Latest / Bloomberg Law / Weekend Law: Prediction Markets, the 'God Squad' and Social Media Addiction

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Weekend Law: Prediction Markets, the 'God Squad' and Social Media Addiction · Bloomberg Law

0:02
Speaker 1: This is Bloomberg Law with June Grosso from Bloomberg Radio.
0:08
Speaker 2: If you want to make a prediction about US Supreme
0:11
Speaker 2: Court review, the odds are clearly in favor of the
0:14
Speaker 2: justices taking a case over who should regulate the booming
0:18
Speaker 2: prediction markets, the States or the Commodity Futures Trading Commission. Calshi,
0:25
Speaker 2: the leading prediction market, won the first appellate court decision
0:29
Speaker 2: in the battle over regulation this week. It argued that
0:33
Speaker 2: bets placed on the outcomes of sporting events on its
0:36
Speaker 2: platform are not gambling, but events contracts, a type of derivative,
0:42
Speaker 2: a theory Calshi's CEO to Rekmansour, has advanced.
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Speaker 3: I always say this, you know, whether something feels and
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Speaker 3: looks like gambling doesn't necessarily make it gambling. Speculation exists
0:53
Speaker 3: in all financial markets. If we're going to take a
0:55
Speaker 3: line that speculation is gambling, then the stock market what
0:59
Speaker 3: retail participation is. Then buying options for retail is yo
1:02
Speaker 3: data expired options is gamming. Then retail buying crypto is gamling.
1:05
Speaker 2: And in a two to one decision, the Third Circuit
1:08
Speaker 2: Court of Appeals agreed with Calshie and ruled that the
1:11
Speaker 2: CFTC regulates the platform, not New Jersey, but lower courts
1:17
Speaker 2: across the country have reached conflicting decisions on the issue,
1:21
Speaker 2: and there are more arguments ahead in at least three
1:24
Speaker 2: other appellate courts, making a circuit court split likely. The
1:29
Speaker 2: favorite route to the Supreme Court joining me is Bloomberg
1:32
Speaker 2: Intelligence senior litigation analyst Elliott Stein. Elliott tell us about
1:37
Speaker 2: the legal battle that's been going on between the prediction
1:40
Speaker 2: markets and the states.
1:42
Speaker 4: Yeah, this litigation has been going on for over a
1:45
Speaker 4: year now, and we have cases all over the country
1:49
Speaker 4: in multiple state courts, multiple federal courts, And essentially it
1:53
Speaker 4: started when some states started sending cease and desist letters
1:57
Speaker 4: to the prediction markets like Calshie, seeking to stop them
2:01
Speaker 4: from operating in those states because the states viewed those
2:03
Speaker 4: products is gambling, and the prediction markets, particular CALCI, at
2:08
Speaker 4: that point sued the states sort of preemptively to stop
2:12
Speaker 4: the states from filing an enforcement action against them. And
2:16
Speaker 4: the prediction market argument is that these are derivatives that
2:20
Speaker 4: should be regulated by the CFTC, and under the Commodity
2:23
Speaker 4: Exchange Act, states are preempted from regulating them as gambling
2:28
Speaker 4: and the states, of course, take the position that these
2:30
Speaker 4: products are really gambling in effect and they should be
2:33
Speaker 4: regulated as such.
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Speaker 2: How are they not gambling? I mean you're placing a
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Speaker 2: wager on an outcome.
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Speaker 4: There are some differences and the event contracts that the
2:42
Speaker 4: prediction markets offer, you really have two sides to the contract,
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Speaker 4: you know, parties on both sides, as opposed to your
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Speaker 4: traditional gambling and betting apps where consumer is really betting
2:54
Speaker 4: against the house. And event contracts, like other derivatives, are
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Speaker 4: you know, contracts that you can get in and out
3:01
Speaker 4: of and sell, which is also a difference, you know.
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Speaker 4: But really it comes down to the statutory language in
3:07
Speaker 4: the Commodity Exchange Act and whether these event contracts fall
3:10
Speaker 4: into the definition of swaps, which is very broad in
3:13
Speaker 4: the Commodity Exchange Act. And related to that is whether
3:18
Speaker 4: Congress intended to preempt states from regulating these products.
3:23
Speaker 2: Lower courts across the country have reached conflicting decisions in
3:27
Speaker 2: these cases. Which side is winning more of the lower
3:30
Speaker 2: court battles, Like you.
3:32
Speaker 4: Said, we have multiple decisions now at the trial court level.
3:36
Speaker 4: It's funny. The first decisions came almost exactly a year ago,
3:39
Speaker 4: in April of twenty twenty five with respect to these
3:42
Speaker 4: sports event contracts, and Calcey won those. They want a
3:45
Speaker 4: preliminary injunction in Nevada, they want a preliminary injunction in
3:50
Speaker 4: New Jersey, and so you know, they sort of came
3:54
Speaker 4: out of the gate winning. Then shortly thereafter, in August,
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Speaker 4: I believe, a federal court in Maryland ruled against Calci
4:01
Speaker 4: and ruled in the states favor. And since then we've
4:04
Speaker 4: had probably more trial court rulings going in favor of
4:08
Speaker 4: the states, because you've had decisions in Ohio and in
4:12
Speaker 4: Michigan in favor of the states. You had a state
4:14
Speaker 4: court in Massachusetts issue of preliminary in junction in favor
4:18
Speaker 4: of the state against Calshi as well. So I would say,
4:21
Speaker 4: you know, up until the decision by the Third Circuit
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Speaker 4: Court of Appeals, you sort of had more federal courts
4:26
Speaker 4: ruling in favor of the states, but you did have
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Speaker 4: some like I mentioned New Jersey and also Tennessee ruined
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Speaker 4: in favor of Calci than a Vada decision I mentioned
4:33
Speaker 4: earlier was interesting because the judge there, even though a
4:35
Speaker 4: year ago he ruled in favor of Calci. More recently
4:38
Speaker 4: in October, he sort of changed his mind and ruled
4:42
Speaker 4: in favor of Nevada, and that set sort of a
4:45
Speaker 4: cascading series of events in Nevada litigation, which is all
4:48
Speaker 4: going to be tied up in the Ninth Circuit next week.
