What’s the “Sitch” On “Stitch”? Jury Says TikTok Did Not Violate the Lanham Act with Their “Stitch” Editing Feature

By Elizabeth J. Porter*

PDF Available

The seven-day trial over whether TikTok owes $116 million for trademark infringement concluded on Thursday, March 9 and the jury returned a verdict in defendant TikTok’s favor.[1] The question before the jury was whether TikTok’s use of the word “Stitch” in conjunction with a video editing feature on the social media platform infringes on the mark “Stitch Editing” owned by a boutique video editing house.[2]

TikTok started marketing an editing feature in 2020 that allows users to splice the first few seconds of other videos onto the beginning of their own videos, which they called “Stitch.”[3] The app automatically includes “#stitch” with every video posted using the feature.

Stitch Editing Ltd. filed suit against TikTok Inc. and its China-based parent company, ByteDance Ltd., alleging that TikTok marketed its program using a font “that mimics the same way the Stitch mark is used in the marketplace.”[4] Stitch Editing has had a registered trademark on the phrase “Stitch Editing” since 2015, according to the U.S. Patent and Trademark Office (“USPTO”).[5] The registration covers editing of “music, television programs, films, commercials, internet videos, and video programs.”[6] While Stitch Editing never registered a trademark for the word “Stitch” alone, it asserts common law rights because it is often referred to by the one word and has been using it commercially.[7]

Throughout the complaint, Stitch Editing refers to itself as simply “Stitch”, further bolstering its common law claims to the word.[8] It also pointed to evidence of use of the word “Stitch” on its websites,[9] in credits, and on social media. Specifically, in a music video it edited featuring Beyonce, which has over 400 million views on YouTube, the company is credited as “Stitch.”[10]

TikTok argued that the word “Stitch” is generic in connection with video editing and thus is not protectable under trademark law.[11]

The lawsuit demands an injunction against TikTok using the term “Stitch” as well as compensation for corrective advertising, punitive damages, and reasonable royalties. The parties failed to settle, and the trial started on March 1, 2023.[12]

On cross examination, the CEO of Stitch Editing admitted that none of his clientele were actually confused about the company’s association with TikTok and that it hadn’t lost out on jobs to TikTok.[13] However, Stitch Editing had two experts who testified to finding significant confusion among customers about whether the companies were affiliated. One expert surveyed likely direct purchasers of Stitch Editing’s services—advertising and marketing professionals—and found a net confusion of 32.2 percent. The other expert focused on relevant non-purchasing consumers who watch short online videos and found a net confusion rate of 23.5 percent. The experts testified that the generally accepted minimum threshold for confusion is fifteen percent and thus, their findings support a jury finding of likelihood of confusion.[14]

TikTok rebutted this survey evidence with its own expert. Professor Itamar Simonson of Stanford University testified that only 1.3 percent of respondents thought there was a connection between the two companies. Simonson said his survey was much more reliable than those presented by the plaintiffs’ experts because those experts had respondents do a matching game which led them to make assumptions while Simonson’s survey allowed respondents to answer with their own words and ostensibly allowed less room for error.[15]

Simonson further disagreed with the plaintiffs’ application of the survey results and offered the following critique: “They said that anything under 15% confusion indicates lack of confusion. I tend to not accept that particular threshold because I believe that is determined by the so-called trier of fact, which is not me. But clearly the 1.3% is well below the 15% that [Stitch Editing’s experts] considered.”[16]

The jury agreed seemingly agreed with Simonson and returned a verdict in favor of TikTok.[17]

This case highlights the importance of protecting intellectual property rights, particularly trademarks. A trademark is a word, phrase, symbol, or design that identifies and distinguishes the source of the goods or services of one party from those of others.[18] Trademarks are crucial to building brand recognition and consumer loyalty, and they can be valuable assets for businesses.

To establish federal common law trademark rights in the United States, a business or individual must show that they have been using a particular mark in commerce to distinguish their goods or services from competitors.[19] While federal registration with the USPTO is not required to establish trademark rights, it can provide significant benefits, such as a presumption of validity and nationwide priority.[20]

The ultimate question that the jury had to decide is whether the marks are confusingly similar. Stitch Editing had the burden of proving that TikTok’s use of the word “stitch” is likely to cause confusion, mistake, and deception as to the origin, sponsorship, or approval of its products or commercial activities.[21] There is not a requirement to prove actual confusion, though it is beneficial if plaintiffs present evidence of actual confusion.[22]

This is not the first time that a social media platform has been accused of trademark infringement when rolling out a new feature. In 2020, the cable network Reelz filed a lawsuit against Instagram alleging trademark infringement over the use of the word “reels.”[23]

Though the jury did not find liability here, both this case and the Instagram case facially appear to be close calls. One can assume that both TikTok and Meta (Instagram’s parent company) have sophisticated counsel who would run a trademark search before rolling out a new product or feature. The question is, did the companies hold a good faith belief that the marks and services were sufficiently distinct to not generate a likelihood of confusion, or did they simply move forward feeling secure in their ability to defend a lawsuit? Either way, this small trend of brands battling over trademark use online has interesting implications for the future of trademark law and branding.

* J.D. Candidate, Class of 2024, Sandra Day O’Connor College of Law at Arizona State University.

[1] Craig Clough, Jury Clears TikTok in $116M TM Suit over ‘Stitch’ Edit Feature, LAW360 (Mar. 9, 2023, 4:57 PM EST), https://www.law360.com/articles/1584318?e_id=98d07013-f314-4843-af37-24e1d232b7d6&utm_source=engagement-alerts&utm_medium=email&utm_campaign=case_updates.

[2] Craig Clough, TikTok Owes over $116M For Stealing ‘Stitch’ TM, Jury Told, LAW360 (Mar. 1, 2023, 11:10 PM EST), https://www.law360.com/ip/articles/1581479/tiktok-owes-over-116m-for-stealing-stitch-tm-jury-told.

[3] Press Release, TikTok, New on TikTok: Introducing Stitch (Sep. 3, 2020), https://newsroom.tiktok.com/en-us/new-on-tiktok-introducing-stitch.

[4] Clough, supra note 2.

[5] STITCH EDITING, Registration No. 4742447.

[6] Id.

[7] Clough, supra note 2.

[8] Complaint at 20, Stitch Editing Ltd. v. TikTok, Inc., 21-cv-00626-CAB-BGS (S.D. Cal. Apr. 12, 2021).

[9] See STITCH EDITING, supra note 5.

[10] See Naughty Boy, Naughty Boy ft. Beyonce, Arrow Benjamin – Runnin’ (Lose it All) [Official Video], YOUTUBE (Sept. 17, 2015), https://www.youtube.com/watch?v=eJSik6ejkr0 (credits for Stitch Editing’s involvement say “Editor: Leo King @ Stitch”).

[11] Clough, supra note 1.

[12] Clough, supra note 2.

[13] Gina Kim, TikTok Feature Didn’t Confuse Stitch Clients, Jury Hears, LAW 360 (Mar. 2, 2023, 11:04 PM EST), https://www.law360.com/articles/1581885?e_id=138756ed-abd6-44a7-93c3-52effb4d21f3&utm_source=engagement-alerts&utm_medium=email&utm_campaign=case _updates.

[14] Craig Clough, TikTok Jury Hears Surveys Found Confusion Over Stitch TM, LAW360 (Mar. 3, 2023, 10:50 PM EST), https://www.law360.com/articles/1582399?scroll=1&related=1.

[15] Craig Clough, TikTok Expert’s Survey Finds No Confusion with Stitch Editing, LAW360 (Mar. 7, 2023, 10:30 PM EST), https://www.law360.com/articles/1583311?e_id=8a2268d5-0444-4d0b-bd9c-bc9b437f2189&utm_source=engagement-alerts&utm_medium=email&utm_campaign=case_updates.

[16] Id.

[17] Clough, supra note 1.

[18] 1 J. Thomas McCarthy, McCarthy on Trademarks and Unfair Competition § 3:1 (5th ed. 2022).

[19] 2 J. Thomas McCarthy, McCarthy on Trademarks and Unfair Competition § 16:1 (5th ed. 2022).

[20] 6 J. Thomas McCarthy, McCarthy on Trademarks and Unfair Competition § 32:134 (5th ed. 2022).

[21] 15 U.S.C. § 1114.

[22] 4 J. Thomas McCarthy, McCarthy on Trademarks and Unfair Competition § 23:12 (5th ed. 2022).

[23] Bill Donahue, Instagram Says Nobody Will Confuse ‘Reels’ for ‘Reelz,’ LAW360 (Nov. 23, 2020, 5:54 PM EST), https://www.law360.com/articles/1331277?scroll=1&related=1.

TikTok Time Out: The Push to Ban the App Due to Privacy Concerns

By Melynda Meyrick*

PDF Available

The social media app known as TikTok in the United States was first developed by Chinese company ByteDance in 2016 and was officially launched worldwide in August 2018.[1] Since its release, the app has blown up, with millions of users downloading, posting, and subscribing to content on the platform. With TikTok’s increasing popularity and ability to share content worldwide in a matter of seconds, content creators have learned to monetize their creations through the app. The ability to monetize content created and shared on the app only led to an increase in daily posts and users. While sharing dance videos, memes, or making money through TikTok all appear harmless, there has been an escalation in privacy concerns about what data is being with the Chinese government by the app’s creators.

