A Two Trillion Dollar Idea: How Minting a Coin Would Avoid Potential Economic Catastrophe.

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By Alexander Rudolph*

Question: When is a two trillion-dollar coin the answer to a nation’s fiscal problems? Answer: When the likely alternative is economic catastrophe, and the opportunity presents itself as an immediate and affable solution to the problem at hand.

Normally that question and answer would sound like the sum total of a bad joke, but we live in a time when it may be the basis for the soundest fiscal policy to avoid a potential economic disaster. While the idea of minting a coin worth two trillion dollars may sound facially absurd, once the contemporary criticisms of the congressional debt ceiling are considered alongside the underlying congressional intent behind its implementation, it becomes clear that the law no longer serves the original purpose that it was meant to. Because the federal government should not risk a potential default in order to remain in compliance with a law that no longer serves its original purpose, the most prudent fiscal policy decision the Biden Administration could take to avoid a potential default would be to direct the Secretary of the Treasury to mint such an absurdly valuable coin and deposit it into the Federal Reserve. That fiscal policy decision would lower the national debt to well below the congressional limit, and effectively eliminate the possibility of the government defaulting on its debt.

On September 28th, 2021, Senate Republicans successfully blocked a bill that was intended to fund the Federal government, despite repeated warnings from Treasury Secretary Janet Yellen about the economic calamity that a potential breach of the debt ceiling would create for the country.[1] Senate Minority Leader Mitch McConnell has steadfastly maintained that he does not intend to compromise and authorize any further increase to the debt ceiling during the current legislative session,[2] which would put the United States in a position where it will default on its outstanding debts if the ceiling is not raised by December 3rd of this year.[3] This battle is nothing new, as similar standoffs occurred as recently as 2011 and again in 2013, when Republican lawmakers wanted to stymie the Obama Administration’s policy agenda. As a result, in 2011 the United States lost its pristine AAA credit rating for the first time in the nation’s history, due to a perceived increase to the “political risk” intrinsic to U.S. debt.[4]

But how did it come to this? Despite this recently recurring political trend, the debt ceiling itself was not conceived to be, and generally has not historically been used as, an opportunity for such political brinksmanship. To the contrary, the concept of a Congressional limitation on the total amount of outstanding federal debt was originally created in the Second Liberty Bonds Act of 1917 as a more efficient alternative to having Congress authorize every individual debt that was issued by the federal government.[5]

Thus, in its early days the main function of the debt ceiling was to promote more efficient congressional discussion on the issues of the nation’s debt.[6] Although it was not a subject of partisan contention at its inception, the debt ceiling gradually came to be used by members of both parties as a means to position themselves as being “serious” about balancing the national budget.[7] At the same time however, those opposed to increasing the debt ceiling never truly considered the possibility of allowing a national default.[8]

Despite its sensible origins, contemporary political obstinacy on the issue of financing the nation’s financial obligations has called into question the very wisdom of having an established national debt ceiling to begin with. Only a few other countries have such a limitation, and of those the debt limit is so high that it effectively cannot ever be reached.[9] While the initial legislative intent behind its creation may have been to encourage bipartisan cooperation on the development of national economic policy, in recent practice it has been more aptly described as a “kind of apocalyptic Groundhog Day in American life,” and critics have begun to point out that the logic behind the debt ceiling is intrinsically nonsensical and potentially even unconstitutional.[10]

When the debt ceiling is considered along with the other spending powers granted to Congress, it is easy to see why the policy is criticized. Most laws passed by Congress include funding provisions that pay for their implementation. Because Congress is the constitutional entity responsible for approving spending, laws that have been passed by Congress have implicitly had their related spending already approved, even if the funding is not fully mentioned in the text of the law itself.[11] But the debt ceiling essentially acts as a barrier in this process, as it can prevent the Treasury from following its constitutional directive to pay for Congressional spending that has already been approved.[12] This policy would be sensible if Congress was willing and able to consider the national debt in the context of individual pieces of legislation that still required funding to go into effect. However, contemporary rhetoric on the issue often appears more preoccupied with vague narratives about governmental fiscal responsibility and political reprisal than anything else.[13]

If the underlying legislative intent behind the debt ceiling is not being respected by Congress, then why should the Executive Branch similarly respect that policy and allow a national default to be triggered if that limit is reached?  The common-sense answer seems to be that the Executive Branch should not be held hostage to that limitation, and the issuance of a two trillion-dollar coin would free it from that burden.

The Omnibus Consolidated Appropriations Act of 1997, in part empowers the Treasury Secretary to print platinum coins of any denomination for any reason.[14] Although the idea was originally intended to bolster government funding by pandering to domestic coin collectors; the plain language of the law gives the Treasury Secretary absolute discretion in terms of pricing, issuing, and disseminating any platinum coins that she chooses to mint. If a coin worth a few trillion dollars was then minted, the President could then direct the Chair of the Federal Reserve to accept said coin as payment for outstanding U.S. bonds.[15] The acceptance of those funds would directly lower the outstanding national debt, preventing the debt ceiling from being reached and thereby stave off triggering any default.

While minting a two trillion-dollar coin to lower the national debt may sound like the Treasury is proverbially ‘cooking its own books’ to avoid crossing the debt ceiling threshold, is that really so bad? Many experts seem to believe that keeping the debt ceiling in place would be worse, since as long as it exists the potential of a government default also exists, and the consequences of a default would be catastrophically harmful to the country.[16]

More recently, contemporary debt ceiling critics have begun to argue that it would be unconstitutional in a few distinct ways for the President and the Treasury Secretary to allow the United States to stop payments on its outstanding debt once the debt limit is reached or passed.[17] It is not entirely clear that even if the President were to just direct the Treasury Secretary to simply ignore the debt ceiling, that anyone would have legal standing to challenge her decision to do so.[18] But simply because a purely legalistic solution to a potential default might exist does not make it the ideal solution. Any legal challenge to the mechanics of the debt ceiling runs the risk of igniting a legal battle that could still result in default, which is an unnecessary risk when the law that authorizes the minting of a trillion-dollar coin is clear and incontrovertible.

Critics of the trillion-dollar coin argue that this novel solution could have its own unforeseeable impacts on the economy. The fact the government would in effect be printing more of its own currency to pay for its own debts has led many to speculate that minting this trillion-dollar currency would result in serious inflation impacting the value of the U.S. dollar. However, that criticism is largely speculative, and economists have long been disputed the idea that Quantitative Easing policies like this necessarily result in an increase to the rate of inflation in general.[19] Indeed, the simplest method the Federal Reserve could use to avoid causing inflation would be to sterilize the government’s spending of the coin by selling other assets from its balance sheet on a dollar-for-dollar basis, in which case the effect on the monetary base of the U.S. dollar would be projected to be net to zero.[20] To put it in simpler terms, because the government owes itself money, it can print more money to pay that debt that it owes itself without letting that currency into circulation and impacting the wider economy.[21] When the debt ceiling issue is considered alongside these facts, one must ask if it still serves any beneficial purpose. If the professional consensus is that the debt ceiling limitation itself is nonsensical, self-contradictory, and potentially unconstitutional, then why not take advantage of an existing legal loophole to avoid continually flirting with economic catastrophe? Because the idea sounds silly? That might have been why the Obama Administration rejected it, but that Administration had a more moderate Congress to work with, and the Biden Administration has been told by its Republican opponents that they cannot expect that same luxury this time around.[22]  The trillion-dollar coin proposal may be an absurd solution, but it is an absurd solution to an equally absurd problem. If embracing absurdity can bring financial stability, then it would be absurdly irresponsible for the Biden Administration not to do so.

* J.D. Candidate, Class of 2022, Arizona State University Sandra Day O’Connor College of Law.

[1] Jeff Stein, U.S. default this fall would cost 6 million jobs, wipe out $15 trillion in wealth, study says, Washington Post (Sept. 21, 2021), https://www.washingtonpost.com/us-policy/2021/09/21/debt-ceiling-recession-/.

[2] Joseph Zeballos-Roig, Treasury Secretary Yellen says she wants to get rid of the debt ceiling as McConnell threatens another default standoff in 2 months, Business Insider (Oct. 11, 2021), https://www.businessinsider.com/yellen-debt-ceiling-congress-mcconnell-gop-biden-default-2021-10.

