“This Situation is Unprecedented”: Examining the Legal Challenges in the Bankruptcy of FTX

By Nicholas Forger*

PDF Available

John J. Ray III has guided companies through bankruptcy before, including the liquidation of Enron Corporation’s assets.[1] Yet, after being appointed the new CEO of FTX Trading LTD (“FTX”), Ray claimed, “Never in my career have I seen such a complete failure of corporate controls and such a complete absence of trustworthy financial information has occurred here…this situation is unprecedented”.[2] Filing for bankruptcy in the Bankruptcy Court for the District of Delaware, Ray laid out the dire situation of the FTX cryptocurrency exchange.[3] The company did not keep reliable financial records, and funds were used personally by the management under co-founder Sam Bankman-Fried.[4]

FTX collapsed seemingly overnight when it came to light that the crypto exchange lent billions of dollars of customer assets to an affiliated trading firm, Alameda Research, to fund risky investments.[5] This resulted in many customers quickly moving to withdraw their assets from the platform.[6] Quickly, FTX found itself eight billion dollars in the hole.[7] The company then filed for Chapter 11 bankruptcy.[8] A Chapter 11 bankruptcy is done to reorganize business’s debt, while allowing it to keep operating. The collapse of FTX will bring about many legal developments, from criminal charges to new regulations. However, the bankruptcy proceeding itself will have several unique challenges. FTX and related entities’ bankruptcy was filed on an emergency basis in Delaware due to an extreme liquidity problem.[9] FTX Trading has many related entities under its corporate umbrella. FTX trading and more than one hundred and thirty were part of the Delaware bankruptcy filing.[10] However, there is a single related company, FTX Digital Markets, which is headquartered in the Bahamas, that was not a part of the Chapter 11 filing.[11] While primarily a U.S. company, the co-founder and staff largely operated out of an office in the Bahamas.[12] FTX Digital Markets had begun a liquidation in a court in the Bahamas, the day before the Chapter 11 filing.[13] Following the Delaware filing, the Bahamian court-appointed liquidators then filed for a Chapter 15 bankruptcy case in the Southern District of New York, alleging that the Chapter 11 filing was not authorized.[14] A Chapter 15 filing allows foreign nationals to file for bankruptcy in the U.S. Courts when there are assets or business in multiple countries, and can be done after insolvency procedures have begun in the foreign country.[15] The Chapter 15 filing was made so that the Bankruptcy Court will recognize the Bahamian insolvency laws.[16] The Bahamian liquidation procedure does not have an absolute priority rule like the United States, and the U.S. system allows for more access by creditors.[17] Another concern when determining who should administer the bankruptcy is judicial competence in running a bankruptcy this large. The Delaware Court is very experienced in large Chapter 11 cases, and some worry that the level of difficulty of this case could prove to be beyond the ability of the Bahamian Court.[18]

The determinative factor in deciding jurisdiction is where the company’s center of main interest lies.[19] Proponents of the Chapter 11 approach will argue that the United States is in control of most of the debtors. The Bahamian side will argue that FTX was headquartered in the Bahamas and that most of the employees were stationed there.[20] Until the jurisdiction issue gets resolved, the bankruptcy cannot move forward.

Another major concern with any bankruptcy is when and how much creditors will be able to recover. The investments made by crypto investors will likely be treated as unsecured claims without collateral rights.[21] These investments will be incredibly hard to recover, and, if anything, will be pennies on the dollar. However, on the debtor side, FTX will be looking to claw back funds that were transferred out of the company before the bankruptcy filing.[22] Payments to creditors right before bankruptcy are known as preferences, and they can be returned to the debtor upon a judge’s approval.[23] The question will be if the digital assets that customers scrambled to pull right before the bankruptcy will count as preferences. The Court will have to determine whether the withdrawals were conducted in the ordinary course of business.[24]

However, a safe harbor exception could apply.[25] A bankruptcy safeguard allows assets like securities to continue to be traded on an exchange without being able to be clawed back as preferences.[26] Furthermore, the Court will listen to the argument that the cryptocurrency withdrawn by the customers was their property, not a payment by the company.[27] The Court’s determination on this issue will have implications on all future bankruptcies involving cryptocurrencies.

In conclusion, these are just some of the many challenges going forward in the fall of FTX. The bankruptcy will likely set new precedent in how the U.S. Courts view cryptocurrencies and exchanges. In addition, Congress will likely look to new regulations for the crypto market. The legal world will be paying close attention to the outcomes in the case, and it is only getting started.


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

[1] Alexander Saeedy & Soma Biswas, FTX’s New CEO Faults Lax Oversight in Bankruptcy
Filing
, WALL ST. J. (Nov. 17, 2022), https://www.wsj.com/articles/ftxs-new-chief-says-complete-failure-of-oversight-contributed-to-firms-downfall11668696069?mod=Searchresults_pos10&page=1.

[2] Decl. of John J. Ray III in Supp. Of Chapter 11 Pet. and First Day Pleadings,
https://s.wsj.net/public/resources/documents/FTXFILING.pdf.

[3] Id.

[4] See Saeedy & Biswas, supra note 1.

[5] Vicky Ge Huang, Alexander Osipovich, & Patricia Kowsmann, FTX Tapped into Customer
Accounts to Fund Risky Bets, Setting up Its Downfall
, WALL ST. J. (Nov. 11, 2022),
https://www.wsj.com/articles/ftx-tapped-into-customer-accounts-to-fund-risky-bets-setting-up-its-downfall-11668093732.

[6] Elizabeth Napolitano, Brian Cheung, & Jason Abbruzzese, Sam Bankman-Fried and the
FTX Collapse, Explained
, NBC NEWS (Nov. 18, 2022), https://www.nbcnews.com/tech/crypto/sam-bankman-fried-crypto-ftx-collapse-explained-rcna57582.

[7] Id.

[8] Id.

[9] Id.

[10] Vince Sullivan, FTX Bankruptcy to Start with International Clash for Control, L. 360 (Nov. 18, 2022), https://www.law360.com/bankruptcy/articles/1551031/ftx-bankruptcy-to-start-with-international-clash-for-control.

[11] Id.

[12] Id.

[13] Id.

[14] Id.

[15] Id.

[16] Id.

[17] Id.

[18] Id.

[19] Id.

[20] Id.

[21] Caitlin Ostroff, Vicky Ge Huang, & Alexander Gladstone, FTX Files for Bankruptcy, CEO
Sam Bankman-Fried Resigns
, WALL ST. J. (Nov. 11, 2022), https://www.wsj.com/articles/ftx-files-for-chapter-11-bankruptcy-11668176869?mod=Searchresults_pos18&page=1.

[22] James Nani & Daniel Gill, FTX Looks at Years of Lawsuits to Recover Billions from
Customers
, BLOOMBERG L. (Nov. 18, 2022), https://www.bloomberglaw.com/login?target=https%3A%2F%2Fwww.bloomberglaw.com%2Fbloomberglawnews%2Fbankruptcy-law%2FBNA%2520000001848695d966ab9dc795c2a60001%3Fbna_news_filter%3Dbankruptcy-law.

[23] Id.

[24] Id.

[25] Id.

[26] Id.

[27] Id.

Internet Law, from the Liberation to the Protection of Rights: Consumers Are Seeking Clarity in Privacy Regulations of Major Internet Companies

By Kateryna Kostiuchenko*

PDF Available

The world has changed dramatically with the advent of the Internet. The Internet brought endless opportunities to create bigger and better businesses, but it also brought more possibilities for yet unexplored issues, such as privacy and security concerns. The Internet reshaped the way we live our everyday lives; it has also reshaped the law. The most prominent emerging area of law is Internet law, and it has always been adjusting to societal changes as the online space continues to progress.

Privacy laws have existed in our country for a long time. Each state, however, has adapted privacy laws to its own system based on the Constitution, common law, and statutes, and there has never been one single national privacy law.[1] The root of the fundamental right of protection of one individual’s privacy against invasion by others lies in the Restatement (Second) of Torts.[2]  Privacy is not only protected in the idea of personal physical space; it can also very much involve one’s senses, such as overseeing or overhearing someone’s private affairs, investigating into private concerns, opening private mail, or examining private bank accounts or personal documents.[3] The law has also adjusted to the online space and applies strict rules to the Internet just as much as the physical world.

The Electronic Communications Privacy Act of 1986, the Communications Decency Act of 1996, and the Federal Trade Commission (“FTC”) are some of the main federal regulations and regulators of online space.[4] The FTC is an independent government agency with the core mission of protecting U.S. consumers and enforcing  antitrust laws.[5] Its vision is inspired by the idea of having an empowered, informed public and protecting it from unfair business practices.[6] With the advent of the Internet, and social media platforms in particular, privacy and security enforcement became one of the more prominent aspects of the FTC’s work.[7] In the past five years, the FTC brought seventy-six cases against big tech companies for violating user privacy or security.[8]

One of the latest FTC cases was filed against Twitter, a company that has been in news headlines for various reasons lately. According to the FTC, Twitter asked its users for personal data for the sole purpose of securing their accounts.[9] However, the company misused the private information to gain monetary benefit.[10] Since May 2013, Twitter has been asking its users to provide their emails and phone numbers under the promise that that information will be used for multi-factor identification and account recovery only.[11] The FTC investigation has revealed that Twitter has also been using the provided consumer information for targeted ads.[12] Twitter settled with the Department of Justice and the FTC in the amount of $150 million. The settlement will take place if approved by the federal court. This case also imposes on Twitter a prohibition against using consumers’ emails and phone numbers illegally and an obligation to notify its users of improper information use, as well as of the FTC action.[13] “No CEO or company is above the law, and companies must follow our consent decrees,” the FTC concluded.[14] “Consumers who share their private information have a right to know if that information is being used to help advertisers target customers,” said U.S. Attorney Stephanie M. Hinds for the Northern District of California.[15] “Social media companies that are not honest with consumers about how their personal information is being used will be held accountable,”[16] she added. 