Due to such privacy concerns, in 2022 Missouri Senator Josh Hawley proposed a law to ban the downloading and use of TikTok on all federal government devices.[2] The bill successfully passed both Houses of Congress and was officially signed into law by President Biden in December 2022.[3] The new law, coined the No TikTok on Government Devices Act, has only sparked further debates revolving around TikTok’s data privacy.

In line with the No TikTok on Government Devices Act, on February 6, 2023, Texas Governor Greg Abbott revealed his plan to ban TikTok from all state-issued electronic devices that are capable of internet connectivity.[4] Governor Abbott’s plans even extended as far as prohibiting government workers from conducting any state-related activities on personal devices that had the app downloaded. Governor Abbott stated that TikTok’s privacy threats were a result of the app being “owned by a Chinese company that employs Chinese Communist Party members, harvest[ing] significant amounts of data from a user’s device, including details about a user’s internet activity.”[5] Texas is not the only state that believes Governor Abbott’s sentiments. South Dakota, Oklahoma, Florida, Tennessee, and twenty-four other states have begun moving to ban TikTok from all state-government devices as well.[6]

The majority of the leading the charge to ban TikTok are Republican states. Due to the inherent political tensions between China and the United States, questions have come to light about the true intentions the Republican states and their political leaders pushing to ban TikTok. While it is impossible to fully know the politicians, TikTok was recently forced to fire four employees that accessed the personal data of two American journalists who had written pieces on the company in an attempt to find their sources.[7] Although only four employees were seemingly involved, the situation exposed the fact that accessing personal information is in fact possible through the app, validating American government officials’ privacy concerns. Additionally, in early February a Chinese “spy” balloon was shot down over the coast of South Carolina by U.S. fighter jets.[8] The publicization of the balloon incident sparked politicians to use it as evidence of why TikTok needs to be banned. In fact, Florida Congressman Mario Diaz-Balart described TikTok as “a Chinese Communist Party balloon in everybody’s home.”[9] Although it does not appear that there was a direct connection between the Chinese balloon and TikTok itself, the occurrence has only lit the fuel to ban the app.

The worry over TikTok’s data privacy and security involving China has even seeped beyond the government and into schools. Public universities across the country, such as in Mississippi, Texas, Iowa, and Oklahoma, have begun banning access to TikTok while on university Wi-Fi.[10] Although these bans do not prevent faculty or students from having the app on their devices, or from accessing it using personal cellular data, it has been viewed as an annoyance to students that live on campus and are therefore almost always on the university’s Wi-Fi, especially for those that cannot afford cellular data or other alternatives.[11]

Due to these continuously rising privacy concerns, TikTok and ByteDance have begun taking steps to refute these allegations and concerns. One-way TikTok representatives have started trying to change perspectives and stall TikTok-related legislation is by increasing the time, effort, and funds dedicated to lobbying. ByteDance’s general counsel stated that this shift is to “accelerate our own explanation of what we were prepared to do and the level of commitments on the national security process.”[12] While it is too soon to know how effective these lobbying efforts have been, ByteDance has already spent upwards of $5.4 million dollars on lobbying efforts, an amount expected to only increase.[13] Another way TikTok is attempting to refute privacy concerns is through the creation of their Transparency and Accountability Center (“TAC”) in Culver City, California. TAC’s purpose is to give individuals an insider perspective on just how TikTok operates, with a focus on the app’s content moderation and recommendations policies, both of which have come under scrutiny in the past.[14] TAC’s creation is relatively new, yet it is already garnering skepticism from those that believe it’s just for show due to the recent ramp-up of privacy concerns. TikTok has expressed its plan to open similar centers across the world to give more users the ability to explore the centers, develop a deeper insight into TikTok’s operations, and hopefully, assuage the concerns over data privacy.[15]

As of now, the future of TikTok in the United States remains uncertain. On March 23, TikTok CEO Shou Zi Chew will testify before the House Energy and Commerce Committee.[16] He is expected to answer questions on consumer privacy, data security, and any relationship TikTok has with the Chinese Communist Party via ByteDance. Shou Zi Chew’s appearance is intended by TikTok to “set the record straight”[17] but how U.S. government officials interpret his answers may determine whether TikTok’s timeout in the United States is temporary or permanent.

* J.D. Candidate, Class of 2024, Sandra Day O’Connor College of Law at Arizona State University.

[1] Elizabeth Atkins, A Complete History of TikTok—From Launch and Banning Controversy, to Best Viral Trends, METRO (Feb. 13, 2021), https://metro.co.uk/2021/01/01/a-complete-history-of-tiktok-launch-us-ban-and-best-viral-dances-13823263/.

[2] Conor Murray, Will TikTok Be Banned from the U.S.? Here’s Where It Stands, FORBES (Feb. 7, 2023), https://www.forbes.com/sites/conormurray/2023/02/07/will-tiktok-be-banned-from- the-us-heres-where-it-stands/?sh=5c38d4d73d2b.

[3] Id.

[4] Mack DeGeurin, Texas Is Banning TikTok from State Government Devices, GIZMODO (Feb. 7, 2023), https://news.yahoo.com/texas-banning-tiktok-state-government-164723637.html.

[5] Id.

[6] Id.

[7] Todd Sprangler, ByteDance Fires Employees Who Improperly Accessed Data on U.S. TikTok Users, Including Two Journalists, Company Says, VARIETY (Dec. 22, 2022), https://variety.com/2022/digital/news/bytedance-fires-employees-data-us-tiktok-journalists-1235468448/.

[8] Lon Harris, Chinese Spy Balloon Reminds Every Politician to Talk a Lot More About Banning TikTok, DOT.LA (Feb. 8, 2023), https://dot.la/tiktok-china-spy-balloon-2659383757.html.

[9] Id.

[10] Murray, supra note 2.

[11] Cecil Hannibal, Amid TikTok Bans, Should You Be Concerned About Using the App?, WAPT (Feb. 7, 2023), https://www.wapt.com/article/should-you-be-concerned-about-using-tiktok- app/42787708.

[12] Murray, supra note 2.

[13] Id.

[14] Karissa Bell, Can TikTok Convince the US It’s Not A National Security Threat?, ENGADGET (Feb. 7, 2023), https://www.engadget.com/can-tiktok-convince-the-us-its-not-a-national-security-threat-173030115.html.

[15] Id.

[16] Murray, supra note 2.

[17] Id.

The GDPR Can Act as a Guide for the Implementation of the California Privacy Rights Act

By Isabella Goldsmith*

PDF Available

Change has come for data privacy and security laws in California with the California Privacy Rights Act (“CPRA”), which went into effect on January 1, 2023.[1] The European Union (“EU”) has implemented and enforced similar data privacy laws since 2018, making it the leading example for regulations on personal data acquisition.[2] Laws like the CPRA do not instantly result in a seamless transition among the company using the data, the consumers giving the data, and the state body as the regulator of the data privacy laws. Companies operating in states that are now following the EU’s lead and creating stricter data protection laws should be cognizant of the friction that was seen between European tech companies and the implementation of the European General Data Protection Regulation (“GDPR”).[3] Exercising the GDPR substantially changed how businesses used tech stacks within regulatory guidelines. Companies operating in California, one of the technological capitals of the world, should begin implementing similar changes to avoid violating privacy laws while using these tech stacks.

A tech stack is “the combination of technologies a company uses to build and run an application or project.”[4] Tech stacks are commonly used in applications or programs that require several different technological functions to operate, such as operating systems, data storage, servers and load balancing, and monitoring and performance tools.[5] One basic example is a service used for data storage and querying.[6] Data storage services allow the app to store user data as well as data about how the program or application is used.[7]

The European Union has thus far been the global leader and innovator in data privacy regulations.[8] With an emphasis on consumer protection, the GDPR is the “toughest privacy and security law in the world.”[9] The GDPR focuses on the regulation of personal data, data privacy, and security, and enforcing these regulations on any organization that targets or collects data from anyone within the EU.[10] After the GDPR was implemented in 2018, IT infrastructure was met with complications in continuing the use of tech stacks because highly integrated systems of technology often relied on the easy acquisition and movement of consumer data.[11]

After the EU’s implementation of the GDPR, tech companies that used tech stacks to operate their applications or programs found it difficult to comply with the privacy regulations when the component parts of the stack were interdependent and used for efficiency of data collection.[12] Because these services can come from different tech companies, it is essential that both the overarching program or application and then every component of the tech stack comply with the applicable privacy regulations.

