The U.S. Supreme Court Hands Down a Very Employer-Friendly Arbitration Ruling

On June 15, the U.S. Supreme Court issued its much-anticipated decision in Viking River Cruises Inc. v. Moriana. The high court ruled that representative actions brought pursuant to the California Private Attorneys General Act (PAGA) may be compelled to individual arbitration—a break from the position previously taken by the California Supreme Court in Iskanian v. CLS Transp. Los Angeles LLC that PAGA representative claims are not subject to arbitration agreements.

The ruling in Viking is a major development that impacts every California employer. Indeed, in the wake of the decision, employers in the Golden State may need to revise their employee arbitration provisions.

PAGA Claims

PAGA allows employees to file actions and pursue civil penalties on behalf of the state for violations of California’s Labor Code. California views PAGA as an important mechanism to ensure that labor laws are being followed and that employees are adequately protected.

For years and pursuant to Iskanian, an employee initiating a representative PAGA claim was permitted to seek redress in court, even in the event an arbitration agreement was signed. It was the finding of the California Supreme Court that a contract that waived an employee’s right to bring a PAGA action in court was invalid as a matter of public policy. As otherwise stated, the enforcement of wage-and-hour laws on behalf of the state by way of a PAGA action was not preempted by the Federal Arbitration Act (FAA)—this because such a case was not between two contracting private parties, but between the state and an employer. The bombshell opinion in Viking changes all that.

The Viking Decision

In Viking, a former sales representative named Angie Moriana initiated a PAGA action alleging wage-and-hour law violations against the river cruise company. Of note, Moriana’s employment contract with Viking contained a mandatory arbitration agreement.

In an 8-1 ruling, the U.S. Supreme Court decided that the FAA—which instructs courts to enforce arbitration agreements and preempts state rules that undermine them—serves to block the Iskanian rule, at least partially. The vast majority of justices found that Viking could push Moriana's individual claims into arbitration pursuant to the FAA. And because of that, it was determined that California law would not permit her to continue in court with her "non-individual" claims (those brought on behalf of other workers).

According to Justice Samuel Alito, "PAGA provides no mechanism to enable a court to adjudicate non-individual PAGA claims once an individual claim has been committed to a separate proceeding." He went on to state, "Moriana lacks statutory standing to continue to maintain her non-individual claims in court, and the correct course is to dismiss her remaining claims.

Justice Sonia Sotomayor concurred, reasoning that PAGA does not permit a plaintiff to proceed in court with non-individual claims if her individual claims are sent to arbitration, though she opined that California's courts and legislature are the best authorities to address questions that may arise about a PAGA plaintiff's standing to litigate "non-individual" claims. Nonetheless, and at least for the time being, the high court’s opinion is one worthy of celebration by California businesses.

The Takeaway for California Employers

The Viking opinion provides some long-awaited relief for California employers whose employees have executed arbitration agreements that waive the right to bring a representative PAGA action. These employers should now take the opportunity to confer with counsel and review their arbitration provisions to determine whether any revisions are necessary to ensure they receive the protections afforded by Viking. Toward that end, the employment attorneys at Michelman & Robinson, LLP stand ready to assist.

This blog post is not offered, and should not be relied on, as legal advice. You should consult an attorney for advice in specific situations.

California’s High Court Characterizes Meal and Rest Period Premiums As Wages

In California, the failure to make timely payments for meal and rest period premiums can trigger waiting time penalties and wage statement violations. This is so because these premiums are considered to be wages, as has been recently confirmed by the California Supreme Court in Naranjo v. Spectrum Security Services, Inc.

For employers, the state high court decision in Naranjo issued on May 23 is an unfavorable development for California employers and a departure from the intermediate appellate court’s determination that meal and rest period premiums are a “legal remedy” as opposed to a wage for work performed.

A Look at the California Supreme Court’s Reasoning in Naranjo

In rendering its decision, the Court relied heavily upon its previous ruling in Murphy v. Kenneth Cole Productions, Inc., in which it was held that premium pay for meal and rest periods constituted wages for purposes of the statute of limitations. If these are wages under Murphy, the Court reasoned, they must be subject to the same timing and reporting rules as other forms of compensation for work.

Digging a bit deeper, the Court in Naranjo explained that the Court of Appeal’s “conclusion that premium pay cannot constitute wages rests on a false dichotomy: that a payment must be either a legal remedy or wages. For these purposes, [Labor Code] section 226.7 is both.” Notably, the Court made clear that under the relevant statute and wage order, an employee becomes entitled to premium pay for missed or noncompliant meal and rest breaks precisely because she was required to work when she should have been relieved of duty (for instance, required to work too long into a shift without a meal break; required to work through a break; or, as was the case at bar, required to remain on duty without an appropriate agreement in place authorizing on-duty meal breaks). This dicta may furnish employers with the grounds to factually distinguish from Naranjo where these specified scenarios are arguably inapplicable.

