As these may also be of interest to our readers here, I wanted to link to a couple of recent op-eds. 

As to the first, I drafted one with Joe Peiffer about FINRA’s expungement process. It ran in Financial Planning Magazine on November 15.  The crux of the argument is that FINRA’s reforms to its expungement process won’t fully solve the problem and will instead burden state regulators with additional unfunded responsibilities.  Here is a small excerpt:

Ultimately, the current reforms offer incremental improvements that will likely slow the deletion of valuable public records. Sadly, however, the current system continues to outsource expungement decisions away from FINRA — the primary regulator for brokerage firms — and onto independent contractor arbitrators. This system leaves the responsibility for educating those arbitrators about reasons not to grant expungements to complaining customers and thinly resourced state regulators.

This approach benefits FINRA because it allows it to avoid entangling itself on these issues. It also shifts costs away from FINRA. After all, parties seeking expungements pay hefty fees to FINRA for arbitration costs. Yet the public pays the price when FINRA  outsources responsibility for wise expungement decisions to poorly informed arbitrators who usually only hear from the brokers seeking expungement. 

Ultimately, FINRA should take this issue out of arbitration entirely and have its Office of Hearing Officers make decisions about which matters merit expungement. Unlike the broken arbitration process, this system would allow for error correction because decisions can be appealed to FINRA’s National Adjudicatory Council, its board of governors, the SEC and the federal courts.

To be clear, the reforms are a good thing and will make some real improvements.  But they won’t go far enough and will likely fail to solve the underlying problems.  The op-ed calls for adopting a solution James Fallows Tierney and I advocated for in a forthcoming law review article–moving expungement out of arbitration entirely.

As to the second, I put out a quick piece in The Hill on Twitter/X’s decision to file a claim against Media Matters.  It argues that Musk won’t be able to establish causation because his own actions have done much more to drive advertisers away. The op-ed closed this way:

Ultimately, the lawsuit appears to be another misstep by Musk. This thin-skinned retaliation undercuts any claim that X offers a home for free speech. The litigation will also struggle with showing that the Media Matters reporting actually caused advertisers to depart. After all, Musk’s recent round of antisemitic amplification was widely reported and condemned by the White House. The litigation seems much more likely to focus additional attention on Musk’s own statements — and the toxic accounts pushing hate speech and conspiracy theories on the site.

Disney’s CEO recently took this position publicly after the op-ed ran.  As everyone likely already knows, Mr. Musk offered some choice comments to advertisers yesteday:

“If somebody’s gonna try to blackmail me with advertising, blackmail me with money? Go fuck yourself,” he said.

“Go. Fuck. Yourself. Is that clear? I hope it is. Hey, Bob, if you’re in the audience,” he added, in an apparent reference to Robert Iger, chief executive of Walt Disney (DIS.N), which pulled ads on X. Iger spoke earlier at the event and said that Disney felt the association with X following Musk’s move “was not a positive one for us”. A spokesperson from Disney did not immediately respond to a request for comment.

And for today’s quick third item, the regulatory process for the Department of Labor’s fiduciary rulemaking continues to chug along.  Yesterday marked the deadline to request to appear and testify before the department of Labor.  The names of the persons and entities requesting to comment are available here.  It appears that a good mix of insurance industry personnel, financial services professionals, and consumer advocates will likely appear.  This should give the DOL a chance to hear a range of perspectives. Testimony will likely occur Dec. 12-13.

Dear BLPB Readers:

“Private law structures the legal building blocks that most profoundly affect our social and economic life, notably property, contract, and torts as well as central aspects of family law, trust law, work law, and more. It thus governs our relationships with each other in arguably the most important spheres of our lives: in the market, the workplace, the neighborhood, and intimate relations. Private law theories develop conceptual and normative analyses of these building blocks and critically investigate their meanings, their interrelationships, their varied institutionalizations, and their implications in these and other social settings. The theory of private law has a proud legacy stretching back to antiquity, which has been continually renewed and updated. The need for a new generation of private law theory has become all the more acute given questions and challenges posed by rapid technological change, economic globalization, and the rise of new forms of family and personal relations.