A large-scale empirical study performed on 400 E-commerce firms found that flexibility in stack compilation resulted in greater success after a change in regulation.[13] Flexibility, which the study described as using new combinations of technologies for stacking purposes, was found to improve the likelihood of compliance under new regulations.[14] Specifically for data storage, it may be easier to use a novel or smaller company to store data so that it is easier to manage the overview of its distribution and to assure compliance.[15]

The CPRA expanded regulations to include most businesses that share data, including service providers, contractors, and third parties that are located in California.[16] The data privacy rights protect California residents’ personal data.[17] Therefore, any business that operates or targets consumers in the state will need to ensure its stacks comply with these stringent data privacy rules.[18] CPRA-affected businesses should begin working to incorporate the previously cited flexibility elements. Consumers’ control over their data is a primary focus of the regulatory changes made in the CPRA, and, therefore, any part of the “back end,” or data storing processes, of the stack will likely be under great scrutiny. To follow the flexibility model set out by the study, California businesses could aim to implement more “creative” and flexible tech stacks, which may allow for lesser change within the entire stack because the sum of the stack will not be accustomed to a certain regulatory scheme and have to change all at once. For example, if the same three stacked components are regularly used together by most applications, a large regulatory change would likely result in disruption to the entire stack because of how interconnected it is. By choosing a less interconnected system, fewer components of the stack may be impacted at once.

The newness of the CPRA will undoubtedly resurface the issue of how tech companies continue to stack technological services to create applications. To protect themselves from heavy fines and disruption of business practices, California companies should look at the GDPR’s impact on EU businesses for guidance on how to comply without losing valuable time and resources.

* J.D. Candidate, Class of 2024, Sandra Day O’Connor College of Law at Arizona State University.

[1] Michael Twomey, Doing Business in California? The California Privacy Rights Act Is Coming . . ., KANE RUSSELL COLEMAN LOGAN (Oct. 11, 2022), https://www.krcl.com/insights/doing-business-in-california-the-california-privacy-rights-act-is-coming#:~:text=In%20general%2C%20the%20CPRA%20allows,effect%20on%20January%201%2C%202023.

[2] Ben Wolford, What is GDPR, the EU’s New Data Protection Law?, GDPR.EU, https://gdpr.eu/what-is-gdpr/?cn-reloaded=1 (last visited Feb. 28, 2023).

[3] Natalie Burford, Andrew Shipilov, & Nathan Furr, How GDPR Changed European Companies’ Tech Stacks, HARVARD BUS. REV. (Feb. 8, 2023), https://hbr.org/2023/02/how-gdpr-changed-european-companies-tech-stacks.

[4] What Is a Tech Stack?, HEAP, https://www.heap.io/topics/what-is-a-tech-stack (last visited Feb. 28, 2023).

[5] What Is a Tech Stack? Technology Stack in a Nutshell, DAC.DIGITAL (Mar. 21, 2022), https://dac.digital/what-is-a-tech-stack-technology-stack-in-a-nutshell/.

[6] HEAP, supra note 4.

[7] Id.

[8] Adam Uzialko, How GDPR Is Impacting Business and What to Expect in 2023, BUS. NEWS DAILY (Feb. 21, 2023), https://www.businessnewsdaily.com/15510-gdpr-in-review-data-privacy.html.

[9] Wolford, supra note 2.

[10] Id.

[11] Burford, Shipilov, & Furr, supra note 3.

[12] Id.

[13] Natalie Burford, Andrew V. Shipilov, & Nathan R. Furr, How Ecosystem Structure Affects Firm Performance in Response to a Negative Shock to Interdependencies,43 STRATEGIC MANAGEMENT J., 30, 30–57 (2021).

[14] Burford, Shipilov, & Furr, supra note 3.

[15] Id.

[16] Hannah Beppel, Everything You Need to Know About the California Privacy Rights Act, ADP SPARK, https://www.adp.com/spark/articles/2022/10/everything-you-need-to-know-about- the-california-privacy-rights-act.aspx#:~:text=The%20CPRA%20applies%20to%20your,nonprofit%20organizations%20or%20government%20organizations (last visited Mar 2, 2023).

[17] Twomey, supra note 1.

[18] Frequently Asked Questions, CA. CCPA, https://cppa.ca.gov/faq.html (last visited Feb. 28, 2023).

The Fall of Crypto Exchange FTX: Under the Noses of the SEC and CFTC

By Brayden Harn*

PDF Available

Within days, FTX went from a $32 billion valuation to filing bankruptcy.[1] Founder and CEO Sam Bankman-Fried was arrested on December 12 and extradited from the Bahamas, where the company was operating.[2] The complaint filed by the Securities and Exchanges Commission (“SEC”) alleges Bankman-Fried treated funds deposited by customers as a “personal piggy bank,” using them for real estate investments and political campaign donations.[3]

Similar to the house of cards TerraUSD was built on before its collapse, FTX promoted its own crypto token to be used for discounts on FTX trading or staking.[4] This strategy is somewhat common; numerous other crypto exchanges offer their own native tokens.[5] However, the way FTX used its own token was drastically different than other exchanges.[6] Prompting the beginning of the collapse, CoinDesk, a crypto news site, revealed undisclosed leverage and solvency concerns regarding FTX and its sister company Alameda Research.[7] Alameda Research, also owned by Bankman-Fried, had an investment foundation in FTX’s native token, FTT, in addition to a $5 billion position in FTT.[8] From the CoinDesk story, “The single biggest asset on Alameda’s $14.6 billion balance sheet were unlocked FTT, while the third biggest asset on the books was a $2.16 billion pile of FTT collateral.”[9] In addition to the revelation that Alameda and FTX were not separate companies and were overleveraged, native tokens are entirely unregulated and extremely susceptible to rapid market downturns.[10]

With so many previous crypto exchange collapses, it is remarkable how it continues to happen with some of the largest exchanges in the industry. The lack of regulatory oversight for FTX is twofold: the crypto industry as a whole is mostly unregulated, and U.S. regulations are not valid in the Bahamas, where FTX is principally operated.

Some people have distinguished Bankman-Fried’s conduct and the collapse of FTX as “an anomaly in an otherwise safe industry.”[11] Others view the collapse of FTX as evidence of a need for new regulation and greater regulatory oversight within the crypto industry. Senator Elizabeth Warren tweeted that “the implosion of FTX showed why the crypto industry needed SEC oversight.”[12] Brian Armstrong, CEO of crypto trading platform Coinbase, responded that “it was the SEC that had created the environment in which FTX could happen.”[13] Armstrong reasoned that FTX operated offshore, outside the reach of the SEC, because the SEC failed to create regulatory clarity in the United States.[14] In response to the FTX collapse, former Commodity Futures Trading Commission (“CFTC”) enforcement director Aitan Goelman said, “It’s a patchwork of global regulators—and even domestically there are huge gaps. That’s the fault of a regulatory system that has taken too long to adjust to the advent of crypto.”[15]

Near the beginning of 2022, the SEC conducted inquiries into how crypto exchanges, including FTX, were handling customer deposits.[16] Interestingly, the SEC’s inquiry into FTX was only concerned with a rewards program it offered to customers, which did not involve any use of the deposited crypto.[17] Meanwhile, it was revealed FTX was moving billions of dollars to Bankman-Fried’s Alameda Research company at that time.[18]

The lack of regulation in the crypto industry increases the risk for investors and related financial markets.[19] If FTX had been subject to the same regulations and level of scrutiny as traditional financial institutions, the flaws in its financial structure and operations would have been identified far sooner and may have prevented the damage caused.

* J.D. Candidate, Class of 2024, Sandra Day O’Connor College of Law at Arizona State University.

[1] MacKenzie Sigalos, Sam Bankman-Fried Steps Down as FTX CEO as His Crypto Exchange Files for Bankruptcy, CNBC (Nov. 11, 2022), https://www.cnbc.com/2022/11/11/sam-bankman-frieds-cryptocurrency-exchange-ftx-files-for-bankruptcy.html.

[2] Id.

[3] Id.

[4] Farran Powell, FTX Ex-CEO Sam Bankman-Fried Is Arrested, FORBES (Dec. 13, 2022), https://www.forbes.com/advisor/investing/cryptocurrency/what-happened-to-ftx/.

[5] Id.

[6] Id.

[7] Nathan Reiff, The Collapse of FTX: What Went Wrong with the Crypto Exchange?, INVESTOPEDIA (Jan. 4, 2023), https://www.investopedia.com/what-went-wrong-with-ftx-6828447.

[8] Id.

[9] Powell, supra note 4.

[10] Id.

[11] Peter Whoriskey & Dalton Bennett, Crypto’s Free-Wheeling Firms Lured Millions. FTX Revealed the Dangers., WASH. POST (Nov. 16, 2022), https://www.washingtonpost.com/business/2022/11/16/ftx-collapse-crypto-exchanges-regulation/.

[12] Id.

[13] Jason Abbruzzese & Daniel Arkin, FTX is in Freefall. Where Was the Oversight?, NBC NEWS (Nov. 15, 2022), https://www.nbcnews.com/tech/crypto/ftx-freefall-was-oversight- rcna57098.

[14] Id.

[15] Chris Prentice, Angus Berwick, & Hannah Lang, How FTX Bought Its Way to Become the ‘Most Regulated’ Crypto Exchange, REUTERS (Nov. 18, 2022), https://www.reuters.com/technology/exclusive-how-ftx-bought-its-way-become-most-regulated-crypto-exchange-2022-11-18/.

[16] Id.

[17] Id.

[18] Id.

[19] Whoriskey & Bennett, supra note 11.

