Ask a group of female attorneys about their experience with the fabled “glass ceiling,” and you will likely hear many stories. The glass ceiling describes the barrier that women in numerous professions bump up against when trying to climb the ladder in their respective careers. Women have made tremendous strides in the working world, yet the glass ceiling remains stubbornly in place in many businesses.
Unequal Partners
Today, women make up more than 50% of entrants into law school, equity that was built over decades of struggle and work. Although a similar number of men and women are studying to become lawyers, this has not translated into an equal number of women becoming partners in law firms: Partnerships still primarily belong to men. The latest statistics, according to Law.com, place partnerships for women at 31% overall. This is an increase over smaller numbers from the past 20 years, but there is still much room for improvement.
Barriers persist for female lawyers who seek to reach higher levels in their careers. Men generally hold higher seniority in law firms, with some notable exceptions, and also typically outearn their female counterparts. Per Law.com, the numbers for women holding equity partnership in firms have experienced growth since studies conducted in 2012. However, even with an improvement in the number of women reaching equity partner status, the growth has been slower than expected.
When I moved to New York City in the mid-1980s to join a private practice, I worked with a number of female attorneys, but the partners were all male. I have definitely seen a major increase in women partners, and law firms have brought more women into management, including managing partner roles. For women entering law, there are more mentors than ever. However, there has been slower progress in terms of women being brought into client development, especially with key clients. The upper echelon of law careers remains, largely, a boy’s club.
The Motherhood Dilemma
In “firm life,” there is a strong emphasis on billable hours. Women may take time off or go part-time to start families. That, to some degree, has led some women attorneys to choose in-house opportunities. Amassing billable hours is difficult when you’re bearing children, taking care of infants and family obligations.
Some firms are beginning to make concerted efforts to give credit for billable hours even when lawyers are on family or maternity leave. These efforts allow women, as well as men, to take desired breaks to build their families without risking their partnership track.
However, because of the many additional pressures and expectations women face around raising and bearing children, female lawyers need extra support, and firms must be thoughtful and break from tradition to promote a path to partnership.
Breaking Through
How should female lawyers confront the reality of the glass ceiling and chisel away at it until they can break through to the other side?
In addition to the larger changes needed in the industry, several individual approaches to the glass ceiling can help lessen its impact and contribute to, someday, eliminating it all together.
Female lawyers should have actionable goals and a plan for the trajectory of their career.
Mentors are important to female lawyers—someone to help them navigate the law firm environment and teach them valuable skills like business development.
Be patient, but not stagnant. Focus not only on building skills, but also on building client relationships and business.
Do not be afraid to ask for business. Be fearless and consider the fact that you are actually helping your clients avoid problems and deal with complicated business issues.
Do not be afraid of change. If you see a unique or exceptional opportunity, go for it. Those who are afraid of change often stagnate.
For over a decade, Chinese insurers have supported Belt and Road Initiative (BRI) project development in Latin America, with state-run insurer Sinosure among the first to insure major Chinese infrastructure projects in and exports to Latin America. While Chinese companies remain focused on backing the BRI in the LATAM region, there is early indication of growing interest in life and other non-life insurance markets, as China’s insurance giants have begun to appreciate the market opportunity.
In 2007, China Life began providing insurance business services to companies in Latin America and to Chinese tourists visiting Latin America.[i] Others, including People’s Insurance Company of China (PICC), began insuring employees of Chinese companies, and China Reinsurance Corporation (China Re) reinsured risks ceded by LATAM insurers.
In recent years, Chinese insurance investment appetite in Latin America has increased. Portuguese insurance company Fidelidade Mundial, majority-owned by Chinese tech firm Fosun International, announced it would sell insurance in Chile through a series of partnership agreements.[ii] In 2019, Fidelidade Mundial’s Peruvian unit, FID Peru, acquired a 51% stake in Peru’s La Positiva Seguros y Reaseguros, providing health, accident, home, and mandatory vehicle insurance; and an approximate 24% stake in Bolivia’s Alianza Compañía de Seguros y Reaseguros.[iii] Fosun International also purchased the Brazil operations of Caixa Seguros, Portugal’s largest insurance group.
The Latin American insurance market might also prove attractive to Ping An, a Chinese financial services conglomerate, as interest in the company’s long-term life policies diminishes among aging Chinese consumers. Ping An’s heavy investment in technology and global competitiveness should facilitate its entry into the life market.
China’s interest in expanding into overseas insurance markets could be dampened, however, by a growing focus on domestic market development and an apparent growing sensitivity to risk among China’s financial giants. In this regard, the China Banking and Insurance Regulatory Commission recently issued regulations enhancing supervision of, and regulating investments by, Chinese insurers to ensure solvency and minimize systemic risk. China’s policies and most recent Five-Year Plan (2021–2025) nevertheless promote a continued focus on not only “bringing in” (i.e., attracting) foreign capital in China’s insurance industry, but also on “going out” (i.e., investing abroad).
Also evident in China is a growing focus on providing risk analysis for Chinese companies operating in Latin America and other regions. Jiangtai International Cooperation Alliance, a Chinese insurance intermediary, has provided risk analysis and rescue services for companies in more than 170 countries. Jiangtai chairman Shen Kaitao noted at a June 2021 conference, “[w]here the foreign investment enterprises go, the risk prevention and control services will extend.”[iv]
Beyond infrastructure risk management, expansion by Chinese insurers into P&C, life, health and other insurance lines in Latin America would also seem inevitable. The life insurance industry in Latin America was performing well even before Covid-19, having grown by 5.1% in 2019, boosted by favorable interest rates. In 2019, total insurance premiums in Latin America and the Caribbean amounted to US$153.05 billion, of which 54% came from non-life insurance and the remaining 46% from life insurance.[v] Indeed, amid the pandemic and related uncertainties, interest in life insurance and other protection products has surged among Latin American consumers.[vi]
As Chinese insurers continue to “go out,” life and non-life products will no doubt feature more prominently in their overseas offerings. These developments sound a cautionary note for U.S. insurance companies seeking to compete in the region while also heralding opportunity.
Alternative business structures (ABS) is a generic term used in the legal ethics arena to refer to any form of business model for provision of legal services that is different from traditional law practice models (sole proprietorship and various types of partnerships). ABS can include the possibility of equity ownership by non-lawyers, including even publicly traded law firms (as has been seen in Australia, where ABS is known as “incorporated legal practices”) and business or consulting entities with non-lawyer equity owners that provide both legal and non-legal services.
Besides Australia, ABS has been permitted for many years in England and Wales (since the Legal Services Act of 2007) and, here in the United States, in the District of Columbia.[1] The D.C. liberalization of its Rules of Professional Conduct did not yield a significant amount of law-firm affiliated ABS. Part of this may have been due to uncertainty about whether D.C.-licensed lawyers, many of whom are also licensed in one or more other U.S. jurisdictions (e.g., Maryland, Virginia), would run afoul of the rules of professional conduct in the other jurisdictions, which did not permit ABS.[2] More recently, however, Arizona and Utah have modified their respective versions of Model Rule 5.4[3] to permit business structures that allow nonlawyer ownership of law firms and the sharing of legal fees with nonlawyers.
Model Rule 5.4
Under ABA Model Rule 5.4, which has been adopted essentially unchanged in nearly all other U.S. jurisdictions, lawyers are prohibited from sharing legal fees[4] with a nonlawyer or practicing in a law firm in which a nonlawyer owns any interest or serves as an officer or director. The original purpose of this prohibition, which a number of lawyers deem anachronistic, was to preserve the professional independence of lawyers.
Starting in the latter part of the twentieth century, however, it became clear that lawyers no longer had—assuming they ever had—a monopoly on the provision of legal and law-related services. Accountants and other tax professionals had for many years offered tax-related services to the general public in a manner that frequently blurred any distinction between legal and non-legal services. Other providers made available document discovery and a broad array of low-cost, high-volume legal-related services to both businesses and individuals.
The success of many of these initiatives attests to the societal problem posed by the high cost of lawyers’ services. The author has frequently remarked (only partially in jest) that, were he in need of a lawyer, he couldn’t afford himself. The issue does not call for levity, however. In a nation that widely regards itself as a leading exponent of the rule of law, the World Justice Project 2020 Rule of Law Index ranked the United States as only twenty-first out of a total of 128 countries, but—more tellingly in terms of peer group analysis—fifteenth out of twenty-four on a regional basis and twenty-first out of thirty-seven based on population income level.
