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Protecting Data Privacy in the Post-Dobbs Era

By Taylor M. Sorrells

Since the recent U.S. Supreme Court decision in Dobbs v. Jackson Women’s Health Organization, ending the federal constitutional protection of abortion rights,[1] there has been legal uncertainty surrounding how to protect personal data held by third-party apps and software.[2] Specifically, some commentators are concerned that prosecutors in states that have criminalized abortion will access electronic data such as healthcare records, geolocation data, phone call,  text message records, and financial statements to prosecute those suspected of obtaining abortions.[3]

The U.S. Constitution provides very limited protection for data privacy. While the Fourth Amendment offers general protections against unreasonable searches and seizures by government officials,[4] most seizures of data in the abortion context will not be barred by the Fourth Amendment, so long as the prosecutor seeking to access the data obtains a search warrant.[5] Further, the Supreme Court has recognized that, in some cases, law enforcement can subpoena data from third parties without triggering the requirements of the Fourth Amendmentthus requiring no warrant.[6]

While the constitutional protections for data privacy are rather weak, several federal privacy statutes may offer some protection for those seeking reproductive healthcare.[7] However, there is only limited potential for current federal privacy laws to protect the majority of individuals seeking abortions in states that have criminalized the procedure because most of these laws include law enforcement exceptions, which enable third parties to disclose data to law enforcement officials without consumer consent.[8]

In an executive order dated July 8, 2022, the Biden administration, seeking to strengthen federal protections for abortions, ordered the Federal Trade Commission (FTC) chair to “consider actions, as appropriate and consistent with applicable law . . . to protect consumers’ privacy when seeking information about and provision of reproductive healthcare services.”[9] Under the FTC Act, the FTC has broad authority to address consumer privacy violations by diverse entities.[10] Similarly, President Biden instructed the Secretary of the Department of Health and Human Services (HHS) to strengthen existing privacy protections for individuals seeking reproductive healthcare.[11]

While the order signals the Biden administration’s interest in preserving data privacy rights within the reproductive healthcare context, for abortion advocates, it will not likely provide sufficient protection because of the law enforcement exceptions that are written into most of the statutes from which these executive agencies derive their authority.[12] Further, the Health Information Portability and Accountability Act (HIPAA), which HHS administers, has a privacy rule which specifically allows abortion providers to share information with law enforcement, and some state laws require sharing under certain circumstances.[13] Because of these weaknesses in current federal law, commentators believe that absent a change in law or a new rulemaking, patients’ sensitive data will remain at risk.[14]

Post-Dobbs, members of Congress have proposed several bills intended to preserve reproductive health data rights.[15] One of the strongest bills proposed so far is the My Body, My Data Act, which would require the FTC to enforce a national privacy standard for reproductive health data collected by third-party apps, cell phones, and search engines.[16] The bill has been introduced in both the House and Senate, but with the Senate deeply divided on the issue of abortion, its future remains uncertain.[17]

Without stronger federal privacy laws, in most cases, prosecutors in states that have criminalized the procedure will be able to use suspected abortion-seekers’ electronically stored data as evidence against them in criminal prosecutions. For many commentators, new federal laws governing data protection have been long overdue.[18] However, in the post-Dobbs era, abortion advocates’ calls for increased data privacy protection have taken on a new urgency.

Keep an eye on this evolving area of the law.

 

[1] 142 S. Ct. 2228 (2022) (overruling Roe v. Wade, 410 U.S. 113 (1973), and Planned Parenthood v. Casey, 505 U.S. 833 (1992)).

[2] Abby Vesoulis, How a Digital Abortion Footprint Could Lead to Criminal Charges—And What Congress can do About it, Time (May 10, 2022, 4:20 PM), https://time.com/6175194/digital-data-abortion-congress.

[3] Id.

[4] U.S. Const. amend. IV.

[5] Riley v. California, 573 U.S. 373, 377 (2014) (holding that police must obtain a warrant before searching a seized cell phone).

[6] United States v. Miller, 425 U.S. 435, 446 (1976) (upholding the warrantless subpoena of bank records); Smith v. Maryland, 442 U.S. 735, 745–46 (1979) (ruling that law enforcement did not need a warrant to access phone records).

[7] See, e.g., Health Information Portability and Accountability Act of 1996, Pub. L. No. 104-191, 110 Stat. 1936 (imposing federal privacy requirements upon entities within the healthcare industry); Gramm-Leach-Bliley Act, Pub. L. No. 106-102, 113 Stat. 1338 (1999) (requiring entities within the banking industry to protect customer data); Stored Communications Act, 18 U.S.C. 121 §§ 2701–12 (1986) (addressing data privacy within electronic communications); Privacy Act of 1974, 5 U.S.C. § 552a (safeguarding data privacy within federal agencies).

[8] Chris D. Linebaugh, Cong. Rsch. Serv., LSB10786, Abortion, Data Privacy, and Law Enforcement Access: A Legal Overview, at 3 (2022).

[9] Exec. Order No. 14076, 87 FR 42053 (2022).

[10] See Federal Trade Commission Act of 1914, 15 U.S.C. §§ 41-58.

[11] Exec. Order No. 14076.

[12] Linebaugh, supra note 8.

[13] Allie Reed & Christopher Brown, Abortion Privacy Push Pits Biden Against Criminal Laws in States, Bloomberg Law (Aug. 3, 2022, 5:45 AM), https://www.bloomberglaw.com/bloomberglawnews/health-law-and-business/XEHPIBOK000000?bna_news_filter=health-law-and-business#jcite.

[14] Id.

[15] E.g., Stop Anti-Abortion Disinformation Act, S. 4469, 117th Cong. (2022) (directing the FTC to prescribe rules prohibiting disinformation in advertisements for abortion services); Health and Location Data Protection Act, S. 4408, 117th Cong. (2022) (prohibiting data brokers from selling and transferring certain sensitive data).

[16] H.R. 8111, 117th Cong. (2022).

[17] Nik Popli & Vera Bergengruen, Lawmakers Scramble to Reform Digital Privacy After Roe Reversal, Time (July 1, 2022, 12:44 PM), https://time.com/6193224/abortion-privacy-data-reform.

[18] See, e.g., Cameron F. Kerry, Why Protecting Privacy is a Losing Game Today—and how to Change the Game, Brookings (July 12, 2018), https://www.brookings.edu/research/why-protecting-privacy-is-a-losing-game-today-and-how-to-change-the-game.

 

Image Source: https://www.nbcnews.com/tech/security/abortion-clinics-providers-digital-privacy-roe-overturn-rcna30654

 

AI: Artificial or Artistic Intelligence?

AI: Artificial or Artistic Intelligence?

By Austin Wade-Vicente

“We see this technology as an engine for the imagination,” emphatically stated David Holz, creator of the popular online AI art generation program Midjourney.[1] The same program table-top games creator James Allen used this past month to win first-place in digital art at the Colorado State Fair ahead of 20 other artists.[2] Allen’s above pictured “Théâtre D’opéra Spatial” is undoubtedly an appealing work of art, but, in the era of these AI-generated masterpieces, who can legally claim ownership of this blue-ribbon piece?

Growing Pains: Sales Tax on Retail Transactions Involving Cryptocurrency in Virginia

By Owen Giordano

 

In just over a decade, cryptocurrency has radically altered our society’s notion of currency.[1] With a growing number of United States (US) citizens holding onto cryptocurrency, many states are at an impasse as to how they should collect tax on the transactions made with the medium.[2] However, under Virginia’s sales tax statute, the state is allowed to levy a tax on transactions.[3] The scope of this tax is broad and allows taxation on transactions done with currency or through bartering (i.e., property for property).[4] As such, retail sales transactions involving cryptocurrency are likely taxable in the state of Virginia, and that retailer would be obligated to collect the tax on Virginia’s behalf.[5] This development would lead to multiple issues for retailers in Virginia.