This year also marked the end of an investigation into another big tech company. Forty states sued Google, and the company agreed to pay a $392 million privacy settlement, which the Attorneys General called the biggest internet privacy settlement led by the Attorneys General.[17] The core issue in the case is that Google kept tracking users’ locations when they connected to WiFi or used certain apps, even when they turned off location-tracking services, despite the fact that the company claimed to no longer collect geolocation data.[18] Google separately settled a similar case against Arizona for $85 million.[19] Additionally, as of June of this year, Google faces a $5 billion class action lawsuit for collecting users’ online activity information even when they were browsing in Google’s private Incognito mode. Thomas E. Loeser, a known class action attorney and a partner at Hagens Berman Sobol Shapiro, said: “Big Tech relies on confusing, incomplete and misleading disclosures about third party use of data.”[20] That is true, and the hope is that it is going to change as the influx of litigation against big tech firms becomes prominent and consumers become more aware of and more educated about privacy laws.

There is essentially a trade-off of privacy—and potentially security—against the ease of access to information from anywhere, anytime. Tech platforms provide us with an ability to access entertainment, communicate with friends and followers, and share any thoughts we desire from the convenience of our pockets.[21] Around seventy percent of individuals use social media platforms on a regular basis in the United States.[22] The question is: will that trade-off be as easy now, as consumers are seeking clarity in what the big tech companies truly mean under their promise of  privacy and security?


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

[1] Ann Wooster, Invasion of Privacy by Internet or Website Postings, 54 A.L.R. 1, 1 (2010). 

[2] James Grimmelmann, Internet Law 260 (12th ed. 2022). 

[3] Id.

[4] Telecommunications Act of 1996, Fed. Commc’n. Comm’n (2013), https://www.fcc.gov/general/telecommunications-act-1996; Telecommunications Act of 1996, Pub. L. No. 104-104, 110 Stat. 56; Grimmelmann, supra note 4.

[5] About the FTC, Fed. Trade Comm’n, https://www.ftc.gov/about-ftc. 

[6] Id. 

[7] Grimmelmann, supra note 4. 

[8] Joel Thayer, The Federal Government Conducted an Investigation of Big Tech’s Privacy Practices. Where Are the Results?, Hill (Oct. 26, 2022), https://thehill.com/opinion/technology/3703490-why-wont-government-release-results-of-investigation-into-big-techs-privacy-practices/.

[9] Lesley Fair, Twitter to Pay $150 Million Penalty for Allegedly Breaking Its Privacy Promises – Again, Fed. Trade Comm’n (May 25, 2022), https://www.ftc.gov/business-guidance/blog/2022/05/twitter-pay-150-million-penalty-allegedly-breaking-its-privacy-promises-again.

[10] Id. 

[11] Id. 

[12] Bobby Allyn, Twitter Will Pay a $150 Million Fine over Accusations It Improperly Sold User Data, (May 25, 2022), Nat’l Pub. Radio,  https://www.npr.org/2022/05/25/1101275323/twitter-privacy-settlement-doj-ftc.   

[13] Id. 

[14] Brian Fung, Musk’s Twitter May Have Already Violated Its Latest FTC Consent Order, Legal Experts Say, CNN, (Nov. 11, 2022), https://www.cnn.com/2022/11/11/tech/musk-twitter-ftc.

[15] Press Release, Dep’t Just., Twitter Agrees with DOJ and FTC to Pay $150 Million Civil Penalty and to Implement Comprehensive Compliance Program to Resolve Alleged Data Privacy Violations (May 25, 2022), https://www.justice.gov/opa/pr/twitter-agrees-doj-and-ftc-pay-150-million-civil-penalty-and-implement-comprehensive.

[16] Id. 

[17] Cecilia Kang, Google Agrees to $392 Million Privacy Settlement with 40 States, N.Y. Times (Nov. 14, 2022), https://www.nytimes.com/2022/11/14/technology/google-privacy-settlement.html#:~:text=More%20on%20Big%20Tech&text=Google%3A%20The%20tech%20giant%20agreed,company%20continued%20collecting%20that%20information.

[18] Id. 

[19] Id. 

[20] Christine Schiffner, ‘The Tide Is Turning’ on Big Tech as Plaintiffs Firms File More Data Privacy Lawsuits, Law (Feb. 16, 2022), https://www.law.com/nationallawjournal/2022/02/16/the-tide-is-turning-on-big-tech-as-plaintiffs-firms-file-more-data-privacy-lawsuits/?slreturn=20221020173828#:~:text=Plaintiffs%20firms%20and%20attorneys%20general,judgments%20are%20giving%20some%20indication.

[21] Thayer, supra note 9. 

[22] Social Media Fact Sheet, Pew Rsch. Ctr. (Apr. 17, 2022), https://www.pewresearch.org/internet/fact-sheet/social-media/.

The Potential Impacts of the Kroger-Albertsons Merger on Arizona

By Madison Andrade*

PDF Available

The Kroger-Albertsons merger announcement rattled the entire nation, yet its implications may be of particular significance for the state of Arizona. The national grocery chains have over 250 stores and upwards of 35,000 employees across the state.[1] The companies also maintain reputations as leading employers in the state’s nongovernmental sector, as they are two of the six companies that employ the largest amount of Arizona citizens.[2] If Kroger acquires Albertsons, the surviving corporation will make up nearly forty-four percent of Arizona’s supermarket industry.[3] While this would allow Kroger to compete with those in the big leagues, such as Amazon or Walmart, the ramifications would ripple well beyond these large competitors.

The largest concern for consumers, both in and out-of-state, pertains to the potential price hikes that coincide with oligopolization or monopolization. Where mergers rid of competition, higher costs for consumers ensue.[4] This is especially true for a lowly saturated grocery store industry, and Arizona’s market is no exception.[5] As noted, the market post-merger would be dominated, to the tune of forty-four percent, by a single corporation.[6] This domination would potentially allow Kroger to entrench its market power and price-gouge as it sees fit.

Alternatively, proponents of the merger project a decrease in costs by way of enhanced efficiency.[7] Enhanced efficiency is said to reveal itself in lower consumer costs.[8] This efficiency argument is supported by 2014 study, The Economic Cost of Food Monopolies: The Grocery Cartels.[9] It is imperative to note that this analysis pertains to the U.S. radio industry from 1996 to 2014, not the U.S. grocery store market in 2022. Whether these perceived efficiencies extend to the modern-day grocery market of Arizona will only be subject to review post-merger.

Not only this, but many question the heart of the efficiency argument itself. Given that both corporations have a large portion of the market prior to the merger[10], how much more efficiency can a consolidation offer? The merchandise purchased by each company is already at categorically high volumes, such that costs are maximally reduced. Will efficiencies, in terms of cost reduction, improve so greatly as to justify a mitigation in competition? Only time will tell.

A further—potentially more positive—implication may pose itself in the progression of smaller grocery chains. Arizona-based stores, such as Bashas’, foresee themselves taking advantage of the expected opportunities. With the merger, Kroger and Albertsons’ individual locations will likely be condensed. This consolidation will allow for stores like Bashas’ to penetrate the sought-after locations that were once steadily occupied by the larger chains. The question as to whether this penetration will be enough for Bashas’ to compete with the potential Kroger-Albertsons superstore will remain unanswered until the merger goes into effect and Bashas’ capitalizes on it.

The theme of this discussion is evidently subject to regulatory approval of the merger, but one aspect is guaranteed upon the deal’s confirmation— Arizona will be greatly impacted.


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

[1] Russ Wiles, In Arizona, Kroger-Albertsons Merger Would Create a Behemoth, AZCENTRAL (Oct. 14, 2022, 6:00 PM), https://www.azcentral.com/story/money/business/2022/10/14/kroger-albertsons-merger-raise-concerns-competition-arizona/10499702002/.

[2] Id.

[3] Id. (citing to a 2019 analysis of the Chain Store Guide).

[4] See The Economic Cost of Food Monopolies: The Grocery Cartels, FOOD & WATER WATCH (Nov. 2021), https://www.foodandwaterwatch.org/wp-content/uploads/2021/11/IB_2111_FoodMonoSeries1-SUPERMARKETS.pdf

[5] Id. at 3.

[6] Wiles, supra note 3.

[7] Jeremy Duda, What a Kroger/Albertsons Merger Would Mean for Valley Shoppers, AXIOS PHOENIX (Oct. 21, 2022), https://www.axios.com/local/phoenix/2022/10/21/what-krogeralbertsons-merger-valley-shoppers (quoting attorney Shruti Gurudanti of Rose Law Group, “I think the bottom line is, is it going to drive down costs for your grocery bill and my grocery bill? [] I think it would because of all of the efficiencies it’s going to create.”).

[8] Daniel Hosken, Luke M. Olson & Loren K. Smith, Do Retail Mergers Affect Competition?
Evidence from Grocery Retailing
(Bureau of Econ. Fed. Trade Comm’n, Working Paper No. 313, 2012), https://www.ftc.gov/sites/default/files/documents/reports/do-retail-mergers-affect
-competition%C2%A0-evidence-grocery-retailing/wp313.pdf.

[9] See Przemysław Jeziorski, Estimation of Cost Efficiencies from Mergers: Application to US Radio, 45 RAND J. ECON. 816, 843–44 (2014) (finding that “[t]he total cost savings from mergers after 1996 amount to about $1 billion, which outweighs the $223 million loss[] caused by the increased market power”).

[10] Wiles, supra note 3.

The FTC’s New Section 5 Policy Statement: An Analysis

By Sarah Pelton*

PDF Available

On November 10, 2022, the Federal Trade Commission (“FTC”) followed up on its promise of restructuring fundamental aspects of antitrust law. In a new statement (the “2022 Statement”) passed in a 3-1 vote, the FTC issued new policy objectives regarding “unfair methods of competition” under Section 5 of the FTC Act.[1] The Statement follows the FTC’s 3-2 vote in 2021 to rescind the 2015 Statement of Enforcement Principles (the “2015 Statement),[2] which was criticized as “contraven[ing] the text, structure, and history of Section 5[,] largely writ[ing] the FTC’s standalone authority out of existence.”[3]

Generally, the FTC’s policy statements serve the purpose of “assist[ing] the public, business community, and antitrust practitioners by laying out the key general principles that apply to whether business practices constitute unfair methods of competition under Section 5 of the FTC Act.”[4] While these statements do not have the force of law, they still serve as an important signal as to how to the FTC may challenge conduct.

