Client Alert Archives

=We are pleased to provide you with the next edition of Gibson Dunn’s digital assets regular update. This update covers recent legal news regarding all types of digital assets, including cryptocurrencies, stablecoins, CBDCs, and NFTs, as well as other blockchain and Web3 technologies. Thank you for your interest.

ENFORCEMENT ACTIONS

UNITED STATES

FTX Founder Sam Bankman-Fried Sentenced to 25 Years in Prison
On March 28, Sam Bankman-Fried was sentenced to 25 years in prison after being found guilty of fraud and money laundering in connection with the collapse of his FTX cryptocurrency exchange. Bankman-Fried’s presentencing report recommended he be sentenced to 100 years in prison. Bankman-Fried’s legal team urged the court to impose a lenient sentence, relied on 29 character references in his sentencing memo, and argued that he did not intend to cause the harms alleged. Bankman-Fried has been held at the Metropolitan Detention Center in New York since his bail was revoked on August 23, 2023, and will be transferred to a low or medium-security prison near his parents in San Francisco to serve his sentence. At sentencing Bankman-Fried said, “I’m sorry about what happened at every stage . . . It haunts me every day.“ He has stated that he plans to appeal his conviction. NYT; Financial Times; CNBC; Reuters; Law360.
DOJ Makes First Public Indictment of Individual for Underreporting Cryptocurrency Capital Gains
On February 6, Frank Ahlgren III was indicted for unreported capital gains from a $4 million sale of bitcoin. According to the DOJ, Ahlgren willfully failed to report capital gains from bitcoin sales between 2017-2019, and knowingly evaded reporting requirements by making cash deposits “in individual amounts of $10,000 or less to avoid the filing of a [Currency Transaction Report].” This marks the first public indictment of an individual for unreported capital gains from legal transactions involving cryptocurrency. This development showcases the federal government’s continued scrutiny of digital asset transactions. DOJ; Law360.
SEC Sanctioned in Debt Box Case
On March 18, the SEC was sanctioned for misstatements made by its counsel in proceedings against the crypto project Debt Box. The court found that the SEC acted in bad faith by making misleading statements about evidence it used to obtain a temporary restraining order and other emergency measures. The SEC initiated the suit against Debt Box in July 2023, and obtained a temporary asset freeze, restraining order, and receivership. Utah Federal District Judge Robert Shelby said in his sanctions order that the SEC acted in “bad faith” and “deliberately perpetuat[ed] falsehoods.” The SEC was ordered to pay attorneys’ fees and all expenses arising from the emergency measures. Judge Shelby rejected the SEC’s argument that it was protected from monetary sanctions by sovereign immunity, instead finding that the common law permits assessment of attorneys’ fees when a party has acted in bad faith. The court also denied the SEC’s motion to dismiss the case without prejudice. Law360; Yahoo Finance; The Block.
SEC Accepts Settlement with ShapeShift AG
On March 5, the SEC entered into a settlement with ShapeShift AG, which, according to the SEC, facilitated the buying and selling of digital assets from 2014 until early 2021 through its ShapeShift.io platform. The SEC’s order alleges ShapeShift violated Section 15(a) of the Securities Exchange Act of 1934. Without admitting liability, ShapeShift agreed to pay a $275,000 penalty and consented to a cease-and-desist order. Commissioners Uyeda and Peirce criticized the enforcement action, calling it “the latest installment in the serial drama of the Commission’s poorly conceived crypto policy.” SEC Press Release; Peirce and Uyeda Statement; The Block.
SEC Demands Information Related to Ethereum Foundation
As of March 20, as part of an investigation into Ethereum, the SEC demanded information from companies regarding dealings with the Ethereum Foundation. Gary Gensler, chair of the SEC, has not commented on Ethereum’s status, but according to companies that have received subpoenas, the SEC seeks to classify Ethereum as a security. Gensler has said that some digital assets are unregistered securities and therefore subject to SEC rules. If Ether is designated as a security, it could create pressure to delist the token. In addition, it could decrease the likelihood of SEC approval of ETFs investing directly in Ether, which is currently being sought by multiple issuers. In the past, the threat of action by the SEC has negatively impacted token prices. Ether, however, gained rather than lost value as news of the investigation spread. Fortune; Bloomberg; Bloomberg.
DOJ Charges Digitex CEO for Failing to Implement Anti-Money Laundering Safeguards
On February 12, Adam Todd, the CEO of Digitex Futures Exchange (Digitex), was charged with allegedly violating the Bank Secrecy Act by failing to implement proper anti-money laundering and know-your-customer protocols. Todd faces up to five years in prison, if convicted. DOJ; Law360; Cointelegraph.
Trial Commences for Accused Operator of Cryptocurrency Mixer Bitcoin Fog
On February 13, the trial for Roman Sterlingov, accused operator of cryptocurrency mixer Bitcoin Fog, commenced in D.C. federal court. Sterlingov was charged with money laundering and operating an unlicensed money transmitting business, among other things. Prosecutors allege that Sterlingov knew Bitcoin Fog facilitated illegal transactions and made a concerted effort to conceal his involvement, including the use of the pseudonym “Akemashite Omedotou.” Law360; Bloomberg.
Crypto Exchange Kraken Seeks Dismissal of Claims in Dispute with SEC
On February 22, Kraken filed a motion to dismiss the SEC lawsuit filed against it in November 2023. The SEC alleges that Kraken failed to register as a securities exchange, broker, and clearinghouse. Kraken’s motion to dismiss argues that the SEC has failed to establish that the tokens on its platform are investment-contract securities. Kraken’s motion also cites the major questions doctrine, arguing that the SEC has expanded its authority beyond what has been delegated to it by Congress. Kraken’s argument echoes those made by other exchanges in their respective SEC enforcement actions. Law360; Bloomberg; CoinDesk; Kraken.
Digital Currency Group Files Motion to Dismiss NY AG’s Suit
On March 6, Digital Currency Group (DCG) filed a motion to dismiss a lawsuit brought by New York Attorney General Letitia James, denying allegations of concealing losses and defrauding investors. DCG founder Barry Silbert also filed a motion to dismiss the claims. In an accompanying press release, the firm described the New York Attorney General’s allegations as based upon “blatant mischaracterizations and unsupported conclusory statements,” and asserted that DCG proceeded based on the advice of its accountants, investment bankers, and advisors. The motion further alleges that rather than creating a “liquidity crunch” as alleged by the AG, DCG invested hundreds of millions of dollars into its subsidiary leading up to its bankruptcy, despite no obligation to do so. CoinDesk; The Block; DCG Motion; Silbert Motion; Press Release.
U.S. District Court Dismisses SEC Claim Against Coinbase Wallet, Allows Lawsuit to Continue
On March 27, a U.S. District Court judge partially ruled in favor of Coinbase’s motion to dismiss by dismissing the SEC’s claim that Coinbase’s Wallet application acts as an unregistered broker under U.S. law. The judge concluded however that the lawsuit could proceed for now with the claim that Coinbase had failed to register its staking program with the SEC, finding that the SEC had plausibly alleged that staking customers had a reasonable expectation of profit due to “Coinbase’s managerial efforts.” CoinDesk; Cointelegraph; Bloomberg.

INTERNATIONAL

Do Kwon Wins Extradition Appeal – Will be Extradited to South Korea Instead of United States
The Appellate Court of Montenegro has overturned a previous decision by the High Court of Podgorica to extradite Terraform Labs co-founder, Do Kwon, to the United States. Now, Kwon likely will be extradited to South Korea after March 23. Kwon, arrested in Montenegro in March 2023, faced extradition requests from both the U.S. and South Korea, with ongoing speculation as to his whereabouts amidst allegations of fraud related to Terraform Labs and its Terra blockchain. AP News; Reuters.
Worldcoin Must Stop Data Collection in Spain for Three Months
On March 6, the Spanish Agency for the Protection of Data (AEPD) directed Worldcoin to cease collecting and processing data in Spain for three months as it investigates complaints related to data collection. Worldcoin, a project that seeks to create a private and secure technology that allows individuals to prove their humanness online, filed suit against AEPD’s order. On March 11, the Spanish High Court upheld the three month pause. Worldcoin has over 4 million users, states that it operates lawfully in all locations in which it is available, and is “grateful to now have the opportunity to help the AEPD better understand the important facts regarding” the technology. Worldcoin Statement; Reuters; Cointelegraph.

REGULATION AND LEGISLATION

UNITED STATES

Republican Senators Introduce “The CBDC Anti-Surveillance State Act”
On February 26, Republican senators introduced legislation aimed at blocking a central bank digital currency (CBDC) in the United States. U.S. Senator Ted Cruz (R-Texas), joined by Senators Bill Hagerty (R-Tenn.), Rick Scott (R-Fla.), Tedd Budd (R-N.C.), and Mike Braun (R-Ind.), filed legislation titled “The CBDC Anti-Surveillance State Act” due to concerns that a digital dollar would impinge on personal privacy. In a post on Cruz’s website, Cruz expressed his view that the “Biden administration salivates at the thought of infringing on our freedom and intruding on the privacy of citizens to surveil their personal spending habits, which is why Congress must clarify that the Federal Reserve has no authority to implement a CBDC.” Former President Donald Trump, the presumptive Republican presidential nominee, has promised to ban the creation of a CBDC. CoinDesk; Press Release.
House Finance Committee Votes to Move Forward with Measure to Overturn SEC’s Staff Accounting Bulletin 121
On February 29, the U.S. House Financial Services Committee voted to advance a resolution aimed at overturning the SEC’s Staff Accounting Bulletin 121 (SAB 121), which mandates regulated financial institutions to record their customers’ crypto holdings as liabilities on their own balance sheets. The resolution garnered bipartisan support, with 31 lawmakers voting in favor of the resolution and 20 lawmakers voting against. SAB 121 has drawn controversy over the past few years due to concerns that it would disincentivize banks from providing custodial services for digital assets and create unnecessary risks in the crypto ecosystem. Rep. Mike Flood (R-Neb.), who introduced the resolution, argues that the result of SAB 121 “is that banks must choose to either custody digital assets[,] thus inflating their balance sheet and severely affecting every other line of business[,] or stay entirely out of the market.” SAB 121 qualifies as a rule under the Congressional Review Act and therefore can be reviewed and disapproved by Congress. Disapproval requires each chamber to pass a resolution of disapproval, which must then be signed by the President. The Block; CoinDesk; Blockworks; Law360; Cointelegraph.
House Financial Services Committee Votes on Bill to Clarify Secret Service’s Authority Over Crypto Cybercrimes
On February 29, every member of the House Financial Services Committee voted in favor of the Combating Money Laundering in Cyber Crime Act, which would clarify the U.S. Secret Service’s power to investigate crypto cybercrimes. Rep. Zach Nunn (R-Iowa), one of the cosponsors of the bill, states that cybercrimes have led to hundreds of billions of dollars lost. According to Nunn, this “is a bipartisan bill and it closes the gap to empower our Secret Service professionals to continue to investigate cybercriminals[,] including cases involving digital assets[,]” around the globe. Rep. Gregory Meeks (D-NY) says this bill will “allow us to better address threats from nations like and including Russia and North Korea,” and by expanding the scope of U.S. Secret Service investigations, this bill “brings another element of protection and defense in line with the 21st century.” The Block; CoinDesk.
SEC Postpones Decision on Ether ETFs, Decision Expected in May
On March 4, the SEC postponed its decision regarding the approval or rejection of BlackRock’s and Fidelity’s spot Ether exchange-traded funds (ETFs). This delay marks the second postponement since January, when the SEC initially delayed its decision after approving several spot Bitcoin ETFs. The SEC is expected to approve or deny the ETFs in May once the first final deadline for a decision is due. Reuters; Cointelegraph.
Virginia Creates Working Group to Foster Blockchain and Digital Asset Expansion Within State
The Virginia Senate passed Senate Bill No. 339, creating a dedicated workgroup within the state to study and recommend measures for fostering the expansion of blockchain technology, digital asset mining, and cryptocurrency. Proposed by Senator Saddam Azlan Salim (D-Virginia), the bill aims to exempt miners from money transmitter licenses and prohibit targeted ordinances. The workgroup, comprising 13 members from legislative and non-legislative backgrounds, is tasked with concluding studies and presenting recommendations on the cryptocurrency ecosystem by November 1, 2024, for consideration in the 2025 Regular Session of the General Assembly. Cointelegraph.
Wyoming Gives DAOs a Nonprofit Legal Framework
On March 7, Governor Mark Gordon signed a bill into state law that would allow in-state decentralized autonomous organizations (DAOs) to establish themselves as decentralized unincorporated nonprofit associations (DUNA). This new legal framework gives DAOs more options, as DAOs have already been cleared to establish themselves as limited-liability corporations within the state of Wyoming. Establishing a DAO as a DUNA gives the DAO legal existence, enables the DAO to pay taxes, and provides the DAO with limited liability from the actions of other members. Miles Jennings, general counsel at a16z Crypto, called this development a “major breakthrough,” as this will give DAOs “much-needed protections and empower them to keep blockchain networks open.” CoinDesk; Blockworks.
President Biden Proposes Crypto Mining Tax and Wash-Sale Rules for Digital Assets
On March 11, United States President Joe Biden announced his fiscal year 2025 budget proposal, which included a crypto mining tax and changes in wash-sale rules. Last year, similar taxes were proposed, but they were not taken up by Congress in drafting budget bills. The new wash trading rules aim to inhibit people from selling an investment for a loss, and then quickly rebuying the investment. CoinDesk; CCN.

INTERNATIONAL

UK Financial Regulator Issued 450 Alerts on Illegal Cryptoasset Advertisements in Q4 2023
On February 14, the Financial Conduct Authority (FCA), an independent financial regulatory body in the UK, reported that it issued 450 consumer alerts against firms for the illegal promotion of cryptocurrency during the last three months of 2023. The FCA previously introduced financial promotion rules for cryptoassets in October 2023, heightening regulatory scrutiny. The regulator has worked with tech companies to address illegal promotions, including the removal of 35 mobile applications from app stores at the end of December 2023, and pledged it will be “continuing [its] robust action against firms issuing illegal financial promotions in 2024.” Financial Conduct Authority; CoinDesk; The Block.
English Draft Legislation Labels Crypto as Property
On February 22, England’s Law Commission published draft legislation confirming the existence of an additional category of common law personal property that includes digital assets. This legislation builds on a report on digital assets produced by the Commission in June 2023, which showed that crypto tokens and NFTs are property rights. The report also concluded that the common law was flexible enough to accommodate digital assets. The legislation seeks to confirm that digital assets are covered by the common law and to remove any legal uncertainty. The Commission accepted responses to the draft legislation until March 22. CoinDesk; Yahoo.
Taiwan Considering Implementation of Further Digital Asset Law
In response to an October 2023 bill introduced in Taiwan’s parliament and a speech by the Chairman of the Financial Supervisory Commission (FSC), Taiwan is considering the implementation of a special act to regulate the cryptocurrency industry, with results expected to be released in September 2024. The bill will aim to protect investors and to create more effective regulations for digital asset markets. The Block; Cointelegraph.
UK Considering How to Implement OECD Crypto Reporting Framework
The UK government launched a consultation to implement the Organization for Economic Co-operation and Development’s (OECD) crypto reporting framework, aiming to address tax non-compliance and enhance tax transparency in the crypto market. The framework, expected to generate £35 million ($45 million) between 2026 and 2027, and £95 million between 2027 and 2028, aims to exchange information on relevant crypto transactions across jurisdictions. The consultation, initiated after the spring budget speech, will close on May 29. The government plans to publish a response and seek further feedback on draft regulations thereafter. CoinDesk.
UAE Grants Initial Approval to Crypto Exchange Nexo
Nexo, a digital asset services provider, has received initial approval as a licensed entity in Dubai from the Virtual Assets Regulatory Authority (VARA). This marks the first step in obtaining full licensing for various activities including lending and borrowing, management and investment, and broker-dealer services. CoinDesk.
UK Law Enforcement Authority to Seize Crypto Assets Expanded
UK law enforcement agencies’ increased ability to seize cryptocurrency assets in criminal cases, including terrorism, will take effect on April 26, following approval of the legislation in March. The provisions include a civil recovery regime for crypto and crypto asset confiscation orders, which enables authorities to seize items associated with crypto assets. CoinDesk.
United Kingdom to Allow Institutional Investors to Build Crypto-Backed ETN Market
On March 11, the United Kingdom’s Financial Conduct Authority (FCA) announced it will not object to requests from Recognized Investment Exchanges (REIs) to build a listed market segment for crypto asset-backed exchange-traded notes (ETNs). ETNs are a form of exchange-traded product, which are often issued by a bank or an investment manager, that tracks an underlying asset or index. While these products would be available to professional investors, retail consumers remain banned. The FCA explained that crypto-backed products are ill-suited for retail investors. The FCA stated that exchanges will be responsible for making sure sufficient controls are in place so that ETN trading is safe and orderly. The London Stock Exchange stated that it will accept applications for bitcoin and ether ETNs in the second quarter of 2024. CoinDesk.
OKX Secures the Monetary Authority of Singapore’s In-Principle Approval for Major Payment Institution License
On March 12, the President of OKX announced that OKX secured in-principle approval for a Major Payment Institution (MPI) license from the Monetary Authority of Singapore (MAS). The license will allow OKX to facilitate multiple payment services. OKX’s President states that “the in-principle approval from MAS is a validation of [OKX’s] business strategy, and also an exciting opportunity for [OKX] to continue as a responsible stakeholder in [Singapore].” After receiving the full license from MAS, OKX will be able to facilitate cross-border transactions in the country, as well as provide digital payment token services to consumers. OKX; Cointelegraph.
EU Approves Anti-Money Laundering Legislation Targeting Anonymous Crypto Transactions Using Hosted Wallets
On March 19, the European Parliament approved a ban on anonymous crypto payments involving hosted wallets, which are wallets operated by third-party providers. The ban has no threshold and applies to any such transaction. Opponents argue that anonymity is a crucial feature of crypto that promotes financial privacy, while the new legislation would have a minimal effect on crime. The new legislation will take effect within three years from its promulgation. Cointelegraph.