The Berkeley Center for Private Law theory promotes interdisciplinary research on these themes. We organize a variety of activities designed to stimulate dialogue, to exchange and advance knowledge, and to explore new ideas. The Berkeley Center for Private Law Theory aims to foster insights into the legal building blocks of our social and economic life and contribute to making them fair and just.

The University of California, Berkeley invites applications for the position of Postdoctoral Scholar. The successful candidate will be mentored by Professor Hanoch Dagan and the dynamic and collaborative research team of the Berkeley Center for Private Law Theory.”

The complete position description is here.

 

It always is a great pleasure to pass along and promote the work of a colleague.  And today, I get to post about the work of a UT Law colleague!  Many of you know Tomer Stein, who came to join us at UT Law back in the summer.  He is such an ideal colleague and, like many of us, has broad interests across business finance and governance.

This post supports a recent draft governance piece, the title of which is the same as this post–Of Directorships: Reconfiguring the Theory of the Firm.  You can find the draft here.  The abstract is included below.

This Article develops a novel account of directorships and then uses it to reconfigure the theory of the firm. This widely accepted theory holds that firms emerge to satisfy the economic need for carrying out vertically integrated business activities under a fiduciary contract that substitutes for the owners’ multiple agreements with contractors and suppliers. As per this theory, the fiduciary contract is inherently incomplete, yet often preferable: while it cannot address all future contingencies in the firm, it will effectively direct all unaccounted-for firm events by placing them under the owners’ purview as a matter of default, or residual right. Under this contractual mechanism, firm owners, such as corporate shareholders, acquire the status of residual claimants who have the power to decide on all contractually unenumerated contingencies.

This view of the firm is conceptually flawed and normatively mistaken. Firms do carry vertically integrated business activities managed by their fiduciaries, but those fiduciaries—agents, trustees, and directors—are not functional equivalents from either the legal or economic standpoint. Unlike agents and trustees who receive commands from principals and settlors, respectively, directors manage the firm’s business by exercising decisional autonomy. Conceptually, shareholders who hire directors do not run the firm’s business as residual claimants. Rather, it is the directors who manage the firm as residual obligors—all contractually unaccounted for contingencies are placed under the fiduciary’s purview as a matter of obligation. This feature makes directorship an attractive management mechanism that often outperforms other fiduciary mechanisms, and the residual-claimant structure that stands behind them, in a broad variety of contexts. By developing this critical insight, the Article proposes not only to reconfigure the prevalent theory of the firm, but also to redesign both federal and state laws in a way that will facilitate directorships not only in corporations, but also across several indispensable dimensions of our financial, communal, and familial organizations.

As someone who understands both the central role of the director in corporate governance and the incomplete and inaccurate principal/agent relationship between shareholders and directors, I have enthusiasm for this project!  But I also am intrigued by the thought that the ideas in the paper can be translated to non-business institutions and groups.

Read on, and enjoy!

The big corpgov news this week is obviously L’Affaire du OpenAI, but I have no idea what I think about that so instead I’m quickly going to highlight an interesting new lawsuit filed by a retired Oklahoma pensioner, alleging that the state’s anti-ESG law violates the First Amendment, as well as both state and federal requirements.

You can find all the relevant documents at this link, but the backstory is that Oklahoma passed a law prohibiting state agencies from contracting with financial institutions that “boycott” oil and gas interests.  OPERS – the state retirement system – took advantage of an exception that allowed continued investment if necessary to fulfill fiduciary responsibilities, which then prompted some nastygrams back and forth between the State Pension Commission (headed by the Treasurer, who is on the OPERS board, but was outvoted) with OPERS itself, regarding whether OPERS qualified for the exception.

And now, a former officer of the Oklahoma Public Employees Association has sued, claiming that the state is using his retirement assets to make an (illegitimate) political statement instead of protecting retiree savings.  The lawsuit is backed by the Oklahoma Public Employees Association.

Anyway, I’m not going to express an opinion on the merits of the suit but I am fascinated by the political economy here, given that OPERS’s board appears to be mainly political appointees.  Despite that fact, the Treasurer stood alone in his insistence on severing ties with “boycotting” institutions.  And I’m constantly trying to wrap my mind around how the First Amendment issues should play out, given the Supreme Court’s insistence that corporate speech may be controlled by shareholders through “the procedures of corporate democracy” – which of course should include shareholders like, say, state pension funds.

