For the first time in U.S. history, one of the two leading candidates for President is a convicted felon and is in the middle of multiple criminal trials on other charges in both state and federal courts. This set of unprecedented circumstances raises a series of urgent legal questions of first impression, particularly in the case in which Donald Trump wins the election. Three questions in particular require urgent examination in the run-up to the 2024 presidential election, and potentially in the immediate post-election period, depending on the outcome. First, with regard to the federal charges prosecuted by the Department of Justice, does the Department’s fifty-year-old policy of never indicting a sitting President apply to a previously indicted individual who is elected President after indictment and in the middle of ongoing criminal trials? Second, if the Department of Justice’s policy does not block continuing with the prosecution, would the President’s usual right of removal apply to allow him to fire Special Prosecutor Jack Smith or otherwise use the President’s control of the Department to effectively end the two federal criminal cases against him? And third, with regard to state prosecutions, how protected would each of these state processes be in the face of claims of federal preemption and arguments of executive privilege, immunity, and authority? Could the State of New York proceed to sentence Trump for his felony convictions and potentially imprison him? Could Georgia prosecutors encumber the presidency by insisting on taking their case against him to trial? In answering each of these questions this Essay considers constitutional history, caselaw on presidential immunity (including the Supreme Court’s recent decision in Trump v. United States), and the implications for the rule of law—and hence for the longevity of U.S. democracy—if a sitting President is effectively above the law.
California Code of Civil Procedure Section 998: An Offer to Compromise Between the American and English Rules for Fee-Shifting?
Imagine you bring a personal injury claim seeking damages of $950,000. At the end of trial, the jury finds the defendant negligent and awards you $375,000. Although you prevailed at trial, the court orders you to pay a portion of the defendant’s litigation costs. Accordingly, you lose your entire award and are required to provide an additional payment of $18,000 to the defendant. If you are confused by this hypothetical situation, you are not alone. This seemingly backwards scenario is made possible by California Code of Civil Procedure section 998 (“section 998”),1See Cal. Civ. Proc. Code § 998(e) (West 2024). Under section 998, if a plaintiff rejects a defendant’s 998 offer and subsequently fails to obtain a more favorable judgment or award, costs from the time of the offer are to be deducted from plaintiff’s award. If the costs exceed damages awarded to the plaintiff, “the net amount shall be awarded to the defendant and judgment or award shall be entered accordingly.” Id. This hypothetical operates under two major assumptions. First, that the defendant, at some point, made a valid 998 offer to the plaintiff that was greater than $375,000, which the plaintiff subsequently rejected. And second, that the defendant’s recoverable costs pursuant to section 998(c)(1) were $393,000. a cost-shifting statute that has perplexed California litigators for decades.
When it comes to the determination of which party is responsible for paying legal fees in a litigation, there are two prominent models: the “English rule” and the “American rule.”2Albert Yoon & Tom Baker, Offer-of-Judgment Rules and Civil Litigation: An Empirical Study of Automobile Insurance Litigation in the East, 59 Vand. L. Rev. 155, 160–61 (2006). The majority of the Western world implements the English rule,3Christopher Hodges, Stefan Vogenauer & Magdalena Tulibacka, Costs and Funding of Civil Litigation: A Comparative Study 19 (Univ. of Oxford Legal Rsch. Paper Series, Working Paper No. 55, 2009). which embodies a loser-pays system in which litigation costs, including attorney’s fees, are shifted to the losing party.4Id. Conversely, in America, absent bad faith or a statutory or contractual provision to the contrary, the general rule is no fee-shifting.5Id. at 23. In other words, unless a lawsuit involves bad faith, a contractual dispute and the contract at issue contains a fee-shifting provision, or a statute that provides for recovery of costs, each party bears their own litigation costs, irrespective of the outcome.6Id.
Each model has its pros and cons. On the one hand, a loser-pays system—the English rule—discourages nuisance litigation and promotes settlement, but may subsequently reduce access to litigation,7Thomas D. Rowe, Jr., The Legal Theory of Attorney Fee Shifting: A Critical Overview, 1982 Duke L.J. 651, 653 (1982); Jaime Leigh Loos, The Effect of a Loser-Pays Rule on the Decisions of an American Litigant, 7 Major Themes Econs., 31, 43– 44 (2005). even for those with meritorious claims.8Yoon & Baker, supra note 2, at 161. Conversely, a system that does not generally allow for fee-shifting—the American rule—enables individuals to have their fair day in court, avoiding the English rule’s “potential chilling effect on meritorious litigation.”9Id. The American rule, however, may subsequently decrease the likelihood of settlement and open the door for increased nuisance litigation, which may overwhelm court systems.10John F. Vargo, The American Rule on Attorney Fee Allocation: The Injured Person’s Access to Justice, 42 Am. U. L. Rev. 1567, 1634–35 (1993).