Some Contradictory Precedent

The Naranjo Court then attempted to harmonize its seemingly contradictory holding in Kirby v. Immoos Fire Protection, Inc. that an action for meal period or rest break premiums is not an “action brought for the nonpayment of wages” for purposes of the attorney’s fees provision in Labor Code section 218.5. It did so by stating that the legal violation triggering a claim for meal and rest period premiums is the failure to provide the break and not the failure to provide the premium pay. This, however, raises certain inconsistencies in the Naranjo ruling can potentially be leveraged by employers, including Naranjo’s interpretation of Murphy. Toward that end, we will monitor how California appellate courts interpret the Supreme Court’s labeling exercise in Naranjo.

Naranjo in Light of Ferra v. Lowes Hollywood Hotel, LLC

It is important to understand that the holding in Naranjo does not affect any of the underlying requirements for establishing meal or rest period violations, waiting time penalties or wage statement violations. For example, waiting time penalties are still subject to a willfulness standard. That being said, the impact of Naranjo is not only significant, but also compounded by last year’s California Supreme Court ruling in Ferra, in which it was held that meal and rest premiums must be paid at the employee’s regular rate of compensation, and not just their hourly rate of pay. Now, under Ferra and Naranjo, payment of meal and rest period premiums at employees’ hourly rates of pay will not only subject employers to meal and rest period exposure, but also waiting time penalties and wage statement violations.

The takeaway is this: employers must ensure that meal and rest period premiums are paid at their employees’ regular rates of pay for any missing, late or shortened meal, rest or recovery periods during any given workday. To be sure, Naranjo only furthers the increased vigilance which employers must operate with so that inadvertent errors do not cause disproportionate derivative wage and hour exposure.

This blog post is not offered, and should not be relied on, as legal advice. You should consult an attorney for advice in specific situations.

H.R. 4445 Is Now Law and the Scope of Arbitration Has Narrowed

Mandatory arbitration of sexual assault or sexual harassment claims is a thing of the past. Last month, the Ending Forced Arbitration of Sexual Assault and Sexual Harassment Act (H.R. 4445) was signed by President Joe Biden. With that, the Federal Arbitration Act was amended to allow victims of alleged sexual assault or sexual harassment—including the representative of a class or collective action—to pursue their federal, state or tribal law claims in court even if they had previously entered into an arbitration agreement or joint-action waiver.

The Net Effect of H.R. 4445

The enactment of H.R. 4445 primarily impacts employers and employees to the extent mandatory arbitration agreements are most often at issue in the workplace setting. Nonetheless, the law is certainly not limited to the employer/employee relationship and can potentially affect customers, patients and consumers as well.

Still, employers and employees are in the crosshairs of H.R. 4445 first and foremost and the net effect of the law on these parties is clear. Simply stated, employers nationwide can no longer rely on predispute agreements that require employees to arbitrate claims—or that preclude them from bringing class actions—alleging incidents of sexual assault or sexual harassment that arise or accrue on or after March 3, 2022, the effective date of the new amendment to the FAA. Significantly, the law applies to all arbitration agreements, including those executed prior to March 3.

Notwithstanding the above, cases stemming from sexual assault or sexual harassment alleged to have occurred before March 3 can still be arbitrated. Likewise, waivers of class actions for these particular pre-March 3 claims remain enforceable. In addition, the FAA as amended does not have any effect on arbitration agreements where the dispute at issue is not based upon sexual assault or sexual harassment.

Sexual Assault or Sexual Harassment Claims Can Still Be Arbitrated

H.R. 4445 reads, in part, as follows:

“. . . at the election of the person alleging conduct constituting a sexual harassment dispute or sexual assault dispute, or the named representative of a class or in a collective action alleging such conduct, no predispute arbitration agreement or predispute joint-action waiver shall be valid or enforceable with respect to a case which is filed under Federal, Tribal, or State law and relates to the sexual assault dispute or the sexual harassment dispute.”

This provision means that the arbitration of sexual assault or sexual harassment cases is not prohibited. Rather, the law (1) serves to forbid parties, employers included, from compelling arbitration of these claims based upon predispute agreements or waivers and (2) gives purported victims the right to elect to air their grievances in courtrooms. That being said, if claimants (employees among them) want to arbitrate sexual assault or sexual harassment disputes, they are free to agree or otherwise elect do so.

A Bit of a Gray Area

In the employment context, it is not uncommon for employees to include discrimination, retaliation, wrongful termination, wage and hour or other unrelated claims within an action against their employers alleging sexual harassment or sexual assault. This begs the question: in such a circumstance and given the applicability of H.R. 4555, would the entire lawsuit be subject to litigation in court (as opposed to arbitration) at the plaintiff’s election, or only the sexual harassment or sexual assault causes of action?