The title of this post is the name of the advanced business associations law course I will teach in the spring.  I got the idea for this course after talking to students about decreasing enrollments in advanced business law courses.  Although they attributed much of the decrease to grade shopping, they also noted that they and their peers often base course registration decisions on course names (from which they make assumptions) without reading the course descriptions.  So, a course named “Advanced Business Associations,” no matter how creatively it is taught (and I teach it as a discussion seminar), is not likely to attract positive attention.  When I floated using the HBO Max series Succession as a jumping off point for a discussion seminar on business law, they responded favorably.  The rest is, as they say, history. The proof of the pudding will be in the registration numbers.

The idea for the Succession-oriented course came to me quite naturally. I already was writing an essay on fiduciary duties relating to the series–forthcoming in the DePaul Law Review in a special volume focusing on Succession.  So, it was only a small jump to think about teaching more broadly from the many business law situations in the four seasons of the show.

Some of my friends from West Publishing heard about my teaching plans when they were visiting UT Law recently.  They mentioned the course to their colleague, Leslie Y. Garfield Tenzer, who produces a podcast for West Academic, Legal Tenzer: Casual Conversations on Noteworthy Legal Topics.  Leslie reached out and asked me to record an episode with her on the series and my course, which I recently did.  The podcast was released last week.  You can find it here.

My Succession course syllabus is still under construction.  If you have a favorite episode that you would like me to include–one that illustrates concepts from business governance or finance–let me know.  I admit that I am excited to teach from the material in Succession, a series that I enjoyed watching.

Back when I was in practice, so many years ago, I spent a bit of time on the IPO Cases, namely, a series of around 300 class actions involving dot-com startup IPOs that, we alleged, had been manipulated by underwriters.  Details differed from case to case, but the typical claim was that the underwriters used manipulative techniques, such as laddering, to cause dot com startups to “pop” in price upon their initial offering, thereby violating Section 10(b).

But we stumbled at class certification.  For false statements, there’s a well established paradigm for creating a classwide presumption of reliance that satisfies Rule 23.  For manipulative conduct there isn’t a paradigm, and our cases faltered.  The Second Circuit reversed one grant of class certification and remanded, In re IPO Securities Litigation, 471 F.3d 24 (2d Cir. 2006) and 483 F.3d 70 (2d Cir. 2006).  We moved for class certification a second time, and eventually matters settled.

Anyway, the recent decision denying class certification in In re January 2021 Short Squeeze Litigation, 21-2989-MDL-ALTONAGA (S.D. Fla. Nov. 13, 2023), takes me back.  It is not on Westlaw or Lexis yet, so all I can do is link the Law360 article, which attaches the opinion.  Anyway – 

This a Robinhood case, where plaintiffs alleged that Robinhood manipulated the prices of various meme stocks when it halted trading and closed out positions.  This was done, plaintiffs alleged, because Robinhood was experiencing liquidity issues at National Securities Clearing Corporation, but Robinhood misled the market as to the full extent of its actions and the reasons behind them.

The plaintiffs survived a motion to dismiss, but the court held that they could not prove reliance on a classwide basis.  The plaintiffs explicitly alleged that the market was not efficient – Robinhood was manipulating it, by halting trades!  Therefore, the plaintiffs could not claim the fraud on the market presumption of Basic v. Levinson, 485 U.S. 224 (1988), based on Robinhood’s lies.  And because Robinhood affirmatively lied, there could be no omissions liability under Affiliated Ute Citizens of Utah v. United States, 406 U.S. 128 (1972). 

What about reliance on the manipulative conduct, specifically, that allegedly distorted market pricing?  The court said, it would not accept some kind of lightened fraud on the market presumption for manipulation cases, that did not depend on market efficiency as articulated in Basic, because such a presumption “would prove too much while doing too little. Prove too much, because it would obviate the need for plaintiffs in manipulative conduct cases to prove reliance; do too little because it does not complete the causal connection between a plaintiff’s transaction in securities and a defendant’s manipulation.” (Op. at 60, quoting Desai v. Deutsche Bank Sec. Ltd., 573 F.3d 931 (9th Cir. 2009) (O’Scannlain, J., concurring)).  Therefore, no class certification.