Affordability of legal services is a large component of arguments advanced in support of repeal or revision of Model Rule 5.4. The revisions in Utah and Arizona in 2020 and 2021, respectively, have already been mentioned. In February 2020, the ABA recognized that “more than 80% of people below the poverty line and the many middle-income Americans who lack meaningful access to effective civil legal services.”[5] Accordingly, the House of Delegates passed Resolution 115 calling for “regulatory innovations that have the potential to improve the accessibility, affordability, and quality of civil legal services.”
In an era in which lawyers and law firms routinely practice on a multistate basis, piecemeal adoption of such changes raises an obvious question: May a lawyer practicing in a jurisdiction that adheres to the current text of Model Rule 5.4 invest in an ABS in a jurisdiction that allows it, and if so, what ethical limitations (if any) apply to that investment?
Formal Opinion 499
In September 2021, the Standing Committee on Ethics and Professional Responsibility (the “Ethics Committee”) addressed that question in Formal Opinion 499. It interpreted Model Rule 5.4 to allow a lawyer “passively [to] invest in a law firm that includes nonlawyer owners . . . operating in a jurisdiction that permits ABS entities, even if the lawyer is admitted to practice law in a jurisdiction that does not authorize nonlawyer ownership of law firms.” “Passive” investment,[6] for this purpose, means investment in an ABS with the sole aim of receiving a return on capital based on the efforts its employees, without any personal participation by the investor in the ABS’s work or management—in short, wholly unrelated to the investor’s law practice.
As a corollary, the opinion further refined its definition of “passive investment” as negating access by the investing lawyer to confidential information protected by Model Rule 1.6 without the informed consent of the ABS’s client. This sounds fairly straightforward, but it is actually somewhat complex, because, as the Ethics Committee acknowledges, it may often be difficult to anticipate what kinds of information about the ABS a potential investor might reasonably request, and therefore “it is unrealistic to assume that there will be no investor requests for information about the ABS operations or revenue. The issue of disclosure of confidential information by an ABS is a developing area of the law and beyond the scope of this opinion.” No extraordinarily useful guidance there, to be sure, but until this area is fleshed out further, conservative ethics advice (which the Ethics Committee, to its credit, offers) is this: If considering investment in an ABS, a lawyer “should exercise due care to avoid exposure to confidential client information held by the ABS or other associations that could result in a determination that the . . . [investing] lawyer is part of the ABS ‘firm.’”
More helpful, by way of guidance, is the rejection by Formal Op. 499 of any notion that this kind of investment could create a conflict of interest per se. “A passive investment does not create an ‘of counsel’ relationship where conflicts are imputed to other lawyers. Nothing about a passive investment necessarily creates the ‘close, regular and personal relationship’ characteristic of ‘of counsel’ arrangements.” To make appearance double sure, however, the opinion insists that investing lawyer make sure that the ABS does not in any way imply that the investor is a lawyer for the ABS or is otherwise associated with the ABS. Furthermore, the mere fact of a lawyer’s passive investment in an ABS in a Model Rule 5.4 jurisdiction does not require imputation of conflicts under Model Rule 1.10 between the investing lawyer (or that lawyer’s firm) and the ABS.
While conflicts at the time of investment are rare, they are not impossible, however. Formal Op. 499 cautions that if the investor when making the investment also represented a client with interests adverse to a client of the ABS, a concurrent conflict under Model Rule l.7(a)(2) might exist. Such a conflict could arise equally where the investor is an advocate for a client adverse to one of the ABS’s clients or a business lawyer representing a client involved in a transaction with one of the ABS’s clients. This is so, the opinion concludes, because the investing lawyer’s interest in the ABS could “create a significant risk” that the investor’s representation of the client would be “materially limited” by the investment in the ABS.
The attentive reader will have noted that the Ethics Committee’s conflict of interest analysis applies only at the point of investment. The opinion subsequently underscores this point: “The fact that a conflict might arise in the future between the . . . [investing lawyer’s] practice and the ABS firm’s work for its clients does not mean that the . . . [investor] cannot make a passive investment in the ABS.”
The Ethics Committee considered the conflict of law issue that arises when (as often will be the case, at least at present) the investor is admitted to practice in a jurisdiction that retains Model Rule 5.4. That issue is addressed by Model Rule 8.5(b)(2). Formal Op. 499 concluded that the law of the jurisdiction in which the ABS is authorized to operate should apply “because under Rule 8.5(b)(2), the predominant effect of . . . [the] passive investment in an ABS would be in the jurisdiction(s) where the ABS would be permitted.”
To recapitulate, then, the gist of Formal Op. 499, a lawyer admitted to practice in a jurisdiction that has adopted (or substantially adopted) Model Rule 5.4 may invest in an ABS entity with nonlawyer equity owners that is permissible under the ethics rules of another jurisdiction if:
the investment is solely for obtaining a return on capital;
the investing lawyer does not practice law with the ABS;
the investing lawyer ensures that the ABS does not in any manner hold out the investing lawyer as practicing at or working at the ABS;
the investing lawyer, prior to making the investment in an ABS, ascertains that none of his or her existing clients are adverse (within the meaning of Model Rule 1.7(a)(2)) to any of the ABS’s clients;
the investing lawyer does not enjoy access to confidential information protected by Model Rule 1.6 absent
the informed consent of affected clients; or
compliance with an applicable exception in the ABS jurisdiction’s version of Rule 1.6.
Beyond Formal Opinion 499
There are, however, some important ethics principles related to lawyer investment in ABS that are not addressed in detail by Formal Op. 499 and that may pose potential snares for unwary lawyer investors. First, the opinion observes, “[T]he mere fact of a passive investment by a Model Rules Lawyer in an ABS does not require imputation of conflicts under Model Rule 1.10 between the . . . [investing] Lawyer (or that lawyer’s firm) and the ABS.” This is correct but could benefit from further elaboration. Where the ABS is itself a client of the investing lawyer or where the investing lawyer asks a client also to invest in the ABS, Model Rule 1.8(a) imposes several requirements before a lawyer may enter into a business transaction with a client.[7] Under that rule, a lawyer cannot enter into a transaction with the client unless (i) the transaction and its terms are fair and reasonable and fully disclosed in writing to the client in a manner that the client can reasonably understand; (ii) the client is notified and given a reasonable opportunity to seek an independent lawyer’s advice; and (iii) the client gives informed consent, in a writing signed by the client, both to the essential terms of the transaction and to the lawyer’s role therein (including whether the lawyer is representing the client in the transaction). While discipline for transgressing this rule can be severe,[8] unlike other conflict of interest limitations in the Model Rules, these are not imputed to affiliated lawyers under Model Rule 1.10(a)[9] (though they may be under the Restatement’s approach).[10]
Furthermore, the mere fact that there is no per se conflict at the time the investing lawyer makes the investment in the ABS does not mean that conflicts will not arise in the future. Therefore, the investing lawyer’s continuous monitoring is required for concurrent conflicts, such as where the lawyer is engaged to represent a client whose interests are adverse to a client of the ABS. In that scenario, the investing lawyer’s representation of the client could be “materially limited” by the investment interest (assuming it is not de minimis) in the ABS; other lawyers in the investing lawyer’s firm might, however, be able to take on that representation.
Another lurking issue is presented where the investing lawyer’s interest in an ABS, either individually or in concert with others, is a controlling interest. This may implicate the rarely invoked Model Rule 5.7, which applies the strictures of the Model Rules in connection with the provision of “law-related services.” This term is defined in Model Rule 5.7(b) in such a way as to be quite relevant to an ABS: “services that might reasonably be performed in conjunction with and in substance are related to the provision of legal services, and that are not prohibited as unauthorized practice of law when provided by a nonlawyer.” The rule applies to:
the lawyer in circumstances that are not distinct from the lawyer’s provision of legal services to clients; or
in other circumstances an entity controlled by the lawyer individually or with others if the lawyer fails to take reasonable measures to assure that a person obtaining the law-related services knows that the services are not legal services and that the protections of the client-lawyer relationship do not exist. (Emphasis added).
Unfortunately, the key term “control”—a concept familiar to business lawyers in a variety of statutory contexts—is defined neither by the rule nor by the Terminology section of the Model Rules. The only guidance offered is somewhat vague and is found in Comment 4 to Model Rule 5.7:
[4] Law-related services also may be provided through an entity that is distinct from that through which the lawyer provides legal services. If the lawyer individually or with others has control of such an entity’s operations, the Rule requires the lawyer to take reasonable measures to assure that each person using the services of the entity knows that the services provided by the entity are not legal services and that the Rules of Professional Conduct that relate to the client-lawyer relationship do not apply. A lawyer’s control of an entity extends to the ability to direct its operation. Whether a lawyer has such control will depend upon the circumstances of the particular case.