Why Medical Debt Should Be Considered Presumptively Non-Consumer Debt

By Leo Yang*

PDF Available

Since the late 2000s, medical bankruptcies have been one of the primary reasons for Americans’ bankruptcy proceedings. A decade later, the root issue causing consumer medical bankruptcies still has not improved. Consumers with primarily medical debt seeking to discharge their debts may suffer the stringent requirements of the Chapter 7 means test and thus may be ineligible for the benefits of the more debtor-friendly Chapter 7 discharge.

A typical consumer debtor can choose between three different types of bankruptcy proceedings: Chapter 7, Chapter 11, and Chapter 13. Individuals typically file under Chapter 7 or 13,[1] as Chapter 11 is by far the most expensive, risky, time-consuming, and complex option.[2]

Chapter 7 is often the best choice for an individual debtor, especially if the debtor does not have significant equity in their residence or other assets, as Chapter 7 is less expensive and faster than Chapter 13.[3] Generally speaking, Chapter 13 debtors are more affluent than Chapter 7 debtors.[4] Therefore, financially disadvantaged individuals are more likely to file under Chapter 7. However, to be eligible for Chapter 7 relief, the debtor has to satisfy the means test.

The means test is one of the most complex requirements for filing a Chapter 7 case,[5] and it was designed to help objectively determine which consumer debtors have the means to repay creditors at least a portion of their claims and should do so under Chapter 13.[6] The first step in the means test is to calculate the debtor’s current monthly income (“CMI”).[7] Once the CMI is calculated, it is annualized and compared to the appropriate median family income in the debtor’s respective State.[8] If a debtor’s annualized CMI is higher than the median family income in the State, the debtor’s disposable income then must be calculated.[9] If there is sufficient disposable income to pay off a portion of the debts after deducting certain expenses, the debtor fails the means test and is ineligible to file a Chapter 7 and the case must be either dismissed or converted to a Chapter 11 or 13.[10]

Due to the more discharge-friendly nature of a Chapter 7 proceeding, Chapter 7 imposes more requirements on individuals that hold primarily consumer debts.[11] Under Chapter 7, a consumer debt is a debt incurred by an individual primarily for personal, family or household purposes.[12][13] Any debt not considered a consumer debt is considered a non-consumer debt.[14] The distinction between consumer and non-consumer debt is relevant for the means test or if a random audit is requested.[15]

To summarize, if an individual’s debt is categorized as primarily consumer debt, the individual would need to face the Chapter 7 means test and therefore the possibility of dismissal or conversion to another chapter of the bankruptcy code. If the individual’s debt is categorized as primarily non-consumer debt, the individual does not need to face the means test and can secure a discharge in the more favorable Chapter 7.

The means test was introduced as a result of the Bankruptcy Abuse Prevention and Consumer Protection Act (“BAPCPA”). BAPCPA’s main purpose is to disqualify many families from abusing the more generous provisions of Chapter 7 and force such individuals into Chapter 13.[16] The means test serves as a way to determine whether an individual is an honest debtor or more likely to be abusing the system. BAPCPA, however, arguably did not address the root of the consumer bankruptcy problem.[17]

Without guidance from the District or Circuit Courts, the current bankruptcy courts are split as to whether medical debts should be considered consumer or non- consumer debts. If medical debts are considered consumer debts, individuals with high amounts of medical debt will likely be subject to the means test and may face a dismissal or conversion of their case. The Chapter 7 means test only applies to consumers with debt categorized as primarily consumer debt. Therefore, if medical debts do not count as consumer debt, it is still possible for the means test to apply to a consumer if their other debts are consumer debt (such as credit card debt). However, if a consumer has primarily medical debt, and medical debt does not count as consumer debt, then that particular consumer would not need to pass the means test to enter a Chapter 7 bankruptcy proceeding.

The court in In re Martinez determined that medical debts, similar to other forms of consumer debts, are used for a personal purpose and therefore satisfy the provision of 11 U.S.C. § 101(8).[18]

The court in In re Sijan rejected In re Martinez’s analysis that all debts incurred for a personal purpose are per se consumer debts.[19] While § 101(8) does not mention volition as a requirement, the District Court found that volition is an essential element of § 101(8).[20] The court in In re Sijan correctly noted that under the readings of the District Court, an individual must have voluntarily intended to incur the debt for a personal, family, or household purpose for the debt to be considered consumer debt.[21] The court in In re Sijan then went on to say that not all medical debts are voluntary, such as bills for surgery,[22] and compared such involuntary medical bills to tax liens and civil judgment liens.[23]

In a fitting manner, the court in In re Zgonina rejected In re Sijan’s reasoning. The Zgonina court was not persuaded by the Sijan court’s reasoning that certain medical services are involuntary.[24] The court in In re Zgonina distinguished medical expenses from tax liens because tax liens are levied for a public purpose, whereas medical expenses are not.[25] The court then echoed the sentiments of In re Martinez, stating that medical treatment provides a direct benefit to a debtor.[26] It should be noted that the exact type of medical debt in In re Zgonina is not specified, but the debtor argued that the debt was not voluntarily incurred.[27]

Despite the Bankruptcy Court split and sparse case law, I believe the general reasoning in In re Sijan for considering medical expenses as non-consumer debt stands: that “involuntary” medical expenses should not be considered consumer debt. But the question then is how do we determine what is considered a voluntary or involuntary medical expense? The court in In re Sijan seems to imply that the difference is whether the treatment is life-saving. While the court believes that routine doctor visits and cosmetic surgery would be examples of consumer debt, while life-saving medical treatment would be non-consumer debt, the line between what is considered life-saving can be thin. I propose that all medical expenses be presumptively considered non-consumer debt, with the burden on the opposing party to make a showing rejecting such a presumption under a totality-of-the-circumstances test.

The presumption in favor of non-consumer debt is necessary because most medical treatments, even routine ones, taken broadly, can be considered life-saving. The totality-of-the-circumstances test serves as a balancing check for Bankruptcy Courts to rule out debts hidden under the medical guise, such as certain cosmetic surgeries.

While this rule, if enacted, would likely increase the cost for consumer bankruptcies, this increase in cost can be justified by deterring frivolous claims and encouraging only honest medical debtors to file for Chapter 7.

* J.D. Candidate, Class of 2024, Sandra Day O’Connor College of Law at Arizona State University.

[1] Chapter 7 Liquidation: Overview, PRACTICAL LAW, https://www.westlaw.com/w-000- 6231?transitionType=Default&contextData=(sc.Default)&VR=3.0&RS=cblt1.0 (last visited Feb. 20, 2023) [hereinafter Chapter 7 WL].

[2] Individual Chapter 11 Bankruptcy: Overview, PRACTICAL LAW, https://www.westlaw com/w-008-8977?transitionType=Default&contextData=(sc.Default)&VR=3.0&RS=cblt1.0 (last visited Feb. 20, 2023).

[3] Comparison: Individual Chapter 7 Versus Chapter 13 Bankruptcy Cases, PRACTICAL LAW, https://www.westlaw.com/w-026- 8811?transitionType=Default&contextData=(sc.Default)&VR=3.0&RS=cblt1.0 (last visited Feb. 20, 2023).

[4] Id.

[5] Chapter 7 WLsupra note 1.

[6] H.R. Rep. No. 109-31, 109 Cong., 1st Sess. 89 (2005).

[7] Chapter 7 WLsupra note 1.

[8] Id.

[9] Id.

[10] Id.

[11] Id.

[12] 11 U.S.C.A. § 101(8).

[13] Chapter 7 WLsupra note 1.

[14] Id.

[15] Id.

[16] Stephen Labaton, Bankruptcy Bill Set for Passage; Victory for Bush, N.Y. TIMES (Mar. 9, 2005), https://www.nytimes.com/2005/03/09/business/bankruptcy-bill-set-for-passage-victory-for- bush.html.

[17] Charles J. Tabb, Consumer Bankruptcy Filings: Trends and Indicators, U. ILL. L. & ECON. 1, 1 (2006).

[18] In re Martinez, 171 B.R. 264, 267 (Bankr. N.D. Ohio 1994).

[19] In re Sijan, 611 B.R. 850, 856 (Bankr. S.D. Ohio 2020).

[20] In re Westberry, 215 F.3d 589, 591 (6th Cir. 2000).

[21] Sijan, supra note 13, at 855.

[22] See id. at 856.

[23] Id.

[24] In re Zgonina, No. 19-90467, 2019 WL 6170776, at 3 (Bankr. C.D. Ill. Nov. 19, 2019.

[25] Id.

[26] Id.

[27] Id. at 1.

Non-Compete Agreements—Preventing Unfair Competition or Unfairly Preventing Competition?

By Taylor Toms*

PDF Available

In January 2023, the Federal Trade Commission (“FTC”) announced proposed rules that would effectively ban non-compete agreements, citing concerns regarding competition and harmful effects on workers.[1] A non-compete agreement is a contractual provision or document provided by an employer to an employee, that stipulates conditions restricting the employee’s ability to work in a particular industry or geographic region for a period of time following the termination of their employment. Proponents assert that these restrictions help prevent unfair competition. The proposed rules would invalidate existing non-competes, ban new ones, and require employers to inform their employees that their non-competes are no longer in effect.[2] An estimated eighteen percent of workers in the United States are subject to such an agreement.[3] Advocates for workers’ rights oppose non- competes on the grounds that they prevent individuals from switching jobs and earning higher wages, and remove incentive for employers to improve working conditions.[4] The FTC references these issues in its briefing, as well as its intention to improve “healthy competition.”[5] If approved, the ban could reshape employer- employee relations, though it will certainly face legal challenges on the way.

