Some people fear commitment but still crave loyalty. They want consistency, maybe even exclusivity—but without the legal entanglement. It sounds like a contradiction, but it's exactly the vibe in the final scene of Four Weddings and a Funeral…….

• Charles: Let me ask you one thing. Do you think - after we've dried off, after we've spent lots more time together - you might agree not to marry me? And do you think not being married to me might maybe be something you could consider doing for the rest of your life?

• Carrie: I do.

The same push and pull plays out between companies and individual workers. Under an “exclusive relationship” arrangement, companies are setting match preferences for loyal, top-tier talent invested in their mission, while individual workers are on the prowl for stable, well-paying gigs that offer security. When it comes to more of an “open relationship” setup, companies will “like” + “winky face” for the ability to scale quickly and cut costs, while individual workers swipe right for autonomy, freedom—and yes, the ability to work in their pajamas.

So let’s look at both sides of this modern commitment-phobia—the individual worker vis-a-vis the business—and what each party should actually consider before saying “I do.”

We’ll be approaching this topic from a US perspective; different countries handle employment law very differently. For example, in the US, at-will employment is the default employment relationship, and it means that an employer can terminate an employee at any time, for any reason (or no reason), with or without notice—as long as it’s not illegal. Likewise, an employee can quit at any time, for any reason, with or without notice.

For clarity: Throughout this piece, I refer to a business as the “employer” when it is engaging someone in an employment relationship, and as the “company” when it is engaging someone in a contractor relationship. I refer to the individual worker as either an “employee” or a “contractor,” depending on the nature of the relationship.

I. Employee v Contractor Differences

A) Employees:

When an employer hires an employee for a formal employment relationship (sometimes referred to as a W-2 employee after the IRS tax form W-2), it’s taking on a set of legal obligations and operational responsibilities in addition to paying a salary. That’s because employment—under US law—is a status, not just a relationship. Employees are protected by a range of labor laws that govern things like working conditions, harassment protections, and wrongful termination rights. In other words, with W-2 status comes both protection and structure for the employee, and responsibility for the employer.

Specifically, if someone is classified as a W-2 employee, the employer is legally required to:

• Withhold and pay the employee’s income taxes, Social Security, and Medicare taxes (collectively known as “FICA” taxes)

• Pay the employer-side portion of Social Security and Medicare (an additional 7.65%)

• Provide a W-2 form at the end of the year for tax reporting

• Often contribute to unemployment insurance and workers’ compensation funds (state-dependent - if no state workers’ comp fund, then employer must purchase private insurance)

• Comply with wage and hour laws (like minimum wage and overtime rules)

• Offer benefits like health insurance or retirement plans (sometimes applicable under federal law or state law - depends on local requirements, number of employees at the employer, etc.)

• Follow anti-discrimination, leave, and labor protections (like FMLA, ADA, and Title VII)

B) Contractors:

By contrast, a contractor (aka freelancer, consultant, independent contractor or, referring to the IRS form tax form 1099, a 1099 contractor) is treated as an independent business. Being an independent contractor has its advantages: the contractor can set their own hours, take on multiple clients, more likely work remotely (many companies are calling employees back to the office or force quitting), and may be able to sidestep the internal politics of climbing the corporate ladder. Contractors may appear to take home more money up front than W-2 employees because no taxes are withheld from their pay—what they invoice is what they receive. However, that doesn’t mean the contractor’s total compensation is higher or equivalent. Why?

Contractors are fully responsible for their own financial and legal obligations. This includes paying 100% of their tax burden—the full 15.3% self-employment tax (both employee and employer portions of Social Security and Medicare)—plus regular income tax. With no automatic withholdings, they must file and pay quarterly estimated taxes. Miss a deadline, and the IRS adds penalties and interest.

Contractors also lack employee protections and benefits. They don’t receive:

• Employer-sponsored health insurance

• Access to employer-sponsored retirement accounts (and if lucky, employer contributions)

• Pre-tax perks (e.g., commuting, childcare)

• Certain protections under US employment law

That said, there are benefits to being a contractor. Contractors may be eligible for Section 199A “qualified business income” deductions, which can reduce taxable income by up to 20% (subject to carve-outs for certain service industries). This is a substantial tax benefit. Contractors can also deduct legitimate business expenses—such as home office costs, software subscriptions, and travel—which further narrows the financial gap with employees. When managed well, these tax advantages can meaningfully offset the additional burdens of self-employment.

The question is, from a cost perspective, is it worth it for the business or the individual worker financially to be a contractor?

II. How much does an employee cost an employer? Does the individual worker save money by being a contractor?

From a business’s perspective, acting as an employer by hiring an employee in California generally costs significantly more than just the employee's base salary. Employers are responsible for a range of payroll taxes—such as Social Security, Medicare, workers’ comp insurance, and federal and state unemployment insurance—and are often expected to provide a comprehensive benefits package that may include health, dental, vision, and life insurance. Using a contractor involves fewer financial obligations for the company, as contractors are responsible for their own taxes and benefits.

From the individual worker’s perspective, being a contractor means they must now cover self-employment taxes, purchase their own health insurance and other insurance or take the penalty, and forgo access to employer-sponsored benefits like guaranteed paid time off, disability coverage (varies but contractors could have disability through the state where they pay taxes), and retirement contributions. As a result, contractors would likely have to charge a considerably higher hourly or annual rate to achieve the same financial outcome as a full-time employee.

Let’s do some math to see how this works!

There are plenty of W-2 vs. 1099 calculators online, but for illustrative purposes, let’s use ChatGPT to model a single employee in California earning $200,000 annually, with the employer covering all healthcare costs and no 401(k) contributions for simplicity. I’ll assume as a contractor, the worker is doing 40 hours of work a week for 49 weeks of the year.

Note: This is a simplified example for illustrative purposes only. Actual taxes, benefits, and costs will vary depending on individual circumstances, deductions, and current regulations. This is not tax or legal advice. For full transparency, I’ll include the exact prompt used at the end of this article so you can try it yourself. Always consult a qualified tax advisor. The chart doesn’t include any potential deductions.

Takeaways:

For Businesses/Employers/Companies:

So you can see in the above chart, employers save money (around 20%) with contractors since there's no obligation to cover payroll taxes, health insurance, unemployment insurance, or other benefits. But that savings for employers comes at the expense of contractors. The contractor now covers the full cost of self-employment taxes, healthcare, insurance, and lacks access to paid leave or job protections. However, this cost-saving may come with tradeoffs, including less control over the worker, potential legal risks if the classification is incorrect, and the loss of team cohesion and institutional knowledge that can come with longer-term employees. We’ll dig into this a bit later

For Individual Workers/Employees/Contractors:

Focusing on gross pay isn’t the full picture. A contractor may earn more upfront, but they keep significantly less. To match the take-home pay and benefits of a W-2 employee, a contractor would need to charge more to get to the same result. In this ChatGPT-run example, a contractor would need to charge $255,000 per year ($130.61 per hour) to get to the same net value as an employee making $200,000 per year for 40 hours a week for 49 weeks. On average, a contractor may have to charge 30-70% more than the equivalent base salary to get the same net take-home pay. Again, there are lots of factors that go into these numbers, but this should hopefully help to weigh the considerations.

While this shows a financial difference to the business and individual worker, this isn’t a full picture of the cost or benefit. There are other risks and costs to consider.

III. Misclassification Risk

A) The cost of worker misclassification

Keeping a working relationship “complicated” has legal and financial consequences. As independent contracting grows (60 million Americans in 2022, with 90 million projected by 2028), regulators are paying close attention. In tech, contract roles exploded from 6% of postings in 2021 to 20% in 2022. And yet, an estimated 10% to 30% of U.S. employers are misclassifying workers, according to the National Employment Law Project.

The penalties to businesses are real and escalating. At the federal level, the Department of Labor can impose fines on businesses up to $1,000 per Fair Labor Standards Act (FLSA) violation, plus back wages (including unpaid overtime) and liquidated damages of 2x or 3x. Repeat violations can even lead to criminal charges.

Tax-wise, the costs add up fast. If a business misclassifies individual workers as contractors, the business may be required to pay a $50 fine for every unfiled W-2, 1.5% of the wages paid, 40% of the employee’s unpaid FICA taxes, and 100% of the employer’s share of unpaid FICA. If the misclassification is found to be intentional, the company could be liable for the full amount of unwithheld FICA and income taxes, plus reimbursement to the individual worker for Social Security and Medicare taxes they paid out of pocket.

States are piling on. In California, penalties range from $5,000 to $15,000 per violation—and up to $25,000 for repeat offenders. Add potential class action lawsuits from misclassified workers, and the exposure balloons.

Cases in point:

• Uber paid $100 million to the state of New Jersey in 2022 after an audit revealed large-scale misclassification of drivers.

• FedEx shelled out $228 million to settle claims with over 2,000 California drivers, some dating back over two decades.

  

B) How do you determine a person’s status as an employee v. contractor?

How individual workers are classified is a legal test: if the company controls how the work is done, sets schedules, integrates them into day-to-day workflows, or makes them economically dependent on that job—then legally, the worker may be an employee. Misclassification can trigger serious penalties: back taxes, back wages, fines, liability for unpaid benefits, and even class-action lawsuits.

So while using a contractor may feel flexible to the company, it’s only appropriate if the relationship is truly arms-length, preferably project-based and the service provided isn’t part of the core business. Even if both sides agree to the 1099, courts and agencies may dig into the true nature of the relationship.

TLDR: The label you choose doesn’t matter. It’s how the day-to-day relationship plays out that’s important. If they look, act, and smell like an employee, they probably are.

C) What can a business do to mitigate the financial and legal risk?

A business needs to be realistic about classification.

• Before engaging a contractor, run a proper test using IRS and state-specific frameworks (IRS 20-factor test, California’s ABC test, etc.). The key element is often control.

• Use a contractor agreement with clear deliverables and autonomy language.

• Have the contractor invoice the company (plus points if it’s from an entity and not an individual).

• Avoid giving contractors:

  • Company emails or equipment

  • Set hours or team lead oversight

  • Restrictions on taking on other clients.

IV. Contractors Dealing with Additional Costs of Being Contractors

Individual workers have additional costs and burdens if they are self-employed; a contractor can manage those costs by treating themselves like a business and planning ahead. They should talk to an accountant to game plan what is permitted and should be done to take full advantage of any tax savings. Specifically, a contractor could do the following:

• Set aside a certain amount of every check for taxes.

• Use bookkeeping software—or at the very least a spreadsheet—to track income and expenses.

• Deduct everything they’re entitled to: home office, laptop, software subscriptions, phone and internet bills, and even a portion of health insurance.

• Consider if it makes sense to pay quarterly taxes.

• Given they get no employment perks, build their own benefits stack into their rate.

• Contribute to a solo 401(k) or SEP IRA to lower their taxable income.

• For more advanced planning, evaluate whether setting up an S-corp makes sense. Many contractors go this route to reduce self-employment taxes through “reasonable compensation” rules. Note, this comes with added administrative costs and complexity—another reason to have a solid CPA in your corner.

V. The Value of Having Employees or Being an Employee

For Employers:
While a business may think it is saving money by using contractors, having an employee may save money in the long-term. Hiring full-time employees offers companies more than just reliable labor—it typically fosters long-term consistency and trust. Unlike contractors who may juggle multiple clients or roll off after short engagements, employees are generally more invested in the employer's success and culture and only need to be on-boarded once. That consistency may translate to:

• Higher quality work: Employees tend to gain deeper knowledge of the employer’s systems, products, and workflows—making them potentailly more efficient and effective over time.

• Institutional knowledge retention: Long-term employees accumulate context, history, and lessons learned that, and that “embedded wisdom” often helps teams avoid repeating past mistakes / speeds up decision-making.

• Reduced retraining costs: Long-term team members retain institutional knowledge, meaning less time and money spent onboarding new people.

• Stronger confidentiality: Employees are more likely to follow internal policies, protect proprietary information, and avoid conflicts of interest.

• Cultural alignment: With ongoing exposure to company values, strategy, and leadership, employees often become better ambassadors and collaborators.

In short, while contractors can offer flexibility, employees offer continuity—and that can pay off in both performance and protection.

For Employees:
Being an employee also offers advantages that go beyond steady pay. Employees benefit from:

• Job stability and legal protections: Employees typically enjoy more consistent work, wage protections, and legal safeguards around termination, discrimination, and workplace safety.

• Employer-sponsored benefits: Health insurance, retirement contributions, disability coverage, and paid time off can significantly enhance total compensation and provide peace of mind.

• Professional development and advancement: Employees are more likely to receive structured training, mentorship, and promotion opportunities.

• Sense of belonging: Being part of a team with a shared mission can foster stronger connections, purpose, and professional identity.

For many individual workers, the non-monetary benefits of being an employee—security, growth, and support—can be just as important as the paycheck.

V. Final Thoughts

The 1099 vs. W-2 question is less about titles and more about weighing costs, benefits, and risks. Not every relationship needs a marriage certificate. But some definitely need a prenup. Have awkward conversations up front and think about what’s right for you –whether you’re a business or an individual worker. Sometimes, it’s just more complicated to have an open relationship…

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Special Thanks: Bryan Edelman, Lisa Kinard and Demetrios Stellatos

Resources:

• https://www.irs.gov/businesses/small-businesses-self-employed/independent-contractor-self-employed-or-employee

• https://www.irs.gov/newsroom/worker-classification-101-employee-or-independent-contractor

• https://legal.thomsonreuters.com/en/insights/articles/independent-contractor-vs-employee-what-does-it-matter

• https://www.dol.gov/agencies/whd/flsa/misclassification

• https://www.wagenmakerlaw.com/blog/employee-vs-independent-contractor

• https://www.labor.ca.gov/employmentstatus/abctest/

• https://www.forbes.com/advisor/business/w2-vs-1099/

• https://www.irs.gov/forms-pubs/about-form-w-2De

• https://velocityglobal.com/resources/blog/independent-contractor-pros-and-cons/#:~:text=Saves%20businesses%20money,contractors%20over%20full%2Dtime%20employees.

• https://www.papayaglobal.com/blog/calculate-salary-to-convert-contractor-to-an-employee/#:~:text=How%20much%20more%20should%20a,long%2Dterm%20contracts%20with%20them.

• https://thehill.com/opinion/technology/4800828-office-mandates-cause-attrition/

• https://www.wingspan.app/articles/lessons-from-uber-lime-meta-on-misclassifying-your-independent-contractors

• https://www.forthepeople.com/blog/lawsuit-alleges-uber-incorrectly-classified-drivers-independent-contractors/

• https://www.irs.gov/newsroom/qualified-business-income-deduction

Prompt for ChatGPT:

(control + F to replace bracketed info with other specifics]

“I am a [single] person in [California] earning [$200,000] per year as a W-2 employee. The company offers comprehensive benefits: health insurance (100% employer-paid for employee), dental and vision (99% paid), and life insurance (100% paid).

Please:

1. Create a fully itemized financial breakdown of what it costs the employer to hire me, including all payroll taxes and benefit contributions.

   • Break out each tax separately (Social Security, Medicare, FUTA, State Unemployment, etc.).

   • Break out each benefit separately (medical, dental, vision, life insurance).

2. Show my net take-home pay as a W-2 employee after federal, state, and employment taxes, with sub-line items for each tax.

3. Show the same scenario as a 1099 contractor earning [$200,000], with no benefits and including:

   • Self-employment taxes

   • Federal and state income taxes

   • The 199A/QBI deduction

4. Calculate the adjusted 1099 contractor income required to match the W-2 role’s total value (salary + benefits – taxes).

5. Calculate the hourly rate required for the contractor to match the W-2 value, assuming 40 hours per week for 49 weeks per year. Please ensure that the Contractor (To Match W-2 Value) column is fully calculated by solving for the contractor gross income required to equal the W-2 net value, rather than leaving placeholders.

6. Output a professional Excel table in HR-style format with three scenarios as columns:

   • W-2 Employee

   • 1099 Contractor (Paid Same)

   • 1099 Contractor (To Match W-2 Value)

7. Export to an Excel

Excel Formatting Requirements:

1. Top Header Row

• Dark green background with bold white text.

• Columns:

  • Category (line items)

  • W-2 Employee

  • 1099 Contractor (Paid Same)

  • 1099 Contractor (To Match W-2 Value)

This creates three comparison scenarios.

Below the Top Header Row, put a row with “Base Salary/Contract Fee” on the first cell. Then, put the amount I stated above in the next few cells for the pay amount. In the 4^th cell, calculate the gross amount you’d have to make as a contractor to walk away with the same net value as an employee.

2. Employer Costs Section

• Has a lighter green section header row labeled EMPLOYER COSTS.

• Line items underneath are indented for clarity:

  • Social Security (with rate & wage cap noted)

  • Medicare (with rate noted)

  • Federal Unemployment (FUTA)

  • State Unemployment (SUTA/ETT)

  • Company-Paid Benefits: Medical, Dental, Vision, Life Insurance

• Ends with an italics subtotal row: Total Employer Cost.

• Put an empty row between this and next section.

3. Employee Net Value Section

• Another lighter green section header row labeled EMPLOYEE NET VALUE.

• Breaks out employee’s take-home pay and taxes, with sub-items indented:

  • Take-Home Pay (after taxes)

  • Federal Income Tax

  • Social Security

  • Medicare

  • Additional Medicare (if applicable)

  • [CA Income Tax]

  • [CA SDI]

• Also includes Value of Employer Benefits as a separate line item.

• Ends with an italics subtotal row: Total Net Value to Worker.

• For 1099 contractor columns, include a full tax breakdown mirroring the W-2 format:

  • Self-Employment Tax (Social Security & Medicare separately).

  • Additional Medicare Tax (if applicable).

  • Federal Income Tax (after QBI deduction).

  • [CA Income Tax.]

• Show “Take-Home Pay (after taxes)” as gross income minus all of these.

4. Bottom Summary Row

• A final row separated by top and bottom borders.

• Bold text: Hourly Rate Needed to Match W-2 (40hrs/wk × 49wks). Put a line on the top and the bottom of this row.

• Only the “Contractor (To Match W-2 Value)” column shows a figure (e.g., $130.61).

5. Formatting Features

• Color coding: dark green (top headers), light green (section headers).

• Indentation for sub-items.

• Bold totals for emphasis.

• Currency formatting ($#,##0) for all monetary values.

• Text left-aligned, numbers right-aligned for readability.

• Cells that have a value of zero, put “$0”

{ChatGPT can be finicky so you may need to play with it a bit to make sure it generates everything properly. We can’t guarantee it will output the exact same way but hopefully it helps you get a foundation for a prompt. Again, not advice.}

Images: All original images are AI-generated with using a combination of Dall-E, Firefly, DreamStudio and Pixlr.

Disclaimer: This post is for general information purposes only. It does not constitute legal advice. This post reflects the current opinions of the author(s) and are for educational purposes only. The opinions reflected herein are subject to change without being updated.

Congratulations! You’ve just received a job offer from a startup—an exciting milestone full of possibility and new beginnings. While offer letters usually cover a range of details—like your role, manager, location, salary, benefits, and bonus—the equity piece is often the most complex. It’s one of the most important aspects to understand, as it can have a significant impact on your long-term financial future. That’s what we’ll focus on here.

You know how, when you have a weird mole on your back, you ask your doctor friend to take a look? Think of this as the legal equivalent—here to help you make sense of the fine print in your offer. No billable hours, just unsolicited (but hopefully helpful) opinions.

Do reach out to counsel for actual advice.

Roadmap:
A. Allocation between Cash and Equity
B. Types of Equity Under a Stock Plan
C. Stock Options: The Basics
D. Read the Stock Plan!!!
E. How to Value Your Options
F. Beware of Companies that Don’t Look Out for Employees
G. Action Items - What Should I Ask For?

A. Allocation between Cash and Equity

When you join a startup, your compensation will likely be a mix of cash and equity. It’s important to negotiate the right balance between these two components based on your financial needs and the perceived value of the equity.

If you believe the startup’s equity has significant growth potential, you might want to push for a higher equity percentage. However, if you’re unsure about the company’s future or prefer financial stability, it may be prudent to negotiate for more cash.

B. Types of Equity Under a Stock Plan

Equity in a startup can come in several forms: stock options, restricted stock units, or direct stock awards.

• Stock options give you the right to purchase a company’s common stock at a set price (the strike price) during a specified period of time.

• Restricted Stock Units (RSUs) are promises to give you stock, or the economics based on the underlying stock value, in the future, which are often tied to performance or time-based vesting.

• Direct stock awards or sales are when you receive stock outright or have the opportunity to buy it (typically at a discount). Unlike options, RSUs and direct awards usually come with immediate tax implications.

We’re focusing on options here because startups prefer them. Why? They align employee incentives with company growth, are easier to manage than other equity types, and offer tax advantages for both sides. Options also simplify things when employees leave—unvested options automatically return to the pool. Unlike stock grants, they defer taxes until exercised and don’t require upfront payment. Plus, they let employees buy shares at a discount if the company’s value increases.

Note, options are appropriate for earlier stage startups. A later-stage company may shift from using options as the default form of employee compensation to RSUs. Also, earlier stage startups tend to use their law firm’s forms without minimal changes. Later on, you’ll see more bespoke stock plans.

C. Stock Options: The Basics

Here are some essential concepts to understand and focus on as you try to make sense of your equity package:

• Number of Shares/Strike Price: Your offer letter should specify how many shares the options entitle you to purchase. To understand what that means for you financially, you’ll need to know the strike price (aka exercise price) for those shares. The strike price is the price at which an employee can buy company common stock when exercising their options, typically set at the stock's fair market value (FMV) on the grant date.

• Calculating the Total Exercise Price: The total exercise price of your options is equal to the number of shares under the grant times the strike price. For example, if the company offers you an option to purchase 3,000 shares at $1.00 per share, that means that you have to pay $3,000 (3,000 x $1) to exercise the options (note that you can elect to partially exercise any portion of the options once they are vested). The idea is that in the future, assuming the value of the company has gone up, you are buying your shares at a discount (i.e. the strike price).

• 409A Valuation: A 409A valuation is an independent appraisal used to determine the FMV of a private company's common stock. The FMV is used to set the exercise price of stock options, ensure compliance with IRS regulations, and avoid potential tax penalties. Under the prior example, if the 409A Valuation is $1.00 per share of common stock, then the FMV of the shares is $3,000 at the time of the grant.