CIVIL LITIGATION

UNITED STATES

Coinbase Challenges SEC’s Refusal to Engage in Rulemaking Regarding Digital Assets
On March 11, U.S. crypto exchange Coinbase filed an action against the SEC in the Third Circuit arguing that the SEC violated the Administrative Procedure Act by denying a rulemaking petition that Coinbase filed in July 2022. Coinbase’s rulemaking petition asked the SEC to propose new rules explaining the basis for the broad authority the agency has asserted over the digital-asset industry. Coinbase’s petition also identified the many ways in which existing SEC rules are unworkable for digital asset firms. The SEC denied the rulemaking petition in December 2023, only after Coinbase filed a mandamus action seeking to compel a response from the agency. Coinbase is asking the Third Circuit to require the SEC to engage in rulemaking or, at a minimum, to provide a rational explanation for its refusal to engage in rulemaking. CoinDesk; CCN.
Texas Crypto Firm Sues the SEC
On February 21, LEJILEX, a Texas based crypto firm, sued the SEC in Texas federal court challenging the SEC’s jurisdiction over digital assets. Working with the Crypto Freedom Alliance of Texas (CFAT), LEJILEX hopes to preemptively avoid an SEC enforcement action against them for failing to register securities or securities exchanges on their platforms. The suit asks the court to enjoin the SEC from bringing actions against LEJILEX or other CFAT members, pointing to cases brought against other crypto exchanges. Law360; Yahoo; Bloomberg.
Survey of Crypto Miners’ Energy Use is Suspended
On February 23, the U.S. Department of Energy (DOE) agreed to suspend its mandatory survey soliciting information about electricity consumption from cryptocurrency miners. The suspension occurred in response to a suit filed by the Texas Blockchain Council and a crypto-mining company, Riot Platforms, Inc., seeking to block the survey. Later the same day, a federal district judge in Texas granted a temporary restraining order against federal agencies and the survey. The U.S. Energy Information Administration (EIA), the DOE’s statistical arm, sought the information to evaluate concerns that increased electricity use by cryptocurrency miners could threaten energy grid reliability. The Office of Management and Budget granted an emergency request from the EIA allowing them to move forward with the survey without following regular statutory processes such as notice and comment. The plaintiffs argue that the EIA failed to make the necessary showing that such emergency approval would prevent public harm, therefore unlawfully circumventing statutory procedure. Law360; Reuters.
SEC Seeks to Leverage Default Judgment in Enforcement Actions Against Crypto Exchanges
Judge Tana Lin of the Western District of Washington granted partial satisfaction of the SEC’s motion for default judgment against Sameer Ramani, a defendant in the case involving former Coinbase product manager Ishan Wahi and co-defendants. Ramani, who reportedly fled the United States and failed to respond to court summonses, faces permanent injunctions, civil penalties, and disgorgement of funds. In its default judgment order, the court assumed that the allegations in the SEC’s complaint were true and concluded that the digital assets at issue in that case were securities. The SEC subsequently filed the default judgment order as supplemental authority in its pending enforcement actions against various crypto exchanges. The exchanges responded that the default judgment order should be disregarded because it was “procured against an empty chair.” Cointelegraph; Response Letter.
Voyager Users Sue Public Relations Firm Ketchum Inc. Over Involvement in Crypto Promotion
On February 9, a class of users of Voyager, a bankrupt digital assets lender, sued public relations firm Ketchum Inc. in federal court for aiding and abetting Voyager’s sale of unregistered securities. Ketchum provided Voyager marketing and communications support for a high-profile press conference with the Dallas Mavericks, which promoted the Voyager platform and products. The complaint argues that Ketchum “knew or should have known that the objective of their partnership, and the promotional activity they undertook together, constituted promoting unregistered securities.” Law360.
Genesis Approved to Sell $1.6 Billion in Shares of Investment Trust to Fund Chapter 11 Bankruptcy Payouts
On February 14, the New York bankruptcy court granted crypto lender Genesis Global’s (Genesis) request to sell $1.6 billion in Grayscale Investments shares to fund payouts to creditors. Digital Currency Group, the parent company of Genesis, objected to the request due to the timing and a demand for Digital Currency Group to be consulted before such sales. Genesis continues its liquidation plan after filing for bankruptcy in January 2023. Bloomberg; Law360; Reuters; WSJ.
Celsius Distributes $2 Billion of Cryptocurrency Pursuant to Bankruptcy Plan
On February 15, Celsius Network filed an update with the court that “[n]early 75% of the BTC/ETH set to be distributed by PayPal/Venmo and through Coinbase has already been collected,” equating to $2 billion for nearly 172,000 creditors. This comes on the heels of the company exiting bankruptcy in late January 2024. The Block; Cointelegraph.
FTX Investors File Class Action Against the Company’s Bankruptcy Counsel
On February 16, FTX investors filed a class action racketeering lawsuit in Florida federal court against FTX’s bankruptcy counsel, alleging that the law firm aided in FTX’s fraudulent behavior. Ryne Miller, a former partner at the law firm, left to become FTX’s general counsel in 2021. The plaintiffs argue that the firm knew of FTX’s impending financial turmoil, but “realized it stood to gain hundreds of millions more from their work in bankruptcy.” According to the complaint, the firm served as counsel for FTX for 16 months prior to the company’s collapse, receiving over $8.5 million in legal fees, and has continued to serve as FTX’s bankruptcy counsel, generating $180 million in fees. Bloomberg; The Block; Reuters; Law360.
FTX Files Proposed Settlement in FTX Europe Clawback Case
On February 22, FTX filed for approval of a settlement resolving a lawsuit seeking to claw back $323 million from the co-founders of an entity they acquired. If approved by the court, the settlement would have FTX sell the subsidiary back to the co-founders for $32.7M. The proposed settlement comes after FTX tried and failed to sell the entity. In 2021, FTX bought Digital Assets DA AG and rebranded it as FTX Europe. The current lawsuit claims that the purchase price was a “massive overpayment” for a company that had just a little more than a business plan. This is one of numerous lawsuits FTX has filed to recover funds for creditors and customers since filing for bankruptcy in November 2022. FTX stated in its court filing that litigation would be costly and complicated, and that the proposed settlement is the best option for creditors. Reuters; WSJ; Law 360.

SPEAKER’S CORNER

UNITED STATES

CFTC Chair Emphasizes Need for Congress to Pass Legislation
Commodity Futures Trading Commission (CFTC) Chair Rostin Behnam reiterated the need for Congress to pass legislation addressing regulatory gaps in the crypto industry during his annual appearance before the House Agriculture Committee. Behnam emphasized the importance of regulating cryptocurrencies like Bitcoin (BTC) and Ether (ETH), which make up a significant portion of the market. He highlighted the Financial Innovation and Technology Act for the 21st Century (FIT Act), which aims to address regulatory uncertainties but has yet to pass a floor vote. Behnam expressed confidence in the CFTC’s ability to establish a regulatory framework within 12 months if the FIT Act is enacted. CoinDesk.
House Financial Services Committee Discusses Cryptocurrency and Illicit Finance
On February 15, the House Financial Services Committee hosted a congressional panel on how to address the use of cryptocurrency for illicit finance. In his opening statement, Chairman French Hill (R-Ark.) highlighted that the “borderless nature of blockchain technology necessitates international cooperation” and that “members of both sides of the aisle are interested in working on solutions.” House Financial Services Committee; Law360; The Block; Politico.
Leading U.S. Investment Bank Argues U.S. Authorities Can Exert Some Control Over Tether via OFAC
On February 15, a leading U.S. investment bank released a research report stating that “U.S. regulators can exert some control on Tether’s offshore usage via [the Office of Foreign Assets Control],” which is a unit of the U.S. Treasury Department. The report cited Tether’s association with Tornado Cash as an example of such regulation. In 2022, OFAC sanctioned Tornado Cash for allegedly assisting in money laundering. Although Tether initially did not take action against Tornado Cash addresses, in December 2023, Tether decided to freeze stablecoin held in OFAC-sanctioned wallets as a proactive measure. The Block; CoinDesk.
OCC Acting Chief Advocates for Trip Wires Around Payments and Private Equity Activity
On February 21, the acting chief of the Office of the Comptroller of the Currency (OCC), Michael Hsu, advocated for regulators to set numerical “trip wires” around activity in the digital payments and private equity industries. In a speech given at Vanderbilt University, Hsu said that payments and private equity pose the largest risk for the next “great blurring” of banking and commerce, with activity in these areas resembling a phase of surging nonbank growth that preceded 2008 and other historic market failures. Hsu called on the Financial Stability Oversight Council (FSOC) to develop quantitative thresholds to identify when a payments or private equity firm becomes a systemic risk. When the threshold is crossed, the FSOC would then formally assess the individual firm. This assessment would inform any additional regulatory activity, which could include use of the FSOC’s designation power to apply heightened bank-like regulations. This proposal follows the FSOC’s policies enacted last year, which lay out an analytical framework for its work as a watchdog and remove procedural hurdles to the use of its designation power, which were put in place during the Trump administration. Law360; Politico; Bloomberg.
Senator and Eight Attorneys General File Amicus Briefs Opposing SEC’s Authority to Regulate Crypto Assets as Securities
On February 27, Senator Cynthia Lummis (R-Wyo.), crypto industry groups, and a veteran appellate attorney filed an amicus brief asserting that the SEC’s suit against crypto exchange Kraken expands the definition of investment contract beyond what Congress intended. Lummis argues that the SEC is overreaching its authority by encroaching on Congress’s lawmaking power. In the suit, the SEC claims that Kraken operated as an unregistered broker, dealer, exchange, and clearing agency. The amicus brief argues that the “SEC is not suited to the task of crafting a holistic regulatory framework for crypto assets, particularly through a judicial enforcement action (where neither the SEC nor this court is positioned to grapple with the unintended consequences of the SEC’s current enforcement stance and the policy implications of its novel legal opinion).” The amicus brief concludes that “such policymaking is precisely the role the Constitution assigns to Congress.” Law360.On February 29, a coalition of attorneys general from eight U.S. states submitted a joint amicus brief, also arguing that the SEC’s attempt to regulate crypto assets as securities exceeds the SEC’s authority. The brief asserts that Congress has not delegated such authority to the SEC and emphasizes the states’ interest in preventing the potential preemption of consumer protection laws. The Block.
DOJ Changes Prosecution Strategy from Whack-a-Mole to Systemic
According to veteran crypto-focused prosecutors, the Department of Justice is no longer playing “whack-a-mole” in its crypto cases, but rather focusing on large, important actors to further the goal of bringing the broader industry into compliance. On February 23, Tara La Morte and Noah Solowiejczyk, leaders of the U.S. Attorney’s Office for the Southern District of New York’s Illicit Finance and Money Laundering Unit, spoke at a New York City Bar Association event about this change in strategy. La Morte stated that law enforcement is focusing on “systemic-type prosecution that’s going to make an industry impact” and lead “the industry to take notice.” Law360.

OTHER NOTABLE NEWS

The Philippines Central Bank, Bangko Sentral ng Pilipinas, Plans to Launch Wholesale Central Bank Digital Currency Within Two Years
On February 12, the Philippines’ central bank, the Bangko Sentral ng Pilipinas (BSP), revealed the bank’s intention of introducing a wholesale central bank digital currency (CBDC) within the next two years. In discussing its decision to limit the CBDC to wholesale, the BSP acknowledged that retail CBDC could intensify bank runs in times of financial stress. Additionally, the BSP confirmed that it will not use blockchain or distributed ledger technology, stating that “[o]ther central banks have tried blockchain, but it didn’t go well.” Cointelegraph; CoinDesk; The Inquirer.
OKX Opens Crypto Exchange in Turkey as Part of International Expansion
On February 27, crypto exchange OKX entered Turkey as part of its global expansion plan. In an interview with CoinDesk, OKX President Hong Fang said that “Turkey is a very important and special market for us. It ranks high in terms of crypto adoption and crypto transaction volume.” Fang detailed that “there is a natural tendency to look for value in bitcoin in Turkey, particularly for wealth preservation.” Due to Turkey’s double-digit inflation rate, crypto has become a lifeline for many. CoinDesk; The Block.
Crypto Campaign Contributions Impacted Super Tuesday
Crypto political action committees spent more than $78 million on Super Tuesday races, helping propel Adam Schiff (D-CA), Young Kim (R-CA), Shomari Figures (D-AL), Julie Johnson (R-TX), and Tim Moore (R-NC) to win their races and advance to run offs. Fast Company; CoinDesk.

The following Gibson Dunn attorneys contributed to this issue: The following Gibson Dunn attorneys contributed to this issue: Jason Cabral, Jeff Steiner, Kendall Day, Sara Weed, Ella Alves Capone, Grace Chong, Chris Jones, Jay Minga, Nick Harper, Simon Moskovitz, Anne Lonowski, Amanda Goetz, and Cody Wong.

Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding the issues discussed in this update. Please contact the Gibson Dunn lawyer with whom you usually work, any member of the firm’s FinTech and Digital Assets practice group, or the following:

FinTech and Digital Assets Group:

Ashlie Beringer, Palo Alto (650.849.5327, [email protected])

Michael D. Bopp, Washington, D.C. (202.955.8256, [email protected]

Stephanie L. Brooker, Washington, D.C. (202.887.3502, [email protected])

Jason J. Cabral, New York (212.351.6267, [email protected])

Ella Alves Capone, Washington, D.C. (202.887.3511, [email protected])

Grace Chong, Singapore (+65 6507 3608, [email protected])

M. Kendall Day, Washington, D.C. (202.955.8220, [email protected])

Michael J. Desmond, Los Angeles/Washington, D.C. (213.229.7531, [email protected])

Sébastien Evrard, Hong Kong (+852 2214 3798, [email protected])

William R. Hallatt, Hong Kong (+852 2214 3836, [email protected])

Martin A. Hewett, Washington, D.C. (202.955.8207, [email protected])

Michelle M. Kirschner, London (+44 (0)20 7071.4212, [email protected])

Stewart McDowell, San Francisco (415.393.8322, [email protected])

Mark K. Schonfeld, New York (212.351.2433, [email protected])

Orin Snyder, New York (212.351.2400, [email protected])

Jeffrey L. Steiner, Washington, D.C. (202.887.3632, [email protected])

Eric D. Vandevelde, Los Angeles (213.229.7186, [email protected])

Benjamin Wagner, Palo Alto (650.849.5395, [email protected])

Sara K. Weed, Washington, D.C. (202.955.8507, [email protected])

Attorney Advertising: These materials were prepared for general informational purposes only based on information available at the time of publication and are not intended as, do not constitute, and should not be relied upon as, legal advice or a legal opinion on any specific facts or circumstances. Gibson Dunn (and its affiliates, attorneys, and employees) shall not have any liability in connection with any use of these materials. The sharing of these materials does not establish an attorney-client relationship with the recipient and should not be relied upon as an alternative for advice from qualified counsel. Please note that facts and circumstances may vary, and prior results do not guarantee a similar outcome.

From the Derivatives Practice Group: Several CFTC advisory committees are scheduled to meet in the upcoming weeks, and ESMA was busy issuing reports and consultations on MiCA.

New Developments

CFTC’s Energy and Environmental Markets Advisory Committee to Meet. The CFTC’s Energy and Environmental Markets Advisory (EEMAC) will hold a public meeting from 9:00 a.m. to 12:00 p.m. (CDT) on Wednesday, April 10 at the University of Missouri – Kansas City in Kansas City, Missouri. At this meeting, the EEMAC will continue its discussion on the federal prudential financial regulators’ proposed rules implementing Basel III and the implications for and impact on the derivatives market. There will also be presentations and discussions on the state of crude oil markets and the future of power markets. Finally, the two EEMAC subcommittees will offer updates on their continued work related to traditional energy infrastructure and metals markets. [NEW]
CFTC’s Agricultural Advisory Committee to Meet. The CFTC’s Agricultural Advisory Committee (AAC) will hold a public meeting on April 11 from 9:30 a.m. to 11:00 a.m. (CDT) at the Sheraton Overland Park Hotel in Overland Park, Kansas. At this meeting, the AAC will discuss topics related to the agricultural economy and recent developments in the agricultural derivatives markets. [NEW]
SEC Adopts Reforms Relating to Investment Advisers Operating Exclusively Through the Internet. On March 27, the SEC adopted amendments to the rule permitting certain internet investment advisers to register with the Commission (the “internet adviser exemption”). The amendments will require an investment adviser relying on the internet adviser exemption to have at all times an operational interactive website through which the adviser provides digital investment advisory services on an ongoing basis to more than one client. The amendments will also eliminate the current rule’s de minimis exception by requiring an internet investment adviser to provide advice to all of its clients exclusively through an operational interactive website and to make certain corresponding changes to Form ADV. [NEW]
CFTC’s Market Risk Advisory Committee to Meet. The CFTC’s Market Risk Advisory Committee (MRAC) will meet on April 9 at 9:30 am ET. The MRAC will consider current topics and developments in the areas of central counterparty risk and governance, market structure, climate-related risk, and emerging technologies affecting derivatives and related financial markets.

New Developments Outside the U.S.