As of now, the answer is unclear and we anticipate that, going forward, appellate courts will weigh in on the severability of claims unrelated to sexual harassment or sexual assault and whether those matters would continue to be arbitrable pursuant to predispute agreements or waivers. In the meantime, clever plaintiffs’ attorneys may insert sexual assault or sexual harassment claims into otherwise unrelated employment cases in an attempt to circumvent mandatory arbitration. Of course, this strategy would run afoul of the express agreements of parties who have consented to the arbitration of employment-related disputes, albeit not those arising out of sexual assault or sexual harassment, and call into question the FAA’s well-established policy favoring arbitration.

Next Steps

In the wake of the new amendment to the FAA, employers would be wise to revisit their current forms of arbitration agreement to carve out sexual assault or sexual harassment claims. But first, an important caveat for California employers.

Within the next few weeks, the U.S. Supreme Court is set to render its decision in Viking River Cruises, Inc. v. Moriana. At issue in that case is whether certain representative actions in California under PAGA are subject to arbitration pursuant to the FAA where a bilateral arbitration agreement is in place. Depending upon how the high court rules, employers in the Golden State may have additional reason to update their arbitration agreements.

This blog post is not offered, and should not be relied on, as legal advice. You should consult an attorney for advice in specific situations.

Changes to the UCC Addressing Digital Assets Up for Consideration

It is no secret that buying, using and trading cryptocurrency and non-fungible tokens has become more and more commonplace. Less clear is whether crypto, like Bitcoin or Ethereum, is to be treated as money. Even more of a mystery to regulators and market participants alike is how security interests in digital assets can be perfected—this so that other parties cannot improperly claim ownership. If adopted, a newly proposed Article 12 of the Uniform Commercial Code would address these issues by governing transfers (including sales and financings) of digital assets.

Article 12 as Proposed

As of this writing, crypto does not fall under the definition of “money” here in the U.S. because it has not been adopted by a domestic or foreign government, intergovernmental organization, or by agreement between multiple countries. To make matters even fuzzier, the only way to perfect a security interest in a cryptocurrency or NFT is to file a financing statement fully describing the coin or token—control over a digital wallet is simply not enough. Article 12 as proposed would remedy this.

Among other things, the proposed Article 12 would update the UCC by:

  • Addressing the transfer of digital assets and cryptocurrencies, providing conforming changes to Article 9 to deal with secured transactions in these assets, and coining the new term “controllable electronic records” (CERs) to define cryptocurrencies and NFTs
  • Facilitating secured lending against CERs
  • Providing protections for qualifying lenders and purchasers so they could take security interests in cryptocurrencies and digital assets free and clear of conflicting property claims
  • Promulgating rules regarding assignment of controllable accounts and payment intangibles
  • Specifying other changes such as updates to the definition of “chattel paper” and revisions to requirements for transfers and perfection of security interests in chattel paper, as well as modifying certain rules regarding negotiable instruments and payment systems

Who Would Be Affected By Article 12?

A new Article 12 would affect crypto and NFT companies, financial institutions, investment banks and parties to equipment finance or lease transactions.

For their part, blockchain-related companies would be impacted to the extent Article 12 as proposed would govern the transfer of property rights in digital assets, like cryptocurrencies, NFTs and other CERs that these companies purchase, sell and finance. Article 12 (if adopted) would specify the rights purchasers acquire in these digital assets to facilitate transactions. Doing so would reduce risk among claimants when companies use digital assets as an exchange mechanism for payment, right to receive services or goods, or interests in personal or real property.

Financial institutions and others that finance digital assets would find it easier to arrange secured lending transactions if Article 12 comes to fruition. This is because an Article 12 would provide lenders with a perfected security interest in a given underlying digital asset assuming the lender has “control” over it or the system on which the asset is recorded (read: the blockchain).

In light of the foregoing, lenders and other secured parties would be wise to take note of the proposed Article 12 and they may want to amend current credit facilities that are secured by blanket or broad liens on “substantially all assets” of the debtor, including intangibles. To be sure, lenders should carefully craft their credit facilities and  provide for an express security interest in CERs, controllable accounts, and controllable payment intangibles. If Article 12 becomes effective, the failure to do so could result in the loss of their position should another party obtain “control” over assets in this class.

Further, Article 12 would also have an impact on structured finance and securitization transactions because they often involve bundles of various types of secured loans. Any party involved in investments in—or underwriting of—these types of deals should become familiar with the relevant sections of Article 12 as proposed, especially those relating to payment obligations, assignments of accounts, and discharge of obligors on digital assets, as well as the provisions which set out the requirements for a purchaser to acquire protection as a good faith purchaser for value of a CER, controllable account and controllable payment intangible.