Foundational knowledge of this topic is necessary before discussion. To start, cryptocurrency refers broadly to a decentralized, digital currency.[6] This medium lacks any sort of centralized oversight that traditional currencies have, with cryptocurrency transactions recorded on a digital register known as a blockchain.[7] A blockchain is best described as a “ledger” that records and tracks the transactions of all assets (tangible and intangible) done with a specific cryptocurrency. Further, a cash equivalent refers to any form of investment security that can be readily liquidated (turned into cash), such as checks.[9] Put bluntly, a cash equivalent is any medium that works like cash in a transactional setting. Finally, and importantly, this blog assumes that, because cryptocurrency is a medium that can be readily liquidated and is ultimately designed as a substitute for cash, Virginia designates cryptocurrency as a cash equivalent.[10]

Through both the relevant sales tax statute and the choice to label cryptocurrency as a cash equivalent, transactions conducted with cryptocurrency would assuredly be taxable, and retailers would be obligated to collect the associated sales tax.[11] While this creates various possibilities, the decision is not without issues.

To begin, cryptocurrency on paper seems more portable than tangible currency due to the medium’s digital (and thus intangible) nature.[12] The closest analogy would be making a purchase via check or card payment for an expensive transaction, in that those mediums save consumers from the hassle of carrying thousands and thousands of coins or dollars. However, the ability to “carry” cryptocurrency has higher barriers to access than carrying cryptocurrency. As a digital currency, the use of cryptocurrency requires some sort of digital device with internet access to engage in a transaction.[13] Conversely, access to such devices and services is not needed for all-cash transactions because of cash’s tangible nature. While over ninety percent of US adults have access to the internet, adding such hurdles makes cryptocurrency a less efficient medium than tangible currencies.[14] One could argue that this issue applies to check or card payments as well. Yes, but the tangible nature of check payments does not require the additional requirements of constant access to digital devices or the internet. Simply put, the current business infrastructure in Virginia (and the country at large) remains lacking for transactions involving cryptocurrency. Therefore, to fully benefit from the use of cryptocurrency, investment in blockchain technology, as well as the ability to access said platforms more readily and freely, is needed.

Secondly, there is the question of cryptocurrency’s acceptability as a form of payment. Cryptocurrency is notable for its oscillating value.[15] This is partly due to the medium’s decentralized, where there is no regulatory body helping to stabilize the medium.[16] The unstable value contributes to businesses’ apprehension towards accepting cryptocurrency, as a profit could turn into a loss within the span of a day.[17] In the realm of sales tax collection obligations, the oscillating values raise concerns as to when the tax should be collected and what a retailer should do about their tax collection obligation when there is swift and dramatic change in the value of a cryptocurrency.[18] As such, Virginia would need to develop policy to address this key issue.

To conclude, cryptocurrency offers potential as a cash equivalent. Its promise of decentralization and minimal regulatory interference offers many valid reasons for its adoption and use in transactions. However, due to the medium’s novel nature, there is still much planning and development needed to support its use. As such, should cryptocurrency qualify as a cash equivalent, investment in the appropriate technological infrastructure would be necessary for Virginia to reap the benefits this medium offers.

 

[1] “Cryptocurrency” is used this blog post to the broad concept of cryptocurrency, rather than a particular type of cryptocurrency.

[2] Eswar S. Prasad, Are Cryptocurrencies the Future of Money?, EconoFact (Oct. 19, 2021), https://econofact.org/are-cryptocurrencies-the-future-of-money#:~:text=Cryptocurrencies%20have%20captured%20the%20public,end%20from%20a%20societal%20perspective; Cryptocurrency Sales and Use Tax by State, The Bureau of National Affairs, Inc. https://pro.bloombergtax.com/brief/cryptocurrency-tax-laws-by-state/  (last updated: Nov. 22, 2021).

[3] For the purposes of this paper, a “transaction” concerns the retail sale of a taxable good or service. Other types of transactions, such as exchanges for cash equivalents or non-tangible goods, exist, with different states adopting different views on the taxability of such transactions. See Casey W. Baker et al., U.S. State Taxation of Cryptocurrency-Involved Transactions: Trends & Considerations for Policy Makers, 75 Tax Law. 601, 625-26 (2022); Va. Code §§ 58.1-603 (authorizing sales tax)

[4] Va. Code §§ 58.1-602, 58.1-603 (definitions, authorization of a sales tax for both transactions using currency or property).

[5] Va. Code § 58.1-612.

[6] Kate Ashford, What Is Cryptocurrency?, Forbes, https://www.forbes.com/advisor/investing/cryptocurrency/what-is-cryptocurrency/ (Jun. 6, 2022).

[7] Id.

[8] What is Blockchain Technology?, International Business Management, https://www.ibm.com/topics/what-is-blockchain#:~:text=Blockchain%20for%20Dummies%22-,Blockchain%20overview,patents%2C%20copyrights%2C%20branding (last visited: Aug. 18, 2022).

[9] James Chen et al., Cash Equivalents¸ Dotdash Meredith, https://www.investopedia.com/terms/c/cashequivalents.asp#:~:text=Cash%20equivalents%20are%20the%20total,are%20the%20most%20liquid%20assets (last updated: Nov. 27, 2020).

[10] See Eswar S. Prasad, Are Cryptocurrencies the Future of Money?, EconoFact (Oct. 19, 2021), https://econofact.org/are-cryptocurrencies-the-future-of-money#:~:text=Cryptocurrencies%20have%20captured%20the%20public,end%20from%20a%20societal%20perspective (contemplating the effects of using cryptocurrency in a transaction setting, in a manner similar to most cash equivalents); Paulina Likos & Coryanne Hicks, The History of Bitcoin, the First Cryptocurrency, U.S. News & Report, L.P. (Feb. 4, 2022), https://money.usnews.com/investing/articles/the-history-of-bitcoin (mentioning Bitcoin’s, a cryptocurrency, use in transactional settings in a manner similar to cash equivalents); Nathaniel Popper, Bitcoin Has Lost Steam. But Criminals Still Love It, N.Y. Times (Jan. 28, 2020), https://www.nytimes.com/2020/01/28/technology/bitcoin-black-market.html (criminals using cryptocurrencies in transactional settings, further comparison of the medium to cash equivalents).

[11] Va. Code §§ 58.1-602, 58.1-603, 58.1-612.

[12] Kate Ashford, What Is Cryptocurrency?, Forbes, https://www.forbes.com/advisor/investing/cryptocurrency/what-is-cryptocurrency/ (Jun. 6, 2022).

[13] The Basics about Cryptocurrency, State University of New York at Oswego, https://www.oswego.edu/cts/basics-about-cryptocurrency (last visited: Aug. 28, 2022).

[14] https://www.pewresearch.org/internet/fact-sheet/internet-broadband/

[15] Eswar S. Prasad, Are Cryptocurrencies the Future of Money?, EconoFact (Oct. 19, 2021), https://econofact.org/are-cryptocurrencies-the-future-of-money#:~:text=Cryptocurrencies%20have%20captured%20the%20public,end%20from%20a%20societal%20perspective

[16] Id.

[17] Ryan Haar, You Can Buy More Things Than Ever With Crypto. Here’s Why You Shouldn’t, NextAdvisor, LLC, (May 3, 2022) https://time.com/nextadvisor/investing/cryptocurrency/should-you-use-crypto-like-cash/ (citing only 20% of people will use cryptocurrency as a cash substitute).

[18] Va. Code § 58.1-612.

