AI and Copyright

Welcome to our first post of 2024; we had a robust holiday season, and further: now that AI has become the topic-de-jour, with articles and programs abounding, we will have less to say about AI as the world has caught up with our focus and view of AI’s importance, risks and transformative power.

Highlights of recent AI events: litigation by news sources and publishers, claiming that the use by AI in absorbing those publications into their database constitutes a copyright violation;  announcement from the US Copyright Office that they have received 10,000 comments in advance of anticipated issuance of regulations about  AI use (digestion) of prior published work and whether or not what AI produces based on such activity is a violation of copyright but rather permitted utilization under the “fair use” doctrine (per the New York Times today the typical number of comments in advance of similar (non-AI) announcements is less than a dozen); a startling visual in the press showing an AI generated image of “Joker” being an absolute copy of  the clearly trademarked “Joker” movie image.

Seems what is at stake here is whether your computer can get away with something that you, personally, clearly cannot do.  Yet another hint that robots will at some point rule our world?  (Just kidding–I think….)

 

Posted in AI

New Anti-Trust Guidelines

Two days ago, the Federal Trade Commission and the Department of Justice issued new and more restrictive guidelines for when the government will challenge business combinations in various categories.  These new guidelines define when the government will take action, and do not constitute law, but the government hopes they will impress the courts as the expression of agency expertise which the courts should follow.  These guidelines certainly define cases where businesses will find themselves being investigated and sued.

The new guidelines are extensive and nuanced; below are just a few highlights. Generally, the new guidelines shift some focus from protecting the consumer from high prices set by monopolies to a goal of both nipping that risk in the bud while considering impact of business concentration on the labor force (which has never been seen as a goal of anti-trust enforcement before).

High points:

*Focus on healthcare and roll-ups generally, with an eye on PE firm platform models (see prior post foreshadowing this focus, December 13, 2023)

*Lowering the level of concentration in a relevant market that will trigger either an investigation of a deal OR declaration of presumption of violation (and increased risk of litigation)

*Focus on coordination between competitors by reason of use of AI such as  pricing algorithms which will lead competitors to the same pricing decision (the risks of such an approach are interesting–what if independent examination of  available facts does lead to similar pricing?)

*How will a deal affect labor when competitors merge (a good question of public policy, but not contained in anti-trust laws which were mostly crafted at a time when even the legitimacy of unions themselves was being questioned)?

*Concerns over, or presumption of, illegality when a deal eliminates a potential competitor, or ties up access to a key component used by competitors

*Examination of effect of acquisition of partial or minority stakes in other companies

*Removal of several statements suggesting lack of problem with certain defined  mergers; now the focus can be based on a series of small deals, and a new deal can open inquiry into prior completed and presumable acceptable deals.

Final observation: anti-trust risk disappeared on many fronts over the last few decades, but has come roaring back in this Administration.  While it is a pleasure for a lawyer to say that companies doing deals need to consult anti-trust counsel, it is also correct advice in an increased number of cases, even of relatively small size.  Deals no longer need to be “big” to be “bad.”

 

Blockbuster SEC Release on Accredited Investors

Today the SEC issued its report on the definition of an “accredited investor” under the Securities Act of 1933.  This report is not only a cautionary tale for the future of capital raises exempt from substantial SEC regulation, but also the most interesting work of social commentary I have ever read.  Please ignore what you suspect is hyperbole and download today’s report (“Review of the ‘Accredited Investor’ Definition under the Dodd-Frank Act” from  http://www.sec.gov 

This 53 page report is replete with analysis of two things:

*the regulatory scheme presently in place which permits companies to raise money from individuals who are “accredited” (people we described pre-Regulation D as “rich and smart” and who now are defined by their income, net worth or professional qualifications as not needing protection of an SEC registered offering)  and

*a startling economic analysis of the distribution of wealth in the United States over the past two decades and the next three decades.