Non-compete agreements have historically been permitted due to concerns over unfair competition by former employees with their employers’ businesses. This blanket ban implicates the tension between differing policy perspectives on contracts—whether the law should promote freedom of contract or advance social goals. The ban would affect companies large and small, the workforce, and the market as a whole, but it is unclear to what extent. Finally, the ban would supersede state laws, which in most states are already restrictive regarding enforceability of non-competes. The proposed ban thus may be either redundant or require states to be permissive toward unfair competition as well as healthy competition. To be considered beneficial, this ban will need to balance the needs of opposing stakeholder groups while taking economic effects into account.

The most notable policy argument in favor of non-competes is freedom of contract. This theory posits that the law should give deference to the intent of the contracting parties, so long as they are adults who knowingly and voluntarily assented to the contract. However, in situations where a non-compete agreement is a standard provision in a company’s offer letter or employment contract, workers may face pressure to agree as a condition of their employment, without sufficient time to consider and negotiate. This implicates the policy perspective that the law should regulate contracts to promote the common good. While many state non- compete laws analyze factors such as education, consideration, access to legal representation, financial situation, and time to consider the agreement when determining whether assent was knowing and voluntary, the difference in sophistication and resources between the average worker and company raises the question of whether non-competes are ever truly knowing and voluntary.[6] Invalidating all non-competes thus arguably advances a social goal, freedom to change jobs, by limiting the freedom of contracting parties.

The FTC estimates the ban will increase workers’ total earnings by $300 billion, help close gender- and race-based wage gaps, and improve working conditions.[7] There is certainly research that supports these claims, but it is challenging for economists to pin down exact figures.[8] Many people who are subject to a non-compete occupy blue collar jobs in industries such as construction and hospitality and fifteen percent have attained less than a college degree.[9] It is easy to see how sophisticated parties could use non-compete agreements to their benefit and to the detriment of unsophisticated parties with fewer resources. Many workers may not know their rights and may not be able to afford to bring an action against an employer even if the non-compete in question would severely limit their job opportunities.

Limitation of job opportunities is one of the FTC’s chief concerns. Even agreements that would not ordinarily be considered a non-compete may come within the ambit of these new regulations, because the FTC has proposed a functional test.[10] Under this test, if a contractual provision operates as a de facto non-compete clause, meaning “it has the effect of prohibiting the worker from seeking or accepting employment . . . or operating a business after the conclusion of the worker’s employment with the employer” it is prohibited.[11] Thus employers cannot simply craft an agreement intended to produce the same effect under a different name. Despite this, the FTC’s proposed rules would not extend to all restrictive covenants, so non-solicitation agreements and non-disclosure agreements will remain enforceable unless they are so restrictive that they effectively act as a non-compete.[12]

In the corporate context, non-competes are often used to restrict executives and partners from taking advantage of their resources and insider knowledge after leaving these roles and involve significant negotiation with both parties represented by counsel. Eliminating non-competes may remove deterrents for high-level employees and allow them to compete unfairly with their former employer until or unless legal action is brought. Even so, this is likely moot due to the resources of the parties involved—an established corporation will typically have patents, trademarks, and other protections in place on their products or services. Non- competes are also frequently used by businesses in relationship-based industries such as sales and distribution, which rely on restrictive covenants to protect trade secrets and customer lists. However, companies will still be able to use non-solicitation and non-disclosure agreements to protect these assets. Additionally, according to the Department of the Treasury, only about twenty-four percent of workers possess trade secrets, so the concern may be disproportionate.[13]

Ultimately, non-competes may harm the workforce while offering little-to-no benefit to employers, for two reasons. First, several states, including California, Nevada, Maryland, Virginia, North Dakota, and Oklahoma have already banned non-competes outright or severely restricted their use, rendering them unenforceable in those jurisdictions.[14] Secondly, if there is a state law cause of action, non-competes are costly to enforce if violated, because they are disfavored and construed strictly in favor of the employee.[15] Even in a favorable outcome, the remedies available typically do not reach beyond the employee’s limited resources, and the most common remedy is injunction, rather than an award of monetary damages.[16]

As discussed above, most states that permit non-competes construe them strictly in favor of the employee, and in many, non-compete agreements are restricted or prohibited.[17] The FTC derives their authority to supersede these state laws from a federal unfair competition law.[18] There are complex administrative law questions surrounding this interpretation, and the FTC’s authority is likely to be the subject of legal action if the ban is effectuated. Courts may use Chevron to analyze whether the FTC appropriately construed its statutory authority.[19] Under Chevron, courts conduct a two-part inquiry. Simply put, the inquiry is: 1) whether congress’s intent is clear, and 2) if it is not, whether the agency’s action is based on a “permissible construction” of the statute.[20]

Even if the ban passes the Chevron test, there is a contention that it would violate the “major questions” doctrine in West Virginia v. EPA.[21] Under this doctrine, because of the breadth and nature of the ban, a court could require the FTC to point to “clear congressional authorization” of its noncompete rulemaking.[22] Historically, the FTC has a record of denouncing this authority rather than affirming it, and explicit authorization is a challenging standard to meet.[23] Thus, the ban may not survive a legal challenge to the FTC’s authority. If it does, because market effects are yet unknown, concern about the negative impact of these broad rules is not entirely misplaced. On balance, the success of the ban will turn on whether the benefits to individuals in the workforce will be significant enough to outweigh any negative economic impact.

* J.D. Candidate, Class of 2024, Sandra Day O’Connor College of Law at Arizona State University.

[1] FTC Proposes Rule to Ban Noncompete Clauses, Which Hurt Workers and Harm Competition, FED. TRADE COMM’N (Jan. 5, 2023), https://www.ftc.gov/news-events/news/press-releases/2023/01/ftc-proposes-rule-ban-noncompete-clauses-which-hurt-workers-harm-competition.

[2] Id.

[3] Id.

[4] Norman D. Bishara & Michelle Westermann-Behaylo, The Law and Ethics of Restrictions on an Employee’s Post-Employment Mobility, 49 AM. BUS. L.J. 1, 45 (2012).

[5] FED. TRADE COMM’N, supra note 1.

[6] See Progressive Techs., Inc. v. Chaffin Holdings, Inc., 33 F.4th 481, 485 (8th Cir. 2022); Puentes v. United Parcel Serv., Inc., 86 F.3d 196, 198 (11th Cir. 1996); Lakeside Oil Co. v. Slutsky, 98 N.W.2d 415, 417 (Wis. 1959).

[7] FED. TRADE COMM’N, supra note 1.

[8] Erik J. Winton et al., Against the Evidence: How the FTC Cast Aside the Input of Experts at Its Own Non-Compete Workshop, JACKSON LEWIS P.C. (Feb. 7, 2023), https://www.jacksonlewis.com/publication/against-evidence-how-ftc-cast-aside-input-experts-its-own-non-compete-workshop.

[9] Alexander J.S. Colvin & Heidi Shierholz, Noncompete Agreements, ECON. POL’Y INST. (Dec. 10, 2019), https://www.epi.org/publication/non-compete-agreements/; U.S. DEP’T TREASURY, NON-COMPETE CONTRACTS: ECONOMIC EFFECTS AND POLICY 4 (2016), https://home.treasury.gov/system/files/226/Non_Compete_Contracts_Econimic_Effects_and_Policy_Implications_MAR2016.pdf.

[10] Non-Compete Clause Rule, 88 Fed. Reg. 3482 (proposed Jan. 19, 2023) (to be codified at 16 C.F.R. pt. 910).

[11] Id.

[12] Clifford R. Atlas et al., A Deeper Dive into FTC’s Proposed Non-Compete Rule, JACKSON LEWIS P.C. (Jan. 10, 2023), https://www.jacksonlewis.com/publication/deeper-dive-ftc-s-proposed-non-compete-rule.

[13] OFF. ECON. POL’Y, supra note 9.


[15] Id.

[16] Id.

[17] Id.

[18] Interestingly, this claimed authority does not extend to banks, federal credit unions, air carriers, common carriers, and meat and poultry dealers, under the code. 15 U.S.C. § 45(a)(2) (2006).

[19] Chevron, U.S.A., Inc. v. Nat. Res. Def. Council, Inc., 467 U.S. 837, 842, 104 S. Ct. 2778, 2781, 81 L. Ed. 2d 694 (1984).

[20] Id.

[21] W. Virginia v. Env’t Prot. Agency, 213 L. Ed. 2d 896, 142 S. Ct. 2587, 2608 (2022) (discussing how the “major questions doctrine” necessitated greater scrutiny of a claim of Congressionally-bestowed authorization for agency actions in “extraordinary cases” where the action is broad, and there are significant economic and political consequences).

[22] Id.

[23] Fed. Trade Comm’n, Dissenting Statement of Commissioner Christine S. Wilson Regarding the Notice of Proposed Rulemaking for the Non-Compete Clause Rule (Jan. 5, 2023), https://www.ftc.gov/system/files/ftc_gov/pdf/p201000noncompetewilsondissent.pdf.

