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The Challenges and Benefits of U.S. Discovery in International Disputes: The New Era in the World of International Arbitration 

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By Omer Er and Maggie Franz

In the world of international disputes, U.S. discovery processes have long been a double-edged sword. On the one hand, they offer an expansive toolkit for fact-finding; on the other, they present significant challenges for arbitration, a mechanism designed for efficiency and privacy. With the recent narrowing of 28 U.S.C. Section 1782—once a powerful tool for parties seeking discovery in aid of arbitration—the landscape for resolving international disputes is evolving rapidly.

For arbitrators, litigants, and practitioners, understanding these changes is critical to navigating discovery in a post-ZF Automotive era.

U.S. Discovery 101

The U.S. discovery process is markedly broader and more expansive compared to other countries, making it a unique feature of its civil litigation system. Unlike many jurisdictions where judges oversee and control evidence-gathering, U.S. lawyers conduct discovery with significant autonomy, including taking oral depositions and requesting extensive document production. The scope of discovery is broad, allowing parties to request any information that might lead to admissible evidence, even if it establishes liability against the producing party—a concept often restricted in other systems. For instance, while U.S. lawyers can compel the opposing party to produce incriminating documents, many civil law countries limit discovery to evidence supporting a party's own case and assign judges a gatekeeping role. Additionally, the U.S. heavily incorporates electronic discovery (e-discovery), requiring the production of electronically stored information like emails and metadata, a process less common or developed abroad. While this liberal approach promotes transparency and thorough preparation, it also significantly increases costs and complexity, contrasting with the more streamlined, judge-controlled discovery processes in other jurisdictions, which prioritize efficiency and cost reduction.

The Power—and Limits—of U.S. Discovery in International Disputes

U.S. discovery is renowned for its breadth and reach, allowing parties to compel testimony, request documents, and unearth evidence that can make or break a case. This expansive approach stands in stark contrast to the narrower discovery mechanisms found in many other legal systems, making U.S. courts an attractive venue for obtaining information, even for disputes rooted outside their borders.

Section 1782 of the U.S. Code historically facilitated this by allowing litigants in foreign or international proceedings to petition U.S. federal courts for discovery. Its appeal lay in the ability to access U.S.-based evidence without the cumbersome procedures of diplomatic letters rogatory. Over time, it became a favored tool for international arbitrations as well.

But the U.S. Supreme Court’s 2022 decision in ZF Automotive US v. Luxshare, Ltd. marked a pivotal shift. By ruling that Section 1782 only applies to tribunals “imbued with governmental authority,” the Court excluded private arbitration panels from its scope. This decision left many questions about where discovery for international arbitration stands now.

The Arbitration Conundrum Post-ZF Automotive

Arbitration thrives on principles of efficiency, confidentiality, and party autonomy. The decision in ZF Automotive reinforced the idea that arbitration, as a private dispute resolution mechanism, should not be subject to the broad, court-supervised discovery processes typically reserved for public tribunals. While this aligns with arbitration’s ethos, it presents challenges for parties who rely on U.S. evidence to support their claims.

For example, multinational companies often hold critical evidence within U.S. jurisdictions—documents, financial records, or emails crucial to the outcome of an arbitration. The narrowing of Section 1782 means parties must now look elsewhere to access such evidence.

The State Court Solution: New York and California Leading the Way

Although federal courts have restricted the use of Section 1782, state courts in New York and California provide alternative avenues for discovery. Both states allow pre-complaint discovery in aid of arbitration, albeit under stricter conditions than federal courts once offered.

  • New York: Rule 3102(c) of the Civil Practice Law and Rules permits pre-complaint discovery to aid arbitration when a party can demonstrate necessity or “extraordinary circumstances.” For example, New York courts have ordered discovery to preserve evidence critical to an overseas arbitration, recognizing its potential impact on the arbitral process.
  • California: The state’s Civil Procedure Code under Title 9.3 allows parties to request discovery assistance from state courts, provided the arbitral tribunal approves. This process ensures that state courts complement, rather than interfere with, arbitration proceedings.

For parties who can satisfy these requirements, state court discovery provides a valuable lifeline.

Despite these options, discovery in aid of arbitration remains inconsistent across the U.S. Most states lack explicit provisions allowing courts to assist with arbitration discovery. In some cases, statutes have been repealed or intentionally exclude arbitration. For example:

  • Pennsylvania: Repealed its discovery provision for foreign tribunals, including arbitrations, in 2012.
  • Texas and Florida: Allow pre-complaint discovery to preserve testimony for court cases but make no mention of arbitration, reflecting a broader reluctance to intervene in private dispute mechanisms.

This patchwork of rules may cause uncertainty for international litigants, underscoring the importance of understanding jurisdiction-specific discovery laws.