In the 2022 Statement, the FTC revealed that it will no longer use the rule of reason analysis outlined in the 2015 Statement for Section 5 violations[5]; instead choosing to focus on “stopping unfair methods of competition in their incipiency based on their tendency to harm competitive conditions.”[6] The 2022 Statement adopts a new method of analysis for “unfair methods of competition.” A “method of competition” can be proven indirectly and is defined as conduct that “implicate[s] competition,” but excludes market conditions that the firm had no power in creating.[7] “Unfair” conduct “goes beyond competition on the merits.”[8] The 2022 Statement adopts two criteria to assist the FTC’s consideration of whether a firm’s conduct “goes beyond competition on the merits” and will weigh the criteria on a sliding scale.[9] The FTC noted that “[w]here the indicia of unfairness are clear, less may be necessary to show a tendency to negatively affect competitive conditions . . . . [and] [e]ven when conduct is not facially unfair, it may violate Section 5.”[10] Additionally, the FTC states that “[b]ecause the Section 5 analysis is purposely focused on incipient threat to competitive conditions, this inquiry does not turn to whether the conduct directly caused actual harm in the specific instance at issue.”[11]

In their accompanying statement, the majority noted that “[r]eactivating Section 5 in a way that is fully faithful to the authority that Congress gave us is critical for promoting the rule of law and for ensuring the democratic legitimacy of our work.”[12] They mentioned the concerns of Congress after the Standard Oil case and prior to passing the FTC Act that “the rule of reason generated erratic, contradictory results, prolonged the resolution of cases, and handed unchecked discretion to the judiciary.”[13] The majority celebrated the return to the plain text of Section 5, stating that “[w]hile courts have applied the rule of reason and consumer welfare standards in the context of the Sherman Act, there is no basis in precedent for applying them wholesale to standalone Section 5.”[14] In a separate statement, Commissioner Bedoya, joined by the majority, argued that the 2022 Statement makes a return to fairness, stating that the business justifications to antitrust analysis allowed in the rule of reason “has been responsible for concentrating American markets and eliminating small businesses from the competitive landscape.”[15]

Commissioner Wilson’s dissent, however, issues an especially hard-hitting alternative view. She criticizes the 2022 Statement’s approach as “requir[ing] balancing among multiple goals without identifying the complete array of special interests to be protected, or the weights to be assigned to any of them.”[16] With no hierarchy of rules to balance these potentially competing interests, enforcement can be too amorphous and “be subject to the whims and political agendas of sitting commissioners.”[17]

What do these changes mean for businesses? In the FTC’s attempt to outline key principles to assist the business community in compliance with the antitrust laws, the 2022 Statement’s unstructured framework sows confusion and uncertainty. Businesses have relied on precedent from courts that allows them to present the procompetitive effects of a transaction before it is condemned. Now, any conduct the FTC determines as “facially unfair” is presumed to be per se illegal, and any conduct not deemed “facially unfair” is no longer subject to the traditional rule of reason analysis. In sum, the 2022 Statement’s expansive nature affirms the FTC’s intent to reach categories of conduct that were previously labeled off-limits in the 2015 Statement, but in doing so, subjects businesses to new areas of legal risk.


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

[1] Fed. Trade Comm’n, Policy Statement Regarding the Scope of Unfair Methods of Competition Under Section 5 of the Federal Trade Commission Act, No. P221202 (Nov. 10, 2022), https://www.ftc.gov/legal-library/browse/policy-statement-regarding-scope-unfair-methods-competition-under-section-5-federal-trade-commission.

[2] Fed. Trade Comm’n, Statement of Enforcement Principles Regarding “Unfair Methods of Competition” Under Section 5 of the FTC Act (Aug. 13, 2015) [hereinafter “2015 Statement”], https://www.ftc.gov/system/files/documents/public_statements/735201/150813section5enforcement.pdf (This statement largely limited the FTC’s enforcement ability under the FTC Act, using a “framework similar to the rule of reason” to address “acts or practices that are anticompetitive but may not fall within the scope of the Sherman or Clayton Act.”).

[3] Fed. Trade Comm’n, Statement of the Commission on the Withdrawal of the Statement of Enforcement Principles Regarding “Unfair Methods of Competition” Under Section 5 of the FTC Act (July 9, 2021), https://www.ftc.gov/legal-library/browse/statement-commission-withdrawal-statement-enforcement-principlesregarding-unfair-methods.

[4] Fed. Trade Comm’n, supra note 1, at 2.

[5] Fed. Trade Comm’n, supra note 2, at 1 (“an act or practice challenged by the Commission must cause, or be likely to cause, harm to competition or the competitive process, taking into account any associated cognizable efficiencies and business justifications . . .”).

[6] Fed. Trade. Comm’n, supra note 1, at 10.

[7] Id. at 8 (These include “high concentration or barriers to entry.”).

[8] Id.

[9] Id. at 9 (First, “the conduct may be coercive, exploitative, collusive, abusive, deceptive, predatory, or involve the use of economic power of a similar nature.” Second, “the conduct must tend to negatively affect competitive conditions. This may include, for example, conduct that tends to foreclose or impair the opportunities of market participants, reduce competition between rivals, limit choice, or otherwise harm consumers.”).

[10] Id.

[11] Id. at 10.

[12] Lina M. Khan, Chair, Fed. Trade Comm’n, Statement on the Adoption of Enforcement Policy Regarding Unfair Methods of Competition Under Section 5 of the FTC Act (Nov. 10, 2022), https://www.ftc.gov/legal-library/browse/cases-proceedings/public-statements/statement-of-chairkhan-commissioners-slaughter-bedoya-on-policy-statement-regarding-section-5.

[13] Id. at 1.

[14] Id. at 4.

[15] Fed. Trade Comm’n, Statement of Commissioner Alvaro M. Bedoya, On the Adoption of
the Statement of Enforcement Policy Regarding Unfair Methods of Competition Under Section 5 of the FTC Act, No. P221202, at 6 (Nov. 10, 2022), https://www.ftc.gov/legal-library/browse/casesproceedings/public-statements/statement-of-commissioner-bedoya-chair-khan-commissionerslaughter-on-policy-statement-regarding-section-5.

[16] Fed. Trade Comm’n, Dissenting Statement of Commissioner Christine S. Wilson Regarding the “Policy Statement Regarding the Scope of Unfair Methods of Competition Under Section 5 of the Federal Trade Commission Act”, No. P221202, at 8 (Nov. 10, 2022), https://www.ftc.gov/legallibrary/browse/cases-proceedings/public-statements/dissenting-statement-of-commissioner-wilsonon-policy-statement-regarding-section-5.

[17] Id. (citing PHILLIP AREEDA & DONALD F. TURNER, ANTITRUST LAW 25 (1st ed. 1978) (antitrust enforcement that seeks to pursue conflicting interests “would involve courts in essentially political decision-making for which there are no appropriate legal criteria and in a regulatory, supervisory role for which they are ill-suited.”)).

ELP: Entirely Legal Protectionism: A Discussion on One Example of Arizona’s Problematic Occupational Licensing Requirements

By Devin Gates*

PDF Available

“Well, that doesn’t seem fair…”

Without fail, that is what I hear after telling people about Arizona’s licensing requirements for a massage therapist applicant. In addition to the education, character, and skill requirements common among licensing requirements in many professions, the State has included an English Language Proficiency (“ELP”) requirement for any massage therapist applicant that doesn’t identify as a native English speaker.[1] The State justified this extra requirement as “a health and safety measure to ensure that a massage therapist is able to make an evaluation of a client and communicate in English with the client or other health care practitioners and with a 911 operator in the case of an emergency.”[2]

On its face, that seems uncontroversial—reasonable, even.

But here’s the kicker: the Arizona State Board of Massage Therapy requires a score of twenty-five in each of the ELP test categories— reading, writing, speaking, and listening—for a total score of 100.[3] The required passing score is higher than the mean and median scores for test-takers with graduate degrees (ninety-one) and native English speakers (ninety-five).[4] The minimum passing score is even higher than the minimum proficiency score required for admittance into Arizona State University’s PhD program (eighty!).[5]

Well, that doesn’t seem fair.

One avenue available to those who have been impacted by unfair licensing requirements like this is through the substantive due process protections enshrined in Arizona’s State Constitution.

Article II, Section 4 states “[n]o person shall be deprived of life, liberty, or property without due process of law.”[6] This clause protects two distinct forms of “due process,” procedural, and substantive.[7] Substantive due process stands for the guarantee “that the state is without right to deprive a person of life, liberty, or property by an act that has no reasonable relation to any proper governmental purpose, or which is so far beyond…necessity… [it is] an arbitrary exercise of governmental powers.”[8]

Substantive due process has been used to overturn or invalidate governmental action in many different contexts, including for occupational licensing. In Stewart, the Court invalidated sections of a city ordinance establishing requirements for applicants attempting to become “supervising electricians.”[9] The Court’s role was to ensure that the regulations were “reasonable and not monopolistic or oppressive.”[10] The Court took issue with the requirements that applicants had to be at least twenty-five years old and must have had six years of experience as a “journeyman” electrician.[11] In questioning the rationality of the minimum age requirement, the Court wrote that “[m]ost of the professions and businesses welcome into their ranks those members of society who have arrived at legal age…” and “[the] learned professions of the law and medicine place no such age limit upon those applying for admission to them.”[12] Likewise, when evaluating the reasonableness of the journeyman experience requirement, the Court stated “[s]ix years’ experience as a master electrician conceivably would do as much to qualify the applicant.”[13] In both instances, the Court assessed the requirements with a common-sense approach and found both lacking for the same reason: they were “oppressive, arbitrary, and monopolistic, and not in the interests of safety to property or life.”[14]

Here the State uses its police powers as a justification for its occupational licensing also, but it’s hard to argue that requiring a PhD level of proficiency for only non-native English-speaking applicants is anything but “so far beyond necessary.”[15] What’s more, Arizona is the only state with such a regulation for massage therapists, and massage therapy is one of the few professions in Arizona with an ELP requirement. Even mental health care providers and physicians do not need to satisfy an ELP requirement. As in Stewart, “If these learned professions” don’t require language proficiency exams to protect their patients, there is no rational reason that a massage therapist would.[16]

When discussing substantive due process, Arizona Downs is often mentioned as the nail in the coffin. In Arizona Downs, the Arizona Supreme Court held that statutes that affect “non-fundamental” rights will be reviewed under a rational basis test.[17] While Arizona Downs does align Arizona law with the rational basis test used at the federal level, it does so by ignoring a long line of precedential cases without explanation.[18] Further, Arizona Downs dealt with the right to enter the regulated industry of horse racing.[19] Occupational licensing instead affects a different right—the right to earn an honest living. Glover and Stewart looked into occupational licensing specifically. Arizona’s massage therapist regulations, while related to the state’s police powers like any other occupational licensing requirement, fail the second step of the Glover test because they are so far beyond what is necessary to protect the public’s health and safety that they constitute an arbitrary use of the state’s power.