Well, I’m not in the weeds of the facts enough to be able to say whether the class should have been certified, but the court misunderstood – just as the Desai court misunderstood – the argument for a reliance presumption in manipulation cases.  Properly interpreted, plaintiffs in manipulation cases should get a presumption of reliance, but they have a higher burden than for statement cases, and not a lower one, and plaintiffs do not need to ask for anything beyond what Basic already established.

We begin by observing that the fraud on the market presumption is actually two distinct propositions.  As the Supreme Court explained in Halliburton Co. v. Erica P. John Fund, Inc., 573 U.S. 258 (2014):

The [Basic] Court based that presumption on what is known as the “fraud-on-the-market” theory, which holds that the market price of shares traded on well-developed markets reflects all publicly available information, and, hence, any material misrepresentations.” Id., at 246, 108 S.Ct. 978. The Court also noted that, rather than scrutinize every piece of public information about a company for himself, the typical “investor who buys or sells stock at the price set by the market does so in reliance on the integrity of that price”—the belief that it reflects all public, material information. 

See the two ideas?  When I teach it, I call them the “objective” presumption – which is about how markets absorb information – and the “subjective” presumption – which is about how investors think about markets.  The Halliburton Court was clear in distinguishing these when it discussed the defendant’s attacks on Basic:

Halliburton’s primary argument for overruling Basic is that the decision rested on two premises that can no longer withstand scrutiny. The first premise concerns what is known as the “efficient capital markets hypothesis.”…. Halliburton also contests a second premise underlying the Basic presumption: the notion that investors “invest ‘in reliance on the integrity of [the market] price.’”

See the two premises, objective, and subjective?  Of course, as we know, the Supreme Court beat back Halliburton’s challenges, and the two presumptions – the objective and the subjective – remain intact.  (That said, the subjective presumption is in fact somewhat controversial – many argue it shouldn’t be necessary to prove a case at all, see eg Donald C. Langevoort, Basic at Twenty: Rethinking Fraud on the Market, 2009 Wis. L. Rev. 151 – but it’s there, so I accept it.)

Together these two presumptions establish: first, that the false statements impacted market prices, and second, that investors relied on market prices when trading.  Together, they create a syllogism: by relying on a price that was in fact manipulated, investors are deemed to have relied on the original false statement.  That is ultimately what reliance means in this context: Investors relied upon a market price that defendants fraudulently manipulated.

In the typical fraud on the market class action, plaintiffs bring in experts to attest as to market efficiency.  They demonstrate the market was liquid, followed by analysts, they show correlations between price movements and new information, they analyze bid-ask spreads, all in service of demonstrating that this is the kind of market to which the fraud on the market presumption should apply.

That evidence is important, but only for the objective presumption – namely, that false statements impact market prices.  If the market is not liquid and widely followed and has not historically reacted to new information etc etc, then it may very well be inappropriate to simply presume, without more, that a false statement influenced price.

But is this evidence important for the subjective presumption, namely, what investors think about markets?

I submit not.  No one conducts an event study to identify historic correlations between price and new information before they place a trade; they just trade.  Investors, when deciding whether they “rely” on market prices, use a much looser set of criteria – is it widely traded, a famous stock, heavily analyzed, on a major exchange?  That’s probably enough to get at whatever it is investors are in fact relying on in their heads when they “rely” on market prices, and it’s reasonable for them to do so.

If that’s right, then those loose indicia of market efficiency should be enough to presume that investors subjectively believed prices to reflect true value or a market price validly set or whatever work it is we think the subjective presumption is doing.

The detailed analysis, the event studies, the Cammer factors – that stuff is only necessary for the objective presumption, namely, that false statements did in fact impact the market.

Now, let’s think about manipulation claims – where the argument is “investors are misled to believe that prices at which they purchase and sell securities are determined by the natural interplay of supply and demand, not rigged by manipulators.”  ATSI Commc’ns, Inc. v. Shaar Fund, Ltd., 493 F.3d 87 (2d Cir. 2007).

There is no reason why the criteria should change for when we adopt the subjective presumption.  That is, if we can presume investors rely on market prices from basic indicia of efficiency in the context of false statements – widely traded stock on a major exchange – we should be able to presume investors rely on market prices in manipulation cases from the same criteria.  So, if the case concerns a widely traded and followed stock on a major exchange, the subjective presumption should be satisfied.