Short of actually exercising dominion over the quotidian business operations of the ABS, what constitutes control for this purpose remains murky. The best way for a lawyer investing in an ABS to be sure of not running afoul of this provision would seem to be contenting oneself with a modest, minority investment and avoiding any possibility of being viewed as acting in concert with other investors who, in the aggregate, might be deemed to exercise control.
Conclusion
Formal Opinion 499 raises the curtain on a sensible approach to ABS as innovation in the provision of legal services and related services becomes more widespread. As is evident from the opinion, this is an area in which further refinement of lawyers’ ethical responsibilities can be anticipated. For now, passivity is the watchword: Make passive investments, act passively and not as a lawyer for the ABS, and be on the lookout for lurking conflicts issues.
[1] D.C. Rule 5.4(b) permits individual nonlawyers, in certain circumstances, to be partners in law firms, as long as they do not provide legal advice but provide different professional services that assist the firm in delivering legal services. The firm must have as its sole purpose providing legal services to clients. The District does not, however, permit passive investment in law firms.
[2] That is precisely the issue that is considered in the recent ABA ethics opinion discussed in this article.
[3] In Arizona, the provisions are now a part of ER 5.3.
[4] Note, the Model Rules of Professional Conduct nowhere define the term “fees.” That potentially gives rise to an argument about the source of law firm revenues that could, even under the Model Rule, be shared with nonlawyers, but this article will not consider that issue.
[6] Formal Op. 499 is limited to passive investment in an ABS and does not address issues implicated by a lawyer practicing in an ABS.
[7] It is possible, albeit unlikely, that the factual settings alluded to here might constitute the investing lawyer “acquir[ing] an ownership, possessory, security or other pecuniary interest adverse to a client.” If that acquisition is “knowing,” that is another basis upon which Model Rule 1.8(a) would come into play.
[8]See, e.g., In re Davis, 740 N.E.2d 855 (Ind. 2001) (suspending lawyer for 18 months); State ex rel. Oklahoma Bar Ass’n v. Perry, 936 P.2d 897 (Okla. 1997) (disbarment for this and other rules violations).
[9] Standing alone, passive investment does not give the investing lawyer “access to information protected by Model Rule 1.6 without the ABS client’s informed consent” and does not create the sort of relationship with the ABS that would normally require imputation of conflicts.
[10] Under the RESTATEMENT (THIRD) OF THE LAW GOVERNING LAWYERS § 126, the rules governing a lawyer’s business transactions with clients are imputed to affiliated lawyers under § 123. See id. § 126, cmt. A.
LeBron James. Zlatan Ibrahimović. Mike Tyson. What is the common factor? Aside from achieving success at the highest level of their respective sports, they are also the bearers of numerous and distinctive tattoos. Tattoos on celebrities—and particularly athletes—have become increasingly ubiquitous, with some gaining significant media attention. For example, Raheem Sterling, a striker for the English Premier League side Manchester City and England national team, has a tattoo of a gun on his right leg that received extensive press coverage[1] in 2018.
Further, it is not uncommon for brand campaigns to feature athletes with visible tattoos. This article will discuss a number of recent legal cases that demonstrate several issues that may arise when those tattoos are visible in the advertisement. Typically, the tattoo artist will argue that they own the copyright in the tattoos they created and should therefore receive a share of the proceeds from commercialization of images featuring the tattoo. This can result in legal action against both the bearer of the tattoo (the athlete) and the third-party brand using the athlete’s image. This article examines recent American case law on the issue and the position under English law.
Recent US Case Law
One of the most famous cases in which a tattoo artist asserted claims based on the unauthorized use of their work is Victor Whitmill v Warner Brothers.[2] In this 2011 case, the tattoo artist (Mr. Whitmill) sued Warner Brothers for its use of Mike Tyson’s facial tattoo in its promotion of the film The Hangover Part II. Mr. Whitmill argued that he owned the copyright in the tattoo and produced an agreement signed by Mr. Tyson confirming that Mr. Whitmill owned all the rights in the tattoo. The parties subsequently settled the matter.
Two more recent cases have provided contrasting outcomes. First, in Solid Oak Sketches, LLC v. 2K Games, Inc. and Take-Two Interactive Software, Inc.,[3] Solid Oak Sketches (“SOS”), a tattoo artist company, sued video game publisher Take-Two Interactive (“TTI”) over TTI’s reproduction of LeBron James’ tattoos—which SOS’s artists had designed—on its NBA 2K videogame series. In March 2020, Judge Laura Swain of the U.S. District Court for the Southern District of New York ruled in TTI’s favor.[4] Judge Swain held that although SOS owned the copyright in the tattoos, it had granted James an implied license to include his tattoos as part of his likeness when commercializing his image, and also that TTI’s use of the tattoos in the videogame constituted fair use (an exception to copyright infringement under US law).
However, another court reached a different outcome in a separate case with strikingly similar facts. In Alexander v. Take-Two Interactive Software, Inc.,[5] a case filed in the Southern District of Illinois, tattoo artist Catherine Alexander filed suit against TTI for its reproduction of wrestler Randy Orton’s tattoos in its WWE 2K videogame. There, on a summary judgment motion, the court ruled in favor of Ms. Alexander,[6] holding that it was not clear on the evidence submitted that Ms. Alexander had granted Mr. Orton a license to commercialize the tattoos she had designed, that such license should not be implied, and therefore whether such license had been granted should be tried. The court also held that TTI’s use of the tattoos did not unambiguously constitute fair use and so was an issue to be decided at trial. At the time of writing, the case remains awaiting trial.
As these conflicting decisions demonstrate, it is not yet clear whether athletes are granted implied licenses to commercialize their tattoos after creation and installation (as it were). Indeed, it is possible in the short-term that the answer may depend upon the jurisdiction in which the athlete was tattooed. Nor is it clear at the moment whether a third party’s display of an athlete’s tattoos constitutes fair use under federal copyright law.
The Position at English Law
English law provides that copyright subsists in original artistic works, including tattoos, from creation until 70 years after the death of the artist. Ownership of the works belongs to the creator of the work (or the employer of the creator, if the work was created in the course of employment) unless and until ownership is assigned to a third party. Unlike the US, the UK does not maintain a copyright registration system, so documentation proving chain of title is needed to prove copyright ownership.
Therefore, in the absence of an assignment from a tattoo artist to the recipient of a tattoo, the copyright in that tattoo would normally be owned by the artist (or his/her employer). The UK does have a fair dealing doctrine which may protect third parties, whose use of athletes’ tattoos may be innocent or purely incidental. It is questionable, however, whether that doctrine would protect an athlete who had inadvertently granted the rights in his or her tattoo to a third party without first obtaining an assignment or license from the tattoo artist.
Further issues may arise with respect to the artistic work itself when the tattoo reproduces an image, logo or song lyrics previously created by another third party. For example, Manchester United and England footballer Jadon Sancho has a prominent tattoo on his arm featuring characters from The Simpsons animated sitcom, in respect of which third party rights almost certainly exist. Were Sancho’s image, featuring the tattoo, to be commercialized, it is possible that entities with rights in The Simpsons IP[7] could assert claims against Sancho and any entity to whom he had granted a right to display the image.
In light of the uncertainty surrounding these complex issues, it has become increasingly common for brands to include express clauses dealing with tattoo ownership when negotiating image rights agreements with athletes.
Likewise, it is important for athletes with tattoos and their business partners to consider the issues that might arise from commercializing the athlete’s image and likeness, including his or her tattoos.
Considerations for Athletes
Due diligence: Prior to getting a tattoo, athletes should consider whether the tattoo is an original work, a common design that is not particularly distinct, or a reproduction of potentially copyrighted work (song lyrics, e.g.). If the tattoo is a common design, then the artist is less likely to have a copyright in the work. If the tattoo contains work possibly copyrighted by someone other than the tattoo artist, this can complicate things even further for the athlete and his or her business partners. Likewise, the more unique the design, the more likely the tattoo will be considered original, in which case it will be more important for the athlete to address copyright and license issues with the artist. Additionally, an athlete may want to consider the law of the jurisdiction in which he or she is planning to get tattooed.
Assignment / license agreement: Athletes may want to negotiate an agreement with the tattoo artist (or their employer) whereby it is agreed that copyright in the tattoo will be assigned to the individual athlete (or his/her image rights company) immediately upon creation. Athletes may also seek representations and warranties regarding the origin of the design, and indemnification from the artist, so as to avoid liability to any unknown third party who may later claim to have created the design. Alternatively, the athlete may consider seeking a license to commercialize and sublicense the copyright in the tattoo.