I may post fascinating details in the coming week, but here is the crux of the matter:

*inflation has made the economic criteria for being accredited as an investor far too low (as an example of various measures of wealth, an individual today need earn $200,000 per year to be accredited which captures a surprisingly large share of the US population, far more than contemplated when the current standard was set up and grossly inadequate over the next 30 years per projections) and

*although the amended standard for measuring wealth now excludes home equity in the net worth test of $1,000,000, much personal wealth today is tied up in benefit plans or IRAs not invested by the individual but by professional designees, and the individuals lack financial sophistication in investments which were presumed, in the beginning, to be a proxy for someone who was knowledgeable in investing and risk evaluation.

Speculation from the tone of the Report:  if I were the SEC, I would radically increase the financial standards for declaring a person accredited, increasing income requirements, or the alternate definition of net worth to exclude certain retirement accounts.  The effect of such action would sharply reduce capital available for emerging companies.  Note that 99% of all investors in Regulation D offerings (by far the most popular fundraising vehicle for early stage enterprises) are, per SEC estimates, defined as accredited. (There is also, it should be noted, a movement to DECREASE the threshold as a matter of equity, to afford investment opportunity to certain areas of the country or certain historically deprived segments of the population where reaching the present standards of wealth are not being met.)

Finally, a spoiler alert culled from the plethora of data in the Report to highlight the disconnect between the SEC current standard for “accredited” status and the concept that such status is a proxy for wealth and sophistication: using the $200,000 individual threshold, in 1983 one half of one percent of US households would be accredited; in 1989, 1.5%; in 2022, 13.8%; in 2032, projected as 23.9%; in 2042, projected 41.1%; in 2052, projected 58.5%.

I offer no comment on the impact on retirement planning that these projected numbers suggest for people whose life horizon reaches far into the future– a subject for another day.

 

US Anti-Trust Focus on Drugs and Healthcare Services

On December 7, the Federal Trade Commission, the Department of Justice and the Department of Health and Human Services jointly announced an intent to focus on anti-competitive practices in the pharma market and in healthcare service delivery.  The announcement was purposefully broad in scope, no doubt intended as a warning shot across the bow of as many business practices as possible.

The FTC declared that “rooting out unlawful business practices in healthcare markets is a top priority for the FTC,” echoing prior Presidential edicts asking for coordinated pressure by US government agencies to bring down spiraling medical bills.

It may be naive to think that anti-trust enforcement will solve all the cost burden of modern medicine (just the other day the exciting news of development of a drug to defeat Sickle Cell was tempered by its $2.2 Million price tag); government is going to have to do things that border on socialized medicine, or price control in the context of a national health crisis, as the reality of rapidly expanding medical expertise will incur huge costs which must be either recovered by market pricing or government funding.

Among the various generalized proposals, two struck me as particularly interesting.

For the first time, the Medicare/Medicaid folks are releasing the names of owners of Federally qualified health centers and rural health clinics, presumably to give non-Federal regulators and private attorneys a road-map of interlocking referrals and other arrangements which may jack up or fix market pricing.

And then there are roll-ups, which are all the rage, often driven by venture capital funds which establish a platform entity which then goes shopping for acquisitions in the perceived lucrative health-care marketplace.  By definition such aggregations of providers generate pricing power in smaller markets.  The enforcement of anti-trust laws against serial smaller acquisitions, although each below the size that triggers automatic financial thresholds of anti-trust review, was generally presaged by recent prior FTC/DOJ pronouncements, see the blog post herein on October 4, 2023 (“US Attacks Roll-Ups…”).  Absent numerical benchmarks to inform investor funds when they are risking an actionable market concentration, PE firms may well be afraid to reach the level of local saturation which will bring down an anti-trust challenge (and risk of break-up).

In the offering materials by which PE funds raise investment to establish a med-tech roll-up platform company, it will be interesting to see what caveats are included for investor evaluation.

(Separately, today’s news reported a $41 Billion pharma acquisition.  There is big money afoot in the medical fields, and hence high stakes for all players, the public and the government charged with regulating it all.)