What about the second presumption, that false statements affect prices? 

In a manipulation case, there are no false statements.  Therefore, there is no presumption of price impact.  Instead, the plaintiffs are expected to prove price impact.  They are expected to come into court with evidence that the defendants’ manipulative conduct in fact affected the market price of the stock.  They do not ask for or receive a presumption at all.

If they do that, if they satisfy their burden, they will have satisfied both halves of the Basic syllogism.  The subjective presumption allowed them to show that investors relied on market prices, and the objective presumption was absent – it was replaced by actual facts proof.

In other words, manipulation plaintiffs are asking for less, not more.  They want only half of the Basic presumptions; they will prove the other half.  And they should be entitled that first half presumption.

So the Robinhood court was wrong when it followed Desai in holding that a presumption of reliance in the manipulation context would “Prove too much, because it would obviate the need for plaintiffs in manipulative conduct cases to prove reliance; do too little because it does not complete the causal connection.”   The presumption that plaintiffs need is one that Basic readily provides; beyond that, plaintiffs don’t need a presumption at all. 

Dear BLPB Readers:

“In 2022, the United States experienced 26 natural disasters, more than any other country in the
world. One storm alone, Hurricane Ian, cost the economy more than $110 billion dollars. Beyond
flooding, drought, and wildfire, in recent years the world has also seen the previously
unimaginable impact of the COVID-19 pandemic and multiple areas of human conflict,
including the war in Ukraine, which has disrupted global food supply and upended life for
millions of people. Each of these disasters brings a unique mix of impact to local businesses,
human lives, and the global economy.

What should businesses, regulators, lawmakers, and attorneys do to prepare for life in an
economy in which disasters are both more likely to strike, due to climate change, and more likely
to have profound multinational impacts, due to globalization? The American Business Law
Journal (ABLJ) seek manuscripts that address this question.

The “Doing Business in a Disaster Economy” special issue will take a broad perspective.
Submissions may cover a wide variety of topics addressing legal planning and regulatory
mechanisms for addressing disasters–before, during, and after the event. Paper topics may
include but are not limited to:
• Insolvency and financial aid, particularly for SMEs post-disaster.
• Meeting health care needs, particularly in underserved or rural areas.
• Addressing the impacts of systemic racism and ethnic bias on disaster preparedness and
the impact of disasters on communities of marginalized populations.
• Economic programs related to unemployment, loan repayment, or essential industry
protection or rebuilding.
• Land use and other environmental programs intended to mitigate predicted impacts of
natural disasters on local and national economies.
• The role of digital assets in a disaster economy.
• Evaluating previous relief programs (such as the American Rescue Plan) and making
recommendations for future programs.
• Valuation of property and insurance issues in high-risk areas.

Submissions incorporating interdisciplinary approaches and/or comparative and international law
are welcome, as are submissions from researchers based outside of North America. It is expected
that four papers will be accepted for the special issue; papers not accepted may be resubmitted to
the ABLJ for publication outside of the special issue.

Articles selected for the special issue will be published in Issue 4, Volume 61 (2024), of the
ABLJ. Submissions must be received by March 1, 2024 for consideration. Submissions should
be made to abljsubmission@alsb.org. Authors will be notified of their acceptance by March 15,
2024.” 

The complete call for papers is here: Download ABLJ 2024 Special Issue Call for Papers

Dear BLPB Readers:

“Babson College invites applicants for a tenure-track Assistant/Associate Professor position in our Accounting & Law division, beginning Fall 2024. We seek an intellectually curious colleague who is aligned with Babson’s mission of educating responsible entrepreneurial leaders who create economic and social value everywhere. Our commitment to diversity of all kinds empowers our students to consider possibilities beyond their own individual experiences – to design products and services, found companies and create value that will transform businesses, communities, and lives. As such, Babson is continually focused on attracting exceptional talent that will add richness to the academic experience. Babson is an Affirmative Action/Equal Opportunity employer.”

The complete job posting is here.