Retrospective action: In the case of already-existing tattoos, athletes still may consider negotiating an assignment or license from the artist. Of course, athletes should give thought before approaching artists, as this may bring an issue to the artist’s attention of which he or she was not previously aware.
Considerations for brands
Express warranties: Brand endorsement contracts should include express provisions addressing body art/tattoos. Brands should seek representations and warranties that the athlete has all necessary rights to grant licenses to commercially exploit images featuring the body art/tattoos, and indemnification if such representations and warranties are false or inaccurate.
Due diligence: It may also be prudent for brands to request that the athlete identify the artist who created any tattoo that is likely to be displayed in a commercial venture, and where the tattoo was received. Brands should review any agreements or licenses that the athlete obtained from the artist.
Editing out: If there is doubt surrounding the right to display an athlete’s tattoos in a commercial enterprise, the brand may consider covering up or digitally editing out such tattoos.
Conclusions
Given the increasing ubiquity of tattoos and corresponding assertion of copyright rights, it is almost certain that this will become a more common area of dispute in the future. Tattoo artists will understandably wish to benefit from rights that they may have under the law, and individuals and organizations who have entered into agreements to use those individuals’ images will want to avoid costly and lengthy litigation. As a result, it is important for athletes to be aware of these issues before getting tattooed, and brands before entering into commercial ventures with athletes who have tattoos.
[7] For instance, creator Matt Groening, or the current owner FX Networks, LLC, a subsidiary of the Disney General Entertainment unit of The Walt Disney Company.
For lenders dealing with troubled loans, a loan workout agreement is often a great first step to address a tricky situation. A loan workout agreement may be a simple short-term standstill agreement, a mechanism to implement a long-term solution to the borrower’s woes, or a path toward a palatable exit strategy to the relationship. Loan workout agreements, which often take the form of a loan modification agreement or forbearance agreement, may include, among other things, modifications to payment terms, forbearance from exercising certain rights and remedies, pledges of additional collateral, or an agreement to liquidate existing collateral.
Obligors often welcome such an agreement, which can afford them breathing room to get back on the path to compliance. Nonetheless, defaults may nonetheless persist. Two recent decisions from the Tenth and Fifth Circuits illustrate that, even when a workout fails, a well-drafted workout agreement can provide lenders protection against lender liability claims once the relationship turns adversarial.
I. Twiford Enterprises, Inc. v. Rolling Hills Bank & Trust, No. 20-8048, 2021 WL 2879126 (10th Cir. July 9, 2021)
In this case, the borrower operated a cattle ranching business in Wyoming. The borrower refinanced its cattle loans with a new lender, who later convinced the borrower to refinance its real estate loans with the lender the following year.
Thereafter, the lender stopped advancing funds to the borrower on the cattle loans, and those loans went into default. Over the next year, the lender and the borrower entered into several loan modification agreements and forbearance agreements to revise payment terms, extend maturity dates, and provide for additional credit advances. Crucially, all the modification and forbearance agreements contained releases or waiver provisions in which the borrower and the guarantors waived any claims or defenses relating to the loans.
The borrower later filed a Chapter 11 bankruptcy petition, and the guarantors filed an adversary complaint against the lender, alleging breach of contract, breach of the implied covenant of good faith and fair dealing, negligence, fraud, and negligent misrepresentation. The guarantors claimed that the lender misrepresented its confidence in the borrower’s business to induce it to refinance its real estate loan and then the lender manufactured a default.
The trial court granted summary judgment in favor of the lender based primarily on the applicable statute of frauds, but it also held that regardless of the statute of frauds, the claims would be barred by the releases contained in the forbearance agreements.
On appeal, the guarantors did not argue that their claims fell outside of the releases’ scope. Instead, the guarantors asserted that the releases were not enforceable because they were wrongfully obtained through economic duress.
The Tenth Circuit affirmed the trial court’s ruling, noting that under applicable state law, an alleged victim of duress may not obtain part of the benefits of an agreement and disavow the rest. Since the guarantors obtained valuable concessions in connection with the forbearance agreements, such as credit advances, the Court held that they could not evade the releases under an economic duress theory.
II. Lockwood International, Inc. v. Wells Fargo Bank, N.A., No. 20-40324, 2021 WL 3624748 (5th Cir. Aug. 16, 2021)
In this case, the borrower companies obtained two sizable lines of credit from their lenders. Within a year, the borrowers breached some of their obligations. Thereafter, the parties agreed to modify the lines of credit. In connection with the modification, the borrowers’ sole owner executed a personal guaranty. Also, at the lenders’ urging, the borrowers hired a chief restructuring officer (CRO).
Despite the loan modification and the appointment of a CRO, the borrowers’ struggles persisted. The lenders grew frustrated, believing that the borrowers and the guarantor did not fully empower the CRO to address the borrowers’ financial issues. The lenders gave the obligors an ultimatum: fully empower the CRO to operate or right-size the business within 48 hours or face an acceleration of the debt. The obligors agreed, but still defaulted on a sizable loan payment. To stave off acceleration, the obligors then executed a forbearance agreement in which they confirmed that the amended loan agreements were valid and enforceable, and waived and released the lenders from all claims. Before this forbearance period expired, the obligors executed a second forbearance agreement, which contained the same confirmation of the debt and releases in favor of the lender.
After the second forbearance agreement expired, the lenders accelerated the debt. This acceleration led to litigation among the parties that eventually was pared down to the lenders’ breach of guaranty claim against the guarantor.
In his defense, the guarantor claimed the lenders engaged in a bait-and-switch scheme to obtain his guaranty and then install the CRO to control the business. Claiming that he only agreed to execute the guaranty and forbearance agreements under intense business pressure, the guarantor asserted affirmative defenses of fraudulent inducement and duress, both of which were rejected by the trial court on summary judgment.
On appeal, the Fifth Circuit noted that because the guarantor ratified his guaranty in connection with the forbearance agreements, the guarantor would need to invalidate the forbearance agreements before he could escape liability. The court found no basis to support a fraudulent inducement defense since the guarantor signed the first forbearance agreement after he already agreed to cede control over the companies to the CRO.
The Court also held that the guarantor’s duress defense lacked merit. The guarantor argued that he only agreed to relinquish control to the CRO and execute the forbearance agreements because the lenders threatened to accelerate the loans. The court rejected this defense, noting that duress requires a threat of unauthorized action. The lenders were authorized to accelerate the loans and were simply using their leverage to extract a concession that they desired (i.e., installing the CRO). The court further noted that “difficult economic circumstances do not alone give rise to duress.” Indeed, the Court opined that loan modifications would become rare if a borrower could later invalidate the agreement because of the economic pressure that precipitated the modification in the first place.
III. Takeaways
While the crush of loan delinquencies that we feared at the outset of the pandemic has not materialized, many observers believe that defaults and resulting workout volume will increase once government support and intervention wane. Lenders can expect that at least some of their borrowers will assert lender liability claims in the face of enforcement efforts.
To that end, these recent decisions offer a compelling reminder that a well-crafted workout agreement can serve multiple purposes. On the one hand, workout agreements are great opportunities for lenders to develop retention or non-retention strategies for troubled loans. On the other hand, even if the workout strategy fails, these agreements can help mitigate potential exposure to lender liability claims. Moreover, as the Lockwood case illustrates, so long as a lender is acting within the bounds of its loan agreement authority, it may elect to apply its leverage to obtain valuable concessions from a troubled borrower in a workout scenario.
The Boeing Company Derivative Litigation evidences the increased focus on director responsibilities for effective governance. That focus is being driven by investors, other stakeholders, regulators, and—as the Boeing case makes clear—growing litigation risk. In November, Boeing’s board agreed to a $237.5 million settlement in a shareholder lawsuit that alleged board failures in overseeing the company and the safety of its 737 MAX ahead of fatal crashes in 2018 and 2019. The case emphasizes the need to ensure the existence of substantive checks and balances in board governance and to explore opportunities to create governance structures with a harder edge. Such structures can aid in ensuring proper communication and operational interaction between the board, management and others.
In assessing the Boeing Company Derivative Litigation through this lens, we begin with an examination of Delaware Court of Chancery Vice Chancellor Morgan T. Zurn’s September 7, 2021, memorandum opinion in the litigation and her findings regarding Director failures. We then turn to identifying and addressing these fundamental governance breakdowns.
I. MEMORANDUM OPINION, 9/7/21, VICE CHANCELLOR ZURN
Vice Chancellor Zurn sets out in her opinion:
“The narrow question before this Court today is whether Boeing’s stockholders have alleged that a majority of the Company’s directors face a substantial likelihood of liability for Boeing’s losses. This may be based on the directors’ complete failure to establish a reporting system for airplane safety, or on their turning a blind eye to a red flag representing airplane safety problems. I conclude the stockholders have pled both sources of board liability. The stockholders may pursue the Company’s oversight claim against the board.”