 

Corporate Transparency Act– Basics

SCOPE OF THIS POST: A general orientation, in one place, of this new Federal law, the Corporate Transparency Act (“Act”).  I have found that clear basic information is spotty and not easily found. This post is intended to inform general  readers of the intent, scope and importance of the Act.

CAVEAT: As readers should know, posts to this site are NOT legal advice and should not be relied upon as a basis for taking or not taking any specific action.  This warning is particularly important when it comes to the  Act, which becomes effective January 1, 2024.  Set forth below are general guides to orient the reader as to the scope of SOME NOT ALL ASPECTS OF the Act.  The regulations relating to the Act, and the statutory text itself, are exceedingly complex, depend on detailed analysis of government definitions together with your facts, and you must assume that there are likely to be exceptions to every general statement set forth below.  Violation of this law is criminal.  The Federal government may amend their regulations under the Act at any time.  Talk to your lawyer, CPA or service provider before you take or do not take any action.

GENERAL PURPOSE OF THE ACT: To force criminals to disclose how they hide their money by requiring disclosure of details about businesses they use as a screen and separately criminalizing failure to make such accurate disclosure. Disclosure is to be made on Federal forms required to be filed under the Act.

TIMING: For existing non-exempt businesses formed prior to 1-1-24, a filing must be made during 2024.  For entities formed during 2024, filing in 90 days after formation (just expanded from 30 days).  For entities formed after 2024–file in 30 days of formation.

WHO FILES: Most typical forms of business must file: corporations, LLCs, limited partnerships.  BUT many other forms of entity fall into the “it depends” category, which analysis relates to the actual attributes of the entity.  If effecting your actual entity formation required filing with a government agency, you are covered if not otherwise exempt.  Certain people who effect the filing with the government on behalf of the company may also have to be disclosed and provide personal information to the government.

WHAT IS DISCLOSED: Names, addresses, identification numbers from passport or drivers license, and picture of document providing that ID number of:  25% equity holders or all persons in actual control of the entity (VERY SUBTLE ANALYSIS–could even be a single director or other non-equity holder).  Future changes require filing updates.

WHAT ENTITIES ARE EXEMPT?  See above disclaimer, do not rely on below text to conclude you are exempt. The below list is not complete and also covers gross categories subject to detailed specifics not set forth below.  Here are possible exempt categories, depending on detailed analysis of facts not necessarily apparent from the below gross descriptions:

Sole proprietorships

Large companies if they have all of:  20 or more full time US employees, a US physical office and a filed Federal tax return showing $5M or more of gross sales receipts

Foreign entities not registered to do business in the US

Banks, insurance companies, broker-dealers, certain investment funds

Tax-exempt entities

CPA firms

Wholly owned subs of an exempt entity

BANK INSTRUMENTS: Banks (subject to definition) must report any transaction involving $3000 or more in at least the following categories: money orders, cashiers checks, travelers checks

Global Crises & Board Directors

How should corporate directors perform their fiduciary duties in the face of the numerous global crises currently assailing the operations of their corporations?

Dean Bhaskar Chakravorti of Tuft’s Fletcher School of International Affairs suggested the appropriate mind-set for corporate boards given always-arising crises (currently in climate, democracy, supply chains, wars, pandemics, inflation). His remarks were made during this morning’s program presented by the New England Chapter of National Association of Corporate Directors.

Directors serve companies the operations of which are impacted by all global crises, which interact in turn with pre-existing confusion emanating from the pandemic and prior US political divisiveness. Determining proper board response is complex as the interactions are complex, but the Dean recommended board focus on what he described as “contextual intelligence.”

That phrase means staying continually abreast of the non-business news as well as the business issues, determining specifically how that news will affect the company in real time, and recognizing also that crises today affect every facet of life and thus every company.