Because the American rule may lack distinct incentives for parties to settle or to refrain from bringing frivolous claims that create a backlog in courts, the American justice system has devices to encourage parties to settle their claims and resolve disputes as quickly and efficiently as possible. One such device includes offer-of-judgment rules: a type of fee-shifting statute that provides an exception to the general rule against fee-shifting. Offer-of-judgment rules are offer-based fee-shifting rules that allocate costs according to pretrial settlement offers.11Kathryn E. Spier, Pretrial Bargaining and the Design of Fee-Shifting Rules, 25 RAND J. Econ. 197, 197 (1994). Thus, under an offer-of-judgment rule, if a litigant rejects a pretrial settlement offer and subsequently receives a less favorable judgement at trial, they must compensate the offeror for certain post-offer costs.
Section 998 is California’s offer-of-judgment rule. Section 998 is a cost-shifting statute designed to encourage settlement of litigation, without the need for a trial, by shifting certain costs to a party that rejected a 998 “offer to compromise” from their opponent and subsequently failed to obtain a better result at trial.12See Cal. Civ. Proc. Code § 998(c)(1), (d), (e) (West 2024). The California legislature and courts have made clear that the fundamental policy behind section 998 is to encourage the settlement of lawsuits prior to trial. However, statutory and case law analyses may indicate that 998’s policy also encompasses promoting settlement without unduly limiting access to courts.
The effectiveness of section 998 remains an ongoing debate among civil litigators. Application of section 998 is exceedingly difficult to understand and there is concern that it may not offer a high enough incentive to settle since the statute allows only a limited amount of recoverable costs. On the other hand, even if section 998 does not result in settlement as frequently as anticipated, it is a beneficial tool that provides a financial incentive for parties to settle that might not otherwise exist. As the debate over section 998’s efficacy continues, the California legislature and courts will likely be increasingly confronted with proposed amendments and judicial disputes over its applicability. Accordingly, in the future, these state actors may wish to consider how section 998 may be a powerful vehicle to relieve overburdened courts without overly deterring claimants from protecting their rights or interests.
This Note considers the extent to which section 998 can genuinely be considered a compromise between the English and American rules for fee-shifting, rather than just a tool to promote settlement. In particular, this Note asks whether section 998 seeks to promote settlement without unduly limiting access to courts, and if so, to what extent.. Although section 998 may be used in trial and arbitration,13See id. § 998(b). this Note focuses on section 998 in the context of litigation and trial. To help inform this Note’s discussion of the underlying policy tradeoffs behind different fee-shifting rules and the significance of promoting settlement prior to trial, Part I provides an overview of the mechanics, principal stages, and costs of civil litigation. Part II discusses section 998 relative to the competing models of the English rule and the American rule, including general policy tradeoffs and impact on litigation strategy. Part III provides an overview of the statutory framework of section 998 and its underlying policy considerations. Part IV examines section 998 legal developments and whether if, and to what extent, judicial determinations are not only promoting section 998’s purpose of encouraging settlements but also doing so without unduly limiting access to courts. A conclusion with final considerations follows.
Nothing Comes from Nothing: Andy Warhol and the Inadequacy of the Fair Use Analysis of Contemporary Art
Andy Warhol looms large—not just within the ivory tower of contemporary visual arts, but in American culture. To many, his colorful silkscreen portraits of such celebrities as Marilyn Monroe or Elizabeth Taylor are paradigmatic of contemporary art. Yet, despite the near-universal reach of his work and his significant celebrity in his own right, the theoretical and conceptual underpinnings of his work remain less accessible to casual viewers.
In 1984, Lynn Goldsmith, a celebrity portrait photographer, licensed a 1981 photograph she took of the musical artist Prince (the “Goldsmith Photograph”) to Vanity Fair Magazine for use as an artist reference in an illustration that appeared twice in the magazine, with attribution back to Goldsmith for the “source photograph.”1Andy Warhol Found. for the Visual Arts, Inc. v. Goldsmith, 143 S. Ct. 1258, 1266 (2023). Vanity Fair hired Andy Warhol to create a silkscreen portrait of Prince based on the Goldsmith Photograph to accompany an article about Prince’s music and newfound celebrity. Unbeknownst to Goldsmith until she discovered “Orange Prince,” an orange silkscreen portrait of the singer, on the cover of Condé Nast’s posthumous tribute to Prince in 2016, Warhol created fifteen additional works based on her photograph (the “Prince Series”) before his death. Goldsmith sued for copyright infringement, and the district court for the Southern District of New York (the “Warhol district court”) initially found the Prince Series was transformative and granted summary judgment to the Andy Warhol Foundation for the Visual Arts (“AWF”) on its fair use defense. The Second Circuit reversed upon concluding that each of the four statutory fair use factors2 See infra Part I . weighed in favor of Goldsmith. The Supreme Court granted certiorari to examine the first fair use factor, ultimately finding in a 7-2 decision that the first factor favored Goldsmith and counseled against fair use because the purpose of Orange Prince was substantially the same as the Goldsmith Photograph and AWF’s licensing of Orange Prince to Condé Nast’s special issue commemorating Prince was of a commercial nature.3Andy Warhol Found. for the Visual Arts, Inc. v. Goldsmith, 143 S. Ct. at 1278, 1280. Justice Kagan, joined by Chief Justice Roberts, penned a sharply-worded dissent in defense of Warhol’s transformative use of his source material, accusing the majority of leaving the Court’s first factor inquiry “in shambles”4Id. at 1292 (Kagan, J., dissenting). and “our world poorer.”5Id. at 1312 (Kagan, J., dissenting).