The Way Forward for International Arbitration

As parties adapt to the post-ZF Automotive landscape, strategic solutions are essential for overcoming discovery challenges. Here’s how arbitration practitioners can navigate this evolving terrain:

Leverage State Courts Where Possible

Familiarity with state-specific rules, particularly in arbitration-friendly jurisdictions like New York and California, is crucial for accessing U.S.-based evidence. Both states allow pre-complaint discovery in support of arbitration under specific circumstances, offering a valuable alternative when federal courts are unavailable.

Draft Tailored Arbitration Agreements

Parties should proactively address discovery needs during contract negotiations by including tailored provisions for evidence gathering. For example, specifying mechanisms for document production or interim relief can prevent uncertainty and reliance on judicial interpretation.

Explore Parallel Litigation Applications

Parallel litigation can be a powerful tool for parties seeking interim relief or addressing discovery challenges in arbitration. Courts can provide remedies that arbitral tribunals may lack the authority to enforce, offering a practical solution for preserving rights and securing compliance. For instance:

Preliminary Injunctions: These orders can prevent the destruction of evidence or ensure that critical information remains available for arbitration proceedings.

Attachments and Freezing Orders: These measures secure assets or preserve evidence at risk of being hidden or dissipated before a tribunal can act.

Pursue Alternative Evidence Sources

When U.S.-based discovery is unavailable or restricted, parties should explore other avenues, such as:

  • Letters Rogatory: Requesting judicial assistance through diplomatic channels to obtain evidence from foreign jurisdictions.
  • Arbitral Tribunal Orders: Seeking evidence directly under the procedural rules of the arbitration institution or tribunal.

These methods may require careful navigation of cross-border legal systems but can yield critical results when local discovery options are insufficient.

Monitor Evolving Case Law

The interpretation of Section 1782 and related discovery rules continues to evolve. For example, courts are clarifying the boundaries of what constitutes a “tribunal imbued with governmental authority.” Staying informed about these developments is essential to identify emerging opportunities or mitigate risks.

Conclusion

The restrictions imposed by ZF Automotive have reshaped the discovery landscape for international arbitration, but they also invite innovative strategies. By leveraging state courts, drafting robust arbitration agreements, employing parallel litigation for interim relief, and exploring alternative evidence sources, parties can adapt effectively to these challenges.

The key to success lies in a proactive and adaptable approach. International arbitration remains a cornerstone of global dispute resolution, and practitioners who navigate these evolving dynamics skillfully will ensure that their clients are well-positioned in any forum.

New Wave of Lawsuits Targeting Website Tracking Tools: What You Need to Know 

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Written by Mona Hanna and Aaron Plesset

A growing number of businesses with websites are facing costly class action lawsuits under California’s Invasion of Privacy Act (CIPA), where potential exposure can reach $5,000 per violation or three times the actual damages, whichever is greater. At the center of these claims are widely used tools like Google Analytics and Meta Pixel, which track visitor activity online. If your business uses similar tools, you could be at risk for significant legal exposure. 

Why Does This Matter? 

CIPA is a California law passed in 1967 that protects individuals' privacy. Suddenly, this decades-old statute is being leveraged in a surge of new class action lawsuits contending that these tracking tools may be violating the law. Two critical parts of CIPA are involved: Section 631, which covers wiretapping—the unlawful interception of communications—and Section 638.51, which addresses devices that track the origin or destination of a communication, like identifying where a website visitor came from or went next. 

While many are familiar with the concept of wiretapping, the idea that web tracking tools could be considered wiretapping or tracking devices is new to most. Plaintiffs, along with their counsel looking to seize upon the opportunity to sue, argue that tools collecting website visitor data—such as IP addresses or browsing habits—without proper user consent are violating CIPA. 

What Does the Law Say? 

Section 638.51 focuses on devices that capture "signaling information"—data that reveals where a user came from or went online, but not the content of their communication. This law originally applied to devices used by law enforcement to track phone numbers, but plaintiffs now assert that website analytics tools (again, such as Google Analytics and Meta Pixel) qualify as “trap and trace devices” under this provision. 

This significantly expands a business’ potential liability. Historically, plaintiffs’ class counsel targeted businesses for CIPA violations under Section 631, limiting claims to those related to the interception of the content of communications. Of note, the collection of metadata related to communications (like IP addresses and browsing patterns) were generally considered exempt. More recently, however, plaintiffs—through their lawyers—have been challenging this notion, arguing that the collection of data falls within the scope of Section 638.51 and is therefore prohibited by CIPA. While only a few cases have been decided, courts have not ruled out that web analytical tools could, in fact, be considered “trap and trace” devices under Section 638.51. This uncertainty exposes businesses to potentially devastating liability, as plaintiffs may now have claims where they previously did not. 

What Does This Mean for You? 

With lawsuits on the rise, businesses should take proactive steps to ensure that their website tracking tools comply with CIPA. This means conducting regular privacy audits to ensure that no data is being collected from website visitors without clear, informed consent. Implementing proper consent forms is critical because obtaining explicit consent from users can serve as a complete defense to CIPA claims under both Section 631 and Section 638.51. 