As I reflect on the current contentious world environment, I cannot help but note the impact that electronic communication has on maintaining quality personal and professional relationships.  Although it sometimes may seem that business law professors are less impacted by domestic and global events, our work’s engagement with broader economic, social, and political issues and our individual intersectionalities can keep us in the throes of it all.  As someone who cares deeply about (and believes in the power of) human relationships and interpersonal communication (leading me to co-design and co-teach small group communication course for our leadership curriculum), I offer some food for thought here.

We all enjoy free speech.  And I respect that right deeply.  I bear a tattoo on my body (an open “speech bubble” on my right scapula) as a symbol of that belief.

I also believe in the careful, considerate exercise of that important right.  I have written a bit about this before, in another blog space, arguing for well considered communication.  My conclusion in that post?

Just because a person can say something in the exercise of their rights to free speech, does not mean that the person should say something. And if someone chooses to say something, the way in which the communication is made can make all the difference. Through mindful collegiality, Ubuntu, civility, and other conduct reinforcing inclusion, a lawyer-leader can motivate action and loyalty in and outside their law practice.

Although I wrote that post back in February of 2022, what I say in the post still rings true to me.

Electronic communication seems to be an enabler of suboptimal behaviors in this regard.  I am, of course, not the first to observe this.  But I see relationships falling apart right and left (political pun acknowledged) because of people’s choices in using electronic communication, especially (although not exclusively) in group settings.  Most recently, as some of you readers know, this has been happening on the Association of American Law Schools Section on Women in Legal Education listserv.  This has saddened me.  That group, and the listserv that binds us, has historically been an inclusive space.  I hope we can revive that ethos of inclusion, even as long-term members of the section determine to disengage from communication in that forum.

There is so much information on the Internet about etiquette in electronic communication.  In the course I taught this semester, my co-instructor and I assigned some of those publications.  We had a robust discussion with the students.  Some expressed their surprise at the way certain words and phrases in emails and text messages may impact the reader in unintended ways.  We discussed whether to communicate electronically at all, and if so, how.  We assigned out-of-class work on related issues.  I felt good about the information we conveyed and the discussions we had.  That positive feeling was borne out when one of the students in the course used the material in another course (Corporate Finance) in which I also am the instructor.

I wish we had covered listservs in our course.  I plan to add that to future iterations of the course.  I have discovered that many organizations, undoubtedly struggling with the threat that listservs will disrupt group relations, have formalized rules about their usage.  This seems like a sensible approach to help avoid (or at least limit) the disrespect that may be shown to listserv managers and moderators in the event of a conflict over the appropriate use of the listserv.  For example, the American Bankruptcy Institute has listserv guidelines.  They provide instruction on best practices (including a statement on topic scope) and also on prohibited practices.  Among the prohibited practices is one that seems relevant to communications I now notice more frequently.

Subjects Generating More Heat Than Light

Occasionally, a subject will come up that generates lots of posts because of its controversial nature. If the discussion threatens to overwhelm our mailboxes or becomes nasty, we will ask that those interested in discussing it further take the discussion off the list.

Do not challenge or attack others. The discussions on the lists are meant to stimulate conversation, not to create contention. Let others have their say, just as you may.

The guidelines also include instructions on brevity, advise users how to alert readers to message content and length, and caution folks to “[o]nly send a message to the entire list when it contains information that everyone can benefit from.”  Other websites I reviewed offered similar guidance (in some cases using some of the same wording).

I offer all of this up for what it may be worth to you.  I am committing myself to working on being the best group member I can be because I value my relationships with members of the groups to which I belong.  These people have helped me ride over many bumps in my personal and professional lives over the years.  They have supported me in handling stress caused by deaths, recessions, bullying/verbal abuse, a global financial crisis, a global pandemic, a number of wars and political conflicts, and much more.  I know my students will benefit more from my teaching if I can manage that stress.  I also aim to teach them some of what I have learned about the importance of relationships as opportunities arise.

Moreover, as I earlier noted here on the BLPB, I am writing an essay that connects with this topic based on a presentation I gave at the annual Business Law Prof Blog symposium, “Connecting the Threads,” last month.  The essay, Business Lawyer Leadership: Valuing Relationships, will cover the connection of business law and lawyering to relationship building and maintenance.  It will be published in a forthcoming (spring 2024) volume of Transactions: The Tennessee Journal of Business Law that will feature works presented at the symposium together with faculty and student commentary.  I will post on the essay and the volume once online access is available.