Warhol’s fame complicates the fair use analysis in the case at hand (“Warhol”) because it raises questions of “celebrity-plagiarist privilege”6Andy Warhol Found. for the Visual Arts, Inc. v. Goldsmith, 11 F.4th 26, 31, 43 (2d Cir. 2021) (“[T]he more established the artist and the more distinct that artist’s style, the greater leeway that artist would have to pilfer the creative labors of others.”). and how the Supreme Court’s ruling may influence less established artists in future copyright suits. The Warhol district court and the Second Circuit, amici for both parties, and Supreme Court Justices have all debated the proper role, or the absence thereof, that Warhol’s fame might play in the Court’s analysis of whether Orange Prince could be protected as fair use of the Goldsmith Photograph. Despite the fact that this case is far from the first time Warhol’s appropriation of photographs for his silkscreen work has embroiled him in copyright disputes with the photographers of the underlying works (most disputes were settled out of court),7Kate Donohue, Andy the Appropriator: The Copyright Battles You Won’t Hear About at the Whitney’s Warhol Exhibit, Colum. J.L. & Arts (Aug. 2, 2019), https://journals.library.columbia.edu/
index.php/lawandarts/announcement/view/112 [https://perma.cc/73LG-4FNT]. this case promised to be of unprecedented significance because of the myriad of ways in which Warhol epitomizes the challenges that appropriation art,8Appropriation art refers to the practice of using preexisting images or objects to create new artwork with minimal physical transformations to the originals; often to challenge traditional notions of authenticity, creativity, and authorship. Appropriation, Tate, https://www.tate.org.uk/art/art-terms/a/appropriation [https://perma.cc/B8UL-VH45]. and the contemporary visual arts more broadly, have historically posed for the fair use doctrine.
The task of formulating a clear standard for evaluating fair use in cases involving appropriation art has only become more challenging in our digital age, in which the use of appropriation in art is no longer limited to the “relatively small segment of creators who practice ‘appropriation art.’ ”9Amy Adler, Fair Use and the Future of Art, 91 N.Y.U. L. Rev. 559, 571 (2016). The practice of copying has become “both the topic of contemporary art and its technique” and “now permeates art in an extraordinarily diverse range of ways.”10Id. at 571–72. Accordingly, Warhol represented a crucial opportunity for the Supreme Court to tailor a more specialized and better-informed standard of fair use in the context of the conceptual visual arts so that the fair use doctrine may continue to evolve alongside advancements in the arts.
This Note proposes that the Supreme Court should have vacated and remanded Warhol to the district court to supplement its evaluation of the first and fourth fair use factors with an evidentiary analysis of the perspective of an art market consumer or magazine editor. Part I of this Note offers an overview of the legislative intent of the fair use defense and the four statutory factors, then traces subsequent articulations of the doctrine in U.S. fair use jurisprudence. Part II discusses the issues of scope and incompatibility that arise from the fraught application of the Second Circuit’s analysis of “transformativeness” under the first factor to conceptual art. Part III explores how adapting the substantial similarity analysis to fair use by allowing courts to consider the perspective of the art market consumer under the first and fourth factors can contribute to a more equitable and informed application of the fair use doctrine.
Social Media Censorship: Is It Protected by the First Amendment?
The Internet has become an indispensable tool that many rely on for information, marketing, commerce, and connections. The wide-reaching data accessible by a quick Google search retrieves information that would otherwise take days to find in a library. Society has become greatly dependent on this access to information, allowing individuals to “make quicker, more-informed decisions”1Jaana Anderson & Lee Rainie, 3. Fifty-Fifty Anecdotes: How Digital Life Has Been Both Positive and Negative, Pew Rsch. Ctr. (July 3, 2018) (quoting Andie Diemer) https://www.pewresearch
.org/internet/2018/07/03/fifty-fifty-anecdotes-how-digital-life-has-been-both-positive-and-negative/ [https://perma.cc/Q2EC-6JMZ]. and “connect [with] anything or anyone at any given moment.”2Id. However, “[o]ur greatest strength can also be our greatest weakness, and our human relationship with technology is a classic testament to that.”3Id.
Social media platforms have grown immensely over the past decade, with many using social media as their primary source to learn about current events and breaking news.4The Supreme Court has acknowledged that many individuals rely on social media websites as their “principal source[] for knowing current events, checking ads for employment, speaking and listening in the modern public square, and otherwise exploring the vast realms of human thought and knowledge.” Packingham v. North Carolina, 582 U.S. 98, 107 (2017). A study conducted in 2020, at the height of the COVID-19 Pandemic and the U.S. presidential election, revealed that a staggering 53% of adults in the United States use social media as their news source either “often” or “sometimes.”5Elisa Shearer & Amy Mitchell, News Use Across Social Media Platforms in 2020, Pew Rsch. Ctr. (Jan. 12, 2021), https://www.pewresearch.org/journalism/2021/01/12/news-use-across-social-media-platforms-in-2020 [https://perma.cc/8JTF-4EHP]. With Facebook being the most popular, a subset of 36% of Americans regularly use the site to learn about news, out of a total of 68% of Americans who are on Facebook generally.6Id. With X (formerly known as Twitter) closely behind, 15% of Americans regularly refer to the site as their news source, out of a total of 25% of Americans registered on X generally.7Id.