In her opinion, the Vice Chancellor stated, “The Board publicly lied about if and how it monitored the 737 MAX’s safety.” The opinion cites 2019 interviews of the Board’s Lead Director, David Calhoun, who became the CEO of Boeing in January 2020, and certain representations he made regarding the 2018 Lion Air crash and the 2019 Ethiopian Airlines crash. The Vice Chancellor’s opinion states, “Each of Calhoun’s representations was false.”
Shortly after the opinion was issued, Boeing’s CEO and other current and former directors asked the Vice Chancellor to clarify her legal opinion that she found the Board “publicly lied.” Those defendants have now settled the case, pending court approval. The finding that they “publicly lied” will be a continuing cloud to be addressed on multiple fronts within and outside of litigation.
II. IDENTIFYING AND ADDRESSING FUNDAMENTAL GOVERNANCE BREAKDOWNS
The Vice Chancellor’s finding of “the directors’ complete failure to establish a reporting system for airplane safety” and her finding of “their turning a blind eye to a red flag representing airplane safety problems” are indicative of a board operating in a “tone at the top” framework where the board may be dictated to/largely directed by the CEO. As we have previously set out,[1] what is required instead of a “tone at the top” approach is a governance structure that incorporates transparency and substantive “checks and balances.” This is not a new concept; members of the board of advisors of Grace & Co. and other experienced business decision-makers addressed it years ago.[2] Yet, a board’s perception of its role as only that of oversight, and at times limited oversight, persists at many boards, often with the support or dictates of the CEO.
To the contrary, boards can make use of internal resources to ensure the boards have access to that information necessary to address their responsibilities. We have discussed the value of these internal resources to boards[3] and recognize that boards can also call on external resources.
Under the proposed $237.5 million agreement to settle the litigation, Boeing’s board has agreed to add a director with safety experience and has adopted other internal measures, such as creating an ombudsperson program to field certain internal complaints. Boeing has agreed to ensure that at least three directors have safety expertise. It may be that the relationship between those board members, and perhaps other board members, and management will be an ongoing interactive relationship where the company can draw on the talents and experience of those board members.
An example of board members participating in addressing management responsibilities arose when Michael Eisner, the CEO of Walt Disney, utilized the chairman of Disney’s compensation committee and another experienced director to handle the employment negotiations with Michael Ovitz and his advisers.[4] Such an interactive relationship between certain directors and members of management helps ensure the quality of the flow of information to the Board and is demonstrative of the nature of the working relationships/checks and balances between the board and management.
III. THE ECONOMICS OF CORPORATE GOVERNANCE
The economics of organization governance point to the responsibilities of ownership and its agents for the governance, oversight, and management of the organization. The board of directors, as owners or agents for ownership, bear the responsibility for the governance, oversight, and management of the organization. The Boeing litigation evidences the increased focus on these fundamental director responsibilities.
The ABA Young Leaders in Securitization and Structured Finance is a growing subcommittee of the Business Law Section (BLS) Committee for Securitization and Structured Finance. The committee and the Young Leaders are at the forefront of discussing and tackling new issues in the growing field of structured finance. Most recently, the Young Leaders hosted a discussion exploring some of the opportunities and career paths in securitization and structured finance available for young lawyers.
The discussion, hosted by the Young Leaders and joined by the panelists Claire Hall, Partner in DLA Piper’s Structured Finance Practice; Kira Brereton, Associate General Counsel at S&P Global Ratings; and Joel Kwan, an Associate at Paul Hastings LLP, was a great opportunity for young lawyers to learn about various career paths available to securitization attorneys. The discussion was well attended and provided a resource for new attorneys to develop a career plan in the securitization and structured finance field.
The BLS Committee for Securitization and Structured Finance and the Young Leaders subcommittee are both planning to hold additional events furthering interest and development in the securitization sector. The Young Leaders also hope to continue to host events for young lawyers who are in the sector or are interested in it.
The Young Leaders are also happy to announce that Carla Potter, of Cassels Brock & Blackwell LLP, is joining the Co-Chairs of the subcommittee and will focus on Diversity and Inclusion initiatives, and Myriam Mossi is joining as Director of Events.
Customers, employees and investors are putting increasing pressure on companies to embrace environmental, social and governance (ESG) initiatives. As businesses take stock of their sustainability efforts to meet new market demands, they may not realize just how much ESG can impact their bottom line and their long-term success. Companies that successfully navigate the world of ESG certifications face incredible opportunity to serve as catalysts for environmental and social responsibility and will be well-positioned to help their clients adopt ESG measures of their own.
ESG certification, however, demands increased scrutiny and accountability to ensure businesses are truly walking the walk. As such, lawyers should be involved in ESG efforts from the outset to guide their companies, clients or their own law firms down the right path.
Understanding Legal Requirements
What separates the ESG efforts of today from corporate social responsibility (CSR) efforts of the past are legal requirements that hold companies to their promises to use their businesses to do good. With ESG certifications such as the B Corporation® certification, businesses must include certain language in their operating and formation documents, providing a legal commitment to operate in sustainable ways and further social and environmental causes.
There are broad-reaching impacts related to how these documents are set up and structured. Having a lawyer involved from the start of ESG certification allows businesses to take a wider look at the core certification process, examining activities, documents and more from a companywide perspective. What’s more, legal counsel must ensure all of a company’s documents meet required ESG framework standards without subjecting the company or its directors and officers to liability and risk. The work doesn’t end there; when exploring ESG solutions, lawyers must remain involved in vendor management and vetting programs to ensure all of a company’s efforts are in line with ESG certification requirements and best practices.
ESG certifications can also include industry-specific requirements. In the accounting industry, for example, firms must include a tax statement relating to tax practitioners. These requirements can be complicated and demand detail from the applicant company or firm, with important legal ramifications.
Clients’ Demand for ESG Efforts Creates Opportunities
Our clients’ own ESG initiatives have begun to put pressure on businesses throughout the supply chain. Law firms and accounting firms have noticed an uptick in requests for ESG-related information in RFPs, and this trend will undoubtedly continue as ESG reporting becomes more mainstream (and potentially required).
Offering transparency to stakeholders and clients requires companies to dig deep into their data, figure out where they stand and report that information. ESG is set to raise the bar in this area, as it will require companies to list more detail about their efforts than ever before. For example, “Does your company recycle?” now becomes a question of what types of materials an organization recycles, and it gives suppliers with offices in LEED-certified buildings that have solid numbers to report on their carbon footprints a competitive advantage.
One of the most exciting things about ESG is its often-unanticipated positive impact on a business’s bottom line and how its customers interact with it. Being environmentally or socially thoughtful helps to improve products and services in a way that can result in cost savings, and clients can even benefit from unintended improvements in risk management. As an example, printing management tools can help with environmental concerns, but by ending the days of documents with confidential information sitting on a printer in a well-traveled area, there’s also a significant benefit to a firm’s compliance with its confidentiality obligations to clients.
Lawyers Can Make an Impact on Governance
Governance is perhaps the least understood piece of the ESG equation, with many frameworks such as B Corporation certification requiring specific language and actions on behalf of companies seeking certification. In addition to including language in organizational documents, good governance efforts must involve lawyers from the start to ensure an organization is meeting this standard from all angles.
Decision-making and policy-making are two parts of good governance that often come into play with ESG efforts. These reflect how a company’s leadership sets an example or even responds to things like disparities in compensation or labor strikes. An insensitive or callous response to these types of issues can put companies in a negative spotlight and potentially a public relations crisis, and it can also put them at risk in terms of ESG certification efforts.
Governance also extends to broad categories, such as how organizations address audits, internal controls and shareholder rights, going beyond corporate structuring or governance on paper to the way an entire organization operates and buys into ESG initiatives.
Whether an organization’s ESG efforts are grassroots, from the bottom up, or influenced from the top down, there must be a meeting in the middle where different perspectives are brought to the table to affect how decisions are made and how a company operates with respect to ESG concerns. As an added benefit, this type of thinking often yields innovation and harmony throughout an organization, another unintended positive consequence of ESG.
How Organizations Can Get Started with ESG
Many business leaders are initially apprehensive about knowing where to start with ESG. Certification processes can seem overwhelming, as they are robust processes that require sound project management and diligence. In reality, these projects are a great fit to be led by legal teams.