ESMA Clarifies Application of Certain MIFIR Provisions, Including Volume Cap. On March 27, the European Securities and Markets Authority (ESMA) published a statement, including practical guidance supporting the transition and the consistent application of the revised Markets in Financial Instruments Regulation (MiFIR).The statement covers guidance on equity transparency and non-equity transparency; the systematic internaliser (SIs) regime; designated publishing entities (DPEs); and reporting. Regarding the volume cap, following the publication by the European Commission, ESMA confirmsed that DVC data will continue to be published, with the next publication scheduled for early April. [NEW]
ESMA Provides Market Participants with Guidance on the Clearing Obligation for Trading with 3rd Country Pension Schemes. On March 27, ESMA issued a public statement on deprioritizing supervisory actions linked to the clearing obligation for third-country pension scheme arrangements (TC PSA), pending the finalization of the review of EMIR. ESMA expects National Competent Authorities (NCAs) not to prioritize supervisory actions in relation to the clearing obligation for derivative transactions conducted with TC PSAs exempted from the clearing obligation under their third-country’s national law. Additionally, ESMA recommends that NCAs apply their risk-based supervisory powers in their day-to-day enforcement of applicable legislation in this area in a proportionate manner. The Council and the European Parliament reached a provisional agreement on February 7. The political agreement on the EMIR 3 text provides for an exemption regime from the EMIR clearing obligation when the TC PSA is exempted from the clearing obligation under that third country’s national law. [NEW]
ESMA Finalizes First Rules on Crypto-Asset Service Providers. On March 25, ESMA published the first Final Report under the Markets in Crypto-Assets Regulation (MiCA). ESMA stated that Tthe report, which aims to foster clarity and predictability, promote fair competition between crypto-asset service providers (CASPs) and a safer environment for investors across the Union, includes proposals on: (1) information required for the authorization of CASPs; (2) the information required where financial entities notify their intent to provide crypto-asset services; (3) information required for the assessment of intended acquisition of a qualifying holding in a CASP, and (4) how CASPs should address complaints. [NEW]
ESMA Launches the Third Consultation Under MiCA. On March 25, ESMA published its third consultation package under the MiCA. In the consultation package, ESMA is seeking input on four sets of proposed rules and guidelines, covering: (1) detection and reporting of suspected market abuse in crypto-assets; (2) policies and procedures, including the rights of clients, for crypto-asset transfer services; (3) suitability requirements for certain crypto-asset services and format of the periodic statement for portfolio management; and (4) ICT operational resilience for certain entities under MiCA. [NEW]
SFC and HKMA Further Consult on Enhancements to Hong Kong’s OTC Derivatives Reporting Regime. On March 22, 2024, the Securities and Futures Commission (SFC) and the Hong Kong Monetary Authority (HKMA) launched a joint-further consultation on enhancements to the over-the-counter (OTC) derivatives reporting regime in Hong Kong. This further consultation follows an earlier joint-consultation in April 2019, in which the SFC and HKMA proposed a requirement to identify transactions submitted to the Hong Kong Trade Repository (HKTR) for the reporting obligation by a Unique Transaction Identifier. The current joint-further consultation consults on the implementation of the Unique Transaction Identifier, together with the mandatory use of Unique Product Identifier and Critical Data Elements for submission of transactions to the HKTR. The Interested parties are encouraged to submit responses to the SFC or HKMA on the consultation by May 17, 2024. [NEW]
ESMA Publishes Feedback on Shortening Settlement Cycle. On March 21, the ESMA published feedback received to its Call for Evidence on shortening the settlement cycle in the EU. According to ESMA’s report on the feedback, respondents focused on four areas: (1) many operational impacts, beyond adaptations of post-trade processes, were identified as the result of a reduction of the securities settlement cycle in the EU; (2) respondents identified a wide range of both potential costs and benefits of a shortened cycle, with some responses supporting a thorough impact assessment; (3) respondents provided suggestions around how and when a shorter settlement cycle could be achieved, with a strong demand for a clear signal from the regulatory front at the start of the work and clear coordination between regulators and the industry; and (4) stakeholders made clear the need for a proactive approach to adapt their own processes to the transition to T+1 in other jurisdictions. Additionally, according to ESMA, some responses warned about potential infringements due to the misalignment of the EU and North America settlement cycles.
HKMA Issues New SPM Modules on Market Risk and CVA Risk Capital Charges. On March 15, the HKMA released a circular informing the industry that it has issued new Supervisory Policy Manual (SPM) modules MR-1: Market Risk Capital Charge and MR-2: CVA Risk Capital Charge as statutory guidance, which will come into effect on a day to be appointed by the HKMA (intended to be January 1, 2025). The HKMA said that the revised market risk and credit valuation adjustment (CVA) risk capital frameworks will be set out in Part 8 and Part 8A of the Banking (Capital) Rules, respectively. The SPM MR-1: Market Risk Capital Charge covers the standardized approach for market risk, the internal models approach, the simplified standardized approach and requirements related to the boundary between the trading book and banking book, while the SPM MR-2: CVA Risk Capital Charge covers the reduced basic CVA approach, the full basic CVA approach and the standardized CVA approach. According to the HKMA, both new SPM modules are designed not just to provide additional technical details in addition to the rules but to integrally cover all of the related requirements. They set out the minimum standards that all locally incorporated authorized institutions are expected to adopt for the calculation of their market risk and CVA risk capital charges.
ASIC Finalizes Minor and Technical Changes to OTC Derivatives Reporting Rules. On March 13, the Australian Securities and Investments Commission (ASIC) finalized the minor and technical changes to the ASIC Derivative Transaction Rules (Reporting) 2024 under ASIC Derivative Transaction Rules (Reporting) 2024 Amendment Instrument 2024/1 to implement the proposed changes to the 2024 rules set out in Consultation Paper 361a ASIC Derivative Transaction Rules (Reporting) 2024: Follow-on consultation on changes to data elements and other minor amendments (CP 361a). The changes include (1) seven additional data elements; (2) provide clarifications and administrative updates to the data elements; (3) make consequential changes to Chapter 2: Reporting Requirements; and (4) make other administrative updates including re-referencing the location of definitions in the Corporations Act 2001 that have been moved by the Treasury Laws Amendment (2023 Law Improvement Package No. 1) Act 2023. According to ISDA, feedback to CP 361a was broadly supportive. In response to industry requests, the final changes also (1) provide for an additional circumstance where the name of Counterparty 2 is not reported and (2) change how the amount of one kind of collateral is reported.

New Industry-Led Developments

ISDA Submits Joint Response to BCBS Crypto Standard Amendments Consultation. On March 28, ISDA, with the Global Financial Markets Association, the Futures Industry Association, the Institute of International Finance and the Financial Services Forum, submitted a joint response to the Basel Committee on Banking Supervision (BCBS) consultation on proposed crypto asset standard amendments. ISDA and the other trade associations stated that they welcome the BCBS’s continued focus on designing and improving the prudential framework for crypto assets. The key topics in the consultation response include public permissionless blockchains, classification condition 2 and settlement finality and Group 1b eligibility. [NEW]
ISDA Responds to CFTC on Clearing Member Funds Protection. On March 18, ISDA responded to the CFTC’s consultation on proposed rules for the protection of clearing member funds held by derivatives clearing organizations (DCOs), including the assets of futures commission merchants (FCMs). According to ISDA, it proposed that the CFTC should finalize the enhanced protection for clearing member assets in connection with an intermediated DCO only, which includes multiple FCMs, unaffiliated with the DCO, as its members. Regarding a DCO providing direct clearing without multiple FCMs unaffiliated with the DCO, ISDA suggested the CFTC should wait to propose enhanced protection for clearing members’ assets, once a full assessment of the risks and complications associated with a DCO providing direct clearing has been completed. At which point, in ISDA’s opinion, it would be appropriate for the CFTC to propose a comprehensive framework to address these risks holistically. Otherwise, ISDA said, the current notice of proposed rulemaking would create a sense of safety for the disintermediated model, which is superficial due to the rule not creating a comprehensive safety regime for disintermediated central counterparties (CCPs), with many risks arising from such models being left unaddressed.
ISDA Responds to FASB on Induced Conversion of Convertible Debt. On March 18, ISDA submitted a response to the Financial Accounting Standards Board’s (FASB) exposure draft on File Reference No. 2023-ED600, Debt—Debt with Conversion and Other Options (Subtopic 470-20): Induced Conversions of Convertible Debt Instruments. ISDA indicated that it supports FASB’s proposals in the exposure draft and believes it achieves the objective of improving the application and relevance of the induced conversion guidance to cash convertible debt instruments.

The following Gibson Dunn attorneys assisted in preparing this update: Jeffrey Steiner, Adam Lapidus, Marc Aaron Takagaki, Hayden McGovern, and Karin Thrasher.

Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding these developments. Please contact the Gibson Dunn lawyer with whom you usually work, any member of the firm’s Derivatives practice group, or the following practice leaders and authors:

Jeffrey L. Steiner, Washington, D.C. (202.887.3632, [email protected])

Michael D. Bopp, Washington, D.C. (202.955.8256, [email protected])

Michelle M. Kirschner, London (+44 (0)20 7071.4212, [email protected])

Darius Mehraban, New York (212.351.2428, [email protected])

Jason J. Cabral, New York (212.351.6267, [email protected])

Adam Lapidus – New York (+1 212.351.3869, [email protected])

Stephanie L. Brooker, Washington, D.C. (202.887.3502, [email protected])

Roscoe Jones Jr., Washington, D.C. (202.887.3530, [email protected])

William R. Hallatt, Hong Kong (+852 2214 3836, [email protected])

David P. Burns, Washington, D.C. (202.887.3786, [email protected])

Marc Aaron Takagaki, New York (212.351.4028, [email protected])

Hayden K. McGovern, Dallas (214.698.3142, [email protected])

Karin Thrasher, Washington, D.C. (202.887.3712, [email protected])

From the Financial Institutions Practice Group: We are pleased to provide you with the first edition of Gibson Dunn’s monthly U.S. bank regulatory update. This monthly update will analyze legal, regulatory and policy developments in the banking industry in the United States and provide insights into how those developments impact and shape the industry.

FDIC Proposes Revised Statement of Policy on Review of Bank Merger Transactions

On March 21, 2024, the Federal Deposit Insurance Corporation (FDIC) approved a Federal Register notice seeking comment on proposed updates to the FDIC’s Statement of bank merger applications subject to FDIC approval under the Bank Merger Act. The proposed Statement of Policy is more principles based than the current Statement of Policy, last updated in 2008, affirms the FDIC’s view concerning the broad applicability of the Bank Merger Act to merger transactions, including mergers in substance, involving an insured depository institution and any non-insured entity, and would revise how the FDIC evaluates various statutory factors under the Bank Merger Act, including competition, convenience and needs, financial stability, and financial and managerial resources. Comments on the proposal will be due 60 days from the date of publication in the Federal Register.

Insights: The FDIC’s proposed policy statement follows closely in time the Office of the Comptroller of the Currency’s (OCC) proposal to adopt a new policy statement summarizing the OCC’s approach to reviewing proposed bank merger transactions under the Bank Merger Act. Like the OCC’s proposed policy statement, the FDIC’s proposal provides no clarity as to the FDIC’s timing expectations for its review and approval of Bank Merger Act applications. Although Acting Comptroller Michael J. Hsu says in his statement in support of the FDIC’s proposal that it “is broadly consistent with the proposed policy statement issued by the OCC in January,” the two proposals differ in several ways. Notably, contrary to current practice, the proposed policy statement contemplates that the FDIC Board of Directors may release a statement regarding its concerns with any transaction for which a Bank Merger Act application has been withdrawn “if such a statement is considered to be in the public interest for purposes of creating transparency for the public and future applicants.” In addition, the proposed policy statement provides that the FDIC may require divestitures to mitigate competitive concerns before allowing a merger to be consummated, a departure from historical precedent. A divestiture could itself require a separate Bank Merger Act approval, thus delaying significantly the merger transaction. Although the FDIC would not use conditions “as a means for favorably resolving any statutory factors that otherwise present material concerns” (as the OCC would), the FDIC would approve applications subject to standard and non-standard conditions pertaining to capital requirements and other factors.The proposed statement of policy would revise how the FDIC evaluates the statutory factors for a Bank Merger Act application, in certain instances seemingly beyond the statutory factor on its face—as raised by FDIC Director Jonathan McKernan in his statement in opposition of the proposal.
- On competition, the proposal would deemphasize the longstanding 1,800/200 HHI thresholds (although the FDIC does intend to coordinate with other relevant agencies regarding any potential changes to the calculation of, or thresholds for, HHI usage). Although deposits will serve “as an initial proxy for commercial banking products and services,” the FDIC “may consider concentrations in any specific products or customer segments” (e.g., small business or residential loan originations volume, activities requiring specialized expertise). The proposal also provides that the FDIC generally will require that the selling institution not enter into non-compete agreements with any employee of the divested entity.
- On convenience and needs, the proposed policy statement would require the resulting institution “to better meet the convenience and the needs of the community to be served” than would occur without the merger. To establish this, applicants will be required “to provide forward-looking information to the FDIC” for purposes of evaluating the statutory factor, and the FDIC would expect to require “commitments regarding future retail banking services in the community to be served for at least three years following consummation of the merger.” Job losses or lost job opportunities from branching changes “will be closely evaluated.”
- On the financial and managerial resources factors, the FDIC would “not find favorably … if the merger would result in a weaker IDI from an overall financial perspective” and would assess “existing or pending enforcement actions,” and “issues or concerns with regard to specialty areas, including information technology and trust examinations,” and integration planning.
Like the OCC’s proposed policy statement, the FDIC’s proposed policy statement focuses in part on large bank mergers, highlighting that the agency would generally expect “to hold a hearing for any application resulting in an IDI with greater than $50 billion in assets or for which a significant number of CRA protests are received.” It also states that transactions that result in a large institution (e.g., in excess of $100 billion) “will be subject to added scrutiny.” (Currently, only four nonmember banks or industrial banks have total assets of $100 billion or more.)

Comments Due April 15, 2024 on OCC’s Proposed Bank Merger Act Approval Requirements

On January 29, 2024, the Office of the Comptroller of the Currency (OCC) issued a notice of proposed rulemaking that would adopt a new policy statement summarizing the OCC’s approach to reviewing proposed bank merger transactions under the Bank Merger Act and make two substantive changes to its business combination regulation (12 C.F.R. § 5.33). In his speech previewing the proposed rule, Acting Comptroller Michael J. Hsu described the policy statement as laying down “chalk lines” demarcating among three groups of merger applications along a spectrum: those that are “straightforward”; those that have “significant deficiencies”; and the majority which “lie somewhere in between.” The proposed policy statement would set forth thirteen (13) indicators that bank merger applications that “are consistent with approval” would generally include and six (6) indicators, any one of which would raise “supervisory or regulatory concerns” favoring denial or a request to withdraw unless “adequately addressed or remediated.” The proposed rule would remove the expedited review procedures and the streamlined Bank Merger Act application form. Comments on the proposal are due by April 15, 2024.

Insights: The proposed policy statement provides no clarity as to the OCC’s timing expectations for its review and approval of Bank Merger Act applications. In his remarks previewing the proposal, Acting Comptroller Hsu noted only that applications including the thirteen (13) indicators in favor of approval—and presumably none of the indicators in favor of denial or withdrawal—would be “consistent with timely approval.” It also does not speak to mergers that include most, but not all, of the factors in favor of approval and none of the factors in favor of denial or withdrawal, which presumably will be subject to enhanced scrutiny.The policy statement includes a bias against size and mergers of equals. The list of thirteen (13) indicators favoring approval includes (i) the “resulting institution will have total assets less than $50 billion” and (ii) the “target’s combined total assets are less than or equal to 50% of acquirer’s total assets” and the list of six (6) indicators favoring denial or withdrawal includes that the “acquirer is a global systemically important banking organization, or subsidiary thereof.” The policy statement also notes that a resulting institution with $50 billion or more in total assets would “inform[] the OCC’s decision on whether to hold public meetings.” The 50% of assets factor presumably would result in bank mergers of equals being subject to enhanced scrutiny, including even small community bank mergers of equals. In addition, “multiple acquisitions with overlapping integration periods” is viewed unfavorably, which could negatively impact community bank roll-up strategies.In his remarks, Acting Comptroller Hsu also noted the “need to develop modes of analysis for banking competition that go beyond retail deposits as a proxy for market power,” though the policy statement does not propose any new antitrust guidance or modify the OCC’s review of competitive factors, which Hsu said is “ongoing” with the Department of Justice. Finally, it is unclear whether the Federal Reserve or FDIC would propose similar guidance for those agencies’ review of applications pursuant to the Bank Merger Act or the Federal Reserve’s review of holding company merger applications pursuant to Section 3 of the Bank Holding Company Act.

Powell Testimony – “broad and material changes” coming to Basel III proposal and “nowhere near” development of CBDC

On March 7, 2024, Chair of the Federal Reserve Board (Federal Reserve) Jerome Powell testified before the U.S. Senate Committee on Banking, Housing and Urban Affairs as part of his mandated semiannual discussion of the Monetary Policy Report. In response to questions regarding the proposed Basel III endgame reforms, Powell addressed the opposition to the proposed rule, noting that the Federal Reserve “hear[s] the concerns” and that Powell “expect[s]” there will be broad material changes to the proposed rule, going so far as to not rule out “re-propos[ing] parts or all of the thing.” Separately, in response to questions regarding the Federal Reserve’s exploration of a central bank digital currency (CBDC), Powell responded by stating that the Federal Reserve is “nowhere near recommending, let alone adopting” a CBDC in any form.

Insights: With respect to the adoption of the Basel III endgame reforms, Chair Powell appears to be signaling a willingness to reconsider such proposals (or certain aspects thereof) in a meaningful way in the wake of the significant opposition. Consistent with the Federal Reserve’s general skepticism of digital- and tokenized-assets, the Federal Reserve appears unwilling to consider the issuance of an on-chain CBDC at this time, creating market opportunities for other issuers (particularly stablecoin issuers) to capitalize on the market’s desire for fiat-backed stablecoins that enable faster payments through immediate settlement.

FDIC Vice Chairman Travis Hill Speech on Tokenization

On March 11, 2024, Vice Chair Travis Hill gave a speech titled, “Banking’s Next Chapter? Remarks on Tokenization and Other Issues” at the Mercatus Center. The prepared remarks focused specifically on tokenization, or the “representation of ‘real-world assets’ on a distributed ledger, including, but not limited to, commercial bank deposits, government and corporate bonds, money market fund shares, gold and other commodities, and real estate.” Vice Chair Hill lauded the potential benefits that tokenization offers, including 24/7/365 operations, programmability, “atomic settlement, or the simultaneous exchange and settlement of payment and delivery…” and immutability, while also highlighting associated risks that could develop and challenges to development, including increased speed and intensity of bank runs, interoperability and legal uncertainty. The Vice Chair then addressed regulatory challenges, namely the need for effective guidance that provides banks with clear answers on questions like when tokenized deposits differ from traditional deposits and “crypto.”

Insights: Vice Chair Hill’s remarks tend to counteract the “general public perception that the FDIC is closed for business” when it comes to blockchain or distributed ledger technology by offering clear thoughts and proposals on future regulation and guidance. Vice Chair Hill recognizes that experimentation and testing, particularly in areas with no material risk, is neither harmful nor requires a lengthy approval process, and cautions that an overly restrictive approach historically could have stifled development of credit cards in the U.S., which was initially “disastrous” but soon after, “revolutionize[d] how millions of Americans pay for things.” These remarks illustrate Vice Chair Hill’s desire to foster greater innovation in banking.Vice Chair Hill also advocated for a more formal regulatory approach to certain bank-friendly approaches, and signaled disapproval of other approaches, indicating disagreement on both process and substance between the FDIC and other regulators. Specifically, Vice Chair Hill embraced a more formalized rulemaking approach over the “bank-by-bank approval process” if the FDIC decides that tokenized deposits differ from traditional deposits, and urged agencies to “distinguish between ‘crypto’ and the use by banks of blockchain and distributed ledger technologies” that are merely “a new way of recording ownership and transferring value.” He contrasted these positions with those taken by the Securities and Exchange Commission (SEC) in issuing Accounting Bulletin 121 (SAB 121), which Vice Chair Hill criticized for making it “prohibitively challenging for banks to engage in [crypto-asset] activity at any scale” and failing to distinguish between “blockchain-native assets” and “tokenized versions of real-world assets.” He also cited the SEC’s approach in SAB 121 as “a clear example of why it is generally constructive for agencies to seek public comment before publishing major policy issuances,” further indicating his preference for industry collaboration and input.