Social media platforms are owned and operated by private entities that currently have full control over the implementation of algorithms and other content-moderation policies.8See NetChoice, LLC v. Att’y Gen., 34 F.4th 1196, 1203 (11th Cir. 2022) (explaining that “with minor exceptions, the government can’t tell a private person or entity what to say or how to say it”). Due to the influential role of social media, especially with younger generations,9Shearer & Mitchell, supra note 5 (stating that those in the age group of 18–29 make up 47% and 39% of the total users that receive news from Instagram and X, respectively). there has been increased tension regarding a state’s ability to regulate the interaction between platforms and their users through content moderation.10Shari Claire Lewis, Circuit Split over States’ Right to Regulate Social Media Platforms, Law.com (Aug. 15, 2022, 10:00 AM), https://www.law.com/newyorklawjournal/2022/08/15/circuits-split-over-states-right-to-regulate-social-media-platforms [https://perma.cc/96XW-B6VE]. Platforms are resisting state intervention by asserting First Amendment claims, stating that platforms have a right to free speech and that content-moderation decisions are equivalent to protected speech.11Id. Currently, there is a circuit split between the U.S. Court of Appeals for the Fifth and Eleventh Circuits addressing this issue, in which Florida and Texas enacted statutes that placed major restrictions on social media platforms’ ability to freely censor or moderate content.12Id. Censorship is defined as the “suppression or prohibition of words, images, or ideas.” Julie Horowitz, The First Amendment, Censorship, and Private Companies: What Does “Free Speech” Really Mean?, Carnegie Libr. of Pittsburgh (Mar. 9, 2021), https://www.carnegielibrary.org/the-first-amendment-and-censorship [https://perma.cc/QD5V-UUM3]. Specifically, both statutes include nondiscrimination provisions, in addition to other disclosure provisions, that would prohibit platforms from censoring based on viewpoint. The key tension arises between the purported First Amendment rights of the private entities that run social media platforms and the ability for users to express and be exposed to diverse viewpoints through “one of the most important communications mediums used in [the] [s]tate[s].”13NetChoice, LLC v. Paxton, 49 F.4th 439, 454 (5th Cir. 2022).
Both Florida and Texas argue that the statutes prohibiting viewpoint discrimination are constitutional because they do not restrict protected speech, and even further, that platforms should be subjected to common carrier obligations.14See Lewis, supra note 10. Common carriers have heightened obligations, in which certain private entities are required to serve the public. The plaintiffs, representing large social media platforms, instead argue that content-moderation decisions require the use of editorial judgment,15Id. Editorial judgment is a term that describes an entity engaging in First Amendment–protected speech through expressive actions. which has been interpreted as protected speech in past cases.16See, e.g., Miami Herald Publ’g Co. v. Tornillo, 418 U.S. 241, 258 (1974). The importance of providing meaningful restrictions on platforms’ censorship policies has become even more evident with the recent acquisition of X, exemplifying that a change in management in such relied-on commodities could potentially be devastating to the access of information.17A critic mentioned that X’s new content-moderation policy seems “wholly dependent on what side of the bed [new owner Elon] Musk wakes up on.” Musk has chosen certain controversial users to be allowed back on the site, including Andrew Tate and Donald Trump, while disallowing others such as Alex Jones. Caleb Ecarma, We’re Officially in the Elon Musk Era of Content Moderation, Vanity Fair (Nov. 21, 2022), https://www.vanityfair.com/news/2022/11/elon-musk-twitter-content-moderation [https
://perma.cc/89GF-YTJM]. Due to the increased uncertainty regarding the status of the law and the importance of providing direction and uniformity on interpreting the Constitution,18See Biden v. Knight First Amend. Inst. at Columbia Univ., 141 S. Ct. 1220, 1221 (2021) (Thomas, J., concurring); NetChoice, LLC v. Paxton, 142 S. Ct. 1715, 1716 (2022) (Alito, J., dissenting). a petition for a writ of certiorari was filed by Texas and granted by the Supreme Court. Opening briefs were filed on November 30, 2023, and oral argument occurred on February 24, 2024.19NetChoice, LLC v. Paxton, SCOTUSblog, https://www.scotusblog.com/case-files/cases/net
choice-llc-v-paxton/ [https://perma.cc/W6VD-WTKN].