A common misconception about ESG certifications is that a company must be selling goods and services that are “green” or explicitly further a social goal to successfully achieve certification. In fact, ESG is a good fit for every organization, and the coming wave of regulations and societal pressure point to ESG as an imperative. Lawyers with broad, in-depth knowledge of an organization can help identify parts of a business’s operations that are a good fit for ESG programs.
Businesses should also know that a successful ESG journey won’t require them to change everything about their products or services, or how they run their company, all at once. Taking incremental steps can help organizations start on the right path, and they often continue to discover opportunities to streamline operations, keep clients happy and add efficiencies that drive revenue and cost savings.
Many companies are interested in how their suppliers are meeting ESG certifications, and often this can spur opportunities for a company to help clients go through the certification process themselves. In the B Corporation community, part of furthering the promise of being a B Corporation is helping other organizations do the same, ensuring they benefit from the shared expertise of others who have gone down this road before. Many certifications also require a periodic evaluation or even recertification, ensuring organizations aren’t resting on their laurels and that they continue to advance ESG efforts and seek continuous improvement.
While the ESG process can be daunting and challenging, it’s important to note that it is incredibly meaningful. Lawyers can help companies take ESG to heart, create opportunities to connect with the issues their clients, people and communities care about most, and hold themselves accountable to do better.
Spotting ethical issues in litigation is usually easy. The direct conflict magnifies tactics on the line between zealous practice and violations of the disciplinary rules, with transgressions quickly raised for the court’s consideration. Corporate transactional practice can also challenge a lawyer’s ethics, but the disciplinary landmines may be hidden in behind-the-scenes struggles for advantage.
Popular fiction, with its extremely stressful situations, can illustrate the lawyer’s dilemma. When the pressure is on, it is easy for professionals to sneak over the ethical line. Only a tiny percentage of novels are built on the intricacies of corporate maneuvering that raise such ethical matters. I hereby offer a tonic for this problem.
This autumn I published my second detective novel, Fistful of Truth, featuring a former lawyer leading a multi-city investigation firm. (Find the novel here.) The action in this book centers around the acquisition of a genetics research company by a huge pharmaceutical corporation. This book is in part an exercise in legal ethics for transactional business lawyers, with a side of mayhem, dirty dealing, and tinkering with the code of life.
The protagonist, Matt Bishop, is conducting a factual investigation of the acquisition target on behalf of the public company prospective purchaser. His client has access to detailed financial records, documentation about secret genetic research and genomics projects, and even computing logs and network records. From the beginning, a transactional attorney wonders, “Why didn’t the lawyers for the target company set limits on this ‘due diligence’ investigation?” In real life, a diligence review under the guise of a potential acquisition may expose the target’s vulnerabilities and secrets whether or not the parties complete the purchase transaction. Then the target is left completely exposed to the former prospective purchaser, often its competitor.
Rule 1.3 of the ABA Model Rules of Ethical Conduct, effectively mirrored in state bar ethics rules, requires an attorney to zealously represent her client. Under this ethical requirement for zealous client representation, the target company’s lawyers should propose limits on what kind of diligence investigations the proposed acquirer may be allowed to conduct, what employees of the target are available to interview and what kind of access investigators can have to the servers of the target. The potentially acquiring company should only be able to review the minimum amount of material needed to confirm its understanding of the target company’s business. It is the job of the target company’s lawyers to enact and maintain those restrictions.
In the book, the investigation itself also raised ethical issues for the lawyers of the acquiring company. Bishop claims he was hired by an outside law firm to conduct this review in order to provide privileged status to the resulting report, yet he never seems to contact the supervising law firm. Under the ethical rules, lawyers are required to closely manage their agents (Ethical Rules 5.1 and 5.3). Failure to do so is not only a violation of disciplinary rules, but can cost the attorney’s client the benefit of attorney-client privilege.
In the recent federal case of In Re Marriott International, Inc. Customer Security Breach Litigation, the court wrote, “For attorney-client privilege to apply, the communication must pertain to legal assistance. Furthermore, the need for legal advice must be a but-for cause of the communication. As such, business advice—such as how Marriott may improve its cybersecurity—is not privileged.” (citations omitted) In the book, Bishop was reporting directly to the pharmaceutical company executives, and not to the lawyers who were supposed to have retained his services. The pharma company lawyers were not exhibiting the required level of competence to maintain a desired privilege and were not directly supervising their non-lawyer agents.
Lack of supervision under Rule 5.3 becomes an even bigger problem for the acquiring company’s outside counsel when their investigating agency acts outside the law and performs hacking activity to find information on behalf of the pharma client. Bishop’s in-house computer forensics team, the Wolf Pack, hacks into business and financial records in the course of pursuing information for the client. Section (c) of Rule 5.3 states that a lawyer is responsible for the conduct of a non-lawyer, if the lawyer supervised or ordered the conduct, or “ratifies” the conduct, or could have prevented or mitigated the effects of the conduct. Clearly, in the book, even if the pharma company’s outside counsel did not order a violation of the Computer Fraud and Abuse Act, it set the investigator loose without closely supervising his activities. The state disciplinary committee could easily impute that violation of law to the lawyers themselves.
A more tenuous case could be made under Rule 4.2 concerning Bishop’s contact with opposing parties that he knows to be represented by counsel. According to the court in the 2020 Minnesota Federal District Court case US vs. Cameron-Ehlen Group, the Rule 4.2 restriction on contact “applies to the conduct of not only attorneys, but also an attorney’s nonlawyer agents, including investigative agents.” So Bishop’s contacts with executives of the target company could be imputed back to his supervising lawyers. One questions whether, as a former private firm lawyer himself, Bishop should have recognized the risks and avoided such contact. In an early scene where Bishop visits the home of the leader of an anti-genetic-manipulation advocacy group, his status as investigative agent for the pharma lawyers should have made him think twice. While the group leader does not state that he is represented by counsel, earlier criminal cases against the advocacy group would imply that he had counsel and Bishop should have known about it.
A corporate acquisition provides a variety of opportunities to run afoul of your state’s attorney disciplinary rules. You may not have the kind of practice that exposes you to this spectrum of ethical issues, so you can keep sharp by issue-spotting in the books you read. Even transactional business lawyers can find books that entertain and help you develop your ethical radar at the same time. Organized crime, government conspiracy, and murder may seem like the gravest misbehavior in Fistful of Truth, but the book demonstrates that even subtle moves by business attorneys can lead to serious consequences.
“Enforcing the Rule of Law in Online Content Moderation” is the fifth article in a series on intersections between business law and the rule of law, and their importance for business lawyers, created by the American Bar Association Business Law Section’s Rule of Law Working Group. Read more articles in the series.
Every day, online intermediaries like Facebook, Instagram, and YouTube make decisions about user activity that can result in the removal of a user’s content or restrictions on a user’s account. Platforms often make such decisions based on standards set by national laws or the platform Terms of Service (ToS). Naturally, there are times when users disagree with a platform’s decisions. In such cases, users might seek to challenge whether the platform got its decision right. An affected user might try to appeal such decisions through a platform’s in-house appeal mechanisms, which all major platforms have established. A Facebook user might further pursue the slim chance of review by Facebook’s Oversight Board.
But what about the traditional pathway to justice: the courts? In the US, uniquely, users have few—if any—chances to successfully challenge the content decisions of social media platforms in court. However, in Europe, the picture is different. For some years now, European courts have been working their way through various platforms’ Community Standards, carving out due process rights and legal boundaries for platforms. As a result, many users have successfully sued Facebook and other social media platforms to reinstate content or accounts.
This article explains two landmark decisions to illustrate how German courts have applied contract law to infuse the principles of the rule of law into the decisions governing social media platforms.
The Anomaly of the US’s (Nearly) Total Platform Discretion
In the US, there have been no reported court cases of users successfully suing online platforms for reinstatement of content or accounts.[1] In part, this might be the product of a common law approach to contracts. Some platforms, for example, shield themselves from liability through termination-for-convenience clauses that allow platforms to suspend accounts without legal recourse for users. However, the ultimate reason for the absence of any viable recourse to courts is the current interpretation of § 230 of the Communications Decency Act (CDA). The provision is well recognized as providing immunity to platforms for non-IP-related content decisions, with immunity for inaction, e.g. not removing content,[2] as well as allowing for any good faith decisions to take down content that is “obscene, lewd, lascivious, filthy, excessively violent, harassing, or otherwise objectionable.”[3] This means platforms are protected when they choose not to act as well as when they actually choose to act.
