicts the position the federal courts have adopted under Titles I and II of the Americans with Disabilities Act (“ADA”), which prohibit the discrimination of employees in the workplace (both for private entities (Title I) and public entities (Title II)) based on their disabilities. Contrasting with the federal courts’ approach to Title VII and FLSA, which ignores marijuana’s status as illegal under federal law, the illegal status of marijuana is a central basis for the federal judiciary to simultaneously conclude that Titles I and II of the ADA provide no protection against discrimination on the basis of medical marijuana use, even where that use is state-authorized and physician-supervised.^[4] Federal courts have likewise consistently rejected the argument that discrimination on the basis of medical marijuana use reflects discrimination on the basis of the disability that the medical marijuana is used to treat.^[5] In these opinions, the federal courts point to the illegality of marijuana under the CSA as a reason for excepting it as a basis for discrimination under Titles I and II of the ADA.^[6] Federal courts could very well take this same approach when addressing discrimination under Title VII or wage and hour claims under the FLSA—that is, courts could refuse to provide protections to workers in state-legal marijuana industries—but, to date, with respect to the two latter statutes, the courts’ analysis instead focuses on the violation of the underlying statute itself, not the illegality of the substance under the CSA.

Muddying the waters even further is the fact that that federal courts will likely require cannabis businesses to be in compliance with Title III of the ADA, which is a separate provision of the ADA that prohibits discrimination in public accommodations on the basis of disabilities. For example, in Smith v. 116 S Market LLC, the U.S. Court of Appeals for the Ninth Circuit affirmed a district court’s ruling that the defendant had violated Title III of the ADA by failing to provide ADA-compliant parking spaces and routes to its property, which was leased to a marijuana dispensary.^[7] The Ninth Circuit distinguished its Smith opinion from that of James v. City of Costa Mesa (“James”),^[8] in which it ruled that Title II of the ADA did not prohibit discrimination on the basis of medicinal marijuana use, because (1) the two cases arose under different provisions of the ADA; (2) James was limited in its holding to medical marijuana users who claim to face discrimination on the basis of their marijuana use; and (3) the district court’s ruling was silent as to marijuana use and only required compliance with the ADA. These are hardly compelling distinguishing factors; at a minimum, the Ninth Circuit, on its face, appears to be treating cannabis use differently within the same federal statute.

The federal judiciary’s inconsistent opinions extend beyond employment law statutes. Recently, the U.S. Court of Appeals for the Sixth Circuit ruled in Great Lakes Cultivation, LLC v. Vara (In re Great Lakes Cultivation, LLC) that federal bankruptcy protections and processes are not available for assets that are used for, or generated by, a business prohibited under the CSA.^[9] However, this reasoning begs the question: if a cannabis business cannot file for federal bankruptcy protections because its business practices are prohibited under the CSA, and an employee cannot maintain a claim for disability discrimination under Titles I and II of the ADA because marijuana is an illegal substance under the CSA, why do those same business practices trigger federal protections for employees who are subject to discrimination under Title VII and wage protection under the FLSA? The status of marijuana as illegal under the CSA appears to apply to prohibit individuals and businesses from seeking protection under the law in some instances, while it is wholly ignored in others.

When read independently, each opinion makes logical sense. However, when read together, it is clear that the federal judiciary has not been able to commit to a consistent position with respect to applying federal statutes to the cannabis industry. This is concerning for both cannabis businesses and the legal professionals who advise them because not only are inconsistent rulings unfair and unpredictable, but they also can have tangible “chilling effects” on the industry, stymieing growth for an industry otherwise poised for rapid expansion in the future.

Given the uncertainties inherent in the cannabis industry, as well as the numerous and demanding state regulations with which most marijuana businesses must contend, well-advised cannabis businesses must be aware of the federal statutes that apply to the industry and, perhaps even more importantly, how federal courts are interpreting these statutes. Depending on, apparently, the specific subdivision of the law being applied to a particular set of facts (e.g., Title III versus Titles I and II of the ADA), federal courts will treat even the most upstanding and reputable marijuana business either the same as any other legitimate business, or as a miscreant without permission to enter through the courthouse gates.