[3] Emily Cochrane, Republicans Block Government Funding, Refusing to Lift Debt Limit, N.Y. Times (Oct. 6, 2021), https://www.nytimes.com/2021/09/27/us/politics/republicans-block-government-funding-bill-debt-limit.html.

[4] John Ditrexie, US Loses AAA Rating at S&P on Concerns Debt Cuts Deficit, Bloomberg (Aug. 6, 2011), https://www.bloomberg.com/news/articles/2011-08-06/u-s-credit-rating-cut-by-s-p-for-first-time-on-deficit-reduction-accord.

[5] CRS. Rep No. RL31967, at 3 (2015). (That law changed the overall congressional perspective regarding issues concerning the national debt away from paying for individual pieces of legislation by incurring new debt and embraced the concept that Congress should prevent the government from exceeding a certain total of outstanding debt that Congress had already determined would be too much).

[6] Linda Kowalcky & Lance T. LeLoup, Congress and the Politics of Statutory Debt Limitation, 53 Public Administration Rev. 14, 16 (1993), https://themonkeycage.org/wp-content/uploads/2011/07/debt-ceiling-leloup-1993.pdf. The debt ceiling used to be the central piece of legislation that enabled congressional debate and hearings to be held on issues involving the national budget, however following the passage of the Budget and Impoundment Act of 1974, the Congressional Budget Office would absorb that responsibility.

[7] Dylan Matthews, How Joe Biden Could End the Debt Ceiling — All By Himself, Vox (Sept. 28, 2021), https://www.vox.com/policy-and-politics/22684328/us-debt-ceiling-government-shutdown-biden-democrats. (As far back as John F. Kennedy and Lyndon B. Johnson’s presidencies, House Republicans were overwhelmingly voting against their opponents’ debt ceiling hikes (Senate Republicans were more prudent). But until the Obama administration, most votes against raising the limit were cheap talk.)

[8] Id. (Voting against an increase allowed politicians (including first-term Sen. Barack Obama) to posture as serious about balancing the budget, but the ultimate passage of the measure was never in jeopardy.)

[9] Tom Risen, Why Do Only US and Denmark Have a Debt Ceiling?, US World & News Report (Oct. 11, 2013), https://www.usnews.com/news/articles/2013/10/11/why-do-only-us-and-denmark-have-a-debt-ceiling. (The United States is the only democracy in the OECD, other than Denmark and Poland, that has a self-imposed legal limit on the amount of debt that it can issue.)

[10] Matthews, supra note 7.

[11] CRS Rep. No. R43389, at 4, (2021). (That understanding that Congress will pay for all of the laws that it passes, is why prior to 1917 and the creation of the aggregate debt ceiling, Congress was required to direct the Treasury to either issue loans or other financial instruments in order to issue that debt during that same legislative session.)

[12] Because the debt ceiling is now assessed on an aggregate rather than an individual policy basis, the federal government often finds itself in a position where, for example, it passes a law that costs $10, authorizes provisions that pay for up to $8 of its costs via taxation, but then faces the separate but related issue of exceeding the national debt ceiling when it attempts to issue debt to recoup those costs.

[13] Jennifer Bendery, Mitch McConnell’s Bogus Argument for Refusing To Raise The Debt Limit, Huffington Post (Sept. 30, 2021), https://www.huffpost.com/entry/mitch-mcconnell-raise-debt limit_n_61547973e4b075408bd1ba9f.

[14] The Omnibus Consolidated Appropriations Act of 1997, H.R. 36101, 104th Cong § 5112 (k), (1997).

[15] Satoshi Kamabayashi, Toss a Coin: A Crackpot Idea to Circumvent America’s Debt Ceiling Gains Currency, The Economist (Jan 12, 2013), https://www.economist.com/finance-and-economics/2013/01/12/toss-a-coin.

[16] Wendy Edelberg &Louise Sheiner, How Worried Should We Be If the Debt Ceiling Isn’t lifted?, Brookings Institute (Sept. 28, 2021), https://www.brookings.edu/blog/up-front/2021/09/28/how-worried-should-we-be-if-the-debt-ceiling-isnt-lifted/.

[17] Neil H. Buchanan, Bargaining in the Shadow of the Debt Ceiling: When Negotiating over Spending and Tax Laws, Congress and the Press and the President Consider the Debt Ceiling a Dead Letter, George Washington University (2013), https://scholarship.law.gwu.edu/faculty_publications/323/.

[18] Jeffery Rosen, How Would the Supreme Court Rule on Obama Raising the Debt Ceiling Himself?, New Republic, (July 28, 2011), https://newrepublic.com/article/92884/supreme-court-obama-debt-ceiling

[19] Lowell R. Ricketts, Quantitative Easing Explained, Fed. Res. Bank of St. Louis (April, 2011), https://files.stlouisfed.org/files/htdocs/pageone-economics/uploads/newsletter/2011/201104.pdf

[20] Kamabayashi, supra note 15.. (The Federal Reserve could ensure that commercial banks do not lend out excess reserves in a few distinct ways, as long as the Federal Reserve pays interest on those bank’s reserves at the Fed, the return commercial banks would receive from them is greater than the banks could receive from alternative uses.)

[21] Dylan Matthews, The Trillion-dollar Coin Scheme, Explained By the Guy Who Invented It, Vox (Oct. 7, 2021), https://www.vox.com/22711346/trillion-dollar-coin-mintthecoin-debt-ceiling-beowulf. (The Federal Reserve is able to do this because around 35% of the outstanding debt that is accounted for in the debt ceiling limitation is already held by the Federal Reserve in the form of US Treasury bonds.)

[22] Ezra Klein, Treasury: We Won’t Mint a Platinum Coin to Sidestep the Debt Ceiling, Wash. Post (Jan. 12, 2013), https://www.washingtonpost.com/news/wonk/wp/2013/01/12/treasury-we-wont-mint-a-platinum-coin-to-sidestep-the-debt-ceiling/.

Estate Tax Changes Make Death and Taxes Even More Certain

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By Camerin Ketterling*

Joe Biden’s presidential victory in the 2020 election put estate planning attorneys and their clients in precarious positions. Not only did a Democrat winner threaten the generous tax rates of the Trump era, but Biden’s win also threatens historically high federal estate tax exclusions. These exclusions refer to the maximum value an estate can reach before federal taxes must be paid from the estate before disbursement to beneficiaries.[1] The estate tax exclusion ranged between $1.5 million in 2004 and 2005 to roughly $5 million throughout most of the 2010s.[2] In 2017, former President Donald Trump’s “Tax Cuts and Jobs Act”[3] amended the Internal Revenue Code in part by increasing the exclusion amount from $5.49 million in 2017 to $11.18 million in 2018.[4]

Automatically adjusting for inflation, this year’s estate tax exclusion increased to a massive $11.7 million.[5] As it stands, the current tax code provides that the exclusion will revert to $5 million after the year 2025.[6] However, with a new democratic regime in Washington, estate planning attorneys are preparing for more immediate changes in estate taxes and are concerned that their carefully drafted estate plans may no longer adequately protect their clients’ assets.

President Biden’s “American Families Plan” aims to increase social programs as well as address inequities in the United States tax system, and to accomplish this, the Biden administration needs to raise revenue through increased taxes.[7] Lowering the estate tax exclusion is not the only method the Biden administration has considered for increasing revenue through estate taxes. In May 2021, the Department of the Treasury published a description of proposed tax changes under the Biden administration, one of which being the implementation of capital gains taxes on deceased persons’ estates.[8] Currently, a decedent’s estate does not pay any capital gains taxes on its accrued unrealized gains. Instead, the cost basis of the estate’s assets is “stepped up” to equal the value on the date of death.[9] This means that if the beneficiary sells an inherited asset, she will pay the capital gains tax based on the value of the asset at the time of the decedent’s death as opposed to its original purchase price. This results in a significant loss of revenue for the federal government. With some exclusions, Biden’s proposal would tax those unrealized gains as if the decedent had sold the asset at the time of death.[10]

Although many are worried about the estate tax changes, small business owners who want their children to inherit their businesses represent an area of special concern. These concerns prompted the accounting firm, Ernst & Young, to conduct a study on the possible effects of capital gains taxes being accessed on inherited small businesses.[11] The study noted that many family businesses will probably have liquidity issues as well as issues in valuing the business and the assets of the business, which could get them into trouble with the IRS.[12] More particular concerns center around family farms. Although subject to debate, some argue that those who inherit farmland may have to sell part of the land to pay the estate tax as most of the value is locked into the land itself as opposed to being held in cash reserves.[13] Fears revolving around small businesses are not lost on the current administration. The Department of the Treasury’s proposals on capital gains included a provision explaining, “[p]ayment of tax on the appreciation of certain family-owned and -operated businesses would not be due until the interest in the business is sold or the business ceases to be family-owned and operated.”[14]

Adding to the uncertainty, it is not yet clear which proposed estate tax change will be implemented when all is said and done. The Department of the Treasury’s proposals do not include any mention of adjusting the exclusion amount. On the contrary, in September of 2021, the House Ways and Means Committee issued tax proposals which include lowering the exclusion to $5 million in 2022, but the committee neglected to include any proposal for capital gains adjustments for estate taxes.[15] Although uncertainty remains around how estate taxes will change in the coming year, estate planners and their clients can be confident that their carefully devised plans will likely need adjusting.