Be on the lookout, because unfair licensing demands like Arizona’s ELP requirements for massage therapists could be lurking anywhere, even hidden inside otherwise reasonable regulations. If you come across such a requirement, consider whether it is extreme enough to be a possible substantive due process violation.


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

[1] A.R.S. § 32-4222(E), ARIZ. ADMIN. CODE § R4-15-201(C) (2004).

[2] 20 Ariz. Admin. Reg. 2246 (Aug. 2014) (Notice of Final Rulemaking).

[3] ARIZ. ADMIN. CODE § R4-15-201(C) (2004).

[4] EDUC. TESTING SERV., TEST AND SCORE DATA SUMMARY 2021 19 (2022), https://www.ets.org/content/dam/ets-org/pdfs/toefl/toefl-ibt-test-score-data-summary-2021.pdf (averaging ninety-one and ninety-five consecutively).

[5] English Proficiency for International Graduation Students, ARIZ. ST A TE UNIV., https://admission.asu.edu/international/graduate/english-proficiency (last visited Nov. 3, 2022) (“Score of at least 80…”).

[6] ARIZ. CONST. art. II, § 4.

[7] Id.

[8] Valley Nat’l Bank of Phoenix v. Glover, 62 Ariz. 538, 553 (1945).

[9] City of Tucson v. Stewart, 45 Ariz. 36, 60 (1935).

[10] Id. at 46.

[11] Id. at 47.

[12] Id.

[13] Id.

[14] Id. at 48.

[15] Gloversupra note 8, at 298-99.

[16] See Stewart, supra note 9, at 47.

[17] Ariz. Downs v. Ariz. Horsemen’s Found., 130 Ariz. 550, 555 (1981) (“[T]he statute will be upheld if it has any conceivable rational basis to further a legitimate governmental interest.”)

[18] Id.

[19] Id.

Drug Money: How Pharmaceutical Companies Are Paying for the Lives Lost to the Opioid Epidemic

By Grace Taskinsoy*

PDF Available

As the U.S. opioid epidemic continues to affect millions of Americans, pharmaceutical manufacturers and distributors find themselves in a harrowing position.[1] Companies including Allergan, AmerisourceBergen, Cardinal Health, Costco, CVS, Endo International, Johnson & Johnson, McKesson, Rite-Aid, Teva Pharmaceuticals, Walgreens, and Wal-Mart are being sued by states, municipalities, and individuals for the role they played in the opioid epidemic.[2] The plaintiffs are claiming that the opioid manufacturers and distributors not only aggressively marketed opioids to physicians and the public, but that they also downplayed the risk of addiction and failed to monitor the distribution of opioids, which resulted in the deaths of more than 500,000 Americans.[3]

The opioid epidemic lawsuits began when West Virginia sued Purdue Pharma in 2004 for aggressively marketing OxyContin to West Virginia residents and concealing the drug’s addiction risks.[4] In 1996, Purdue Pharma introduced the drug OxyContin into the pain-relief community and influenced the first wave of the opioid epidemic.[5] The drug was aggressively marketed, and only eight years after its release, it became the “leading drug of abuse in the United States.”[6] One of Purdue Pharma’s marketing techniques was to specifically target the physicians who were identified as the highest prescribers of opioids throughout the United States.[7] Purdue Pharma also targeted primary care physicians and encouraged them to liberally prescribe opioids.[8] In 2003, half of the total physicians that were prescribing OxyContin were primary care physicians.[9] This posed an issue because unlike medical specialists, primary care physicians are not always trained on the care and “management of specific conditions,” such as chronic pain.[10]

On top of everything, Purdue Pharma assured the public that the risk of addiction to OxyContin was “extremely small” and trained their sales associates to spread the message that “the risk of addiction was less than one percent.”[11] Additionally, as concerns about addiction and overdoses grew, Richard Sackler, the former president of Purdue Pharma, diverted blame onto the opioid users and told the company to “hammer on the abusers in every way possible.”[12] After countless lawsuits, Purdue Pharma recently agreed to a dissolution plan and a $6 billion settlement, which will be put into a trust and used to pay the plaintiff states and victims.[13]

Following the Purdue Pharma lawsuit, Johnson & Johnson, a manufacturer of opioids, and “the big three” opioid distributors, AmerisourceBergen, Cardinal Health, and McKesson, began facing thousands of opioid-related lawsuits from state and local governments and their citizens starting in 2014.[14] A spotlight was directed at the companies’ wrongdoings and troubling actions that allegedly helped fuel the opioid epidemic.[15] These companies ignored red flags, targeted small rural communities, and encouraged physicians to over-prescribe opioids.[16]

On February 25, 2022, the companies agreed to a $26 billion settlement, which was contingent on whether the companies believed enough state and local governments signed onto the settlement and gave up their right to sue.[17] As of now, all 50 states and the District of Columbia will receive a portion of the settlement.[18] The settlement payments started in April 2022 and will continue for almost twenty years.[19] Johnson & Johnson will pay a total of $5 billion over nine years, and AmerisourceBergen, Cardinal Health, and McKesson will pay a combined total of $21 billion over eighteen years.[20]

Although roughly 85% of each state’s settlement proceeds will be earmarked for “healthcare,” education, and other “addiction treatment and prevention services,” the states must still decide how they want to use, distribute, and allocate the funds.[21] This month, Arizona lawmakers decided to use the first $4 million installment of the state’s $540 million settlement to create grants that will be “available to organizations fighting the opioid crisis” across Arizona.[22] The funds will be distributed across Arizona’s fifteen counties and “medically underserved populations statewide.”[23] The grants will be used for “opioid treatment, prevention, and education” including “opioid use disorder treatment, support for people in treatment and recovery, and preventing the misuse of opioids.”[24] Arizona nonprofit, for-profit, and faith-based organizations, as well as community coalitions, can apply to receive the grants.[25]

Purdue Pharma, Johnson & Johnson, and “the big three” aren’t the only companies that have proposed settlement offers. Teva Pharmaceuticals, one of the biggest manufacturers of generic opioids in the United States, recently proposed a settlement for $4.25 billion after it received over 2,500 lawsuits from local governments, states, and tribes.[26] The settlement will be paid in installments over thirteen years.[27] Teva was said to have produced “far more prescription opioids during the peak years of the crisis than [other] opioid manufacturers such as Johnson & Johnson.”[28] It is also alleged that Teva, like many other opioid manufacturers and distributors, “play[ed] down the risks of addiction and fail[ed] to stop pills from being diverted for illegal use.”[29]

Additionally, pharmacy chains such as CVS, Walgreens, and Wal-Mart are being accused of “failing to implement adequate safety and monitoring systems for high-risk medications,” such as opioids.[30] States are seeking damages for costs related to the opioid epidemic, including hospital expenses, “emergency room costs,” “dealing with and fighting crime related to opioids,” and “larger foster care programs.”[31] Wal-Mart is also being accused of ignoring red flags amid the rapid increase of opioid sales.[32] In 2012, a Wal-Mart pharmacist described arriving at work early in the morning only to see a line of fifteen to twenty people already waiting to get their opioid prescriptions refilled.[33] He couldn’t understand why patients were driving such long distances to get their pills from Wal-Mart specifically and why they couldn’t explain their need for “such powerful opioid doses.”[34] For many years, Wal-Mart received and ignored multiple reports from pharmacists who were concerned “about the doctor up the corporate chain” and continued to “dispense thousands of opioid pills.”[35]

As of now, Florida has received a $484 million settlement from CVS and a $638 million settlement from Walgreens.[36] Additionally, West Virginia has received an $82.5 million settlement from CVS and a $65 million settlement from Wal-Mart.[37]

Although these pharmaceutical companies have agreed to abundant settlements with state and local governments and the funds will be used toward addiction treatment and prevention, the companies fail to take responsibility for their actions that have fueled the opioid epidemic and affected hundreds of thousands of people and families.[38] Not only did an AmerisourceBergen executive refer to the West Virginians who are addicted to OxyContin as “pillbillies,” but the executive also responded to Kentucky’s new opioid regulations by stating “one of the hillbilly’s [sic] must have learned how to read :-).”[39]

Unfortunately, these settlements do not fix the problem. Although Johnson & Johnson has agreed to “permanently end its manufacturing and distribution of opioids nationwide” as part of its settlement agreement, the other companies facing these opioid-related lawsuits will continue manufacturing and distributing opioids.[40] It is important to recognize the role these pharmaceutical companies have played in fueling the illegal drug market as the opioid epidemic rapidly shifts from “prescription opioids to heroin, illicitly manufactured fentanyl, and other illicit drugs.”[41] When individuals who are addicted to prescription opioids are no longer able to renew or afford their prescriptions, they may resort to cheaper methods of obtaining opioids or opiates through the illegal drug market.

Although we cannot reverse the effects of the pharmaceutical companies’ actions, we can try to make a difference in the next generation. Initiatives and programs are being implemented at the state and federal levels to help spread knowledge of addiction risks and prevent inappropriate use of opioids.

Ultimately, these settlements will never be able to make up for the lives lost to the opioid epidemic and the negligence and intentional wrongdoings of the pharmaceutical companies. Right now, it is up to the states receiving portions of the settlements to use those funds to implement programs such as state drug courts, resources, and regulations to aid those who have fallen victim to the opioid epidemic.[42]


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

[1] Opioid Crisis Statistics, DEP’T HEALTH & HUMAN SERVICES, https://www.hhs.gov/opioids/about-the-epidemic/opioid-crisis-statistics/index.html (last visited Oct. 24, 2022).