 

Image source: https://time.com/nextadvisor/investing/cryptocurrency/should-you-use-crypto-like-cash/

AI Cannot Get Patents…Yet

AI Cannot Get Patents…Yet

By Grayson Walloga

The recent decision in Thaler v. Vidal held that an artificial intelligence (“AI”) could not obtain a patent for its creations.[1] Thaler’s AI, DABUS, generated patentable inventions without any direct contribution from Thaler himself. He attempted to secure patent protection on his AI’s behalf for two such inventions in 17 jurisdictions all across the world.[2] The United States Patent and Trademark Office (PTO) denied these patents and claimed that a machine does not qualify as an inventor.[3] Thaler brought his case to court, but the court ended up siding with the PTO. He appealed his case, but the Court of Appeals for the Federal Circuit affirmed the lower court’s decision.[4]

In its analysis, the court noted the specific language used in both the Patent Act and the Dictionary Act. The Patent Act defines an inventor as “the individual or, if a joint invention, the individuals collectively who invented or discovered the subject matter of the invention.”[5] Since this act failed to provide a definition for “individual,” the court looked to the Dictionary Act, which observed a distinction between individuals and non-human entities such as corporations, associations, and societies.[6] Additionally, the Supreme Court had defined “individual” in prior cases as something that “ordinarily means a human being, a person.”[7]

Thaler attempted several different arguments for why his AI should be allowed to get a patent. He pointed out that DABUS already had a patent in another country.[8] The South African Patent Office granted the AI a patent for its application relating to a “food container based on fractal geometry.” [9] This shocking action by South Africa, however, had little effect in the United States apart from serving as a conversation starter. The Court of Appeals for the Federal Circuit explained that this did nothing for DABUS’s patent application in the United States because “[t]his foreign patent office was not interpreting our Patent Act.”[10] Australia went in a different direction following the South African patent grant.[11] Justice Jonathan Beach of the Federal Court of Australia ruled that AI fell within the scope of “inventor,” but it could not be an applicant or a grantee of a patent.[12]

Thaler tried to convince the skeptical American court that “inventor” should include AI because it would encourage innovation and public disclosure.[13] The court once again dismissed his claim as mere speculation that lacked a basis in any relevant text.[14] Thaler’s contention may be irrelevant in deciding what the Patent Act says, but it remains a good policy question for possible legislative change. The promise of a patent may have little effect on an AI’s motivation to create new things, but the same cannot be said of the person who created that AI.[15] Inventors could create something like DABUS and use it to help them invent new and useful technologies – resulting in more innovation for society.[16] The court did not completely stamp out Thaler’s hope for more innovation. Its decision was only meant to clarify the definition of inventor under the Patent Act. It did not suggest that inventions made by human beings with the assistance of AI are not eligible for patent protection.[17]

But, of course, most people have a fearful outlook towards AI.[18] Many believe that AI could replace them in their jobs or that AI will be relied upon too much in the future. The world would hardly have need of a Thomas Edison toiling away in some lab running experiments all day. An AI could handle all the calculations and simulations so long as its creator properly sets the parameters. The main obstacle for the inventor who wants a patent but uses an AI’s assistance would be the standard for obviousness under the Patent Act. Perhaps an AI generates some formula for success after analyzing scores of data. Would that still be considered obvious even though it might be impractical for an expert in that field to do the very same?[19] If more inventors all start using AI, would the obviousness standards be relative to AI or still just to normal human experts? Businesses continue to accelerate their AI adoption plans which indicates that these questions will not go away anytime soon.[20] But those of us who did not miss the point of the Terminator franchise can at least take solace in knowing that the decision in Thaler v. Vidal means AI cannot get patents…yet.

 

 

 

[1] Thaler v. Vidal, Appeal No. 2021-2347 (Fed. Cir. Aug. 5, 2022).

[2] Utkarsh Patil, India: South Africa Grants A Patent With An Artificial Intelligence (AI) System As The Inventor – World’s First!!, Mondaq (Oct. 19, 2021), https://www.mondaq.com/india/patent/1122790/south-africa-grants-a-patent-with-an-artificial-intelligence-ai-system-as-the-inventor-world.

[3] Thaler v. Vidal.

[4] Id.

[5] 35 U.S.C. § 100(f) (2012).

[6] Thaler v. Vidal.

[7] Mohamad v. Palestinian Auth., 566 U.S. 449, 454 (2012).

[8] Thaler v. Vidal.

[9] Patil supra note 2.

[10] Thaler v. Vidal.

[11] Patil supra note 2.

[12] Id.

[13] Thaler v. Vidal.

[14] Id.

[15] See Ryan Abbott, The Artificial Inventor Project, Wipo Magazine (Dec. 2019), https://www.wipo.int/wipo_magazine/en/2019/06/article_0002.html.

[16] Id.

[17] Thaler v. Vidal.

[18] How Americans think about artificial intelligence, Pew Research Center (Mar. 17, 2022), https://www.pewresearch.org/internet/2022/03/17/how-americans-think-about-artificial-intelligence/.

[19] See Derek Lowe, AI, and the Patent System, Science (June 8, 2022), https://www.science.org/content/blog-post/ai-and-patent-system.

[20] Joe McKendrick, AI Adoption Skyrocketed Over the Last 18 Months, Harvard Business Review (Sept. 27, 2021), https://hbr.org/2021/09/ai-adoption-skyrocketed-over-the-last-18-months.

Image source: https://thenextweb.com/news/why-ai-systems-should-be-recognized-as-inventors

Epic Apple Fight: Round 2 & 3

By Drew Apperson

 

In a 2020 blog post, I summarized some of the issues between Fortnite developer, Epic Games, Inc., and the respective app markets of Apple and Google. The feud lead to the then-pending lawsuit between Epic Games, Inc. and Apple, Inc. concerning allegedly anticompetitive policies of the App Store.[1] In September of last year, the United States District Court for the Northern District of California ruled in Apple’s favor.[2] However, Apple and Google are far from being in the clear.

In dismay of the District Court’s holding, “[n]early 40 law, business and economics academics” filed an amicus brief in the Court of Appeals for the Ninth Circuit this past January “arguing the [district court] judge wrongly accepted Apple’s justifications that restrictions on third-party app distribution are necessary to protect users.”[3] The brief hit on various flaws it saw in the District Court’s analysis, such as:

[T]he court could have concluded that, on balance, Apple’s restraints were anticompetitive. Short-circuiting the analysis at an earlier stage prevented the court from assessing the ultimate competitive effects under the Rule of Reason, as courts have done for the past 45 years. The court erred in not balancing harms and benefits.[4]

Meanwhile, the federal legislature has simultaneously been working to combat anticompetitive policies in app markets. The United States Senate’s introduced Bill 2710, Open App Markets Act, on August 11, 2021, The Congressional Research Service’s bill summary described the bill as follows:

The bill prohibits a covered company from (1) requiring developers to use an in-app payment system owned or controlled by the company as a condition of distribution or accessibility, (2) requiring that pricing or conditions of sale be equal to or more favorable on its app store than another app store, or (3) taking punitive action against a developer for using or offering different pricing terms or conditions of sale through another in-app payment system or on another app store.

A covered company may not interfere with legitimate business communications between developers and users, use non-public business information from a third-party app to compete with the app, or unreasonably prefer or rank its own apps (or those of its business partners) over other apps.[5]

Just last week at the Global Privacy Summit in Washington, D.C., Apple CEO, Tim Cook, was reported as “slamming” the proposed legislation, arguing that unvetted apps would cause profound results, such as developers circumventing Apple’s privacy rules and putting users at risk.[6] The bill for the Open App Markets Act cleared the Senate Judiciary Committee earlier this year.[7]

As the threat of private suits continue, and as the Congressional bill continues to progress, Apple’s App Store and Google’s Play Store will likely remain under the microscope for the foreseeable future.

 

[1] Drew Apperson, An Epic Apple Fight, Rich. J.L. & Tech. Blog (Dec. 25, 2020), https://jolt.richmond.edu/2020/12/25/an-epic-apple-fight/.