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

[1] 26 U.S.C.A § 2010(c).

[2] Estate Tax, IRS, https://www.irs.gov/businesses/small-businesses-self-employed/estate-tax.

[3] Tax Cuts and Jobs Act of 2017, Pub. L. No. 115-97, 131 Stat. 2054.

[4] Supra note 2.

[5] Id.

[6] Supra note 1.

[7] Press Release, Fact Sheet: The American Families Plan, THE WHITE HOUSE (April 28, 2021), https://www.whitehouse.gov/briefing-room/statements-releases/2021/04/28/fact-sheet-the-american-families-plan/.

[8] US Dep’t of Treasury, General Explanations of the Administration’s Fiscal Year 2022 Revenue Proposals (May 2021), https://home.treasury.gov/system/files/131/General-Explanations-FY2022.pdf#page=69.

[9] 26 U.S.C. § 2031(a).

[10] Supra note 8.

[11] Ernst & Young, Repealing Step-Up of Basis on Inherited Asset: Macroeconomic Impacts and Effects on Illustrative Family Businesses (2021), https://www.fb.org/files/FBETC_Stepped-Up_Basis_Report_2021.

[12] Id.

[13] Glenn Kessler, Ad Exaggerates Potential Impact of Biden Estate Plan, THE WASHINGTON POST (October 19, 2021), https://www.washingtonpost.com/politics/2021/10/19/ad-exaggerates-potential-impact-biden-estate-tax-plan/.

[14] Supra note 8.

[15] H.R. 5376, 117th Cong. (2021).

Should Hotels Be Classified as Single Asset Real Estate?

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By Ryan Deutsch*

The recent enactment of the Small Business Reorganization Act of 2019 (“SBRA”) has generated significant discussion in the bankruptcy world.[1] The SBRA created Subchapter V of Chapter 11 to distinguish small business bankruptcies from typical larger Chapter 11 cases. The goal of the SBRA is to streamline the bankruptcy process for Chapter 11 debtors by reducing costs, and offering other enticing benefits.[2] Usually, the SBRA only applies to debtors with secured and unsecured debts of less than $2,726,000.[3] However, the recent passage of the Coronavirus Aid, Relief, and Economic Security Act[4] (“CARES Act”) extended this debt ceiling to $7,500,000.[5] This extension expands the number of debtors qualifying for Subchapter V bankruptcy by a significant magnitude.

Thus, debtors that ordinarily would not qualify for Subchapter V benefits are permitted, at least for a brief period, to capitalize on these benefits. Many small hotel chains are filing for Subchapter V due to the recent downturn in the industry caused by the COVID-19 pandemic. However, a hurdle arises for hotels seeking Subchapter V benefits—escaping single asset real estate (“SARE”) classification. The SARE classification bars debtors from filing under Subchapter V.[6]  The Bankruptcy Code defines Single Asset Real Estate as the following:

The term “single asset real estate” means real property constituting a single property or project, other than residential real property with fewer than 4 residential units, which generates substantially all of the gross income of a debtor . . . and on which no substantial business is being conducted by a debtor other than the business of operating the real property and activities incidental thereto.[7]

On April 20, 2021, a Florida Bankruptcy court issued an opinion addressing whether a hotel filing for Subchapter V benefits classified as a SARE Debtor.[8] The Debtor, ENKOGS1, LLC, owned and operated a seventy-nine-room hotel.[9] Bankruptcy Judge Karen Jennemann, who presided over the case, noted that although the phrasing of the SARE statutory definition is somewhat puzzling, it essentially requires a debtor to show they do more than just manage the real property.[10]

Courts have interpreted the statute as imposing the following three requirements for characterizing a Debtor’s case as a SARE: (1) the debtor must have real property constituting a single property or project, (2) which generates substantially all of the gross income of the debtor, and (3) on which no substantial business is conducted other than the business of operating the real property and activities thereto.[11]

Most of the SARE debate in this case focused around the third prong of the test. Determining whether an entity qualifies as a SARE is a fact specific analysis. In this case, the Debtor hotel employed fifteen individuals, provided room cleaning services, laundry services, internet/wi-fi services, phone services, parking, complimentary breakfast, a swimming pool, and a fitness center.[12] Judge Jennemann found that this collection of services excluded the hotel from SARE status.

Judge Jennemann’s decision states that “[e]very amenity is designed to attract guests to choose that hotel over other lodging options. And every amenity is essential to the hotel’s financial success.” Additionally, Judge Jennemann reasons, “Even hotels that offer fewer services at no additional charge will require more staff, more cost, and more effort than companies managing vacant land or even an apartment complex where tenants sign a one-year lease and require little additional assistance.”[13]

These statements beg two assumptions. First, that there must be different levels of effort deployed by apartment complex management and hotel management. And second, that hotels are a unique industry in their use of amenities to attract guests for financial success.

Judge Jennemann’s reasons for distinguishing hotels from apartment complexes as a SARE classification are problematic under a critical examination. For instance, the decision reads, “the hotel has no-expectation that short-term, overnight guests, for example, will fix a drippy bathroom sink.”[14] However, residents of apartment complexes are also often not required to fix their sinks and amenities. Instead, tenants often rely on an emergency maintenance technician to come to their apartment. Maintenance Technicians come even in the wee hours of the night. The same comparison can be made for other services the Debtor hotel offers. For example, most apartment complexes provide wi-fi, swimming pools, a fitness center, and study or conference rooms. Especially in the era of COVID-19, apartment complexes are taking extra precautions to clean these facilities often, just as a hotel would require cleaning daily. Thus, apartment complexes use the same amount as effort as hotels by having maintenance on call as frequently as hotels.

Additionally, although tenants often do not check in to apartment complexes after business hours, leasing officers require commendable effort to ensure that each room is ready for move-in and guiding the new tenant through the move-in process. Leasing managers make up for their lack of twenty-four-hour duty for the extra time with the tenant during the check-in process. As already mentioned, if any crisis comes up in the middle of the night, tenants can often call emergency maintenance to solve those issues. Therefore, apartment complexes and hotels are not quite as distinguishable from a managerial effort standpoint or when looking at services provided. 

Furthermore, it is not entirely true that hotels are unique in using amenities to diversify themselves from competition. Apartment complexes often strategically design their facilities to include amenities that diversify their complex from competitors. Thus, apartment complexes like hotels offer unique amenities to attract potential tenants from rival businesses. Whether in the form of a resort-style pool, a bonfire pit, or a unique putting green, apartment complexes advocate to potential tenants on why they are different from the competition. Thus, hotels and apartment complexes are not so different in their desire to provide distinctive amenities to create financial success.

Since the beginning of the COVID-19 pandemic, it is no secret that many industries are losing business compared to pre-pandemic times. Congress recognized this and extended the CARES Act to March of 2022 to provide a window of opportunity for industries to remedy their financial ruin. Hotels are of the industries hit hardest, and while the debt ceiling for filing under Subchapter V remains at the peak of $7,500,000, many hotels will try to use this window as an opportunity to file. In turn, many debtor hotels will face challenges from creditors attempting to classify the hotel as SARE. However, relying on Judge Jennemann’s opinion, it appears hotels will have a jump start in litigating around SARE status.