[2] Michelle Llamas, Opioid Lawsuits, DRUGWATCH (Sept. 8, 2022), https://www.drugwatch.com/opioids/lawsuits/.

[3] Understanding the Opioid Overdose Epidemic, CTRS. DISEASE CONTROL & PREVENTION, https://www.cdc.gov/opioids/basics/epidemic.html#:~:text=The%20first%20wave% 20began%20with,overdose%20deaths%20involving%20heroin4 (last visited Oct. 24. 2022).

[4] Rebecca Haffajee & Michelle M. Mello, Drug Companies’ Liability for the Opioid Epidemic, NAT’L LIBR. MED. (Dec. 14, 2017), https://www.ncbi.nlm.nih.gov/pmc/articles/PMC7479783/#:~:text=The%20earliest%20suits% 20against%20opioid,Opioid%20Companies%2C%202004
%E2%80%932017; Jan Hoffman, Teva Reaches Tentative $4.25 Billion Settlement Over Opioids, N.Y. TIMES (July 26, 2022), https://www.nytimes.com/2022/07/26/health/teva-opioids-settlement.html.

[5] CTRS. DISEASE CONTROL & PREVENTION, supra note 3.

[6] Art Van Zee, The Promotion and Marketing of OxyContin: Commercial Triumph, Public
Health Tragedy
, NAT’L LIBR. MED. (Feb. 2009), https://www.ncbi.nlm.nih.gov/pmc/articles
/PMC2622774/#:~:text=When%20Purdue%20Pharma%20introduced%20OxyContin,almost %20%241.1%20billion%20in%202000.

[7] Id.

[8] Id.

[9] Id.

[10] Id.; Get to Know Your Doctors: Primary Care Versus Specialists, DRS. OSTEOPATHIC MED., https://findado.osteopathic.org/get-to-know-your-doctors-primary-care-physicians-and-specialists#:~:text=While%20PCPs%20have%20broad%20knowledge,based%20on% 20their%20respective%20specialties (last visited Oct. 24, 2022).

[11] Van Zee, supra note 6.

[12] Andrew Joseph, ‘A Blizzard of Prescriptions’: Documents Reveal New Details About
Purdue’s Marketing of OxyContin
, STAT (Jan. 15, 2019), https://www.statnews.com/2019/01/15/massachusetts-purdue-lawsuit-new-details/.

[13] Dietrich Knauth & Tom Hals, Purdue Pharma Judge Overrules DOJ to Approve $6 Bln
Opioid Settlement
, REUTERS (Mar. 9, 2022), https://www.reuters.com/legal/transactional/purdue-seeks-approval-6-billion-opioid-settlement-over-state-doj-objections-2022-03-09/.

[14] Opioid Litigation Global Settlement Tracker, OPIOID SETTLEMENT TRACKER,
https://www.opioidsettlementtracker.com/globalsettlementtracker (last visited Oct. 24, 2022); Brian Mann, 4 U.S. Companies Will Pay $26 Billion to Settle Claims They Fueled the Opioid Crisis, NAT’L PUB. RADIO (Feb. 25, 2022), https://www.npr.org/2022/02/25/1082901958/opioid-settlement-johnson-26-billion.

[15] Mann, supra note 12.

[16] Id.; Van Zee, supra note 6.

[17] Geoff Mulvihill, J&J, Distributors Finalize $26B Landmark Opioid Settlement,
ASSOCIATED PRESS (Feb. 25, 2022), https://apnews.com/article/coronavirus-pandemic-business-health-opioids-camden-dec0982c4c40ad08b2b30b725471e000.

[18] Opioid Litigation States’ Opioid Settlement Statuses (BETA), OPIOID SETTLEMENT
TRACKER, https://www.opioidsettlementtracker.com/globalsettlementtracker/#statuses (last visited Oct. 24, 2022) (list of all money being allocated to each state in each lawsuit).

[19] Mann, supra note 12.

[20] Jan Hoffman, Companies Finalize $26 Billion Deal With States and Cities to End Opioid
Lawsuits
, N.Y. TIMES (Feb. 25, 2022), https://www.nytimes.com/2022/02/25/health/opioids-settlement-distributors-johnson.html.

[21] Mann, supra note 17; Hoffman, supra note 18.

[22] Arizona AG Allocates $4M From Pharmaceutical Settlements to Fight Opioid Crisis, KTAR NEWS (Oct. 13, 2022), https://ktar.com/story/5290185/arizona-ag-allocates-4m-from-pharmaceutical-settlements-to-fight-opioid-crisis/.

[23] Id.

[24] Id.

[25] Id.

[26] Steven Scheer, Teva Expects to Start Paying U.S. Opioid Settlement in 2023, REUTERS (Sept. 19, 2022), https://www.reuters.com/world/us/teva-pharm-expects-start-paying-us-opioid-settlement-2023-ceo-2022-09-18/.

[27] Id.

[28] Hoffman, supra note 4.

[29] Scheer, supra note 24.

[30] Brian Mann, A Landmark Opioid Trial Puts Spotlight on Pharmacy Chains CVS, Walmart
and Walgreens
, NAT’L PUB. RADIO (Oct. 4, 2021), https://www.npr.org/2021/10/04/1041979845/a-landmark-opioid-trial-puts-spotlight-on-pharmacy-chains-cvs-walmart-and-walgre.

[31] Id.

[32] Brian Mann, Former Walmart Pharmacists Say Company Ignored Red Flags As Opioid
Sales Boomed
, NAT’L PUB. RADIO (Jan. 3, 2021), https://www.npr.org/2021/01/03/950870632/former-walmart-pharmacists-say-company-ignored-red-flags-as-opioid-sales-boomed.

[33] Id.

[34] Id.

[35] Id.

[36] Press Release, CVS Health, CVS Health Reaches Opioid Settlement Agreement With State of Florida (Mar. 30, 2022), https://www.cvshealth.com/news-and-insights/press-releases/cvs-health-reaches-opioid-settlement-agreement-with-state-of; Dietrich Knauth, Walgreens Reaches $683 Mln Opioid Settlement With Florida, REUTERS (May 5, 2022), https://www.reuters.com/business/healthcare-pharmaceuticals/walgreens-reaches-683-mln-opioid-settlement-with-florida-2022-05-05/; OPIOD SETTLEMENT TRACKER, supra note 16.

[37] Dietrich Knauth, CVS, Walmart Reach $147.5 Mln Opioid Settlement With West Virginia,
REUTERS (Sept. 20, 2022), https://www.reuters.com/business/healthcare-pharmaceuticals/cvs-health-walmart-reach-1475-mln-opioid-settlement-with-west-virginia-attorney-2022-09-20/; OPIOID SETTLEMENT TRACKER, supra note 16.

[38] Mulvihill, supra note 15; Scheer, supra note 24.

[39] Mann, supra note 12; Chris McGreal, Big Pharma Executives Mocked ‘Pillbillies’ in Emails, West Virginia Opioid Trial Hears, GUARDIAN (May 16, 2021), https://www.theguardian.com/us-news/2021/may/16/amerisourcebergen-pillbillies-emails-west-virginia-opioid-trial-.

[40] Kevin Dunleavy, Johnson & Johnson Inks Eleventh-Hour Settlement Worth $230M to Avoid NY Opioid Trial, FIERCE PHARMA (June 28, 2021), https://www.fiercepharma.com/pharma/n-y-opioid-case-looming-johnson-johnson-inks-230m-settlement#:~:text=As%20part%20of%20the%20settlement,two%20 decades%2C%20CDC%20data%20show.

[41] Pain Management and the Opioid Epidemic: Balancing Societal and Individual Benefits
and Risks of Prescription Opioid Use
, NAT’L LIBR. MED. (July 13, 2017), https://www.ncbi.nlm.nih.gov/books/NBK458661/.

[42] Press Release, Ctrs. Disease Control & Prevention, CDC Launches Campaign to Help States Fight Prescription Opioid Epidemic (Sept. 25, 2017), https://www.cdc.gov/media/releases/2017/p0925-rx-awareness-campaigns.html.

Comparing Regulatory Responses to Privacy Threats in Digital Markets

By Madalyn Grace*

PDF Available

On October 12, leaders from the Federal Trade Commission (“FTC”) and Department of Justice (“DOJ”) participated in a G7 Joint Competition Policy Makers & Enforcers Summit to discuss competition policy and enforcement in digital markets.[1] Digital markets challenge the efficacy of existing competition law in nearly every jurisdiction: regulators of the world’s largest economies agree some form of ex-ante regulation is necessary to address the insufficient effectiveness and timeliness of ex-post remedies, especially concerning data privacy.[2]

Several participants shared how they are improving their ability to respond to consumer privacy threats posed by Big Tech.[3] For example, to increase competition in digital markets while protecting consumers, the European Union published the Digital Markets Act (“DMA”) on October 12, 2022.[4] The DMA allows regulators to issue prescriptive rules applicable to digital gatekeepers identified by monthly active users, capitalization, and other indicia.[5] Once implemented, these self-executing rules may help the EU avoid lengthy lawsuits.[6]

Using a different approach to ex-ante rulemaking, the United Kingdom established the Digital Markets Unit (“DMU”) within its competition agency; with future legislation it will “pro-actively shape the behavior of digital firms with significant and far-reaching market power, by making clear how they are expected to behave.”[7] The reform would allow conduct requirements for firms with Strategic Market Status, or “substantial, entrenched market power in at least one digital activity, providing the firm with a strategic position.”[8] Therefore, it may enforce further requirements on such companies’ use of data.[9]

Although several states have specific privacy laws, and five comprehensive state consumer privacy laws take effect in 2023,[10] the United States has not yet passed comprehensive privacy legislation at the federal level. The FTC has recently sought to fill this void and clarify its authority through adjudication and ex-ante rulemaking. As the agency relayed at the Summit, “The FTC seeks to improve coordination across competition, consumer protection, and privacy activities and apply an integrated approach to the agency’s cases, rules, research, and other policy tools. This may help identify interconnections between the conditions that give rise to competition and consumer protection violations. … For example, as alleged in the FTC’s amended complaint against Facebook, increased concentration in a market may lead to lower levels of service quality in areas such as privacy and data protection.”[11]

First, the FTC is attempting to use its authority over Unfair or Deceptive Acts and Practices (“UDAP”) under Section 5 of the FTC Act of 1914 (“FTC Act”) to sue Kochava, a company that allegedly sold sensitive consumer data without first anonymizing it, allowing the purchaser to track the movements of mobile device users.[12] However, per West Virginia v. EPA, the FTC must demonstrate a “clear congressional authorization” for the power it claims.[13] This raises the question whether the FTC can impose a condition on the sale of sensitive consumer information when it does not enforce a federal law expressly providing for the requirement.[14] Considering the Children’s Online Privacy Protection Act of 1998 (“COPPA”) narrowly applies to children under thirteen,[15] and the FTC Act did not contemplate privacy, the FTC’s efforts may be unappreciated by the current Court.