Bringing these concepts together, at the time of the option grant, the exercise or strike price should equal the 409A valuation on a per share basis. Companies typically use the 409A to set the FMV of option grants. If a company offers you an option with a strike price below FMV, that’s a red flag and can lead to high tax penalties.

• Authorized v. Outstanding Shares. Authorized shares are the maximum number of shares a company can legally issue, as set by its certificate of incorporation — but they don’t reflect actual ownership. It’s just a cap on how many shares a company may issue. Outstanding shares are the shares that have been issued and are currently held by shareholders like founders, employees, and investors. To calculate your actual ownership, use the number of outstanding shares as your baseline.

• Fully-Diluted Shares: The fully-diluted shares refer to the total number of shares that would be outstanding if all convertible securities, such as stock options, warrants, and convertible bonds, were exercised or converted into common stock. This represents the maximum potential share count and is often used to assess more holistic ownership percentages and company valuation. Because companies all have different valuations, understanding your percentage of the fully-diluted shares is a digestible way to compare apples and oranges. More on this later!

• Vesting Schedule: This is the timeline over which you earn your equity. Companies use vesting to encourage you to stay with them and contribute to the company’s success over the course of years. Vesting typically occurs on a time-based schedule, which is usually over four years with a one-year “cliff”, meaning you’ll earn 25% of your equity after one year and then continue to vest monthly, quarterly, or yearly over the remaining 3 years. Sometimes you see vesting over 5 years, and you may also see vesting that does not include a cliff. Once options are vested, the employee can exercise them, meaning they can purchase the underlying shares at the strike price. Vesting usually starts on your first day of work, so you’ll want to confirm the date your option starts vesting (known as the “vesting commencement date”). If you are no longer providing services to a company, any unvested portion of your options is usually automatically returned to the option pool.

• Acceleration: If you have the clout, you may be able to negotiate vesting acceleration, which accelerates the vesting of the equity upon certain triggering events, such as the sale of the company or involuntary termination. Single-trigger acceleration (STA) occurs upon the sale of the company or an involuntary termination, leading to the immediate vesting of some or all equity. Double-trigger acceleration (DTA) occurs when an involuntary termination without cause follows the sale of the company, leading to accelerated vesting. Acceleration is difficult to negotiate as an employee—especially single-trigger acceleration, which is relatively rare. However, it’s worth asking if a company offers any acceleration. For founders, acceleration is a way to protect yourself. FWIW, many investors are fine with DTA but may balk at STA.

• Early Exercise Option: Some companies allow you to exercise your stock options early, meaning you can buy both vested and unvested shares. Unvested stock remains subject to vesting. Note that early exercising requires upfront payment, and you will have to pay ordinary income taxes on the spread between the exercise price and the then-current FMV. However, early exercise offers tax benefits. First, you get the benefit of being taxed only on the spread between exercise price and FMV at exercise, as opposed to the stock’s value in the future. Also, if you hold the shares for at least one year, the proceeds from their sale will qualify for long-term capital gains tax rate. However, you will need to file an 83(b) election with the IRS (VERY IMPORTANT!) upon exercising an unvested option. Whether vested or unvested, once you exercise your options, you become a stockholder and can vote your shares.

  • In addition to the out-of-pocket costs of early exercising, there are additional risks: losing the money if the company fails or if the shares lose value, owing taxes like alternative minimum tax (AMT) (a backup tax to prevent high earners from overusing deductions) or income tax, illiquidity until an IPO or limited secondary transactions, and the possibility of a company buyback of unvested shares at a potentially lower value if you leave. I recommend seeking advice from your tax professional on whether early exercising makes sense for you.

  ---

  Pro Tip: There are companies like SecFi that offer tools for scenario modeling, tax planning, and financing options (i.e. loans for option exercising). These are worth looking into to assess your options.

  ---

Now that we have a grasp of some of the basic terms, let’s talk about the Stock Plan and what to watch out for in the documentation.

D. Read the Stock Plan!!!

The stock plan (sometimes colloquially referred to as the option pool or stock pool) sets the overall rules and framework for the company's equity compensation, while the individual stock option agreement details the specific terms of the stock options granted to an individual employee within that framework.

Make sure you request a copy of and thoroughly review the company’s stock plan. It outlines crucial details like option expiration dates, rights of first refusal, and transfer restrictions. You usually won’t be able to get a copy until you onboard, but you can still ask about some of the below key terms:

Expiration: So long as you are still working for or engaged with the company, options typically expire 10 years from the date of grant.

BUT, if your service ends, options oftentimes expire 3 months after termination (or 6 months in the case of disability). Sometimes, you’ll see longer expiration periods so don’t assume anything (read the plan!). After you leave, you’ll need to make a quick decision if you want to exercise the options.

Since this can mean an all or nothing decision soon after you leave the company, you can try to negotiate for a longer window or use a company like SecFi to trade some of the potential upside for not losing the option entirely by not exercising.

Transfer Restrictions/Liquidity: Often, there are restrictions on transferring common stock. Even though you own shares, you may not be able to sell your shares without the company’s approval. This is important because you want to know if you can sell your shares before an IPO or sell on a secondary market. You would need to check the stock plan and also the company’s bylaws.

Change of Control: What happens to your unvested stock options if the company gets acquired? In the event of a merger or acquisition, options and shares under the plan will be treated as specified in the transaction agreement, which may include continuation, assumption, substitution, or cancellation with or without payment. Per this catchall, you could get nothing! Stay alert on the job—keep an eye out, listen closely, and try to sense any signs of a potential change of control, like shifts in leadership, strategy, or unusual activity behind the scenes.

Here are some examples of unusual additions to a stock plan you’ll want to keep an eye out for:

• Payment Method: The company may block loans against the options or shares.

• Fee Per Transfer: The company may require a fee per transfer.

• Clawback Provisions: If you violate a non-compete or non-solicit agreement or get fired for cause, the company can take back shares or the proceeds you make from selling the shares.

• Holding Period Requirements: The company may require you to keep a certain percentage of vested shares for a while, even after fully vested.

• Repurchase Rights: The company might be able to buy back shares at a set price, which could limit your ability to sell them.

E. How to Value Your Options

Now that you’ve reviewed the key terms in your stock plan, let’s dive into how to actually value your options. This section will walk you through what to ask for, what to look for in public documents, and how to make rough estimates when information is limited.

1) Calculate the paper value of your option

To calculate the value of your option grant, multiply the FMV of the common stock by the total number of shares granted. Where do you find the FMV? Two ways: the ideal way and the “make it work” way.

Ideal Way: Ask the company for their 409A valuation and when it was calculated.

If the company can’t tell you the 409A valuation and when it was calculated, that’s a red flag that they either don’t know what they are doing or they are being secretive. If you can’t get the official valuation from the company, there are ways to do some back of the envelope calculations (i.e. very rough estimates) on your own.

Alternative (Make it Work): Use the company’s certificate of incorporation (COI) to calculate the value of the common stock.

A COI is a public document that generally anyone can pull from the US state the company is incorporated in (usually Delaware). So, if the company doesn’t want to give you the COI, you are more than free to request it yourself directly from the state of incorporation. Once in hand, here’s what you can do yourself:

• Find the Last Price of their Financing Round: The COI will tell you the price per share (PPS) of preferred stock (usually called the “original issue price”) and the number of authorized shares for each class and series. Look at the very last series of the preferred stock’s original issue price (ex. if their last round was a Series C, then look at the Series C original issue price).

• Calculate the Value: The current 409A value is often around 20%-30% of the price for a Series Seed Preferred Stock after the Seed round. That goes up over time and gets closer to 40% after a Series C round and can be an even greater percentage if the Company has a lot of secondary activity. So, if the last round the company did was a Series Seed round and the Series Seed Preferred Stock price was $1.00, the company’s common stock will probably be valued somewhere between $0.20 to $0.30 per share. Caveat that the value of the common stock should, in theory, go up over time—so if it’s been a few years after a round and the company has not raised further funds, the value of the common stock may be out of those ranges.

Example: let’s look at Uniswap’s COI from 2022:

Looking at Uniswap’s 2022 COI, they had done 2 preferred rounds. The PPS of the Series A Preferred Stock was $2.35617 so it’s likely that the 409A valuation after the round was around $0.47, or 20% of the PPS. Again, not a precise calculation, but a rough, rough estimate. If you can, always get that official 409A valuation.

2. Figure out where you fall in the liquidation stack

Your option grant might look valuable on paper—but that value only matters if there’s enough money following a liquidation event to pay out to shareholders. That’s why it's important to understand where you sit in the payout hierarchy — aka liquidation stack.

As an option holder, you typically hold common stock, which is at the bottom of the stack. First, any debt gets repaid—banks, lenders, and convertible notes get paid before any equity holders see a dollar. Next come preferred shareholders, who have negotiated terms entitling them to be paid before common shareholders. Finally, if there’s anything left, common shareholders (including employees holding options) are paid.

To gauge whether your options are likely to be worth anything in an exit, you need to understand the company’s liquidation structure—which is usually spelled out in the COI. This determines how proceeds from a sale or liquidation are distributed among different stakeholders.

Key things to look for in the COI include the following:

• Return Multiples: Do preferred shareholders get just their original investment back (e.g., 1x), or a multiple of it (e.g., 2x or 3x) before the common sees anything?

• Seniority: Are some preferred share classes ranked higher than others in the liquidation order? Senior classes are paid out before junior ones.

• Preference: What exactly are preferred shareholders entitled to in a liquidation event? This includes the amount they’re owed (typically tied to their original investment), when they get paid (ahead of common), and any special provisions like interest or accrued dividends. Understanding the preference helps estimate how much needs to be paid out before common shareholders receive anything.

• Participation: Are preferred shares non-participating (investors choose between their preference or converting to common) or participating (investors get their preference and also share in the remaining proceeds)?

These features can dramatically affect how much, if anything, is left for common shareholders. For example, a 2x preference means preferred shareholders must receive twice their original investment before common gets paid. If the company exits for a modest amount, that could leave common shareholders—and option holders—with nothing.

Return Multiple and Seniority Example

Let’s run through an example of what a multiple of return and seniority to preferred shareholders would look like in a COI – from Globus Medical in 2012:

Here, the holders of Series E Preferred Stock were entitled to be paid first in a liquidation event (even before the other series of preferred stock), and if that happened prior to January 31, 2009, then they would get 1.5 times their PPS.

Preference and Participation

In a liquidity event, preferred stockholders generally have two options:

1. Take their liquidation preference (e.g., get paid back their investment or a multiple of it), or

2. Convert to common stock and share in the remaining proceeds pro rata with common shareholders—if this results in a higher return.

This flexibility ensures preferred shareholders always take the better deal, which often leaves less value for common shareholders. 1x non-participating preferred stock is the most common structure, granting investors the right to either receive their initial investment back (1x) or convert to common stock to share in the remaining proceeds—whichever results in a higher return to them.

In some cases, preferred stock can even be participating, meaning holders not only get their preference first but also share pro rata in the remaining proceeds with common shareholders. While this structure is less common, it does still happen (particularly in later rounds)—and it’s especially important to look out for.

You can often find these terms in the company’s COI. By reviewing the number of authorized shares and the liquidation preferences tied to each class of preferred stock, you can do some rough calculations to estimate how much each series of preferred stock would be paid before common shareholders receive anything.

Note, it’s not a perfect calculation as there usually are more authorized shares than outstanding shares.

Example: Uniswap 2022

Let’s look at a real-world example of 1x non-participating preferred – from Uniswap in 2022:

• The above tells us the authorized number of shares, including each series of preferred stock.

• Above tells us this is 1x non-participating preferred: the preferred get paid first (preference) — i.e. they get 1 times (1x) their original investment if there isn’t enough to go to everyone. If there is enough for the common and preferred, then the preferred convert into common and share in those proceeds (participation) pro rata with the other shareholders.

• Here, we can see the PPS (i.e. original issue price) of the Seed and Series A.

Now — using the information from the COI, let’s figure out how much preferred stock must be repaid before common shareholders receive any proceeds in a liquidation event. By multiplying the number of authorized shares for each preferred series by their respective PPS, we can estimate the total liquidation preference amount that takes precedence over common equity:

The total preference for preferred shareholders was around $12.7 million.

This means that, in a liquidation event, $12.7M would need be distributed to preferred shareholders first, before any money flows to common shareholders—not including any debt that might come before all equity holders. Huh…interesting…

Again, these are approximate estimates to provide a general sense of the figures involved, not precise calculations.

• Why? The number of authorized shares does not necessarily equal the number of outstanding shares. Companies often authorize slightly more shares than they immediately issue, typically maintaining a 3–5% buffer in the latest series of preferred stock. This buffer provides flexibility for future needs, such as issuing stock warrants in connection with bank loans.

3. Ask the company what percentage of the fully-diluted shares your options package represents

In addition to understanding the potential value of your option package and where you fall in the liquidation stack, it’s also helpful to ask what percentage of the company’s fully-diluted cap table your grant represents—essentially, how much of the pie you’re being offered. This gives you another lens to evaluate your equity: not just what it might be worth someday, but how much ownership you’re actually being granted relative to the whole company at the time of grant.

You may be able to find some metrics around what’s a typical percentage of the fully-diluted for someone at that role and level in another company. You can then ask around to peers or perhaps gleam some numbers on Reddit. There are also paid, firewalled metrics you can pay for if so inclined or if you have a friend in HR.

Thinking about your options package as a percentage of the cap table can be a helpful, complimentary way to evaluate its value. Note that as a company grows and their cap table increases, those percentages will likely go down over time.

F. Beware of Companies that Don’t Look Out for Employees

Anecdotally, you’ll hear about companies making decisions that hurt employees’ options under the catchall in the stock plan – that the company can basically do whatever it wants (recall above that the company can substitute or cancel options or stock under the stock plan without any compensation to you). Usually, under a merger:

• Vested options are cashed out or converted into shares of the acquirer.

• Unvested options could be accelerated (vested immediately), replaced with new unvested options in the acquirer, cashed out, or cancelled entirely.

Suffice it to say, everything depends on the deal. The company and board have ultimate leeway to make the “best decision” for shareholders.

A 2021 study from ASU reveals that in about 80% of mergers and acquisitions (M&As), employee stock options are often modified or canceled to reduce company costs, benefiting shareholders instead of employees. The study, which examined 1,277 deals between 2006 and 2014, found that canceling stock options could reduce the value of employee compensation by an average of 38.4%, leading to a 3-4% increase in market value for the target companies. While this cost-cutting benefits shareholders, particularly in cases where employee losses are high, it can negatively affect employees who lose potential future gains from their stock options.

You should monitor what is going on at your company or risk being left behind. Below are a few examples of companies who were willing to throw employees under the bus:

• In 2011, Skype, under Silver Lake's ownership, fired executives before its sale to Microsoft to avoid paying out their vested options, using complex legal clauses to invalidate them. Link

• In 2017, Juno, a ride-hailing company, was acquired by Gett for $200 million, but cancelled its restricted stock unit program for drivers instead offering cash bonuses. Link

• Most recently, OpenAI threatened to take back stock options from former employees if they didn't sign a non-disclosure agreement. The company has since apologized and promised not to do this in the future. Link

You can see why negotiating acceleration is so important because it can protect against these types of incidents.

G. Action Items - What Should I Ask For?

Now that you understand how the sausage is made, hopefully that empowers you to stand up for your own interests. If you don’t ask, you don’t get. It is harder to negotiate for more compensation once you start working for a company. It’s easier at this point, since the company wants to land you. Ask these questions to evaluate your option plan and what you should negotiate for:

• Can I get a copy of the stock plan/form of option grant and most recent certificate of incorporation? If I can’t get it until after I onboard, can you walk me through the key terms?

• What is the vesting schedule?

• Can I get an early exercise option?

• When do the options expire?

• What happens if I leave the company?

• What are the acceleration terms of my shares?

• What’s the 409A? When was it? Is the strike price of my option the current 409A value?

• What percentage of the fully-diluted shares are my shares?

• Are there any transfer restrictions?

• What’s the company’s discretion to cancel shares and options?

• Does the company have employees sign a non-disclosure agreement when they leave?

Take the time to understand what you’re being offered and seek professional advice if needed. Your equity could be worth a significant amount in the future, but it’s essential to ensure that you’re protected and that the terms are favorable. It may be worth paying a lawyer and/or accountant to help you assess your options (pun intended) to avoid long-term bigger dollar value pains.

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Resources:

• Rev. Rul. 2007-19, https://www.irs.gov/irb/2007-19_IRB.

• Mischa Vaughn, What Happens to Stock when a Company Is Bought?, Carta (June 22, 2022), https://carta.com/blog/equity-stock-company-acquired-acquisition/.

• Kristoffer Warren, 409A Evaluation, Carta (Aug. 9, 2024), https://carta.com/learn/startups/equity-management/409a-valuation/.

• Fully Diluted Shares, CoolyGo (Apr. 28, 2021), https://www.cooleygo.com/glossary/fully-diluted-shares/.

• Chris Arnold, 11 Questions to Ask When Negotiating a Job Offer Including Stock Options, SecFi (July 4, 2023), https://secfi.com/learn/how-to-negotiate-a-job-offer-stock-options.

• Stock Vesting, Carta (Mar. 9, 2024), https://carta.com/learn/equity/stock-options/vesting/.

• Adam Lewis, Stock Options, Carta (Apr. 4, 2024),https://carta.com/learn/equity/stock-options/.

• Acceleration, CooleyGo (May 10, 2021), https://www.cooleygo.com/glossary/acceleration/.

• Sean Dugan, Early Exercise of Stock Options, Carta (Apr. 4, 2023), https://carta.com/learn/equity/stock-options/exercising/early-exercise/.

• Laura Moreno, 83(b) Elections, Carta (Apr. 15, 2024), https://carta.com/learn/equity/stock-options/taxes/83b-election/.

• Should I Contribute to ESPP? An Analysis of Pros and Cons for Employees with Employee Stock Purchase Plans, Upstock, https://www.upstock.io/post/should-i-contribute-to-espp-an-analysis-of-pros-and-cons-for-employees-with-employee-stock-purchase-plans.

• Vieje Piauwasdy, Avoid the 7 Most Common Employee Stock Option Mistakes, Carta (July 4, 2023), https://secfi.com/learn/avoid-the-7-most-common-employee-stock-option-mistakes.

• Jane Larson, Employee Stock Options Suffer in Most Merger Deals, Ariz. State Univ. W. P. Carey News (July 28, 2021), https://news.wpcarey.asu.edu/20210728-employee-stock-options-suffer-most-merger-deals.

• Kia Kokalitcheva, Juno, the ‘Anti-Uber’ Startup, Sells to Gett for $200 Million, Axios (Apr. 16, 2017), https://www.axios.com/2017/12/15/juno-the-anti-uber-startup-sells-to-gett-for-200-million-1513301874.

• Mary Russell, The Good Stuff – Continuation Plans – How to Avoid the Juny Drivers’ Fate of Cancelled RSUs in a $200 Million Acquisition, Stock Option Counsel (Apr. 27, 2017), https://www.stockoptioncounsel.com/blog/startup-stock-plan-gotcha-cancellation-of-unvested-equity-0-for-rsus-in-junos-200-million-acquisition/2017/4/27.

[Special thanks to Chris Ahsing, Bryan Edelman, Naveen Pai, Sam Silverberg, and Zack Skelly for their review.]

Images: All original images are AI-generated with using a combination of Dall-E, Firefly, DreamStudio and Pixlr.

Disclaimer: This post is for general information purposes only. It does not constitute legal advice. This post reflects the current opinions of the author(s). The opinions reflected herein are subject to change without being updated.

Antitrust hasn’t always been an area of the law where the cool kids hung out; its relevance throughout history has ebbed and flowed depending upon the historical circumstances and the cast of characters involved.  Today, antitrust is once again “straight fire,” with the nerds taking over the school as years of limited regulation in the tech industry have led to a boiling point over issues like social media misinformation and AI’s existential risks.

The first domino might have already fallen, with the D.C. District Court recently ruling against Google in the biggest US antitrust trial in decades.  It could signal a broader trend, with antitrust suits pending against Apple, Google (part 2), Amazon, Visa, and Meta. Interestingly, these lawsuits have supporters from both sides of the aisle (regulating tech might be the last purple issue). While commentators disagree on why Big Tech presents antitrust concerns, they can agree that the concentration of power in tech is a problem. The result is a philosophical shift among antitrust enforcement agencies who are ramping up scrutiny of Big Tech.

Antitrust law, originally designed to curb the abuses of monopolistic titans like Standard Oil, has evolved dramatically over the years, particularly with the rise of the consumer welfare standard in the 1970s. Today, as Big Tech dominates the global market, antitrust enforcement is shifting again, moving beyond consumer prices to focus on the broader impact of corporate power on competition, innovation, and even democracy itself. This article explores how antitrust laws have developed, the challenges of regulating in the digital age, and how current legal battles are shaping the future of tech regulation in the United States.

Roadmap:

I. Antitrust Explained: History Repeating Itself All Over Again…
     A. Background on Antitrust Laws
     B. Who Brings Antitrust Lawsuits?
     C. Origin Story: Standard Oil and the Robber Barons
     D. The Chicago School, Robert Bork and the Rise of the Consumer Welfare Standard (1970s)
     E. Microsoft Loses Antitrust Case (2000)…Kinda
II. Vintage Antitrust: Pivot From Protecting Consumer Welfare Back To Competition
     A. The Limits of Consumer Welfare Model on Big Tech
     B. The New Brandeis Movement and Big Tech
III. DOJ V. Google - Round 1 Goes To The Government
     A. The Ruling
     B. Would Remedies Realistically Be Effective? 
IV. The Reformation Of Antitrust Law And Reactions
V. How Has Big Tech Dodged Antitrust Violations Until Now
     A. Antitrust Compliance Programs
     B. Avoidance Mergers: Special Dividends­­ and Acqui-Hires and Poaching
VI. Final Thoughts: The Past And The Future
VII. Extra Credit: Cases To Keep On Your Radar
VIII. Resources

I. Antitrust Explained: History Repeating Itself All Over Again…

A. Background on Antitrust Laws

Why do we have them? Antitrust laws are all about encouraging innovation and ensuring big companies don’t abuse their power, keeping competition fair.  It’s fine for a company to take over a market by offering something better, but problems start when a party uses its position to shut out new, creative competitors. These laws are there to stop shady tactics like paying off suppliers to avoid working with rivals, which hurts competition. Exclusive deals happen in business, but they need a closer look to make sure they’re not too restrictive. The goal is a healthy, competitive market where businesses can come and go easily, and consumers get clear info to make smart choices. By keeping big companies from unfairly blocking competition or misleading customers, antitrust laws keep the marketplace fair for everyone.