The Super Bowl’s Impact on Business Free Speech

By Bradley Greenberger*

PDF Available

As the chaos of Super Bowl LVII dissipates, a lasting impact has been made on Arizona businesses. In addition to the $600 million economic impact,[1] the rights and procedures for host cities have changed for the future. In 2022, the City of Phoenix passed Resolution 22073, amending Phoenix Zoning Ordinance Section 705 F.1.B, requiring temporary sign permits in designated “Clean Zones” to be approved by the NFL and the Super Bowl Host Committee.[2] Designating Clean Zones is nothing new for the NFL,[3] nor is it unique to football.[4] The Clean Zones for this Super Bowl extends for the areas around the stadium and parts of downtown Phoenix.[5] It requires permit approval by the NFL and Host committee for temporary structures, sales on the street/sidewalk, and temporary commercial and advertising signage.[6] The purpose of these restrictions is to protect advertising deals with NFL sponsors.[7] These restrictions have caused issues in the past. During the 2017 Super Bowl in Houston, the host committee scrambled to spray paint over tires on food trucks because they were not Bridgestone, the NFL’s official tire partner.[8]

These restrictions have not gone unchallenged in the past. In 2013, a lawsuit was filed by the ACLU in federal court challenging the New Orleans Clean Zone, which encompassed the area around the Superdome, the entire French Quarter, and other neighborhoods.[9] While the lawsuit was successful in reducing the Clean Zone to public areas surrounding the stadium, the ruling did not upset the policy of allowing the NFL and Host Committee to maintain control.[10]

The restriction did not go unchallenged in Arizona either. Bramley Paulin, the owner of property adjacent to a downtown Phoenix Clean Zone, entered negotiations with Coca-Cola to secure an advertising deal with his property.[11] However, the NFL is sponsored by competitor Pepsi, so the zoning restrictions caused the deal to fall through.[12] Paulin, represented by The Goldwater Institute, filed suit, alleging the zoning law is a prior restraint on speech and an unconstitutional delegation of governmental powers.[13] The court agreed on both points, finding the zoning plan was a delegation of powers without governmental oversight.[14] The city agreed to remove the NFL and Host Committee from the permit approval decisions.[15]

The city then issued Resolution 22095, which removed the NFL and Host Committee from approval decisions but did not provide a remedy that would allow temporary signage to be available for Super Bowl weekend as the typical process takes four to six weeks.[16] [17] Therefore, the parties went back to court requesting immediate relief.[18] The court called this a moving of the goalposts, recognizing that the only way to get legal permission for temporary signage was still to ask the NFL for a permit.[19] The court rejected any notion that the delay was Paulin’s fault, as the NFL and city created the circumstances themselves.[20] Thus, the court ordered the permit office to make a decision on Paulin’s application within forty-eight hours.[21] Counsel for Paulin noted, “Freedom of speech—including the right to advertise—is one of our most basic constitutional values. As the big game approaches, it’s refreshing to see our constitutional rights start the festivities with a clean touchdown.”[22]

* J.D. Candidate, Class of 2024, Sandra Day O’Connor College of Law at Arizona State University.

[1] Abigail Gentrup, Phoenix Expects $600M Windfall from Eagles-Chiefs Super Bowl, FRONT OFFICE SPORTS (Jan. 29, 2023, 10:31 PM), https://frontofficesports.com/phoenix-expects-600m- windfall-from-eagles-chiefs-super-bowl/.

[2] Paulin v. Gallego, CV 2023-000409 (Super. Ct. Ariz. Maricopa Cnty. 2023).

[3] The NFL has previously imposed Clean Zones in cities like New Orleans, LA and Arlington, TX. See Sam Borden & Cara Coello, How the Super Bowl Tests Boundaries, Including the Constitution, ESPN (Feb. 7, 2023) https://www.espn.com/nfl/story/_/id/35583812/how-super- bowl-tests-boundaries-including-constitution.

[4] Similar Clean Zones have been enacted in the areas around Olympic venues and World Cup Stadiums. See Borden & Coello, supra note 3.

[5] Paulin, CV 2023-000409, supra note 2.

[6] Nicole Grigg, ‘Clean Zone’ Will Be in Place for Super Bowl Around State Farm Stadium, ABC 15 ARIZONA (Sep. 19, 2022, 9:57 PM), https://www.abc15.com/sports/clean-zones-will-be-in-place-for-super-bowl-around-state-farm-stadium.

[7] Borden & Coello, supra note 3.

[8] Id.

[9] Bruce Eggler, Size of Super Bowl ‘Clean Zone’ Reduced by Federal Judge After ACLU Suit, TIMES PICAYUNE (Jan. 25, 2013, 5:03 AM), https://www.nola.com/news/politics/size-of-super-bowl-clean-zone-reduced-by-federal-judge-after-aclu-suit/article_16b89067-9146-5544-b767-c31c7f3daeac.html.

[10] Id.

[11] Paulin, CV 2023-000409, supra note 2.

[12] Kevin Reagan & Bianca Buono, Judge Rules Phoenix’s Super Bowl ‘Clean Zone’ Rules Were ‘Unconstitutional’, 12NEWS (Feb. 3, 2023, 2:51 PM), https://www.12news.com/article/sports/nfl/superbowl/judge-rules-phoenixs-super-bowl-clean-zone-resolution-unconstitutional/75-f3b0fef1-8780-4377-9928-41555a1c1617.

[13] Paulin, CV 2023-000409, supra note 2.

[14] Paulin, CV 2023-000409, supra note 2 (quoting Emmett McLoughlin Realty, Inc. v. Pima Cnty., 203 Ariz. 557, 559 ¶ 7 (App. 2002).

[15] Paulin, CV 2023-000409, supra note 2.

[16] Id.

[17] With the lawsuit being filed in January 2023 and Resolution 22073 being repealed in the middle of the month, it was practically impossible to go through the regular permit process in time for Super Bowl weekend.

[18] Paulin, CV 2023-000409, supra note 2.

[19] Id.

[20] Id.

[21] Id.

[22] Timothy Sandefur, VICTORY! Court Orders Phoenix to Stop Censoring People for the Super Bowl, GOLDWATER INST. (Feb. 2, 2023), https://www.goldwaterinstitute.org/victory-court-orders-phoenix-to-stop-censoring-people-for-the-super-bowl/.

J&J Talc Powder and the Rejection of the “Texas Two-Step”

By Trey Miller*

PDF Available

Large corporations are no stranger to product liability. Johnson & Johnson (“J&J”) is currently facing tens of thousands of tort lawsuits related to their talc powder product.[1] A variety of legal tools have been developed for dealing with corporate product liability issues like these. A controversial method, taking advantage of Texas state law, is the “Texas-Two Step.”[2] J&J has attempted to employ the Texas-Two Step to manage its liability related to these talc lawsuits. Recently, the Third Circuit rejected this attempt by J&J, marking the first major rejection of this strategy for dealing with mass tort product liability.[3] This marks a significant development in the area of product liability, corporate law, and bankruptcy and stands to influence the future of corporate strategy related to managing mass tort product liability.

The relevant Texas law is the Texas Business Organizations Code (“TBOC”). The TBOC contains a unique understanding of “merger,” which is the theoretical basis for the “Texas-Two Step”. This is the “divisive merger,” which is defined to include a division of a business into two entities.[4] The divisive merger allows a business to isolate valuable assets related to primary operations in an entity protected from creditor claims. This creates a valuable opportunity for corporations facing significant product liability in the form of mass tort lawsuits.

In October 2021, J&J announced it was planning a divisive merger that would create a subsidiary called LTL Management LLC (“LTL”). The first step was for J&J to incorporate in Texas under state law. Then, the divisive merger happened, creating two new corporate entities, in this case J&J and LTL. Under Texas law, J&J can allocate assets and liabilities amongst the new entities. The goal for the parent corporation is to isolate mass tort liability in the subsidiary, while preserving the parent’s assets outside of the reach of tort claimants. The final step is for the subsidiary to file for bankruptcy, seeking to acquire its protections. On October 14, 2021, LTL filed for bankruptcy while the other entities composing the parent company, J&J, stayed out of the process.[5]

In J&J’s case, the court rejected this approach for the first time. In its opinion published on January 30, 2023, the Third Circuit Court of Appeals led into its discussion with the revealing statement,

We start, and stay, with good faith. Good intentions— such as to protect the J&J brand or comprehensively resolve litigation—do not suffice alone. What counts to access the Bankruptcy Code’s safe harbor is to meet its intended purposes. Only a putative debtor in financial distress can do so. LTL was not. Thus we dismiss its petition.[6]

Tort claimants in the bankruptcy court had filed motions to dismiss against LTL for having filed in bad faith. Chapter 11 bankruptcy petitions are “subject to dismissal under 11 U.S.C. § 1112(b) unless filed in good faith.”[7] Section 1112(b) provides for dismissal for “cause.” A lack of good faith constitutes “cause,” though it does not fall into one of the examples specifically listed in the statute.[8] The court grounded the good faith requirement in the “equitable nature of bankruptcy” and the “purposes underlying Chapter 11.”[9] The court focused on two inquires. These are (1) whether the petition serves a valid bankruptcy purpose, and (2) whether it was filed merely to obtain a tactical litigation advantage.[10] Valid bankruptcy purposes include preserving a “going concern” or “maximizing the value of the debtor’s estate.[11] Additionally, a debtor who does not suffer from financial distress cannot demonstrate its Chapter 11 petition serves a valid bankruptcy purpose supporting good faith. Courts have consistently dismissed petitions filed by financially healthy companies with no need to reorganize under the protection of Chapter 11.[12]

This analysis provided the foundation for the Third Circuit’s circuits dismissal of LTL’s bankruptcy. The court found that LTL was not in financial distress, and thus did not warrant the protection of Chapter 11.