[2] Epic Games, Inc. v. Apple Inc., No. 4:20-cv-05640-YGR, 2021 U.S. Dist. LEXIS 172303 (N.D. Cal. Sep. 10, 2021).

[3] Bryan Koenig, Apple Can’t Hide Behind Privacy In Epic Fight, 9th Circ. Told, Law360 (Jan. 27, 2022, 7:17 PM), https://www.law360.com/articles/1459311.

[4] Brief of Amici Curiae: Law, Economics, and Business Professors in Support of Appellant/Cross-Appellee at 38, Epic Games, Inc. v. Apple, Inc., No. 21-16695 (9th Cir. Jan. 27, 2022).

[5] S.2710 – 117th Congress (2021-2022): Open App Markets Act, S.2710, 117th Cong. (2022), https://www.congress.gov/bill/117th-congress/senate-bill/2710.

[6] Ben Kochman, Apple CEO Claims Antitrust App Store Laws Will Hurt Privacy, Law360 (Apr. 12, 2022, 8:27 PM EST), https://www.law360.com/ip/articles/1482972/apple-ceo-claims-antitrust-app-store-laws-will-hurt-privacy.

[7] S.2710 – 117th Congress (2021-2022): Open App Markets Act, S.2710, 117th Cong. (2022), https://www.congress.gov/bill/117th-congress/senate-bill/2710.

Image source: https://wordpress.org/openverse/image/7edd602f-4fd2-4e31-8ace-dd29151a663b

 

How Will the I.R.S. Tax Staking Rewards? Examining Jarrett v. United States

By Merritt Francis

 

In prior blog posts, I’ve written on blockchain technology, its future implementation into the private and public sectors, and NFTs.[1]  Blockchain technology is a decentralized, distributed ledger that records transactions.  It may be helpful to think of blockchains like a bank ledger, where computers record the transactions rather than individuals. Blockchains are “decentralized” because there is no central authority for data stored on them; transactions are recorded by a peer-to-peer network run by participant “nodes”.  Blockchains are “distributed,” because all transactions are viewable by the public.  Once a transaction is recorded on a blockchain, it is unmodifiable.

Transactions are recorded on a blockchain by participant “nodes,” which are computers completing consensus algorithms, allowing the transaction to be recorded on the blockchain.  Once an individual submits a transaction on a blockchain, the transaction is only recorded once a participant node satisfies the blockchain’s respective consensus algorithm.  There are two main examples of consensus algorithms blockchains use today: proof of work (PoW) and proof of stake (PoS).  I will first explain the PoW and PoS consensus algorithms, then proceed to examine the tax consequences Joshua Jarrett found himself in by engaging in a PoS blockchain.

PoW (Proof of Work) Consensus Algorithms

Bitcoin and Ethereum, two widely adopted blockchain technologies, employ a proof of work (PoW) consensus algorithm.[2]  Under a PoW consensus algorithm, participant nodes (crypto miners) download and run the full chain through a mathematical function.  Once a node has satisfied the PoW consensus algorithm, it’s rewarded by “mining” a block, which is the act of adding valid blocks onto the blockchain.  For example, the hash for Bitcoin block #660000, mined on December 4, 2020, is 00000000000000000008eddcaf078f12c69a439dde30dbb5aac3d9d94e9c18f6.  The block reward for that successful hash was 6.25 BTC.[3]

PoW makes it extremely difficult to alter any aspect of the blockchain, since such an alteration would require re-mining all subsequent blocks.  Unfortunately, however, PoW is bad for the environment because it uses up an immense amount of computing power.  Ethereum’s PoW consumes 73.2 TWh (terawatt-hour) annually, which is the energy equivalent of a medium-sized country like Austria.[4]  Tesla suspended vehicle purchases using Bitcoin due to climate change concerns.[5]  Elon Musk elaborated on the decision in a tweet, saying “Cryptocurrency is a good idea on many levels and we believe it has a promising future, but this cannot come at great cost to the environment.”[6]

PoS (Proof of Stake) Consensus Algorithms

In response to the PoW blockchains’ negative externalities, the proof of stake (PoS) consensus algorithm was created as an environmentally friendly alternative.  PoS “doesn’t rely on expensive hardware using vast amounts of electricity to compute mathematical puzzles,” like bitcoin’s PoW system.[7]  Under a PoS consensus algorithm, owners of a cryptocurrency offer their coins to nodes as collateral, and those nodes have a chance to validate new blocks.[8]  Offering coins as collateral to participant nodes is the process of “staking” your cryptocurrency.[9]  Coin owners with staked coins become “validators,” which entitles them to cryptocurrency rewards for each new block its node validates.[10]  This is what happened in Jarrett v. United States.[11]

Jarrett v. United States of America

During 2019, a Nashville couple, Joshua and Jessica Jarrett, received 8,876 tezos (XTZ) in staking rewards.  The tezos coins were worth $9,407 when the Jarretts received them, and they reported $9,407 as income and paid the related taxes.[12]

On July 31, 2020, the Jarretts filed an amended tax return demanding a $3,793 refund from the IRS.  Under IRS Notice 2014-21, virtual currencies are considered property for federal tax purposes.[13]  And, pursuant to § 1001(a) of the IRC (Computation of gain or loss), the gain from the sale or other disposition of property shall be the excess of the amount realized over the adjusted basis.[14]  As such, the Jarretts argued the virtual currency they received as staking rewards did not amount to taxable income because property is only taxed when it is sold or dispossessed, rather than when the property is created.[15]

The United States Department of Justice ordered the IRS to issue a $3,793 refund to the Jarretts, which they received on February 14, 2022.  The Jarretts, however, refused to accept the refund because the IRS failed to acknowledge the true rationale for issuing the refund.[16]

The rationale behind issuing the refund would provide precedent for other stakers to properly file their income taxes in the future.  So, the Jarretts sought a formal ruling from the United States District Court for the Middle District of Tennessee.  In response, the United States filed a motion to dismiss arguing the Jarretts’ action was moot because the United States fully refunded the claimed overpayment.[17]

In its February 28, 2022 motion to dismiss, the United States stated that “Mootness is ‘the doctrine of standing set in a time frame: The requisite personal interest that must exist at the commencement of the litigation (standing) must continue throughout its existence (mootness).’”[18]  Because the Jarretts received a full refund, as the United States argues, the Jarretts’ action for a refund is moot.

Taxpayers who engage in staking their cryptocurrencies will likely have to continue to speculate as to how the IRS will approach taxing staking rewards.  One thing is clear: it is time for the I.R.S. to release guidance on the matter.

 

[1] Merritt Francis, You Bought a JPEG File for $69.3 Million – What Are You Allowed To Do With It?, Richmond J. L. Tech. (2021), https://jolt.richmond.edu/2021/10/20/you-bought-a-jpeg-file-for-69-3-million-what-are-you-allowed-to-do-with-it/; Merritt Francis, Blockchain as Best Practice: The Benefits of the Criminal Justice System Implementing Blockchain Technology, Richmond J. L. Tech. (2021), https://jolt.richmond.edu/2022/01/06/blockchain-as-best-practice-the-benefits-of-the-criminal-justice-system-implementing-blockchain-technology/.

[2] Jake Frankenfield, Proof of Work (PoW), Investopedia (July 22, 2021), https://www.investopedia.com/terms/p/proof-work.asp.

[3] Id.

[4] Proof-Of-Work (POW), Ethereum (Mar. 28, 2022), https://ethereum.org/en/developers/docs/consensus-mechanisms/pow/.

[5] Lora Kolodny, Elon Musk says Tesla will stop accepting bitcoin for car purchases, citing environmental concerns, CNBC (May 12, 2021), https://www.cnbc.com/2021/05/12/elon-musk-says-tesla-will-stop-accepting-bitcoin-for-car-purchases.html.