Directors typically have been trained to be expert in some important element of corporate governance or company operations.  How do they process the current world in light of its diversity of problems and impacts? A conscious effort must be made to evaluate the entire business landscape holistically, integrating prior knowledge with current global realities. In some ways, this invitation to make sure that directors openly engage in overviews echoes the solution presented a few years ago when, in evaluating enterprise risk, it was urged that corporate committees be established to capture input from a wide variety of corporate operations and groups (“silos”), to be sure that they were mixed together and evaluated as a whole.

While not possible in a blog format to capture ninety minutes of intense content, three examples were explored meaningfully:

Supply chains were upended by the pandemic and lately by government policies.  Just in time inventory that had been sourced world-wide has been replaced by stockpiling and recognition of needs for multiple sources. But those solutions can add expense and in the end, says the Dean, “the market always wins” as cost efficiency is paramount.  So change will be constant, responding back and forth to world events. Possible options for adopting supply chains quickly will arise as technology creates more and more data and suggests new solutions.

Boards should not follow the path which attracts capital markets, which are a poor indicator.  Capital markets seek the next new thing, invest because others are investing and trying to stay ahead of identifying future profit.

Finally, the dean emphasized the need for directors with broad management experience as being the people best trained historically to holistically evaluate and deal with crisis environments. These are people trained to “connect the dots.”  Directors without this experience have been  trained in narrow key specialties by academic institutions which have organized information in verticals to train specialists, not directors.  It almost sounded like a plea for eliminating term limits and favoring boards weighted towards graying heads and former CEOs.

 

SEC: Controlling How You Fire Staff?

I am not making this up.

When you fire someone you should obtain a Severance Agreement in exchange for granting severance pay or other considerations not otherwise mandated. Standard language in such agreements seeks to assure the employer, providing separation benefits, that the recipient has not filed claims against the employer with a government agency.

The SEC has a robust business in receiving information concerning corporate malfeasance and actually paying money to the person providing such information as the SEC finds actionable within its area (and anything significantly wrong and not disclosed where company shares are held publicly is likely a violation of SEC disclosure regulations).  And who is a better source of information of wrongdoing as an employee whose sense of company loyalty evaporates while being fired?

Language in separation agreements for public companies (and per one SEC regional director, also private companies) needs to be reconsidered in light of the SEC position.  Surely there is value to an employer to learn that a fired (or departing) employee has not filed a claim with a government agency, but: what if other agencies take the same  (SEC)  position; and today, if the separation agreement expressly must state “You need not tell me if you have filed a complaint with the SEC that may result in your receiving money as a whistleblower”– sort of feels like a hint or an invitation, doesn’t it.

Those of us who follow the SEC must confess that the whistleblower program has uncovered very very many illegal practices, to the material benefit of the integrity of the securities markets and the honest conduct of our country’s businesses.  Don’t assume that either the whistleblower program, or the SEC’s position on severance contracts, is going to disappear.

I need here to reiterate that whatever appears in my blog posts are my views, not necessarily the view of my law firm, and are NOT legal advice.  Talk to your lawyer.

SEC re Asset Backed Securities

The SEC just issued a Rule prohibiting entities, which package and sell to the public asset-backed securities (ABSs), from taking market actions which would profit from a decline in value of those very same ABSs.  It is a usual practice to take certain classes of assets (home mortgages, credit card receivables, student loan obligations are typical), and bundle them together and sell the bundle to investors.

The evil to be prevented is for those entities who underwrite, sell or sponsor the creation of these bundles to take securities positions that will profit if the value of the bundle decreases (e.g. a short position).  The perceived conflict is that these parties are selling to the public a bundle the value of which they themselves believe will prove to be less valuable than the sale price from which they profited  upon issuance.

There are some technical exceptions; shorts are permitted if driven by general changes in interest rates or in currency values, and for certain investors who were holders of the security from the onset.

Those who accuse the SEC of being overly aggressive will smile upon learning that this marketplace limitation took a dozen years to promulgate, following a Congressional directive following market abuses in the 2008 financial melt-down.  It is notable that, on this new Rule, one of the two Republican SEC commissioners voted in favor, a rare instance of inter-party agreement on any matter of securities market regulation.