By adopting these measures, businesses can reduce the risk of costly litigation and ensure compliance with California’s evolving privacy laws. Of course, the attorneys at Michelman & Robinson, LLP stand ready to assist toward that end. 

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.

Fashion’s Waste Problem and Move Toward Sustainability

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By Warren Koshofer and Maggie Franz

Every year, tons of unwanted garments end up in landfills across the United States. This waste problem continues to escalate, driven largely by the rise of "fast fashion," which prioritizes speed over sustainability and produces garments meant to be worn only a few times. This practice is at odds with the fashion industry's stated sustainability goals, which encourage designs that facilitate reuse, repair, and recycling.

The Rise of Fast Fashion and Sustainability Efforts

For both fashion brands and consumers, focus has increasingly shifted to sustainability and circularity, which has become a 'make-or-break' factor for fashion brands. New York Fashion Week illustrated this shift clearly, serving as a platform for designers to showcase eco-friendly innovations that seek to marry style and environmental consciousness. For example, Christian Siriano showcased two pieces—a trench coat and a wide-leg pant set—made from Circ Lyocell, a fabric made using 40 percent recycled textile waste. Siriano’s choice not only underscored his commitment to integrating sustainability into fashion, but also showed that eco-friendly materials can deliver the same elegance as traditional fabrics.

For its part, Coach also transformed used leather jackets, chinos, and discarded pajamas into trendy, streetwear-inspired looks. By turning what could have been waste into fashion pieces, Coach tapped into Gen Z’s desire for both individuality and environmental responsibility. And in a fitting commentary on fashion’s waste problem, British performance artist Jeremy Hutchison took to the streets with his ‘Clothing Zombie,’ designed to portray the 92 million tons of textile waste produced globally each year. Hutchison, dressed as an eight-foot-tall ‘zombie’ made of discarded clothing, is still making daily appearances in New York to symbolize the fashion industry waste problem ‘zombie in the room’.

The Economic Challenges of Sustainability

Solving this waste problem and fostering sustainability through the use of natural materials to supplant synthetics is a daunting task. Two brands that had strong followings—New York’s Mara Hoffman and Australia’s Kit X—succumbed to the increased cost of natural materials, with the competitive fashion industry not shifting significantly enough to prioritize sustainability over the fast pace of production and staying ahead of trends. In addition to grappling with the increased cost of producing garments and getting them to market, fashion brands may have to deal with additional costs at the back end of a product’s useful life.

The Responsible Textile Recovery Act of 2024

Enter the Responsible Textile Recovery Act of 2024 (the “Textile Recovery Act”), a bill approved by both houses of the California legislature earlier this month. This first-of-its-kind bill, now awaiting Governor Newsom’s signature by September 30, calls for the creation of an Extended Producer Responsibility Organization (EPRO) for apparel and other textile products, designed to manage the collection, sortation, and recycling of discarded products.

The proposed Textile Recovery Act requires companies that make clothing and other textiles sold in California to create a non-profit organization by 2026 that would set up hundreds of collection sites at thrift stores, begin mail-back programs, and implement additional recovery and recycling measures for discarded products. Clothing producers and retailers doing business in California will have to pay fees to the EPRO to finance the plan for collection, transportation, repair, sorting, and recycling of used garments. Similar programs already exist in California for the disposal of mattresses, carpets, and pharmaceuticals. For example, California’s Used Mattress Recovery and Recycling Act requires that mattress retailers take back customers’ used mattresses at no additional cost and then arrange and pay for recycling.

Industry Pushback and Revisions

It is no surprise that the Textile Recovery Act has met with significant pushback from various fashion industry trade groups, especially concerning who will be responsible for the costs of the EPRO. One contentious issue has been whether large third-party vendors like Amazon, Temu, and Shein—who sell substantial volumes of garments in California—would be required to contribute financially. In response to this, the bill was revised to include brands, retailers, and importers in the definition of “producers,” ensuring these large third-party platforms are held accountable.

Industry players also expressed concern over the types of recycling deemed acceptable. Fashion brands with existing take-back programs, resale, and reuse efforts wanted these initiatives recognized as valid recycling measures. The bill was adjusted to address some of these concerns, allowing advanced textile recycling to be included as an acceptable channel for the disposal of waste.

Compliance and Enforcement

California’s Department of Resources Recycling and Recovery (CalRecycle) will oversee the implementation of the Textile Recovery Act, which includes approving the EPRO and monitoring compliance. Clothing manufacturers, retailers, and third-party sellers who make over $1 million per year selling covered goods in California will be required to participate in the EPRO. Failure to comply could result in fines of up to $10,000 per day, or up to $50,000 per day for willful non-compliance.
Looking Ahead: Will the Textile Recovery Act Move the Needle?

Whether Governor Newsom signs the Textile Recovery Act by the end of the month remains to be seen. Should it pass, the legislation could have profound implications for an industry already grappling with the costs of sustainability.