Finally, parties to equipment financing and/or lease transactions should pay close attention to the changes that an Article 12 would bring to the UCC. In its current form, Article 9 defines “chattel paper” as a monetary obligation that is either secured by specific goods (like a car or other tangible asset) or arises in connection with a lease of specific goods. A new Article 12 would change all that.

What Is Excluded?

Article 12, if adopted, would be limited in scope and apply only to CERs for cryptocurrencies and other digital assets. Likewise, it would not (1) define who has rights in or title to digital assets; (2) touch on federal or state securities laws, data privacy, cybersecurity or other regulations; (3) incorporate banking laws; (4) provide rules for the taxation of digital assets; (5) tackle anti-money laundering laws; or (6) affect transferable records under the Uniform Electronic Transactions Act or E-SIGN.

What Is Next?

The American Legal Institute (ALI) has until this month to approve the draft of Article 12 as proposed. If approved, the provisions would go to the Uniform Law Commission for approval no later than July 2022. After that, Article 12 would be submitted to the states for adoption.

Of course, we will continue to monitor the status of Article 12 and provide updates as they develop.

This blog post is not offered, and should not be relied on, as legal advice. You should consult an attorney for advice in specific situations.

5 Emerging Trends in Mental Health and Substance Use Treatment

The business of mental health and addiction treatment is continually evolving. Here, we shine a light on five trends in the mental health and substance use disorder (SUD) space, from insurance company challenges to developing therapeutic methodologies.

Payor Pressure

Many private insurance companies (payors), which provide customers with health plans that offer cost coverage and reimbursements for SUD treatment and care services, are now required to align treatment and payment policies with American Society of Addiction Medicine (ASAM) or equivalent industry guidance. This has led to some more reasonable requirements for providers. Nevertheless, payors are still conducting medical record audits, placing providers in SIU or pre-payment review, and often delaying or denying payment on legitimate claims.

For their part, SUD providers must be diligent about tracking all hours of services provided, including specifying the individuals providing those services and making sure they are qualified to do so. This is especially important because some payors are using minor documentation discrepancies as a basis to deny payment for an entire day, or even an entire week, of treatment—an outcome that can create conflicts with clients.

Some payors are also using improper guidelines as a basis for denying payment, including inconsistent standards applied by different auditors even within the same payor organization. Providers need to get ahead of these issues, ideally before they get audited. If providers are sent to SIU or pre-payment review, they should act immediately and aggressively to avoid payment denials and delays that can have a devastating financial impact on their organizations.

State Laws Regarding Advertising

Several states are enacting their own SUD industry-specific advertising restrictions. These laws generally prohibit misleading advertising, particularly as to the location, services or identity of a given provider. Others require specific credentials or licenses for advertisers. In light of the national reach of online advertising, providers must be diligent in determining what advertising rules apply to them, with an eye toward compliance with new laws as they continue to spring up across the country.

Market Expansion Combined With Overwhelmed Public Agencies

As money continues to flow into the SUD space, public agencies continue to be backlogged and overwhelmed from COVID-19-related restrictions and prioritization directives. Consequently, new facilities are facing unprecedented delays in obtaining licenses, which is creating financial burdens for providers and access to care issues for clients.

Tension Between State and Local Governments on NIMBY Laws

Over the law few years, several California cities and counties have attempted to limit the number, type, operations and size of SUD facilities and sober living/transitional living homes. Some of these restrictions are patently unconstitutional. Federal and state agencies have reiterated parity concerns and their desire to protect clients who are seeking treatment for mental health and SUD issues. While certain local governments are heeding this guidance, others are disregarding it entirely. And even cities that do not have so-called NIMBY laws on the books will nevertheless target mental health or SUD facilities with frequent unannounced visits by officials or law enforcement. Oftentimes, no citations are ever issued; instead, the goal seems to intimidate providers and their clients.

Medication Assisted Therapy

Medication Assisted Therapy continues to become more mainstream and both federal and state governments are dedicated to reducing discrimination against clients receiving this form of treatment. However, MAT can create a conflict with abstinence-based programs, as well as with sober living or transitional living homes. Although some traditionally abstinence-based providers are now incorporating MAT, others are resistant to what they consider government overreach into treatment philosophies and methodologies. By virtue of these differences in opinion, we will likely see more discourse on this topic within the recovery industry.

This blog post is not offered, and should not be relied on, as legal advice. You should consult an attorney for advice in specific situations.

Preserving the Confidentiality of Cybersecurity Reports

Your company’s computer network has been breached and confidential customer data stolen. Not surprisingly, this results in a lawsuit filed against you by down-the-line victims; read, customers whose personal information found its way into the wrong hands.