TL;DR on the Law:  Three main statutes govern antitrust law in the US:  (i) The Sherman Antitrust Act of 1890, (ii) the Clayton Act of 1914, and (iii) the Federal Trade Commission Act of 1914. These laws among others are the framework for the three “pillars” of prohibited behavior:

1. Agreements to Limit Fair Competition (i.e. Two Parties Acting Together):  Section 1 of the Sherman Act outlaws agreements between parties to unfairly restrain trade. This could include competitors agreeing to (i) fix prices, (ii) limit output, (iii) submit fake or coordinated bids to win a contract, or (iv) divide up markets and customers, among others.  These kinds of agreements are considered automatically illegal (called “per se illegal”). If an agreement is less obviously harmful, courts use a "rule of reason" standard to figure out if it's illegal (i.e. the court has to do some analysis on the overall big picture).

2. Monopolies (i.e. One Party’s Actions):  Section 2 of the Sherman Act prohibits monopolies that act unfairly to limit competition. A company breaks this law if (i) it controls a large part of the market (called “dominant position”) and (ii) uses its power to block or crush competitors through unfair practices (the legal jargon used here "predatory" or "exclusionary").

3. Anti-Competitive Mergers and Acquisitions (M&A): Section 7 of the Clayton Act prohibits mergers and acquisitions (when one company buys another) if they reduce competition or create a monopoly. If a company buys a competitor to limit competition, it can be illegal. Note, the Sherman Act can also be used to stop mergers that result in monopolies or trade restraints.

B. Who Brings Antitrust Lawsuits?

Two federal agencies enforce the antitrust laws: the Department of Justice (“DOJ”) and the Federal Trade Commission (“FTC”).  One might think we have two antitrust enforcement agencies because we value competition, but this redundancy is partly due to (i) historical developments (the DOJ was the enforcer under the Sherman Act while the FTC was established under the Federal Trade Commission Act) and (ii) a desire for specialized expertise.  

• The DOJ’s antitrust division, headed by Jonathon Kanter, is the historic and general enforcer of antitrust laws. It handles all criminal enforcement while also doing complex civil enforcement.  DOJ also has specific statutory authority in areas like banking, telecommunications, airlines, and railroads.

• The FTC, chaired by Lina Khan, is the expert in antitrust. It focuses on civil action (potentially through their own administrative court) particularly in consumer protection, advertising, and unfair competition, often targeting sectors like healthcare, pharmaceuticals, professional services, food, energy, and high-tech industries like computing and internet services.

Prior to investigating anyone, the agencies will coordinate so they don’t both bring a lawsuit against the same offender.  Although antitrust is known for being more of a federal thing, states have their own antitrust statutes, and the offices of the attorney general in each state are in charge of enforcing them.  More on that here.

But how did we get here in the first place?  Why do we have these laws?

C. Origin Story: Standard Oil and the Robber Barons

To understand the birth of antitrust laws, we have to go back to the late 19^th Century – a period known as the Gilded Age.  An epoch marked by massive income inequality, political corruption, industrialization, and the rise of powerful monopolies.  This was a time when the captains of industry, known as robber barons, like Andrew Carnegie, Cornelius Vanderbilt and J.P. Morgan would, according to rumors of the time, go to Delmonico’s, one of NYC’s most exclusive restaurants at that time, roll up hundred-dollar bills and smoke them – just because they could.

This concentration of wealth was evident among both corporations and individuals. Among the smoke-filled drawing rooms of the Jekyll Island Club was America’s first billionaire John D. Rockefeller, who founded Standard Oil in 1870, a company that along with Andrew Carnegie’s US Steel, inspired lawmakers to pass the Sherman Antitrust Act of 1890.  Standard Oil was notorious for its aggressive business strategies like undercutting competitors, restricting supply chains, and procuring exclusive contracts with railroads.  At its peak, Standard Oil controlled 90% of US oil production (hmm….sounds like Google).

In 1911, the Supreme Court struck down Standard Oil’s practices, ruling that it violated Sections 1 and 3 of the Sherman Act (pillar 1 and 3) and ordering its breakup into smaller companies. While Standard Oil may seem like a no-brainer example of antitrust violations, in reality, determining whether a violation had occurred was surprisingly tricky for the government.  Standard Oil consolidated many of its entities into a single trust, purposefully designed to obfuscate any governmental scrutiny.  As muckraking journalist Ida Tarbell (who exposed Standard Oil’s dealings) wrote, “You could argue its existence from its effects, but you could not prove it.”  

Going into the early 20th Century, antitrust enforcement was strong, focused on breaking up monopolies like Standard Oil and Northern Securities under Presidents Theodore Roosevelt and William Taft. This "trust-busting" period aimed to limit corporate power and promote fair competition. Key laws, including the Clayton Act and Federal Trade Commission Act, were introduced to strengthen the Sherman Act, preventing large corporations from using unfair practices to dominate industries. 

Then, a new philosophy changed everything.

D. The Chicago School, Robert Bork and the Rise of the Consumer Welfare Standard (1970s)

In the 1970s, the Chicago School of Economics, led by figures like Robert Bork, prompted a rethinking of antitrust law’s goals. They argued that large firms could achieve efficiencies that benefit consumers, and that market concentration wasn’t necessarily harmful unless it resulted in higher prices or reduced consumer choice.

The consumer welfare model gained momentum as it aligned with the broader pro-market, deregulation trends of the 1970s and 1980s, influencing courts and policymakers. This shift reduced the scrutiny of mergers and market concentration, with fewer cases brought against dominant firms unless there was clear evidence of consumer harm, primarily through price increases.

This trend continued into the 1980s through the Reagan era and beyond, persisting until the 1990s, when regulators began scrutinizing the rise and market dominance of major tech companies.

E. Microsoft Loses Antitrust Case (2000)…Kinda

The first company in the crosshairs of the government in this new era was Microsoft.  At the time, Microsoft controlled 90% of the PC operating system market. A federal judge ruled that Microsoft had abused this monopoly by bundling its Internet Explorer browser with Windows, effectively stifling competition from browsers like Netscape, which once held over 80% of the market. By giving Internet Explorer away for free and bundling it with Windows, Microsoft eroded Netscape’s market share and blocked innovation, actions that were ultimately deemed anticompetitive. The case not only highlighted Microsoft's effort to eliminate potential middleware competitors like Netscape, which could have diminished Windows' dominance, but also set important precedents for how tech giants wield power—especially when offering "free" services to consumers.

(Sounds like Google).

Surprisingly, despite the judge initially ordering Microsoft to be broken up, the company settled with the DOJ on appeal in 2001. Instead, the settlement-imposed restrictions on Microsoft’s business practices, including requirements to share its application programming interfaces (APIs) with third-party developers and limitations to ensure fair competition.

Why did the DOJ settle with Microsoft?  Well, in 2001, the Clinton administration was out, and the Bush administration was in.  Although courts had found Microsoft guilty of using its power to unfairly dominate competitors, breaking up the company was seen as too extreme, and constant monitoring wasn’t practical. Instead, the settlement required Microsoft to share more of its software with competitors, allowing them to develop products compatible with Windows. This compromise aimed to move the tech industry forward, but critics argued it didn’t do enough to rein in Microsoft's control, leaving room for future monopolistic behavior.

While the settlement wasn’t as severe as it could have been and allowed Microsoft to retain its dominance in the operating system market, it also made the company more cautious. Increased regulatory scrutiny slowed its expansion into new markets like mobile and internet services. This shift in focus created opportunities for new players to capitalize on this changing landscape.

Ironically, the antitrust case against Microsoft cleared the path for Google to rise as a new tech giant. Now, Google is finding itself in the crosshairs of its own antitrust battles.

History has a way of repeating itself.

II. Vintage Antitrust: Pivot From Protecting Consumer Welfare Back To Competition

A. The Limits of Consumer Welfare Model on Big Tech

As the digital age progressed, the Chicago School's focus on consumer welfare in antitrust law—primarily concerned with price—faced increasing criticism. Under this theory, as long as a company’s actions led to lower prices, courts rarely intervened, even when the company held significant market share. While effective for traditional industries, this approach proved inadequate for tech giants like Amazon, Google, and Facebook, which could dominate markets without raising prices, offering low-cost or free services instead.

These companies operate in complex, multi-sided markets, often acting as both platforms for sellers and competitors. They also benefit from network effects, where their services become more valuable as more people use them, making it difficult for smaller competitors to thrive. This shifted the focus from price to non-price harms like reduced innovation, exclusion of competitors, and control over data, revealing the limitations of the consumer welfare model in addressing modern monopolistic practices.

B. The New Brandeis Movement and Big Tech

Today’s antitrust enforcers (like Lina Khan, Chair of the FTC, and Jonathan Kanter, head of the DOJ’s Antitrust Division) embrace Neo-Brandeisianism (aka the New Brandeis Movement or the Neo Brandeis Movement).  Named after Supreme Court Justice Louis Brandeis, this approach emphasizes a broader view of competition, focusing less on consumer prices and more on how large corporations harm competition (particularly for small businesses) and stifle innovation.  Brandeis was a key figure in early 20^th-Century antitrust philosophy and focused more on competition and less so on price.  Critics have called Neo-Brandeisianim “hipster antitrust,” arguing that it tries to use antitrust law to address social issues like inequality, which they believe it wasn’t designed to handle. They worry it could lead to overregulation and political interference in business

Judges in cases brought by the DOJ under Kanter and the FTC under Khan also seem skeptical of Neo-Brandeisianism, and both agencies have suffered a string of losses in court. In the FTC's cases against the Microsoft-Activision and Meta-Within mergers, and the DOJ's case against UnitedHealth Group-Change Healthcare merger, the courts found insufficient evidence that these mergers would significantly harm consumers. The judges felt these cases were based on novel antitrust theories that lacked enough concrete evidence. Courts often focus on immediate, demonstrable harm to competition or consumers, so without clear proof of negative impacts—such as higher prices—they are less likely to block mergers, even when broader, more speculative antitrust theories are presented.

Amid facing skepticism from courts and critics, Khan and Kanter have continued  to pursue high-profile litigation against Big Tech. Their strategy isn’t just about winning individual cases—it’s also about educating the public and pushing Congress to update antitrust laws for the digital age.

III. DOJ V. Google - Round 1 Goes To The Government

A. The Ruling

Despite suffering such loses, Kanter and Khan’s efforts are paying off in a big way (to the power of googol).  In August 2024, the D.C. District Court dealt a major antitrust blow to Big Tech, with Judge Mehta ruling that Google had illegally maintained its monopoly over (i) internet search and (ii) search text ads—a significant victory (pillar 2) in the ongoing efforts to rein in tech giants. 

1. Search

Google engaged in behavior that harms competition by making exclusive contracts, primarily with device manufacturers and carriers, to make its search engine the default engine on smartphones and web browsers and block its competitors.

Google has argued that it dominates the market because its product is the best, so it was simply benefiting consumers by providing them with the best product.  Well, let’s think about that assertion.  Google paid Apple $20 billion a year to be the default search engine on Apple devices and around 50% of all search queries come from such default placements. The Apple agreement also prohibits Apple from making its search features better than Google’s. Siri and Spotlight, for instance, cannot be meaningfully improved without risking a renegotiation of the deal.  Perhaps the most surprising condition of the deal is Apple's obligation to defend Google in the face of regulatory scrutiny!  

As a result of deals like this, Google controls around 90% of the online search market (wow, there’s that number again) and 95% of search on smart phones. That market share also gives Google a leg-up in collecting uber valuable user data. For example, Google is able to gather as much user data in 13 months as Bing can accumulate in 17 years. All of this creates a flywheel effect and being so entrenched makes it hard to dethrone it. So is Google really on top because of its superior product, like it argued? Or does it rule because of it entrenches itself through superior negotiating power? 

2. Search Text Ads

Regarding the search text ads (not to be confused with the general search ads), Google acted anti-competitively by gradually raising ad prices in a way that masks the increases through auctions, making it seem like price fluctuations are due to demand when in reality, Google was just inflating prices.  This behavior showed Google could raise prices without concern for competitors, which is a clear sign of monopoly power. Judge Mehta called out this pricing manipulation as both monopolistic and unethical.

Ultimately, the fact that Judge Mehta rejected Google’s consumer benefit argument, one grounded in traditional antitrust theories, is a victory for Khan’s Neo-Brandeism. Despite the fact that Google’s dominance is arguably super convenient for consumers, it was not a get-out-of-jail-free-card for Google; this falls perfectly in line with the type of antitrust jurisprudence that Kanter, Khan and the Neo Brandeisians would be in favor of.

B. Would Remedies Realistically Be Effective? 

On Tuesday, October 8^th, the DOJ announced that it might seek to break up Google as a potential remedy (penalty). Per its court filing, “Fully remedying these harms requires not only ending Google’s control of distribution today, but also ensuring Google cannot control the distribution of tomorrow.” Judge Mehta is expected to decide on a remedy to this situation by summer 2025; meanwhile, Google will appeal the case.

The DOJ’s requested breakup seems improbable. A breakup of Google’s complex business structure  would be difficult, and breakups are an extreme remedy anyway. While Judge Mehta has avoided signaling specific remedies, the focus is likely to be on prohibiting Google’s exclusive contracts, possibly through a “choice screen” where users can select their preferred search engine, which is what was done in the EU’s antitrust cases against Google. It’s also doubtful whether consumers, given the choice, would choose to switch away from their old friend Google.  But AI could change all that too.

Critics of the antitrust action argue that forcing Google to change its agreements with device manufacturers and carriers could undermine innovation and leave consumers worse off by weakening products many rely on for their quality. It could for example lay a death blow to Mozilla’s Firefox web browser, which relies on an exclusivity agreement with Google for over 80% of its operating budget. Even if apps like Firefox survive, Google’s litigation costs—and any costs it passes onto consumers—could outweigh any benefits consumers see. Ultimately, while remedies aim to boost competition, their full impact will unfold slowly over years, with potential appeals further delaying the process.

Nevertheless, Judge Mehta’s ruling in the Google antitrust case is significant as it may guide future Big Tech cases, particularly on market definition, default settings, and scale.  It acts as a "test case" that could influence future rulings and might prompt companies like Alphabet or Amazon to restructure, potentially spinning off YouTube or AWS, to avoid harsher penalties.

IV. The Reformation Of Antitrust Law And Reactions

Clearly, the Neo-Brandeisists think antitrust needs to be reformed to be practical to the realities on the ground, but how could they be reformed practically? 

One type of proposed reform would make merger rules stricter and clearer to prevent Big Tech companies from consolidating power even more. For example, stricter merger rules could restrict when tech companies can buy out their smaller rivals, a practice that’s common today.

Other rules could prevent large tech companies from favoring their own products, as Google did. These rules could rein in Big Tech’s size and monopoly power (pillar 2).

Another type of proposed reform would make new rules designed specifically for Big Tech’s brave new world. Big Tech can consolidate power in new ways that antitrust doesn’t address. For example, companies “lock in” users to their products by making it difficult to move data to another company’s product or use multiple companies’ products together. Some companies, like Apple, have become infamous for this practice, creating a “walled garden” where only their products work. Tech-specific antitrust rules could knock down the garden’s walls, forcing companies to allow users to freely move their data between companies (a concept called “interoperability”).  This is the value proposition of crypto.

What’s been the pushback on reforms?

There’s been a lot of pushback on the suggested antitrust reforms for Big Tech. Critics often point to three major concerns: (1) feasibility, (2) innovation, and (3) the free market.

1. Feasibility: First, some critics argue that rules, like those that knock down the walled garden, aren’t feasible. They say forcing platforms to work together could create security risks and be too technically difficult to manage.

2. Innovation: Second, some critics argue that restrictions on behaviors like merging or self-favoring would hurt innovation and competition. They claim such rules would deter venture capital investment in startups and reduce incentives for mature tech companies to innovate, ultimately undermining U.S. competitiveness and global tech leadership.

3. Free Market: Finally, some critics advocate for free market approach. In this theory, antitrust issues will work themselves out through a sort of natural selection as the industry evolves. For example, Sears dominated retail through its mail-order catalogs and big-box stores but eventually lost ground as it failed to keep up with digital innovation, allowing Amazon to take the lead in online retail.

V. How Has Big Tech Dodged Antitrust Violations Until Now

Big Tech has a long history of staying one step ahead of government regulators on antitrust issues by adapting their strategies to avoid violations and scrutiny. These companies are not only proactive in ensuring compliance but also innovative in finding ways to circumvent potential legal challenges. Here’s how they had been managing to remain ahead:

A. Antitrust Compliance Programs

Until recently, Big Tech had little concern over antitrust investigations, as the long-standing consumer welfare model guiding enforcement remained unchanged for decades. This allowed companies to establish “antitrust compliance” measures—internal processes designed to ensure they operated within legal boundaries and avoided monopolistic practices.

To stay ahead of potential scrutiny, tech companies invested heavily in compliance, creating internal "antitrust filters" to review new products and services. They trained employees on antitrust issues and consulted legal experts to ensure their strategies wouldn’t be seen as anti-competitive. This proactive approach allowed them to avoid legal challenges while continuing to innovate and expand within the boundaries of US antitrust laws.  Even when investigations occurred, agencies like the DOJ and FTC often faced limited resources and lengthy timelines, as seen in the Microsoft case, where penalties arrived too late to have significant impact.

After the Google suit, there will be updates to their policies.

B. Avoidance Mergers: Special Dividends­­ and Acqui-Hires and Poaching

Big Tech’s playbook also has included innovative ways to consolidate power without triggering merger rules and government oversight. Big Tech commonly circumvents merger oversight by (1) keeping mergers below reporting thresholds (certain $ deal sizes require a government review), (2) structuring a merger as a different type of transaction, or (3) not technically merging at all.

1. Special Dividends: First, Big Tech uses a special dividend to keep mergers below the price that triggers reporting and oversight. In this strategy, the company that’s being bought pays its investors a special one-time dividend before the sale, reducing its overall value. This allows the buyer to acquire the company at a lower price, staying under the thresholds that would normally require reporting the deal to regulators.

2. Acqui-Hires: Second, Big Tech has used acqui-hires to structure mergers as a hiring event rather than a merger that triggers reporting and oversight. An acqui-hire is when a large company buys a startup primarily to gain its key employees. Sometimes, these deals are structured to look like regular employment contracts, hiding the true value of the acquisition by undervaluing the assets and promising future stock options. While these types of deals often go unreported, they can be anticompetitive by benefiting the companies involved while reducing future competition—which ultimately hurts consumers.

3. Reverse Acqui-hires / Controlling Stakes: Third, Big Tech gains control without outright purchases through reverse acqui-hires and acquiring controlling stakes. Unlike traditional acquihires, where a company is fully acquired mainly for its talent, a reverse acqui-hire involves hiring key employees and licensing a startup’s technology without acquiring the company, allowing it to remain independent. Additionally, purchasing controlling stakes gives Big Tech access to competitors’ confidential information and influence over strategic decisions. For example, Microsoft recently acquired a 49% stake in OpenAI while poaching talent from AI firm Inflection, actions that have attracted antitrust scrutiny in the U.S. and UK.

However, the government is keenly aware of these corporate maneuvers. The real question now is, with the first antitrust domino having fallen, what new strategies will Big Tech devise to navigate this shifting regulatory landscape? 

VI. Final Thoughts: The Past And The Future

The exclusive deal between Google and Apple is one of the most significant and consequential in tech history, shaping the competitive landscape of Silicon Valley.

It has allowed Google to solidify its dominance in search while Apple profits without entering the search market directly. This "co-opetition" has effectively shut out rivals like DuckDuckGo and Microsoft’s Bing, undermining claims that Google’s success is purely consumer-driven. Instead, Google’s financial leverage, bolstered by its agreement with Apple, has marginalized competitors and reinforced a closed ecosystem that stifles innovation and blocks new market entrants.

But the far-reaching influence of this deal goes beyond technical dominance. Silicon Valley’s largest companies, including Google and Apple, have not only built powerful businesses but have also leveraged their wealth and influence to shape government policy. The same tech giants now facing antitrust scrutiny have poured millions of dollars into lobbying efforts, creating a formidable political force that protects their interests. In 2024 alone, Google and other Big Tech players have funneled vast amounts of money into political super PACs and lobbying groups, aiming to sway policy in their favor and stave off regulatory threats. In 2023, Big Tech companies, led by giants like Apple, Microsoft, and Alphabet, spent $243.7 million on lobbying, making them the second-largest industry in lobbying expenditures, behind only the pharmaceutical sector at $382.6 million.  These aggressive lobbying tactics have helped Big Tech stay one step ahead of regulators, shaping antitrust enforcement and slowing down efforts to rein in their power.

The remedy imposed upon Google will truly shape the future of Big Tech.  One wonders if the actual remedy will be much reduced as concerns with the US falling behind China on the AI front could push Washington not to threaten US tech dominance.  The change in presidential administration adds another layer of intrigue, as it will undoubtedly influence the scope and execution of these remedies – not to mention, it could mean a new inflection point in the enforcement of antitrust laws and direction of the DOJ and FTC.

Even so, when you look at the Microsoft case, even though the remedies were softened, it still paved the way for the rise of Google.  The Gilded Age is over at this point and a new Google may emerge from all of this….

VII. Extra Credit:  Cases To Keep On Your Radar

With the rise of Khan (sounds like a Star Trek movie) and Kanter and suits brought against Amazon and Google (among others), Big Tech is on notice.  Keep the following cases on your radar:

1. Google (2^nd Case Focuses on Advertising): A second antitrust case targeting Google’s online advertising practices is currently ongoing, with trial scheduled to wrap-up on November 25, 2024. This case accuses Google of anticompetitive mergers and monopolistic practices in the ad tech space.

2.  Amazon: In September 2023, the FTC and 17 states sued Amazon, accusing it of maintaining a monopoly by squeezing sellers and favoring its own services on its marketplace. The FTC claims these practices led to artificially higher prices for consumers. Amazon has asked for the case to be dismissed, arguing that its marketplace benefits both consumers and sellers. The trial is set for October 2026.

3.  Apple: In March 2024, the Department of Justice sued Apple, alleging that it monopolized the smartphone market and stifled competition, especially for services like cloud streaming, messaging, and digital wallets. Apple has moved to dismiss the case, claiming that its practices enhance the iPhone experience and don’t violate antitrust laws.