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

[1] Small Business Reorganization Act of 2019, Pub. L. No. 116-54, 133 Stat. 1079.

[2] James Blake Bailey & Edwin G. Rice, The Small Business Reorganization Act, Tampa Bay Bus. & Wealth, (Feb. 26, 2020), https://tbbwmag.com/2020/02/26/the-small-business-reorganization-act/.

[3] Id.

[4] Coronavirus Aid, Relief, and Economic Security Act, sec. 1113, Pub. L. No. 116-136, 134 Stat. 281, 310 (2020).

[5] President Biden signed the “CARES Extension Act of 2021” to extend the expiration dates of certain bankruptcy provisions, including the debt ceiling for small businesses, until at least Mar. 27, 2022. See COVID-19 Bankruptcy Relief Extension Act of 2021, sec. 2, Pub. L. No. 117-5, 135 Stat. 249.

[6] 11 U.S.C. § 1182(1)(A).

[7] 11 U.S.C. § 101(51B).

[8] In re ENKOGS1, LLC, 626 B.R. 860, 861 (Bankr. M.D. Fla. 2021).

[9] Id.

[10] Id. at 862.

[11] E.g., In re Scotia P. Co., LLC, 508 F.3d 214, 220 (5th Cir. 2007).

[12] Supra note 9, at 863.

[13] Id. at 864.

[14] Id. at 864.

Ushering in the New Era of Campaign Finance Law: A Discussion on Americans for Prosperity Foundation v. Bonta

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By Kristen Iteen*

In wake of the January 6th Capitol riots, corporate political donations have once again become the forefront of business and political debate.[1] However, criticism and discussion regarding political donations and public disclosure is not a novel issue. The United States Supreme Court and policymakers have continuously grappled with the topic of campaign finance and public disclosure laws. Nevertheless, after creating well known public disclosure precedent, the Supreme Court has once again moved the goal line for political transparency.

On July 1st, 2021 the Supreme Court handed down the decision Americans for Prosperity Foundation v. Bonta.[2] The main issue in this case was whether California’s disclosure requirement violated charities’ First Amendment rights.[3] Specifically, California required charitable organizations to disclose the identities of major donors to the State Attorney General’s Office.[4] The Americans For Prosperity Foundation and the Thomas More Law Center, two tax-exempt organizations, argued that the mandatory disclosure law violated their First Amendment right of free association because the disclosure requirement would make donors less likely to contribute given the risk of reprisals.[5] However, the State argued that it has an interest in preventing charitable fraud and self-dealing, and that up-front collection of donor information improved the efficiency and efficacy of the Attorney General’s regulatory efforts.[6]

While finding California’s law unconstitutional, the Court created noteworthy precedent regarding the standard of review and what constitutes a valid facial challenge for public disclosure cases in the future.[7] Drawing on former electoral and campaign finance precedent, Chief Justice Roberts writing for the majority, applied exacting scrutiny with a narrow tailoring requirement.[8] Additionally,  while citing the general rule for challenging facially neutral laws in the First Amendment context, Justice Roberts recognized a second type of facial challenge whereby a law may be invalidated as overbroad if a substantial number of its applications are unconstitutional, judged in relation to the statute’s plainly legitimate sweep.[9] Roberts reasoned that California’s law was not narrowly tailored, as there were various alternative mechanisms through which the Attorney General could obtain donor information.[10] Given this lack of tailoring, Roberts found that the law was overbroad and therefore not facially valid.[11]

In arriving at this conclusion, Roberts reasoned that every demand that is not narrowly tailored to achieve a legitimate state interest and that might chill first amendment association fails exacting scrutiny. [12] As Justice Sotomayor pronounced in her dissenting opinion, joined by Justice Breyer and Kagan, the majority’s analysis “marks reporting and disclosure requirements with a bull’s eye.”[13] Hinting that more nonprofits and corporations are likely to combat other disclosure requirements by arguing that the law is not narrowly tailored while simulations showing little or no burden. Sotomayor further argued that, given Roberts’ analysis and creation of precedent, regulated entities who wish to avoid their obligations can now do so by “vaguely waving toward First Amendment privacy concerns.”[14]

It is important to note that while campaign finance reform often arises as a political debate, the organizations presenting amicus briefs in support of the plaintiff-petitioners spanned the ideological spectrum: from the American Civil Liberties Union to the Proposition 8 Legal Defense Fund; from the Council of American-Islamic Relations to the Zionist Organization.  For instance, The ACLU and the NAACP Legal Defense and Education Fund argued that a critical corollary of the freedom to associate is the right to maintain the confidentiality of one’s association.[15] Similarly, Americans For Prosperity Foundation, founded by Republican mega-donors Charles and David Koch, echoed similar sentiments regarding the right to anonymous association.[16]

Overall, it is not a matter of if, but when other organizations and corporations are going to rely on the precedent established by Americans for Property Foundation v. Bonta, to strike down disclosure requirements in other areas of the law such as campaign finance.

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

[1] Andrew Ross Sorkin et al., How Corporate Donations Changed After the Capitol Riot, New York Times (Aug. 19, 2021), https://www.nytimes.com/2021/04/19/business/dealbook/corporate-donations-capitol-riot.html.

[2] Americans For Prosperity Foundation v. Bonta, 141 S.Ct. 2373 (2021).

[3] Id. at 2379.

[4] Id..; Cal. Govt. Code Ann. §12584 (West 2018).

[5] Americans for Prosperity Foundation, 141 S.Ct. at 2380.

[6] Id. at 2381.

[7] Id. at 238.

[8] Id. at 2383.

[9] Americans for Prosperity Foundation, 141 S.Ct. at 2387 (quoting United States v. Stevens, 130 S.Ct. 1577, 1587 (2010)).

[10] Id. at 2387.

[11] Id. at 2389.

[12] Id. at 2387.

[13] Americans for Prosperity Foundation, 141 S.Ct. at 2392 (Sotomayor, J., dissenting).

[14] Id.

[15] Brief Amici Curiae of The American Civil Liberties Union, Inc. at 4, Americans for Prosperity Foundation v. Bonta, 141 S.Ct. 2373 (2021) No. 19-251.

[16] Brief for Petitioner, Americans for Prosperity Foundation v. Bonta, 141 S.Ct. 2373 (2021) No. 19-251.

Epic Games v. Apple: Taking on Big Brother

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By Marcel Ruzan*

When Apple Computers released its infamous “1984” commercial during Super Bowl XVIII it was intended to be symbolic of Apple taking on the proverbial “Big Brother” that the established giants of the tech industry represented. Thirty-seven years and over a trillion dollars in revenue later, Apple has gone from the plucky underdog to a technology behemoth that is the most valuable company on the planet.[1] Apple’s success comes from its stellar brand loyalty with consumers, and its consistent, easy-to-use software that people of all ages feel comfortable using.

Part of the comfort comes from the closed nature of the App Store on iOS compared to the open and more blurry nature of Android’s various app stores and downloading methods. The only way to download apps onto the iPhone or iPad is through Apple’s App Store, which is tightly controlled by the folks at Apple, subjecting apps to rigorous checks and scrutiny. For all this work Apple claims to do in exchange for access to the iOS ecosystem and over a billion users, software developers are required to pay what has been unofficially dubbed “The Apple Tax” which is a 30% cut of all in-app sales that occur.[2]

The App Store, the closed nature of iOS, and the Apple Tax have ruffled the feathers of developers for years, but on August 13, 2020, everything was shaken up. Epic Games, the creators of the video game Fortnite, implemented its own in-app payment method within the mobile version of Fortnite that bypassed Apple’s payment system and avoided the Apple Tax.[3]  When Apple removed Fortnite from the App Store, in accordance with the policies that Epic Games agreed to, Epic surprised Apple and retaliated with a sixty-five page lawsuit and released a video called “Nineteen Eighty-Fortnite” which was an obvious parody of Apple’s 1984.[4] It was clear that Epic intended to be removed from the App Store due to the immediacy of the lawsuit and the PR campaign that followed. Epic claimed that Apple violated the Sherman Act and the California Unfair Competition Law because it “unlawfully maintains a total monopoly in the iOS App Distribution Market” and filed ten total claims against Apple.[5]  California’s UCL has a lower bar for remedies that allow claims to be brought on general unfair practices, and does not require a monopoly for courts to act.[6] The California UCL looks for “any unlawful, unfair, or fraudulent business act or practice” and a practice may be deemed unfair even if it is not prohibited by other antitrust laws.[7]