CFPB Issues Final Rule on Credit Card Late Fees

On March 5, 2024, the Consumer Financial Protection Bureau (CFPB) issued a final rule governing late fees charged by “Larger Card Issuers” (those with one million or more open credit card accounts). The final rule effectively caps the amount such Larger Card Issuers can charge in late fees at $8 per incident, subject to an exemption for fees to cover a portion of actual collection costs. The rule also eliminates the automatic annual inflation adjustments to allowable fees, providing instead that the CFPB will “monitor the market” and adjust the $8 threshold as necessary. Notably, the final rule actually increases the amount smaller card issuers can charge in late fees, from $30 to $32 for initial violations, and from $41 to $43 for subsequent violations. The final rule has an effective date of May 14, 2024.

Insights: The final rule will create challenges for issuers, including operationalizing changes resulting from the final rule, amending cardholder agreements, customer disclosures, and more broadly, marketing materials, and issuing any required change in terms notices or adverse action notices to customers resulting from changes to customer terms arising from the final rule. The final rule also will not permit issuers to recover full collection costs or take into account deterrence or consumer conduct, factors Congress expressly directed the CFPB to consider. On March 7, 2024, just two days after the final rule was announced, a coalition of industry trade groups filed suit, challenging the rule on multiple grounds. The trade groups argue, among other things, that the rule violates the CARD Act, the Dodd-Frank Act, the Administrative Procedure Act, and the Truth in Lending Act. As noted, the final rule has an effective date of May 14, 2024, subject to the current litigation which may impact the final rule’s effective date.

Federal Reserve Governor Bowman Speaks on Tailoring

On March 5, 2024, Federal Reserve Governor Michelle W. Bowman gave a speech titled “Tailoring, Fidelity to the Rule of Law, and Unintended Consequences.” In her speech, Governor Bowman states that tailoring, being the setting of regulatory priorities and allocation of supervisory resources in a risk-based manner, ensures a focus on the most critical risks over time, avoiding the over-allocation of resources or imposition of unnecessary costs on the banking system. Governor Bowman further claimed that “the current regulatory agenda includes many … regulatory reform proposals [that] lack sufficient attention to regulatory tailoring and thereby fail to further statutory directives to tailor certain requirements and, more importantly, to address the condition of the banking system.” Governor Bowman cites both the pending Basel III endgame reforms and the final climate guidance as regulatory actions that deviate from the principle of tailoring.

Insights: Governor Bowman’s speech on tailoring is not net-new for her, following on her January 2024 speech to the South Carolina Bankers Association, in which she called for a “renewed commitment to [the Federal Reserve’s] Congressionally mandated obligation to tailoring.” In making this call for a renewed commitment to tailoring, Governor Bowman notes “all banks are affected when policymakers shift away from or deemphasize tailoring. When we fail to recognize fundamental differences among firms, there is a strong temptation to continually push down requirements designed and calibrated for larger and more complex banks, to smaller and less complex banks that cannot reasonably be expected to comply with these standards.”In expanding on her prior critique of Basel III, in her March 5th speech, Governor Bowman stated that “the federal banking agencies have proposed several reforms to the capital framework, among them the Basel III ‘endgame’ and new long-term debt requirements that would apply to all banks with over $100 billion in assets. I have expressed concern with both of these proposals on the merits, in terms of striking the right balance between safety and soundness and efficiency and fairness, and out of concern for potential unintended consequences. Another concern is whether these proposals show fidelity to the law, which requires regulatory tailoring above the $100 billion asset threshold.”

Federal Reserve Governor Bowman Speaks on Bank Regulation

On March 7, 2024, Federal Reserve Governor Michelle W. Bowman gave a speech titled “Reflections on the Economy and Bank Regulation,” in which she shared her thoughts on monetary policy, the economy, and the path of regulatory reform. In the speech, Governor Bowman made several key observations: (1) regulatory reforms within bank mergers and acquisitions should prioritize speed and timeliness; (2) when considering new liquidity requirements, the Federal Reserve must consider not only calibration and scope, but also the unintended consequences of such requirements; and (3) the Federal Reserve must manage its supervisory programs and teams to ensure effective and consistent supervision.

Insights: Governor Bowman states that to accomplish these goals, the Federal Reserve should aim to conduct supervision “in a manner that respects due process and provides transparency around supervisory expectations.” Due process, transparency, calibration of supervision, and the communication of supervisory expectations are consistent themes of Governor Bowman as it relates to proper oversight and supervision by regulators. As it relates to current bank M&A procedures and policies, a footnote in Governor Bowman’s speech directs readers to provide feedback through the recently launched mandatory review of regulatory burdens under the Economic Growth and Regulatory Paperwork Reduction Act of 1996.

The following Gibson Dunn attorneys contributed to this issue: Jason Cabral, Rachel Jackson, Zach Silvers, Karin Thrasher, Andrew Watson, and Nathan Marak.

Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding the issues discussed in this update. Please contact the Gibson Dunn lawyer with whom you usually work, any member of the firm’s Financial Institutions or Global Financial Regulatory practice groups, or the following:

Jason J. Cabral, New York (212.351.6267, [email protected])

Stephanie L. Brooker, Washington, D.C. (202.887.3502, [email protected])

M. Kendall Day, Washington, D.C. (202.955.8220, [email protected])

Jeffrey L. Steiner, Washington, D.C. (202.887.3632, [email protected])

Sara K. Weed, Washington, D.C. (202.955.8507, [email protected])

Ella Capone, Washington, D.C. (202.887.3511, [email protected])

Rachel Jackson, New York (212.351.6260, [email protected])

Chris R. Jones, Los Angeles (212.351.6260, [email protected])

Zack Silvers, Washington, D.C. (202.887.3774, [email protected])

Karin Thrasher, Washington, D.C. (202.887.3712, [email protected])

As we wrap up the first quarter of 2024, Gibson Dunn’s Media, Entertainment and Technology Practice Group highlights some of the notable rulings, developments, deals, and trends from 2023 forward that will inform the industry this year and beyond.

TABLE OF CONTENTS

1. Copyright
2. Artificial Intelligence
3. Trademark
4. Music
5. Fashion & Entertainment
6. Sports
7. Transactions/Deals

_______________________

1. COPYRIGHT

Fourth Circuit Sets Aside $1 Billion Jury Verdict and Orders New Trial on Damages for Contributory Copyright Infringement by Cox Communications

On February 20, 2024, the Fourth Circuit set aside a $1 billion jury verdict against Cox Communications, Inc. for contributory and vicarious copyright infringement in a suit brought by more than 50 record labels and music publishers.[1] The plaintiffs, including Sony Music Entertainment, Warner Music Group, and Universal Music Group, alleged that users of Cox’s internet service downloaded or distributed music over the internet without permission, resulting in the infringement of over 10,000 copyrighted works.[2] After the Fourth Circuit previously held that the Digital Millennium Copyright Act (DMCA)’s safe harbor defense—which protects internet service providers from monetary liability resulting from copyright infringement by their users—did not apply to Cox because of its failure to reasonably implement an anti-piracy policy, the case proceeded to trial.[3] The jury found Cox liable for both willful contributory infringement and vicarious infringement, and awarded $1 billion in statutory damages.[4]

On appeal, the Fourth Circuit affirmed the jury’s willful contributory infringement verdict, holding that sufficient evidence was presented to the jury that Cox “knew of specific instances” of infringement, “traced those instances to specific users,” and “chose” to continue providing internet service to those users in order to preserve its revenue stream.[5] However, the court reversed the vicarious infringement verdict, because the plaintiffs failed to show (a) that infringing users subscribed to Cox’s services, as opposed to a competitor’s, because it gave them a better ability to infringe due to Cox’s more lenient policies, and (b) that users paid more for faster internet so as to engage in infringement.[6] Instead, the court concluded that Cox received the same monthly fees from subscribers, regardless of whether those subscribers engaged in infringing activity.[7] Because the jury’s damages award was a “global figure” for liability under both claims, the Fourth Circuit remanded for a new damages trial to determine damages for solely the willful contributory infringement claim.[8] In doing so, the Fourth Circuit rejected arguments by Cox that certain works should be excluded from the damages calculation because they were being double-counted.[9] Specifically, Cox argued that individual sound recordings compiled in a single album should be counted as one work, and that a music composition and its derivative sound recording should also be counted as one work.[10] The Fourth Circuit, without deciding the merits of Cox’s theories, held that Cox had failed to present evidence that would have allowed the jury to determine which works were derivative or part of a compilation, and declined to reduce the number of copyrighted works at issue.[11]

Supreme Court Holds New Meaning Alone Is Not Sufficient for the Fair Use Defense

On May 18, 2023, the Supreme Court ruled that the Andy Warhol Foundation for the Visual Arts’s (“AWF’s”) licensing of an Andy Warhol-created illustration of a photograph of Prince to a magazine was not a fair use of the underlying photograph of Prince under copyright law.[12] In 1981, professional photographer Lynn Goldsmith was commissioned to photograph the musician Prince.[13] Years later, she licensed her photo to Vanity Fair for a one-time use as an artist’s reference.[14] Warhol created a purple silkscreen portrait of Prince to appear in Vanity Fair.[15] In total, Warhol created 16 silkscreen portraits, now known as the Prince Series, that he derived from Goldsmith’s original copyrighted photograph of Prince.[16] In 2016, Condé Nast, Vanity Fair’s parent company, purchased a license from AWF to publish another Warhol work from the series, Orange Prince, for a commemorative issue on Prince.[17]

After Goldsmith notified AWF of her belief that Orange Prince infringed on her original photo’s copyright, AWF sued Goldsmith for a declaratory judgment of noninfringement or, alternatively, fair use.[18] Goldsmith counterclaimed for infringement.[19] The sole question presented to the Court was whether the first fair use factor, “the purpose and character of the use, including whether such use is of a commercial nature or is for nonprofit educational purposes,” 17 U.S.C. § 107(1), weighed in favor of AWF’s recent commercial licensing to Condé Nast.[20] The Court rejected AWF’s transformative use argument, finding that Goldsmith’s original photograph and Warhol’s illustration shared the substantially same purpose, i.e., both were portraits of Prince used in magazine stories about him.[21] Although the Court acknowledged that a derivative work might add a new expression, that alone does not equate to a transformative use that dispenses with the need for licensing.[22] Moreover, AWF’s use of the photograph was commercial, also weighing against a finding of fair use.[23] As such, the Court affirmed the Second Circuit’s decision that the first fair use factor favored Goldsmith.[24]

Ninth Circuit Concludes That Epic Games’ Dance Animations Share Substantial Similarities with Copyrighted Choreographic Works

On November 1, 2023, the United States Court of Appeals for the Ninth Circuit reversed the dismissal of choreographer Kyle Hanagami’s copyright claim against Epic Games, finding that Hanagami had plausibly alleged that the company released a virtual animation, or “emote,” that was “substantially similar” to Hanagami’s copyrighted choreographic material.[25] In 2022, Hanagami alleged that the emote, released for purchase on Epic Games’ Fortnite in August 2020, included four “counts of movement” that copied the most recognized portion of a five-minute choreographic work that Hanagami created.[26] The United States District Court for the Central District of California found that Hanagami’s dance steps were not protectable under copyright laws on their own, because the “individual poses” at issue were only a “small component” of the work.[27] The court found that copyright law protected Hanagami’s work “only for the way the Steps are expressed in his registered choreography.”[28] Because “[t]he two works contain[ed] a series of different poses performed in different settings and by different types of performers,” the district court reasoned that the works were not “substantially similar as a matter of law” and dismissed Hanagami’s copyright claims.[29]

The Ninth Circuit disagreed, rejecting the district court’s contention that choreography can be analyzed by breaking down a routine into “individual poses.”[30] The Ninth Circuit stated that copyright protects the “[o]riginal selection, coordination, and arrangement” of individual dance movements in a manner akin to an analysis of the original elements inherent in music or photography.[31] Consequently, the Ninth Circuit concluded that the proper analysis for the original elements in a choreographic work centers less on analyzing “poses” in isolation and instead evaluates them alongside myriad elements including “body position, body shape, body actions, [and] use of space.”[32] By applying this analysis, the court found that the copied portion of Hanagami’s work was “the most recognizable and distinctive portion of his work, similar to the chorus of a song.”[33] Because the copied portion “ha[d] substantial qualitative significance to the overall Registered Choreography” and was a “complex, fast-paced series of patterns and movements,” it could receive the benefit of copyright protections.[34] Accordingly, the Ninth Circuit reversed the district court’s dismissal and remanded the case for further proceedings. The parties ultimately entered into an agreement settling the dispute on February 12, 2024.

Supreme Court Takes Up Question of Time Limit On Copyright Infringement Damages

On September 29, 2023, the Supreme Court granted certiorari in Warner Chappell Music, Inc. v. Nealy, a long-running music copyright dispute, to address the limited question of whether the discovery accrual rule and the Copyright Act allow a copyright plaintiff to recover damages for acts that allegedly occurred more than three years before the filing of a lawsuit.[35]

In the underlying case, the United States Court of Appeals for the Eleventh Circuit held that in certain cases a copyright plaintiff “may recover retrospective relief for infringement that occurred more than three years prior to the filing of the lawsuit.”[36] As the Eleventh Circuit acknowledged, the federal Copyright Act establishes a three-year statute of limitations, stating that that “[n]o civil action shall be maintained . . . unless it is commenced within three years after the claim accrued.”[37] Under the Eleventh Circuit’s “discovery rule,” however, “a copyright ownership claim accrues, and therefore the limitations period starts, when the plaintiff learns, or should as a reasonable person have learned, that the defendant was violating his ownership rights.”[38] The Eleventh Circuit held that neither imposes a bar on retrospective relief for an otherwise timely copyright claim.[39]

In holding that a copyright plaintiff may in certain cases recover for infringement occurring more than three years before a lawsuit’s filing, the Eleventh Circuit has entered an ongoing circuit split, as various appellate courts around the country disagree on the relevance of the discovery rule to a plaintiff’s ability to recover retrospective relief for copyright claims.[40] The Supreme Court held oral argument on February 21, 2024 and may soon provide clarity on this long-disputed issue.

Southern District of New York Holds That Scanning and Lending Print Books for Free Infringes Publishers’ Copyrights

On March 24, 2023, the United States District Court for the Southern District of New York, on a motion for summary judgment, held that scanning lawfully acquired books and lending them out like a library violates the copyright of the books’ publishers.[41] The lawsuit concerned Internet Archive’s (“IA”) “controlled digital lending” (“CDL”) practice for sharing books. Under this practice, IA would electronically lend out fully scanned copies of books that it had lawfully acquired through purchase or subscription.[42] In June 2020, the publishers of 127 books challenged IA’s CDL practices, stating that the publishers possessed the exclusive right to publish the works in print and digital form.[43] In response, IA argued that its lending of the books was protected under copyright’s fair use doctrine. Id. Both parties cross-moved for summary judgment.

District Judge John Koeltl found in favor of the publishers, concluding that a straightforward application of copyright law’s four-factor fair use text compelled summary judgment. Focusing on the first prong of the test, the court found that “[t]here is nothing transformative about IA’s copying and unauthorized lending of the Works in Suit.” In doing so, the court rejected IA’s argument that its CDL practice was inherently transformative by “making the delivery of library books more efficient and convenient.”[44] The court distinguished IA’s CDL practice from other utility expanding transformative uses of copyrighted works, because lending ebooks in full “merely replace[s]” the original print books and does not “provid[e] information” about the books in a novel or interesting way.[45] Similarly, the court rejected IA’s argument that IA did not lend the books for a commercial use, both because the company did not charge patrons to borrow books and also because private reading is noncommercial in nature.[46] In so finding, the court noted that IA’s lending practices would help the company by “attract[ing] new members, solicit[ing] donations, and bolster[ing] its standing in the library community.”[47] In assessing the fourth fair use factor—”the effect of the [copying] use on the potential market for or value of the copyrighted work,”—the court noted that IA’s offer of “complete ebook editions of the Works in Suit” without paying a licensing fee to Publishers for those books would “‘bring[ ] to the marketplace a competing substitute’ for library ebook editions of the Works in Suit, ‘usurp[ing] a market that properly belongs to the copyright holder.’”[48] Following the March 2023 opinion, the court approved and entered a negotiated consent judgment that declared IA’s CDL practices to constitute copyright infringement, and further permanently enjoined IA from lending scanned copyrighted works that are available digitally.[49] IA appealed the district court’s ruling to the Second Circuit and submitted its opening brief in December 2023;[50] Hachette filed its answering brief on March 15, 2024.[51] The case has not been set for oral argument.

2. ARTIFICIAL INTELLIGENCE

Getty Images Sues Stability AI

In February 2023, Getty Images (US) sued Stability AI in federal district court in Delaware for allegedly infringing more than 12 million of Getty’s photographs and their associated captions and metadata, in connection with two of Stability AI’s products—Stable Diffusion and DreamStudio—which generate images in response to text prompts. Getty Images also brought trademark and unfair competition claims, alleging the generative output of Stability AI’s products have included Getty Images watermarks.[52] The copyright claims are based on Stability AI having allegedly reproduced images from Getty’s collection without authorization and by using a version of the Getty watermark in Stable Diffusion output.[53] The Lanham Act claims and the state law claims allege Stability AI’s products are causing the public to mistakenly believe that Getty has authorized Stability AI to use and alter its images, resulting in lower quality products.[54] Stability AI has challenged the lawsuit on personal jurisdiction grounds, and the case is currently in jurisdictional discovery.[55]

Artists File Class Action Against Stability AI, Midjourney, and DeviantArt

In January 2023, artists Sarah Andersen, Kelly McKernan, and Karla Ortiz, along with a proposed class of “at least thousands” of other artists, filed a class action complaint against Stability AI, Midjourney, and DeviantArt. The complaint alleges direct and vicarious copyright infringement, DMCA violations and right of publicity violations, and unfair competition based on the creation and functionality of the defendants’ generative AI products.[56] The named plaintiffs, all artists, allege the defendants allegedly used their art to train their artificial intelligence models. The complaint also seeks to certify a class of individuals whose work was used to train any of the defendants’ artificial intelligence products.[57] Plaintiffs’ copyright, DMCA, and state law claims assert that the defendants used plaintiffs’ art in their products for training and other commercial purposes without licensing or in violation of existing contracts.[58] The defendants have moved to dismiss under Rule 12(b)(6).