In response to the breach, you did all the right things, including hiring experts to investigate and provide a forensic report. But to your dismay, that report—which includes some rather sensitive and potentially damaging information—has become subject of discovery in the litigation. What are you to do?

Forensic Reports Can Be Fair Game

Several cases have been decided that have compelled defendants to hand over forensic reports to plaintiffs.

Most recently, in Guo Wengui v. Clark Hill, PLC, the U.S. District Court for the District of Columbia ordered Clark Hill, PLC, a Detroit-based international law firm, to deliver to the plaintiff a forensic report prepared by a vendor at the direction of legal counsel. In so doing, after viewing the report in camera and learning of its wide distribution both internally and externally, the court determined that the report would likely have been written in response to the data breach at issue, whether or not litigation was filed. Consequently, its findings were not deemed to be confidential or otherwise protected by the work-product doctrine.

The decision in Guo Wengui was consistent with a previous opinion in a 2019 case heard in the U.S. District Court for the Eastern District of Virginia. That matter involved the well-publicized Capital One data breach, in which an unauthorized individual gained access to the personal information of more than 100 million Capital One credit card customers and individuals who had applied for the company’s credit card products.

In Capital One’s case, it was decided that the financial giant failed to distinguish a post-breach forensic report from one that would have been prepared for business purposes, regardless of the multi-district litigation that had been filed. Remarkably, production of the Capital One forensic report was compelled even though the report in question was distributed primarily to legal staff, paid for out of the company’s legal budget, and Capital One’s lawyers signed the engagement letter with the relevant cybersecurity vendor.

Of note, the court in the Capital One case found that circumstances surrounding the creation of the forensic report suggested that it was the byproduct of an operational investigation, as opposed to one prompted by litigation. Likewise, the court seized upon other factors that seemed to run contrary to the application of the attorney-client privilege or work-product doctrine.

Preserving Confidentiality

Given this legal precedent, companies subject to data breach lawsuits must be mindful to do all they can to preserve the confidentiality of forensic reports by way of the attorney-client privilege or the work-product doctrine. But how?

First and foremost, it is critical for organizations to hire lawyers experienced in cybersecurity law. This is true even in the absence of active litigation. Retaining trusted legal counsel, as opposed to a consulting firm, to manage pre-breach assessments, audits and regulatory compliance sets the table for the continued veil of confidentiality. Leaving it to lawyers to handle cyber incidents becomes even more critical when it comes to post-breach investigations, not to mention, of course, regulatory litigation from AGs, the SEC or FTC and third-party lawsuits, including class actions, filed by private individuals.

What is important for stakeholders to understand is that they themselves do not hold the legal privileges, nor do consultants. Likewise, the days of executives keeping in-house counsel in the loop in an effort to preserve confidentiality are long gone. Hence the importance of having outside cybersecurity lawyers in the driver’s seat.

Also, companies might consider creating separate reports for mitigation and litigation. Toward that end, sensitive analysis—legal and otherwise—should be kept out of mitigation reports, which should be limited to facts and technical information only.

Finally, access to all forensic reports should be limited, particularly any privileged legal report—this in order to establish that the latter was created for litigation purposes alone.

This blog post is not offered, and should not be relied on, as legal advice. You should consult an attorney for advice in specific situations.

5 Ways Blockchain Technology Will Change The Legal Industry


Blockchain technology is changing the world as we know it. Indeed, the investment opportunities it has spawned—namely, cryptocurrency and NFTs—have captured imaginations worldwide.

Headlines about newly minted crypto millionaires and eye-popping NFT deals aside, there are many questions surrounding blockchains (both private and public), including uncertainty about who bears responsibility for maintaining privately-owned blockchains versus public ones that are sustained by way of mining requirements or gas fees.

What we do know for certain is that blockchains (essentially, shared databases that securely store and verify information) have the potential to markedly advance industries, the legal sector included.

Here, we identify 5 major ways blockchains are—and will continue—shaking the legal space.

1. Smart Contracts

The process of entering into binding agreements will transform with the continued adoption of smart contracts—programs that automate the execution of agreements once certain predetermined conditions are satisfied. Essentially, smart contracts are governed by “if/when…then…” instructions written into code and residing on a blockchain. Once the “if/when” (or predetermined) conditions are met, the “then” occurs with computers executing specific actions—say, project funding, purchases and sales and the like. Smart contracts are fast and efficient in terms of execution and benefit from the security and transparency inherent in blockchain technology.

2. Intellectual Property

The way intellectual property is protected is evolving thanks to the blockchain as well. This tech can be leveraged to create records of unregistered IP rights and help track creation timelines. Not only that, blockchains can be leaned on to determine who has previously viewed and accessed copyrighted materials. As a result, advances in trademark and copyright law are clearly on the horizon.