One of the main difficulties in resolving this issue is the continuum of control and expression that platforms exert when moderating content. This Note will argue that the ultimate determination of whether moderation decisions rise to protected speech will be fact dependent. Platforms that lack a clear target audience and only censor objectively obscene content (rather than subjective beliefs) do not convey a message through their content moderation that amounts to protected speech. Most large platforms, such as X, Facebook, Instagram, and TikTok20See generally X, https://twitter.com [https://perma.cc/9XGM-Y4RA]; Facebook, https://
http://www.facebook.com [https://perma.cc/TT82-6VX7]; Instagram, https://www.instagram.com [https:
//perma.cc/XJE6-SL4B]; TikTok, https://www.tiktok.com [https://perma.cc/LF25-FPNQ]. would be included within this category. Conversely, this Note will argue that platforms that clearly moderate content based on political or other personal beliefs, and express these choices with their users, will have First Amendment protections as the moderation expresses a message equivalent to speech. By conveying subjective viewpoints through a platform’s content moderation, potential users can make informed decisions about whether to opt-in to the platform’s services. Groups that fall within this second category include Vegan Forum, ProAmerica Only, and Democratic Hub.21See generally Vegan Forum, https://www.veganforum.org [https://perma.cc/426R-P897]; ProAmerica Only, https://proamericaonly.org [https://perma.cc/Z26P-5GT2]; Democratic Hub, https://www.democratichub.com [https://perma.cc/FWP5-FT9A].
Alternatively, with a view on consistency and the best overall policy outcome, there is an argument that Congress should designate social media platforms as common carriers in order to regulate this area similarly to the telecommunications industry.22See Communications Act of 1934, 47 U.S.C. § 151. This Note primarily provides a doctrinal analysis of common carrier law and editorial judgment and applies the analysis to the conflicting arguments raised in the circuit-split cases. While the current debate is highly politicized, with the perceived motive of the Florida and Texas statutes to stop platforms from censoring conservative views,23Press Release, Off. of the Tex. Governor, Governor Abbott Signs Law Protecting Texans from Wrongful Social Media Censorship (Sept. 9, 2021), https://gov.texas.gov/news/post/governor-abbott-signs-law-protecting-texans-from-wrongful-social-media-censorship %5Bhttps://perma.cc/P3SQ-HFKZ%5D (“[T]here is a dangerous movement by social media companies to silence conservative viewpoints and ideas”); News Release, Fla. Gov’t, Governor Ron DeSantis Signs Bill to Stop the Censorship of Floridians by Big Tech (May 24, 2021), https://www.flgov.com/2021/05/24/governor-ron-desantis-signs-bill-to-stop-the-censorship-of-floridians-by-big-tech/ %5Bhttps://perma.cc/2RKT-CSZ3%5D (stating that “by signing [the Florida statute] into law, Florida is taking back the virtual public square” and preventing “censor[ship] if [one] voice[s] views that run contrary to [the platforms’] radical leftist narrative”). this Note argues that analyzing these issues with a neutral, doctrinal-focused lens will provide a positive long-term solution.
Part I of this Note will establish an example of a current content-moderation policy exercised by a large social media platform. Part II will provide a doctrinal analysis concerning First Amendment law, specifically referring to the development and current state of “common carriers” and “editorial judgment.” Part III will identify the state and federal statutes that underly the circuit-split litigation. Part IV will discuss the facts and the conflicting rationales of the current circuit-split cases. This Note will also highlight the most persuasive arguments and their application to the doctrinal analysis of First Amendment law provided in Part II. Then, Part V will speak to the significance of resolving this issue and how it will affect social media platforms, states, and the greater community. A conclusion will follow.
Justices on Yachts: A Value-Over-Replacement Theory
The Justices have it made. On top of their government salaries, guaranteed until retirement or death, they are pampered with luxuries supplied by various wealthy benefactors—billionaire friends, big publishing houses, and well-funded nonprofits. These benefactors make (and forgive) large loans, book fancy resorts in exotic locations, and save seats on their yachts—glacial-iced cocktails included. The public is rankled. Something seems amiss, but it is hard to say exactly what. There is scant evidence of any quid pro quo. None of this luxury treatment has likely changed any Justice’s vote in any particular case. Thus, the problem here is not run-of-the-mill corruption.
In this Article, we explore an alternate theory. These donors are not trying to influence individual votes; they are trying to influence Justices’ decisions about whether to keep voting at all. The Justices’ government salaries are generous. But their private-sector earning potential is far higher, providing a strong incentive to retire relatively early and maximize lifetime consumption. Supplying a sitting Justice with a luxury lifestyle reduces the retirement incentive, “locking in” the Justice as a voter in more cases.
We explore this strategy for influencing the Court and model its expected results. We argue that, rationally, the strategy will be deployed differentially. All other things equal, Justices who are older and more ideologically extreme, compared with the expected replacement Justice, will receive more pampering. This will systematically alter both the mix of cases the Court hears and its substantive decisions to favor moneyed and politically hard-line interests.
The Societal Interest Theory—Preserving the Marketplace of Ideas in the Twenty-First Century
With respect to free speech, the good is prior to the right: the goods achievable by the practice of free speech are the reason for protecting speech, and the protection should be shaped with those goods in mind.1outhern California Law Review, Volume 96; J.D. 2023, University of Southern California, Gould School of Law.