With respect to immunity when taking action, the less prominent feature of § 230, US courts have found robust immunity for social media platforms against suit in § 230. In the words of the 9th circuit, when ruling on redress regarding a platform decision to delete a user profile: “[A]ny activity that can be boiled down to deciding whether to exclude material that third parties seek to post online is perforce immune under section 230.”[4] Courts have interpreted CDA § 230 as granting platforms wide discretion to self-regulate via Community Standards.[5] Given this wide discretion, legal scholars are skeptical as to whether suing social media platforms to reverse moderation decisions can be successful.[6]
Europe’s Middle Ground: User Rights through Contract Law, Cultivated by the Courts
In Europe, there is no legislation comparable to CDA § 230 (a legislative provision unique to the US), and courts, especially civil law courts, have strong tools to squash ToS that do not adequately reflect principles of fairness and rule of law.
In this landscape, unjustified moderation decisions amount to breach of contract, resulting in a claim for reinstatement. But when is a platform’s decision unjustified? In Germany, e.g., answering this question typically boils down to a two-step inquiry: First, is the content/user-behavior in question violating the law or Community Standards? If not, the user can demand reinstatement. Second, if the court does find that the conduct is violating a platform’s Community Standards (but no laws) the court considers whether these Community Standards are valid. If the standards are invalid, the court squashes the relevant standards and the user may claim reinstatement, in the absence of any valid justification for content moderation.
Such judicial review of Community Standards is based on general principles of German contract law: when ToS do not meet minimum standards of fairness, courts will find the ToS invalid and inapplicable. Judicial review of ToS is based on the assumption that the consumer has neither the opportunity nor the bargaining power to re-negotiate the ToS. Substantive judicial review (when contractual disputes arise) is meant to counterbalance this reality. When looking at moderation decisions based on Community Standards, courts will apply this “ToS-review” to Community Standards.
For some years now, users have been bringing actions for reinstatement to German courts, arguing that their content was not violative of any given standards and that even if it were, the relevant portions of the platform ToS / Community Standards were unfair, thus void. It is difficult to derive an exact number, but approximately 50 such court decisions have been reported thus far in Germany. Most often, the claimants seeking reinstatement are men, and disputes center around right-wing content, which the platforms typically categorize as “Hate Speech.” Often, though not always, claimants are successful, and the platforms are required to re-publish the disputed content or to re-establish an account.
July 2021 – Landmark Decisions by the German Federal Court of Justice
In Germany, claims of this nature have already reached the Constitutional Court, which has issued a preliminary injunction requiring Facebook to reverse the suspension of an account belonging to a right-wing political party.[7] While the order was issued in the context of a preliminary proceeding and issued without clarification of the merits of the legal issues at hand, in 2021, the German Federal Court of Justice became the first High Court world over to deliver landmark decisions when reviewing content removal and account suspensions by Facebook.[8]
In one such case, Facebook removed a user’s comments about an online video showing a person (assumed by the user to be an immigrant) refusing to be checked by a female police officer. The plaintiff commented on this video excerpt, stating: “What are these people doing here … no respect … they will never assimilate and will be a taxpayer’s burden forever … these gold pieces[9] are only good for murder … theft … rioting …” Facebook deleted these comments on the grounds that they constituted “Hate Speech.”
In the second such case, the Plaintiff had posted a message which included the following: “Germans get criminalized, because they have a different view of their country than the regime. Immigrants here can kill and rape and no one is interested!” Facebook deleted the post and temporarily restricted the account of the user who posted it, placing the user’s account on read-only mode for 1 month.
In both cases, the Federal Court of Justice reversed the lower courts’ rulings and ordered Facebook to reinstate the content and reinstate user accounts with full privileges. The clarifications of law delivered through these decisions strengthen the Rule of Law in the context of platform moderation powers in the following ways:
1. Holding Parties Accountable to Contractual Terms
To start with, the decisions by the Federal Court of Justice reaffirmed that upon registration, the platform and the user enter into a contract.[10] Under this contract, the platform’s obligation is to allow the user to post content. Accordingly, the platform may not delete content without justification.
2. While Platforms are Not State Actors, Constitutional Guidance may Shine Upon their Moderation Powers
In its decisions, the Federal Court of Justice took an in-depth look at how constitutional rights govern the legal questions at hand. Before these decisions, it had been heavily disputed whether large platforms like Facebook could be bound to fundamental rights like state actors. Some scholars have argued—and courts have found—that a platform like Facebook, while not being a state actor, provides an essential public forum fulfilling functions like the state (the speaker’s corner of the 21st century). Such an argument would jump on an idea which in past precedents, the German Constitutional Court had openly opined about: “where private companies take on a position that is so dominant as to be similar to the state’s position, or where they provide the framework for public communication themselves, the binding effect of the fundamental right on private actors can ultimately be close, or even equal to, its binding effect on the state.”[11]
Notably, the Federal Court of Justice did not find that Facebook’s platform fell into this (narrow) category of state-like providers of frameworks for public communication; although Facebook did provide a substantial means of online communication, it was not found to be the doorkeeper to the internet as such.[12]
After rejecting this argument (of Facebook as being state-like), the Court elaborated how constitutional rights indirectly govern the case. In Germany, under the well-established Drittwirkung-doctrine, fundamental rights serve as a strong guidance for interpreting obligations between private parties, especially when courts must apply abstract terms like the “appropriateness” or “fairness” of certain obligations (which formed the decisive question in the case: Are Facebook’s Community Standards adequately fair?).
Consequently, the Court carefully evaluated which constitutionally protected positions should be brought into balance:
The Court acknowledged the users’ free speech rights and that the constitutional principle of equality before the law supported strong protection against discriminatory treatments by the platform. The Court based its decision to bind Facebook to principles of equal and just treatment of users on three considerations: First, the fact that Facebook is, by its own decision, opening its services to a broad public;[13] second, that at least a portion of citizens highly depend on social networks;[14] and third, due to lock-in-effects users cannot easily substitute one large platform with another.[15]
The Court also found freedom of commerce weighed in favor of Facebook when it acts to self-regulate communication standards to protect the safety and well-being of its users, who themselves could have a valid interest in respectful communication on “their” platform.[16] The court also highlighted Facebook’s own speech rights, when “speaking” by setting Community Standards. Moreover, the Court acknowledged that platforms have a practical need to moderate content and users in order to mitigate liability risks.[17]
3. Within Limits, Platforms Might Self-Regulate by Defining “Permissible Speech”
After all this balancing of interests, the Court then proceeded to its more granular conclusions. It allowed Facebook to self-define communication rules through its Community Standards, which might go beyond speech restrictions of German law (“the police could not arrest you for it, but Facebook might block it”). Thus, platforms might legitimately ban “awful but lawful” hate speech.[18] However, the Court did not grant Facebook total discretion.[19] Instead, it held that restrictions on speech must be grounded on objective reasons. Since Facebook opened its platform to general discourse, political opinions could not be outlawed as such.[20] Though the Court does not explain this finding any further, one might conclude that there is generally little room for viewpoint-based restrictions, but greater flexibility for banning certain (e.g., aggressive) forms of speech.
4. The Articulation of Private Due Process
Furthermore, the Court veritably “invented” strict private due process by arguing that Facebook’s ToS would otherwise be unfair, meaning it would cause undue disadvantage for the user. To prevent undue disadvantage to users, the Court advanced the following framework for platforms seeking to restrict content or accounts:
Diligent Investigation: Platforms must take reasonable efforts to investigate before a decision. To limit the risks of discriminatory behavior,[21] moderation decisions must be reasonably justified, which requires the platform to reasonably examine the situation.
Prompt Information: To bring colliding interests in balance, platforms must inform their users about a decision. For content removal, the Court found that a platform may take immediate action and notify users after the fact.[22] For account suspensions and restrictions (e.g., placing an account in read-only mode), the Court finds that the affected user generally (with some possible exceptions) must be informed before a decision is implemented.[23]
Providing Reasons and Considering Appeals: When informing its user of content- or account-related decisions, the platform must provide a statement of reasons. Moreover, users must have the ability to appeal.[24]
The Court’s Conclusion and its Outlook
On this basis, the German Federal Court of Justice found that, because Facebook’s ToS did not sufficiently include an explicit statement of due process, the relevant provision (§ 3.2. of the ToS: “… We can remove or block content that is in breach of these provisions …”) was unfair and thus inapplicable. On this basis, the Court found that there was no sound legal basis for the content removals and account suspension in question.[25]
On a more abstract level, the decisions are a win for both users and social media platforms as well. First and foremost, this is because the Court did not treat Facebook as a state actor, instead reaffirming that even Facebook is—within limits—allowed to self-define communication standards. Moreover, even though the decisions created some bureaucratic burdens, they have also created valuable legal certainty. Platforms now know what to do; the court has given them instructions: what to write into their ToS and how to safeguard sufficient due process for their users when making moderation decisions. One can expect that other European courts will follow this precedent.