4.  Meta (formerly Facebook): The FTC sued Meta in 2020, accusing it of monopolizing social media by acquiring Instagram and WhatsApp to eliminate competition. After some setbacks, the case is proceeding, with the FTC calling for the acquisitions to be undone. Meta argues that the acquisitions were not anticompetitive and contributed to innovation.

5. Visa: The DOJ filed a civil suit in 2024, accusing Visa of monopolizing the US debit network market through exclusionary policies and anticompetitive agreements. Visa allegedly isolated competitors by offering discounts for exclusive routing and paying rivals like Apple and PayPal to avoid developing competing products.

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[Special thanks to Sam Silverberg.]

VIII. Resources:

• Carl Shapiro, Antitrust in a Time of Populism, 61 Intl. J. Indus. Org. (2018).

•  Daniel Francis, Christopher John Sprigman, Antitrust Principles, Cases, and Materials 7 (2d ed. 2024).

• United States v. Grinnell Corp., 384 U.S. 563 (1966).

• Amy Hayes, Here’s How John D Rockefeller Became the First Billionaire, THE COLLECTOR (Oct. 12, 2023). thecollector.com/how-john-d-rockefeller-became-first-billionaire/.

• Ashkay Jagtap, Aakash Biswas, James Blaney, The Antitrust Legacy of Standard Oil in Today’s World, THE WAY AHEAD (Nov. 1 2021). jpt.spe.org/twa/the-antitrust-legacy-of-standard-oil-intoday’s-world.

• Katie Wilson, 1912: When antitrust views collided in a presidential election, CASCADE PBS (Nov. 4, 2020) cascadepbs.org/opinion/2020/11/1912-when-antitrust-views-collided-presidential-election.

• R. Hewitt Pate, The Common Law Approach and Improving Standards for Analyzing Single Firm Conduct (Oct. 23, 2003).

• Thomas A. Lambert, Defining Unreasonably Exclusive Conduct: The “Exclusion of a Competitive Rival” Approach, 92 N.C.L. Rev. 1175, 1177(2014).

• See Mark S. Popofsky, Defining Exclusionary Conduct: Section 2, The Rule of Reason, and the Unifying Principle Underlying Antitrust Rules, 73 L.J. 435, 442 (2006).

• Rebecca Klar and Karl Evers-Hillstrom, How Big Tech fought antitrust reform–and won, THE HILL (Dec. 23, 2022) thehill.com/policy/technology/3785894-how-big-tech-fought-antitrust-reform-and-won/.

• Bryce Covert, Lina Khan’s Anti-Monopoly Power, THE NATION (Dec. 9, 2023) https://www.thenation.com/article/society/lina-khan-ftc-monopoly.

• Andre Fiebig & David Gerber, The Causes and Consequences of the Neo-Brandeisian Antitrust Movement in the United States, DEGRUYTER.COM (Apr. 5, 2021) https://www.degruyter.com/document/doi/10.15375/zwer-2021-0405/html

• Andrea O’Sullivan, What Is ‘Hipster Antitrust,’ MERCATUS.ORG (Oct. 18, 2018) https://www.mercatus.org/economic-insights/expert-commentary/what-hipster-antitrust.

• Lina Khan & Sandeep Vaheesan, Market Power and Inequality: The Antitrust Counterrevolution and Its Discontents 11 Harv. L. & Pol’y Rev. 235, 237 (2017).

• David Streitfeld, Amazon’s Antitrust Antagonist Has a Breakthrough Idea, THE NEW YORK TIMES (Sept. 7, 2018). https://www.nytimes.com/2018/09/07/technology/monopoly/-antitrust-era-lina-khan-amazon.html.

•  Russell Brandom, Amazon says new FTC Chair shouldn’t regulate it because she’s too mean, THE VERGE (Jun. 30, 2021) https://www.theverge.com/2021/6/30/22557456/amazon-lina-khan-recusal-petition-federal-trade-commission-antitrust.

• Callum Jones, ‘She’s going to prevail:’ FTC head Lina Khan is fighting for an anti-monopoly America, THE GUARDIAN (Mar. 9, 2024) https://www.theguardian.com/us-news/2024/mar/09/lina-khan-federal-trade-commission-antitrust-monopolies.

•  Brian Fung & Clare Duffy, Google has an illegal monopoly on search, judge rules. Here’s what’s next, CNN (Aug. 6 ,2024).

• David McCabe, Strongest U.S. Challenge to Big Tech’s Power Nears Climax in Google Trial, THE NEW YORK TIMES (May 2, 2024) https://www.nytimes.com/2024/05/02/technology/google-antitrust-trial-closing-arguments.html.

• Google Antitrust Ruling: A Landmark Decision in the Tech Industry, MONEY MORNING (Aug. 5, 2024), https://moneymorning.com/2024/08/05/google-antitrust-ruling-a-landmark-decision-in-the-tech-industry/.

• Jennifer Elias, Google’s antitrust ruling has experts looking to 25-year old Microsoft case for answers, CNBC (Aug. 7, 2024).

• Nick Riso, Google Antitrust Ruling: A Landmark Decision in the Tech Industry, MONEY MORNING (Aug. 5, 2024) https://moneymorning.com/2024/08/05/google-antitrust-ruling-a-landmark-decision-in-the-tech-industry/.

• Satya Marar, The Antitrust War Against Google Fails Consumers (Sep. 13 2023).

• Bill Scher, A Short History of Democrats and Antitrust, WASHINGTON MONTHLY (Jul. 19, 2021) https://washingtonmonthly.com/2021/07/19/a-short-history-of-democrats-and-antitrust/.

• Leah Nylen, Huge win for progressives as Lina Khan takes helm at FTC, POLITICO (Jun. 15, 2021) https://www.politico.com/news/2021/06/15/khan-confirm-ftc-494609.

• Roger P. Alford, The Bipartisan Consensus on Big Tech, 71 Emory L. J. 895 (2022).

• Gregory J. Werden, Identifying Exclusionary Conduct Under Section 2: The “No Economic Sense” Test, 73 Antitrust L.J. 413 (2006).

• Steven C. Salop & Craig Romaine, Preserving Monopoly: Economic Analysis, Legal Standards, and Microsoft, 7 Geo. Mason L. Rev. 617, 652 (1999).

• Zephyr Teachout, BREAK ‘EM UP; RECOVERING OUR FREEDOM FROM BIG AG, BIG TECH AND BIG MONEY (2020) 214.

• Robert Lande, Who Cares Whether A Monopoly is Efficient? The Sherman Act Is Supposed to Ban Them All, THE SLING (Nov. 15, 2023), https://www.thesling.org/who-cares-whether-a-monopoly-is-efficient-the-sherman-act-is-supposed-to-ban-them-all/.

• Mark McCareins, Why Antitrust Regulators Don’t Scare Big Tech, KELLOGG INSIGHT (Aug. 19, 2019) https://insight.kellogg.northwestern.edu/article/why-antitrust-regulators-dont-scare-big-tech.

• https://www.britannica.com/event/Gilded-Age

• https://www.history.com/news/robber-barons-gilded-age-wealth

• https://historyanecdotesforteachers.com/the-gilded-age/

• https://www.nytimes.com/2018/09/07/technology/monopoly-antitrust-lina-khan-amazon.html

• https://www.cnn.com/2023/10/16/tech/lina-khan-risk-takers/index.html

• https://www.gao.gov/products/gao-23-105790#:~:text=We%20found%20that%20DOJ%20and,or%20comments%20on%20that%20investigation.

• https://sgp.fas.org/crs/misc/R46875.pdf

• https://ainowinstitute.org/publication/antitrust-and-competition

• https://time.com/6116953/antitrust-reform-big-tech-congress-biden/

• https://www.csis.org/analysis/breaking-down-arguments-and-against-us-antitrust-legislation

• https://insight.kellogg.northwestern.edu/article/why-antitrust-regulators-dont-scare-big-tech

• https://systemicjustice.org/article/putting-the-anti-back-into-antitrust-the-need-for-antitrust-reform-in-the-digital-age/

• https://www.nytimes.com/2024/08/05/technology/antitrust-google-amazon-apple-meta.html

• https://www.ftc.gov/system/files/documents/public_statements/1596340/20210915_final_chopra_remarks_non-hsr_reported_acquisitions_by_big_tech_platforms.pdf

• https://www.kff.org/health-costs/issue-brief/understanding-the-role-of-the-ftc-doj-and-states-in-challenging-anticompetitive-practices-of-hospitals-and-other-health-care-providers/

• https://www.reuters.com/legal/us-judge-rules-google-broke-antitrust-law-search-case-2024-08-05/

• https://slate.com/technology/2024/08/google-monopoly-antitrust-decision-defeat-big-tech.html

• https://www.nytimes.com/2001/09/07/business/us-vs-microsoft-overview-us-abandoning-its-effort-break-apart-microsoft-saying.html

• https://knowledge.wharton.upenn.edu/article/the-microsoft-settlement-a-remedy-that-pleases-almost-no-one/

• https://www.cato.org/regulation/winter-2023-2024/neo-brandeisianisms-democracy-paradox

• https://www.paulweiss.com/practices/litigation/antitrust/publications/takeaways-from-the-doj-s-unitedhealth-change-healthcare-merger-loss?id=44360

• https://www.newyorker.com/magazine/2024/10/14/silicon-valley-the-new-lobbying-monster

• https://www.nytimes.com/2020/10/25/technology/apple-google-search-antitrust.html

• https://www.opensecrets.org/news/2023/10/google-ramped-up-federal-lobbying-ahead-of-doj-antitrust-showdown/

• https://www.visualcapitalist.com/ranked-which-u-s-industries-spend-the-most-on-lobbying/

• https://ainowinstitute.org/publication/antitrust-and-competition

• https://sgp.fas.org/crs/misc/R46875.pdf

• https://time.com/6116953/antitrust-reform-big-tech-congress-biden/

• https://moneymorning.com/2024/08/05/google-antitrust-ruling-a-landmark-decision-in-the-tech-industry/

Images: All images are AI-generated with using a combination of Dall-E, Firefly, DreamStudio and Pixlr.

Disclaimer:  This post is for general information purposes only. It does not constitute legal advice.  This post reflects the current opinions of the author(s).  The opinions reflected herein are subject to change without being updated.

On December 31, 1999, adorned in chokers and elevated by platform shoes, we were torn between playing Snake on our Nokias or Pokémon on our Gameboys, all while counting down the American Top 40 with Casey Kasem (RIP Shaggy) to that number-one hit, Smooth by Santana featuring Rob Thomas. Together, we collectively held our breath, awaiting the stroke of midnight and the dawn of a new millennium.

Y2K was supposed to bring chaos: computers crashing, planes falling, power outages, nuclear war, and the end of civilization as we knew it. But after the clock hit midnight on January 1, 2000, nothing much happened.

25 years later, we got the Y2K no one knew was coming in the major IT outage during the summer of 2024 that affected almost 8.5 million devices. The cause? A defect in a software update sent out by cybersecurity vendor CrowdStrike.

In this follow-up to the previous article, The Untouchables: Why Software Companies Escape Liability for Faulty Software?, we’ll lay out how CrowdStrike could leverage the legal protections to shield itself from liability from the various lawsuits related to the massive IT hiccup.

I. CrowdStrike and the IT Outage

CrowdStrike’s core technology is Falcon, a platform designed to prevent cybersecurity breaches. On July 19th, 2024, CrowdStrike pushed out a routine software update for Falcon—or so it thought. Operating off of a successful stress check done in March 2024, it seems CrowdStrike assumed the best and skipped some tests before pushing the July update, allowing a flaw to sneak through. With no phased rollout, the flawed update went out to everyone once released. Since Falcon is tightly integrated with Microsoft Windows, when the flaw crashed Falcon, down went the millions of Windows systems connected to it.

The outage affected airlines, hospitals, banks, media outlets, hotels, retail stores, stock markets, emergency services. Particularly affected was Delta Airlines, which relied on Windows for over half of their IT systems and accounted for nearly ⅔ of all canceled flights worldwide. And while CrowdStrike was able to find and push out a fix to the update file in 79 minutes, the disruption in many places went on longer. Many systems were stuck on the “Blue Screen of Death,” requiring manual reboots to get them out of the crash loops they were stuck in. The outage caused worldwide financial damage of at least $10 billion, with insurers estimating that U.S. Fortune 500 companies took $5.4 billion in losses.

II. A Deluge of Lawsuits

Every party affected by the outage—CrowdStrike shareholders, Delta passengers, Microsoft, Delta, and CrowdStrike themselves—all seem to have an opinion as to who and how people should be held responsible. Here are some of the outstanding lawsuits CrowdStrike is facing related to this incident that we’ll discuss: 

• CrowdStrike Sued by Air Passengers: CrowdStrike was sued in a class action by air travelers whose flights were delayed or canceled. They say CrowdStrike was negligent in testing and deploying its software and want compensation for their disrupted flights, as well as punitive damages.

  • Note that Delta was sued by passengers in a separate class action for breach of contract over how it handled refunds, with passengers also seeking compensation for travel disruptions.

• CrowdStrike Sued by Delta (and counter sues!): Delta sued CrowdStrike on October 25th citing $500 million in losses. Delta has accused CrowdStrike of gross negligence, misrepresentation, computer trespassing, trespass to personal property, strict liability, breach of contract, and deceptive and unfair business practices. Delta is seeking monetary and punitive damages.

  • CrowdStrike countersued to seek declaratory judgment that it wasn’t responsible for Delta’s claimed harm, noting Delta repeatedly declined help from CrowdStrike and Microsoft.

[CrowdStrike was also sued in a class action by its own shareholders as the shareholders say that CrowdStrike made false and misleading statements about their software testing. The shareholders want compensation after share prices dropped 32% post-outage, and $25 billion in market value was wiped out. For brevity, we’ll not discuss this suit.]

III. Can CrowdStrike Escape? The “Tech Veil” in Action!

Despite Delta’s chest puffing, holding software companies liable for tech defects isn’t easy. This is partly because products (and software lawsuits) are complex, partly because companies create defenses in contracts, and partly because of industry norms. Each of these issues can function as a “moat”: a competitive advantage for software companies and a deterrent for everyone else. We’ll walk through the implications of each moat within the Tech Veil that protects software companies from liability.

A. Recap of the “Tech Veil”

1. Litigation Moat: Software companies can face litigation for breach of warranty, negligence, or strict liability, but each claim has significant challenges. Breach of warranty requires a contract, which often limits damages, and limited damages often make lawsuits unattractive. Negligence claims are hard to win due to difficulties proving direct harm, especially with third-party involvement. Strict liability is rare since it only applies to software causing significant physical or property damage.

2. Contractual Moat: Software companies build defenses into their contracts by disclaiming warranties, limiting liability, and including indemnity clauses. Disclaiming warranties reduces the company's promises, limiting grounds for lawsuits. Liability limitations cap or restrict damages, and indemnity clauses can shift legal defense costs to the consumer if the company is sued due to the consumer's use of the software.

3. Structural Moat:  Certain legal barriers and norms help shield tech companies. For one, the software industry itself argues that flaws are inevitable.  Software is complicated and the components are intricate. Serious errors can slip by, with some of those issues only being discovered through real-world reviews and tests. But the fix, software companies argue, is not to hold them to a higher, more sensitive standard of liability. Software companies say that would slow development, inhibiting innovation and resulting in higher prices for consumers. Courts agree, resulting in cases frequently getting tossed out of court or settled for small amounts.

B. How CrowdStrike Could Beat Each Lawsuit

1. Airline Passengers v. CrowdStrike:  Negligence

The air travelers bringing a suit against CrowdStrike are alleging negligence, or that the software was carelessly made. In negligence cases, a direct contract isn’t required, but plaintiffs must prove four key elements:

1. There was a legal duty

2. The duty was breached

3. The breach of that duty caused harm

4. The harm led to damages

Proving negligence in software cases can be tricky because of the duty software companies owe. Unlike other technical professionals (like doctors and lawyers) who are held to a high standard of behavior, software companies are only required to act "reasonably" — i.e. not held to higher standards like doctors or lawyers. This makes it harder to prove they breached their duty, as the average person wouldn't catch every software defect.

Causation is also tricky—plaintiffs must prove the software itself caused the harm, not a third party like Delta, which managed the flights. CrowdStrike has pointed out that Delta was slow to recover, declined offered help, and failed to keep systems updated, shifting blame toward Delta.

Lastly, plaintiffs need to show tangible injury or property damage, which is rare in software-related cases. Punitive damages are even tougher, requiring proof of serious misconduct. Given the complexity of software, companies often argue that issues were unavoidable or due to carelessness, rather than intentional harm or recklessness.

Given these challenges, it seems unlikely that the airline passengers will have an easy win in court. Judges in tort cases like this one are typically cautious about holding a defendant liable for harm that may be too indirect or unforeseeable. With attention also focused on Delta's handling of the situation, there’s much to explore in the chain of causation between CrowdStrike's software error and the flight delays. If CrowdStrike couldn’t have reasonably foreseen Delta's heavy reliance on them or its outdated systems, Delta’s actions may overshadow any negligence by CrowdStrike, potentially shielding the company from liability.

2. Delta v. CrowdStrike:  Limitation of Liability

A.    Risk Shifting Provisions: Limitation of Liability

CrowdStrike and Delta have also been publicly disputing the extent of CrowdStrike’s liability.  In contracts, companies often limit their liability by restricting the types of damages covered, such as excluding indirect or punitive damages, and setting a monetary cap. In a letter to Delta prior to the lawsuit, CrowdStrike wrote that its liability was capped at an amount in the “single-digit millions.” According to CrowdStrike’s complaint, its liability for Delta’s services is capped at twice the fees Delta paid, excludes indirect or consequential damages, and requires Delta to comply with applicable laws (details below).

Delta argues in its complaint, however, that gross negligence or willful misconduct would override the liability cap—something CrowdStrike concedes, if proven (see below). To succeed, Delta must demonstrate that CrowdStrike’s actions were more than just careless. Gross negligence implies a severe lack of care with reckless disregard, while willful misconduct involves intentional disregard for known risks. Both are challenging standards to meet.

Delta points to CrowdStrike’s lack of a staged rollout and its admission that certain tests were skipped as examples of this misconduct. However, software development is complex, and skipping tests or not implementing a staged rollout does not necessarily prove intentional harm.

CrowdStrike points to Delta’s own IT decisions and response failures as primary causes of the slow recovery. It asserts that other companies resolved similar issues more quickly, suggesting Delta’s infrastructure and choices contributed to the impact. CrowdStrike also questions Delta’s compliance with federal cybersecurity requirements, particularly a 2023 TSA mandate for airlines. If CrowdStrike can demonstrate that Delta’s actions contributed to the incident, it could weaken Delta’s claim of gross negligence and reduce CrowdStrike’s potential liability.

What’s very telling is that Delta’s complaint doesn’t mention the limitation of liability language at all, suggesting it knows the only way it can win is to focus on a gross negligence or willful misconduct argument. To do so, it will try to argue that CrowdStrike’s actions were serious enough to warrant unlimited damages. However, CrowdStrike’s lawsuit for a court ruling on liability limits could force Delta to address these caps directly at an early stage of the trial process, potentially limiting Delta’s recovery if the court sides with CrowdStrike.

While these types of cases usually settle, if we get to the discovery phase, it would be interesting to read the full terms, i.e. the reps, warranties and indemnification provisions.

FWIW, CrowdStrike’s online terms and conditions protects it well in these areas:

• The warranty limits remedies to problem resolution, workarounds, or a prorated refund, placing maintenance responsibility on the customer, while indemnification is restricted to covering a customer’s defense costs in third-party intellectual property claims only. That’s some protective language!

IV. Final Thoughts: Is Software Getting Worse?

On August 12th, CrowdStrike's President accepted the Pwnie Award for the “Most Epic Fail” in cybersecurity. Just days later, on September 24th, Adam Meyers, CrowdStrike’s Senior VP for Counter Adversary Operations, testified before the House Homeland Security Cybersecurity and Infrastructure Protection Committee, admitting that CrowdStrike had "let our customers down." This incident is a reminder that software companies must prioritize actual quality assurance over assumptions. CrowdStrike has pledged to implement more software checks and stagger future updates to prevent similar issues.

The global IT outage caused by a faulty CrowdStrike update also illustrates how over-reliance on a few dominant players in sectors like transportation, healthcare, and finance can magnify risks to the public. While the CrowdStrike outage was directly caused by its faulty Falcon update, it was worsened by Microsoft's dominance in enterprise software. Windows systems, which are used globally in corporate and public infrastructure, were disproportionately affected. Though Microsoft wasn’t directly responsible, the widespread reliance on its systems amplified the consequences. Critics argue this is a prime example of the dangers of technological “monocultures,” where too many organizations depend on a single platform, increasing the impact of any failure. Tech folks have suggested this reflects the need to diversify software solutions across industries to reduce the risk of widespread outages.

Addressing these issues would require significant changes in industry priorities. Currently, the focus is on fast software development to serve more consumers and stay competitive in a market dominated by a few major players. Speed, in this case, isn’t a bug—it’s a feature. However, speed without reliability benefits no one. Without regulations addressing software monopolies and effective private regulation via lawsuits, companies are free to make repeated mistakes, leaving consumers with limited alternatives.

We've seen how courts hesitate to impose broad liability on tech companies, and how software firms promote the narrative that change is difficult, if not impossible. It may take an act of Congress to truly shift the status quo and penetrate the “Tech Veil.”

For now, death, taxes, and software bugs remain the only certainties in life.

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[Special thanks to Sam Silverberg.]