[6] Id.

[7] Rachel-Rose O’Leary, The Creator of Proof-of-Stake Thinks He Finally Figured It Out, CoinDesk (Sept. 13, 2021, 4:21 AM), https://www.coindesk.com/markets/2018/09/07/the-creator-of-proof-of-stake-thinks-he-finally-figured-it-out/.

[8] Id.

[9] Id.

[10] Id.

[11] Jarrett v. United States of America, Docket No. 3:21-cv-00419 (M.D. Tenn. May 26, 2021).

[12] Id.

[13] I.R.S. Notice 2014-21.

[14] I.R.C. § 1001.

[15] Jarrett, Docket No. 3:21-cv-00419.

[16] Id.

[17] Id.

[18] Id.

Image source: https://sftaxcounsel.com/taxation-of-crypto-staking/

An Overview of the Social Credit System and the Challenges It Creates

By Walker Upchurch

 

The Chinese government has been widely criticized for its social policy of providing a social credit score to its citizens. The thought of a score based on a person’s morality and conformity to overreaching government regulation is terrifying. Our country was founded on personal freedoms. We pride ourselves on our ideology that everyone is free from government surveillance and unjust treatment. Thus, the thought of an Orwellian system in which “Big Brother Is Watching” and counting our moral missteps on a scoreboard is abhorrent. However, the ideology that the government in China is scoring every individual may be slightly more of a mythological scare tactic than fact.[1] According to the Mercator Institute for China Studies (MERICS), the Chinese Social Credit System (CSCS) is less a social boogeyman and more of an accounting system. [2] The system judges businesses based on their social and financial credit history.[3] The study states that under the social credit system, only violations of law and regulations are ground for a CSCS reduction and that the CSCS should be considered more of a loyalty rewards program than a score that determines citizens’ place in society.[4]

Additionally, according to the China News Service “Personal credit points can be combined with trustworthiness incentives, but they cannot be used as Punishment.”[5] Likewise, the Chinese government laid out that better administrative services, financing, and lower transaction costs were critical factors for a company to raise its CSCS.[6] However, this does not mean that the CSCS not a significant threat to international companies and private citizens. This has led to significant increases in the surveillance of a population and companies, leading to further corruption.[7]

According to a study out of Stanford, the CSCS is out of a total possible score of 1,000.[8] The required data submitted to the Chinese government are Basic Data, Finance and Taxation, Governance, Compliance, and social responsibility.[9] Basic Data is the information collected by the government on high-ranking corporate members and the business that they perform. This data set is collected to decipher whether they have engaged in dishonest acts or “abnormal’ operations.[10] Additionally, the catchall “compliance” indicator, which accounts for nearly half of all the points given, considers the company’s compliance record with several agencies and judicial authorities.[11] The system could allow for significant manipulation of a company’s credit due to “not complying.” As it seems, there is an extremely high level of deference given to the government actor to determine whether a company should be considered highly trustworthy or untrustworthy. [12]

This creates a system where government actors are enabled to determine whether a company will prosper or fail, and the company will do whatever possible to appease them. The system is highly likely for corruption as government actors could be incentivized to give high compliance scores because of unsavory dealings. As written in a wired article, “For the Chinese Communist Party, Social credit is an attempt at softer, more invisible authoritarianism. The goal is to nudge people toward behaviors ranging from energy conservation to obedience to the party.”[13] When asked for a quote in the same article Samantha Hoffman with the International Institute for Strategic Studies in London stated that “Social credit ideally requires both coercive aspects and nicer aspects, like providing social services and solving real problems. It’s all under the same Orwellian umbrella.”[14]

According to the U.S.-China Economic And Security Review Commission, the origin of the document was founded not to subject its citizens to harsher regulations but instead to crack down on corporate misconduct.[15] Additionally, the USCC has laid out 14 significant points which overview the Chinese Social Credit System (CSCS):

  1. The CSCS was created to address domestic concerns regarding their domestic market entities.[16]
  2. The CSCS is a mechanism to strengthen the enforcement of China’s existing laws.[17]
  3. The CSCS is operational, but the degree of implementation is divergent across sectors.[18]
  4. The CSCS files have been established on most registered entities in China, including U.S. companies.[19]
  5. The files are primarily aggregated government records relating to corporate compliance.[20]
  6. In popular discourse, the ability of these systems is massively overstated, and the sophistication of the technologies is not high.[21] However, the scale of the government centralization effort, of which the CSCS is massive.[22]
  7. Government bodies and state regulators control Blacklists relevant to their jurisdictional mandate. Likewise, government bodies may determine which companies are added to the list.[23]
  8. The CSCS aims to improve “trustworthiness” by creating a dragnet under which these companies Blacklisted by one regulator are subject to sanctions from multiple regulators, and companies red-listed by one regulator are subsequently granted incentives.[24]
  9. The CSCS creates a more significant amount of vulnerability to regulatory corruption.
  10. The CSCS likely could be politicized as a trade weapon.[25]
  11. Under the CSCS system, the social credit files are kept on file for a company’s legal representative, key personnel, and actual controllers.[26]
  12. Companies with more extensive business experience are likely to be more exposed.[27]
  13. CSCS data is being used to supplement financial credit data in the assessment of lending.[28]
  14. As the platforms gain insights from social credit data become more sophisticated, “algorithmic accountability” or the inherent difficulty in verifying the fairness or accuracy of machine-generated recommendations is a crucial concern.[29]

There are two categories in which the CSCS’s policies are scored.[30] First, the CSC looks at public credit information or PCI, which is data or information that has been collected by the government or legally authorized administrators.[31] The second is market credit information or MCI, which is information that has been generated by businesses organizations and credit services such as investigative bodies.[32] The PCI is the information collected regarding a company during its interactions with the government. The MCI is directly tied to corporation’s business dealings.[33] As stated by the USCC, the PCI is the critical set of records on which the CSCS is based.[34] With this being considered, interactions these companies have with the Chinese government are crucial to their success.

While this system may be built on the ideology of social amicability, it is a system that is rife with corruption. While, in theory, as Fortune magazine notes, these companies could not be arbitrarily Blacklisted, regulatory bias and corruption could result in an abuse of the system.[35]

Additionally, one of the surprising things is the sheer amount of information that the CSCS holds. According to Trivium, the operation is equal to that of the IRS, the FBI, the EPA, the FDA, the Department of Agriculture, the health department, HUD, the Department of Energy, the Department of Education, and the State Agency sharing records on one single platform.[36] Likewise, these regulators can access the databanks and use the information to provide benefits to corporations that are performing ideally.[37] The predominant issue is that the CSCS could hypothetically surpass the international credit scoring that is currently in place.[38] This could lead to a problem for the U.S. economy as the CSCS could be used negatively against American companies in China and across countries that adopt the CSCS.[39]

 

[1] Vincent Brussee, China’s social credit score – untangling myth from reality, MERICS (Feb. 22, 2022), https://merics.org/en/opinion/chinas-social-credit-score-untangling-myth-reality.

[2] Id.

[3] Id.

[4] Id.

[5] Development and Reform Commission: Personal credit points can be combined with trustworthy incentives but cannot be used for punishment, China News Service (Jul. 18, 2019), https://new.qq.com/omn/20190718/20190718A0W6MO00.html.

[6] Id.

[7] Brussee, supra note 1.

[8] Lauren Yu-Hsin Lin & Curtis J. Millhaupt, China’s Corporate Social Credit System and the Dawn of Surveillance State Capitalism, Stan. L. School (Mar. 30, 2022), https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3933134.

[9] Id. at 9.

[10] Id.

[11] Id.

[12] Id.