District of Columbia District Court Holds AI-Generated Art Is Not Copyrightable

On August 18, 2023, the D.C. District Court affirmed the Copyright Office’s denial of the plaintiff’s application to register visual artwork generated by the “Creativity Machine”—an artificial intelligence system owned by Stephen Thaler.[59] The court agreed with the Copyright Office’s determination that a work generated autonomously by a machine, without human input, is not copyrightable because it lacks the requisite “authorship” under the Copyright Act.[60]

In holding that the Register of Copyrights did not err in denying Thaler’s application, the court determined that the Copyright Act’s plain text—conferring protection to “original works of authorship”—requires protectable works to have an “author,” and that authorship is necessarily “human creation.”[61] Because the administrative record reflected Mr. Thaler’s admissions that the Creativity Machine “autonomously” created the work, the court rejected Mr. Thaler’s new arguments before the district court that he provided instructions to and directed the AI system to create such work.[62] The court acknowledged, however, that “[t]he increased attenuation of human creativity from the actual generation of the final work will prompt challenging questions regarding how much human input is necessary to qualify the user of an AI system as an ‘author.’”[63]

New York Times Files Lawsuit against AI Companies, Alleging Copyright Infringement

On December 27, 2023, the New York Times filed a lawsuit against Microsoft and its partner OpenAI, accusing the companies of copyright infringement and other related claims.[64] The Times alleges that Microsoft and OpenAI “directly infringed The Times’s exclusive rights in its copyrighted works” by using the newspaper’s registered, copyrighted works to train artificial intelligence models like ChatGPT.[65] According to the Complaint, Microsoft and OpenAI “seek to free-ride on The Times’s massive investment in its journalism by using it to build substitutive products without permission or payment” by essentially providing Times content directly to consumers.[66]

In response to the lawsuit, OpenAI published a statement on its website addressing the allegations, calling The Times’ claims “without merit.”[67] According to the OpenAI statement, “[t]raining AI models using publicly available internet materials is fair use,” but regardless, OpenAI still has “led the AI industry in providing a simple opt-out process for publishers,” including the New York Times.[68] According to OpenAI, the Times “intentionally manipulated prompts, often including lengthy excerpts of articles, in order to get [ChatGPT] to regurgitate” information, which forms the basis of the lawsuit.[69] OpenAI also highlighted its collaboration with various prominent news organizations, noting that one of the company’s goals is “to support a healthy news ecosystem.”[70]

The Times is seeking damages and injunctive relief.[71] Both OpenAI and Microsoft have filed motions to dismiss the lawsuit.[72] The Times reported that its lawsuit “could test the emerging legal contours of generative A.I. technologies . . . and could carry major implications for the news industry.”[73]

3. TRADEMARK

The Supreme Court Holds That Source-Identifying Uses of Trademarks Are Not Afforded First Amendment Protection against Infringement Claims

In June 2023, the Supreme Court unanimously held that VIP, a dog toy maker that made chewable dog toys designed to look like a bottle of Jack Daniel’s whiskey, could not rely on the First Amendment as a shield against Jack Daniel’s trademark claims.

VIP had originally sought a declaratory judgment that its toy neither infringed nor diluted Jack Daniel’s trademarks. Jack Daniel’s counterclaimed for infringement and dilution. VIP conceded that while its “Bad Spaniels” mark was meant to communicate a humorous message, it also used its “Bad Spaniels” trademark and trade dress as source identifiers.[74] The defendant sought to rely on the Second Circuit’s Rogers test, which affords limited First Amendment protections to the use of trademarks in “expressive works.”[75] The Court held the test does not apply when a trademark is used to indicate the source of a product, as it was here, and remanded the case to the district court to assess Jack Daniel’s claim on the merits. The Court also held that the Lanham Act’s exclusion from liability for dilution for “non-commercial” uses of a mark does not apply to parody, criticism, or commentary when the alleged infringer uses a mark to designate the source of its own goods.[76]

The Supreme Court Clarifies the Lanham Act’s Extraterritorial Reach

On June 29, 2023, the Supreme Court harmonized the extraterritoriality framework of trademark law with recent developments in the Court’s presumption against extraterritoriality jurisprudence. Hetronic International, a domestic manufacturer of radio remote controls for construction equipment, sued six foreign parties (collectively Abitron) for trademark infringement under the Lanham Act.[77] As one of Hetronic’s authorized distributors, Abitron claimed it held the rights to much of Hetronic’s intellectual property, including the marks at issue, in connection with selling its own Hetronic-branded products—mostly in Europe, but some in the United States.[78] Hetronic sought damages for Abitron’s alleged infringement worldwide, while Abitron countered that Hetronic’s claims required an impermissible extraterritorial application of the Lanham Act.[79]

In applying the presumption against extraterritoriality, the Court held that the two provisions of the Lanham Act that prohibit trademark infringement through the unauthorized use in commerce of a protected trademark that is likely to cause confusion (15 U.S.C. § 1114(1)(a) and § 1125(a)(1)) are not extraterritorial, and apply only to claims where the infringing “use in commerce” is domestic.[80] “Use in commerce” means the legitimate use of a mark in the ordinary course of trade where the mark has a source-identifying function, serving to identify and distinguish the goods.[81] The Court held that the location in which the infringing “use in commerce” of a trademark occurs dictates whether the Lanham Act provisions at issue may apply extraterritorially.[82] The Court remanded the case for fact-finding on that issue.[83]

4. MUSIC

Ed Sheeran Successfully Defends against Copyright Claim in New York

In May 2023, following a jury trial in the Southern District of New York, singer Ed Sheeran won a copyright lawsuit over the hit song “Thinking Out Loud,” which Plaintiff Ed Townsend alleged infringed on Marvin Gaye’s “Let’s Get It On.”[84] Subsequently, U.S. District Judge Louis Stanton dismissed Structured Asset Sales, LLC’s closely related complaint on a motion for reconsideration of a prior verdict, finding that the parts of “Let’s Get It On” that Sheeran was accused of infringing—namely, the chord progression and harmonic rhythm—were too common for copyright protection.[85] The court concluded that protecting the combination of these musical elements in “Let’s Get It On” would give the song an “impermissible monopoly over a basic musical building block.”[86] If such a “selection and arrangement” were “protected and not freely available to songwriters,” the court noted, “the goal of copyright law . . . would be thwarted.”[87]

Plaintiffs Claim That over 1,600 Songs by Reggaeton Artists, Like Bad Bunny and Pitbull, Infringe a 1989 Work

Popular artists Bad Bunny, Pitbull, and Daddy Yankee found themselves among hundreds of artists targeted in a lawsuit that threatens the entire genre of “Reggaeton” music—a blend of reggae music with Latin American dance hall music, with hip-hop influences.[88] This litigation, which began in 2021 in the Central District of California, will address the extent to which rhythm is deemed protectable under Copyright Law. Specifically, Plaintiffs Cleveland Browne and the estate of Wycliffe Johnson, who performed under the name Steely & Clevie, allege that the 100-plus artists named in the litigation infringed on the rhythm of the 1989 song “Fish Market.”[89] In June 2023, Bad Bunny moved to dismiss Plaintiffs’ Second Consolidated Amended Complaint. Bad Bunny argued Plaintiffs were seeking to protect the “basic building block(s)” of the genre, which belong in the public domain.[90] The parties are awaiting a decision.

5. FASHION & ENTERTAINMENT

Hermès Prevails in Request for Permanent Ban on US “MetaBirkin” NFT Sales

In June 2023, in Hermes International v. Rothschild, U.S. District Judge Jed Rakoff permanently blocked Mason Rothschild and his associates from selling or minting MetaBirkin non-fungible tokens (NFTs).[91] This ruling was made pursuant to Hermès’s request to block Rothschild’s sales of “MetaBirkin” NFTs following a jury verdict that the NFTs violated Hermès’s trademark rights in its popular Birkin bags.[92] That jury had found Rothschild liable on all three counts of trademark violations in February 2023, and awarded Hermès damages in the amount of $133,000 for Rothschild’s use of the Birkin mark in his “MetaBirkin” NFTs.[93]

The court found Hermès satisfied the four threshold requirements for a permanent injunction articulated by the Supreme Court in eBay Inc. v. MercExchange, L.L.C., specifically that (i) Hermès suffered an irreparable injury, (ii) the remedies available at law are inadequate, (iii) a remedy in equity is warranted due to the balance of hardships between Hermès and Rothschild, and (iv) the public interest would not be disrupted by a permanent injunction.[94] The court ordered Rothschild to transfer the metabirkins.com domain name and relevant materials to Hermès; however, the court refused to order the transfer of the NFTs and smart contracts out of an abundance of caution related to First Amendment concerns, as the court reasoned that “MetaBirkins NFTs are at least in some respects works of art.”[95]

Historic Strike Ends following SAG-AFTRA’s Approval of Agreement

In November 2023, SAG-AFTRA’s negotiating committee unanimously voted to approve a tentative three-year agreement that ended a 118-day strike—the longest actors’ strike against the television and film studios in Hollywood history. Union leadership voted to ratify the deal shortly thereafter.[96] The deal included historic protections for actors against artificial intelligence, increases in health and pension contributions, a “streaming participation bonus,” and an unprecedented pay increase.[97] The deal resulted in a 7% pay increase effective immediately after it was approved, another 4% increase in July 2023, and another 3.5% increase set to take effect in July 2024.[98]

Chanel Prevails in Trademark Dispute against Luxury Reseller

On February 6, 2024, a New York federal jury found luxury reseller What Goes Around Comes Around (“WGACA”) liable on all four of Chanel’s claims for trademark infringement, false advertising, unfair competition, and counterfeiting.[99] Chanel brought the action in 2018, accusing WGACA of, among other allegations, (1) selling counterfeit Chanel bags, including bags bearing serial numbers tied to stolen bags and bags made from materials not used by Chanel’s factories; and (2) creating consumer confusion by using Chanel’s marks in advertising and consumer communications in violation of the Lanham Act.[100] On July 26, 2021, both parties moved for summary judgment.[101] Chanel sought findings of liability for the trademark infringement and false association claims, and WGACA sought summary judgment in its favor with respect to all claims. The court granted Chanel’s motion in part, finding WGACA liable for trademark infringement for selling handbags loaned to retailers for display that were never authorized for sale, and several handbags bearing serial numbers associated with those reported as stolen or pirated. The court emphasized Chanel’s rights to control the quality of its marks.[102] By selling handbags that were never authorized for sale or whose serial numbers confirm they never went through Chanel’s quality control procedures, WGACA sold non-genuine products in violation of the Lanham Act.[103] The court also granted WGACA’s motion for summary judgment in part, but only with respect to Chanel’s New York state law claims because it determined issues of material fact existed as to the remaining federal claims.[104] The case proceeded to a jury trial, after which the jury returned a verdict in favor of Chanel for all surviving claims, awarding the company $4 million in statutory damages.[105]

6. SPORTS

N.Y. Knicks Say Former Employee Took Trade Secrets to the Toronto Raptors

In August 2023, the New York Knicks filed a lawsuit in federal district court against Maple Leaf Sports & Entertainment, the parent company of the Toronto Raptors, Darko Rajakovi, Noah Lewis, and Ikechukwu Azotam (together “Raptors”), over an alleged theft of the Knicks’ trade secrets, seeking damages over $10 million.[106] The Knicks claim that a former team employee, Ikechukwu Azotam, stole proprietary information from the Knicks franchise, and took the information with him to the Toronto Raptors, where he assumed the role of assistant coach.[107] The alleged stolen proprietary information includes scouting files, season preparation books, play reports, and other materials.[108] The Knicks further allege that Azotam stole this information under the instruction of the Toronto Raptors, including head coach Darko Rajakovic.[109]

On October 16, 2023, the Raptors filed a motion to dismiss, denying all allegations and arguing that the alleged stolen proprietary information is not a protected trade secret because the information was not unique to the Knicks and contained data on all NBA teams that could be gathered by watching televised games.[110] The motion further argued that federal court was the improper forum for commencing the action and that, per the NBA Constitution, the Knicks and Raptors were to arbitrate their dispute.[111]

On November 20, 2023, the Knicks filed their response to the Raptors’ motion to dismiss, arguing the dispute is not governed by the NBA Constitution because it is not a dispute about “basketball operations,” but rather a dispute over “the theft of trade secrets by a disloyal employee.”[112] The parties are awaiting a decision.[113]

7. TRANSACTIONS/DEALS

Lionsgate Acquires eOne

On December 27, 2023, Lionsgate announced its acquisition of studio Entertainment One (eOne) from toy company Hasbro for $375 million.[114] The acquisition added 6,500 film and television titles to Lionsgate’s library.

Artémis Acquires Majority Stake in CAA

On October 2, 2023, Artémis, an investment company run by French billionaire Francois-Henri Pinault, agreed to acquire a majority stake in Creative Artists Agency (CAA) that was previously held by global investment firm TPG.[115] Although an exact figure has not been disclosed, the sale has been reported to be for around $7 billion.

AMC Entertainment Executes Distribution Agreements with Beyoncé and Taylor Swift

In mid-2023, AMC Entertainment struck deals with Beyoncé and Taylor Swift to distribute the artists’ concert films: “Taylor Swift: The Eras Tour” and “Renaissance: A Film by Beyoncé.”[116] The films represented the first ever movies distributed by AMC, and bypassed the usual protocol where studios distribute the films to theaters.[117] The deals also included minimum ticket prices for both films: starting at $19.89 for Eras and $22 for Renaissance.[118] The deals boosted AMC’s earnings, with AMC’s CEO attributing AMC’s 2023 fourth quarter revenue and EBITDA increases entirely to the two films, which collectively earned more than $115 million at the domestic box office on their opening weekends.[119] According to reports, AMC shared in 43% of the profits from the Eras film with Taylor Swift taking home the remaining 57%, whereas Beyoncé split box office earnings from the Renaissance film roughly 50% with exhibitors while AMC accepted a small distribution fee.[120]

Music Catalog Acquisitions

The market for music catalog acquisitions—which includes master recordings, music publishing, and other trademark and IP—cooled in 2023 due to rising interest rates.[121] Catalog acquisitions had become extremely lucrative revenue streams for investors, who use the songs in licensing deals, film and television, and advertisements, but became less attractive in the past year given rising borrowing costs.[122] Nonetheless, the year still saw major acquisitions by companies like Sony Music Group, Universal Music Group, Litmus Music, and Hipgnosis. Some highlights from the past year include:

Universal Music Group and Shamrock Capital Acquire Dr. Dre’s Music Catalog

In January 2023, Universal Music Group and Shamrock Capital purchased various passive income streams from Dr. Dre’s catalog, including producer royalties, his share of N.W.A artist royalties, and the writer’s share of the song catalog where he does not own the publishing.[123] Reported to be at around $200 million, the deal was the largest-ever hip-hop catalog deal for a single artist.

Litmus Music Acquires Katy Perry’s Music Catalog

On September 18, 2023, Litmus Music announced its $225 million purchase of Katy Perry’s master rights royalties and publishing income from her five albums released between 2008 and 2020.[124] Litmus Music is a music rights company founded in 2022, backed by private equity company Carlyle Group LLC. The deal marked the year’s largest artist catalog transaction.

Hipgnosis Acquires Justin Bieber’s Music Catalog

On January 24, 2023, Hipgnosis Songs Capital announced that it had reached a deal to purchase all of Justin Bieber’s publishing royalties, artist royalties from his master recordings, and neighboring rights.[125] The catalog included 290 titles, covering songs released through the end of 2021. The deal was reported to be valued at around $200 million.

Sony Music Group Acquires Half of Michael Jackson’s Music Catalog

On February 9, 2024, Sony Music Group announced that it had reached a deal to acquire half of Michael Jackson’s publishing and recorded masters catalog in a transaction that reportedly valued the total catalog at over $1.2 billion, which could be the highest-ever valuation of a single artist’s work.[126] Sony reportedly paid at least $600 million for its stake. The deal also included assets from Jackson’s Mijac publishing catalog, including songs by Sly & the Family Stone and Ray Charles.