3. Crypto Litigation

As more and more individuals and entities embrace Bitcoin, Ethereum and other cryptocurrencies, crypto litigation will keep on surging. Lawsuits, including those against coin exchanges, are on the rise, as are crypto-related cases alleging false advertising, breach of fiduciary duty and/or fraud. SEC and other regulatory litigation is becoming more prevalent too, as are Department of Justice prosecutions for money laundering offenses.  and misinformation lawsuits.

4. Chain of Custody

In the event of litigation—crypto-related or otherwise—blockchains will make “chain of custody” issues more easily reconcilable. In legal parlance, chain of custody is used in both the criminal and civil context to refer to the order in which items of evidence have been handled. An unbroken chain of custody is typically required for documents and other evidence to be considered in court. Blockchain technology will be leaned upon to facilitate the ability to adequately document the chain of custody in court cases nationwide.

5. Enhanced Oversight

The financial instruments produced by blockchains (read: cryptocurrency) will be subject to increased regulation and oversight. Exhibit A is the recent executive order on crypto issued by President Joe Biden. This EO directs the U.S. Treasury Department to assess and develop policy recommendations addressing the rapidly growing digital asset sector and resulting changes in financial markets. The order also encourages regulators to safeguard against systemic financial risks posed by digital assets, among other things. Going forward, we can expect additional EOs providing strategies to best protect consumers, preserve financial stability, enhance national security and address climate-related risks connected to cryptocurrencies and digital assets. Taken together, enhanced blockchain-related oversight will surely be fodder for litigation and related legal work for years to come.

This blog post is not offered, and should not be relied on, as legal advice. You should consult an attorney for advice in specific situations.

Athletes Aren’t Changing the Collegiate Playing Field, NIL Deals Are

Eight million dollars. That’s the mind-bending potential value of an NIL deal recently signed by a 2023 five-star football recruit—a kid still in high school who’s now positioned to join the seven-figure club by the time he’s a college senior.

NIL deals were also front and center during March Madness. Several men’s and women’s basketball players participating in the tournament were endorsing footwear, apparel and the like in exchange for big bucks.

But this should come as no surprise. Last year, new state laws and NCAA rule changes dramatically shifted the landscape of college sports by allowing athletes to cash in by selling their name, image and likeness (NIL) rights. With that, more than a few student-athletes are now flush with cash, which is great for those reaping the benefits of endorsement and promotional agreements. Still, NIL mania is creating real problems in terms of athletic recruiting and is upsetting the balance of power in college sports programs nationwide.

It's Tough to Compete With the Almighty Dollar

According to several Power 5 conference coaches, recruiting strategies pale in comparison to the availability of NIL opportunities. This explains the surge of donor-led collectives that are exploiting NIL rules and playing havoc with the ability of some universities to attract players to their schools, especially through the advent of the transfer portals, which allow student-athletes to freely transfer between schools without losing a year of eligibility

These collectives are funded by boosters and businesses that pool resources to lure student-athletes looking to monetize their personal brands with NIL deals. Between collectives, which are technically independent of universities, and local media markets, certain colleges, depending on their location and popularity, are essentially able to buy players—and given the NCAA’s relatively recent about-face on the sale of NIL rights, they can do so legally.

Human nature dictates that recruits will flock to the conferences and universities offering the greatest money-making opportunities. This reality hasn’t been lost on administrators, with athletic departments across the country now working to educate, engage and entice athletes with the specter of NIL paydays. This includes the creation of the aforementioned collectives that are committing millions to the cause.

Anything to Stay Competitive

In light of the new economics informing athletes’ college decisions, schools are getting rather creative, even beyond collectives. Some, like Oregon State and the University of Nebraska, are creating NIL marketplaces, platforms where businesses can access students and offer NIL opportunities. For their part, interested athletes can leverage marketplace technology to create profiles so that third-parties can contact, pitch and (ultimately) pay them. This is over and above the work brands are doing to connect directly with student-athletes for paid endorsements and other NIL arrangements. No matter the vehicle used to promote the promise of NIL riches, there can be no doubt that the collegiate playing field is no longer a level one, as universities and their boosters are looking for new ways to entice top talent to their athletic programs.

NIL-Related Legal Disputes on the Horizon

While some are lining their pockets in a big way, many other student-athletes are certainly being taken advantage of, with some likely signing away the exclusive rights to their NIL. Not only that, it’s inevitable that a share of NIL deals, big and small, will go south. And to make matters even worse, there’s an overwhelming lack of federal guidelines in place to protect the kids being hounded for their NIL rights. Parenthetically, the unregulated NIL marketplace will reach a tipping point at some point that’ll leave the NCAA and the federal government scrambling to enact protections for student-athletes and the very integrity of collegiate athletics.