On the one hand, the proposed law may spur further innovation, much like the creative recycling efforts showcased at New York Fashion Week by Christian Soriano and Coach. Designers and brands could be incentivized to adopt sustainable materials or explore ways to reuse second-hand goods, potentially reducing the volume of discarded garments. The rise of second-hand fashion, as seen in events like the Council of Fashion Designers of America’s “Pre-Loved Fashion Week,” could become a permanent fixture in the industry.

Conversely, the added costs of compliance could disproportionately burden smaller fashion brands, which already struggle to compete in a market dominated by fast fashion and larger players. These smaller companies may face the same fate as Mara Hoffman and Kit X or become targets for acquisition as the industry consolidates further.

One thing is certain: fashion industry players should monitor Governor Newsom’s decision closely. If signed into law, the Textile Recovery Act will necessitate significant adjustments to business models, and brands will need to prepare to shoulder the financial and logistical burdens that come with compliance.

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.

“Google is a Monopoly,” Declares Federal Judge: Implications for Big Tech and Digital Markets 

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By Omer Er

On August 5, 2024, U.S. District Judge Amit P. Mehta ruled that Alphabet's Google violated U.S. antitrust laws through its search business practices. This landmark decision represents a significant victory for the Department of Justice and a coalition of state attorneys general seeking to curtail the market power of Big Tech.

In his 286-page opinion, Judge Mehta declared, "Google is a monopolist, and it has acted as one to maintain its monopoly." The court found that Google had abused its dominant position in the online search market, commanding approximately 90% of web searches and 95% on mobile devices.

The Court’s Key Findings

  1. Sherman Act Violation: Google violated Section 2 of the Sherman Antitrust Act by maintaining its monopoly in online search and search advertising markets.
  2. Anticompetitive Agreements: Google's exclusive contracts with OEMs like Apple and Samsung to be the default search engine were deemed anticompetitive. In 2021, Google paid Apple approximately $18 billion for default status.
  3. Foreclosure of Competition: These practices hindered competitors like Microsoft's Bing and DuckDuckGo from gaining market share.
  4. Monopoly Pricing: Google's pricing in search advertising exceeded rates that would prevail in a competitive market.

This antitrust case, initiated in 2020, marks the most significant digital age antitrust decision since the Microsoft case of the late 1990s. It sets a precedent that could influence pending actions against other tech giants including Apple, Amazon, and Meta.

Next Steps and Potential Outcomes

  1. Appeal Process: Google is expected to appeal to the U.S. Court of Appeals for the D.C. Circuit, which could take several months to a year.
  2. Remedy Hearing: Judge Mehta will likely schedule a remedy hearing to determine injunctive relief, potentially including:
    • Prohibiting exclusive default search agreements
    • Mandating equal access for competing search engines on devices
    • Potential divestiture of certain Google business units
  3. Stay of Remedies: Google may request a stay of imposed remedies pending appeal.

Google's Potential Strategies 

  1. Legal Arguments: On appeal, Google may challenge the court's market definition, argue that its practices enhance consumer welfare, and assert that the ruling stifles innovation.
  2. Compliance Measures: Google might proactively modify contractual arrangements, increase transparency in search algorithms, and enhance user options for default search engines.
  3. Public Relations: Google is likely to highlight its contributions to technological innovation and economic growth.
  4. Legislative Engagement: The company may seek to influence potential antitrust reform legislation.

The Potential Supreme Court Outlook

If the case reaches the U.S. Supreme Court, several factors could influence the outcome:

  1. Conservative Majority: The current Court's conservative majority has shown skepticism towards broad interpretations of antitrust law.
  2. Evolving Antitrust Doctrine: The Court may update antitrust doctrine for the digital age, considering factors beyond consumer pricing.
  3. Precedent Considerations: The Court's decision in Ohio v. American Express Co. (2018), dealing with two-sided markets, could influence their view of Google's business model.
  4. Economic Impact: The Court may consider the broader economic implications of altering Google's business model.

Global Implications

The U.S. ruling against Google's search practices could have global repercussions, particularly in Europe and other regions with growing tech regulation:

In the European Union

  • Reinforce Existing Stance: This ruling may reinforce the EU's aggressive approach and accelerate ongoing investigations into Google.
  • Digital Markets Act (DMA) Implementation: The ruling could influence DMA implementation, aimed at ensuring fair competition in digital markets.

In the United Kingdom

  • Post-Brexit Regulatory Alignment: The UK's Competition and Markets Authority (CMA) may align with this ruling in their own investigations.

In Asia-Pacific

  • Japan and South Korea may pursue their own antitrust actions.
  • China might use this ruling to justify regulatory actions against both domestic and foreign tech giants.

In the Global South

  • Developing nations may model their digital market regulations on this case.
  • Countries negotiating with Google for market access may leverage this ruling for more favorable terms.