A challenging aspect about claiming Apple is a monopoly, is that Epic needed to define the market that Apple was monopolizing, and ultimately Epic lost that battle. Epic tried and failed to prove that Apple was an illegal monopolist in control of the iOS platform as a whole, and the payment processing system within iOS.[8] The court determined that Epic failed to meet the burden of establishing the relevant market and that “digital mobile gaming transactions” was the correct market for this claim.[9] To meet the burden, Epic needed to show that new rivals are being prevented from entering the defined market and that existing rivals lack the ability to expand their output which could challenge the defendant’s high price.[10] District Court Judge Yvonne Gonzalez Rodgers wrote that Epic overreached in its claims and market definition, and this caused the trial record to not be “as fulsome with respect to antitrust conduct in the relevant markets as it could have been.”[11] At multiple points during her opinion, Judge Yvonne Gonzalez Rodgers points to anti-competitive activities Apple is conducting but states that it does not rise to the level of monopolistic behavior because Epic could not meet the burden.[12] It was noted that Sony, Microsoft, and Nvidia each entering into the mobile gaming submarket in recent years shows that the submarket is dynamic and currently evolving.[13] Judge Yvonne Gonzalez Rodgers was extremely skeptical of Epic’s motivations because she noted that Epic had already penetrated and dominated other video game markets, and also noted that Epic viewed Apple as an impediment to the mobile gaming market.[14]

One of the most controversial App Store policies, which was a part of the lawsuit and the only claim out of the ten that Epic won, is the Anti-Steering provision. This provision prevented developers from not only providing an in-app option to purchase the content off the app but also prevented developers from even telling consumers that the option existed.[15] For example, Netflix could offer subscriptions through the iOS app, be forced to give up that 30% cut, and would be unable to inform their consumers that they could have subscribed through the website. At the time of writing, the Netflix prices are the same on the iOS app as they are on the website, so it does not seem massively detrimental. Yet if Netflix had offered a discount through the website subscription option, they would not be able to tell consumers in the app about those savings. The court determined that the Anti-Steering provision was anticompetitive, and that Apple had no real justification for the behavior.[16] Apple was required to eliminate that provision from the App Store agreement, with the court stating that it will “increase competition, increase transparency, increase consumer choice and information while preserving Apple’s iOS ecosystem which has procompetitive justifications.”[17]

At the conclusion of the trial, Judge Yvonne Gonzalez Rodgers stated that Apple’s enforcement of the Anti-Steering provision was anticompetitive under the California UCL, but concluded that it did not raise Apple to the level of a monopoly under the Sherman Act.[18] The court also determined that Epic had violated its App Store agreement with Apple and was required to pay damages for its breach of contract.[19] While Apple may have walked away from this trial without a monopoly label, the ruling was not exactly an endorsement of its practices. The Pandora’s box may still burst open if future lawsuits bring a more persuasive challenge, or if Epic is successful upon appeal. There is genuine concern that technology companies can spend decades and billions of dollars developing closed software only to be forced to open them up if they become too successful. If consumers flock to a closed system, especially in the current state of consumer data privacy, courts shouldn’t look to further “competition” at the cost of the security and privacy that a closed system provides. Only time, and multiple appeals, will tell if Apple remains the hero of the story, or if it becomes the Big Brother it feared.

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

[1] Jenna Ross, The Biggest Companies in the World in 2021, Visual Capitalist (June 10, 2021), https://www.visualcapitalist.com/the-biggest-companies-in-the-world-in-2021/.

[2] Adi Robertson, A Comprehensive Breakdown of the Epic v. Apple Ruling, The Verge (Sep. 12, 2021), https://www.theverge.com/2021/9/12/22667694/epic-v-apple-trial-fortnite-judge-yvonne-gonzalez-rogers-final-ruling-injunction-breakdown.

[3] Id.

[4] Id.

[5] Epic Games, Inc. v. Apple Inc., No. 4:20-cv-05640-YGR, 2021 U.S. Dist. LEXIS 172303, at *327-28 (N.D. Cal. Sep. 10, 2021).

[6] Cal. Bus. & Prof. Code § 17200.

[7] Epic Games, supra note 5, at *287.

[8] Id. at *11-12.

[9] Id. at *13.

[10] Rebel Oil Co. v. Atl. Richfield Co., 51 F.3d 1421, 1438-39 (9th Cir. 1995).

[11] Epic Games, supra note 5, at *327.

[12] Id. at *13.

[13] Id. at *231.

[14] Id. at *11-12.

[15] Robertson, supra note 2.

[16] Epic Games, supra note 5, at *327.

[17] Id. at *328.

[18] Id.

[19] Id. at *326.

Alexander Wang, Luxury Fashion, and the Business of Intellectual Property Infringement in Fashion

PDF Available

By Markus Benavidez *

          Jangle Vision, a design house based in California, has sued luxury fashion designer Alexander Wang for alleged copyright infringement and unfair competition and is seeking monetary damages of $75 million.[1] The complaint alleges that Alexander Wang unlawfully utilized Jangle Vision’s copyrighted art—The Jangle Vision Twins—in various advertisements, advertising content, and emails for promotion of their rhinestone bag line.[2]

          Claudia Diroma, Jangle Vision’s founder, originally provided Alexander Wang access to their art, including “Jangle Vision Twins in different colored skins framed with circular structures,” as part of an application for a temporary graphic designer position with Alexander Wang Incorporated in 2018.[3] After Ms. Diroma was contacted by a talent consultant for the company, she provided additional character designs for consideration of her application but heard nothing further from the company.[4]

          In July 2020, Alexander Wang posted ad campaigns on their Instagram and Facebook which contained characters that are strikingly similar to those created by Jangle Vision.[5] In addition to these posts, Alexander Wang displayed these advertisements in their stores and marketing emails.[6] Jangle Vision then filed suit alleging copyright infringement and unfair competition by Alexander Wang and has requested $75 million in relief.[7]

            While luxury brands seem to be the embodiment of creative expression, they may not be that creative after all, as this isn’t the first time that a luxury brand has coopted a smaller artist’s work for their own gain. For example, in 2018, French luxury designer Christian Dior was accused of stealing designs from Orjit Sen, a founder of the New-Delhi brand People Tree.[8] Upon bringing suit, however, a settlement was quickly reached for an undisclosed amount.[9] While a settlement was reached, this does not rectify the fact that Dior, an internationally recognized and highly regarded luxury brand, created a nearly identical print to that of People Tree’s and openly sold the product. Clearly, they did not see this as a problem. Similarly, the fashion retailer Zara has faced numerous claims of stealing from other artists. Yet, both independent designers and big-name luxury designers—such as Christian Louboutin—have yet to prevail against the multi-billion-dollar retailer.[10] While stealing from independent designers is clearly a problem in the fashion space, why do independent artists never seem to prevail?

            Largely, small, independent designers are unlikely to prevail in cases similar to the ones above simply because the law is not on the side of fashion. While fashion designers and companies alike often argue for greater intellectual property rights, large fashion businesses still use various loopholes in intellectual property law to substantiate their stealing from smaller designers. Trademark protections, for example, only apply to those elements of the design with an identifiable mark.[11] For example, the iconic Louis Vuitton “LV” monogram is the subject of trademark protection. This avenue of protection is often difficult for independent designers to pursue,  because of their lack of brand recognition and resources to pursue such litigations.[12] Additionally, designers may pursue trade dress protections to protect the design of the product.[13] In order to receive such protections, designers must demonstrate that their design is distinct, which has been clarified to mean an “inherently distinctive mark or a secondary meaning in trade.”[14] This is likely the most viable protection of many designers but difficult to obtain because fashion has an extremely short life-cycle and thus proving distinctiveness may be extremely hard for a small, unknown fashion house. [15] Lastly, copyright and patent protections are also insufficient avenues for ensuring protection of designs.[16] First, the courts do not recognize clothing as a protectable article under copyright law, thus this avenue provides no protection or recourse to designers.[17] Second, the route of patents has an extremely high bar—designers must prove their design is unusual and memorable—and they are extremely expensive to obtain.[18] As such, independent designers, often with limited resources and time, are left unprotected and subject to infringement with little opportunity to pursue recourse.