Along with these potential problems, and the lawsuits that may eventually accompany them, comes a perceived lack of financial literacy on the part of those earning significant sums of money for the first time. The tax filing deadline is just days behind us, but how many student-athletes understand their tax liabilities, let alone what to do with a 1099? Bottom line: a flurry of disputes stemming from NIL agreements—tax-related or otherwise—are a virtual certainty.

Without question, NILs are turning the college sports world upside down. And to think we’re just in the infancy of the NIL frenzy. Watch this space.

This blog post is not offered, and should not be relied on, as legal advice. You should consult an attorney for advice in specific situations.

How NFTs Are Rockin’ the Music Industry

Just over a year ago, Michael Winkelmann—better known as Beeple—shook the art world when an NFT of his work, a digital collage titled “Everydays: The First 5000 Days, sold for $69 million through an auction at Christie’s. Some would say this is the eye-popping sale that cemented the NFT craze that continues to make headlines.

Since then, NFTs have expanded well beyond fine arts. In fact, non-fungible tokens have exploded, creating new business models across industries. This includes the music space, which has joined the chorus of NFT innovation.

With the steady stream of NFTs now disrupting the music scene, those creating and investing in these digital assets must be aware of the dangers that come with the territory. In fact, legal landmines associated with NFTs are already beginning to surface, as is litigation arising from less-than-diligent NFT practices.

But before diving into their potential pitfalls, let’s begin with an overview of how NFTs are starting to change the face of the music biz as we know it.

An Enhanced Relationship Between Artists and Fans

NFTs are digital assets stored on a blockchain used to record ownership. Among so many other things, songs, albums, album art, lyrics, soundbites and most anything else music related can all be tokenized. And musicians in the know are doing just that—creating and selling NFTs, which is decentralizing the business away from streaming services and record companies and, at the same time, markedly changing the way artists and fans interact.

Kings of Leon was the first band to directly release a complete album as an NFT. In addition to the group’s music, purchasers were able to unlock special perks, such as a limited edition vinyl, and secure front row seats to upcoming concerts. Kings of Leon also released a separate NFT which included exclusive audiovisual artwork.

The NFT options for acts like Kings of Leon are many. Blockchain technology allows musical artists to offer NFTs that include access to audio files, alternate mixes, and PDFs that deliver lyrics, album art or even personalized messages. Remember, the NFT itself is simply a token—or key—to gain access to any type of digital file or provide authentication for off-chain physical items; say, Kings of Leon merch, tickets for entry to exclusive shows, or the chance to hang backstage with the band.

NFTs can also be minted to be upgradeable. This means that songs can be released that fans or collaborators can build upon—an offering that bypasses the legal firewall normally in play when music is sampled or remixes are created. Parenthetically, these NFTs allow original creators to maintain a modicum of control and even profit directly when their works are “upgraded” (more on the pros of NFTs for artists in just a moment).

As NFTs become more mainstream within the world of music, it’ll become abundantly clear that, for fans, NFT purchases will far exceed the streaming experience or other methods of music listening.

A Potential Windfall for Musical Acts

NFTs can be a boon for musicians as well.

Artists typically earn a minority percentage from the sale or licensing of their music, regardless of the distribution channel. Music streaming to paying subscribers pays very low rates—rates that are significantly worse for ad-based streaming. It’s concert tours that provide the primary revenue source for many musical acts, but live events were an impossibility during most of the COVID-19 pandemic. This lack of touring income highlighted the low rates paid for streaming consumption and negatively impacted artist earnings over the past two years.

By selling music, collectibles, limited access events and similar items as NFTs, musicians are in the driver’s seat, able to increase revenues without relinquishing ownership or control to content platforms. In fact, when minting NFTs, musical acts can use smart contracts to decide the scope of rights to release, if any, and to whom those rights should flow. For instance, a performer who sells an NFT can continue to receive royalties automatically, even after the original buyer decides to sell the digital asset at a later date. Better yet, this process can continue each time the NFT is sold or re-sold—all because of the blockchain and the NFT’s own metadata that record and store transfers of ownership. And to the extent these offerings are sold directly by artists, they realize an additional income source not subject to recoupment by labels or publishers.

Artists can leverage NFTs to sell royalty streams along with their music too. That’s right, available technology can be used to embed rights into NFTs so that buyers can receive royalties from the songs or albums they purchase. However, allowing fans to become financial stakeholders in their favorite bands’ music can be a dicey proposition given the federal securities issues that may arise.

To be sure, selling music royalties to the general public by way of NFTs is a revolutionary strategy, though the scheme could be seen as soliciting investments to those expecting to turn a profit through no direct work of their own. This is risky and requires legal counsel, especially when federal regulators may be chomping at the bit to police NFTs and reprimand artists who knowingly or unknowingly attempt to skirt federal law.