More notably, the FTC is exercising its rulemaking authority under Section 18 of the FTC Act via Advance Notice of Proposed Rulemaking (“ANPR”) regarding commercial surveillance and lax data privacy practices.[16] The agency has not yet announced its proposed rules, but it is currently seeking input regarding the business of collecting, analyzing, and profiting from consumer information.[17] The proposed rules may introduce substantive limits on the use and collection of data to replace the dominant “notice and consent” privacy paradigm.[18]

FTC rulemaking offers numerous advantages over attempting to litigate consumer privacy standards into existence. Although rulemaking is a slow process, the FTC can implement rules addressing topics beyond the narrow question at issue in typical competition suits, which may render an outdated holding by the time a final judgment is entered.[19] Second, the FTC generally cannot seek financial penalties for first-time violations of the FTC Act, and trade regulation rules may more effectively deter unlawful conduct because they do not carry the same limitation.[20] Finally, the ANPR process invites greater public participation, especially considering the notice and comment period in this instance has been extended to November 21, 2022.[21]

The FTC may issue both procedural and substantive rules “for the purpose of carrying out the [FTC Act’s] provisions,”[22] and it has previously used its UDAP authority to create several consumer protection rules where it has congressional authorization to regulate certain industries.[23] However, in the century since its inception, it has never exercised its authority over Unfair Methods of Competition (“UMC”) to create consumer privacy rules, and it has not enforced the one antitrust rule it promulgated.[24]

Through one or both of these mandates, the FTC may be capable of addressing privacy challenges in digital markets like comparable agencies in the EU and UK, but it faces significant adversity from the courts. Ironically, a letter from President Eisenhower suggests a major appeal of delegating responsibility to a federal agency was that federal courts would have less discretion over novel antitrust issues,[25] yet the FTC may end up litigating the question of whether it should be cabined to the role of a law enforcement agency or if it can fill the privacy void in federal law.


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

[1] Press Release, Fed. Trade Comm’n, Federal Trade Commission and Justice Department Meet With Fellow G7 Enforcement Partners on Competition in Digital Markets (Oct. 12, 2022), https://www.ftc.gov/news-events/news/press-releases/2022/10/federal-trade-commission-justice-department-meet-fellow-g7-enforcement-partners-competition-digital-markets.

[2] OECD, EXECUTIVE SUMMARY OF THE HEARING ON EX ANTE REGULATION AND COMPETITION IN DIGITAL MARKETS: ANNEX TO THE SUMMARY RECORD OF THE 136TH MEETING OF THE COMPETITION COMMITTEE 3 (2021), https://one.oecd.org/document/DAF/COMP/M(2021)2/ANN4/FINAL/en/pdf.

[3] See generally G7 JOINT COMPETITION POL’Y MAKERS & ENFORCERS SUMMIT, COMPENDIUM OF APPROACHES TO IMPROVING COMPETITION IN DIGITAL MARKETS (2022), https://www.bundeskartellamt.de/SharedDocs/Publikation/EN/Others/G7_Compendium.pdf?__blo b=publicationFile&v=4.

[4] Francesco Liberatore, DMA: EU Publishes the New Digital Markets Act, NAT’L L. REV., (Oct. 13, 2022), https://www.natlawreview.com/article/dma-eu-publishes-new-digital-markets-act.

[5] Aline Blankertz, The EU’s Experimental Approach in Overhauling Competition Rules, BROOKINGS INST. (Apr. 14, 2022), https://www.brookings.edu/techstream/the-eus-experimental-approach-in-overhauling-competition-rules-digital-markets-act-dma/.

[6] See id.

[7] DEP’T BUS., ENERGY & INDUS. STRATEGY & DEP’T DIGIT. CULTURE, MEDIA & SPORT, A NEW PRO-COMPETITION REGIME FOR DIGITAL MARKETS, CP 489 (2021), https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment _data/file/1003913/Digital_Competition_Consultation_v2.pdf; see Brad Stone & Jillian Deutsch, CMA’s Hayter Says UK’s Tech Law Enforcement Is ‘Out of Date’, BLOOMBERG (Sept. 28, 2022), https://www.bloomberg.com/news/articles/2022-09-28/cma-s-hayter-says-uk-s-tech-law-enforcement-is-out-of-date.

[8] DEP’T BUS., ENERGY & INDUS. STRATEGY & DEP’T DIGIT. CULTURE, MEDIA & SPORT, supra note 7, at 19.

[9] OECD COMPETITION DIVISION, G7 INVENTORY OF NEW RULES FOR DIGITAL MARKETS 20-21 (2022), https://www.bmwk.de/Redaktion/DE/Downloads/g7-inventory-of-new-rules-for-digital-markets.pdf?__blob=publicationFile&v=6.

[10] FED. TRADE COMM’N, A LOOK AT WHAT ISPS KNOW ABOUT YOU: EXAMINING THE PRIVACY PRACTICES OF SIX MAJOR INTERNET SERVICE PROVIDERS, at 10 (2021), https://www.ftc.gov/system/files/documents/reports/look-what-isps-know-about-you-examining-privacy-practices-six-major-internet-service-providers/p195402_isp_6b_staff_report.pdf; Peter Guffin & Melanie Conroy, As Mass. Punts on Privacy Law, Cos. Can’t Be Complacent, LAW360 (Oct. 11, 2022), https://www.law360.com/articles/1538387/as-mass-punts-on-privacy-law-cos-can-t-be-complacent.

[11] COMPENDIUM, supra note 3, at 85.

[12] 15 U.S.C. § 45(a)(1) (2018); Press Release, Fed. Trade Comm’n, FTC Sues Kochava for Selling Data That Tracks People at Reproductive Health Clinics, Places of Worship, and Other Sensitive Locations, (Aug. 29, 2022), https://www.ftc.gov/news-events/news/press-releases/2022/08/ftc-sues-kochava-selling-data-tracks-people-reproductive-health-clinics-places-worship-other.

[13] W. Va. v. Env’t Prot. Agency, 142 S. Ct. 2587, 2609 (2022).

[14] Esposito et al., FTC Privacy Suit Tests Agency’s Regulatory Authority, LAW360 (Sept. 22, 2022), https://www.law360.com/articles/1532689/ftc-privacy-suit-tests-agency-s-regulatory- authority.

[15] 15 U.S.C. §§ 6501–6506 (2012).

[16] Press Release, Fed. Trade Comm’n, FTC Explores New Rules Cracking Down on Commercial Surveillance and Lax Data Security Practices (Aug. 11, 2022), https://www.ftc.gov /news-events/news/press-releases/2022/08/ftc-explores-rules-cracking-down-commercial- surveillance-lax-data-security-practices; Lesli Esposito et al., FTC Privacy Suit Tests Agency’s Regulatory Authority, LAW360 (Sept. 22, 2022), https://www.law360.com/articles/1532689/ftc- privacy-suit-tests-agency-s-regulatory-authority.

[17] Chair Lina Khan, Fed. Trade Comm’n, Remarks as Prepared for Delivery at the IAPP Global Privacy Summit (Apr. 11, 2022).

[18] Id.

[19] See Rohit Chopra & Lina M. Khan, The Case for “Unfair Methods of Competition” Rulemaking, 87 U. CHI. L. REV. 357, 362 (2020).

[20] Fed. Trade Comm’n, supra note 16.

[21] Id.; Press Release, Fed. Trade Comm’n, FTC Extends Comment Deadline on Commercial Surveillance, Lax Data Security Practices Initiative Exploring Possible Rules (Oct. 14, 2022), https://www.ftc.gov/news-events/news/press-releases/2022/10/ftc-extends-comment-deadline-commercial-surveillance-lax-data-security-practices-initiative.

[22] 15 U.S.C. § 46(g) (2012); Nat’l Petroleum Refiners Ass’n v. FTC, 482 F.2d 672 (D.C. Cir. 1973).

[23] Daniel A. Crane, Debunking Humphrey’s Executor, 83 GEO. WASH. L. REV. 1835, 1861-63 (2015); Telemarketing Sales Rule, 16 C.F.R. § 310.1 (2015) (implementing Telemarketing and Consumer Fraud and Abuse Prevention Act, 15 U.S.C. §§ 6101–6108 (2012)). Children’s Online Privacy Protection Rule, 16 C.F.R. § 312.1 (2015) (implementing Children’s Online Privacy Protection Act of 1998, 15 U.S.C. §§ 6501–6506 (2012)).

[24] Crane, supra note 23, at 1861; FTC Men’s and Boy’s Tailored Clothing Rule, 16 C.F.R. § 412 (1968); Notice of Rule Repeal, 59 Fed. Reg. 8527 (1994).

[25] Id. at 1859; See President Woodrow Wilson, Address to a Joint Session of Congress on Trusts and Monopolies (Jan. 20, 1914) (transcript available at the American Presidency Project website, https://www.presidency.ucsb.edu/documents/address-joint-session-congress-trusts-and-monopolies).