GAI–Hinton is Scared!?!

Who is Hinton?  The godfather of AI, winner of the Turing Prize, left Google earlier this year due to the potential “existential threat” that AI presents to the human species.  Single most quoted expert on GAI in the world, period.   Not a guy who has been educated by sci-fi movies.  He is not blindly following Skynet here….

Why is Hinton scared?  According to the ten-page New Yorker interview (November 20, 2023 issue): unlike human brains, which die when the carcass dies, digital intelligence can be used on many other computers simultaneously and forever. Thousands of neural networks “can learn ten thousand different things at the same time, then share what they’ve learned.”  As digital learning combines immortality and infinite replicability, “we should be concerned about digital intelligence taking over from biological intelligence.”

Hinton thinks machines do “think” like people.  Like people, computers work by analogy with a sprinkling of reason on top. In the next decade AI will overcome its current difficulties with “physical intuition,” which is part of animals but not wholly a matter of  intelligence (example: a cat with limited intelligence can still jump on a series of pieces of furniture and a machine cannot cause that happen–yet.)  Then AI’s skill set will be complete.

Hinton fears that the human drive for control will cause a dictator to deploy an autonomous lethal weapon.  And worse yet, since machines that are human-like will themselves crave more control by following neural paths similar to humans, “…how do you prevent them [computers]  from ever wanting to take control?  And nobody knows the answer.”

Lots of people with lots of technical skill are out in the marketplace, running the race to get their country or their company to a point of technical superiority.  Along comes “THE” expert in all of this, and he sounds like a screen-writer for James Cameron.

Let’s talk movies:

When John Badham  filmed War Games (incredibly, 40 years ago), the WHOPPER computer, which had started the ultimate world war just because it could, at the last minute stepped back and started a game of tic-tac-toe, observing that the only way to win the thermo-nuclear war game was “not to play.”  When Cameron did Terminator, his autonomous weapons system did not stop.  When Kubrick filmed Dr. Strangelove, the Russian autonomous weapons system did not stop.  Hinton is telling us that Badham wrote a fairy tale in War Games–that real GAI would not stop.

Yes, I “researched” this blog post in New Yorker magazine and in sci-fi movies.  But that is not what the godfather of GAI did–is it?

 

 

GAI Faces the Music

No, this is not a post about Sam Altman being ousted by Open AI (even though at this very moment the final outcome is unclear).  This post is about how another AI company was sued by music publishers, seeking to enjoin the use of copywritten words and music employed by AI to train its LLMs (large-language models).

When asked by users to write a poem in the style of a given writer, the program combined lyrics from songs from two different singing groups; the AI company neither asked permission for use nor gave credit to the artists. Can style plus phrases violate copyright?

These kinds of suits, filed in Federal court, are testing the degree of protection from using all types of intellectual property which is subject to copyright protection.  The LLMs plug in parts of protected works, and are following programming orders to use the information they absorbed from billions of scanned data points. [The AI company involved in this particular litigation had installed protections against certain  data use (no medical or legal advice, no support of illegal activities), but no guardrails re use of music to compose.]

As AI absorbs words, ideas and images from huge data bases, using those pieces to create new “works” from parts contained in the “original,” how close must a “copy” be in order to offend legal protections?   Does it matter that there is no specific intent to steal, since the product is created by a programmed device which pools everything? What sort of swimming lanes will courts or the Copyright Office mandate?  Is copying a “style” prohibited?  How to deal with “mash-ups” where fragments from different works are combined, yet fan-identifiable by viewers, readers or listeners?

When the U.S. Copyright Office asked for comments on what sort of  AI guard-rails should be imposed, it received 10,000 responses.  I wonder if the government is using artificial intelligence to digest all that data?  I wonder if those artificial intelligence programs will skew the comments in acts of self-protection?

Posted in AI