Conclusion

This landmark case underscores the complex interplay between technological innovation, market dynamics, and regulatory frameworks in the digital age. As it progresses through the judicial system, it will shape the future of antitrust enforcement in the tech sector. The Supreme Court's stance could set a precedent for applying antitrust laws to digital platforms and tech giants, with far-reaching implications for the tech industry and broader economy.

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.

New PAGA Reforms in California: Key Points for Employers 

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By Lara Shortz 

California's recent reforms to the Private Attorneys General Act (PAGA) have introduced new limits on penalties for employers that can demonstrate they have taken "all reasonable steps" to comply with the law. These penalty caps—discounting PAGA claims up to 85%—are crucial, especially considering that PAGA claims can sometimes amount to seven-figure penalties. To be sure, employers operating in California should consider conducting a privileged wage-and-hour audit to leverage these new rules and mitigate potential financial liabilities. 

What Are "All Reasonable Steps"?

To qualify for the penalty caps, employers must take "all reasonable steps," which can include

  • Performing regular payroll audits and addressing any discrepancies found. 
  • Distributing lawful written policies to employees that comply with relevant labor laws (and ensuring these policies are regularly updated). 
  • Training supervisors on Labor Code and wage order compliance to ensure they understand and follow the rules. 
  • Correcting supervisor actions when necessary to maintain compliance

The assessment of these actions' reasonableness takes into account the overall context, including an employer's size, resources, and the nature of any potential violations. Even if an employer takes all reasonable steps, there may still be evidence of violations, and often are, given the breadth of the Labor Code.

It's important to note that these penalty caps do not apply if a court finds that the employer acted maliciously, fraudulently, or oppressively, or if the employer has been found guilty of similar unlawful practices by a court or the Labor Commissioner within the past five years

Applicable Penalty Caps: Discounts from 70% to 85

  • 15% Cap: This cap applies if the employer can demonstrate that they took all reasonable steps before receiving a PAGA notice or a request for personnel records. 
  • 30% Cap: This cap applies if the employer takes all reasonable steps within 60 days after receiving a PAGA notice

For example, an employer facing potential penalties of $500,000 for violations across 20,000 pay periods could see a significant reduction. Demonstrating compliance before a PAGA notice could reduce the penalties to $75,000 (15%), while taking corrective actions within 60 days of receiving the notice could cap the penalties at $150,000 (30%)

The Importance of Attorney-Client Privileg

Conducting wage-and-hour audits under the protection of attorney-client privilege is critical. This privilege shields sensitive communications from discovery, protecting employers from having their internal discussions exposed to plaintiffs. Without legal counsel's involvement, any findings from an audit, such as incorrect wage rates, could become accessible to plaintiffs' attorneys, potentially leading to further legal complications

Final Thoughts

Employers in California should act promptly to conduct a wage-and-hour audits, update their policies and ensure that management training is occurring on a regular basis. By doing so, employers can take advantage of the recent PAGA reforms, which offer a substantial reduction in potential penalties to 15% or 30%. This proactive approach not only helps mitigate the risk of substantial financial penalties but also safeguards against individual wage-and-hour lawsuits and state investigations.  

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. 

Navigating the Ethical Landscape of Generative AI in Legal Services 

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By Hooman Yazhari & Enrico Trevisani

The rapid advancement of generative artificial intelligence (GAI) technologies presents both opportunities and challenges for the lawyers. Given the speed with which GAI is being leveraged among law firms, the American Bar Association (ABA) just issued Formal Opinion 512, providing critical guidance on the ethical use of these tools in legal practice. No doubt about it, GAI can enhance efficiencies and accuracy in tasks such as legal research, contract review, and predictive analytics. But with the good come significant ethical concerns—many of which are discussed here—along with some insight into how legal professionals can circumvent the ethical pitfalls associated with ChatGPT and the like.

Competence: Mastering the New Tools 

One of the foundational principles in the ABA's guidance is the duty of competence. Lawyers must ensure they have a reasonable understanding of the GAI tools they rely upon, including capabilities and limitations. This does not mean that attorneys need to become AI experts. Instead, they must be aware of how the technology works, what data it relies on, and the potential risks associated with its use.

Competence also involves staying updated with technological advancements. As GAI evolves at an extraordinary pace, lawyers must continuously educate themselves about new features, risks, and ethical considerations. This ongoing education can be achieved through self-study, attending continuing legal education (CLE) programs, or consulting with experts in the field.

Importantly, lawyers should not rely solely on the substantive work product of ChatGPT or similar platforms without independent verification. The ABA highlights the risks of "hallucinations" in GAI—situations where the AI generates plausible-sounding but inaccurate or fabricated information. For this reason, attorneys must carefully evaluate and verify AI-generated content before relying on it in legal documents, client communications, or court submissions. Failing to do so could result in inaccurate legal advice or misleading representations, potentially violating the duty of competence.