After these course corrections, we cannot agree LTL was in financial distress when it filed its Chapter 11 petition. The value and quality of its assets, which include a roughly $61.5 billion payment right against J&J and New Consumer, make this holding untenable.[13]

The court found that the valuation of J&J, combined with the indemnity agreement required in the Texas-Two Step, precluded the finding that LTL was in financial distress. The court found that J&J—and by extension, LTL—were “highly solvent with access to cash to meet comfortably its liabilities as they came due for the foreseeable future.”[14] Because LTL was not in financial distress, it could not show its petition served a valid bankruptcy purpose and was filed in good faith under Code § 1112(b). This led to the dismissal of LTL’s petition.

The court explicitly did not lay down a rule that no nontraditional debtor could ever satisfy the bankruptcy codes good-faith requirement, as they “mean not to discourage lawyers from being inventive and management from experimenting with novel solutions.”[15] Nonetheless, the court reversed the Bankruptcy Court’s order denying the motions to dismiss and remanded the case with the instruction to dismiss LTL’s Chapter 11 petition, which annulled the litigation stay.

In conclusion, the court in In re LTL Mgmt., LLC left the door open for future attempts at the Texas-Two Step, but company management and the bankruptcy bar must consider the court’s new scrutiny of such a tactic and whether or not the subsidiary companies filing for bankruptcy will have their filings dismissed as not being filled in good faith for not being in financial distress.

* J.D. Candidate, Class of 2024, Sandra Day O’Connor College of Law at Arizona State University.

[1] Mike Spector & Dan Levine, J&J Puts Talc Liabilities into Bankruptcy, REUTERS (Oct. 15, 2021, 8:50 AM MST), https://www.reuters.com/business/healthcare-pharmaceuticals/jj-unit- manage-talc-claims-files-bankruptcy-protection-2021-10-14/.

[2] Samir D. Parikh, Mass Exploitation, 170 U. PA. L. Rev. Online 53 (2022) (discussing the development and history of the “Texas-Two Step”).

[3] Tom Hals, et al., U.S. Court Rejects J&J Bankruptcy Strategy for Thousands of Talc Lawsuits, REUTERS (Jan. 31, 2023, 6:43 AM MST), https://www.reuters.com/legal/jjs-ltl-units- bankruptcy-dismissed-by-us-appeals-court-filing-2023-01-30/.

[4] TEX. BUS. ORGS. CODE ANN. § 1.002(55) (West 2021).

[5] See Rick Archer, Johnson & Johnson Puts Talc Spinoff into Ch. 11, LAW360 (Oct. 14. 2021, 6:29 PM), https://www.law360.com/articles/1431315/johnson-johnson-puts-talc-spinoff-into-ch- 11; see also Jonathan Randles, et al., How Bankruptcy Could Help Johnson & Johnson Corral Vast Talc Litigation, WALL ST. J. (Nov. 12, 2021).

[6] In re LTL Mgmt., LLC58 F.4th 738 (3d Cir. 2023).

[7] In re 15375 Mem’l Corp. v. BEPCO, L.P.589 F.3d 605, 616 (3d Cir. 2009) (citing NMSBPCSLDHB, L.P. v. Integrated Telecom Express, Inc. (In re Integrated Telecom Express, Inc.), 384 F.3d 108, 118 (3d Cir. 2004)).

[8] See In re SGL Carbon Corp., 200 F.3d 154, 159-62 (3d Cir. 1999).

[9] Id.

[10] Id.

[11] Id. at 619.

[12] Integrated Telecom, 384 F.3d at 122.

[13] In re LTL Mgmt., LLC, 58 F.4th at 738.

[14] Id.

[15] Id.

Next KXL Chapter: State Affairs

By Yuki Taylor*

PDF Available

TC Energy Corp. v. United States is an arbitration proceeding in the International Centre for Settlement of Investment Disputes (“ICSID”) brought by a Canadian corporation against the United States over the terminated Keystone XL (“KXL”) oil pipeline expansion plan. KXL was a proposed extension of the existing cross-border oil pipeline system owned by TC Energy, formerly known as TransCanada Corporation.

The Keystone pipeline, commissioned in 2010, runs crude oil from tar sands in Alberta, Canada, to refineries and distribution hubs in Illinois, Texas, and Oklahoma. KXL was designated to be the fourth expansion of the Keystone pipeline. It was planned on a direct route from the Canadian tar sands reserves, through Montana and South Dakota, to Steel City, Nebraska. This latest extension project was the subject of persistent large-scale protests due to concerns over the protection of indigenous land rights, the risk to wildlife habitats and ecosystems, and the endangerment of public health due to the highly destructive characteristics of the dirtiest fuel in the world.

Both chambers of Congress passed the Keystone XL Pipeline Approval Act at the beginning of 2015, but President Obama vetoed the act, as he considered the project a threat to the national interest of the United States over security, safety, and the environment. However, immediately after taking office, President Trump revived the project, issuing a presidential memorandum to expedite approval of the KXL project in January 2017, followed by a presidential permit two months later. The presidential permit was further superseded by a new presidential permit in March 2019, immediately authorizing TC Energy to construct the KXL pipeline amidst intensified protests and accumulating lawsuits against the executive branch.

The political upheavals concerning KXL involving all three branches of both local and central governments during the Trump presidency were instantly ended by President Biden on his first day in office, January 20, 2021, when he revoked his predecessor’s 2019 permit. Several months later, TC Energy completely scrapped the KXL project.

The Canadian energy giant then submitted an arbitration request to ICSID on November 22, 2021, seeking damages as a victim of a “regulatory roller coaster.”[1] It filed the request pursuant to Annex 14-C of the U.S.-Mexico-Canada Agreement(“USMCA”), the successor of the North American Free Trade Agreement (“NAFTA”), and argued that President Biden’s decision to revoke the 2019 presidential permit was “unfair and inequitable, discriminatory, expropriatory, and violated U.S. obligations under Chapter 11 of NAFTA.”[2] TC Energy
specifically alleged that the revocation of the 2019 permit, “breached U.S. obligations under Articles 1102 (National Treatment), 1103 (Most-Favored-Nation Treatment), 1105 (Minimum Standard of Treatment), and 1110 (Expropriation and Compensation) of NAFTA.”[3]

However, NAFTA had been terminated and superseded by the USMCA in 2020. Although, like NAFTA, the USMCA contains a provision for foreign investment ICSID arbitration without exhaustion of local remedies under Annex 14-D, Canada opted out of that direct arbitration provision. Accordingly, since July 1, 2020, Canadian investors in the United States and U.S. investors in Canada have lost the option to commence direct ICSID arbitration proceedings against the host states under the USMCA. Speculatively, Canada’s withdrawal from the direct arbitration provision was attributed to its “bleak scorecard” in ICSID investor-state arbitrations.[4] Not only has Canada been subject to more investor-state claims under NAFTA compared to the other two states, but Canada has lost a number of such cases, in contrast to the United States, which has never lost a NAFTA case.[5] Further, Canadian investors also had a low success rate.[6] As such, Canada has paid comparatively more in damages to foreign investors, while Canadian investors have recovered relatively less against other host states.[7]

TC Energy nevertheless requested ICSID arbitration, invoking Annex 14-C to Chapter 14 (Investment) of the USCMA, titled “Legacy Investment Claims and pending Claims.” Chapter 14 contains a three-year dispute resolution sunset clause, i.e., Annex 14-C, providing investors with direct ICSID arbitration opportunities for legacy investments in existence when the USMCA entered into force on July 1, 2020.[8]

On January 11, 2023, the United States submitted its first response, requesting bifurcation of the international investor-state arbitration proceedings to allow the tribunal to render a decision on jurisdiction before addressing the merits of the claims.[9] The United States argued that, because the construction permit was revoked on January 20, 2021, more than six months after the termination of NAFTA, the United States could not have breached the substantive obligations of NAFTA.[10] Instead, any claim would have to relate to the investor’s rights under the USMCA, which are similar to those in NAFTA, but for which there was no direct arbitral jurisdiction between the United States and Canada.[11] The United States asserted that “NAFTA does not contain a survival provision obligating a party to continue abiding by its terms for some period post-termination.”[12]

In support of its argument, the United States cited Article 70(1)(a) of the Vienna Convention on the Law of Treaties to which the United States is a nonparty, under customary international law, providing in relevant part that “[u]nless the treaty otherwise provides or the parties otherwise agree, the termination of a treaty under its provisions or in accordance with the present Convention: (a) releases the parties from any obligation further to perform the treaty.”[13] The United States further cited Article 13 of the International Law Commission’s Articles on Responsibility of States for Internationally Wrongful Acts: “An act of a State does not constitute a breach of an international obligation unless the State is bound by the obligation in question at the time the act occurs.”[14]

Annex 14-C does not provide any additional description for greater certainty regarding the eligibility of alleged beaches, unlike the defined legacy investment. However, the language is deemed rather unambiguous, stating that “[e]ach Party consents, with respect to a legacy investment, to the submission of a claim to arbitration in accordance with . . . this Annex alleging breach of an obligation under: Section A of Chapter 11 (Investment) of NAFTA 1994.”[15] Although the obligations of a host state on issues concerning national treatment,
most-favored-nation treatment, minimum standard of treatment, and expropriation and compensation for foreign investors are analogous and continued from NAFTA to the USMCA, breaches of obligations eligible for direct ICSID arbitration appear to be limited to those under NAFTA in the text. The three-member tribunal chaired by a French arbitrator will soon issue a decision on the U.S.’s jurisdictional objections by April 13, 2023, according to the procedural calendar prepared for the case.