1. Aichele v. Blue Elephant Holdings, LLC, 292 F. Supp. 3d 1104 (D. Or. 2017); Jones v. Blair Wellness Ctr., LLC, No. ADC-21-2606, 2022 U.S. Dist. LEXIS 66919 (D. Md. Apr. 11, 2022). ↑

2. EEOC v. AMMA Inv. Grp., LLC, No. 1:30cv2786 (D. Md. Sept. 24, 2020). ↑

3. 284 F. Supp. 3d 1186 (10th Cir. 2018). ↑

4. Zarazua v, Ricketts, No. 8:17-cv-318, 2017 U.S. Dist. LEXIS 161990, at *5 (D. Neb. 2017) (no cognizable claim under the ADA for denial of access to medical marijuana); Steele v. Stallion Rockies, Ltd., 106 F. Supp. 3d 1205, 1212 (D. Colo. 2015) (termination on basis of medical marijuana use did not constitute discrimination for purposes of the ADA); Forest City Residential Mgmt. v. Beasley, 71 F. Supp. 3d 715, 731 (E.D. Mich. 2014) (medical marijuana user was not an individual with a qualified disability). ↑

5. Bailey v. Real Time Staffing Servs., 543 F. App’x 520, 524 (6th Cir. 2013) (unpublished); Eccleston v. City of Waterbury, No. 3:19-cv-1614 (SRU), 2021 U.S. Dist. LEXIS 52835, at *17 (D. Conn. Mar. 22, 2021). ↑

6. For example, in the Eccleston opinion, Judge Underhill stated, “[B]ecause medical marijuana does not fit within the supervised-use exception [of the ADA] and remains illegal under federal law, an individual who uses medical marijuana cannot state a prima facie case under the ADA for discrimination on the basis of medical marijuana use.” Id. at *18 (emphasis in original); see also James v. City of Costa Mesa, 700 F.3d 394, 403 (9th Cir. 2012). ↑

7. 831 F. App’x 355 (9th Cir. 2020) (unpublished). ↑

8. 700 F.3d 394. ↑

9. No. 21-12775, 2022 U.S. Dist. LEXIS 148145 (6th Cir. 2022). ↑

This article is the third in a series reviewing recent regulatory developments related to cryptoasset-related issues in the banking sector. Previous articles discussed a potential U.S. central bank digital currency and legislative efforts to regulate stablecoins.

In recent years, some states have started to approve limited purpose banking charters for firms offering cryptoasset services to customers. Well-known among these are the Wyoming Special Purpose Depository Institution (“SPDI”) charter and the New York limited purpose trust company charter.^[1] This article provides a brief overview of these developments, as well as the use of M&A by cryptoasset-focused firms to acquire a bank charter.

In September 2020, the Wyoming Division of Banking (“WDoB”) approved Kraken Bank to become the first SPDI.^[2] In October 2020, Avanti Bank & Trust (now called Custodia) also was approved for a SPDI charter by the WDoB to engage in cryptoasset activities, including providing a stablecoin-type product called Avit.^[3] As of June 2022, there were nine virtual currency businesses operating under a New York limited purpose trust company charter, including Coinbase, Fidelity, Gemini, and Bakkt.

At the federal level, under former Acting Comptroller of the Currency Brian Brooks, the Office of the Comptroller of the Currency (“OCC”) accepted two conversion applications and one de novo national trust bank charter from cryptoasset firms proposing to engage in cryptoasset activities. On January 13, 2021, the OCC granted its first conditional approval to Anchorage Trust Company, a South Dakota non‑depository public trust company, for conversion to a national trust bank operating under the title of Anchorage Digital Bank, National Association.^[4] On February 4, 2021, the OCC granted conditional approval for Protego Trust Company, a Washington state trust company, to convert to a national trust bank under the title Protego Trust Bank, National Association.^[5] And on April 23, 2021, the OCC granted preliminary conditional approval for the de novo charter of Paxos National Trust.^[6] These approvals came on the heels of an interpretation issued by the OCC’s Chief Counsel that the OCC has authority to expand the activities of national trust banks to include certain activities of state trust banks under the “bootstrap” provision of 12 U.S.C. § 92a and the “business of banking” under 12 U.S.C. § 24 (Seventh).^[7]

The national trust banks that received approvals proposed to engage in a range of cryptoasset custody and related activities, including providing fiduciary custody of digital assets, custody and management of stablecoin reserves, custody of client cash deposits, settlement of transactions, on-chain governance services, transaction validation, staking services, payment exchange, and other agent services. Moreover, some banks proposed to offer platform services, including running a client-to-client trading platform for assets under custody, operating a client-to-client lending platform, and managing a platform for the origination and issuance of new digital assets whereby asset owners can digitize existing and prospective assets. Finally, some banks also would provide certain “know your customer” services, such as customer identification, sanctions screening, enhanced due diligence, and customer risk rating.