[13] Mara Hvistendahl, Inside China’s Vast New Experiment in Social Ranking, Wired (Dec. 14, 2017), https://www.wired.com/story/age-of-social-credit/.

[14] Id.

[15] Kendra Schaefer, China’s Corporate Social Credit System, U.S.-China Economic and Security Review Commission & Trivium (Nov. 16, 2020), https://www.uscc.gov/sites/default/files/2020-12/Chinas_Corporate_Social_Credit_System.pdf.

[16] Id. at 6.

[17] Id.

[18] Id.

[19] Id.

[20] Id.

[21] Id. at 6-7.

[22] Id.

[23] Id. at 7.

[24] Id.

[25] Id.

[26] Id. at 7-8.

[27] Id. at 8.

[28] Id.

[29] Id.

[30] Id. at 19.

[31] Id.

[32] Id.

[33] Id.

[34] Id.

[35] Eamon Barrett, Blacklist vs.‘redlist’: What to know about China’s new corporate social credit score, Fortune (Dec. 10, 2020), https://fortune.com/2020/12/10/china-corporate-social-credit-system-cscs-blacklist-redlist/.

[36] Id.

[37] Id.

[38] Id.

[39] Id.

Image source: https://home.kpmg/cn/en/home/insights/2017/12/china-looking-ahead-edition-7.html

 

Regulating Ransomware Under United States Law

By Liz Jacobs

 

Ransomware is a type of malicious software cybercriminals use to block you from accessing your own data.[1] Ransomware remains a global cybersecurity threat, as it is a unique kind of attack because it is the one cybercrime that has a high direct return of investment associated with it, by holding the victims’ ransom for financial payment.[2] On a global scale, cybercriminals will continue to focus their efforts on this revenue-generating stream.[3] There is no industry that is exempt from the ransomware threat,[4] and it requires constant focus, assessment, and review to ensure that critical information assets remain safeguarded and protected against it.[5]

Ransomware involves digital extortionists encrypting the files on your system and adding extensions to the attacked data and holding it “hostage” until the demanded ransom is paid.[6] Ransomware enters your network in a variety of ways, the most popular is a download via a spam email attachment.[7] The download then launches the ransomware program that attacks your system.[8]

Ransomware can occur in both a large scheme and a smaller scale. It can occur to individuals, small businesses, large businesses, and even the government. There are two types of ransomware, crypto and locker.[9] Crypton Ransomware targets the data and file systems on the device versus the device itself, so the computer is functional except for the ability to access the encrypted files.[10] Locker ransomware prevents the victim from using the system by locking components or all of the system.[11]

Biden has referenced ransomware to “fit comfortably within a legal framework,” the United States should expressly endorse three interdependent legal positions; to wit, that: “1) Sovereignty is a rule of international law; 2) States must exercise due diligence to terminate hostile cyber operations from their territory; and 3) States may engage in collective countermeasures.” [12]

The United States faces persistent and increasingly sophisticated malicious cyber campaigns that threaten the public sector, the private sector, and ultimately the American people’s security and privacy. There are many different arguments on how to address this nationwide problem. For one, the government and private sector work together to help decrease ransomware attacks by using preventative measures and reporting attacks.[13] This ultimately comes in shape by requiring the private sector to work with the government in reporting ransomware attacks. Biden has signed an executive order meant to strengthen the federal government’s cybersecurity standards for software and technology services it uses, which a senior administration official described as a fundamental shift in the federal government’s approach to cybersecurity incidents away from spot responses and toward trying to prevent them from happening in the first place.[14]

Others argue that the government cannot and should not regulate the private sector to prevent these actions. This argument believes that the government should regulate their own technology and let private businesses control their own. Ultimately, ​the growth of unregulated cryptocurrency, one official said, is “what’s driven the growth of ransomware.”[15]

As mentioned, ransomware is a type of malicious software cybercriminals use to block you from accessing your own data.[16] Ransomware effects vary depending upon who the victim of the attack is. As a country, we are reliant on technology, so any sort of ransomware attack can make us extremely vulnerable to other sorts of attacks. Overall, the increase in ransomware has been a concern for the United States government and lawmakers. The impact of such legislation and choice of governmental involvement will ultimately affect the country’s safety from such attacks.

 

[1] How Ransomware Works, Unitrends, https://www.unitrends.com/solutions/ransomware-education#:~:text=Ransomware%20Definition,from%20accessing%20your%20own%20data.&text=During%20this%20time%2C%20the%20cybercriminals,use%20of%20backups%20for%20recovery.

[2] Alicia Hope, A Suspected Ransomware Cyber Attack Shuts Down World’s Fifth Largest Beermaker Molson Coors, CPO Magazine (Mar. 19, 2021), https://www.cpomagazine.com/cyber-security/a-suspected-ransomware-cyber-attack-shuts-down-worlds-fifth-largest-beermaker-molson-coors/.

[3] Id.

[4] Ransomware: The Trust Cost to Business, Cybereason, https://www.cybereason.com/hubfs/dam/collateral/ebooks/Cybereason_Ransomware_Research_2021.pdf.

[5] Alicia Townsend, Watch Out! Cyber Criminals Are Coming, Onelogin (Jan. 5, 2022), https://www.onelogin.com/blog/cybercriminals-coming.

[6] How Ransomware Works, supra note 1.

[7] Id.

[8] Id.

[9] Ransomware Attacks and Types – How Encryption Trojans Differ, Kaspersky, https://www.kaspersky.com/resource-center/threats/ransomware-attacks-and-types.

[10] Id.

[11] Id.

[12] Gary Corn, International Law’s Role in Combating Ransomware, Just Security (Aug. 23, 2021), https://www.justsecurity.org/77845/international-laws-role-in-combating-ransomware/.

[13] Press Release, Treasury Takes Robust Actions to Counter Ransomware, U.S. Dep’t of the Treasury (Sept. 21, 2021), https://home.treasury.gov/news/press-releases/jy0364.

[14] Maria Henriquez, President Biden Signs Executive Order to Strengthen U.S. Cybersecurity Defenses, Security Magazine (May 13, 2021), https://www.securitymagazine.com/articles/95197-president-biden-signs-executive-order-to-strengthen-us-cybersecurity-defenses.

[15] Ellen Nakashima, Hamza Shaban & Rachel Lerman, The Biden Administration Seeks to Rally Allies and the Private Sector Against the Ransomware Threat, Wash. Post (June 4, 2021, 2:24 PM), https://www.washingtonpost.com/business/2021/06/04/white-house-fbi-ransomware-attacks/.

[16] How Ransomware Works, supra note 1.

Image source: https://krebsonsecurity.com/category/ransomware/

A Sample Amendment to the Revised Uniform Fiduciary Access to Digital Access Act: How California Can Advance User Interests

By Kevin Frazier*

 

I. Introduction

American users of cloud providers, social media services, or other digital content providers place the value of their digital assets at $55,000, on average.[1] However, property law has yet to undergo a commensurate transformation to provide ownership rights over digital assets.[2] Generally, digital assets refer to the accounts, documents, information, records, photos, and other media accessible through an electronic device.[3]

Despite users feeling as though they own and control their digital assets, the law has left these assets in a perilous position. State law in California exemplifies how the current legal framework in most states excessively defers to providers in the determination of how to distribute a user’s digital assets.

 

II. The Current Legal Framework to Access Digital Assets Fails Californians

By 2100, millions of Californians will be among the 4.9 billion deceased individuals with social media accounts held by private entities.[4] Absent reform, those mourning their lost loved ones will have few means to locate and obtain the digital assets left behind.[5] Under current California law, digital assets do not explicitly constitute property and may not, therefore, be passed down through the intestate proceedings.[6] This is a regrettable omission given the ever-expanding importance of digital assets to their owners.