Resources:

• https://www.reuters.com/technology/microsoft-says-about-85-million-its-devices-affected-by-crowdstrike-related-2024-07-20/

• https://www.techtarget.com/whatis/feature/Explaining-the-largest-IT-outage-in-history-and-whats-next

• https://www.crowdstrike.com/products/faq/

• https://www.theverge.com/2024/7/24/24205020/crowdstrike-test-software-bug-windows-bsod-issue

• https://abcnews.go.com/Business/delta-days-restore-normal-service-after-crowdstrike-outage/story?id=112299966

• https://www.cbs42.com/news/business/ap-us-opens-investigation-into-delta-after-global-tech-meltdown-leads-to-massive-cancellations/

• https://www.thestreet.com/investing/stocks/analysts-reboot-crowdstrike-stock-price-target-after-lawsuit

• https://www.bbc.com/news/articles/cy08ljxndr4o

• https://www.reuters.com/legal/crowdstrike-is-sued-by-shareholders-over-huge-software-outage-2024-07-31/

• https://www.reuters.com/legal/crowdstrike-is-sued-by-fliers-after-massive-outage-disrupts-air-travel-2024-08-05/

• https://www.reuters.com/legal/delta-passengers-sue-airline-refusing-refunds-after-computer-outage-2024-08-07/

• https://www.reuters.com/business/aerospace-defense/delta-air-warns-380-mln-revenue-hit-crowdstrike-outage-2024-08-08/

• https://assets.law360news.com/1868000/1868027/crowdstrike%20response%20letter%20(2024.08.08).pdf

• https://www.crowdstrike.com/terms-conditions/

• https://assets.law360news.com/1866000/1866558/2024.08.04%20-%20crowdstrike%20response%20to%20delta%207.29.24%20letter.pdf

• https://assets.law360news.com/1868000/1868027/crowdstrike%20response%20letter%20(2024.08.08).pdf

• https://www.americanbar.org/groups/business_law/resources/business-law-today/2014-october/section-10-b-litigation-the-current-landscape/

• https://www.pcmag.com/news/crowdstrike-exec-shows-up-to-accept-most-epic-fail-award-in-person

• https://www.reuters.com/technology/crowdstrike-exec-testify-before-congress-it-outage-2024-08-30/

• https://abcnews.go.com/US/wireStory/crowdstrike-executive-apologizes-congress-july-global-tech-outage-114077758

• https://moduscreate.com/blog/unrealistic-expectations-dangerous-piece-software/

• https://stackoverflow.blog/2023/12/25/is-software-getting-worse/

• https://www.commondreams.org/news/big-tech-monopoly_

• https://www.geekwire.com/2024/a-little-frightening-crowdstrike-outage-puts-microsofts-role-in-critical-infrastructure-back-in-the-spotlight/

• https://x.com/ByERussell/status/1849937873413325277/photo/1

• https://www.wsj.com/business/airlines/delta-sues-crowdstrike-over-july-operations-meltdown-099ad8fa

• https://www.reuters.com/legal/crowdstrike-delta-sue-each-other-over-flight-disruptions-2024-10-28/

• Delta Air Lines, Inc. v. CrowdStrike, Inc. - complaint filed on 10/25/24

• CrowdStrike, Inc. v. Delta Air Lines, Inc. - complaint filed on 10/25/24

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Disclaimer:  This post is for general information purposes only. It does not constitute legal advice.  This post reflects the current opinions of the author(s).  The opinions reflected herein are subject to change without being updated.

In a dramatic and rare turn of events, the CEO of a social media platform was arrested, not for his own conduct, but for the alleged transgressions of his company and its user base. Pavel Durov, the CEO of the messaging app Telegram, was taken into custody in August 2024 by the French police on personal charges for crimes connected to illicit activity on the app (more on that to come). The arrest sent shockwaves throughout the tech world, especially in the US, where such action is almost unthinkable.  Why?  Typically, authorities go after corporations rather than their executives.

What makes this case even more fascinating isn’t just the rarity of a CEO being arrested—it’s the fact that US authorities might have come to a different conclusion under US law. Should a social media CEO be legally responsible for user-generated content? Should platforms like Telegram be required to hand over data to government bodies for surveillance at the expense of privacy? Or does this veer too close to censorship? This debate hits at the core values that both the US and France have long championed—liberty, privacy, and freedom of speech, ideals inherited from the French Enlightenment. But where do we draw the line between protecting those ideals and safeguarding society? 

Let’s dig in. 

Roadmap:

I.  What Is Telegram?

II.  The Arrest and Charges:  EU v. US Law

     A. French and European Union Law:  Trying to Make Online Platforms Safe Spaces

     B. US Law:  Don’t Mess with ‘Mericans’ Free Speech

     C. The Takeaways for Social Media Companies Wanting to Do Business in Europe

          1. EU’s Proactive and Precautionary Regulatory Approach: Durov Is Made an Example of for Refusing to Cooperate

          2. French Compliance Obligations: Filing a Declaration of Cryptographic Services

III. Closing Thoughts: Global Trends

I. What Is Telegram?

Telegram is a messaging app with around 950 million users worldwide. It facilitates peer-to-peer messaging and small group chats, alongside larger public “channels” of up to 200,000 users. The app built its reputation on user privacy, both through tech tools and its owners’ distaste for content moderation. However, this commitment to privacy has also attracted criminals looking for a way to communicate discreetly and securely online.  That said, it’s also not the most protected social media platform as compared to its peers (more on that below).

In the past, Telegram had made headlines for platforming groups like neo-Nazis and ISIS.  But despite providing a space to extremists, the app has maintained a strong anti-censorship philosophy, reflected in its lean workforce of only 30 engineers working on the infrastructure and apps—a number dwarfed by its peers’ content moderation teams alone. Just as a comparison, Meta (Facebook) has 15,000 people working just on content moderation. 

II. The Arrest and Charges:  EU v. US Law

Durov faces multiple charges in France, including the following:

(1) complicity in allowing Telegram users to commit crimes through the platform; 

(2) refusing to cooperate with investigations into crimes that include the distribution of child sexual abuse material (CSAM), drug trafficking, and fraud; and 

(3) importing a cryptographic service into France without filing the requisite declaration with the government. 

Let’s break down the charges, where they come from, and how they contrast with the American approach.

A. French and European Union Law:  Trying to Make Online Platforms Safe Spaces

In an effort to make the digital world safer, French regulators have ramped up their expectations for content moderation on online platforms by focusing on the culpability of the executive officers. The charges against Durov are based on a recent and untested French criminal law. Passed in 2023, Article 323-3-2 of the French Penal Code imposes up to a 5-year sentence and €150,000 fine on executives who knowingly allow the distribution of, or facilitate payments for, illegal content or services on their platforms. In cases involving organized crime, the penalty is enhanced to up to 10 years and €500,000. This law’s imposition of personal liability for tech executives is unparalleled in both America and other European countries.

While France’s ability to charge Durov individually is clearly uncommon, its strict approach to social media moderation is more common across the continent. Article 323-3-2 was passed alongside the European Commission’s 2022 Digital Services Act (DSA), which requires social media companies like Telegram to monitor user-generated content and provide data related to alleged criminal activities. The EU can fine large violators up to 6% of their gross revenue, while the fine for smaller violators depends on the country they choose to be regulated in. Telegram is currently regulated by Belgium, although the EU is investigating whether it underreported its European user base to avoid oversight. Belgium also imposes a fine of up to 6% of gross revenue for DSA violations. The DSA supplements existing French law that requires social media platforms to moderate their content. For example, under the Loi Lutte Contra la Haine sur Internet (Law Against Hate Speech on the Internet), the French government can fine global internet companies up to $1.4M per violation and up to 4% of their global revenue for not removing hate speech.

While European laws are getting stricter on content moderation, France stands out as the most aggressive enforcer due to its ability to criminally charge executives individually.

B. US Law:  Don’t Mess with ‘Mericans’ Free Speech

In the United States, free speech protections are paramount, with social media platforms benefiting from strong legal shields against liability for user-generated content. Hence, the charges against Durov for complicity would be much harder to achieve in the US. 

Section 230 of the Communications Decency Act gives social media companies (and by extension, officers and employees) broad immunity for their users’ posts with some limits (companies will still be liable if they violate federal criminal law, create harmful content, or violate a third party’s intellectual property rights). This framework allows for a balance between free speech and accountability. This means that, had US law applied, Section 230 would likely shield Telegram and Durov for the most part from liability for failing to take down fraudulent, drug-related, and most other illegal user-generated content. However, Telegram would clearly be responsible for the user-generated CSAM on its platform, which falls into Section 230’s carve-out for federal crimes. More on Section 230 from a prior post.

Additionally, in the US, executives usually aren’t personally responsible for their company’s actions due to a concept called the "corporate veil." Under this legal doctrine, a company is seen as a separate entity from the people who run it, protecting executives from being sued for the company’s bad actions. This allows the executives to take business risks without worrying about losing their personal assets. However, if such executives were to engage in illegal activities or serious wrongdoing like fraud, courts can sometimes "pierce the corporate veil" and hold individuals personally responsible.

Understanding these differing legal philosophies, the complicity charge is alarming for social media companies in Europe for two reasons: 

1. It highlights Europe's trend toward holding platforms liable for user-generated content and lax moderation, unlike in the US where laws limit such liability, and 

2. It targets Telegram's CEO, Durov, personally rather than the company, which is uncommon in both the U.S. and Europe where corporate entities are typically held accountable.

Given the US’s laissez-faire attitude, perhaps Americans are more French than the French, peut-être?

C. The Takeaways for Social Media Companies Wanting to Do Business in Europe

1. EU’s Proactive and Precautionary Regulatory Approach: Durov Is Made an Example of for Refusing to Cooperate

France's tough stance on Telegram may be influenced by the company's history of resisting legal investigations and efforts to moderate content.  At the core of this refusal is Durov’s staunch opposition to government censorship. For context, the Russian-born Durov was forced to leave his home country after refusing to cooperate with the Russian government’s attempted censorship of his first social media app, Vkontakte. That experience strengthened Durov’s anti-censorship ideology and inspired him to create Telegram as a platform that lived up to his ideals of free speech, privacy, and resistance to government control. 

While these ideals aren't inherently problematic, it's the degree to which Durov adheres to them that often puts him at odds with governments. Durov’s pro-free-speech philosophy trends towards absolutism. His refusal to cooperate in the French investigation is just the latest in a series of negative encounters with state authorities. Telegram regularly refused to work with governments, even when their requests involved legitimate issues such as child pornography moderation and complying with mandatory reporting laws. For instance, Germany fined Telegram in 2022 for failing to comply with its criminal reporting laws, and Brazil temporarily suspended the company in 2023 for refusing to cooperate with an investigation into neo-Nazi activity. Telegram’s behavior, informed by its anti-moderation philosophy, goes considerably further than its competitors. In contrast, major social media platform owners Meta and Google regularly comply with lawful government data requests worldwide. Tech companies should note that the EU is willing to go further than the US and isn’t afraid of making an example of individuals.  That said, it’s the absolutist approach that is getting Durov and Telegram into trouble.

Ironically, if it chose to, Telegram could have cooperated with French authorities more easily than its peers. Despite its privacy-forward image, Telegram isn’t as secure as many other messaging platforms. Many large messaging services use end-to-end encryption by default, ensuring that only the participants in a conversation can read the messages—restricting even the platform or law enforcement from accessing the content. Telegram’s encryption, on the other hand, is optional; it automatically uses server-client encryption. Users must specifically opt into "secret chats" to access end-to-end encryption. These secret chats come with additional privacy features, such as self-destructing messages and anti-forwarding protections.  Moreover, it seems a bit disingenuous that a company that claims to care so much about privacy doesn’t offer end-to-end encryption by default.

2. French Compliance Obligations: Filing a Declaration of Cryptographic Services

Let’s dig into the charge of importing a cryptographic service into France without the required declaration as it’s yet another charge that could not exist under US law.  Durov’s encryption-related charge combines the two main themes we’ve seen so far: (i) how French law’s aggressive approach to content moderation differs from that of American, and (ii) how Telegram’s antagonistic behavior has made it the test case for France’s new approach. 

France charged Durov under Article 30-I of French Law 2004-575, known as “Loi pour la Confiance dans l’Economie Numérique” (Law for Confidence in the Digital Economy). The law requires those who import certain encryption tools to make a declaration to the French cybersecurity agency, the French Network and Information Security Agency (ANSSI). Interestingly, and perhaps a result of Telegram’s especially antagonistic relationship with national authorities, France has for the first time used its declaration law to charge a social media platform or executive. 

The French licensing system could not exist in America due to First Amendment protections, which recognize code as a form of free speech. This principle was established in the landmark 1996 case Bernstein v. Department of Justice, where a federal court held that the US government could not constitutionally require code to be licensed—as in France—before being published. Any restriction on free speech, like regulating code, requires a compelling government interest. Today, the US primarily applies its compelling interest through (i) export control laws and (ii) foreign investment oversight by the Committee on Foreign Investment in the United States (CFIUS), focusing on national security without broadly infringing upon free speech rights.

The declaration law’s first-ever use may signal that France has set its sights on encryption software that it sees as an impediment to enforcing its content moderation laws. Telegram’s antagonist behavior and reputation for attracting criminals make them a particularly good test case. But how far will France go? If France focuses on this charge, encryption software will become another area–alongside content moderation–where Europe’s law is increasingly diverging from those in America. Considering how much computer engineering and tech rely on encryption, understanding the compliance requirements should be a priority for any tech company aiming to do business in France.

III. Closing Thoughts: Global Trends

France’s crackdown on the darker corners of social media is part of a larger global trend. In 2022, a Brazilian court launched an aggressive moderation campaign to curb election misinformation. However, as the saying goes, "the road to hell is paved with good intentions." This experiment went viral when social media platform X (formerly Twitter) resisted the court's order to remove certain accounts for spreading alleged misinformation. In response, in September 2024, the Brazilian court blocked X nationwide, threatened heavy fines for Brazilians caught using the platform, and even threatened to arrest X’s executives in the country—a move that forced X to close its Brazilian office.  

In a notable about-face, as of September 21, 2024, X has reversed its stance after weeks of defying court orders, now complying with Brazil’s Supreme Court demands, including removing accounts deemed threats to democracy in an effort to have the platform unblocked. Similarly, just this month, Durov acknowledged these issues and pledged to improve Telegram's moderation practices, committing to the removal of features being misused for illegal activities.

The reality is that holding an absolutist stance about free speech becomes increasingly difficult for social media platforms as governments around the world, like those in Brazil and France, implement stricter regulations to combat misinformation, hate speech, and threats to democracy. These platforms, while championing free expression, often find themselves at odds with national laws designed to protect the public. The clash between ideals of unrestricted speech and the practical need for moderation in the face of real-world consequences highlights the delicate balance tech companies must navigate to operate globally, often leading them to compromise on their principles to avoid legal and financial penalties.

While many free speech advocates believed Brazil's moderation efforts went too far, it does suggest that other countries are looking to the EU as a model for stricter content regulation and may begin adopting similar policies to combat misinformation and protect democratic institutions.  Moreover, France’s actions are part of a broader European trend, where the European Council has recently passed a series of sweeping tech regulations (including the Digital Services Act discussed earlier). This trend is significant enough to have earned a nickname: "the Brussels effect." The process is simple: Europe sets strict global standards, and companies comply worldwide because it’s cheaper than customizing regulations for each country.

To conclude, Durov's arrest raises the question of whether France’s actions could signal the start of a new "Brussels effect," where social media platforms are forced to adopt more aggressive moderation globally. Given that companies often design their policies to meet Europe's stringent standards—since it's cheaper than customizing regulations for each market—platforms may increasingly have to adhere to the European standard for content moderation or face the risk of personal liability for their executives. Time will tell. 

In the meantime, if you're a CEO of a social media company, it might be wise to reconsider any European vacation plans. Instead of the French Riviera, there’s always the Redneck Riviera?!

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[Special thanks to Anahita Arora, Sofia DeSimone, Bryan Edelman and Jane Perov for their thoughtful feedback.]

Resources:

• French Preliminary Charges, https://www.tribunal-de-paris.justice.fr/sites/default/files/2024-08/2024-08-26%20-%20CP%20TELEGRAM%20.pdf 

• Adam Satariano & Cecilia Kang, Can Tech Executives Be Held Responsible for What Happens on Their Platforms?, N.Y. Times (Aug. 28, 2024), https://www.nytimes.com/2024/08/28/technology/durov-telegram-liability-platforms.html. 

• Barbara Ortutay, What is Telegram and Why Was Its CEO Arrested in Paris?, AP News (Aug. 28, 2024, 4:36 PM), https://apnews.com/article/telegram-pavel-durov-arrest-2c8015c102cce23c23d55c6ca82641c5.

• Aurelian Breeden & Adam Satariano, Telegram Founder Charged With Wide Range of Crimes in France, N.Y. Times (Aug. 28, 2024), https://www.nytimes.com/2024/08/28/business/telegram-ceo-pavel-durov-charged.html.

• Mike Isaac & Sheera Frenkel, Telegram Founder’s Indictment Thrusts Encryption Into the Spotlight, N.Y. Times (Aug. 29, 2024), https://www.nytimes.com/2024/08/29/technology/telegram-encryption-pavel-durov.html. 

• Miranda Nazzaro, Telegram CEO’s Arrest: What It Could Mean for US Companies, The Hill (Aug. 29, 2024, 6:00 AM), https://thehill.com/policy/technology/4852352-telegram-ceo-detention-free-speech/

• Ash Johnson & Daniel Castro, Overview of Section 230: What It Is, Why It Was Created, and What It Has Achieved, Info. Tech. & Innovation Found. (Feb. 22, 2021), https://itif.org/publications/2021/02/22/overview-section-230-what-it-why-it-was-created-and-what-it-has-achieved/. 

• David Greene & Eva Galperin, The French Detention: Why We’re Watching the Telegram Situation Closely, EFF (Aug. 30, 2024), https://www.eff.org/deeplinks/2024/08/french-detention-why-were-watching-telegram-situation-closely.

• Ellen Ioanes, Why Telegram’s CEO Was Detained in France, VOX (Aug. 28, 2024, 4:45 PM), https://www.vox.com/technology/368896/telegram-pavel-durov-france-cyber-crimes-terrorism-content-moderation-macron-elon-musk. 

• Pieter Haeck, As France Cracks Down on Telegram, EU Sits on Sidelines, Politico (Aug. 29, 2024, 6:00 AM), https://www.politico.eu/article/telegram-crackdown-eu-pavel-durov-paris-online-dsa/.

• Joe Tidy, Telegram Repeatedly Refuses to Join Child Protection Schemes, BBC, https://www.bbc.com/news/articles/cy54905nv0go.

• Yohan Yun, How Big Tech Handles Privacy and Governments’ Data Demands, CoinTelegraph (Aug.29, 2024), https://cointelegraph.com/news/big-tech-privacy-government-data-regulation.

• Foo Yun Chee & Supantha Mukherjee, Musk’s X Has a Fraction of Rivals’ Content Moderators, EU Says, Reuters (Nov. 10, 2023, 3:48 PM), https://www.reuters.com/technology/musks-x-has-fraction-rivals-content-moderators-eu-says-2023-11-10/#:~:text=According%20to%20reports%20the%20companies,speaking%20on%20condition%20of%20anonymity. 

• Lorenzo Franceschi-Bicchierai, Telegram Says It Has ‘About 30 Engineers’; Security Experts Say That’s a Red Flag, TechCrunch (June 24, 2024, 1:04 PM), https://techcrunch.com/2024/06/24/experts-say-telegrams-30-engineers-team-is-a-security-red-flag/?guccounter=2.

• Digital Services Act, Eur. Council: Council of the Eur. Union (July 5, 2024), https://www.consilium.europa.eu/en/policies/digital-services-act/#consequences.

• Digital Services Act Tracker, DLA Piper, https://www.dlapiper.com/en/insights/publications/2024/02/digital-services-act-tracker (last visited Sept. 15, 2024).

• Jack Nicas & Kate Conger, How Brazil’s Experiment Fighting Fake News Led to a Ban on X, N.Y. Times (Aug. 31, 2024), https://www.nytimes.com/2024/08/31/world/americas/brazil-x-ban-free-speech.html?smid=nytcore-ios-share&referringSource=articleShare&sgrp=c-cb.

• Antoaneta Roussi, Clothilde Goujard & Océane Herrero, France Uses Arcane Cyber Law to Charge Telegram CEO, Politico (Sept. 5, 2024, 8:00 AM), https://www.politico.eu/article/telegram-ceo-pavel-durov-arrest-france-charges-cyber-laws/.

• Yohan Yun, How Big Tech Handles Privacy and Governments’ Data Demands, CoinTelegraph (Aug. 29, 2024), https://cointelegraph.com/news/big-tech-privacy-government-data-regulation. 

• Gabriel Stargardter, France Uses Tough, Untested Cybercrime Law to Target Telegram’s Durov, Reuters (Sept. 17,2024, 4:12 PM), https://www.reuters.com/world/europe/france-uses-tough-untested-cybercrime-law-target-telegrams-durov-2024-09-17.

• Liberty, Equality, Fraternity, France Diplomacy, https://www.diplomatie.gouv.fr/en/coming-to-france/france-facts/symbols-of-the-republic/article/liberty-equality-fraternity (last visited Sept. 20, 2024).

• Mark Trevelyan & Martin Coulter, Durov Says Telegram Will Tackle Criticism of How It Moderates Content, Reuters (Sept. 6, 2024, 10:20 AM), https://www.reuters.com/technology/durov-says-telegram-will-take-new-approach-towards-moderation-2024-09-06/.

• Bernstein v. U.S. Dep’t of State, 945 F. Supp. 1257 (N.D. Cal. 1996), reprinted in https://law.justia.com/cases/federal/district-courts/FSupp/945/1279/1457799/.

• Lora Kolodny, X Blocked in Brazil After Supreme Court Panel Upholds Suspension Order, CNBC (Sept. 2, 2024, 2:02 PM), https://cnbc.com/2024/09/02/x-blocked-in-brazil-after-court-majority-upholds-suspension-order.html. 

• Telegram Logos and App Screenshots, Telegram https://telegram.org/tour/screenshots (last visited Sept. 20, 2024).

• Margaret Fogarty, Artist Revives Singing Telegram with a Modern Twist, Western Union (May 13, 2020), https://www.westernunion.com/blog/en/artist-revives-singing-telegram-with-a-modern-twist/.

• Justino Mora, Demystifying the Signal Protocl for End-to-End Encryption (E2EE), Medium (Aug. 17, 2017), https://medium.com/@justinomora/demystifying-the-signal-protocol-for-end-to-end-encryption-e2ee-ad6a567e6cb4.

• Telegram FAQ, Telegram, https://telegram.org/faq?setln=en (last visited Sept. 22, 2024).

• MTProto Mobile Protocol, Telegram, https://core.telegram.org/mtproto (last visited Sept. 22, 2024).

• Susan Buckner & Aviana Cooper, Piercing the Corporate Veil, FindLaw (May 23, 2024), https://www.findlaw.com/smallbusiness/liability-and-insurance/officer-and-director-liability-piercing-the-corporate-veil.html.