          The current state of the law does not offer great protections for fashion designers, and thus Diroma faces an uphill battle to defeat Wang in its recent lawsuit. However, if a favorable decision can be reached, the case may set a massive precedent in protecting independent designer’s work. This case, however, is about more than protecting independent fashion designers. This case can offer two possible outcomes: one, the case may outline greater protections for designers who experience infringement from massive companies, or two, it may signal to large corporations, especially those in the field of fashion, that they will not be allowed to steal from independent designers and take credit for their work.

          This case is just one of a million others that demonstrate how large businesses take advantage of smaller businesses, without any recourse for the smaller business. Large companies in all markets engage in similar practices, and this does nothing but allow for big companies, with large economic backing, to dominate the marketplace. The creative field, and especially fashion, is one that is built on the idea of freedom of expression. Such increased freedom of expression can be encouraged by providing greater protections to designers. Currently, the law makes it very difficult for designers, specifically independent designers, to seek any recourse when their designs are stolen. By bolstering protections for designers and artists alike, the law will incentivize designers to create and disclose such creations—as they know that the law will provide a viable avenue of protection if someone attempts to capitalize on their hard work. By providing this increased protection, both the marketplace and fashion enthusiasts will reap the benefits of having diversified voices in the field. This case may not be new, but it is one that should be watched closely for its ability to change the course of design protections for fashion designers.

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

[1] Complaint at 4, Jangle Vision, LLC. v. Alexander Wang Inc., No. 2:21-cv-06627 (C.D. Cal. Aug. 16, 2021); Alexander Wang Named in $75 Million-Plus Copyright Suit for Allegedly Infringing Contest Entrant’s Designs, The Fashion Law (Aug. 17, 2021), https://www.thefashionlaw.com/alexander-wang-named-in-75-million-plus-copyright-suit-for-allegedly-infringing-applicants-designs/.

[2] Complaint, supra note 1, at 8.

[3] Complaint, supra note 1, at 6; Alexander Wang Named in $75 Million-Plus Copyright Suit for Allegedly Infringing Contest Entrant’s Designs, supra note 2.

[4] Complaint, supra note 1, at 6–8.

[5] Complaint, supra note 1, at 8; Alexander Wang Named in $75 Million-Plus Copyright Suit for Allegedly Infringing Contest Entrant’s Designs, supra note 2.

[6] Complaint, supra note 1, at 10–1.

[7] Complaint, supra note 1, at 17–18; Alexander Wang Named in $75 Million-Plus Copyright Suit for Allegedly Infringing Contest Entrant’s Designs, supra note 2.

[8] Christian Dior Pays Up After Copying Indian Designer’s Original Print, The Fashion Law (June 13, 2018), https://www.thefashionlaw.com/christian-dior-pays-up-after-copying-indian-designers-original-print/.

[9] Id.

[10] Oladele, supra note 11.

[11] Tiffany din Fagel Tse, Article, Coco Way Before Chanel: Protecting Independent Fashion Designers’ Intellectual Property Against Fast-Fashion Retailers, 24 Cath. U.J.L. & Tech. 401, 407-08 (2016).

[12] Id. at 407.

[13] Id. at 410; Kristin Sutor, Comment, In Fast-Fashion, One Day You’re In, and the Next Day You’re Out: A Solution to the Fashion Industry’s Intellectual Property Issues Outside of Intellectual Property Law, 2020 Mich. St. L. Rev. 853, 866 (2020).

[14] Sutor, supra note 15, at 866.

[15] Sutor, supra note 15, at 867.

[16] Tse, supra note 13, at 412-14; Sutor, supra note 15, at 867-70.

[17] Sutor, supra note 15, at 869.

[18] Tse, supra note 13, at 414-15; Sutor, supra note 15, at 867-69.

The Implications of the Supreme Court’s Decision to Uphold Indiana University’s Vaccine Mandate

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By Shelby Respicio*

            On August 12, 2021, the Supreme Court denied a request by students at Indiana University to block the school’s requirement that they receive the COVID-19 vaccine.[1] The request, reviewed by Justice Amy Coney Barrett, was the first case about vaccination requirements to reach the Supreme Court. The decision forecasts current and future vaccine mandate cases, which are likely to surface given the surging number of cases and hospitalizations across the country.[2]

            The case at issue, Klaassen v. Trustees of Indiana University, centers around a decision the university made in May to require all faculty, students, and staff to be vaccinated unless they applied and qualified for a religious or medical exemption.[3] In June, eight students sued the university, claiming the mandate violated their right to “bodily integrity” and due process under the U.S. Constitution’s Fourteenth Amendment.[4]

            In July, U.S. District Court Judge Damon Leichty denied the students’ request for a preliminary injunction, finding “the Fourteenth Amendment permits Indiana University to pursue a reasonable and due process of vaccination in the legitimate interest of public health for its students, faculty, and staff.”[5] Judge Leichty reasoned that while students seeking to avoid vaccination may have to forego a semester of school,  the students have the option to leave to another university that doesn’t require a vaccine.[6] Given the university’s interest in mandating vaccines, the Judge concluded that the “balance of harms tilts heavily in favor of the university.”[7] The students appealed.[8]

            The U.S. Court of Appeals for the Seventh Circuit similarly denied the students’ request.[9] In an opinion authored by Judge Easterbrook, the court compared the case to Jacobson v. Massachusetts. Jacobson was a 1905 Supreme Court case that held “a state may require all members of the public to be vaccinated against smallpox.”[10] Judge Easterbrook argued that given Jacobson, “there can’t be a constitutional problem with vaccination against SARS-CoV-2.”[11] He further articulated that this case is easier than Jacobson for two reasons.[12] First, Jacobson lacked exemptions for adults while here, the university has provided religious and medical exemptions.[13] And second, the state of Indiana is not requiring every member of the public to receive a vaccine, as opposed to Jacobson in which it was required by the state of Massachusetts.[14] The university’s vaccine requirement had survived another court.

            On August 6, 2021, the students requested relief from the Supreme Court.[15] Their arguments claiming constitutional violations mirrored those they made to the lower courts.[16] Without giving reason or referring the matter to the other justices, Justice Barrett rejected the students’ plea.[17.

            It seems improbable that the Supreme Court will come to a different conclusion in future vaccine mandate cases, given the precedent set by Jacobson and now, Klaassen. Future cases are likely to arise given that hundreds of colleges and universities across the country have mandated the COVID-19 vaccine, as have many private employers.[18] Moreover, various municipalities have begun implementing vaccine mandates for businesses.[19].

            On a related issue, on September 9, 2021, the Biden Administration announced a vaccine mandate on all private employers with more than 100 employees.[20] Employers will have the choice to either (1) ensure employees in the workplace are vaccinated, or (2) have unvaccinated employees in the workplace present negative test results on at least a weekly basis.[21] Issues are likely to arise as to whether the federal government has authority to mandate these vaccines and at least twenty-four states have threatened to bring a legal challenge against the Biden Administrative over this rule.[22]

            In sum, the Supreme Court’s decision to uphold Indiana University’s vaccine mandate will likely have implications for future cases surrounding vaccine mandates. These cases are almost inevitable given the vaccine mandates colleges, universities, companies, municipalities, and now, the Biden Administration, have implemented across the country. It is reasonable to assume that while Klaassen might have been the first COVID-19 vaccine mandate case to reach the Supreme Court, it likely won’t be the last.

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

[1] Andrew Chung, Students can’t Block Indiana University Vaccine Mandate –U.S. Supreme Court’s Barrett, Reuters (Aug. 12, 2021, 2:24 PM), https://www.reuters.com/world/us/supreme-courts-barrett-rejects-indiana-university-students-vaccine-mandate-2021-08-12/.

[2] See Harris v. Univ. of Massachusetts, Lowell, No. 21-CV-11244-DJC, 2021 WL 3848012 (D. Mass. Aug. 27, 2021) (upholding the University of Massachusetts’ vaccine mandate).

[3] Klaassen v. Trustees of Indiana Univ., 7 F.4th 592, 592 (7th Cir. 2021).