A confusing combination of federal, state, and private laws makes accessing a decedent’s digital assets difficult.[7] For example, each state has an anti-hacking statute, which complicates accessing the account of a decedent.[8] That’s why, in part, California, along with 45 other states, passed the Revised Uniform Fiduciary Access to Digital Assets Act (“RUFADAA”)[9] to govern how fiduciaries may access this increasingly prevalent asset class.[10] The California version of RUFADAA (“California RUFADAA”) provides,[11] through new California Probate sections 870-884,[12] nearly all the protections and assurances as the Uniform Law Commission’s version of RUFADAA. However, the California legislature, in the same way as other states, made certain changes to its version. Additional changes must occur to decrease the barriers to fiduciaries accessing the digital assets of decedents.

Online service providers or custodians have their own terms of service agreements (“TOSA”) that thwart the purpose of RUFADAA.[13] Many TOSA treat content, such as photos, files, and documents, created by the user as the property of the user.[14] However, providers specify in their TOSAs that the account itself, which stores the user’s content, remains in their control;[15] TOSAs often have provisions that prevent the transfer of rights with respect to a decedent’s account.[16] Many providers even retain the authority to delete accounts at any time.[17]

Federal laws also “pose legal obstacles” in an executor’s attempt to gain access to a decedent’s online accounts.[18] The Stored Communications Act (“SCA”) represents one such federal barrier. It criminalizes the intentional access to “a facility through which an electronic communication service is provided” without authorization.[19] A provider may disclose the contents of a communication with “the consent of the originator or an addressee or intended recipient of such communication[.]”[20] Content includes the text of emails as well as social media accounts.[21]

The Computer Fraud and Abuse Act (“CFAA”) bans “unauthorized access to computers.”[22] Unauthorized access includes anyone other than an account owner accessing the online account in violation of the provider’s terms of service agreement.[23] If an executor found a decedent’s password and used it to access their accounts, the executor may have violated federal law. Neither the SCA nor the CFAA explicitly addresses what happens when a user dies.

Reforms at the state level have tried to lower these federal barriers. Kansas took the step of explicitly defining property to include digital assets because legislators there regarded RUFADAA’s treatment of digital assets as property as insufficient to ensure fiduciaries could access digital assets as they would any other property under intestate succession.[24] That clarification is an important one. Probate laws generally differentiate between intangible property interests in a copyright and tangible property;[25] the former may be passed separately from the tangible property under a will or a state’s intestate succession laws.[26] These reforms may not go far enough, though.

If California (and any other state that has passed a version of RUFADAA) wants to ensure that providers do not exercise undue control over the digital assets of descendants, then the legislature should enact the amendments detailed below.

 

III. How RUFADAA Works

RUFADAA allows fiduciaries to access a deceased user’s online accounts hosted by a custodian.[27] A “user” is “a person that has an account with a custodian.”[28] A “custodian”, or provider, is “a person that carries, maintains, processes, receives, or stores a digital asset of a user.”[29] And, digital asset “means an electronic record in which an individual has a right or interest.”[30] Custodians may offer “online tools” for users to set forth directions for the disclosure of digital assets to a third person.[31]

If a custodian does provide an online tool, then the directions established by the user to distribute their assets carry legal force and take priority over any other instructions.[32] If an online tool is not available or used, then the user can set forth legally-binding instructions in their will.[33] If the user has not provided any directions via an online tool or will, then the provider’s TOSA governs.[34]

RUFADAA lacks sufficient guidance to remedy all the issues associated with fiduciary access to digital assets.[35] The scope of fiduciary powers to manage the digital assets of decedents needs clarification.[36] The unchecked discretion of providers to delete accounts, to require court orders to access deceased users’ digital assets, and to specify the manner in which they’ll disclose any digital assets creates costly uncertainty and “administrative delays” for fiduciaries.[37]

These issues could be ameliorated, in part, by making it easier for users to use online tools and by granting more finality to the determinations made in those tools. Yet, only a few providers offer online tools.[38] And, the users who do discover these tools may have to go through a number of steps to outline their directions for the distribution of their digital assets.[39]

Even in the case of a decedent using an online tool, the fiduciary must get through several barriers to access the user’s content. RUFADAA requires that they (1) send a request to the custodian, (2) provide the custodian with a copy of the user’s death certificate, and, (3) provide the custodian with documentation of their authority.[40] And, at the custodian’s discretion, the fiduciary may have to obtain a court order finding that the administration of the estate reasonably necessitates disclosure of the user’s digital assets.[41] Custodians exercise this discretion despite having protection against any liability for actions taken while complying with RUFADAA.[42]

As discussed above, many providers also may delete an account at their discretion, despite recognizing that users have a property interest in those accounts. The ability of providers to take such action contradicts their own declarations related to the user’s retention of ownership of their content.[43] There’s also a strong argument that providers that exercise this discretion violate all wills that include residuary clauses, “which transmit any items, such as digital assets, not specifically mentioned to named beneficiaries.”[44]

 

IV. Possible Amendments to California RUFADAA

Amendments to California RUFADAA can resolve many of these issues. Click here for an example of possible amendments. First, RUFADAA must clarify the rights of fiduciaries with respect to the digital assets of the decedent and use constant terminology through the Act to refer to those rights.[45] The fact that these changes would it easier for fiduciaries to control and manage the digital assets would align with the purpose of the act, which Professor Patricia Sheridan derived from the Prefatory Note and summarized as “to give fiduciaries the legal authority to manage digital assets in the same way they manage tangible assets.”[46]

Second, RUFADAA should require service providers to offer online tools to users. Additionally, providers should obligate users to complete the online tool prior to the user receiving access to the provider’s service. A higher rate of completion of these online tools would significantly reduce the barriers to accessing the digital assets of decedents.

Third, RUFADAA should pare down the discretion of providers to delete accounts and require court orders to exercise otherwise authorized access to the content of a deceased user. Under current law, this discretion has few limits. For example, providers can mandate a court order even when a fiduciary can show that the decedent provided explicit instructions in their will to allow the disclosure of their electronic communications.[47]

Fourth, clarify under RUFADAA and the civil code in general that personal property must expressly include digital assets. The latter clarification requires legislative action outside the scope of the sample amendment below but merits concomitant attention. Following the lead of reformers in Kansas, California should amend its definition of property to state the following:

“Personal Property” includes money, goods, chattels, evidences of debt and things in action, and digital assets as defined in California RUFADAA.

This definition would guarantee that digital assets would receive the same treatment as traditional property in the context of intestate succession. Additional research should take place prior to this possible legislative step. For instance, Californians deserve to know whether such a change to the Civil Code would subject their digital assets to remedies other than those spelled out in contracts and in statute. Hopefully, legislators can pursue this research and, subsequently, amend the Civil Code alongside updates to RUFADAA.

The former clarification can also take place in this reform of RUFADAA. An amendment that specifies that personal property includes digital assets will ensure that Californians unable to make use of online tools will have some assurance that their digital assets will pass down pursuant to their wishes or intestate succession. These dual efforts to categorize digital assets as personal property will create beneficial redundancy in the law.[48] In the event both pass, the legislature will have made clear their intent to treat digital assets as personal property.