On January 6, 2021, a mob of 2,000 to 2,500 supporters of then-President Donald Trump rushed into the Capitol building and disrupted a joint session of Congress in response to the former president’s allegations of vote fraud on Twitter.2Capitol Riots Timeline: What Happened on 6 January 2021?, BBC News (June 10, 2022), http://www.bbc.com/news/world-us-canada-56004916 [http://perma.cc/4WLN-CA96]. Soon afterward, Twitter banned President Trump’s account on its platform. To justify the ban, a spokesman expressed concerns regarding the risks of keeping President Trump’s commentaries live.3Kate Conger, Mike Isaac & Sheera Frenkel, Twitter and Facebook Lock Trump’s Accounts After Violence on Capitol Hill, N.Y. Times (Jan. 14, 2021), http://www.nytimes.com/2021/01/
06/technology/capitol-twitter-facebook-trump.html [http://perma.cc/6RFB-HZBN]. The spokesman stated, “[o]ur public interest policy—which has guided our enforcement action in this area for years—ends where we believe the risk of harm is higher.”4Id. Facebook and Instagram followed Twitter’s actions by barring former President Trump from posting on their social network platforms for twenty four hours.5Id. While some responded by pressing for more regulations to prevent future potential spread of misinformation and violent insurrections, others met the social media companies’ actions with criticism, alleging that these companies silenced “conservative viewpoints and ideas.”6Jameel Jaffer & Scott Wilkens, Social Media Companies Want to Co-Opt the First Amendment. Courts Shouldn’t Let Them., N.Y. Times (Dec. 9, 2021), http://www.nytimes.com/2021/12/09/opinion/
social-media-firstamendment.html?partner=slack&smid=sl-share [http://perma.cc/YS7A-EXK3]. Within the broad range of responses were the Florida and Texas legislatures’ criticism of these companies’ actions. To express their disapproval, the two states passed legislation prohibiting social media companies from certain behaviors such as deplatforming a candidate in office.7See Decoder, Can We Regulate Social Media Without Breaking the First Amendment?, Verge (Dec. 16, 2021, 7:00 AM), http://www.theverge.com/22838473/social-media-first-amendment-regulation-section-230-decoder-podcast [http://perma.cc/AY4T-65RA] (explaining the Texas and Florida regulations on social media companies and discussing the arguments made in criticism of the regulations). For example, the 2021 Florida legislature enacted Senate Bill 7072, which created three Florida statutes: section 106.072, section 287.137, and section 501.2041.8NetChoice, LLC v. Moody, 546 F. Supp. 3d 1082, 1085 (N.D. Fla. 2021), vacated in part, 34 F.4th 1196 (11th Cir. 2022); Fla. Stat. §§ 106.072, 287.137, 501.2041 (2022). The statutes were met with vigorous disapproval from major social media companies and unsurprisingly resulted in a lawsuit filed by NetChoice and the Computer & Communications Industry Association challenging the statutes’ constitutionality.9NetChoice, LLC, 546 F. Supp. 3d at 1082; see Jaffer & Wilkens, supra note 6 (discussing both parties’ arguments presented before the court and their flaws).
In response to the district court’s grant of a preliminary injunction enjoining enforcement of the Florida statutes, Jameel Jaffer—the executive director of the Knight First Amendment Institute at Columbia University—and Scott Wilkens—an attorney at the Knight Institute—raised an interesting point:
The companies are right that the laws violate the First Amendment, but some of the arguments they are making are deeply flawed. If these arguments get traction in the courts, it will be difficult for legislatures to pass sensible and free-speech-friendly laws meant to protect democratic values in the digital public sphere . . . . [T]he companies’ arguments would make it almost impossible for legislatures to enact carefully drawn laws that protect the integrity of the digital public sphere. They would make it difficult for legislatures to impose even modest transparency requirements on the companies, to require the companies to share data with academic researchers or to require them to provide explanations to users whose posts are removed or . . . accounts are suspended.10Jaffer & Wilkens, supra note 6.
The discussion poses a pressing question: Is limited government regulation of private entities, particularly social media companies, justified to protect the integrity of public discourse on social media platforms? Although the First Amendment is ordinarily thought to apply only to government actions, is the fundamental value of free speech rights so essential to also warrant government regulation of private entities? This Note attempts to address these issues and argues that the societal interest of free speech values calls for government regulation of private social media companies to protect the integrity of the public squares of the twenty first century.