Confidentiality: Safeguarding Client Information 

Confidentiality is a cornerstone of the attorney-client relationship, and the use of GAI tools introduces certain red flags in this area. Consequently, lawyers must be mindful of the risks of disclosing confidential client information when using GAI. This is especially the case when employing self-learning AI systems that could potentially store and reuse information from multiple sources.

By virtue of the confidentiality conundrum, the ABA emphasizes the importance of informed consent in situations where client information might be disclosed. This means legal professionals should explain to clients the potential hazards and benefits of using GAI tools, including any privacy concerns. As a practical matter, the discussion between attorney and client must be thorough and tailored to the specific circumstances of the case and the technology in question.

It is important to note that general boilerplate language in engagement letters may not suffice. Clients need to understand the specific risks associated with the use of GAI, such as the potential for inadvertent disclosure of sensitive information. Likewise, clients must be assured that appropriate safeguards are in place to protect their data, which may involve consulting with IT professionals or cybersecurity experts.

Communication: Transparency with Clients

Effective communication is vital in maintaining trust and ensuring that clients are fully informed about their legal representation. According to the ABA, lawyers must consider whether their use of GAI tools should be disclosed to clients under Model Rule 1.4, which covers the duty to communicate, even in the absence of privacy concerns.

Of course, the necessity of disclosure depends on various factors, including the significance of the GAI tool's output in the representation and the potential impact on the client's decision-making. For example, if a GAI tool is used to generate an analysis that significantly influences a case strategy, the client should be informed. Similarly, if the use of GAI affects the reasonableness of legal fees, this should be communicated to the client as well.

Bottom line, even when not required, voluntary disclosure about the use of GAI tools can foster transparency and trust. Including information about GAI use in engagement agreements can help set clear expectations and ensure clients are comfortable with the technology being employed.

Meritorious Claims and Candor: Upholding Integrity

In litigation, the use of GAI tools must align with ethical standards, particularly concerning meritorious claims and candor toward the tribunal. Attorneys are responsible for ensuring that any AI-generated content used in court filings or communications is accurate and truthful. This includes verifying citations, ensuring that legal arguments are well-founded, and avoiding the submission of misleading or false information.

The ABA warns against relying on GAI tools without proper oversight, as doing so could lead to violations of ethical duties. For instance, if ChatGPT generates an inaccurate legal analysis or cites non-existent case law, the lawyer must correct these errors before submitting any documents to the court. The responsibility for accuracy ultimately rests with the lawyer, not the AI tool.

Supervisory Responsibilities: Ensuring Compliance 

Legal professionals in supervisory roles have a duty to ensure that all lawyers and non-lawyers in their firm adhere to ethical standards when using GAI. This includes establishing clear policies on the permissible use of such tools, providing necessary training, and appropriately supervising work.

Training should cover the ethical and practical aspects of GAI and hit upon the technology's capabilities and limitations. Attorneys should also be aware of any and all security measures in place to protect client information and the potential risks associated with GAI use.

Fees: Transparency and Reasonableness 

The ABA's guidance also addresses the issue of billing for the use of GAI tools. Lawyers must ensure that fees charged for GAI-related work are reasonable and transparent. This includes clearly communicating the basis for any charges related to GAI and ensuring that clients are not overcharged for the efficiency gains provided by these tools.

For example, if a GAI tool enables a lawyer to complete a task more quickly than traditional methods, it may be unreasonable to charge the same fee as if the work had been done manually. Attorneys should also avoid billing clients for general overhead costs associated with GAI tools, such as subscriptions or software maintenance, unless explicitly agreed upon.

Final Thoughts 

The ABA's Formal Opinion 512 makes clear that lawyers must navigate the evolving landscape of AI technology with a commitment to competence, confidentiality, transparency, and integrity. By doing so, they can harness the benefits of GAI tools while upholding the highest ethical standards in their professional conduct.

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.

PAGA Reform Likely to Bring Significant Changes to Future Litigation

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By Alexandra Miller

In the face of a potential ballot measure threatening the elimination of Private Attorneys’ General Act (PAGA) actions, Governor Gavin Newsom signed Assembly Bill 2288 and Senate Bill 92 into law yesterday (July 1), both of which take effect immediately.

Under the amended laws, employers are expected to finally have some relief from the extreme financial burdens imposed by PAGA. While PAGA will continue to be an avenue for employees and former employees to bring representative actions, these actions and the related penalties will be far more limited. Some of the key changes built into the amended laws are summarized as follows:

1. Plaintiffs must experience a given violation themselves, within the applicable statute of limitations, to bring a PAGA claim. To date, Plaintiffs have been able to bring claims on behalf of others, even if they did not experience the violation personally.

2. Certain penalties will be capped where employers have taken all reasonable steps toward compliance. This incentivizes employers to cure and allows an opportunity to reduce penalties where policies and practice are no longer violative. For example, there will be a 15% cap on penalties for employers who took all reasonable steps toward compliance before receiving a PAGA notice and a 30% cap on penalties for employers who took all reasonable steps toward compliance within 60 days after receiving a PAGA notice. This will be particularly beneficial to help reduce serial litigation against the same employer. There will also be reduced penalties for wage statement violations and violations that only occurred within a limited time period.