Reconsidering CDA § 230 in light of the European Approach
If we look from Europe across the Atlantic: might American users and businesses benefit from the German solution found by focusing on injecting due process through contract law?
The Culture War over CDA § 230
Certainly, the temperature is rising around whether § 230 delivers just outcomes for businesses and users alike. For some time now, politicians from both sides of the aisle in the US have been considering limitations on the protections that CDA § 230 grants to online platforms. Originally, most critics of § 230 focused on holding platforms accountable when they did not act or amplified harmful content, especially through their algorithms.
However, especially after major platforms took action to suspend former President Donald Trump, concerns have been raised over whether platforms should—in part—be stripped of their protection on the other side of the coin; that is, for when they do take action—what this paper is about. These concerns about the platforms’ moderation powers are often politicized and often frame California-based big tech as pushing a (left-wing) political agenda. Content moderation is described as viewpoint discrimination and ideological censorship. Such a narrative, of course, might overshadow reflections on reasonable grounds for the platforms’ actions.
For this side of the coin, a wide range of suggestions are on the table,[26] from requiring platforms to be more transparent about their moderation decisions, to safeguarding more uniform decisions, to narrowing the scope of the moderation liability exemption, or drastically limiting content moderation powers by introducing must-carry obligations.[27] Notably, in this debate, some voices argue against watering down of platform immunity for moderation decisions: platforms could become ungovernable when being held to First Amendment standards.[28] While this argument seems convincing, it does not argue against finding a middle ground: holding platforms accountable at least to minimum due process. Others are rightfully pointing out that loosening § 230’s immunity for making decisions undercuts its principal benefit—namely, cheap and reliable defense wins.[29] I find this generally convincing, too. Indeed, rising costs of moderation decisions could make platforms reluctant to take reasonable actions, or even lead to “over-put-back”: if you know that certain actors, e.g., white supremacist groups, are going to challenge every content decision, this might incentivize the platform to restore (“put-back”) content even though it is against the platform’s Community Standards. However, this shouldn’t be an argument against at least injecting minimum due process into moderation decisions, which would leave platforms sufficient immunity for taking good faith decisions.
Can Company Promises and User Expectations Help Re-interpret CDA § 230?
One wonders: Is there no middle path even under the existing CDA § 230(c)(2)(A)? Does the wording of § 230(c)(2)(A) necessarily grant immunity for all content moderation? And, even if it does: might not contract law be relied upon to work, at least in part, around § 230? Would this result in middle-ground outcomes like in Europe as I have described above?
At its core, the European approach is about translating what today’s mega-platforms are and what they promise to be. They are no longer underground bulletin boards where one might expect his or her content to stay online as long as the administrator is in a good mood or too busy. To the contrary, modern platforms present themselves as public forums where speech restrictions should not be arbitrary, as the motto is: “You should be able to speak your mind.”[30] Users rightfully expect any sanctions not to be based on Mark Zuckerberg’s whims or preferences, but (only) upon reasoned grounds. Indeed, the Facebook ToS is tied to legitimate concerns: “We want people to use Facebook to express themselves …, but not at the expense of the safety and well-being of others …”[31] User expectations of platform self-restraint are reaffirmed through the platform ToS: “You therefore agree not to engage in the conduct described below … We can remove or block content that is in breach of these provisions.”[32] Platform Rule of Law is strongly justified as we are talking about a non-altruistic relationship: Users “pay” for using the platform with their data and by accepting advertisements.
A change in user expectation regarding platform governance is no coincidence, as platforms increasingly accept their role as community governors, that is, enforcing values and norms, as Kate Klonick has described thoroughly.[33] But this, of course, goes hand in hand with self-restraint in adherence to common values and norms—one could say the rule of law.
Could this, in the US, translate into the legal sphere?
Eric Goldman has described potential theoretical pathways,[34] though he obviously would reject the following conclusions which seem moderate from a European’s perspective:
Revisit “objectionable content” and “good faith.” In its plain words, CDA § 230(c)(2) does not provide blanket immunity for any moderation decision, but regarding “obscene, lewd, lascivious, filthy, excessively violent, harassing, or otherwise objectionable” material and only for moderation decisions taken “in good faith.” If the platform erred in its assessment about a violation of its ToS, courts could question whether the content can amount to being “otherwise objectionable.”[35] Moreover, courts could inject due process through the “good faith” requirement: if a platform does not inform a user and does not listen to defense (denying appeal), this could amount to “bad faith.”[36]
“Promissory estoppel” through abstract promises. Theoretically, online platforms should be free to waive their discretion for content moderation (which is otherwise backed by § 230), especially through marketing representations and contract provisions.[37] Courts have affirmed that a user-specific individual promise could lead to promissory estoppel, thus waiving the protection of CDA § 230.[38] Lawyers could test waters beyond individual promises: If counsel would find that platforms abstractly “promise” to act on reasonable grounds only (see above), one could conclude that they waive § 230’s subjective total discretion standard with no due process.
The suggested interpretation would merely hold platforms accountable to their own rules and inject minimum due process. Such modest self-restraint is something that nowadays even Facebook seems to suggest as a threshold for § 230 CDA. If platforms still want to hold on to full discretion, they would be free to do so, as long as they are explicit and non-ambivalent about this.
Of course, given the common platform-friendly interpretation of § 230, the suggested interpretation (waiving § 230 in parts through abstract promises of due process) faces an uphill battle, as courts are generally (rightfully) reluctant to translate unclear contract provisions and marketing representations into estoppel of privileges (one does not give up rights through warm words).
However, as user expectations of platform self-restraint (Rule of Law-inspired, perhaps) continue to grow, these questions invite reinterpretation. In Europe, as I have shown, lawyers and courts have been pushing large platforms towards more Rule of Law in moderation decisions. Maybe, there is a similar, as yet untraveled, road ahead under current US law, too.
[4] Riggs v. MySpace, Inc., 444 F. App’x. 986 (9th Cir. 2011), citing Fair Hous. Council of San Fernando Valley v. Roommates.com, LLC, 521 F.3d 1157, 1170-71 (9th Cir. 2008).
[5]See, e.g., Green v. Am. Online, 318 F.3d 465, 471 (3d Cir. 2003): “allows … to establish standards of decency;” Langdon v. Google, 474 F. Supp. 2d 622, 631 (D. Del. 2007): “provides … immunity for … editorial decisions regarding screening and deletion.”
[8] Federal Court of Justice, decisions of 29 July 2021 – III ZR 192/20 and III ZR 179/20.
[9] The term “gold pieces” is used as a sarcastic description of refugees. It refers to a former statement of German politician Martin Schulz, who in 2016 argued in favor of welcoming refugees as follows: “The way we benefit from these people, is more valuable than gold, it is the unperturbed belief in the dream of Europe.”
[10] Federal Court of Justice, decision of 29 July 2021 – III ZR 192/20, para 40.
[11] Decision of 6 November 2019 – 1 BvR 16/13 “Right to be forgotten I,” para 88 (English version here).
[12] Federal Court of Justice, decision of 29 July 2021 – III ZR 192/20, para Rn. 71.
[23] Federal Court of Justice, decision of 29 July 2021 – III ZR 179/20, para 87.
[24] Federal Court of Justice, decision of 29 July 2021 – III ZR 192/20, para 97.
[25] The Court briefly considered whether the content in question was illegal according to Criminal Law (which would have yielded a right to remove it irrespective of the ToS). However, the Court found it did not, so it ordered Facebook to reinstate the content and to refrain from restricting accounts for the given reasons again.
[26] A good overview is to be found on the Wikipedia page for § 230.
[27]See, e.g.,Eugene Volokh, “Treating Social Media Platforms Like Common Carriers?”, 1 Journal of Free Speech Law, 377 (2021).
[28] Jack M. Balkin, Free Speech is a Triangle, 118 Colum. L. Rev., pp. 2011, 2026 (2018).
[35] This implies strengthening an objective understanding of CDA § 230(c)(2), which is disputed, Id. at 662. Goldman even argues that platforms might not be able to waive § 230 protection.
[36] Id. at 665 and pointing towards Smith v. Trusted Universal Standards in Elec. Transactions, No. 09-4567 (RBK/KMW), 2011 WL 900096, at *25–26 (D.N.J. Mar. 15, 2011).
[38] Barnes v. Yahoo!, Inc., 570 F.3d 1096 (9th Cir. 2009): “under the theory of promissory estoppel, subsection 230(c)(1) of the Act does not preclude … cause of action” (action was brought against the provider for not taking action after user-specific promise to do so).
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