Squeezed: the Narrow Bank, the Federal Reserve, and the Future of Full-Reserve Banking
To say the U.S. Federal Reserve System (“Fed”) is the most important financial institution in the world is not so much a bold claim as a banal statement of fact. Since the Fed’s initial charter in 1913, the U.S. economy has grown from roughly $500 billion in gross domestic product (“GDP”)—a comprehensive measure of economic activity1 would like to thank Andrew Wylie and W. Rives Fleming for their time and commentary, which were invaluable.—to more than $23 trillion, from less than 19% of the world’s GDP, to almost 25% of it, even while other Western countries shrunk comparatively.2See GDP (Current US$), World Bank, http://data.worldbank.org/indicator/NY.GDP
.MKTP.CD [http://perma.cc/B7P3-MJZJ] (reporting gross domestic product (“GDP”) for 2021); Angus Maddison, Contours of the World Economy, 1–2030 AD: Essays in Macro-Economic History 379, 381 (2007). The Fed’s first century of existence has not been without crises, however, and each crisis catalyzed systematic changes in the U.S. banking system, as well as accretion of the Fed’s power. The most recent economic downturns are no exceptions. In the wake of the 2008 financial crisis, Congress passed the Emergency Economic Stabilization Act (“EESA”) and authorized the Fed to begin paying interest on excess reserves3Since its charter, the Federal Reserve (“Fed”) has required banks to hold a percentage of their deposits in reserves—cash or deposits in their accounts at the Fed—to ensure banks can meet their liabilities in the case of sudden withdrawals. James Chen, Reserve Requirements: Definition, History, and Example, Investopedia, http://www.investopedia.com/terms/r/requiredreserves.asp [http://perma.cc
/CE8Q-4Z3T]. Excess reserves are those banks are not required to hold—money they choose to keep in their accounts at the Fed. James Chen, Excess Reserves: Bank Deposits Beyond What Is Required, Investopedia, http://www.investopedia.com/terms/e/excess_reserves.asp [http://perma.cc/5VDN-SD
6X]. In response to the COVID-19 pandemic, the Fed reduced the reserve requirement to 0%, effectively eliminating it. Reserve Requirements, Bd. Governors Fed. Rsrv. Sys., http://www.federalreserve.gov
/monetarypolicy/reservereq.htm [http://perma.cc/9VRK-HWJU]; see 12 C.F.R. § 204.4 (2023). As of March 2023, the Fed has not announced a return of the reserve requirement to historical levels. (“IOER”4Interest on Reserve Balances (“IORB”) replaced Interest on Excess Reserves (“IOER”) and Interest on Required Reserves (“IORR”) on July 29, 2021. Interest on Reserve Balances (IORB) Frequently Asked Questions, Bd. Governors Fed. Rsrv. Sys., http://www.federalreserve.gov/monetary
policy/iorb-faqs.htm [http://perma.cc/9VRK-HWJU]. The change, however, would not have affected The Narrow Bank’s (“TNB”) business model. To avoid confusion, this Note uses IOER when referencing any date before July 29, 2021, and it uses IORB when referencing any date after July 29, 2021.). For the first time, a commercial bank5“A financial institution that accepts deposits, offers checking account services, makes various loans, and offers basic financial products . . . .” Julia Kagan, How Do Commercial Banks Work, and Why Do They Matter?, Investopedia, http://www.investopedia.com/terms/c/commercialbank.asp [http://
perma.cc/6BTL-FC86]. could earn interest by holding its reserves instead of loaning them out, a complete inversion of the traditional banking model. And unlike interest on loans, IOER was a virtually riskless income stream.6See infra note 94.
One corporation saw the potential for a viable full-reserve, or “narrow,” bank that would not lend any money, but instead collect IOER and pay depositors above-market interest on their savings, profiting a modest difference. The Narrow Bank (“TNB”) received a temporary endorsement from its state chartering authority, yet its business model was dependent on a master account7“[A] master account is both a record of financial transactions that reflects the financial rights and obligations of an account holder and of the Reserve Bank with respect to each other, and the place where opening and closing balances are determined. For each institution, all credits and debits resulting from the use of Federal Reserve services at any Federal Reserve office are booked to this single master account at one Reserve Bank.” Bd. of Governors of the Fed. Rsrv. Sys., Reserve Maintenance Manual 5 (2019). Put simply, a master account is a bank account for banks. at the Fed. After long deliberation, the Fed expressed concerns about TNB’s business model and opted to continue evaluating the bank’s economic implications. TNB sought a declaratory judgement of its entitlement to a master account, but its complaint was dismissed because the Fed did not officially reject its application but rather declined to rule on it.
On its face, the challenge to a central bank’s discretion in determining which institutions can avail themselves of its services may seem arcane, inconsequential, and distant from the legal issues that affect most Americans. Its consequences, however, are broad and far-reaching. Since the Fed began paying IOER, interest paid on retail (consumer) savings accounts and certificates of deposits (“CDs”) has lagged significantly. TNB, on the other hand, was designed to pass nearly all of its earned interest to account holders, providing them a more attractive savings option and incentivizing them to save more—a nudge toward financial security in a country where the median family’s bank account balances total $8 thousand.8Fed. Rsrv. Sys., Changes in U.S. Family Finances from 2019 to 2022 18 (2023).
The Fed’s opposition to TNB was rooted in concerns that a full-reserve bank could destabilize the economy by challenging the Fed’s ability to regulate liquidity and interest rates. But beyond the economic effects of full‑reserve banking, which have been debated by scholars for almost a century, the conflict between TNB and the Fed raises important, relatively unexplored legal issues and implicates sociopolitical questions related to fairness and federalism. This Note contributes to full-reserve banking scholarship by exploring those legal and social topics and situating them in an assessment of full-reserve banking’s future, using TNB USA Inc. v. Federal Reserve Bank of New York, No. 18-cv-7978, 2020 U.S. Dist. LEXIS 62676 (S.D.N.Y. Mar. 25, 2020), as a guidepost.