[4] Id.

[5] Klaassen v. Trustees of Indiana Univ., No. 1:21-CV-238 DRL, 2021 WL 3073926 at *1 (N.D. Ind. July 18, 2021).

[6] Id. at *43.

[7] Id.

[8] Klaassen, 7 F.4th at 592.

[9] Id. at 594.

[10] Jacobson v. Massachusetts, 197 U.S. 11, 25 (1905).

[11] Klaassen, 7 F.4th at 593.

[12] Id.

[13] Id.

[14] Id.

[15] Amy Howe, Barrett Leaves Indiana University’s Vaccine Mandate in Place, Scotusblog (Aug. 12, 2021, 9:40 PM), https://www.scotusblog.com/2021/08/barrett-leaves-indiana-universitys-vaccine-mandate-in-place/.

[16] Chung, supra note 1.

[17] Id.

[18] Id.

[19] See e.g., COVID-19 Policy Tracker, Multistate (last updated Sept. 10, 2021), https://www.multistate.us/issues/covid-19-policy-tracker.

[20] President Joseph Biden, Remarks by President Biden on Fighting the COVID-19 Pandemic (Sept. 9, 2021), https://www.whitehouse.gov/briefing-room/speeches-remarks/2021/09/09/remarks-by-president-biden-on-fighting-the-covid-19-pandemic-3/.

[21] Id.

[22] Harper Neidig, 24 States Threaten Legal Action Over Biden’s Vaccine Mandate, The Hill (Sept. 16, 2021, 3:32 PM) https://thehill.com/regulation/court-battles/572649-24-states-threaten-legal-action-over-bidens-vaccine-mandate.

Royal Dutch Shell Ruling Unlikely to Rattle U.S. Oil Companies’ Cages

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By: Brandon Taylor*

In May 2021, a Dutch trial court found that Royal Dutch Shell (“RDS”) had contributed to climate change and their corporate policies failed to adequately curb their carbon emissions.[1]  In a groundbreaking ruling, the court ordered RDS to reduce its 2019 carbon emissions by 45% by 2030.[2]

The Dutch Civil Code (DCC) provides that a person who commits a tortious or unlawful act against another person, must repair the damage that this other person has suffered.[3]  In determining whether RDS committed a tortious act, the court developed an “unwritten standard of care” and relied on a series of international treaties and accords including the UN Climate Convention, the Paris Agreement, and the European Union Treaty.[4]  The court  found that RDS breached the standard of care that these treaties required of private entities.[5]

In the U.S., public nuisance claims appear to provide the most likely cause of action for holding companies civilly liable for contributing to climate change, similar to the RDS decision in the Netherlands.[6]  U.S. federal law defines public nuisance as “an unreasonable interference with a right common to the general public.”[7]  The question now is, does RDS provide a blueprint for U.S. courts to follow to curb the emissions of high carbon emitting private entities?

U.S. businesses facing similar causes of action will be armed with case law not afforded to RDS. In American Electric Power Co. v. Connecticut (“AEP”) the Supreme Court held federal common law public nuisance claims are unavailable to plaintiffs as a means to address greenhouse gas emissions.[8]  The plaintiffs in AEP sought injunctive relief under federal common law public nuisance theory against power companies responsible for 10% of carbon emissions in the U.S.[9]  The Court held that the Clean Air Act  displaces any federal common-law right of private individuals to seek abatement of carbon emissions.[10]

Even so, plaintiffs seeking to curtail emissions for businesses had some reason for optimism.  AEP precluded injunctive relief but did not address whether plaintiffs have a common-law right to damages.  However, this optimism faded when the Ninth Circuit rejected this notion stating in Kivalina v. Exxon Mobil Corp., “the lack of a federal remedy may be a factor to be considered in determining whether Congress has displaced federal common law,” but applying Supreme Court precedents on displacement, the court held “if a cause of action is displaced, displacement is extended to all remedies.”[11]

It seems improbable that the Supreme Court will reverse its precedent in a manner similar to the Dutch court’s RDS ruling.  These setbacks have not disclosed the possibility of state and local public nuisance claims resulting in injunctive relief against carbon emitting businesses.[12]  State and local governments may permit plaintiffs to have a cause of action or bring parens patriae lawsuits on behalf of their constituents.[13]  Parens patriae suits are public nuisance suits brought by a state or municipality against a business to correct a social harm.[14]  U.S. Courts  have been hesitant to adopt this approach with climate change litigation as it may usurp the role of the legislature to regulate and provide clear standards for businesses.[15]

For now, private entities may be able to rest easy in their carbon emissions, largely free from the kind of judicial sanctions applied against RDS.  Due to the largely passive role U.S. courts have taken in climate change, it seems unlikely the decision in RDS will provide any framework for an overhaul of causes of action against high carbon emitters in the U.S.


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

[1] Rechtbank Den Haag, 26 mei 2021, HA ZA 19-379, at 4.4.37 (Neth.).

[2] Id. at 4.4.55.

[3] Art. 6:162 para. 1 BW.

[4] Rechtbank Den Haag at 4.5.4.

[5] Id. at 4.4.55.

[6] Albert C. Lin & Michael Burger, State Public Nuisance Claims and Climate Change Adaptation, 36 Pace Envtl. L. Rev. 49, 56 (2018).

[7] Native Vill. of Kivalina v. ExxonMobil Corp. 696 F.3d 849, 855 (9th Cir. 2012).

[8] Am. Elec. Power Co., Inc. v. Connecticut, 564 U.S. 410, 410 (2011).

[9] Id.

[10] Id. at 412.

[11] Native Vill. of Kivalina 696 F.3d at 857.

[12] Lin & Burger, supra note 6, at 56.

[13] Hon. Luther J. Strange III, A Prescription for Disaster: How Local Governments’ Abuse of Public Nuisance Claims Wrongly Elevates Courts and Litigants into a Policy-Making Role and Subverts the Equitable Administration of Justice, 70 S.C. L. Rev. 517, 533 (2019).

[14] Id.

[15] Id. at 537.

Propelling the Practice of Law into the Present: Arizona Approves More Alternative Business Structures

PDF Available

By: Courtney Kamauoha*

Eighty-six percent of civil legal matters reported by low-income Americans receive no or inadequate legal aid according to a 2017 study by the Legal Services Corporation.[1] In an effort to close the access to justice gap the Arizona Supreme Court issued an order eliminating Ethics Rule 5.4 in August of 2020, thereby allowing non-lawyers to own and manage law practices through Alternative Business Structure (“ABS”) licensing.[2] Arizona is the first state to take this action, but not the only state liberalizing its rules regarding the legal industry.[3] It is likely that this innovative trend will continue to spread to more states. This rule change is a needed shift away from traditional views of the legal profession which likely perpetuate the justice gap.

Comment 1 of Ethics Rule 5.4 explained that “[t]hese limitations are to protect the lawyer’s professional independence of judgment.” Rule 5.4 displayed a distrust in lawyers, implying that a lawyer’s judgment and duties of loyalty and confidentiality would be swayed if a non-lawyer had some control over the law firm.[4] The Arizona Task Force on the Delivery of Legal Services concluded that “no compelling reason exists for maintaining ER 5.4 because its twin goals of protecting a lawyer’s independent professional judgment and protecting the public are reflected in other ethical rules[.]”[5] For example, after Rule 5.4 was eliminated, lawyers are still held accountable for exercising their independent professional judgment and upholding their duties of loyalty and confidentiality to their clients.[6]

 

An Arizona Supreme Court press release following their order to eliminate Rule 5.4 explained that “[t]he Court’s goal is to improve access to justice and to encourage innovation in the delivery of legal services.”[7] To achieve these goals, the court amended Rule 31 to implement Alternative Business Structure (“ABS”) licensing.[8] An ABS is a business entity that includes nonlawyers who hold an economic or decision-making authority in the firm and must provide legal services in compliance with Rule 31.1.[9] Rule 31.1 requires an ABS to employ at least one attorney in good standing with the State Bar of Arizona, be licensed, and only permit those authorized to practice law to do so.[10]

 

So far eight entities have been licensed as an ABS in Arizona, with the last five licenses issued this August.[11] LegalZoom, a company worth $7 billion which went public in June, has applied for a license which is pending approval.[12] LegalZoom provides an online platform for various legal services such as Will creation, trademark applications, contracts, and bankruptcy aid.[13] LegalZoom has faced numerous unauthorized practice of law suits in multiple states.[14] If granted an ABS license, LegalZoom will likely avoid these suits in Arizona and more effectively be able to provide legal services to more people. The technological aspect of platforms like LegalZoom demonstrate the potential of this rule change; they provide access to legal services to everyone with a connection to the internet and at a lower cost.