• Jack Nicas & Ana Ionova, Elon Musk’s X Backs Down in Brazil, N.Y. Times (Sept. 21, 2024),https://www.nytimes.com/2024/09/21/world/americas/elon-musk-x-brazil.html.

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Disclaimer:  This post is for general information purposes only. It does not constitute legal advice.  This post reflects the current opinions of the author(s).  The opinions reflected herein are subject to change without being updated.

Introduction 

Software is an anomalous industry.  There aren't many types of businesses that can get away with releasing products or services to the public with the assumption that there could be a high likelihood of significant flaws and defects.  If Tesla were to release a car with faulty brakes with the attitude of, "We can just fix this later,” they’d be sued into bankruptcy.  Yet software companies don’t face an onslaught of lawsuits for products that could be laden with flaws, and if they are sued, they frequently get such cases thrown out or settled for nominal amounts. 

Ever wonder why software companies get away with that and why, as users, we are constantly asked to update software and accept and agree to updates in the terms of use and privacy policy?  In this article, we'll explore the legal barriers and norms shielding tech companies from an onslaught of civil litigation from private parties, the points of negotiation you should try to push for if you have any leverage with a software company, and the recent case law trends.  Buckle up, let’s go beyond the firewall, and get “wired in.” 

Roadmap:

I.  What Is a Bug?  Why Is It So Hard to Create Glitch-Free Software?

II.  Is Software a Service or a Product?

III.  Tech Veil Protects Software Companies from an Onslaught of Class Action Lawsuits

     A.  Litigation Moat

     B.  Contractual Moat 

     C.  Structural Moat  

IV.  Recent Case Law Trends in the US and UK

V.  Conclusion

VI. Extra Credit (Government Actors v. Software Developers)

Key Takeaways (TL;DR):

• Creating bug-free software is challenging because of its complexity and whether software is classified as a service or a product affects how liability is determined.

• Software companies are shielded by a "tech veil" that includes legal defenses like litigation hurdles, contractual terms, and structural protections.

• The terms of use and licensing agreements include disclaimers of warranties, liability limits, and indemnification clauses to protect software companies. Courts usually uphold these terms, so consumers should negotiate exceptions for express warranties, liability caps, and limit indemnification.

• Case law shows that courts often favor software companies in liability cases.

• Meanwhile, new regulatory efforts are emerging to hold software companies to higher standards, especially re AI, crypto, and cybersecurity.

I. What Is a Bug?  Why Is It So Hard to Create Glitch-Free Software?

A software bug is a mistake or glitch in a program that prevents it from working correctly. Imagine baking a cake with a typo in the recipe calling for 1 tablespoon instead of 1 teaspoon of salt, making it too salty. Now, if this cake is a layer in a multi-tiered cake, the mistake affects the entire dessert. Similarly, minor software errors can escalate due to dependencies (external libraries or modules a software relies on) and integrations (connecting different software systems), causing widespread issues in connected systems.

Writing flawless software is also like setting up a massive line of falling dominos: if one tile is out of place, the entire chain reaction may fail. Even a tiny mistake, like a misplaced character or minor logical error in the code, can lead to crashes, data loss, or security vulnerabilities. Working code in one part of a program might break when edits are made elsewhere. Software must also be compatible with different devices and systems and requires regular updates, which can introduce new problems. These factors make it incredibly challenging to ensure software is entirely fault-free.

II. Is Software a Service or a Product?

So now that we understand why software is complex as a technology, let’s explore why it’s tricky to hold software companies liable.  As a starting point, let's consider whether software is (i) an intangible good/product or (ii) a service.  Frustratingly, software could be both!   

Software as a service

In the US, contracts for services (and real property) fall under common law (i.e., case law and judicial decisions). Software may be considered a service if custom-designed for a specific customer, licensed in cloud applications (SaaS or software-as-a-service), or involved maintenance and support services.

Software as a product

Contracts for tangible and movable products or goods fall under state commercial laws (known as the Uniform Commercial Code (UCC)). The UCC provides a standardized, predictable framework for commercial transactions involving movable goods and products, which, in the context of software, we can think of as "off-the-shelf" products, software included in hardware, software sold on physical mediums, or any mass-marketed software.  For more on the UCC and how commercial law works in the US, I recommend my prior post.  

Of course, it's often difficult to classify software as a product OR a service as it may have elements of both.  In which case, software that is a mixture of product and service will require a court to analyze which predominates.  That analysis matters because whether the software is a service or a product can determine the available legal routes for a lawsuit.

III. Tech Veil Protects Software Companies from an Onslaught of Class Action Lawsuits

Like the corporate law concept of the “corporate veil” that shields stockholders from personal liability for a corporation’s legal infractions, software companies are protected against broad liability by a “tech veil.” 

Coined by Jenny Leung, the "tech veil" helps software companies and developers avoid liability for bugs, vulnerabilities or third-party misuse of their code.  Indeed, various legal tactics have created moats (i.e., a competitive advantages deterring adversaries) that shield software companies from the wrath of litigants. I classify these moats into three broad categories:

• A. Litigation Moats

• B. Contractual Moats

• C. Structural Moats

A. Litigation Moats

In general, software companies can be sued under claims for a (1) breach of warranty, (2) negligence, or (3) strict liability.  The factors that lead you to decide upon which legal theory to sue a software company depend on whether:

• the software is considered a good or service,

• the damage is economic, personal, or property-related,

• there is a contract in place, and

• the software is part of something abnormally dangerous.

1. Breach of Warranty

What is a breach of warranty?

When software fails or isn't delivered correctly, a user with a contract can sue the software company for breaching or violating the contract. This breach occurs when the company fails to fulfill its contractual obligations.

Contracts typically include promises or guarantees about the quality of the product or service, known as warranties. If the software doesn't meet the standards or specifications outlined in the warranties, it constitutes a breach of warranty. Often, when a software customer sues for breach of contract, the underlying issue is actually a breach of warranty. [Note: A breach of warranty is a specific type of breach of contract, but not all breaches of contract involve a breach of warranty. For simplicity, consider a breach of warranty claim as also being a breach of contract.]

There are two types of warranties:

1. “Express warranties” are specific promises made by the seller or service provider in the contract.  For example, I promise to deliver you working software by Tuesday.

2. “Implied warranties” are legal protections that the law automatically applies to goods and services, regardless of whether stated or not in the contract.  There are two types: (i) "fitness for particular use" (when the seller knows the buyer needs the goods for a specific purpose and the buyer relies on the seller to provide the correct goods for that purpose) and (ii) "merchantability" (goods are good enough to be sold and used for their usual purpose without any issues).  Here’s an example of a warranty:

When it comes to determining if the seller has done what's required under the contract, the standards are different for product contracts versus service contracts.  For product contracts, the seller must meet all the specifications, descriptions, and promises outlined in the contract exactly - this is called "perfect tender."  Even a minor deviation from any contract term is considered a breach.  

However, for service contracts, the requirements are not as strict. Instead, they only need to provide a service that substantially meets the main contractual requirements, even if there are some minor issues or deficiencies. As long as the essential parts of the contract are reasonably fulfilled and the service is fit for its intended purpose, it is generally considered acceptable.

Why can’t plaintiffs extract a lot of money against software companies for breach of warranty (contract) claims when there are issues with the software? 

When software fails and causes only financial losses, lawsuits are typically limited to breach of contract claims. Recovery is usually restricted to direct damages, which means compensating the customer for their actual losses, such as the cost or value lost. The goal is to place the non-breaching party in the position they would have been in if the contract had been fulfilled. This often makes lawsuits unattractive because legal costs can exceed potential recovery.

The rationale is that parties can manage risks through contract terms, with economic risks best handled within the contract framework and often mitigated with insurance. Contract law aims to facilitate fair exchanges (not punishment), focusing on restoring the parties to their expected positions if the contract were honored. We’ll see how the language of the contract itself can limit recovery.

If the damage involves an accident or physical harm, that’s better suited for the next two litigation moats.

2. Negligence 

What is negligence as it relates to software as a product vs. service?

If damages from software include damages to property or a person, a negligence lawsuit can be brought.  Negligence occurs when someone fails to take reasonable care to prevent harm to others.  Unlike contract related claims, negligence claims do not require a direct contractual relationship between the consumer and the manufacturer; liability is imposed by law. For example, let’s say a software bug led to an accident in a factory, in which some of the workers were injured.  Those workers could potentially sue the software company for negligence, even though they didn't directly purchase the software from or have a contract with that company.

Negligence claims for software products can be based on defects, which fall into these categories:

• (i) design defects (where the product’s design is itself unsafe),

• (ii) manufacturing defects (where the product deviates from design specifications), or 

• (iii) information defects (where there is a failure to provide proper instructions or warnings).  

For software as a service, negligence involves failing to perform services with reasonable care.   Negligence allows for compensation if it can be shown that a software defect arose from the service provider's lack of proper care in designing or developing the software.  Under this principle, a service provider isn't liable for every defect that causes loss but only for harmful defects that could have been identified and remedied through reasonable software practices.  

Why is it so hard to bring a negligence claim against a software company?

To succeed in a negligence claim, you must prove all of the following 4 elements:  (1) there was a legal duty, (2) that duty was breached, (3) the breach of that duty caused harm, and (4) that harm led to damages.  Pretty simple, right?  Well, for software, this is hard to prove:

• Duty and Breach of Duty (Element 1 & 2):  Software developers are not held to a higher "professional" standard of care like doctors or lawyers.  They have a duty to act with the reasonable care of an average person, which is a low bar.  Proving a breach of this minimal duty is tricky because an ordinary person would not catch every possible defect (we are only human and flawed, just like software).  

• Causation (Element 3):  Proving the software defect directly caused the harm is also challenging. Users must prove the software defect itself caused the harm, rather than any user-related contribution, like failure to install updates, improper installation, or unauthorized modifications to the software.  The involvement of multiple intermediaries (developer -> third-party vendor -> end-user) further complicates assigning blame.  Additionally, as software often interacts with other hardware or software, pinpointing the defect as the direct cause (known as ‘proximate cause’) becomes difficult.  Proving who caused the harm gets complicated!

• Damages (Element 4):   Most software products don't cause tangible injuries or property damage.  While exceptions exist like self-driving car software failures, these are rare cases.  So, proving damages can be pretty remote.

Remember, a litigant needs to prove all four elements (duty, breach, causation, and damages) to win – an uphill battle.

In cases where there was a contract between the user and the company, the “Economic Loss Doctrine” can prohibit plaintiffs from seeking compensation for negligence (and also strict liability) for solely economic losses. Recovery is limited to claims involving property or personal damage. It ensures that parties stick to the remedies specified in their contract, preventing them from seeking additional compensation through negligence claims.

Let's turn to strict liability, which focuses on the product's inherent danger rather than the developer's level of care.

3. Strict Liability 

What is strict liability?

If a software product is inherently, abnormally, or imminently dangerous (ex., software embedded in a medical device that could cause injury if it malfunctions), lawsuits might be brought under a strict liability standard.  Strict liability doesn't take fault into account.  Under strict liability, a software developer is automatically held accountable for all physical injuries and associated losses caused by a defective product it produces, regardless of whether it was negligent in its design or manufacturing decisions.  The idea is that when dealing with inherently dangerous products, the responsibility for any resulting harm should rest with the producer to ensure higher safety standards and protect public welfare.

Is it easy to succeed in a lawsuit against software companies for strict liability?   Who else can be liable?

You can sue anyone in the commercial chain of sale for strict liability as long as the product was defective when it left the defendant’s control.  To succeed, you must prove that: (i) the defendant was the supplier who produced or sold a defective product, (ii) the defective product was the cause of a physical injury or property damage, and (iii) the consumer suffered those damages.  Again, most software doesn't result in physical or personal damages, so this is more of an edge case.

Will strict liability apply to software as a service and a product?

Note that strict liability typically applies to defective products, not services, because services do not have the same characteristics that justify strict liability.  When customers hire service providers to create custom software, they are more involved and have better visibility into how the software is made.  Because of this, strict liability, which holds manufacturers responsible for defective products regardless of fault, usually does not apply to custom-developed software.  

That brings us to the end of the litigation moats.  Let's talk about contractual moats.

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Decision Tree:  Which Kind of Harm Leads to What Type of Lawsuit

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B. Contractual Moat

1. Terms of Contract

Software companies use various contractual techniques to protect themselves, deployed in the terms of use (TOU), privacy policies, licensing agreements, and end-user licensing agreements (EULA).

When you buy off-the-shelf software, the agreement you sign (or click "I agree") is usually one-sided.  It states that the software company isn't responsible if something goes wrong and restricts the use.  If you don't like the terms, too bad; you can take it or leave it.  Basically, the company is passing on all the risks to you, and the courts have generally upheld these clickwrap agreements as valid, enforceable contracts.  You probably click "I agree" without much thought, but remember that the TOU is a binding contract.  Since the rise of the internet, courts have supported software companies' ability to contract away most liability for defects in their products.  The law assumes you can make your own contracts and will only nullify a contract under rare circumstances.

Whether you are entering into terms of use (TOU) or end-user licensing agreements (EULA), you’ll notice certain boilerplate language, including disclaimers of warranties, indemnification, waivers, limitation of liability, barring consequential damages, dispute resolution, insurance requirements, assumption of the risk, force majeure clauses, among others.  These risk-shifting provisions transfer certain risks from the company to the user.  Tech companies are constantly updating and improving these terms, which is why you are frequently asked to accept any updates to the TOU and privacy policies.  You can see how crucial it is to negotiate software agreements if you have any leverage. 

This risk-shifting does come with a price. Harrison Hawkes, my former colleague, pointed out to me that software providers are able to include such blanket disclaimers and risk-shifting provisions partly because they've priced their offerings accordingly. In other words, software companies may be able to provide lower prices by shifting the risk to the consumer. One additional factor to consider when negotiating a contract.

Let’s look at a few examples of disclaimers of warranties, limitation of liability, and indemnification and see points where you can push back in your negotiations.

i. Disclaimer of Warranty

What is a disclaimer?

Interestingly, a software provider can disclaim express and implied warranties by including a clear and noticeable disclaimer in the contract.  For implied warranties, you'll often see phrases like "as is" or "with all faults." You've likely encountered this language in the TOU for many websites.  Here's an example of warranty disclaimer from Google:

How to push back against disclaimers

One way for you or your lawyer to push back on the disclaimers is to add a phrase saying, “EXCEPT AS EXPRESSLY SET FORTH IN THE REPRESENTATIONS AND WARRANTIES SECTION.”  “Representations and warranties” (R&W) is a section where a party states to the other party that a particular fact is true (a representation) or will be true (a warranty).  Sometimes, they are mutual (both sides make them), and sometimes, they are one-sided.  A representation looks backward in time, and a warranty is future-facing.  If the rep or warranty is not true, then the party making the rep or warranty has breached the contract, and you could sue.  R&W are often connected to an indemnification provision (see below).  Thus, by saying the disclaimer doesn’t apply to the R&W section, you limit what can be disclaimed.

ii. Limitation of Liability

Most software companies will limit their liability by (1) excluding indirect damages, consequential, lost profits, special damages, punitive damages, etc. (basically anything that’s not direct damages) and (2) putting a cap (a monetary limit) on the amount of damages.  Here’s an example from Microsoft:

How to push back against limitations of liability

If you have any wiggle room to negotiate the contract with a software company, add a carveout to the liability cap for (1) breaches of confidentiality; (2) indemnification obligations; and (3) gross negligence, willful misconduct, and fraud.  You can negotiate a higher monetary limit or cap for better coverage or require the software company to obtain insurance.

iii. Indemnification

Software contracts often include an indemnification clause, where one party agrees to compensate the other for legal defense costs.  This could be mutual or one-sided.  If the consumer is indemnifying the software company, that means the consumer must protect the software company if the company is sued due to the consumer's use of the software, whether for legitimate or unlawful reasons.  Here’s an example from Ironclad:

How to push back against indemnification

You can try to remove the indemnification provision altogether, but if that’s a non-starter for the software company, you can try to limit it in the following ways: 

1. Only agree to indemnify the company for your own gross negligence or willful misconduct.

2. Exclude indemnification claims that arise due to the software company's negligence, breach of contract, or intellectual property violations.

3. Cap the indemnification amount to a reasonable sum covering only direct damages, excluding indirect or consequential damages.

4. Ensure the indemnification only covers losses from an actual (not exploratory) lawsuit or claim brought by a third party against the software company.  Be careful as you could end up indemnifying the software company for suing you! If possible, limit losses to amounts paid or payable to third parties, avoiding internal costs incurred by the indemnified party.

5. Consider pushing for mutual indemnification (i.e. both parties agree to indemnify each other) under similar terms.   This tactic can help balance and defang an otherwise one-sided provision.

Note from the perspective of the party being indemnified (getting compensated): this is the best risk-shifting provision for the party being indemnified because, in theory, you can be made whole.   

Since UCC and contract law principles believe in the freedom to contract and only void a contract under certain edge cases, courts have upheld these risk-shifting provisions.  It's one of many things that have become the industry norm.

C. Structural Moat

1. Industry Norms and Illustrative Cases

After decades of improvement in software safety and quality, most commercial software is still shipped with serious flaws and defects, and as users, we’ve come to just accept this. 

Software industry argues flaws are inevitable

The software industry pushes the idea that such defects are unavoidable, and it tries to ameliorate those weaknesses by continuing to update the software.  If a higher standard were imposed on software providers, the industry argument is that it would lead to (i) slower development inhibiting innovation and (ii) higher prices for consumers.  Not to mention, software doesn't exist in a vacuum, and it must interact with the rest of the world.  Issues that cannot be mitigated by simple bug fixes, and which can only be discovered via thorough reviews and testing (or revealed when the software fails or is successfully hacked after deployment), are unlikely to ever be addressed.  This may be a form of Stockholm syndrome…

Apple Siri lawsuit: dodging a breach of implied warranty claim

Here's a classic example (Fazio v. Apple, Inc.) – in 2013, Apple was sued for breach of implied warranties for misrepresenting the capabilities of the voice-activated iPhone “Siri” assistant so that consumers would be encouraged to pay a premium for the iPhone 4S.  However, the court noted that the plaintiffs admitted Siri could perform basic functions like finding gas stations or restaurants.  Because Siri could still perform these tasks, the court concluded that the iPhone 4S was not entirely unfit for ordinary use.  Therefore, the plaintiffs did not provide enough evidence that Apple breached the implied warranty.

Third-party bad actors complicate pinpointing liability

Additionally, courts have been reluctant to hold a software company liable for a security vulnerability involving third-party bad actors.  While there is a logic to holding the wrongdoer liable for a hack, when do you hold a software company (the toolmaker) liable for someone else's nefarious actions?  The software company can also be seen as a victim in these situations, making secondary liability tenuous.  Furthermore, plaintiffs must demonstrate that the security breach caused actual harm or poses a substantial risk of imminent harm.  Courts often dismiss cases where plaintiffs only allege an increased risk of future identity theft or preventive costs, like credit monitoring, without showing concrete injury.

Sony data breach lawsuit:  evading negligence and breach of implied warranty

In 2014, Sony faced a data breach lawsuit (In re Sony Gaming Networks & Customer Data Sec. Breach Litig.) with the court dismissing 43 of the 51 claims.  Most negligence, negligent misrepresentation, and consumer protection claims were dismissed due to insufficient evidence of real harm. Plaintiffs argued for a “special relationship” with Sony, implying a higher duty to protect their data, but the court found no such relationship existed, citing typical consumer transactions and Sony's disclaimers. The Economic Loss Doctrine barred claims in California and Massachusetts, and the loss of free services was not considered an injury. Breach of implied warranty claims were dismissed due to effective disclaimers provided during registration. Ultimately, Sony settled the remaining claims for $15 million in games, online currency, and identity theft reimbursement.

Hidden complexities beneath software’s surface

Software is often a black box, making it difficult for laypeople to understand its inner workings.  Assigning blame is challenging because errors are not easily visible, and it is hard to determine whether the problem lies within the software or another component it interacts with.  If you leave a banana peel on the sidewalk and someone slips on it (breaking his arm), it’s pretty obvious that the banana peel led to the accident.  The complexity and lack of transparency with software make pinpointing the source of issues and holding the correct party accountable particularly difficult.

Hewlett-Packard Co.:  breach of warranty dropped because hard to prove the cause

As an illustration, Hewlett-Packard was sued in 2012 (Wilson v. Hewlett-Packard Co.) for breach of contract for violating its warranty due to its Pavilion and TouchSmart computers overheating and creating a danger to consumers.  The court dismissed these claims, saying the plaintiffs failed to explain how laptops without power could catch fire.  Without any proof, it was an implausible defect.

2. No Privity of Contract

End users may lack a formal relationship with software company

In business-to-business scenarios, the end user often lacks a direct, contractual relationship (“privity of contract”) with the software developer. This complicates accountability. Not having privity of contract often discourages consumers from pursuing tort or product liability claims against developers.  Additionally, contracts between vendors and manufacturers may limit the manufacturer's liability for end-user complaints.

Free products may not create a contractual relationship

A contract requires (i) an offer, (ii) acceptance, and (iii) payment (“consideration”). Many consumers don't pay directly for software; for example, Gmail users provide data instead of money, making them the product and ad companies the customers. Without a payment or consideration, there is no contract between users and the software company. This helps software companies avoid liability for breach of contract claims and can make users ineligible to bring claims under certain state consumer protection laws meant for paying customers.

Facebook privacy lawsuit - nonpaying users are not “consumers”

In a consumer protection class action suit brought against Facebook in 2011 (In re FACEBOOK PRIVACY LITIGATION) for a data breach, the court dismissed the lawsuit because the plaintiff hadn’t paid to use Facebook and was not protected by the California general consumer statute on point.  Without paying for services, the user was not considered a "consumer" under state law.  The law was designed to protect consumers.  Apple had a similar case dismissed.

Note, software lacks specific consumer protection laws and is not highly regulated like banks or drug companies. General consumer protection laws apply in some cases, but they don't address the unique safety and security challenges of software.

IV. Recent Case Law Trends in the US and UK

There is a clear desire by US courts to address data breaches.  While there are data protection laws in each of the states, which in theory can lead to a successful lawsuit for a plaintiff, winning a case against a software company for data breaches can still be challenging.  Judges are leveraging all available legal resources to protect consumers.  