The Note proceeds in three parts. Part I examines the history of the U.S. banking system and, in particular, the Fed. It also introduces full-reserve banking and outlines economic arguments for and against its adoption. Part II analyzes TNB USA and the legality of the Fed’s decision to deny TNB a master account. Part III explores the future of full-reserve banking in the United States, explains its relevance, and argues that the Fed’s restrictions on full-reserve banking are undesirable from legal and social perspectives because they rob start-up banks and depositors of the opportunity to capitalize on programs that perpetually benefit large, legacy financial institutions. A short conclusion follows.
The Trading Game: An Analysis of Robinhood’s Use of Digital Engagement Practices
In December 2020, the Enforcement Section of the Massachusetts Securities Division of the Office of the Secretary of the Commonwealth filed an Administrative Complaint against Robinhood Financial LLC (“Robinhood”), a registered broker-dealer, in part, “for violations of Massachusetts law in connection with Robinhood’s . . . use of strategies such as gamification to encourage and entice continuous and repetitive use of its trading application [“app”].”1Complaint at *3, Robinhood Fin., LLC v. Galvin, No. 2184CV00884, 2022 Mass. Super. Lexis 19 (Mar. 30, 2022) (No. E-2020-0047). This action is part of a growing trend in which regulators have voiced potential concerns2E.g., Letter from Robert W. Cook, President and Chief Exec. Officer, Fin. Indus. Regul. Auth., to Elizabeth Warren, Sen., U.S. Senate (Feb. 23, 2021) [hereinafter Cook Letter], http://www.warren.senate.gov/imo/media/doc/FINRA%20Response.pdf [http://perma.cc/A2HT-GJ3C]. about broker-dealer use of digital engagement practices (“DEPs”), which include “behavioral prompts, differential marketing, game-like features (commonly referred to as “gamification”), and other design elements or features designed to engage with retail investors on digital platforms.”3Request for Information and Comments on Broker-Dealer and Investment Adviser Digital Engagement Practices, Exchange Act Release No. 34,92766, 86 Fed. Reg. 49067, 49068 (Sept. 1, 2021) [hereinafter Request for Information].
This Note will evaluate the novel use of gamification, or game-like features, by broker-dealers in their online and mobile platforms. “A broker-dealer . . . is a person or firm in the business of buying and selling securities for its own account or on behalf of its customers” that serves several important roles like “providing investment advice to customers [and] . . . facilitating trading activities.”4Adam Hayes, Broker-Dealer, Investopedia, http://www.investopedia.com/terms/b/broker-dealer.asp [http://perma.cc/BV3B-E6W4]. Broker-dealer use of gamification to perform these functions will specifically be analyzed in relation to two potential legal issues that the Financial Industry Regulatory Authority (“FINRA”) has already identified. These issues are whether broker-dealer marketing and advertising using game-like features follow regulations governing communications with the public and whether broker-dealers are making recommendations in compliance with relevant rules relating to recommendations when broker-dealers use game-like features.5Cook Letter, supra note 2, at 5. Ultimately, this Note concludes that the current use of game-like features, at least by Robinhood, does not violate existing regulations. However, additional information is necessary to complete the proposed analysis, which will hopefully be available following the Securities and Exchange Commission’s (“SEC”) recent request for public comment on broker-dealer use of DEPs.6Request for Information and Comments on Broker-Dealer and Investment Adviser Digital Engagement Practices, supra note 3, at 49068. Therefore, based on the proposed analysis, if regulators want to rein in broker-dealer use of gamification, they will probably need to amend existing regulations. This is a favorable objective given critical policy concerns, like protecting retail investors, or “non-professional investor[s]” participating in the securities market,7Adam Hayes, Retail Investor, Investopedia, http://www.investopedia.com/terms/r/retailinvestor.asp [http://perma.cc/P7TN-T4RK]. especially those that are inexperienced or young.
This Note will evaluate the issue of gamification in the context of popular online broker-dealer, Robinhood. The company was founded in 20138Robinhood Mkts., Inc., Registration Statement (S-1) 8 (July 1, 2021) [hereinafter Registration Statement]. and, over the past few years, has grown into a major player in the securities industry.9Id. at 173. As of March 2021, the company had 18 million Net Cumulative Funded Accounts.10Id. at 2. However, the company has proven particularly popular with millennial and Generation Z investors; the company stated in its Form S-1 filed during its initial public offering in 2021 that “as of March 31, 2021, approximately 70% of our [Assets Under Custody] came from customers on our platform aged 18 to 40, and the median age of customers on our platform was 31,”11Id. at 173. which will prove relevant to the issues analyzed in this Note.
This Note will proceed in several parts. Part I will present the concept of gamification, including its potential risks, the DEPs that Robinhood has implemented in its platform, the history of how broker-dealers came to use these features, including the development of the modern technologies that have made these features possible, and the legal issues raised by broker-dealer use of gamification. Part II will introduce the regulatory bodies that govern the U.S. securities industry, the specific regulations that are relevant to evaluating the legal issues in this Note, and the policy goals that underlie the U.S. securities regulation system. Finally, Part III will analyze whether Robinhood’s use of game-like features violates existing securities regulation, will summarize the legal and legislative actions that have already been taken regarding this issue, and will present policy concerns that lean in favor of increased regulation.