Vice Media Group Acquired by Consortium of Lenders

Gibson Dunn represented Fortress Investment Group and a consortium of lenders, including Soros Fund Management and Monroe Capital, in the debtor-in-possession financing and acquisition of Vice Media Group in its chapter 11 filing. With its secured lenders’ support, Vice Media filed for Chapter 11 on May 15, 2023.[127] On July 31, 2023, the lenders, represented by Gibson Dunn, closed on the sale of substantially all of Vice Media’s assets, including its international next-gen media and entertainment platform for a purchase price of $350 million, plus the assumption of certain liabilities.[128] In a joint statement, the lender group said, “We are very pleased to complete the acquisition of Vice and we are excited to build upon the achievements of one of the most iconic brands in news and entertainment. We look forward to growing a strong business that is committed to serving audiences, brands and partners with award-winning content.”[129]

RedBird IMI Takes Stake in Media Res

Gibson Dunn advised RedBird Capital Partners in RedBird IMI’s investment in Media Res, the production studio behind Apple TV+ shows The Morning Show and Pachinko.[130] The investment, announced in January 2024, is RedBird IMI’s first investment in scripted entertainment.[131] Jeff Zucker, CEO of RedBird IMI, said, “Media Res was a natural partnership for us as we continue to expand our presence across all forms of scripted, unscripted and children’s entertainment as well as news and information.”[132] The studio, founded by former HBO executive Michael Ellenberg, will use the investment to “strike new strategic partnerships” and continue “championing artists’ original ideas and sourcing projects from exceptional IP.”[133]

NFL and Skydance Media Partner to Form Skydance Sports

Gibson Dunn represented the NFL in its joint venture with Skydance Media to form Skydance Sports, a premier global multi-sports production studio.[134] NFL Films Senior Executive Ross Ketover said, “Through this new venture, we will be able to expand our storytelling acumen into different areas of content by tapping into the expertise and creativity of a highly accomplished media company in Skydance.”[135] Via the partnership, the studio will produce both scripted and unscripted sports media content.[136] In May 2023, the studio announced the first project to come from the joint venture, which is a docuseries chronicling Dallas Cowboys owner Jerry Jones and the Cowboys franchise.[137] The series is currently in development and will feature never-before-seen content from the NFL Films archive.[138]

Investment Partnership Led by Josh Harris Acquires the Washington Commanders

On July 21, 2023, a partnership led by Josh Harris, founder of Apollo Global Management, announced the closing of its acquisition of the Washington Commanders.[139] The Harris group includes 20 limited partners, including NBA legend Magic Johnson.[140] The acquisition closed for a North American sports franchise record $6.05 billion.[141] Dan Snyder, the former Commanders owner, bought the franchise in 1999 for $800 million.[142]

WWE and UFC Merge to Create TKO Group

On April 3, 2023, Endeavor Group Holdings, UFC’s parent company, announced the closing of its merger with WWE and the formation of the new publicly listed TKO Group.[143] The newly merged TKO Group has a valuation of $21.4 billion.[144] Former WWE majority shareholder and chairman Vince McMahon will serve as executive chairman of TKO, while Dana White, former UFC president, is named as UFC CEO.[145] Shares in TKO began trading on September 12, 2023, pegged to WWE’s stock price, which closed at $100.65/share on its final day of trading.[146]

Microsoft’s Acquisition of Activision Blizzard

In October 2023, Microsoft closed its $69 billion acquisition of the gaming firm Activision Blizzard, the largest deal in Microsoft’s 48-year history.[147] The deal, which was announced in January 2022, underwent a lengthy and robust review from regulators, including the U.K.’s Competition and Markets Authority, before finally being cleared nearly two years later.[148]

Disney’s Acquisition of Comcast’s Stake in Hulu

On November 1, 2023, the Walt Disney Company (“Disney”) announced its intention to acquire the 33% stake in Hulu, LLC held by Comcast Corp.’s NBCUniversal (“NBCU”) by December for an anticipated $8.6 billion.[149] The deal has a $27.5 billion guaranteed floor value but will be subject to an appraisal process by which Hulu’s equity fair value will be assessed as of September 30, 2023.[150] Under this process, “if the value is ultimately determined to be greater than the guaranteed floor value, Disney will pay NBCU its percentage of the difference between the equity fair value and the guaranteed floor value.”[151] According to a company press release, the acquisition is anticipated to “further Disney’s streaming objectives.”[152]

Production Company M&A

Blumhouse Productions and James Wan’s Atomic Monster Merge

On January 2, 2024, Jason Blum’s Blumhouse Productions and James Wan’s Atomic Monster, two of the world’s leading horror film production houses, merged in a deal that resulted in a three-way ownership structure split amongst Blum, Wan, and Universal Pictures.[153] Blumhouse and Atomic Monster will continue to operate as separate labels, but Blum and Wan look forward to increased content output as a result of their collaboration.[154] The merged company retains and expands Blumhouse’s long-standing first-look deal with Universal Pictures, which Gibson Dunn represented in connection with the merger.

The North Road Company Expands with Key Acquisitions

On November 7, 2023, Peter Chernin’s production studio, North Road, acquired an undisclosed stake in Questlove’s production house, Two One Five Entertainment.[155] The purchase is the latest in a series of acquisitions by North Road in 2023, including the Turkish film and television studio, Karga Seven Pictures on June 6, 2023.[156] North Road also received $150 million capital investment from the Qatar Government Investment Fund back in January, 2023, adding to the capital base of $300 million from Apollo and up to $500 million from Providence Equity Partners that North Road secured at its launch in July 2022.[157]

__________

[1] [ ] Sony Music Ent. v. Cox Commc’ns, Inc., 93 F.4th 222 (4th Cir. 2024).

[2] Id. at 229.

[3] Id. at 227-28.

[4] Id. at 229.

[5] Id. at 236.

[6] Id. at 232-33.

[7] Id. at 232.

[8] Id. at 237.

[9] Id. at 238.

[10] Id.

[11] Id. at 239-41.

[12] Andy Warhol Found. for the Visual Arts, Inc. v. Goldsmith, 598 U.S. 508, 508-09 (2023).

[13] Id. at 508.

[14] Id.

[15] Id.

[16] Id.

[17] Id.

[7] Id.

[18] Id.

[19] Id. at 508-09.

[20] Id. at 535-36.

[21] Id. at 541.

[22] Id. at 537.

[23] Id. at 551.

[24] Hanagami v. Epic Games, 85 F.4th 931, 935 (9th Cir. 2023).

[25] Id.

[26] Id.

[27] Id. at 938.

[28] Id.

[29] Id. at 943.

[30] Id.

[31] Id.

[32] Id. at 946.

[33] Id. at 947.

[34] Warner Chappell Music, Inc. v. Nealy, 216 L. Ed. 2d 1313 (Sept. 29, 2023).

[35] Nealy v. Warner Chappell Music, Inc., 60 F.4th 1325, 1334 (11th Cir. 2023).

[36] 17 U.S.C. § 507(b).

[37] Nealy, 60 F.4th at 1330.

[38] Id. at 1334.

[39] Id. at 1331.

[40] Hachette Book Grp., Inc. v. Internet Archive, 664 F. Supp. 3d 370, 374 (S.D.N.Y. 2023).

[41] Id. at 375-76.

[42] Id. at 377.

[43] Id. at 380.

[44] Id. at 382.

[45] Id. at 383.

[46] Id.

[47] Id. at 388 (quoting Fox News Network, LLC., v. Tveyes, Inc., 883 F.3d 169, 179 (2d Cir. 2018)).

[48] Consent J. and Permanent Inj., Hachette Book Grp. v. Internet Archive, 664 F. Supp. 3d 370 (S.D.N.Y. 2023) (No. 1:20-cv-04160), ECF No. 215.

[49] Docketing Notice, Hachette Book Grp. v. Internet Archive, No. 23-1260 (2d Cir. Sept. 15, 2023).

[50] Brief of Appellee, Hachette Book Grp. v. Internet Archive, No. 23-1260 (2d Cir. Mar. 15, 2023).

[51] Getty Images (US), Inc. v. Stability AI, Inc., et. al., No. 1:23-cv-00135-UNA (D. Del.).

[52] Getty Images (US), Inc. v. Stability AI, Inc., et. al., No. 1:23-cv-00135-UNA (D. Del.).

[53] Id.

[54] Id.

[55] Id.

[56] Andersen v. Stability AI, et al., No. 3:23-cv-00201 (N.D. Cal.).

[57] Id.

[58] Id.

[59] Thaler v. Pelmutter, No. CV 22-1564 (BAH) (D.D.C. Aug. 18, 2023).

[60] Id.

[61] Id. at 9-10.

[62] Id. at 14.

[63] Id. at 13.

[64] Complaint, New York Times Co. v. Microsoft Corp., No. 23-CV-11195 (S.D.N.Y. Dec. 27, 2023).

[65] Id.

[66] Id.

[67] OpenAI, OpenAI and Journalism (Jan. 8, 2024) https://openai.com/blog/openai-and-journalism.

[68] Id.

[69] Id.

[70] Id.

[71] Id.

[72] Motion to Dismiss, New York Times Co. v. Microsoft Corp., No. 23-CV-11195 (S.D.N.Y. Feb. 26, 2024); Motion to Dismiss, New York Times Co. v. Microsoft Corp., No. 23-CV-11195 (S.D.N.Y. Mar. 4, 2024).

[73] Michael M. Grynbaum and Ryan Mac, The Times Sues OpenAI and Microsoft Over A.I. Use of Copyrighted Work, N.Y. Times, Dec. 27, 2023.

[74] Jack Daniel’s Properties, Inc. v. VIP Prod. LLC, 599 U.S. 140, 159-60 (2023).

[75] Id. at 153.

[76] Id. at 161-63.

77] Abitron Austria GmbH v. Hetronic Int’l, Inc., 600 U.S. 412, 415-16 (2023).

[78] Id. at 416.

[79] Id.

[80] Id. at 419-20.

[81] Id. at 428.

[82] Id. at 422-24.

[83] Id. at 423.

[84] Ben Sisario, Ed Sheeran Wins Copyright Case Over Marvin Gaye’s ‘Let’s Get It On’, New York Times (May 4, 2023), https://www.nytimes.com/2023/05/04/arts/music/ed-sheeran-marvin-gaye-copyright-trial-verdict.html.

[85] Structured Asset Sales, LLC v. Sheeran et al, 1:18CV05839, Dkt. 217 at 13 (S.D.N.Y May 16, 2023); Bill Donahue, Ed Sheeran Wins Another Copyright Case Over ‘Let’s Get It On’, Billboard (May 16, 2023) https://www.billboard.com/pro/ed-sheeran-wins-second-lets-get-it-on-lawsuit/.

[86] Id.

[87] Id. at 15.

[88] Grace Flynn, Reggaeton: Origin and Evolution of a Genre, Marquette Wire (Nov. 28, 2011).

[89] Cleveland Constantine Browne et al v. Rodney Sebastian Clark Donalds et al, 2:21CV02840, Dkt. 305 (C.D.C.A) (April 21, 2023).

[80] Cleveland Constantine Browne et al v. Rodney Sebastian Clark Donalds et al, 2:21CV02840, Dkt. 330 (C.D.C.A) (June 30, 2023).

[91] Blake Brittain, Hermes wins permanent ban on ‘MetaBirkin’ NFT sales in US lawsuit, Reuters (2023), https://www.reuters.com/business/hermes-wins-permanent-ban-metabirkin-nft-sales-us-lawsuit-2023-06-23/ (last visited Feb 10, 2024).

[92] Id.

[93] Hermes Int’l v. Rothschild, No. 22-CV-384 (JSR), 2023 WL 4145518 (S.D.N.Y. June 23, 2023).

[94] Melanie J. Howard & Jennifer Kahn, Hermès International v. Rothschild, Loeb & Loeb LLP (2023), https://www.loeb.com/en/insights/publications/2023/06/hermes-international-v-rothschild (last visited Feb 10, 2024).

[95] Id.

[96] Gene Maddus, SAG-AFTRA Approves Deal to End Historic Strike, Variety (2023) https://variety.com/2023/biz/news/sag-aftra-tentative-deal-historic-strike-1235771894/ (last visited Feb 10, 2024).

[97] Id.

[98] Andrew Dalton, Hollywood Actors Union Board Approves Strike-Ending Deal as Leaders Tout Gains, TIME (2023) https://time.com/6334007/hollywood-actors-union-approves-deal-strike-ends (last visited Feb 10, 2024).

[99] Chanel, Inc. v. What Comes Around Goes Around LLC et al., No. No. 18-CV-2253 (LLS), Dkt. 407 (S.D.N.Y.).

[100] Chanel, Inc. v. What Comes Around Goes Around LLC et al., No. 18-CV-2253 (LLS), 2022 WL 902931, at *1 (S.D.N.Y. Mar. 28, 2022).

[101] Id.

[102] Id.

[103] Id.

[104] Id.

[105] Chanel, Inc. v. What Comes Around Goes Around LLC et al., No. No. 18-CV-2253 (LLS), Dkt. 407 (S.D.N.Y.).

[106] Compl., N.Y. Knicks vs. Maple Leaf Sports & Ent. Ltd., No. 1:2023cv07394 (Aug. 21, 2023).

[107] Id.

[108] Id.

[109] Id.

[110] Memorandum of Law in Support of Motion to Dismiss, N.Y. Knicks vs. Maple Leaf Sports & Ent. Ltd., No. 1:2023cv07394 (Oct. 16, 2023).

[111] Id.

[112] Mike Vorkunov & Eric Koreen, Knicks Argue Lawsuit Against Raptors Should Stay in Federal Court and Not Be Moved to NBA-Run Arbitration, Athletic (Nov. 20, 2023), https://theathletic.com/5078586/2023/11/20/knicks-raptors-lawsuit-nba.

[113] Alder Almo, Raptors Label Knicks Lawsuit a PR Stunt, Push for Dismissal, Heavy (Feb. 20, 2024), https://heavy.com/sports/new-york-knicks/raptors-slams-knicks-lawsuit/.

[114] Jennifer Maas, Lionsgate Closes eOne Acquisition for $375 Million, Variety (Dec. 27, 2023), https://variety.com/2023/tv/news/lionsgate-closes-eone-375-million-1235851625.

[115] Nellie Andreeva, Francois-Henri Pinault’s Artémis Closes Deal For Majority Stake In CAA – Update, Deadline (Oct. 2, 2023), https://deadline.com/2023/10/caa-tpg-majority-stake-iacquired-francois-henri-pinault-artemis-bryan-lourd-ceo-1235539266.

[116] Nardine Saad, No Surprise Here: Taylor Swift, Beyoncé Concern Films Boost AMC Quarterly Earnings, L.A. Times (Feb. 29, 2024, 2:03 PM), https://www.latimes.com/entertainment-arts/business/story/2024-02-29/taylor-swift-beyonce-concert-films-boost-amc-earnings.

[117] Id.

[118] Ephrat Livni & Michael J. de la Merced, How Beyoncé and Taylor Swift Struck a New Kind of Movie Deal, N.Y. Times (Oct. 7, 2023), https://www.nytimes.com/2023/10/07/business/dealbook/how-beyonce-and-taylor-swift-struck-a-new-kind-of-movie-deal.html.

[119] Nardine Saad, No Surprise Here: Taylor Swift, Beyoncé Concern Films Boost AMC Quarterly Earnings, L.A. Times (Feb. 29, 2024, 2:03 PM), https://www.latimes.com/entertainment-arts/business/story/2024-02-29/taylor-swift-beyonce-concert-films-boost-amc-earnings.

[120] Id.

[121] Glenn Peoples, The 10 Biggest Music Business Deals of 2023, Billboard (Dec. 29, 2023), https://www.billboard.com/lists/biggest-music-deals-2023-katy-perry-justin-bieber-hybe.

[122] Id.; Anna Nicolaou & Eric Platt, Rising Interest Rates Rock Private Equity’s Billion-Dollar Bets On Music, Fin. Times (Dec. 14, 2023), https://www.ft.com/content/86bb6d35-91f6-4002-9e9e-5412e609be52.

[123] Peoples, supra.

[124] Jem Aswad, Katy Perry Sells Catalog Rights to Litmus Music for $225 Million, Variety (2023), https://variety.com/2023/music/news/katy-perry-sells-catalog-rights-litmus-music-1235726293.

[125] Ethan Millman, Justin Bieber Sells Publishing and Recorded Catalog for Reported $200 Million, Rolling Stone (2023), https://www.rollingstone.com/music/music-news/justin-bieber-sells-catalog-hipgnosis-1234651518.

[126] Ed Christman, Sony Music Buys Stake in Michael Jackson Catalog, Valuing Rights at Over $1.2B, Billboard (Feb. 9, 2024), https://www.billboard.com/business/business-news/michael-jackson-estate-sells-music-rights-sony-valuation-1235604155.

[127] Jesse Whittock, Vice Media Files for Chapter 11 Bankruptcy, Deadline (May 15, 2023, 1:01 AM), https://deadline.com/2023/05/vice-media-chapter-11-bankruptcy-1235366640/.

[128] Todd Spangler, Vice Media Closes $350 Million Sale to Investors Fortress, Soros Fund Management and Monroe Capital, Variety (July 31, 2023, 6:58 AM), https://variety.com/2023/digital/news/vice-media-closes-sale-post-bankruptcy-investors-fortress-soros-monroe-1235683295.

[129] Id.

[130] Dade Hayes, Jeff Zucker-Led RedBird IMI Takes Stake In ‘The Morning Show’ Studio Media Res, Deadline (Jan. 4, 2024, 6:09 AM), https://deadline.com/2024/01/jeff-zucker-redbird-imi-invests-in-the-morning-show-pachinko-studio-media-res-1235695014.

[131] Todd Spangler, Jeff Zucker-Led RedBird IMI Takes Minority Stake in ‘Morning Show’ Producer Media Res, Variety (Jan. 4, 2024, 7:15 AM), https://variety.com/2024/tv/news/jeff-zucker-redbird-imi-media-res-investment-minority-stake-1235861452.

[132] Id.

[133] Id.

[134] Dade Hayes, NFL and Skydance Team To Create Multi-Sport Production Studio, Deadline (Nov. 15, 2022, 10:05 AM), https://deadline.com/2022/11/nfl-skydance-team-up-for-multi-sport-production-studio-1235172891/.

[135] Id.

[136] Press Release, The National Football League, NFL, Skydance Media partner to expand Skydance Sports into the preeminent global sports content studio (Nov. 15, 2022, 12:52 PM), https://www.nfl.com/news/nfl-skydance-media-partner-to-expand-skydance-sports-into-the-preeminent-global-.

[137] BreAnna Bell, Jerry Jones Docuseries in Development at Skydance Media, Variety (May 3, 2023, 12:00 PM), https://variety.com/2023/tv/news/jerry-jones-docuseries-skydance-media-1235602545/.

[138] Id.

[139] Josh Harris Announces Acquisition of Washington Commanders, Washington Commanders (July 21, 2023), https://www.commanders.com/news/josh-harris-announces-acquisition-of-washington-commanders.

[140] Bruce Haring, NFL’s Washington Commanders Sold For $6.05B, A North American Sports Franchise Record, Deadline (July 20, 2023), https://deadline.com/2023/07/nfl-washington-commanders-sold-for-6-05b-north-american-sports-franchise-record-1235443619/.

[141] Id.

[142] Id.

[143] Endeavor Announces UFC® and WWE® to Form a $21+ Billion Global Live Sports and Entertainment Company, WWE (April 3, 2023), https://corporate.wwe.com/investors/news/press-releases/2023/04-03-2023-115019034.

[144] Marc Raimondi, UFC, WWE officially combine under TKO umbrella, ESPN (September 12, 2023), https://www.espn.com/mma/story/_/id/38386430/ufc-wwe-officially-combine-tko-umbrella.

[145] Id.