* J.D. Candidate, Class of 2023, Sandra Day O’Connor College of Law at Arizona State

[1] Request for Arbitration at 1, TC Energy Corp. v. United States, ICSID Case No. ARB/21/63 (ICSID, filed November 22, 2021), https://www.state.gov/wp-content/uploads/2022/05/TCE-v-US-Request-for-Arbitration-Nov-22-2021.pdf.

[2] Id.

[3] Id. at 8.

[4] See Daniel Garcia-Barragan et al., The New NAFTA: Scaled-Back Arbitration in the
, 36 J. INT’L ARB. 742, 739–54 (2019).

[5] Id. As of the time this article was published in 2019, “Canada has lost eight such cases.”

[6] Id.

[7] Id.

[8] Request for Arbitration at 1, TC Energy, supra note 1; Agreement between the United States of America, the United Mexican States, and Canada (USMCA) Ch. 14 Investment, Annex 14-C (entered into force July 1, 2020), https://ustr.gov/sites/default/files/files/agreements/FTA/USMCA/Text/14-Investment.pdf.

[9] Request for Bifurcation, TC Energy, ICSID Case No. ARB/21/63 (Jan. 11, 2023),

[10] Id. at 9.

[11] Id. at 9-10.

[12] Id. at 6.

[13] Request for Bifurcation at 5-6, TC Energy, supra note 9; Vienna Convention on the Law of Treaties art. 70(1)(a), 1155 U.N.T.S. 331 (entered into force Jan. 27, 1980), https://legal.un.org/ilc/texts/instruments/english/conventions/1_1_1969.pdf.

[14] Request for Bifurcation at 9, TC Energy, supra note 9; Int’l L. Comm., Articles on Responsibility of States for Internationally Wrongful Acts, art. 13 (U.N. Doc. A/56/49(Vol. I)/Corr.4 (2001), https://legal.un.org/ilc/texts/instruments/english/draft_articles/9_6_2001.pdf.

[15] USMCA, supra note 8, at Ch. 14 Investment, Annex 14-C.

I Robot Esq.—Artificial Intelligence’s Impending Takeover of the Legal Profession

By David K. Korn*

PDF Available

“Your Honor, ChatGPT, presenting on behalf of the Petitioner.” Over the past few decades, automation has slowly replaced blue collar jobs across industries while white collar industries, particularly the practice of law, have enjoyed relative immunity to technological displacement. Professional rules restricting the unauthorized practice of law, strict limitations on fee arrangements, and the inherent uniqueness of routine legal problems have rendered law practice impossible or, at the very least, impractical, to automate. LegalZoom is the best attempt thus far to automate aspects of the legal profession, and it has been plagued by both lawsuits and legal scholars questioning its legality since its inception.[1] Even the most straightforward legal procedures, such as will drafting and divorce, still require consulting an attorney. A new artificial intelligence (“AI”) called ChatGPT is poised to change that.

ChatGPT is a new AI developed by OpenAI that uses language models to generate responses to any question. Within a week of its November 2022 launch, ChatGPT amassed millions of users who discovered the program could write essays, debug computer code, and carry on complex conversations.[2] Among those users were lawyers. ChatGPT could answer questions like: “How do I file a brief with the Arizona District Court?” “Can I adversely possess my neighbor’s land if I plant a tree on it?” and “How do I answer a motion to dismiss?” While the answers were slightly verbose, they could be easily mistaken for a legal intern’s work product.[3] As the AI improves with the help of investors like Microsoft, ChatGPT’s answers and legal skills will only become more sophisticated.

ChatGPT has already passed its first semester of law school.[4] The AI took four finals along with students at the University of Minnesota Law School— Constitutional Law: Federalism and Separation of Powers, Employee Benefits, Taxation, and Torts.[5] Researchers discovered the program accurately summarized appropriate legal doctrines, correctly recited the facts and holdings of specific cases, and even highlighted relevant legal doctrines without prompting.[6] Its essays were clear, cohesive, and maintained a consistent tone throughout.[7] Given three more years, ChatGPT’s grades would have been sufficient to graduate.[8]

Unbeknownst to the general public, AI has already seeped into roles that have long been reserved for human actors. In 2014, Deep Knowledge Ventures, a Hong Kong venture capital firm, appointed an AI to its board of directors.[9] In 2016, Nordic company Tieto appointed AI “Alicia T” to its business leadership team.[10] In the United States, AI “Einstein” comments on Salesforce business proposals during the company’s weekly staff meetings, accurately singling out executives who will not make their quotas.[11] In the coming decades, all managerial jobs are likely to be replaced or augmented by AI. Because the majority of the average manager’s day-to-day tasks are administrative, current AI can already accomplish such work more cheaply and with fewer errors.[12]

However, AI still has a long way to go before being accepted to the bar. ChatGPT consistently scored at or near the bottom of the class. Its grades, while theoretically passing, would have placed a student on academic probation. On some multiple-choice tests, it performed barely better than random chance. In the real world, it is unlikely ChatGPT would be able to comply with the standard of care required of a lawyer. With the exception of administerial tasks, legal problems are simply too important to be left to a subpar performer, even if doing so would reduce costs.

What AI advancement means for the legal profession is best articulated by ChatGPT itself:

“In conclusion, while AI will play an increasingly important role in the legal industry, it is unlikely to replace lawyers entirely. Instead, it will help lawyers to work more efficiently and effectively and improve access to legal services for all. However, it is important to ensure that the development and use of AI in the legal sector is guided by ethical and legal principles that protect the rights of individuals and ensure that the use of AI is transparent and accountable.”

* J.D. Candidate, Class of 2024, Sandra Day O’Connor College of Law at Arizona State University.

[1] Emily McClure, LegalZoom and Online Legal Service Providers: Is the Development and Sale of Interactive Questionnaires that Generate Legal Documents the Unauthorized Practice of Law?, 105 KY. L.J. 563, 564 (2016).

[2] Tom Dotan, ChatGPT Spotlights Microsoft’s Early Efforts to Monetize AI, WALL ST. J. (Jan. 29, 2023, 5:30 AM), https://www.wsj.com/articles/chatgpt-spotlights-microsofts-early- efforts-to-monetize-ai-11674964348?st=y9gyyka9t5pphar&reflink=desktopwebshare_permalink.

[3] Id.

[4] Jonathan H. Choi et al., ChatGPT Goes to Law School 1-16 (Minn. L. Studs. Rsch. Paper No. 23-03, 2023), https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4335905.

[5] Id.

[6] Id. at 8.

[7] Id. at 9.

[8] Id. at 5.

[9] Press Release, Charles Groome, Deep Knowledge Ventures, Deep Knowledge Venture’s [sic] Appoints Intelligent Investment Analysis Software VITAL as Board Member (May 13, 2014), https://www.globenewswire.com/news-release/2014/05/13/635881/10081467/en/Deep- Knowledge-Venture-s-Appoints-Intelligent-Investment-Analysis-Software-VITAL-as-Board- Member.html.

[10] Helsinki, Tieto the First Nordic Company to Appoint Artificial Intelligence to the Leadership Team of the New Data-Driven Businesses Unit, BLOOMBERG (Oct. 16, 2016, 11:48 PM), https://www.bloomberg.com/press-releases/2016-10-17/tieto-the-first-nordic-company-to-appoint- artificial-intelligence-to-the-leadership-team-of-the-new-data-driven-businesses-unit.

[11] David Reid, Marc Benioff Brings an A.I. Machine Called Einstein to His Weekly Staff Meeting, CNBC (Jan. 25, 2018, 4:49 AM), https://www.cnbc.com/2018/01/25/davos-2018-ai- machine-called-einstein-attends-salesforce-meetings.html.

[12] Martin Petrin, Corporate Management in the Age of AI, 2019 COLUM. BUS. L. REV. 965, 972 (2019); The Board Perspective (McKinsey & Co. No. 2, 2018), https://www.mckinsey.com/~/media/McKinsey/Featured%20Insights/Leadership/The%20board% 20perspective/Issue%20Number%202/2018_Board%20Perspective_Number_2.pdf.