Lehman Brothers’ Fourteen-Year Liquidation Ends

By Joseph Barreras*

PDF Available

Another chapter has closed in the fallout of the 2008 financial crisis: Lehman Brothers’ fourteen-year liquidation has ended. In January 2008, Lehman Brothers was the fourth-largest investment bank and had just reported a record high in net income: over $4 billion.[1] By the end of 2008, Lehman Brothers would forever be remembered as the largest corporate bankruptcy filing in U.S. history, totaling over $619 billion in debt.[2]

The securities that made Lehman Brothers into a powerhouse of the 2000s—mortgage-backed securities—also led to its demise.[3] Mortgage-backed securities, like collateralized debt obligations, are securities backed by real estate loans.[4] Certain mortgage-backed securities, however, involved subprime mortgages: mortgages that carry a higher risk of default and thus charge a higher interest rate. Before the Glass-Steagall Act was repealed, it worked to “prevent[] high-risk wall street gambling from endangering the commercial bank” by separating investment banks from commercial banking activities.[5] When that legislation was repealed in 1999, it ushered in a new generation of risk-taking and leverage by allowing investment banks to speculate further, knowing they were insured by government-backed regulations and institutions such as the Federal Deposit Insurance Corporation (“FDIC”).[6] This meant that the government would get involved when the uninsured aspects of the bank “threatened to take down the FDIC-insured part of the bank.”[7]

Through the early to mid-2000s, Lehman Brothers spent its time and funds acquiring several different mortgage lenders, eventually amassing a leverage ratio of 31.[8] As the real estate and equity markets began to fall, coupled with the Bear-Stearns collapse, Lehman Brothers watched its stock and cash reserves plummet in September 2008. In a last-ditch effort, CEO Richard Fuld took steps to de-leverage, to reduce mortgage exposure, and to spin off and sell several divisions of Lehman Brothers.[9] Some would say this was too little, too late. Lehman Brothers was hemorrhaging billions of dollars each month in losing investments, leaving it with only $1 billion in cash before attempting to facilitate a takeover by Bank of America and Barclays, which ultimately failed.[10] The following Monday, September 15, Lehman Brothers declared bankruptcy.[11]

Almost 14 years to the day, Lehman Brothers’ liquidation ended on Wednesday, September 28. The order was issued Wednesday, the 28th of September, by Judge Shelley C. Chapman of the U.S. Bankruptcy Court for the Southern District of New York.[12] James Giddens, of Hughes Hubbard & Reed LLP, acted as trustee overseeing the liquidation, helping to see that “Lehman’s 111,000 customers received all $106 billion they were owed, and secured creditors also received full payouts. Unsecured creditors recovered $9.4 billion, or about 41 cents on the dollar.”[13]

The question remains: what has changed in the last fourteen years? First, we have the Dodd-Frank Act, passed in 2010 in response to the 2008 financial crisis.[14] A large part of the 2008 crisis was caused by the predatory tactics used by banks in issuing subprime mortgages.[15] Dodd-Frank introduced the Consumer Financial Protection Bureau, which completely changed how lenders disclose information to consumers, thereby eradicating a large fear that remained from the 2008 crisis.[16] Second, the Volcker Rule was introduced, leaning us back towards the time of the Glass-Steagall Act and restricting how banks can invest.[17] Additionally, the Securities and Exchange Commission (“SEC”) formed the Office of Credit Ratings, “charged with ensuring that agencies provide meaningful and reliable credit ratings of the businesses, municipalities, and other entities that they evaluate.”[18] In an effort to help smaller banks, President Trump signed into law the Economic Growth, Regulatory Relief, and Consumer Protection Act in 2018.[19] This rolled back portions of the Dodd-Frank Act in the face of criticisms that it was too restrictive on smaller, regional banks, which played little to no role in the 2008 crisis.[20]

While market corrections, collapses, and resurgences are all part of a healthy cycle of the economy, we are still left questioning if we are prepared for the “next 2008.” After the trial concluded on Wednesday, Giddens, the trustee overseeing the liquidation, said “The LBI case ultimately taught us that a failure of a large financial institution should be avoided, but history tells us that it is inevitable.”[21] “While the exact cause of that failure may presently be unknown, no law will prevent all causes of future financial institution collapses.”[22] Time will tell if we learned our lesson from 2008, or if we will repeat the missteps that lead us to the crisis.


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

[1] Lehman Brothers – A Fall From Grace, CORP. FIN. INST., https://corporatefinanceinstitute.com/resources/knowledge/finance/lehman-brothers/ (last updated May 6, 2020).

[2] Id.

[3] Nick Lioudis, The Collapse of Lehman Brothers: A Case Study, INVESTOPEDIA, https://www.investopedia.com/articles/economics/09/lehman-brothers-collapse.asp (last updated Jan. 30, 2021).

[4] Mortgage Backed Securities, FINRA, https://www.finra.org/investors/learn-to-invest/types-investments/bonds/types-of-bonds/mortgage-backed-securities (last visited Oct. 4, 2022).

[5] Fact Sheet: Glass-Steagall Financial Reform Law and Efforts to Reinstate It, BETTER MARKETS 2, (May 1, 2017), https://bettermarkets.org/sites/default/files/Better%20Markets%20Fact%20Sheet%20on%20Glass-Steagall%20_0.pdf.

[6] See id.

[7] Id. at 1.

[8] Lioudis, supra note 3.

[9] See id.

[10] Id.

[11] Id.

[12] Alex Wolf, Lehman Brothers 14-Year Brokerage Liquidation Case Comes to End, Bloomberg L. (Sept. 28, 2022, 3:24 PM), https://www.bloomberglaw.com/product/blaw /bloomberglawnews/bloomberg-law-news/XFF8707O000000?bc=W1siU2VhcmNoICYgQnJvd3N lIiwiaHR0cHM6Ly93d3cuYmxvb21iZXJnbGF3LmNvbS9wcm9kdWN0L2JsYXcvc2VhcmNoL3J lc3VsdHMvZjFhYzkzYmIzODIzN2VjMzA1YjhkMjcwY2M2ZWNiZjgiXV0–1bfc01ddbee8dbdd ff2a68c06b7e6c8e8a666e9c&bna_news_filter=bloomberg-law-news&criteria_id=f1ac93bb38237e c305b8d270cc6ecbf8&search32=PrZei7GWyb45srDlv8gB8A%3D%3D37SdLJEklHiQGqufEwW y5Fvwp2ae-cWlROuumGWJz8haj-OnSrKuOYoua2oozgdY6u9J-LBrbJpNxZmHIrkl0B7rTq28bJbcvgb_oQ_GJXK4SmvjaN9rke992N-EtRL8.

[13] Id.

[14] Dodd-Frank Wall Street Reform and Consumer Protection Act, H.R. 4173, 111th Cong. (2010), https://www.cftc.gov/sites/default/files/idc/groups/public/@swaps/documents/file/hr4173 _enrolledbill.pdf.

[15] See Wolf, supra note 12.

[16] Adam Hayes, Dodd-Frank Act: What It Does, Major Components, Criticisms, INVESTOPEDIA, https://www.investopedia.com/terms/d/dodd-frank-financial-regulatory-reform-bill.asp (last updated Sept. 8, 2022).

[17] See id.

[18] Id.

[19] Economic Growth, Regulatory Relief, and Consumer Protection Act, PUB. L. NO. 115-174, 132 STAT. 1296. https://www.congress.gov/115/plaws/publ174/PLAW-115publ174.pdf.

[20] See Hayes, supra note 16.

[21] Wolf, supra note 12.

[22] Id.

A Look at President Biden’s Antitrust Enforcement Efforts

By Stone Hunt*

PDF Available

President Biden made clear during his campaign and early in his presidency that he wanted to “take on growing economic concentration and monopoly power.”[1] The president codified this stance when he released an executive order titled “Executive Order on Promoting Competition in the American Economy” in July of his first year in office.[2] President Biden stated specifically in the order “that it is the policy of my Administration to enforce the antitrust laws to combat the excessive concentration of industry, the abuses of market power, and the harmful effects of monopoly and monopsony — especially as these issues arise in labor markets, agricultural markets, Internet platform industries, healthcare markets (including insurance, hospital, and prescription drug markets), repair markets, and United States markets directly affected by foreign cartel activity.”[3] (emphasis added).

President Biden has taken his antitrust enforcement promises seriously and has taken multiple steps to make good on this promise.[4] The Department of Justice (“DOJ”)’s antitrust division has brought on five partners from outside firms and at least a dozen associates to beef of its ranks in antitrust litigation.[5] These hires have been brought in from some of the largest antitrust players in the country: Kirkland & Ellis, Latham & Watkins, Davis Polk & Wardwell (“Davis Polk”), and Paul, Weiss, Rifkind, Wharton & Garrison (“Paul Weiss”).[6] The hirings come as the DOJ looks towards litigation against companies like Google and American Airlines and faces its largest ever amount of merger notifications.[7]

With all of this heightened activity and hiring, how has the current administration fared in the courtroom? It’s been rocky, to say the least. Davis Polk released an article last month stating that the primary effect of Biden’s antitrust push “has been to create uncertainty, as the agencies struggle with institutional constraints and have yet to achieve groundbreaking victories in court.”[8] In just the one month since the writing of the Davis Polk article, President Biden has lost two large scale antitrust cases.[9] These cases included two of the largest sugar refiners in the United States and UnitedHealth Group’s acquisition of Change Healthcare.[10] The UnitedHealth Group deal was of particular importance to the Biden administration as it dealt with the U.S. healthcare system, specifically healthcare insurance.[11]

The D.C. federal judge in the UnitedHealth Group case not only rejected the government’s argument that the merger would “substantially lessen competition” but also proposed a new legal standard when looking at divestitures and what it would take for the government to meet its prima facie burden.[12] This loss not only hurts the look of the administration, but the ruling also may make it more difficult for the government to shift the burden of persuasion to defendants in future divestiture deals, only adding to the challenges DOJ already faces. To add to the pain, longtime DOJ antitrust attorney Frank Nabs left the agency this week for private practice.[13] These losses, mixed with the administration’s increased costs of bulking up the DOJ’s antitrust division, aren’t a good look for the Biden administration.

However, President Biden’s hope to crack down on business has a chance to spring to life shortly. Trial began on Tuesday, September 27th to challenge an American Airlines-JetBlue alliance in the northeast.[14] That trial is expected to last until mid-October.[15] Large tests also loom in the future when the government begins to tackle antitrust cases against Big Tech (Alphabet, Facebook, Apple, etc.).[16] The Biden administration has a chance to make good on its promises to crack down on economic concentration and needs some big wins now if it hopes to keep its promise before the November midterms and his own reelection on the horizon.

Conflict Disclosure: The author of this article worked on the defense team for Change Healthcare in the UnitedHealth Group litigation and will be returning to the firm this summer.