[146] Todd Spangler, WWE, UFC Officially Merge to Form TKO Group, New Stock to Start Trading, Variety (September 12, 2023), https://variety.com/2023/tv/news/wwe-ufc-deal-closes-tko-group-1235719908/.

[147] Josh Novet, Microsoft closes $69 billion acquisition of Activision Blizzard after lengthy regulatory review, CNBC (October 13, 2023), https://www.cnbc.com/2023/10/13/microsoft-closes-activision-blizzard-deal-after-regulatory-review.html.

[148] Id.

[149] The Walt Disney Company, The Walt Disney Company to Purchase Remaining Stake in Hulu from Comcast, (November 1, 2023), https://thewaltdisneycompany.com/disney-hulu/.

[150] Id.

[151] Id.

[152] MoneyWatch, Disney reaches $8.6 billion deal with Comcast to fully acquire Hulu, (November 1, 2023), https://www.cbsnews.com/news/disney-8-6-billion-dollar-deal-fully-acquire-hulu-from-comcast/.

[153] Aaron Couch, Jason Blum’s Blumhouse and James Wan’s Atomic Monster Close Merger Deal, The Hollywood Reporter (Jan. 2, 2024).

[154] Id.

[155] Jennifer Maas, North Road Acquires Significant Stake in Questlove and Black Thought’s Two One Five Entertainment, Variety (November 7, 2023), https://variety.com/2023/tv/news/questlove-black-thought-production-company-two-one-five-north-road-1235782787/.

[156] Nick Vivarelli, Peter Chernin’s The North Road Company Buys Turkish Film and TV Powerhouse Karga Seven Pictures, Variety (June 6, 2023), https://variety.com/2023/film/global/peter-chernin-north-road-company-karga-seven-pictures-1235634663/.

[157] Todd Spangler, Peter Chernin’s North Road Receives $150 Million From Qatar Government Investment Fund, Variety (January 31, 2023), https://variety.com/2023/film/news/peter-chernin-north-road-qatar-investment-authority-1235507929/.

The following Gibson Dunn attorneys assisted in preparing this update: Scott Edelman, Ilissa Samplin, Brian Ascher, Jillian London, Marissa Mulligan, Shaun Mathur, Doran Satanove, Dillon Westfall, Cate Harding, Monica Woolley, Sasha Dudding, Zachary Montgomery, Elise Widerlite, Peter Jacobs, Amanda Bello, Maya Halthore, Ignacio Martinez Castellanos, Maryam Asenuga, Narayan Narasimhan, Zachary Goldstein, and Sophia Amir.

Gibson Dunn lawyers are available to assist in addressing any questions you may have regarding these developments. Please contact the Gibson Dunn lawyer with whom you usually work, the authors, or the following leaders and members of the firm’s Media, Entertainment & Technology practice group:

Scott A. Edelman – Co-Chair, Los Angeles (+1 310.557.8061, [email protected])
Kevin Masuda – Co-Chair, Los Angeles (+1 213.229.7872, [email protected])
Benyamin S. Ross – Co-Chair, Los Angeles (+1 213.229.7048, [email protected])
Theodore J. Boutrous, Jr. – Los Angeles (+1 213.229.7000, [email protected])
Orin Snyder – New York (+1 212.351.2400, [email protected])
Brian C. Ascher – New York (+1 212.351.3989, [email protected])
Jillian N. London – Los Angeles (+1 213.229.7671, [email protected])
Ilissa Samplin – Los Angeles (+1 213.229.7354, [email protected])

Gibson Dunn’s Workplace DEI Task Force aims to help our clients develop creative, practical, and lawful approaches to accomplish their DEI objectives following the Supreme Court’s decision in SFFA v. Harvard. Prior issues of our DEI Task Force Update can be found in our DEI Resource Center. Should you have questions about developments in this space or about your own DEI programs, please do not hesitate to reach out to any member of our DEI Task Force or the authors of this Update (listed below).

Key Developments:

On March 21, 2024, Chief Judge Diane Sykes of the United States Court of Appeals for the Seventh Circuit announced the resolution of a judicial misconduct complaint filed by America First Legal (AFL) against three judges on the United States District Court for the Southern District of Illinois. The complaint accused Chief Judge Nancy J. Rosenstengel, Judge Staci M. Yandle, and Judge David W. Dugan of race and sex discrimination in violation of Rule 4(a)(3) of the Rules for Judicial-Conduct and Judicial-Disability Proceedings, Canon 2A of the Code of Conduct for United States Judges, and the Fifth Amendment of the United States Constitution. AFL took issue with the judges’ policies that a motion for oral argument would be granted if “at all practicable to do so” where the moving party “intends to have a newer, female, or minority attorney” argue. The complaint drew the attention of Senators Ted Cruz (R-TX) and John Kennedy (R-LA), who sent a letter to Chief Judge Sykes arguing that the policies are unethical and unconstitutional in light of SFFA v. Harvard. In her order, Chief Judge Sykes stated that Judge Dugan had removed references to “women and underrepresented minorities” from his courtroom policies in October 2022, and that Judge Rosenstengel and Judge Yandle had both since rescinded the policies at issue. In letters attached to Chief Judge Sykes’ order, Judge Rosenstengel stated that she “chose the wrong means to accomplish [her] goal of expanding courtroom opportunities for young lawyers,” and Judge Yandle acknowledged that the now-rescinded policy, as worded, “created a perception of preferences based on immutable characteristics.”

Governor Kay Ivey signed Alabama Senate Bill 129 (S.B. 129) into law on March 20, one day after the bill passed both chambers of the Alabama General Assembly. The sweeping anti-DEI legislation prevents higher education institutions, public school boards, and state agencies from using state funds to support DEI programming, offices, or training, and prohibits these entities from teaching about certain “divisive concepts” related to race, bias, and meritocracy. The law also includes a measure that prohibits public universities from allowing transgender people to use bathrooms designated for their gender identity. Student groups, state Democrats, and advocacy groups like PEN America have campaigned against the law, noting Alabama’s fraught history with respect to race issues and criticizing the bill’s restrictions on speech and diversity initiatives. The law takes effect on October 1, 2024. A similar Kentucky bill, SB 6, has passed both chambers and will soon be sent to Governor Beshear’s desk. The governor is expected to veto the bill, but it is anticipated that a Republican supermajority will overrule the veto.

On March 19, conservative think tank Goldwater Institute filed a complaint against the Arizona Board of Regents, claiming that Arizona State University violated state law by requiring a professor to complete ASU’s “Inclusive Communities” training. The Institute alleges that the mandatory virtual training, which addressed issues including white supremacy and microaggressions, violated an Arizona law that prohibits the state from “us[ing] public monies for training, orientation or therapy that presents any form of blame or judgment on the basis of race, ethnicity or sex.” The Institute also asserts that the training violated the state constitution’s free-speech protections.

The Congressional Hispanic Caucus sent a letter to the leaders of Fortune 100 companies on March 11, 2024, calling for an increase in representation of Hispanics in executive roles. The letter asserts that, although nearly 20 percent of people living in the United States today are of Hispanic descent, only 4 percent of Fortune 100 CEOs are Hispanic. The caucus asked recipients to provide data on current Hispanic representation among senior and government relations staff, as well as the percentages of philanthropic funding and contract dollars awarded to Hispanic recipients and Hispanic-owned businesses. The requests are similar to those made in recent months by both the Congressional Asian Pacific American Caucus and the Congressional Black Caucus.

Media Coverage and Commentary:

Below is a selection of recent media coverage and commentary on these issues:

Bloomberg Law Daily Labor Report, “Firms From KKR to Coors Flag DEI as Business, Legal Risk” (March 11): Bloomberg’s Clara Hudson and Riddhi Setty report on the increasing number of public companies listing DEI as a “risk factor” in securities filings. According to an analysis by Bloomberg Law, JetBlue Airways Corp., Molson Coors Beverage Co., Blue Owl Capital Corp., Duolingo, Inc., and Leidos Holdings, Inc.—among others—have listed DEI as a legal or brand value risk on their most recent 10-Ks. Fordham University School of Law professor Atinuke Adediran says this can be a strategic choice; in the event of future DEI-related litigation, these securities filings may help the company defend against a related shareholder action. But Hudson and Setty note that companies listing DEI as a risk in their 10-Ks also list diversity as “pivotal to the success of their business,” and that most companies continue to recognize DEI as a key corporate value.
Fast Company, “DEI needs to get back on track—these leaders have solutions” (March 13): Tania Rahman reports on “The Fight for DEI,” a panel discussion hosted by Fast Company earlier this month at the South by Southwest festival. Lenovo’s Chief Diversity Officer Calvin Crosslin, Making Space Founder and CEO Keely Cat-Wells, and Upwork’s Head of Diversity, Inclusion, Belonging, and Access Erin L. Thomas spoke about the challenges facing DEI initiatives and offered potential paths forward. Upwork’s Thomas stated that companies have to be genuinely motivated for their DEI initiatives to succeed––companies that felt forced to adopt diversity programs in the wake of George Floyd’s murder, she believes, are those that have already scaled back. Making Space’s Cat-Wells emphasized the importance of tying DEI impact to business strategy, saying that viewing diversity through a “charity lens” doesn’t lead to permanent systemic change. And Lenovo’s Crosslin recognized the significant burdens of advancing DEI initiatives in the current political and legal climate, advocating for corporate executives to better support their DEI leaders.
New York Times Magazine, “The ‘Colorblindness’ Trap: How a Civil Rights Ideal Got Hijacked” (March 13): NYT Magazine staff writer and Howard University professor Nikole Hannah-Jones opines that the recent flurry of conservative legal activism around affirmative action and reverse discrimination is the latest step in a 50-year effort to reverse the constitutional legacies of the civil rights movement. In Hannah-Jones’ view, the SFFA decision is the Supreme Court’s latest effort to erode racial minorities’ constitutional rights, following in the footsteps of Parents Involved in Community Schools v. Seattle School District No. 1 in 2007 (holding that the school district’s school assignment policy designed to remedy historic racial segregation violated the Equal Protection Clause), and Shelby County v. Holder in 2013 (invalidating the Voting Rights Act provision requiring that the DOJ or a federal court approve proposed redistricting plans as not harmful to minority interests). Hannah-Jones provides a comprehensive history of reconstruction, desegregation, and the civil rights era, and she posits that this history has developed around a still-unresolved tension: “Do we ignore race in order to eliminate its power, or do we consciously use race to undo its harms?”
Law360 Employment Authority, “Worker’s 10th Circ. Loss May Aid Future DEI Challenges” (March 15): Law360’s Anne Cullen reports on the Tenth Circuit’s recent decision affirming dismissal of a harassment and discrimination suit brought by a white male former Colorado Department of Corrections officer. The officer alleged that the Corrections Department’s DEI seminar about white supremacy and racial injustice violated Title VII, but the district court dismissed the complaint, concluding that any effects of the program were not severe or pervasive enough to constitute a hostile work environment. But in the majority opinion affirming the dismissal, Judge Timothy Tymkovich wrote that the “race-based rhetoric” included in the seminar was “well on the way to arriving at objectively and subjectively harassing messaging” that “could promote racial discrimination and stereotypes within the workplace.” Jason Schwartz, Gibson Dunn partner and co-head of the firm’s Labor and Employment practice group, called the decision “a signal that they’re certainly not shutting the courthouse door to these claims.” “If anything, they’re saying come on back with more, and we’ll see,” said Schwartz, who concluded that the majority decision “provided a road map for a future challenge to DEI training.” Judge Scott Matheson Jr.—who wrote separately to concur only in the result—took issue with the majority’s “unnecessary” commentary on the Correction Department’s seminar and “the potential for future legal challenges to it or other [DEI] programs.”
National Law Journal, “‘Tip of the Iceberg’: Appellate Ruling Provides Roadmap for Bias Suits Over DEI Training” (March 18): The National Law Journal’s Avalon Zoppo reports on two recent appellate decisions addressing reverse-discrimination claims. On March 11, the Tenth Circuit issued one of the first appellate decisions involving a claim that DEI training creates a hostile work environment for white employees. The panel affirmed a district court’s dismissal of the case, holding that any harassment resulting from the DEI training was neither severe nor pervasive. The majority opinion nonetheless expressed concern that the training’s “race-based rhetoric” had the potential to place employees who express criticism of diversity programming at risk of “being individually targeted for discriminatory treatment.” And on March 12, the Fourth Circuit partially upheld a jury’s verdict for a former executive who contended that he was fired intentionally to make room for a more diverse workforce. Zoppo reports that Gibson Dunn’s Jason Schwartz called these two cases “the tip of the iceberg” and predicted and there will “be a huge number of reverse discrimination type cases filed this year and in subsequent years.”
Law360, “EEOC Official Flags ‘Overblown’ Takes On Admissions Ruling” (March 19): Law360’s Vin Gurrieri reports on comments made by Equal Employment Opportunity Commission Vice Chair Jocelyn Samuels about the impact of the SFFA decision on corporate diversity initiatives. Speaking as part of a panel at the American Bar Association’s recent conference on equal employment opportunity law, Vice Chair Samuels acknowledged that “there have been a lot of allegations about the ways in which the SFFA decision affects employment programs” but called those allegations “way overblown,” as “there is nothing about the SFFA decision that applies to the vast majority of DEI programs in employment for several reasons.” Vice Chair Samuels emphasized that multiple factors—the education context, the underlying law, and the degree to which challenged policies expressly authorized the consideration of race in conferring benefits—distinguish SFFA from lawful corporate initiatives attempting to ensure equal opportunities in the workplace. In light of “the persistence of entrenched inequities that are too often based on race or gender or national origin,” Vice Chair Samuels emphasized “that employers are not under the law required to turn a blind eye to trying to address these kinds of inequities.”
Law360 Employment Authority, “DEI Backers Clinch Big Wins, But The Fight Is Far From Over” (March 19): Law360’s Anne Cullen highlights three recent appellate decisions that gave “a boost” to corporate DEI initiatives. On March 4, the Eleventh Circuit affirmed a district court order preliminarily enjoining operation of Florida’s “Stop WOKE Act,” which would prohibit employers from requiring employees to participate in trainings that identify certain groups of people as “privileged” or “oppressors.” On March 6, the Second Circuit affirmed a district court dismissal of the medical advocacy association Do No Harm’s reverse-discrimination claims against Pfizer, holding that a plaintiff relying on organizational standing must name at least one affected member to establish Article III standing. And on March 11, the Tenth Circuit affirmed dismissal of a white former correctional officer’s suit against the Colorado Department of Corrections based on alleged harassment in a racial equity seminar. But Cullen refers to the Tenth Circuit decision as a “double-edged sword”––the majority opinion affirmed that the effects of the training program were not severe or pervasive enough to support a hostile work environment claim, but also expressed concern about the program, providing a road map for future challenges to DEI training programs. Meanwhile, on March 12, the Fourth Circuit partially upheld a jury verdict awarded to a white male marketing executive who sued his former employer alleging that he was fired without cause from his management position because of his race and sex. Gibson Dunn’s Jason Schwartz said the Fourth Circuit decision would encourage similar lawsuits: “If you’ve got a plaintiff who is a white employee saying that he was displaced as part of a larger corporate diversity initiative, this case is going to add fuel to that fire.”
New York Times, “America First Legal, a Trump-Aligned Group, Is Spoiling for a Fight” (March 21): The Times’ Robert Draper reports on the recent efforts of America First Legal Foundation (AFL), the conservative organization founded and run by former Trump policy advisor Stephen Miller. AFL, which Draper refers to as “a policy harbinger for a second Trump term” and which Miller has called “the long-awaited answer to the A.C.L.U.,” has filed or submitted more than 100 lawsuits, EEOC complaints, amicus briefs, and demand letters over the past three years. Draper notes that although the substance of these challenges has varied, all have sought to advance the same “hard-line views on immigration, gender and race” that Miller prioritized during his time in the White House. AFL’s success rate is hard to determine, as many of the group’s lawsuits remain pending and the EEOC does not comment on complaints or investigations. But Draper posits that “winning” is not necessarily the group’s goal; ACLU Executive Director Anthony D. Romero reportedly told Draper that AFL seems “less interested in defending core [legal] principles and more about cherry-picking cases that feed the grievances of the MAGA wing of the Republican Party.”
Washington Lawyer, “Defending Diversity: DEI Practice Groups on the Rise” (March/April 2024): Washington Lawyer contributor William Roberts reports on the growth of law firm practice groups “aimed at helping companies reduce their legal risk and defend diversity efforts” following SFFA. Molly Senger, Gibson Dunn Labor and Employment partner and co-leader of the firm’s DEI Task Force, told Roberts that the team’s work requires a dual focus on “both advice work and litigation,” highlighting the firm’s recent Eleventh Circuit defense of Fearless Fund, a venture capital group that provides financing to black female entrepreneurs. The Task Force is also watching for the Supreme Court’s much-anticipated decision in Muldrow v. City of St. Louis; Senger told Roberts that, “[d]epending on how the Supreme Court rules, it could significantly expand the scope of conduct in the workplace that could give rise to Title VII claims,” leading to “a proliferation of Title VII litigation challenging corporate DEI programs.” Although many companies, nonprofits, and other organizations are actively assessing their legal risk, they also seek to maintain commitment to diversity efforts. As Dariely Rodriguez, deputy chief counsel for the Lawyers’ Committee for Civil Rights Under Law, told Roberts, given “persistent systemic discrimination” against minorities, it remains “important to lean into what’s possible under the law.”