These approvals may have come under greater scrutiny under current Acting Comptroller, Michael Hsu, who has stated that the agency would review the provisional approvals granted under former Acting Comptroller of the Currency Brooks’ leadership.^[8] For example, Anchorage Digital Bank was recently issued a consent order for failing to meet the Bank Secrecy Act/anti-money laundering (“BSA/AML”) requirements under its operating agreement with the OCC.^[9]

More generally, OCC Interpretive Letter 1179, issued under Hsu and clarifying earlier interpretive letters (including Interpretive Letter 1176), suggests that while the path to charter a national trust bank engaged in cryptoasset-related activities remains available, it is narrower than the path envisioned by former Acting Comptroller Brooks.^[10] Notably, to date, no new national trust bank charter for a crypto‑native company has been approved by the OCC under current leadership.

Other innovation-focused companies have taken the M&A route rather than applying for a de novo or charter conversion with the OCC. For example, in September 2020, Fintech startup Jiko acquired Mid-Central National Bank, and in February 2021, LendingClub completed its acquisition of digital bank Radius Bank. In January 2022, federal banking regulators also approved SoFi’s application to acquire Golden Pacific Bank. In granting the approval, however, the OCC stated that the acquired bank may not engage in any cryptoasset activities or services currently conducted by SoFi unless it has received prior written determination of no supervisory objection from the OCC. In addition, the Federal Reserve Bank of San Francisco stated that “SoFi is currently engaged in crypto-asset related activities that the [FRB] has not found to be permissible for a bank holding company or a financial holding company” and must divest or conform to the requirements of the Bank Holding Company Act within the available two-year conformance period (subject to any available extension).^[11] SoFi’s current investment offerings include a cryptoasset trading service that offers trading in Bitcoin, Ethereum, Dogecoin, Cardano, and 26 more coins.^[12] To date, the FRB has not issued any guidance on permissible cryptoasset activities of bank holding companies.

The introduction of special purpose banking charters from states and the OCC’s acceptance of conversion and de novo charters represent new options for companies offering cryptoasset services to operate within the regulatory perimeter. Recent bank M&A deals also evidence the diverse paths that companies are taking to offer such services, particularly as the regulators under the Biden administration have seemed less receptive to charter applications. It remains to be seen, however, which path(s) will emerge as a dominant or favored approach by regulators and the industry.

1. New York also offers virtual currency licenses for businesses conducting cryptoasset activities, known as the BitLicense. ↑

2. “Kraken Wins Bank Charter Approval,” KrakenFX (September 16, 2020). ↑

3. “Avanti Granted Bank Charter and Approval of Business Plan for Digital Asset Custody and Tokenized U.S. Dollar,” Custodia (October 28, 2020). ↑

4. “Re: Application by Anchorage Trust Company, Sioux Falls, South Dakota to Convert to a National Trust Bank,” Office of the Comptroller of the Currency (January 13, 2021). ↑

5. “Re: Application by Protego Trust Company, Seattle, Washington, to Convert to a National Trust Bank,” Office of the Comptroller of the Currency (February 4, 2021). ↑

6. “Re: Application to charter Paxos National Trust, New York, New York,” Office of the Comptroller of the Currency (April 23, 2021). ↑

7. OCC, Interpretive Letter #1176 (January 11, 2021). See also “OCC Updates Guidance on Cryptoasset-related Activities of Banks,” Cravath, Swaine & Moore client memo (November 29, 2021). ↑

8. “OCC’s Hsu: Recent Approvals of Crypto Charters ‘On the Table’ for Review,” ABA Banking Journal (June 2, 2021). ↑

9. “OCC Issues Consent Order Against Anchorage Digital Bank,” News Release 2022-41 (April 21, 2022). In the press release, Hsu stated, “The OCC holds all nationally chartered banks to the same high standards, whether they engage in traditional or novel activities. When institutions fall short, we will take action and hold them accountable to ensure compliance with federal laws and regulations.” ↑

10. OCC, Interpretive Letter #1179 (November 18, 2021). ↑

11. Letter from Sebastian R. Astrada, Fed. Res. Bank of S.F., to Mr. Richard K. Kim (January 18, 2022) (on file with author). Cf. “Re: Conditional Approval to charter SoFi Interim Bank, National Association, Cottonwood Heights, Utah and for SoFi Interim Bank, National Association to merge with and into Golden Pacific Bank, National Association, Sacramento, California and engage in a change in asset composition,” Office of the Comptroller of the Currency (January 18, 2022). ↑

12. Based on the descriptions available on SoFi’s website. ↑