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

[1] Cat Zakrzewski, Biden Inherits Bipartisan Momentum to Crack Down on Large Tech Companies’ Power, WASH. POST (Jan. 18, 2021), https://www.washingtonpost.com/politics/2021 /01/18/biden-antitrust-big-tech/.

[2] Exec. Order No. 14036, 86 Fed. Reg. 36,987 (July 14, 2021).

[3] Id.

[4] Biden Administration Steps Up Antitrust Enforcement, AMERICAN BAR ASSOCIATION, https://www.americanbar.org/news/abanews/aba-news-archives/2021/11/antitrust-enforcement/ (last visited Sept. 28, 2022).

[5] Dan Papscun & Sam Skolnik, Looming Antitrust Enforcement Spurs DOJ Hiring Binge (Correct), BLOOMBERG L. (Sept. 12, 2022), https://news.bloomberglaw.com/antitrust/looming-tough-antitrust-enforcement-spurs-doj-hiring-binge.

[6] Id.

[7] Id.

[8] President Biden’s Executive Order on Competition: One Year Later, DAVIS POLK (Aug. 25, 2022), https://www.davispolk.com/insights/client-update/president-bidens-executive-order- competition-one-year-later.

[9] American, JetBlue Poised for Antitrust Battle With US Enforcers, BLOOMBERG L. (Sept. 26, 2022), https://www.bloomberglaw.com/bloomberglawnews/.

[10] Id.

[11] See Exec. Order No. 14036, supra note 2.

[12] United States v. UnitedHealth Grp. Inc., 2022 U.S. Dist. LEXIS 170934 1, 31 (D.D.C. 2022)

[13] Dan Papscun, Fried Frank Nabs Longtime DOJ Antitrust Division Deputy Powers, BLOOMBERG L. (Sept. 28, 2022), https://www.bloomberglaw.com/bloomberglawnews/.

[14] Nate Raymond, David Shepardson, & Diane Bartz, U.S. Challenges American AirlinesJetBlue Alliance as Antitrust Trial Begins, REUTERS (Sept. 27, 2022), https://www.reuters.com /legal/us-antitrust-trial-against-american-airlines-jetblue-alliance-kicks-off-2022-09-27/.

[15] Id.

[16] See Derek Saul, Feds Reportedly Preparing Antitrust Suit Against Apple, FORBES (Aug. 26, 2022), https://www.forbes.com/sites/dereksaul/2022/08/26/feds-reportedly-preparing-antitrust- suit-against-apple/.

The War Against “Woke Capitalism”: Anti-ESG Legislation in State Government

By Julia Sardiñas*

PDF Available

It seems that the culture warriors have chosen the sustainable investment movement as their latest battleground. In recent years, corporate interest in environmental, social, and governance (“ESG”) criteria has exploded. In 2021, ninety-two percent of the S&P 500 and seventy-one percent of the Russell 1000 published sustainability disclosures.[1] The number of Environmental & Social (“E&S”) shareholder proposals receiving majority support almost tripled between 2019 and 2021.[2] These proposals advocated for setting greenhouse gas emission reduction targets, increasing board diversity, and disclosing political contributions.[3] While supporters argue that reallocating capital into sustainability will improve long-term returns for investors,[4] opponents argue that ESG activists are forcing companies to support unpopular, unprofitable progressive causes.[5]

Last week, thirteen state treasurers published a letter opposing recent legislation aiming to curb ESG investment.[6] So far, seventeen states have proposed or passed “anti-ESG bills.”[7] These bills fall into two camps: some ban state entities from contracting with companies that discriminate against fossil fuel businesses or gun manufacturers, while others ban state entities from investing in funds that consider ESG criteria.[8] Legal commentators supporting anti-ESG bills argue that sustainability-focused investors are violating the sole interest rule, which requires that a trustee only consider the interests of the beneficiary, by promoting social goals.[9] Other commenters have observed that ESG investing does not violate fiduciary duties if the trustee’s exclusive motives are to improve risk-adjusted returns.[10]

Thus far, anti-ESG bills have exchanged symbolic political victories for increased costs. For instance, Texas passed the first “Energy Discrimination Elimination” law last summer.[11] The statute requires that the Texas Comptroller maintain a list of financial companies that boycott energy companies.[12] “Boycott” is defined broadly, encompassing any action intended to “penalize, inflict economic harm on, or limit commercial relations” with fossil fuel companies.[13] State entities are then prohibited from investing in any company on this list.[14] However, the statute exempts state entities if the entity determines that the requirement interferes with its fiduciary duties.[15] If ESG disclosures yield material information, these broad exceptions would allow trustees to continue investing in blacklisted companies. Texas has also passed a similar bill aimed at companies that boycott firearm manufactures.[16] Since both statutes went into effect, five of the largest underwriters in the world have exited the municipal market in Texas.[17] As a result, a recent study found that Texas municipalities will pay an additional $300-500 million in interest in bonds.[18]

Although the financial consequences of ESG bills may be up for debate, it is indisputable that these bills have created ample fodder for political conflict. In August, the Texas Comptroller blacklisted nine financial institutions, including BlackRock, the world’s largest asset manager.[19] In response, many of the institutions shied away from the ESG label, pointing instead to longstanding ties to the energy sector.[20] For example, BlackRock has hotly denied boycotting the energy sector, noting that the institution is the largest investor in Texas’ oil and gas industry. [21] The Texas Comptroller’s statements suggest that states intend to name and shame large financial institutions with the hopes of spooking smaller investors from joining the ESG movement. Responses from companies like BlackRock may signal that funds are weary of political retaliation and are not ready to fully plunge into sustainable investing.

Given the rise of anti-ESG backlash and a bear market in the S&P 500, shareholder support for ESG activism has cooled this year.[22] As ESG investing becomes more politically controversial, anti-ESG rhetoric and legislation will likely gain steam in anticipation of the midterm elections. Regardless of which side wins the culture war, anti-ESG legislation will increase regulatory complexity and uncertainty for financial companies seeking to invest in state entities.


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

[1] 92% of the S&P 500® and 70% of the Russell 1000® Published Sustainability Reports in 2020, G&A Research Shows, GOVERNANCE & ACCOUNTABILITY INST., INC. (Nov. 30, 2021), https://www.ga-institute.com/research/ga-research-collection/sustainability-reporting-trends/2021-sustainability-reporting-in-focus.html#:~:text=The%202021%20research%20report%20features ,CDP%2C%20CSA%2FDJSI.

[2] Marc S. Gerber & Raquel Fox, Investors Press for Progress on ESG Matters, and SEC Prepares to Join the Fray, SKADDEN (Jan. 19, 2022), https://www.skadden.com/insights /publications/2022/01/2022-insights/corporate/investors-press-for-progress.

[3] Id.

[4] Pursuing Long-Term Value for Our Clients: A Look Into the 2020-2021 Proxy Voting Year, BLACKROCK INV. STEWARDSHIP (June 30, 2021), https://www.blackrock.com/corporate /literature/publication/2021-voting-spotlight-full-report.pdf.

[5] The ESG Pushback, HERITAGE FOUND. (May 15, 2022), https://www.heritage.org /environment/heritage-explains/the-esg-pushback.

[6] Press Release, Brad Lander, Comptroller, New York City, Comptroller Lander Joins State Treasurers’ Letter Opposing Anti-ESG Legislation (Sept.14, 2022), https://comptroller.nyc.gov /newsroom/statement-from-comptroller-lander-on-recent-anti-esg-legislation/.

[7] Elizabeth S. Goldberg et al., The State of Anti-ESG Legislation, MORGAN LEWIS: ML BENEBITS (Aug. 25, 2022), https://www.morganlewis.com/blogs/mlbenebits/2022/08/the-state-of-anti-esg-state-legislation?p=1.

[8] Id.

[9] Jed Rubenfeld & William P. Barr, ESG Can’t Square With Fiduciary Duty, WALL STREET J.: OPINION (Sept. 6, 2022), https://www.wsj.com/articles/esg-cant-square-with-fiduciary-duty- blackrock-vanguard-state-stree-the-big-three-violations-china-conflict-of-interest-investors- 11662496552.

[10] Max M. Schanzenbach & Robert H. Sitkoff, Reconciling Fiduciary Duty and Social Conscience: The Law and Economics of ESG Investing by a Trustee, 72 STANFORD L. REV. 381, 385-86 (Feb. 2020), https://review.law.stanford.edu/wp-content/uploads/sites/3/2020/02 /Schanzenbach-Sitkoff-72-Stan.-L.-Rev.-381.pdf.

[11] See generally Prohibition on Investment in Financial Companies that Boycott Certain Energy Companies, TEX. GOV’T. CODE. ANN. §809 (West 2022).

[12] TEX. GOV’T. CODE. ANN. §809.051(a) (West 2022).

[13] TEX. GOV’T. CODE. ANN. §809.001(1) (West 2022).

[14] TEX. GOV’T. CODE. ANN. §809.053(d)(1) (West 2022).

[15] TEX. GOV’T. CODE. ANN. §809.005(d)(1) (West 2022).

[16] See generally Prohibition on Contracts with Companies that Discriminate Against Firearm and Ammunition Industries, TEX. GOV’T. CODE. ANN. §2274 (West 2022).

[17] Daniel Garrett & Ivan T. Ivanov, Gas, Guns, and Governments: Financial Costs of Anti- ESG Policies 1 (July 11, 2022) (unpublished), https://papers.ssrn.com/sol3/papers.cfm?abstract_id =4123366.

[18] Id.

[19] Brooke Masters & Patrick Temple-West, Companies Attack Texas Over ‘Politicised’ ESG Blacklist, FIN. TIMES (Aug. 29, 2022), https://www.ft.com/content/8031aaad-efc6-4829-ac02- bd9c151974f4.

[20] Id.

[21] Brooke Masters & Patrick Temple-West, BlackRock Labels Texas ‘Anti-Competitive’ Over ESG Blacklisting, FIN. TIMES (Aug. 25, 2022), https://www.ft.com/content/9bbb250f-2995-4035-914c-b42b1f3397ee.

[22] Greg Andrews, Is the ESG Locomotive Suddenly Losing Steam?, ALM (June 9, 2022), https://www.law.com/2022/06/09/inside-track-is-the-esg-locomotive-suddenly-losing-steam/.