Here are a few notable cases that illustrate the complexity and some positions the courts have taken:

• Liability upheld despite free service.  In a 2018 class action lawsuit in California against Facebook for a data breach affecting 29 million users (Echavarria v. Facebook, later Schmidt v. Facebook), Judge Alsup rejected Facebook’s claim that it shouldn't be liable because its service was free.  He emphasized that Facebook's business platform monetized users’ personally identifiable information (PII) by selling it to advertisers.  The judge noted that no previous case directly addressed this question and looked to be trying to find some logic to protect users.  The case was ultimately settled for $6.5 million--a drop in the bucket for Facebook.

• Bailment theory applied to electronic data mishandling.  A 2022 Indiana class action suit (Krupa v. TIC International Corp.) recently held software developers liable under a bailment theory (i.e., you temporarily hand over your belongings to someone else for a specific reason, with the understanding that they'll return them to you later).  The court recognized that bailment applies to electronic data, not just physical goods.  The Krupa court found that the defendant negligently exposed the plaintiff's personal data, which was held under an agreement of confidentiality.  Similarly, a 2021 New York case (Wallace v. Health Quest Systems, Inc.) denied a motion to dismiss a constructive bailment claim for a data breach, affirming that New York courts would extend bailment to intangible information.

Let's look at some examples from the crypto industry where there have been cases exploring whether developers owe a fiduciary duty to users.  A fiduciary duty is a legal obligation requiring one party (the fiduciary) to act in the other party's best interests (the beneficiary).  Fiduciaries must avoid conflicts of interest, act in good faith, act with care and loyalty, put the beneficiary's interests above their own, and fully disclose relevant information.  

• Economic loss rule bars negligence claims.  In Singh v. Illusory Systems, Inc., the software developers of the Nomad Bridge were sued for the theft of crypto assets due to a vulnerability in the underlying software.  The judge dismissed the negligence claims because the economic loss rule bars recovery for purely economic damages when a contract governs the dispute.  The plaintiffs were bound by agreements (the Terms of Use (TOU) and Apache License (a type of software license)) that covered the risks and limited liability for issues like security breaches and hacks.  Additionally, the court found no independent duty of care outside these contracts, particularly since the plaintiffs were sophisticated parties capable of understanding and negotiating risk allocation.  Lastly, the defendants weren't directly connected to the plaintiffs, so they didn't owe the plaintiffs any special care.  The negligence claims were dismissed as a result.

• Special relationship establishes duty of care.  While not a case pushing a breach of fiduciary duty, the following case goes into software companies and developers of a decentralized protocol having a duty of care towards the users of its protocol.  In Sarcuni v. bZx DAO, a major security breach of the bZx crypto protocol resulted in the theft of around $55 million in cryptocurrency. The breach occurred due to a phishing attack that compromised a bZx developer's private seed phrase, allowing the hacker to drain funds from the protocol.  The court determined that a “special relationship” existed between the plaintiffs and the defendants (who included the software developers, development company, and DAO, among others), establishing a duty of care. Unlike in Illusory, the judge ruled the terms of use / click wrap agreements were not conspicuous enough to be enforceable: “Plaintiffs had neither actual nor constructive notice of the Terms of Use and, therefore, aren't bound by them.” The terms were located at the bottom of the page so you had to scroll all the way to the bottom. The case was ultimately settled, so it’s unclear if the negligence claim, if tried, would have succeeded.  While software companies and developers may not rise to the level of being fiduciaries, the law seems to want to put some sort of duty on them and hold someone accountable even in the case of a decentralized blockchain, which in theory has no intermediaries.

Fiduciary duty on trial in UK.  There is one case worth watching presently in the UK. The case of Tulip Trading v Wladimir van der Laan & Ors asks whether Bitcoin developers owed fiduciary duties to cryptocurrency owners.  In March 2022, the UK High Court ruled that Bitcoin developers did not owe any fiduciary duties, but in 2023, the Court of Appeal overturned that decision, saying it is a "serious issue to be tried."  The case moved to a full trial to try this question.  But in an odd turn of events, Craig Wright who brought the Tulip lawsuit against Bitcoin developers and also falsely claimed to be Satoshi Nakamoto (the inventor of Bitcoin), dropped the lawsuit after it came out that he lied about being Satoshi… We’ll have to wait to see how the UK looks at this issue in a future lawsuit.

V. Conclusion 

It's clear that existing laws need an upgrade if society feels consumers need greater protections.  That could look like providing a professional standard of duty on software companies (some people even think we should hold software developers to a reasonable computer standard).  

VI. Extra Credit (Government Actors v. Software Developers)

With AI and crypto pushing the boundaries and raising novel questions of our legal systems, we are starting to see lawmakers take action to regulate Big Tech – although folks have been saying this for years.  Where conduct rises to the level of fraud or Bank Secrecy Act violations (money laundering / illicit finance), the government is flexing its muscle on these types of cases:

• Unfair or deceptive trade practices: The Federal Trade Commission (FTC) has broadened its scope beyond lawsuits for unfair competition against tech companies.  It now also takes action against unfair or deceptive trade practices, including software misrepresentation.  Notably, the FTC has taken legal action against companies like D-Link, TRENDnet, and ASUS  for vulnerabilities in internet-connected devices.  

• Liability for end user scams or misuse: 

  • The FTC a few months ago proposed a rule that would impose liability on anyone that provides the tools and services that they know or should have reason to know are being used in AI impersonation scams -- i.e. AI software companies and developers.  For more info, please read my comment letter to the FTC.

  • Commodity Futures Trading Commission (CFTC) Commissioner Brian Quintenz warned if "code developers could reasonably foresee, at the time they created the code, that it would likely be used by U.S. persons in a manner violative of CFTC regulations," they could be prosecuted for aiding and abetting such violations. 

• Unregistered security offering: The Securities and Exchange Commission (SEC) in 2018 charged Zachary Coburn (founder of EtherDelta and writer/deployer of the EtherDelta smart contract) with operating an unregistered national securities exchange.

• Mixers and money laundering: The Department of Justice has brought criminal prosecutions against individual crypto software developers for cryptocurrency mixing services (U.S. v. Rodriguez and Hill) that involve charges for alleged unlicensed money transmitter business and conspiracy to commit money laundering.  Case is pending.

• Accountability for negligence or deficient cybersecurity: 

  • The Department of Justice's Civil Cyber-Fraud Initiative will hold government contractors accountable for software insecurity resulting from negligent or fraudulent practices, such as providing deficient cybersecurity products or misrepresenting their cybersecurity practices.

  • In May 2021, President Biden issued the Executive Order on Improving the Nation's Cybersecurity, which mandates that software companies selling to the federal government meet new security standards.  These standards include providing greater transparency about their software development processes and cooperating in vulnerability disclosure programs to ensure the security of their products.

  • In March 2023,  President Biden's administration announced its National Cybersecurity Strategy, which aimed to hold software vendors accountable for cyberattacks by proposing legislation that shifts liability to companies that fail to secure their software adequately.  This initiative included a safe harbor for companies following best practices and aims to drive the market toward producing safer software while supporting innovation and competition among smaller businesses.  Thus far, there’s been no legislative action. 

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[Special thanks to Jason Gottlieb and Emma McGrath (for doing some pro bono research confirming that the case law is truly all over the place) as well as Harrison Hawkes (for his review as a tech transactions expert)!]

Resources:

• https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2877380

• https://www.wsj.com/articles/should-software-companies-be-held-liable-security-flaws-d2a3f5db

• https://www.wsj.com/articles/if-software-companies-are-liable-for-bugs-how-exactly-would-that-work-9d150402

• https://www.coindesk.com/markets/2019/01/03/7-legal-questions-that-will-define-blockchain-in-2019/

• https://www.sitepoint.com/developers-sued-for-application-bugs/

• https://law.stackexchange.com/questions/78076/can-i-viably-sue-for-damages-caused-by-bugs-in-freeware

• https://www.justsecurity.org/87294/bugs-in-the-software-liability-debate/#:~:text=Taken%20together%2C%20in%20legal%20terms,recognize%2C%20that%20any%20harm%20occurred.

• https://www.scmagazine.com/analysis/software-liability-the-hard-truths-of-holding-manufacturers-responsible

• https://kaner.com/pdfs/theories.pdf

• https://digitalcommons.law.scu.edu/cgi/viewcontent.cgi?referer=&httpsredir=1&article=1025&context=chtlj

• https://www.dentons.com/en/insights/newsletters/2019/april/3/consumer-finance-report/back-to-basics-continued-what-are-implied-warranties-and-who-cares-anyway

• https://jolt.law.harvard.edu/assets/articlePDFs/v33/33HarvJLTech557.pdf

• https://digitalcommons.pepperdine.edu/cgi/viewcontent.cgi?article=1137&context=jbel

• https://www.americanbar.org/groups/construction_industry/publications/under_construction/2021/spring2021/economic_loss_doctrine/

• https://newrepublic.com/article/115402/sad-state-software-liability-law-bad-code-part-4

• https://kaner.com/pdfs/negligence_and_testing_coverage.pdf

• https://www.pcworld.com/article/457080/linkedin-wins-dismissal-of-lawsuit-seeking-damages-for-massive-password-breach.html

• https://casetext.com/case/in-re-facebook-privacy-litigation-1

• https://www.perkinscoie.com/en/news-insights/possibility-of-future-harm-allows-sony-data-breach-plaintiffs-to.html

• https://www.clarkhill.com/news-events/news/courts-look-unfavorably-on-recent-class-actions-arising-out-of-ransomware-attacks/

• https://www.law360.com/articles/1155760?copied=1

• https://jolt.law.harvard.edu/assets/articlePDFs/v33/33HarvJLTech557.pdf

• https://www.lowenstein.com/news-insights/publications/client-alerts/biden-administration-aims-to-shift-liability-for-cyberattacks-to-software-developers-privacy

• https://www.bloomberg.com/professional/insights/data/software-maker-liability-is-elusive-target-of-us-cyber-plan/

• https://www.perkinscoie.com/en/news-insights/possibility-of-future-harm-allows-sony-data-breach-plaintiffs-to.html

• https://www.law360.com/articles/1820275/attachments/0

• https://www.law360.com/articles/1820275

• https://www.nelsonslaw.co.uk/tulip-trading-v-wladimir-van-der-laan/

• https://www.mayerbrown.com/en/insights/publications/2023/02/stolen-crypto-uk-court-of-appeal-opens-door-to-software-developers-legal-duties-to-users

• https://www.technologyreview.com/2002/07/01/40875/why-software-is-so-bad/

• https://www.dundaslawyers.com.au/are-software-developers-liable-for-defects-in-their-software/

• https://www.ccdcoe.org/uploads/2018/10/TP_02.pdf

• https://repository.law.uic.edu/cgi/viewcontent.cgi?article=1705&context=jitpl

• https://www.eejournal.com/article/20161116-liability/

• https://scholarship.law.duke.edu/cgi/viewcontent.cgi?article=1322&context=dltr

• https://www.researchgate.net/publication/310674753_Legal_liability_for_bad_software

• https://dl.acm.org/doi/pdf/10.1145/2030256.2030258

• https://www.justice.gov/usao-sdny/pr/tornado-cash-founders-charged-money-laundering-and-sanctions-violations

• https://www.justice.gov/usao-sdny/file/1311391/dl?inline

• https://www.theblock.co/post/294142/us-senators-ring-alarms-over-the-dojs-treatment-of-crypto-mixers-and-its-interpretation-of-money-transmitters

• https://www.cooleygo.com/glossary/corporate-veil/

• https://www.law.cornell.edu/wex/bailment

• https://www.law.cornell.edu/wex/fiduciary_duty

• https://www.coindesk.com/markets/2019/01/03/7-legal-questions-that-will-define-blockchain-in-2019/

• https://www.cbinsights.com/research/report/business-moats-competitive-advantage/

• https://www.meta.com/legal/portal/limited-warranty/

• https://trial.docusign.com/?elqCampaignId=12586&tgr=com-trial-netlogin

• https://policies.google.com/terms?hl=en-US

• https://support.microsoft.com/en-us/topic/microsoft-software-license-terms-remote-help-4add423a-7701-49f8-b423-695a518060a2#:~:text=IF%20YOU%20HAVE%20ANY%20BASIS,SPECIAL%2C%20INDIRECT%20OR%20INCIDENTAL%20DAMAGES.

• https://legal.ironcladapp.com/terms-of-service

• https://www.britannica.com/science/Stockholm-syndrome

• https://www.regulations.gov/comment/FTC-2023-0030-0076

• https://www.cftc.gov/PressRoom/SpeechesTestimony/opaquintenz16

• https://www.sec.gov/news/press-release/2018-258

• https://www.justice.gov/usao-sdny/media/1349321/dl

• https://www.justice.gov/opa/pr/deputy-attorney-general-lisa-o-monaco-announces-new-civil-cyber-fraud-initiative

• https://www.whitehouse.gov/briefing-room/presidential-actions/2021/05/12/executive-order-on-improving-the-nations-cybersecurity/

• https://www.whitehouse.gov/wp-content/uploads/2023/03/National-Cybersecurity-Strategy-2023.pdf

• https://www.jdsupra.com/legalnews/a-basic-primer-on-damages-terms-in-35657/

• https://www.americanbar.org/groups/construction_industry/publications/under_construction/2021/spring2021/economic_loss_doctrine/

Legal Cases:

• https://topclassactions.com/lawsuit-settlements/lawsuit-news/apple-gets-siri-false-advertising-class-action-lawsuit-dismissed/

• https://casetext.com/case/in-re-sony-gaming-networks-customer-data-sec-breach-litig-4

• https://law.justia.com/cases/federal/appellate-courts/ca9/10-16249/10-16249-2012-02-16.html

• https://www.pcworld.com/article/457080/linkedin-wins-dismissal-of-lawsuit-seeking-damages-for-massive-password-breach.html

• https://casetext.com/case/in-re-facebook-privacy-litigation-1

• https://www.scribd.com/document/65952724/In-re-Apple-iPhone-Application-Litigation-Dismissal

• https://law.justia.com/cases/federal/district-courts/california/candce/3:2018cv05982/332800/153/

• https://dockets.justia.com/docket/indiana/insdce/1:2022cv01951/203289

• https://casetext.com/case/wallace-v-health-quest-sys-inc

• https://caselaw.findlaw.com/court/us-dis-crt-d-del/116009637.html

• https://casetext.com/case/sarcuni-v-bzx-dao

• https://www.mayerbrown.com/en/insights/publications/2023/02/stolen-crypto-uk-court-of-appeal-opens-door-to-software-developers-legal-duties-to-users

• https://www.ftc.gov/business-guidance/blog/2019/07/d-link-settlement-internet-things-depends-secure-software-development

• https://www.ftc.gov/news-events/news/press-releases/2013/09/marketer-internet-connected-home-security-video-cameras-settles-ftc-charges-it-failed-protect

• https://www.ftc.gov/news-events/news/press-releases/2016/02/asus-settles-ftc-charges-insecure-home-routers-cloud-services-put-consumers-privacy-risk

AI-Generated Images:

• Image of Software Developer Dodging Bullets created by Pixlr, Firefly, BeFunky, and DreamStudio

• Image of Get out of Jail Free Card created by Pixlr and Firefly

• Image of Castle with 3 Moats created by Dall-E and Firefly

• Image of Tech Veil bride created with Dall-E, Firefly, and Pixlr

• Image of Chasing the Rainbow created with Dall-E and Pixlr

• Image of Rip Van Winkle created by Dall-E, Firefly, and Pixlr

• Image of Alligator Purse created by Dall-E, Firefly, and Pixlr

• Image of Computer on the Stand by Dall-E, Firefly and Pixlr

Disclaimer:  This post is for general information purposes only. It does not constitute legal advice.  This post reflects the current opinions of the author(s).  The opinions reflected herein are subject to change without being updated.

[Mr. Whiskers (Larry David) appeared in a Super Bowl commercial for FTX.  He was later sued in a class action lawsuit for allegedly defrauding investors who lost money in the cryptocurrency exchange’s collapse.]

Those Sarah McLachlan ASPCA commercials are some of the most effective, emotional blackmail infomercials ever created, extracting our hard-earned dollars to rescue some of the most helpless cats and dogs across the country.  Similarly, and for just a few minutes of your time, you could impact the lives of those truly needing your help.  I’m of course talking about the glitterati – our beloved celebrities and influencers.

Join the cause, not with wallet but with keyboard, to educate our other favorite obsessions (besides pets) on the mistakes of not complying with advertising laws when they do product endorsements.  Every year, influencers and celebrities post their support of brands on their social media accounts, and companies exploit the person’s fame for promotional purposes.  Oh, the horror!  These adorable creatures with the memory of a goldfish (no offense, Dory) keep making the same mistakes and don’t learn from one another’s blunders.  Let’s help them.  After all, private islands and blow don’t come cheap.

Celebrities and influencers are generally most susceptible to lawsuits from these 3 sources:  (a) the Federal Trade Commission, (b) the Securities and Exchange Commission, and (c) Class Action Litigants. 

So, let's dive deep into the legalese, decipher the suits and penalties haunting our A-listers. 

I. The Shift in Regulatory Focus from Traditional Marketing to Social Media

While social media advertising is largely subject to the same laws and regulatory principles as traditional marketing, celebrities often get into the most trouble with their tweets and posts.  Why?  Unlike a TV commercial or newspaper spread, influencers are effectively the medium themselves because the promotional platform (ex. Twitter or Instagram) remains under the control of the celebrity.  This practice is a big change in the way companies reach their consumers. By leveraging celebrity influence, brands can now connect directly with their followers, creating more personal, targeted and effective advertising experiences. This shift has not gone unnoticed by regulators and class action litigants who are chomping at the bit to bring down our beloved superstars.

II. Federal Trade Commission:  General Enforcer for Deceptive or Unfair Business Practices with Endorsements and Testimonials

The Federal Trade Commission (the “FTC”) is the general consumer watch dog agency that deals with anti-trust, consumer protection and competition issues. 

A. The Law in a Nutshell:  Section 5(a) of the Federal Trade Commission Act (the “FTC Act”) grants the agency the authority to protect consumers from fraudulent and deceptive advertising practices, which include endorsements, testimonials, sponsorships and partnerships. 

B. Applying the Law to Celebrities:  The FTC scrutinizes celebrity enforcements with a particular focus on:

1. Failure to disclose a relationship with a brand

2. Misleading, fraudulent, or dishonest statements regarding a product

Per the FTC’s Endorsement Guides, if there’s a “material connection” between a brand and its endorser (i.e. celebrity is being paid to promote something), the quid pro quo must be front and center.  Why should I care, for example, if reality star Khloe Kardashian is being paid to endorse Old Navy jeans?  Let’s say you are looking to buy a pair of denims and come across a tweet from Ms. Kardashian raving about the brand.  Learning that she was paid to promote Old Navy jeans might make you weigh that tweet differently.

[Khloe Kardashian advertising Old Navy Jeans but not pointing out she’s being paid to promote it.]

Besides disclosing one’s relationship with a brand, influencers can't mislead the public and lie about liking a product they don't actually enjoy or haven’t actually used.  Ads must be honest and reflect the genuine opinion of the promoter who should make sure claims can be backed up with solid proof.  For example, if a celebrity touts the effectiveness of a health product, that claim can’t be so removed from what the science would show.  One odd but helpful example was when actress Gwyneth Paltrow and her company Goop promoted the unsubstantiated claim that vaginal eggs could regulate menstrual cycles, prevent uterine prolapse, and increase bladder control. 

[Gwyneth Paltrow promoting the vaginal egg on Jimmy Kimmel Live. Jimmy:  “How does it help?” Gwyneth:  “I don’t know.  I need to start my jade egg practice.” Yikes:  she should know better!]

C. Best Practices:  Here’s what influencers should aim to do to comply with the FTC’s rules:

1. Clearly disclose they are promoting sponsored content.  For social media, use hashtags like “#ad,” “#sponsored,” or “#partner” to indicate that the post is paid for.  Don’t make it hard to find a hashtag.  Best to put the disclosure at the top of the page and not buried in a group of hashtags. 

   1. Specifically for Instagram, the FTC has highlighted that a “material connection” should be disclosed above the “more” button because most people don’t click below that when scrolling through the platform. 

   2. Also, if you’re making an endorsement in a video, indicate it’s sponsored content in the video itself and not just in the description.  If you are live streaming a video, repeat the disclosure periodically so that new viewers can hear it.

2. Use simple and clear language. Avoid vague words or abbreviations, such as “sp,” “spon,” or “collab,” or stand-alone terms like “thanks.” 

3. Don’t promote a product you haven’t tried or make a claim that you know or should know isn’t scientifically true.  You may swear that tiger blood will cure all ailments but keep that to yourself — for multiple reasons.

4. Leverage online resources from the FTC.  The FTC has put together a pamphlet entitled  “Disclosures 101 for Social Media Influencers.” 

To help bring these best practices to life, here are some IRL examples of celebrity posts that miss and hit the mark:

Bad Practices: In tweets by singer Rihanna and wrestler Ric Flair, there are no disclosures about being paid to promote anything. 

Better Practices: Soccer player Carli Lloyd’s tweet (left) showing “#ad #Delta Partner” makes it clear this is an ad; her Instagram post (right) indicates “Paid partnership” up top and “#lacroixpartner” at the end. Always a masterclass with Carli.

D. Costs for Noncompliance:  After providing notice and observing continued bad behavior, the FTC can slap you with fines up to $50,120 per violation.  Around 90% of the FTC’s consumer protection actions focus on financial services, web and telecommunications, healthcare and retail sectors.  Usually, the FTC will alert the violator of the issue so s/he can fix the mistake, and it won’t go much further than that. 

Even so, the FTC does actively police social media.  Back in 2017, the FTC sent out more than 90 letters telling influencers that they needed to “clearly and conspicuously disclose their relationships to brands when promoting or endorsing products through social media.”  More recently, the FTC sued and settled their first monetary settlement with celebrity endorsers Scott Yancey (Flipping Vegas on A&E) and Dean Graziosi (author of Millionaire Success Habits) for their involvement in promoting a scammy real estate training program.  The influencers allegedly knew about customer complaints claiming the coaching programs were misleading and even attempted to plant fake, positive reviews online.  Graziosi agreed to pay $1.25 million, and Yancey will pay $450,000.  If a celebrity or influencer is particularly egregious, the FTC can get serious about it.