3. In addition to civil penalties, Plaintiffs will now be able to seek injunctive relief under PAGA.

4. Courts will now be specifically empowered to rule on manageability concerns which includes limiting evidence at trial and limiting the scope of PAGA claims in a given case. This is particularly important given the dearth of procedural mechanisms to combat these cases.

The amended laws also provide clarification on when larger penalties are permissible and creates other limitations, including on derivative claims. All of these changes should be carefully reviewed, as they will certainly impact future litigation.

While the reform will only apply to civil actions filed after June 19, 2024, we expect that courts may find this action persuasive and consider this change when awarding PAGA penalties with respect to currently pending litigation. That being said, employers should leverage this legal update and the related legislative history to argue for reduced penalties, as possible.

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.

Don’t Change Those Menus: New Legislation Exempts Restaurants from “Junk Fees” Law

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As business finalize preparations to comply with SB 478 “Junk Fees” law, Senate Bill 1524— recently passed by the California Assembly and Senate and signed into law by Governor Gavin Newsom—creates an exemption for restaurants and other food-related businesses from the new inclusive pricing requirements.

BACKGROUND ON SB 1524

SB 1524, an emergency measure introduced by Senator Bill Dodd—the same senator behind SB 478—was intended to prevent the comprehensive pricing transparency requirements of SB 478 from applying to restaurants, bars, food concessions, grocery stores, grocery delivery services, and menus or contracts for banquet or catering services. Now that it has been enacted, prices on restaurant, room service and food delivery menus and point-of-sale systems will not be required to display all-inclusive pricing. This measure comes in response to concerns raised by the restaurant industry about the practicality and impact of the new pricing rules on their operations.

LEGISLATIVE PROGRESS AND URGENCY

The push to pass SB 1524 was unprecedented and extraordinarily swift. Last week, on June 25, the California Assembly unanimously approved the bill, and two days later, on June 27, it passed the Senate as well. Governor Gavin Newsom signed the measure over the weekend. Given the tight timeline, with the compliance deadline for SB 478 looming on July 1, the legislature’s expedited efforts highlight the urgency of addressing industry concerns.

IMPLICATIONS FOR THE FOOD AND BEVERAGE INDUSTRY

For restaurants and other affected businesses, the enactment of SB 1524 means they can continue to apply mandatory service charges, gratuities, and other fees without including these in the advertised price of individual items, provided these fees are clearly disclosed to consumers before purchase. This approach offers flexibility in covering operational costs such as employee benefits, credit card fees, and other expenses without significantly raising menu prices.

CONCLUSION

The swift legislative movement surrounding SB 1524 reflects the significant impact these pricing laws have on the food and beverage industry. With its enactment, restaurants and other food-related businesses can breathe a sigh of relief.

California’s New “Junk Fees” Law Brings Big Changes for Businesses 

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On July 1, SB 478 takes effect in California, introducing major changes regarding pricing for businesses, particularly those in the hospitality industry. Businesses should begin preparing for these changes immediately to ensure compliance before the effective date that is less than two months away.

Prohibition of “Drip Pricing”

The new law aims to prohibit “drip pricing,” which occurs when a business advertises a price that is less than the actual cost for a good or service. Specifically, it prohibits businesses from “[a]dvertising, displaying, or offering a price for a good or service that does not include all mandatory fees or charges” other than government-imposed taxes and fees or reasonable shipping costs.

Applicability and Scope

This mandate applies to the sale of most goods and services, including those offered by hotels and restaurants. The Attorney General’s Office recently published a Frequently Asked Questions guide clarifying that the law’s effects will be significant. Businesses can charge whatever they wish for items sold and services rendered, but advertised prices must include the total cost a consumer will pay, including service fees, automatic gratuities, and the like. As otherwise stated, all charges must be specified up front; however, taxes and other limited fees need not be calculated into advertised prices.

Mandatory Fees in Advertised Prices

Businesses cannot comply with SB 478 by disclosing additional required fees before a transaction is complete. For example, a hotel advertising a room for $100 per night cannot then add resort fees, cleaning fees, or other surcharges to that price, even if the consumer is made aware of these additional costs in advance of payment being issued. Similarly, the cost initially provided to
potential customers for events hosted at hotel properties must include all fees, such as room rental, food charges, and service fees.

Compliance with SB 478 will be particularly tricky for restaurant owners and operators because, going forward, the price of individual items on their menus will have to include any proportionate service fees, automatic gratuities, or other fees charged. Consequently, restaurants may have to increase menu prices to account for these fees.

Automatic Gratuities

With regard to automatic gratuities, these tips have to be designated in the cost of each menu item with a note explaining as much to customers. Likewise, the automatic gratuity must be allocated directly to employees’ wages, necessitating careful calculations to avoid wage claims.
To be sure, restaurants will need to work with point-of-service and payroll service providers to ensure compliance. Alternatively, restaurants can eliminate automatic gratuities, leaving tip amounts to the customer’s discretion, though this could unintentionally result in lower tips for food service employees.