 

V. The Path to Amending California RUFADAA

To amend California RUFADAA legislators and advocates will have to anticipate and circumvent several barriers. RUFADAA’s status as a uniform law presents the first barrier. States legislators receive guidance from the developers of uniform laws to adopt them in their entirety “with as few changes as possible.”[49] Still, RUFADAA’s status as a uniform law has not previously stopped California legislators from modifying it. California adopted a version of RUFADAA with several amendments, omitting whole parts from the final Act.[50]

Opposition from Internet service providers (“ISPs”) and privacy advocates represents another barrier. These groups have at times been on the same side in opposing laws intended to lower barriers to granting third parties control over the accounts of a decedent.[51] For example, they managed to nudge the Uniform Law Commission to remove text from an earlier draft that allowed fiduciaries to “access” the digital assets of the decedent.[52] Tech companies in California have shown a willingness to thwart efforts by Californians and their elected officials to add new responsibilities to their operations.[53]

While other states with versions of RUFADAA should analyze the amendments below, legislators in California have additional reasons to consider them because California RUFADAA has not lived up to expectations. State legislators avoided passing several other pieces of legislation because they worried that executors would have to jump through too many hoops to control and manage digital assets. California Assembly Member Ian Calderon initially introduced model legislation that would have “require[d] a probate court to order a [provider] to disclose to the executor [] a record of other information pertaining to the deceased user, but not the contents of communications or stored contents.”[54] By eventually passing the California RUFADAA, the legislature signaled a desire to create an easier process through which digital assets of deceased users could be disclosed to fiduciaries.

The “clear path” that legislators wanted to pave has been cluttered by court orders demanded by providers. That’s why the amendment outlined above makes three key changes: (1) clarifying language that providers could cite as a reason for delaying the production of digital assets; (2) insisting on a default setting for disclosure of digital assets by mandating that providers offer online tools; and, (3) raising the threshold for when a provider may request a court order. Californians deserve these amendments to become law.

 

* Kevin Frazier is a Fellow at the Miller Institute for Global Challenges and the Law at the UC Berkeley School of Law.

[1] McAfee Reveals Average Internet User Has More Than $37,000 in Underprotected ‘Digital Assets’, Business Wire, https://bwnews.pr/3AwRwY0 (last visited Jan. 25, 2022).

[2] See generally Sjef van Erp, Ownership of digital assets?, 5 Euro. Prop. L.J. 73 (Aug. 2016).

[3] See Patricia Sheridan, Inheriting digital assets: does the revised uniform fiduciary access to digital assets act fall short?, 16 ISJLP 363, 364-65 (adding online credit and bank accounts, cloud storage accounts, and digital music subscriptions among the things commonly considered to be “digital assets,” while noting that “no single definition” exists.).

[4] See Carl J. Ohman & David Watson, Are the dead taking over Facebook? A Big Data approach to the future of death online, Big Data & Society (2019), available at: https://journals.sagepub.com/doi/full/10.1177/2053951719842540.

[5] Sheridan, supra note 3, at 364 (“Dealing with digital property after the account owner’s death has emerged as an important issue for state legislatures, online service providers, and the family members of those individuals who maintain an online presence.”).

[6] Cal. Prob. Code § 62 (2018).

[7] Sheridan, supra note 3, at 364.

[8] Computer Crime Statutes, NAT’L CONFERENCE OF STATE LEGISLATURES (Feb. 24, 2020), http://www.ncsl.org/research/telecommunications-and-information-technology/computer-hacking-and-unauthorized-accesslaws.aspx [https://perma.cc/3PQX-X2JS].

[9] Revised Uniform Fiduciary Access to Digital Assets Act (2015), NAT’L CONFERENCE OF COMM’RS ON UNIF. STATE LAWS (Mar. 8, 2016), http://www.uniformlaws.org/shared/docs/Fiduciary%20Access%20to%20Digital%20Assets/2015_RUFADAA_Final%20Act_2016mar8.pdf [https://perma.cc/7EFY-Y5WR] [hereinafter “RUFADAA”].

[10]Access to Digital Assets of Decedents, NAT’L CONFERENCE OF STATE LEGISLATURES (Jan. 24, 2021), available at: https://www.ncsl.org/research/telecommunications-and-information-technology/access-to-digital-assets-of-decedents.aspx (listing the states that have passed RUFADAA).

[11] 2016 Cal. Stat. Ch. 551, § 1 (AB 691) (effective Jan. 1, 2017).

[12] Cal. Prob. Code §§ 870–884 (2017) [hereinafter “California RUFADAA”].

[13] See Sheridan, supra note 3, at 364.

[14] See id. at 373-74 (enumerating the social media companies with TOSA that regard certain content as the property of the user).

[15] Ashley F. Watkins, Digital Properties and Death: What Will Your Heirs Have Access to After You Die?, 62 BUFFALO L. REV. 193, 216 (2014).

[16] See Sheridan, supra note 3, at 375-76.

[17] See id. at 376 (detailing the provisions of several providers).

[18] Id. at 366.

[19] Electronic Communications Privacy Act of 1986, Pub. L. No. 99-508, 100 Stat. 1848, at § 2701(a) (2012) (codified as amended at 18 U.S.C. §§ 2510-22, 2701-12, 3121-27).

[20] 18 U.S.C. § 2702(b)(3) (2012).

[21] See Sheridan, supra note 3, at 371.

[22] 18 U.S.C. § 1030 (2012).

[23] Id.

[24] K.S.A. 77-201 Ninth.

[25] Jonathan J. Darrow & Gerald R. Ferrera, Who Owns A Decedent’s E-Mails: Inheritable Probate Assets or Property Of The Network?, 10 N.Y.U. J. LEGIS. & PUB. POL’Y 281, 286-87 (2007).

[26] Natalie M. Banta, Death and Privacy in the Digital Age, 94 N.C. L. REV. 927, 988 (2016).

[27] RUFADAA, supra note 9, § 2(10).

[28] California RUFADAA, supra note 12, § 871(v).

[29] Id. § 871(f).

[30] Id. § 871(h); note that this definition excludes digital assets created in an employment setting because the individual would not have a right to that electronic record. See, e.g., Solomons v. United States, 137 U.S. 342, 346 (1890) (“If one is employed to devise or perfect an instrument, or a means for accomplishing a prescribed result, he cannot, after successfully accomplishing the work for which he was employed, plead title thereto as against his employer. That which he has been employed and paid to accomplish becomes, when accomplished, the property of his employer.”).

[31] Id. § 2(16).

[32] Id. § 4(a).

[33] Id. § 4(b).

[34] Id. § 4(c).

[35] Sheridan, supra note 3, at 377.

[36] Id.

[37] See id. at 377-78.

[38] See id. at 370 (outlining the online tools of Google and Facebook).

[39] See id.

[40] RUFADAA, supra note 9, §§ 7, 8.

[41] Id. §§ 7(5)(D), 8(4)(D).

[42] Id. § 16.

[43] Sheridan, supra note 3, at 377.

[44] Id. at 377 (citing David Horton, Contractual Indescendibility, 66 HASTINGS L.J. 1047, 1052 (2015)).

[45] See id. at 379.

[46] See id. at 379 (citing RUFADAA Prefatory Note).

[47] RUFADAA, supra note 9, § 7(5)(C).

[48] See John M. Golden, Redundancy: When Law Repeats Itself, 94 Tex. L. Rev. 629, 630 (“[A]nti-redundancy principles should generally be contextually confined to condemnation of excessive or otherwise problematic redundancy, rather than redundancy per se.”).

[49] Linda D. Jellum, Mastering Legislation, Regulation, and Statutory Interpretation at 253 (3d, Carolina Academic Press) (2020).

[50] Michael T. Yu, Towards a New California Revised Uniform Fiduciary Access to Digital Assets Act, 39 Loy. L.A. Ent. L. Rev. 115, 143 (2019).

[51] See Sheridan, supra note 3, at 368.

[52] Id. at 378-79.

[53] Brian Chen & Laura Padin, PROP 22 WAS A FAILURE FOR CALIFORNIA’S APP-BASED WORKERS. NOW, IT’S ALSO UNCONSTITUTIONAL, NELP (2021), available at: https://www.nelp.org/blog/prop-22-unconstitutional/.

[54] Cal. Leg., Assemb. B. No. 691 (2015-2016 Reg. Sess.) as introduced Feb. 25, 2015.

 

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