{Side note:  the Supreme Court recently curtailed some of the FTC's powers. Per its ruling in AMG Capital Management, LLC v. FTC (2021), the FTC can no longer request a court to return money to injured consumers, a key tool under Section 13(b) of the FTC Act. Instead, the FTC is limited to seeking injunctions to halt illegal activities without the ability to provide monetary relief to consumers. However, the FTC still retains its penalty authority. As of this writing, there is sentiment in DC that a congressional fix is forthcoming, so keep an eye on this development in the future.}

III.  The Securities and Exchange Commission:  Defending the Financial Market Against the Promotion of Unregistered Securities, Inadequate Disclosures, Fraud or Misleading Statements

In addition to the FTC (a general consumer watchdog agency), other government agencies regulate various industries and their advertising practices based on their subject matter expertise.  The Securities and Exchange Commission (the “SEC”) is the cop on the beat protecting investors and ensuring the securities market is fair, orderly and efficient.  It enforces the registration of securities, disclosure of financial information, and monitoring financial professionals and firms. 

A. The Law in a Nutshell:  The Securities Act of 1933 (the “Securities Act”) and the Securities Exchange Act of 1934 (the "Exchange Act") empower the agency to guard consumers against being materially misled by advertisements during the sale of securities.  Specifically, Section 17(b) of the Securities Act (known as the anti-touting provision) makes it unlawful to promote a security without disclosing the compensation for said endorsement.  Additionally, Section 17(a)(2) of the Securities Act (aka the anti-fraud provision) outlaws extracting money or property from another person through materially untrue statements or the omission of a material fact. 

{What is a security? For simplicity, think of it as a tradable financial asset like stocks, bonds, options, and shares.}

B. Applying the Law to Celebrities:  Where celebrities often get into trouble here is twofold:

1. Promotion of an asset the SEC considers to be a “security” while failing to disclose a relationship with a brand

2. False or misleading statements about the sale of a security that would impact a decision to purchase a security

According to a 2017 statement from the SEC, an individual who promotes the sale of a security must disclose the “nature, scope, and amount of compensation received in exchange for the promotion” (in contrast to the FTC that doesn’t require a celebrity to reveal the actual amount). The SEC’s logic for the need for such disclosures is similar to that of the FTC.  It should be clear and transparent if a promoter is compensated to make an endorsement, so consumers aren’t duped into thinking the promotion is impartial.  Also, many celebrities (no offense) lack investment expertise and shouldn’t be giving investment advice.  

Additionally, influencers are prohibited from making false or deceptive claims about a financial product or omitting crucial details that could prevent the information from being misleading, especially when offering or selling securities to investors. This rule is in place to prevent investors from making poorly-informed decisions based on incorrect or partial information. Ultimately, having transparency, honesty, and fairness in the securities market is essential for maintaining public trust and confidence in the financial system. Given the influence the glitterati can have on their followers, the SEC closely scrutinizes the movements of celebrities. After all, social media posts provide easily obtainable evidence.

Celebrities often get tripped up here with the promotion of a crypto and/or NFT project because their status as a security is hotly contested.  Let’s take a look at the case of the basketball player Paul Pierce, a slam dunk case for the SEC.  Pierce failed to disclose online that he was paid $244,000 to promote the EthereumMax platform and its token EMAX and never labeled his social media posts with “#ad.”  [Kim Kardashian did the same thing.] 

He went a step further and made many misleading statements to the public about his investment strategy.  In a series of posts on Twitter, he bragged that he made more money with EMAX/crypto than anything else sharing a screenshot of his crypto wallet showing profits.  He also remarked how he would only sell his EMAX if it got up to $1 per token and that he was in it for the long haul.  All the while, Pierce was disposing of large quantities of EMAX received as payment for his promotions – a complete contradiction to his public claims.  By making false statements that he was in it for the “long haul” and encouraging followers to “jump on board” while simultaneously profiting from token sales, the SEC accused Pierce of misleading his followers and engaging in deceptive behavior.

[Paul Pierce’s Twitter posts on all the money he was making by holding EMAX while actually he was selling.  Someone needs to take his phone away]

C. Best Practices:  Here’s what influencers should aim to do to comply with the SEC’s rules:

1. Ask yourself whether what you are promoting may be considered a security by the SEC.  Very key.  Taylor Swift knew better.

2. Perform due diligence on the company.

3. Disclose the nature, source and amount of compensation.  The SEC requires you to disclose more than the FTC.

4. Don’t offer investment advice.

5. Make it clear you are doing an ad.

6. Don’t make false or misleading statements or statements you should have known to be false or misleading. 

7. Avoid phrases that make it sound too good to be true, such as “incredible upside, little risk,” “breakout stock,” “guaranteed 100%”, or “opportunity is limited so hurry!” 

D. Costs for Noncompliance:  In my opinion, celebrities should be more worried about the SEC that is less forgiving than the FTC and has the power to impose huge fines.  In its 2022 fiscal year, the SEC recovered a record $6.4 billion in penalties, disgorgement, and prejudgment interest, and $5 billion in the 2023 fiscal year.  How the SEC arrives to a penalty is rather opaque as most settlements don’t detail the calculation of civil monetary penalties.  As an example, Kim Kardashian settled with the SEC for $1.26 million, and Paul Pierce settled for $1.4 million for their promotion of EMAX. 

Moreover, the SEC and other agencies often delight in the publicity they get for catching a big fish celebrity defendant – just ask Kim Kardashian.  Going after a public figure helps spread the word to the public about what is considered bad advertising hygiene.  The SEC has filed enforcement actions in recent memory for the above violations against Lindsay Lohan, Jake Paul, Soulja Boy, Kendra Lust, Lil Yachty, Ne-Yo, Austin Mahone, Akon, Floyd Mayweather Jr., DJ Khaled, Steven Seagal, to name a few.  Bottom line: don’t mess with the SEC. 

IV. Private Litigants and Class Action Lawsuits:  Using Consumer Protection Laws to Bring Lawsuits for Damages

In addition to the government bringing an action, private actors can bring lawsuits against celebrities.  Those suits can be brought for violations of either state law or federal law under similar legal logic to that of the government agencies.

A. State Law in a Nutshell:  Individual states have their own laws on the books concerning deceptive and unfair trade practices, including the violation of securities laws (like the federal laws enforced by the FTC and SEC).  Plaintiffs may utilize the state versions of these laws in addition to tort-related claims like conspiracy, conversion (theft), and aiding and abetting an unlawful act (let’s call them the “Kitchen Sink Torts”).

B. Applying the Law to Celebrities:  Celebrities often get into legal trouble for:

1. Failure to disclose material connections

2. Misleading or fraudulent or dishonest statements regarding a product

3. Doing  no. 1 and no. 2 when the promotion is for a security (including when they don’t realize something could be a security)

I think we get the legal concepts so let’s hop into an example.  The renowned soccer player Cristiano Ronaldo promoted the platform Binance and an NFT collection called CR7 made in a collaboration during the 2022 World Cup.  Ronaldo faced a $1 billion class action lawsuit for allegedly promoting an unregistered security and misleading consumers by failing to disclose his compensation from Binance, deceptive business practices, and the Kitchen Sink Torts.  All these causes of actions were violations of Florida, Colorado and California laws.

[Cristiano Ronaldo’s Tweet on his NFT collection with Binance.  He heavily promoted his NFT collection but allegedly failed to tell people he was being paid to do so.]

C. Federal Law in a Nutshell:  In addition to state violations, celebrities can be sued by anyone under federal laws for securities fraud or manipulative or deceptive practices related to securities.  Section 10(b) of the Exchange Act prohibits the use of any manipulative or deceptive methods in the purchase or sale of any security, in violation of SEC rules. Rule 10b-5, which is based on Section 10(b), further specifies that it is unlawful to commit fraud, make false material statements, or engage in any deceitful act or business practice in relation to the purchase or sale of securities. 

D. Application to Celebrities:  The famous often face class action suits related to the following:

1. Promotion of the sale of unregistered securities

2. Defrauding or misleading someone in the sale of securities

One epic example is the class action suit brought against Justin Bieber, Gwyneth Paltrow, Serena Williams, Paris Hilton, Madonna, Jimmy Fallon, and Kevin Hart, etc. for promoting Yuga Labs’ Bored Ape NFTs.  Sounds like an overly clever theme for the Met Gala!  The plaintiffs accused multiple celebrities of scheming to inflate the NFT values via endorsements without the proper disclosure of the financial relationships.  Folks like Madonna allegedly misled the public about their actual involvement and others like Jimmy Fallon allegedly feigned their interest in the collection for their own personal gain. 

[Madonna tweeted (left) “Thanks @moonpay” but didn’t say if she was paid to promote Bored Apes. Jimmy Fallon  through his tweets (right) and TV program, was accused of giving the impression he was “involved” in this project and like the Ape in his tweet, would help captain this NFT ship.]

C. Costs for Noncompliance:  With a private right of action, you can seek damages, restitution, and other remedies.  The first lesson you learn in law school is that you never sue a turnip; you sue a tomato.  If you squeeze a turnip, it doesn’t yield much juice, but a tomato has a large projectile range. 

Here’s the difficult part of being an influencer or celebrity:  because people think you have money, you are very much a tomato.  Defending these suits can be expensive, and settling is often preferred to avoid the expense, time, and negative publicity.  It can be costly to defend a lawsuit and pay for a ghost detector, a dinosaur skull, a $2 million humidifier…ok maybe, I don’t feel so bad.  Many lawyers make a whole career out of that…some of us do Substacks for free…

V. Conclusion

What can you do to help Tom Brady, Cristiano Ronaldo, Lindsay Lohan, among other glitterati?  Tweet them this article.  You sliding into their DMs with this PSA could save them some money and us plebeians from having to witness uncomfortable (perhaps, disingenuous) public displays of remorse.  Act now!

VII. Extra Credit

I want to note for you readers who made it this far, the above isn’t completely exhaustive of every potential pitfall a celebrity may face in their promotion of a product.  Celebrities should be careful about endorsing any product in a highly regulated industry – see below:

• Like the SEC, the Commodity Futures Trading Commission (CFTC) also requires individuals promoting trading advice to disclose that they have received compensation.

• The Federal Reserve Board takes action when unfair or deceptive acts or practices are discovered in the banking and financial services industry.

• The Food and Drug Administration (FDA) regulates advertising for prescription drugs, certain medical devices, such as hearing aids, the lasers used in LASIK procedures, and contact lenses.  It has issued guidance on internet/social media platforms. 

• Financial Industry Regulatory Authority (FINRA), while a self-regulatory organization (SRO), regulates broker-dealers’ communications.  It also has issued guidance to influencers on social media practices. 

  

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Sources:

• AMG Capital Management, LLC v. FTC is 593 U.S. _ (2021), https://www.supremecourt.gov/opinions/20pdf/19-508_l6gn.pdf

• 15 U.S. Code § 45 (Section 5 of the Federal Trade Commission Act), Unfair methods of competition unlawful; prevention by Commission, https://www.law.cornell.edu/uscode/text/15/45

• 12 U.S.C. § 1818 (Section 8 of the Federal Deposit Insurance Act), Termination Of Status As Insured Depository Institution, https://www.fdic.gov/regulations/laws/rules/1000-900.html

• 15 U.S.C. § 78j(b) (Section 10(b) of the Exchange Act), Manipulative and deceptive devices, https://www.law.cornell.edu/uscode/text/15/78j

• 15 U.S. Code § 77q(a)(2) (Section 17(a)(2) of the Securities Act) - Fraudulent Interstate Transactions, https://www.law.cornell.edu/uscode/text/15/77q

• 15 U.S. Code § 77q (Section 17(b) of the Securities Act) - Fraudulent Interstate Transactions, https://www.law.cornell.edu/uscode/text/15/77q

• 15 U.S. Code § 77e (Sections 5(a) and 5(c) of the Securities Act) - Prohibitions Relating To Interstate Commerce and the Mails, https://www.law.cornell.edu/uscode/text/15/77e

• California Securities Law, California Corp. Code § 25110, https://law.justia.com/codes/california/2007/corp/25110-25118.html

• California’s Unfair Competition Law Business & Professions Code, §§ 17200, https://leginfo.legislature.ca.gov/faces/codes_displaySection.xhtml?sectionNum=17200.&lawCode=BPC

• Florida Securities and Investor Protection Act, Section 517.07(1), Fla. Stat., http://www.leg.state.fl.us/Statutes/index.cfm?App_mode=Display_Statute&Search_String=&URL=0500-0599/0517/Sections/0517.07.html#:~:text=(1)%20It%20is%20unlawful%20and,registered%20pursuant%20to%20this%20chapter.

• Florida Deceptive and Unfair Trade Practices Act, Section 501.201, Fla. Stat., http://www.leg.state.fl.us/Statutes/index.cfm?App_mode=Display_Statute&URL=0500-0599/0501/Sections/0501.201.html.

• 17 CFR § 4.41 - Advertising by commodity pool operators, commodity trading advisors, and the principals thereof, https://www.law.cornell.edu/cfr/text/17/4.41

• 88 FR 48102, Guides Concerning Use Of Endorsements And Testimonials In Advertising, https://www.ecfr.gov/current/title-16/chapter-I/subchapter-B/part-255

• Federal Trade Commission, FTC Staff Reminds Influencers and Brands to Clearly Disclose Relationship, April 19, 2017, https://www.ftc.gov/news-events/news/press-releases/2017/04/ftc-staff-reminds-influencers-brands-clearly-disclose-relationship

• Federal Trade Commission, FTC's Endorsement Guides: What People Are Asking, https://www.ftc.gov/business-guidance/resources/ftcs-endorsement-guides-what-people-are-asking

• Federal Trade Commission, What the FTC Does, https://www.ftc.gov/news-events/media-resources/what-ftc-does

• Federal Trade Commission, FTC Publishes Inflation-Adjusted Civil Penalty Amounts for 2023, January 6, 2023, https://www.ftc.gov/news-events/news/press-releases/2023/01/ftc-publishes-inflation-adjusted-civil-penalty-amounts-2023?utm_source=govdelivery

• Federal Trade Commission, Advertising without proper proof can prove costly under new Notice of Penalty Offenses, Lesley Fair, April 13, 2023, https://www.ftc.gov/business-guidance/blog/2023/04/advertising-without-proper-proof-can-prove-costly-under-new-notice-penalty-offenses

• Federal Trade Commission, Disclosures 101 for Social Media Influencers, November 2019, https://www.ftc.gov/business-guidance/resources/disclosures-101-social-media-influencers

• Federal Trade Commission, FTC Seeks to Add Real Estate Investment Celebrities Dean Graziosi and Scott Yancey as Defendants in Real Estate Training Case, August 31, 2020, https://www.ftc.gov/news-events/news/press-releases/2020/08/ftc-seeks-add-real-estate-investment-celebrities-dean-graziosi-scott-yancey-defendants-real-estate

• Federal Trade Commission, FTC Suit Leads to $16.7 Million Judgment Against Principals and Celebrity Endorsers of Real Estate Investment Training Program, May 22, 2023, https://www.ftc.gov/news-events/news/press-releases/2023/05/ftc-suit-leads-167-million-judgment-against-principals-celebrity-endorsers-real-estate-investment

• Securities and Exchange Commission, Investor Alert: Social Media and Investing - Avoiding Fraud, https://www.sec.gov/investor/alerts/socialmediaandfraud.pdf

• Securities and Exchange Commission, SEC Statement Urging Caution Around Celebrity Backed ICOs, November 1, 2017, https://www.sec.gov/news/public-statement/statement-potentially-unlawful-promotion-icos

• Federal Reserve Board, Federal Trade Commission Act Section 5: Unfair or Deceptive Acts or Practices, December 2016, https://www.federalreserve.gov/boarddocs/supmanual/cch/ftca.pdf

• Food and Drug Administration (FDA), Prescription Drug Advertising | Questions and Answers, June 19, 2015, https://www.fda.gov/drugs/prescription-drug-advertising/prescription-drug-advertising-questions-and-answers#:~:text=The%20Federal%20Trade%20Commission%20(FTC,LASIK%20procedures%2C%20and%20contact%20lenses.

• Food and Drug Administration (FDA), Guidance for Industry Internet/Social Media Platforms with Character Space Limitations— Presenting Risk and Benefit Information for Prescription Drugs and Medical Devices, June 2014, https://www.fda.gov/regulatory-information/search-fda-guidance-documents/internetsocial-media-platforms-character-space-limitations-presenting-risk-and-benefit-information-0

• Financial Industry Regulatory Authority (FINRA), FINRA Provides Update on Sweep: Social Media Influencers, Customer Acquisition and Related Information Protection, February 2023, https://www.finra.org/rules-guidance/guidance/targeted-examination-letters/sweep-update-feb2023

• Skadden, Arps, Slate, Meagher & Flom LLP and Affiliates, FTC Enforcement Trends in Consumer Protection Under the Biden Administration, Anthony J. Dreyer, Margaret E. Krawiec, Paul M. Kerlin and Todd D. Kelly, December 13, 2023, https://www.skadden.com/insights/publications/2023/12/2024-insights/enforcement-and-litigation/ftc-enforcement-trends#:~:text=FTC%20has%20significantly%20affected%20FTC,seek%20monetary%20and%20injunctive%20relief

• Skadden’s The Rise And Reformation Of Private Securities Litigation, Jay B. Kasner and Mollie M. Kornreich, August/September 2014, https://www.skadden.com/-/media/files/publications/2014/08/lit_augsept2014_securitieslitigation.pdf

• Arnall Golden Gregory LLP, FDA Is (Once Again) Keeping Up With the Kardashians: A Cautionary Tale Involving Endorsements, Testimonials and Influencer Marketing, Matthew V. Wilson, March 19, 2021, https://www.agg.com/news-insights/publications/fda-is-once-again-keeping-up-with-the-kardashians-a-cautionary-tale-involving-endorsements-testimonials-and-influencer-marketing/

• Holland & Knight, 2023 Social Media Advertising Landscape: An Update from a Senior FTC Official, April 18, 2023, Anthony E. DiResta, Da'Morus A. Cohen, Benjamin A. Genn, and Luis Garcia, https://www.hklaw.com/en/insights/publications/2023/04/2023-social-media-advertising-landscape

• Morrison Foerster, The Guide To Social Media And The Securities Laws, August 2017, https://media.mofo.com/docs/pdf/170814-guide-to-social-media-and-the-securities-laws/82092FCB23EF590F76E3D38EF281CFF6/170814-guide-to-social-media-and-the-securities-laws.pdf

• American Bar Association, Social Media Endorsement Activities Can Prompt Securities and Exchange Commission Liability for Celebrities, Michael J. Rivera and Abby Yi, May 12, 2021, https://www.americanbar.org/groups/entertainment_sports/publications/entertainment-sports-lawyer/esl-37-01-winter21/social-media-endorsement-activities-can-prompt-securities-and-exchange-commission-liability-celebrities/

• The Importance of the ‘How’ and the ‘Why’ in SEC Settlement Penalty Calculations, Michael J. Osnato Jr., Meaghan Kelly and Stephanie Hon, December 01, 2023, https://www.law.com/newyorklawjournal/2023/12/01/the-importance-of-the-how-and-the-why-in-sec-settlement-penalty-calculations/

• Sarah McLachlan ASPCA Commercial, YouTube

Celebrity Lawsuits:

• SEC v. Paul Anthony Pierce, Order Instituting Cease-And-Desist Proceedings, https://www.sec.gov/files/litigation/admin/2023/33-11157.pdf

• SEC v. Kimberly Kardashian, Order Instituting Cease-And-Desist Proceedings, https://www.sec.gov/files/litigation/admin/2022/33-11116.pdf

• Michael Sizemore v. Cristiano Ronaldo, US District Court of the Southern District of Florida, November 11, 2023, https://www.tbstat.com/wp/uploads/2023/11/ronaldo.pdf

• Adonis Real and Adam Titcher v. Yuga Labs, Inc., et. al., US District Court of the Central District of California, https://deadline.com/wp-content/uploads/2022/12/CELEBS-NFT-SUIT.pdf

Celebrity Promotions:

• Ric Flair Tweet:  https://twitter.com/ricflairnatrboy/status/1742573643673018583?t=0SfwUepwmhm_JDYyzO6lXg

• Khloe Kardashian Tweet:  https://twitter.com/khloekardashian/status/28907554676?lang=ar-x-fm

• Rihanna Tweet: https://twitter.com/rihanna/status/1690074315688185856

• Carli Lloyd Tweet and Instagram Post: https://twitter.com/CarliLloyd/status/1694024295700213869 & Instagram Post

• Gwyneth Paltrow on Squatting, Earthing & That Special Egg for 'Lady Parts': YouTube

• Kim Kardashian Instagram Post:  https://www.goingconcern.com/sec-order-kim-kardashian-emax-tokens/

• Paul Pierce Tweets: https://twitter.com/paulpierce34/status/1397628485917577217?lang=en; https://twitter.com/paulpierce34/status/1398294745806299139; https://twitter.com/paulpierce34/status/1398652340610080770 & https://twitter.com/paulpierce34/status/1399013195151417345

• Cristiano Ronaldo Tweets and YouTube Video:  https://twitter.com/Cristiano/status/1539972040291061765; https://twitter.com/Cristiano/status/1592520297290551308; & YouTube

• Jimmy Fallon Tweet: https://twitter.com/jimmyfallon/status/1463166515289669650?lang=en

• Paris Hilton Surprises Tonight Show Audience Members By Giving Them Their Own NFTs | Tonight Show: YouTube

• Madonna Tweet: https://twitter.com/Madonna/status/1507183071551971330

Celebrity Gossip:

• Gwyneth Paltrow's Goop brand penalized for 'unsubstantiated claims', September 5, 2018, https://abc7chicago.com/gwyneth-paltrow-goop-penalties-health-claims/4154422/

• 14 of the Most Ridiculous Celebrity Purchases, April 13, 2023, https://www.cosmopolitan.com/entertainment/celebs/g43402256/14-of-the-most-ridiculous-celebrity-purchases/

• Lindsay Lohan, Jake Paul, Lil Yachty, other celebs hit with SEC charges for boosting crypto, Brian Contreras, March 22, 2023, https://www.latimes.com/entertainment-arts/business/story/2023-03-22/lindsay-lohan-lil-yachty-akon-and-other-celebs-charged-for-boosting-crypto#:~:text=Those%20charged%20included%20%E2%80%9CMean%20Girls,named%20in%20the%20agency's%20complaint.

Disclaimer:  This post is for general information purposes only. It does not constitute legal advice.  This post reflects the current opinions of the author(s).  The opinions reflected herein are subject to change without being updated.