The Attorney General’s Office has indicated it does not intend to focus initial enforcement efforts on fees paid directly and entirely to workers, such as automatic gratuities. That being said, businesses may still be liable in private actions, potentially resulting in significant exposure. To avoid potential liability, businesses should consult with legal counsel to discuss compliance options.

Exclusion of Conditional Fees

Businesses do not need to set forth conditional fees that a consumer may incur, such as fees for smoking in a non-smoking room, in advertised prices. Only mandatory fees must be included.

Conclusion

Without question, SB 478 will present challenges across industries in California, especially the hospitality sector. As such, businesses should begin reviewing their policies and practices now to prepare for the law’s effective date on July 1.

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.

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The New York Fashion Workers Act Slowly Progressing Forward

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By Warren Koshofer

As a means to regulate modeling and creative agencies and provide basic labor protections to the creative workforce behind the fashion industry—models, influencers, artists, and stylists—the New York Fashion Workers Act (FWA) was introduced by Senator Brad Hoylman-Sigal and Assemblymember Karines Reyes back in March 2022. Recently, legislators in New York amended the bill to require fashion companies to obtain written consent to use a model’s digital replica, as more designers and brands leverage artificial intelligence to supplement traditional photography. The amendment aside, it has been more than two years since the introduction of the FWA and progress toward the legislation becoming law remains slow. Yet for those who are the literal faces of the fashion industry, passage of the FYA cannot come soon enough.

Closing a Loophole

The FWA seeks to address the current treatment of models, influencers, artists, and stylists as “independent contractors” under the terms of the Fair Labor Standards Act. Unlike talent agencies, modeling and creative agencies are considered “management companies” under New York State General Business Law §171(8)—commonly known as the “incidental booking exception,” which allows these entities to escape licensing and regulation. As a result, fashion creatives are generally deprived of basic labor protections.

Along with Paris, Milan and London, New York City is one of the four global fashion capitals of the world, a distinction highlighted every year during the semiannual New York Fashion Week that pumps hundreds of millions of dollars into the local economy. Adding to its stature as a fashion mecca, New York is also home to three of the most prominent fashion design schools in the country: the Fashion Institute of Technology, Parsons School of Design, and Pratt Institute.

By virtue of the importance of the fashion industry to the state, Senator Hoylman-Sigal continues to fight for passage of the FWA, making clear that New York must ensure that models and other creative workers are not exploited and instead are afforded workplace protections that guarantee fair compensation and treatment.

Fairness for Models in Particular

The exploitation of models has been a hot-button topic for years. This is because modeling agencies generally have power of attorney as part of their agreements with models. Consequently, they can accept payments on behalf of models, deposit checks, deduct expenses, book jobs, negotiate rates of pay, and give third parties permission to use a model’s image. This leaves models unprotected outside the terms of their individual contracts that tend to be agency friendly.

For their part, models often wait months to get paid for jobs, and only after commissions (up to 20%) and various other fees are deducted. To make matters worse, young models are frequently crowded into apartments and charged monthly rents that exceed market value—this on top of them being held to exclusive, multi-year contracts without any promise of work or timely payment.

In response, the FWA would, among other things, require modeling agencies to provide models with copies of contracts and agreements, notify formerly represented models when royalties are collected on their behalf, and protect models’ health and safety, including by establishing a zero-tolerance policy for abuse. Bigger picture, the bill, as proposed, would impose a fiduciary duty on these agencies to act in the best interests of the talent.

Affirmative Obligations

The FWA would also force the discontinuation of certain offensive existing practices; among them, imposing powers of attorney as a necessary condition for models to obtain contracts, collecting signing fees or deposits from models and interest on their earnings, charging more than fair market rates for rent, deducting fees or expenses beyond agreed upon commissions, renewing contracts without a model's affirmative consent, insisting on commissions greater than 20% of a model's compensation, taking retaliatory actions against models for filing complaints, and engaging in discrimination or harassment of any kind.

Likewise, the FWA would require clients hiring models to provide overtime pay and meal breaks for work that exceeds eight consecutive hours and liability insurance to cover the health and safety of models. Pursuant to the FWA, clients additionally would be compelled to allow models on the job to be accompanied by chaperones and otherwise adhere to zero-tolerance policies in terms of abuse.

The Clock Is Ticking

Just last month, the New York Senate Labor Committee passed the FWA for the third year in a row. Now, the Model Alliance, which co-sponsored the bill, is urging state lawmakers to pass the FWA in both chambers before the legislative session ends in June. While ambitious in timing, it seems that there is room for optimism. Indeed, the FWA, like the New York Fashion Sustainability and Social Accountability Act, is gaining momentum as lawmakers in New York are poised to reshape the fashion 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.