 

The theory behind permitting outside investment and non-lawyer ownership in law practices is two-fold. First, the extra funding of firms will lead them to engage in more pro bono and low-cost legal services for the community.[15] Second, because more options for seeking legal services will be available, the services will be more affordable.[16] However, this may not be the actual result. Some have argued that additional funding could just as likely be used to improve the services already provided, raising their value and cost.[17] Further, more options and innovation may not result in cheaper options, though this is likely to occur.[18]

 

Even if the implementation of ABS licensure does not actually help to close the access to justice gap, it will still create a positive result. The rule change allows for greater innovation and collaboration across disciplines involving the practice of law and can lead to more comprehensive and holistic legal services. This change widens the options that lawyers have to pursue their legal careers and provides businesses with more leeway to be innovative in supplying legal services. Arizona’s elimination of Ethics Rule 5.4 is a step forward in bringing the practice of law into the current world, where technology and collaboration can make the delivery of legal service more effective, and hopefully, more affordable, and accessible for all.

 

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

[1] Legal Services Corporation, The Justice Gap: Measuring the Unmet Civil Legal Needs of Low- Income Americans 6 (2017), https://www.lsc.gov/sites/default/files/images/TheJusticeGap-FullReport.pdf.

[2] In re Restyle & Amend Rule 31, No. R-20-0034, 2020 Ariz. LEXIS 273 at *60 (Aug. 27, 2020).

[3] Daniel Rodriguez, Legal Services Reform at the Bleeding Edge, 56 ARIZ. ATT’Y 26, 27 (April 2020).

[4] Whitney Cunningham, In Favor of Alternative Business Structures, 56 ARIZ. ATT’Y 34, 36 (April 2020).

[5] ARIZ. SUP. CT. TASK FORCE ON THE DELIVERY OF LEGAL SERVICES, REPORT AND RECOMMENDATIONS at 13 (Oct. 4, 2019), https://www.azcourts.gov/Portals/74/LSTF/Report/LSTFReportRecommendationsRED10042019.pdf?ver=

2019-10-07-084849-750.

[6] Id.

[7] Press Release, Ariz. Sup. Ct., Arizona Supreme Court Makes Generational Advance in Access to Justice (Aug. 27, 2020), https://www.azcourts.gov/Portals/201/Press%20Releases/2020Releases/082720RulesAgenda.pdf.

[8] Supra note 2.

[9] Id. at 3.  

[10] Id.

[11] Sara Merken, Arizona approves five more entities for new legal business structure, REUTERS (Aug. 27, 2021, 1:24 PM), https://www.reuters.com/legal/legalindustry/arizona-approves-five-more-entities-new-legal-business-structure-2021-08-27/.

[12] Sam Skolnik, LegalZoom Asks to Employ Lawyers Under New Arizona Rules, Bloomberg Law (Aug. 16, 2021, 1:08 PM), https://news.bloomberglaw.com/business-and-practice/legalzoom-asks-to-employ-lawyers-under-new-arizona-rules?context=search&index=8.

[13] Id.

[14] LegalForce RAPC Worldwide, P.C. v. LegalZoom.com, Inc., No. 17-cv-07194-MMC, 2018 U.S. Dist. LEXIS 72488 (N.D. Cal. Apr. 30, 2018); Medlock v. LegalZoom.Com, Inc., No. 2012-208067, 2013 S.C. LEXIS 362 (Oct. 18, 2013); Janson v. LegalZoom.com, Inc., 802 F. Supp. 2d 1053 (W.D. Mo. 2011).

[15] Angela O’Meara, Non-lawyer Ownership and Management of Law Practices, 53 GONZ. L. REV. 339, 343 (2018).

[16] Id.

[17] Id. at 344-45.

[18] Id.

New Treasury Regulations May Open Floodgates for Foreign Investment in Opportunity Zones, but Questions on Tax Implications Remain

PDF Available

By Michael Shaw *

        Foreign taxpayers may have a new avenue to avoid gain recognition from U.S. businesses and real estate: distressed American neighborhoods.

In a set of proposed rules released by the Treasury Department on April 12, the Internal Revenue Service set out requirements for certain foreign persons and foreign-owned partnerships to qualify for Opportunity Zone treatment.[1] Opportunity Zones are a federal designation of certain lower income areas for which investment can produce various tax benefits for taxpayers. Opportunity Zones are among the biggest creations in the 2017 Tax Cuts and Jobs Act, the Trump administration’s overhaul of the Internal Revenue Code.[2]

The primary Opportunity Zone tax benefit comes from loosening the requirements for “like-kind” exchange treatment. Prior to the Tax Cuts and Jobs Act, to swap real property without triggering capital gains recognition, the exchanged property had to be of like-kind and held for productive use in a trade or business found in.[3] While technically outside the “like-kind” statue  purview, the Opportunity Zone Program works like §1031 like-kind exchanges when investors divert gains from real estate and other qualified business activities located within designated Opportunity Zones into Opportunity Funds. These Opportunity Funds don’t have to deal exclusively in like-kind property to recognize the tax benefit which has appeared to be a huge driver in Opportunity Zone investment.[4]

Prior to the proposed regulation, Opportunity Funds were solely a domestic tax vehicle. This is because foreign taxpayers are subject to withholding on gains from U.S. business and real estate interests under an “Effectively Connected To” test.[5]  Prior IRS comments published after the TCJA passed were unclear on how non-U.S. persons with gains located inside Opportunity Zones would be treated for tax purposes. The legislative intent of Opportunity Zones as a domestic economic driver coupled with the IRS’s rules regarding withholding of gains of foreign real property interests quelled non-American appetite for early Opportunity Zone investment.[6]

Yet even with the proposed rules set to change, questions regarding timing and future implications for foreign Opportunity Zone investors remain. While the Opportunity Zone component of the TCJA received bipartisan support,[7] the Biden administration’s intent to change various provisions of the TCJA call future applicability into question.

In any case, foreign investors interested in utilizing Opportunity Zones for expanded like-kind exchange treatment will want to act fast. As the provision and proposed regulations are written, the 10 percent capital gains deferral is only available to investments in Opportunity Funds made by the end of 2021, and the entire program is set to expire by 2026.[8]

In the meantime, the Treasury Department will receive comments and requests for public hearings on the rules until June 11, 2021.[9]

*J.D. Candidate, Class of 2022, Arizona State University Sandra Day O’Connor College of Law.

[1] Prop. Treas. Reg. § 121095-19, 86 Fed. Reg. 19585 (Apr. 14, 2021)

[2] Mary Margert Frank and Jennings Heussner, Opportunity Zones, Darden Case Note UVA-C-2429

[3] IRC §1031(a)(1)

[4] Libin Zhang (Nov. 20, 2020), Three Years of Opportunity Zones and Outlook for 2021, Bloomberg Tax, retrieved from https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3736450

[5] Lydia O’Neal (Apr. 12, 2021), IRS Opens Doors for Foreign Investors in Opportunity Zones, Bloomberg Tax, https://www.bloomberglaw.com/product/tax/bloombergtaxnews/true/X1P0VRP4000000?bna_news_filter=true#jcite

[6] Id.

[7] Press Release, Sen. Cory Booker, Booker, Wyden, Lewis, Neal Request GAO Study on Opportunity Zones (Nov. 7, 2019), https://www.booker.senate.gov/?p=press_release&id=1011

[8] Lydia O’Neal (Apr. 13, 2021), Foreign Investors Face Hurdles Under New Rules, Bloomberg Tax,  https://www.bloomberglaw.com/product/tax/bloombergtaxnews/daily-tax-report/X86DNJ58000000?bna_news_filter=daily-tax-report#jcite

[9] Prop. Treas. Reg. § 121095-19, 86 Fed. Reg. 19585, 19586 (Apr. 14, 2021)