The Perils of the NFT Trade

Without question, there are plenty of reasons why fans, investors and musicians would want to jump on the NFT bandwagon. But they’d all be wise to do so with caution. Here are but some of the reasons why.

As mentioned, certain NFTs may be regulated as securities; specifically, those that include participation in royalty streams, which will likely be scrutinized by the SEC or other securities regulatory agencies. If NFTs like these aren’t compliant with applicable securities law and they lose value for market reasons, buyers may have claims for recission of their investments and creators could face regulatory actions to boot.

NFTs sometimes incorporate the works or rights of others, without having the rights associated with the underlying IP. This is a real problem because the failure to secure permission from a copyright or other IP owner before including the protected material in an NFT could subject the originator of the digital asset to legal action and financial exposure in the form of infringement litigation. This has already come up in a case involving Roc-A-Fella Records and Damon Dash, Quentin Tarantino’s proposed NFT involving the Pulp Fiction script, and a StockX NFT involving a pair of Nike sneakers.

Another red flag is waved when NFTs are issued based on opaque licensing language or vague disclosures. To say the least, music licensing is extremely complex and requires a sophisticated knowledge of royalty streams, overlapping rights and related issues. In the context of NFTs, some underlying licenses are—or will be—just too ambiguous and related disclosures unclear, a combination likely to wind up being litigated when investors believe their NFTs include certain rights but issuers have something different in mind.

A Whole New World

Many in the music space treat NFTs like something out of the Wild West. Carrying this metaphor a step further, artists and buyers may soon find themselves embroiled in courtroom shootouts.

The peril of lawsuits and regulatory actions aside, NFTs look to be a win-win for fans and musicians alike. Blockchain technology facilitates unique offerings that heighten the fan experience and fosters a never-before-seen level of interaction between collectors and creators. Contemporaneously, musical acts have at their disposal an entirely new method of monetizing their art, albeit in a manner that—once more universally adopted—could potentially have a fundamental impact on the economics of the music industry.

This blog post is not offered, and should not be relied on, as legal advice. You should consult an attorney for advice in specific situations.

For Cyber and Data Security, Companies Are Only as Strong as Their Weakest Links

Cybercrime is on the rise and continues to come in all shapes and sizes. Late last month, it was discovered that hackers gained access to the underlying blockchain that powers Axie Infinity, a very popular NFT-based online video game, and stole the equivalent of $625 million in cryptocurrency. The breach represents the second biggest hack in crypto history. 

As troubling is a recent announcement by Apple Inc. and Meta Platforms Inc—Facebook’s parent company—that they were hoodwinked into handing over customer data (read: personal addresses, phone numbers and IP addresses) to hackers posing as law enforcement. This happened in the middle of last year, when the tech giants were sent forged “emergency data requests” from hacked email domains belonging to multiple law enforcement agencies. Snap Inc. was also on the receiving end of these forgeries, though it’s unclear if that company took the bait. 

By way of background, emergency data requests are a tool that law enforcement leverages to obtain user information when conducting criminal investigations. Typically accompanied by a search warrant or subpoena signed off by a judge, these requests are legally sufficient even in the absence of court orders. 

For their part, Apple and Meta did what they could to verify the veracity of the emergency data requests in line with ongoing efforts to flag suspected fraud. Nonetheless, customer data was allowed to be stolen, and conventional wisdom suggests it was exploited to facilitate financial fraud. For instance, the personal information illegally gathered could be used to bypass account security measures. 

Apple and Meta were duped because their verification procedures relied upon information that could not be confirmed by their compliance departments. What made these cyberattacks particularly dangerous is that they were not merely technical; instead, the breaches successfully blended technical tools with human engineering. With these hacks, black hats—cyber criminals looking to break into computer networks with malicious intent—penetrated email systems of government agencies, and then used that access to forge documents that were trusted by internal compliance teams. 

These attacks highlight how important it is for companies to approach cybersecurity at not just the technical level, but also operationally and with iron clad policies so as to limit the chance of technical penetrations leading to human errors. No doubt about it, companies like Apple, Meta, Axe Infinity and the like are constant targets of cyber criminals. And as hackers become more and more sophisticated and brazen, data privacy becomes an increasingly complex undertaking, requiring ongoing vigilance and professional attention. 

That being said, combatting the unyielding efforts of hackers requires not only technical safeguards, but human oversight, which is why comprehensive cyber and data policies and training are critical for every organization. Remember, for purposes of cyber and data security, organizations large and small are only as strong as their weakest links.  

This blog post is not offered, and should not be relied on, as legal advice. You should consult an attorney for advice in specific situations.