I’m a law professor, the general counsel of a medtech company, a podcaster, and I design and deliver courses on a variety of topics as a consultant. I think about and use generative AI daily and it’s really helped boost my productivity. Apparently, I’m unusual among lawyers. According to a Wolter’s Kluwers Future Ready Lawyer report that surveyed 700 legal professionals in the  US and EU, only 15% of lawyers are using generative AI right now but 73% expect to use it next year. 43% of those surveyed see it as an opportunity, 25% see it as a threat, and 26% see it as both.

If you’re planning to be part of the 73% and you practice in the US, here are some ethical implications with citations to select model rules. A few weeks ago, I posted here about business implications that you and your clients should consider.

  • How can you stay up-to-date with the latest advancements in AI technology and best practices, ensuring that you continue to adapt and evolve as a legal professional in an increasingly technology-driven world? Rule 1.1 (Competence)
  • How can AI tools be used effectively and ethically to enhance your practice, whether in legal research, document review, contract drafting, or litigation support, while maintaining high professional standards? Will it be malpractice NOT to use GAI in the future? Rule 1.1 (Competence), Comment 8, duty to understand the benefits and risks associated with relevant technology; Rule 1.3 (Diligence)
  • How can you obtain and document informed consent from clients when using AI tools in your practice, ensuring that they understand the risks, benefits, and alternatives associated with these technologies? Rule 1.4 (Communication); Rule 1.6 (Confidentiality of Information)
  • How can you obtain and document informed consent from clients when using AI tools in your practice, ensuring that they understand the risks, benefits, and alternatives associated with these technologies? Rule 1.4 (Communication); Rule 1.6 (Confidentiality of Information). Tip- Make sure your engagement letter discusses the use of technology and specifically addresses the responsible use of GAI.  If needed, amend your engagement letter. Adequately anonymize client information in your prompts. Make sure to opt out of data sets. Check the terms of service and privacy policies of your AI tools.
  • How do you rethink billing clients and what’s ethical if you have reliable AI models that can do some work in a fraction of the time? Is it still ethical to bill by the hour or do you use a flat rate? Rule 1.5 (Fees)
  • How can you effectively explain and defend the use of AI-generated evidence, analysis, or insights in court, demonstrating the validity and reliability of the methods and results to judges and opposing counsel? Rule 3.3 Candor Toward the Tribunal; Rule 4.1 Truthfulness in Statements to Others
  • What measures should you implement to supervise and train your staff, including paralegals and support personnel, in the responsible use of AI tools, ensuring that ethical and professional standards are maintained throughout the practice? Rule 5.1 (Responsibilities of Partners, Managers, and Supervisory Lawyers); Rule 5.3 (Responsibilities Regarding Nonlawyer Assistance)

Then there are the harder questions:

  • How many lawyers and legal professionals will you replace?
  • How many should you replace?
  • Who and how will you retrain and upskill?
  • Should your firm be developing your own large language models as some are already doing?  What are the risks? The 2022 ABA Legal Technology Survey Report found that accuracy is the top barrier preventing many lawyers from adopting AI. Some insurance brokers have indicated the existing GAI tools are not fit for law practice because of reliability, accuracy, confidentiality, and copyright concerns,

If you’re ready to take the deep dive or maybe just dip your toe in the AI waters, here are some resources to help you get started on the journey. Of course, with the way things are changing so rapidly on the legislative and tech development front, this list could be relatively useless in the next few weeks.

•ABA House of Delegates Resolution 604

•Task Force on Responsible Use of Generative AI for Law- MIT

• NIST AI Framework

•FTC AI Guidance

•EEOC Artificial Intelligence and Algorithmic Fairness Initiative

•National Conference of State Legislatures-2023-legislation

•SEC Investor Advisory Committee Establishment of an Ethical Artificial Intelligence Framework for Investment Advisors

•ABA Task Force on the Law and Artificial Intelligence

•Health AI Partnership

•National Association of Insurance Commissioners

•ISO 27701- International Standard for Protecting Personally Identifiable Information

Partnership on AI

Are you using generative AI in the classroom? How are you preparing the next generation of lawyers? If you’re a practicing lawyer, are you ready to be part of the 15% this year or the 73% next year?