Case Updates:

Below is a list of updates in new and pending cases:

1. Contracting claims under Section 1981, the U.S. Constitution, and other statutes:

Do No Harm v. National Association of Emergency Medical Technicians, No. 3:24-cv-11-CWR-LGI (S.D. Miss. 2024): On January 10, 2024, Do No Harm challenged the diversity scholarship program operated by the National Association of Emergency Medical Technicians (NAEMT), an advocacy group representing paramedics, EMTs, and other emergency professionals. NAEMT awards up to four $1,250 scholarships to students of color hoping to become EMTs or Paramedics. Do No Harm requested a temporary restraining order, preliminary injunction, and permanent injunction against the program. On January 23, 2024, the court denied Do No Harm’s motion for a TRO and expressed skepticism that the group had standing to bring its Section 1981 claim, since the anonymous member had “only been deterred from applying, rather than refused a contract.” On February 29, 2024, NAEMT filed an answer and motion to dismiss.
- Latest update: On March 4, Do No Harm filed an amended complaint, alleging that “Member A,” the anonymous potential applicant for NAEMT’s scholarship program, had now enrolled in a one-semester EMS course, whereas she previously had simply registered to begin the course. As a result, Do No Harm withdrew its original motion to dismiss and filed a new answer and motion to dismiss on March 18. NAEMT argues in its new motion that even though the amended complaint now includes allegations that “Member A” has satisfied a prerequisite for the scholarship program, Do No Harm has still failed to plead a cause of action under Section 1981 because there is no contractual relationship between a would-be applicant and NAEMT. NAEMT also reasserted its argument that Do No Harm lacks associational standing because it has not identified by name a plaintiff who has suffered a concrete injury.
Am. Alliance for Equal Rights v. Zamanillo, No. 1:24-cv-509-JMC (D.D.C. 2024): On February 22, 2024, AAER filed a complaint and motion for a preliminary injunction against Jorge Zamanillo in his official capacity as the Director of the National Museum of the American Latino, part of the Smithsonian Institution. The complaint targets the Museum’s internship program, which aims to provide Latino, Latina, and Latinx undergraduates with training in non-curatorial art museum careers. AAER claims that the program constitutes race discrimination in violation of the Fifth Amendment because the Museum considers the race of applicants in choosing interns and allegedly refuses to hire non-Latino applicants. AAER has asked for an injunction to prevent the Museum from closing the application window on April 1, or selecting interns for the program (currently scheduled to begin in late April).
- Latest update: On March 8, the Museum opposed AAER’s preliminary injunction motion and moved to dismiss for lack of jurisdiction. The Museum argued that AAER does not have Article III standing because “Member A” did not apply to the challenged internship and therefore was not denied an internship based on his or her race or ethnicity. Furthermore, the museum argued that AAER does not meet the “redressability” prong of the preliminary injunction test because the program does not consider an applicant’s race, so any injunction to prohibit race-based admissions decisions would have no effect. The plaintiff’s opposition to the motion to dismiss is due on March 29.
Do No Harm v. Gianforte, No. 6:24-cv-00024 (D. Mont. 2024): On March 12, 2024, Do No Harm filed a complaint on behalf of a white female dermatologist in Montana, alleging that a Montana law requiring the governor to “take positive action to attain gender balance and proportional representation of minorities resident in Montana to the greatest extent possible” when making appointments to the Medical Board violates the Equal Protection Clause of the Fourteenth Amendment. The complaint further alleges that since the ten filled seats are currently held by six women and four men, Montana law requires that the remaining two seats be filled by men, which would preclude the plaintiff from holding the seat.
- Latest update: The defendant has not yet responded to the complaint.
Californians for Equal Rights Foundation v. City of San Diego, et al., No. 3:24-cv-00484-MMA-MSB (S.D. Cal. 2024): On March 12, 2024, the Californians for Equal Rights Foundation filed a complaint on behalf of members who are “ready, willing and able” to purchase a home in San Diego, but ineligible for a grant or loan under the City’s BIPOC First-Time Homebuyer Program. The plaintiffs allege that the program discriminates on the basis of race in violation of the Equal Protection Clause of the Fourteenth Amendment.
- Latest update: The defendants have not yet responded to the complaint.
Do No Harm v. Pfizer, No. 1:22-cv-07908–JLR (S.D.N.Y. 2022), on appeal at No. 23-15 (2d Cir. 2023): On September 15, 2022, plaintiff association representing physicians, medical students, and policymakers sued Pfizer, alleging that the company’s Breakthrough Fellowship Program, which provided minority college seniors summer internships, two years of employment post-graduation, and a scholarship, violated Section 1981, Title VII, and New York law. The association alleges that the program illegally excludes white and Asian applicants. The association is represented by Consovoy McCarthy PLLC, the firm that also represents American Alliance for Equal Rights in multiple lawsuits. In December 2022, the court granted Pfizer’s motion to dismiss, finding that the plaintiff did not have associational standing because they did not identify at least one member by name, instead only submitting declarations from anonymous members. The Second Circuit affirmed the dismissal on March 6, 2024.
- Latest update: On March 20, 2024, Do No Harm filed with the Second Circuit a petition for rehearing en banc, arguing that the panel’s opinion “splits with at least two circuits and creates an irreconcilable line of intracircuit precedent.”

2. Employment discrimination and related claims:

Gerber v. Ohio Northern University, et al., No. 2023-1107-CVH (Ohio. Ct. Common Pleas Hardin Cnty. 2023): On June 30, 2023, a law professor sued his former employer, Ohio Northern University, for terminating his employment after an internal investigation determined that he bullied and harassed other faculty members. On January 23, 2024, the plaintiff, now represented by America First Legal, filed an amended complaint. The plaintiff claims that his firing was actually in retaliation for his vocal and public opposition to the university’s stated DEI principles and race-conscious hiring, which he believed were illegal. The plaintiff alleged that the investigation and his termination breached his employment contract, violated Ohio civil rights statutes, and constituted various torts, including defamation, false light, conversion, infliction of emotional distress, and wrongful termination in violation of public policy.
- Latest update: On February 28, the plaintiff filed an opposition to Ohio Northern University’s motion to dismiss the second amended complaint, arguing that he adequately stated a claim for defamation and intentional infliction of emotional distress because he alleged that the university made false accusations of misconduct against him. On March 13, the defendants filed their reply, arguing that Gerber’s discrimination and defamation claims against university officials in their individual capacity should be dismissed because the university was engaged in official academic activities. On March 18, the plaintiff filed a motion to voluntarily dismiss two of his claims—for conversion and replevin––citing the university’s return of property left in his former office.
Rogers v. Compass Group USA, Inc., No. 23-cv-1347 (S.D. Cal. 2023): On July 24, 2023, a former recruiter for Compass Group USA sued the company under Title VII for allegedly terminating her after she refused to administer the company’s “Operation Equity” diversity program, in which only women and people of color were entitled to participate. The plaintiff alleged that she was wrongfully terminated after she requested a religious accommodation to avoid managing the program, claiming it conflicted with her religious beliefs.
- Latest update: On March 21, the parties filed a stipulation of dismissal, stating that they had reached an undisclosed agreement to settle the case on February 28.

3. Challenges to agency rules, laws, and regulatory decisions:

American Alliance for Equal Rights v. Ivey, No. 2:24-cv-00104-RAH-JTA (M.D. Ala. 2024): On February 13, 2024, AAER filed a complaint against Alabama Governor Kay Ivey, challenging a state law that requires Governor Ivey to ensure there are no fewer than two individuals “of a minority race” on the Alabama Real Estate Appraisers Board (AREAB). The AREAB consists of nine seats, including one for a member of the public with no real estate background (the at-large seat), which has been unfilled for years. Because there was only one minority member among the Board at the time of filing, AAER asserts that state law will require that the open seat go to a minority. AAER states that one of its members applied for this final seat, but was denied purely on the basis of race, in violation of the Equal Protection Clause of the Fourteenth Amendment.
- Latest update: On March 11, AAER moved for a temporary restraining order and preliminary injunction to prevent the Governor from enforcing the statute and to require her to withdraw her pending Board appointments. In response, Ivey argued that AAER had not shown irreparable harm and lacked standing via anonymous “Member A.” On March 15, the court ordered AAER to “file under seal the name of Member A” that day. On March 18, the court held a hearing on the emergency motion for a temporary restraining order and preliminary injunction, and on March 19 denied AAER’s motion, holding that AAER has standing, but is not entitled to a TRO and preliminary injunction because it will not suffer irreparable harm.
Valencia AG, LLC v. New York State Off. of Cannabis Mgmt. et al, No. 5:24-cv-116-GTS (N.D.N.Y. 2024): On January 24, 2024, Valencia AG, a cannabis company owned by white men, sued the New York State Office of Cannabis Management for discrimination, alleging that New York’s Cannabis Law and implementing regulations favored minority-owned and women-owned businesses. The regulations include goals to promote “social & economic equity” (“SEE”) applicants, which the plaintiff claims violates the Equal Protection Clause and Section 1983. On February 7, 2024, the plaintiff filed a motion for a temporary restraining order and preliminary injunction, seeking to prohibit the defendants from implementing the regulations, charging SEE applicants reduced fees, or preferentially granting SEE applicants’ applications.
- Latest update: On March 5, the defendants filed their opposition to the plaintiff’s motion for a preliminary injunction. On March 8, plaintiff’s new counsel, Pacific Legal Foundation, asked to withdraw the plaintiff’s motion for a preliminary injunction, which the court granted. On March 13, the plaintiff filed an amended complaint, naming only two New York state officials as defendants in their official capacity and voluntarily dismissing others, including the claims against the two officials in their personal capacity.

4. Actions against educational institutions:

Chu, et al. v. Rosa, No. 1:24-cv-75-DNH-CFH (N.D.N.Y. 2024): On January 17, 2024, a coalition of education groups sued the Education Commissioner of New York, alleging that its free summer program discriminates on the bases of race and ethnicity. The Science and Technology Entry Program (STEP) permits students who are Black, Hispanic, Native American, and Alaskan Native to apply regardless of their family income level, but all other students, including Asian and white students, must demonstrate “economically disadvantaged status.” The plaintiffs sued under the Equal Protection clause and requested preliminary and permanent injunctions against the enforcement of the eligibility criteria.
- Latest update: On March 18, the defendant moved to dismiss for lack of standing, arguing that neither the organizational plaintiffs (comprised of parent members) nor the named parent plaintiff have suffered any personal or individual injury, and that the plaintiffs cannot sue for alleged violations of members’ rights as prospective STEP applicants. The plaintiffs’ response is due on April 8.

The following Gibson Dunn attorneys assisted in preparing this client update: Jason Schwartz, Mylan Denerstein, Blaine Evanson, Molly Senger, Zakiyyah Salim-Williams, Matt Gregory, Zoë Klein, Mollie Reiss, Alana Bevan, Marquan Robertson, Janice Jiang, Elizabeth Penava, Skylar Drefcinski, Mary Lindsay Krebs, David Offit, Lauren Meyer, Kameron Mitchell, Maura Carey, and Jayee Malwankar.

Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding these developments. Please contact the Gibson Dunn lawyer with whom you usually work, any member of the firm’s Labor and Employment practice group, or the following practice leaders and authors:

Jason C. Schwartz – Partner & Co-Chair, Labor & Employment Group
Washington, D.C. (+1 202-955-8242, [email protected])

Katherine V.A. Smith – Partner & Co-Chair, Labor & Employment Group
Los Angeles (+1 213-229-7107, [email protected])

Mylan L. Denerstein – Partner & Co-Chair, Public Policy Group
New York (+1 212-351-3850, [email protected])

Zakiyyah T. Salim-Williams – Partner & Chief Diversity Officer
Washington, D.C. (+1 202-955-8503, [email protected])

Molly T. Senger – Partner, Labor & Employment Group
Washington, D.C. (+1 202-955-8571, [email protected])

Blaine H. Evanson – Partner, Appellate & Constitutional Law Group
Orange County (+1 949-451-3805, [email protected])

From the Derivatives Practice Group: This issue addresses ESMA’s ongoing process to potentially shorten the settlement cycle in EU Markets, developments in Hong Kong and Australia, and a couple responses from ISDA to regulators.

New Developments

CFTC’s Global Markets Advisory Committee Advances Three Recommendations. On March 7, the CFTC’s Global Markets Advisory Committee (GMAC), sponsored by Commissioner Caroline D. Pham, advanced three new recommendations intended to (1) promote U.S. Treasury markets resiliency and efficiency, (2) provide resources on the upcoming transition to T+1 securities settlement, and (3) publish a first-ever digital asset taxonomy to support U.S. regulatory clarity and international alignment.
CFTC’s Market Risk Advisory Committee to Meet. The CFTC’s Market Risk Advisory Committee (MRAC) will meet on April 9 at 9:30 am ET. The MRAC will consider current topics and developments in the areas of central counterparty risk and governance, market structure, climate-related risk, and emerging technologies affecting derivatives and related financial markets.

New Developments Outside the U.S.

ESMA Publishes Feedback on Shortening Settlement Cycle. On March 21, the European Securities and Markets Authority (ESMA) published feedback received to its Call for Evidence on shortening the settlement cycle in the EU. According to ESMA’s report on the feedback, respondents focused on four areas: (1) many operational impacts, beyond adaptations of post-trade processes, were identified as the result of a reduction of the securities settlement cycle in the EU; (2) respondents identified a wide range of both potential costs and benefits of a shortened cycle, with some responses supporting a thorough impact assessment; (3) respondents provided suggestions around how and when a shorter settlement cycle could be achieved, with a strong demand for a clear signal from the regulatory front at the start of the work and clear coordination between regulators and the industry; and (4) stakeholders made clear the need for a proactive approach to adapt their own processes to the transition to T+1 in other jurisdictions. Additionally, according to ESMA, some responses warned about potential infringements due to the misalignment of the EU and North America settlement cycles. [NEW]
HKMA Issues New SPM Modules on Market Risk and CVA Risk Capital Charges. On March 15, the Hong Kong Monetary Authority (HKMA) released a circular informing the industry that it has issued new Supervisory Policy Manual (SPM) modules MR-1: Market Risk Capital Charge and MR-2: CVA Risk Capital Charge as statutory guidance, which will come into effect on a day to be appointed by the HKMA (intended to be January 1, 2025). The HKMA said that the revised market risk and credit valuation adjustment (CVA) risk capital frameworks will be set out in Part 8 and Part 8A of the Banking (Capital) Rules, respectively. The SPM MR-1: Market Risk Capital Charge covers the standardized approach for market risk, the internal models approach, the simplified standardized approach and requirements related to the boundary between the trading book and banking book, while the SPM MR-2: CVA Risk Capital Charge covers the reduced basic CVA approach, the full basic CVA approach and the standardized CVA approach. According to the HKMA, both new SPM modules are designed not just to provide additional technical details in addition to the rules but to integrally cover all of the related requirements. They set out the minimum standards that all locally incorporated authorized institutions are expected to adopt for the calculation of their market risk and CVA risk capital charges. [NEW]
ASIC Finalizes Minor and Technical Changes to OTC Derivatives Reporting Rules. On March 13, the Australian Securities and Investments Commission (ASIC) finalized the minor and technical changes to the ASIC Derivative Transaction Rules (Reporting) 2024 under ASIC Derivative Transaction Rules (Reporting) 2024 Amendment Instrument 2024/1 to implement the proposed changes to the 2024 rules set out in Consultation Paper 361a ASIC Derivative Transaction Rules (Reporting) 2024: Follow-on consultation on changes to data elements and other minor amendments (CP 361a). The changes include (1) seven additional data elements; (2) provide clarifications and administrative updates to the data elements; (3) make consequential changes to Chapter 2: Reporting Requirements; and (4) make other administrative updates including re-referencing the location of definitions in the Corporations Act 2001 that have been moved by the Treasury Laws Amendment (2023 Law Improvement Package No. 1) Act 2023. According to ISDA, feedback to CP 361a was broadly supportive. In response to industry requests, the final changes also (1) provide for an additional circumstance where the name of Counterparty 2 is not reported and (2) change how the amount of one kind of collateral is reported. [NEW]

New Industry-Led Developments

ISDA Responds to CFTC on Clearing Member Funds Protection. On March 18, ISDA responded to the CFTC’s consultation on proposed rules for the protection of clearing member funds held by derivatives clearing organizations (DCOs), including the assets of futures commission merchants (FCMs). According to ISDA, it proposed that the CFTC should finalize the enhanced protection for clearing member assets in connection with an intermediated DCO only, which includes multiple FCMs, unaffiliated with the DCO, as its members. Regarding a DCO providing direct clearing without multiple FCMs unaffiliated with the DCO, ISDA suggested the CFTC should wait to propose enhanced protection for clearing members’ assets, once a full assessment of the risks and complications associated with a DCO providing direct clearing has been completed. At which point, in ISDA’s opinion, it would be appropriate for the CFTC to propose a comprehensive framework to address these risks holistically. Otherwise, ISDA said, the current notice of proposed rulemaking would create a sense of safety for the disintermediated model, which is superficial due to the rule not creating a comprehensive safety regime for disintermediated central counterparties (CCPs), with many risks arising from such models being left unaddressed. [NEW]
ISDA Responds to FASB on Induced Conversion of Convertible Debt. On March 18, ISDA submitted a response to the Financial Accounting Standards Board’s (FASB) exposure draft on File Reference No. 2023-ED600, Debt—Debt with Conversion and Other Options (Subtopic 470-20): Induced Conversions of Convertible Debt Instruments. ISDA indicated that it supports FASB’s proposals in the exposure draft and believes it achieves the objective of improving the application and relevance of the induced conversion guidance to cash convertible debt instruments. [NEW]
ISDA Submits Response to IOSCO Voluntary Carbon Markets Consultation. On March 1, ISDA submitted a response to IOSCO’s Voluntary Carbon Markets Consultation Report. The response welcomes IOSCO’s work on developing good practices for regulation of voluntary carbon markets (VCMs), as well as its recognition of the critical role that financial market participants play in VCMs. ISDA explains that clear legal and regulatory categorization of voluntary carbon credits is key to building liquidity in order to support scaling VCMs and to develop safe, efficient markets in Voluntary Carbon Credit derivatives.
ISDA Submits Response to the UK Financial Conduct Authority’s Money Market Funds Consultation. On March 8, ISDA responded to the UK Financial Conduct Authority’s (FCA) consultation on updating the regime for money market funds (MMF). In the response, ISDA highlights its support for using MMFs as collateral for non-cleared derivatives margin requirements and the advancement of tokenized MMFs to be used as collateral to increase collateral mobility, reduce collateral-related transaction costs and related settlement risks.
ISDA Publishes Whitepaper Charting the Next Phase of India’s OTC Derivatives Market. On March 4, ISDA published a new whitepaper that explores the growth of India’s financial markets and makes a series of market and policy recommendations to encourage the further development of a safe and efficient over-the-counter (OTC) derivatives market. The whitepaper proposes several initiatives that industry participants and regulators could take that ISDA believes will create deeper and more liquid domestic derivatives markets and enhance risk management practices. The recommendations are centered on five key pillars: (1) Broaden product development, innovation and diversification; (2) Foster adoption of similar market and risk principles across regulatory regimes; (3) Enhance market access and diversification of participants in the OTC derivatives market; (4) Ensure growth in a safe and efficient manner; and (5) Encourage greater alignment with international principles and practices.