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Speaker 2: And explain the Third Circuit's decision in favor of the CFTC.
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Speaker 4: This is a split decision, but the majority ruled that
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Speaker 4: the definition of swa under the Commodity Exchange Act is
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Speaker 4: very broad and is broad enough to encompass event contracts
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Speaker 4: like those that are offered by the likes of Calshie
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Speaker 4: and other designated contract markets dcms, and that under the
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Speaker 4: Commodity Exchange Act, the CFTC has exclusive jurisdiction over swaps
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Speaker 4: that are traded on designated contract markets and as a result,
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Speaker 4: states are preempted from regulating them as gambling. Those are
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Speaker 4: like sort of the two main issues, and those are
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Speaker 4: the same issues that we see being decided in the
5:30
Speaker 4: trial court. But the decision by the Third Circuit is
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Speaker 4: the first time that we have very federal appeals court
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Speaker 4: rule on these issues in any sort of substance.
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Speaker 2: The dissenting judge, Jane Richards Roth wrote that Calshe's actions
5:43
Speaker 2: are a performative slight meant to obscure the reality that
5:47
Speaker 2: Calshie's products are sports gambling, and she said that their
5:52
Speaker 2: offerings were virtually indistinguishable from the betting products available on
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Speaker 2: online sports books like Kings and FanDuel. Is she right?
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Speaker 4: Well, it depends how you ask, right, But you know,
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Speaker 4: I tend to think the prediction markets actually have the
6:07
Speaker 4: better statutory argument here. I think the Commodity Exchange Act
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Speaker 4: is pretty clear that the CFCC has exclusive jurisdiction over
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Speaker 4: swaps that are traded on designated contact markets. You know,
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Speaker 4: that doesn't mean that states can't regulate your more traditional
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Speaker 4: forms of gambling because the Commodity Exchange Act doesn't stop
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Speaker 4: them from doing that.
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Speaker 2: The Third Circuit covers Delaware, New Jersey, and Pennsylvania. Other
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Speaker 2: jurisdictions don't have to follow this ruling. So how important
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Speaker 2: is it?
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Speaker 4: It's important because it's the first federal appeals court to
6:41
Speaker 4: weigh in on these issues, But it's not going to
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Speaker 4: be the last, right, I mean, I mentioned earlier that
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Speaker 4: next week the Ninth Circuit is going to hold argument
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Speaker 4: in cases in Nevada concerning calcy robinhood and poly market.
6:55
Speaker 4: The Maryland case that I mentioned earlier is going to
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Speaker 4: be argued in the Fourth Circuit next month in May.
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Speaker 4: The Massachusetts preliminary in junction that I mentioned earlier is
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Speaker 4: going to be argued in the Massachusetts Supreme Court also
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Speaker 4: next month. And then in the Sixth Circuit, we have
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Speaker 4: conflicting rulings from federal trial courts in Ohio and Tennessee
7:16
Speaker 4: that is going to be argued sometime probably, you know,
7:19
Speaker 4: in the second half of the year. So we're going
7:20
Speaker 4: to have multiple decisions from multiple federal circuit courts, and
7:25
Speaker 4: inevitably these cases are destined for the Supreme Court because
7:29
Speaker 4: you're probably going to get conflicting rulings from some of
7:31
Speaker 4: the circuit courts, and we're talking about issues of federal preemption,
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Speaker 4: which is a really important issue that the Supreme Court
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Speaker 4: likes to weigh in on.
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Speaker 2: So sketch out for us what the issues might look
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Speaker 2: like at the Supreme Court.
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Speaker 4: I think the issues have to do with what the
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Speaker 4: Commodity Exchange Act provides for and what Congress intended with
7:52
Speaker 4: the Commodity Exchange Act going back multiple decades, and then
7:56
Speaker 4: in nineteen seventy four, Congress basically gave the CFTC exps
8:00
Speaker 4: of jurisdiction over derivatives that trade on federally regulated exchanges.
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Speaker 4: They removed language that would have given states concurrent jurisdiction
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Speaker 4: over those products. And then in twenty ten you get
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Speaker 4: the Dodd Frank Act, which adds swaps to that language
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Speaker 4: and very clearly includes event contracts in the definition of
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Speaker 4: swaps and also gives the CFTC authority and discretion to
8:28
Speaker 4: and or reject event contracts that might be against the
8:32
Speaker 4: public interests. So I think that's really what the focus
8:35
Speaker 4: is going to be at the Supreme Court when these
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Speaker 4: cases reach are just like it's been in the lower court.
8:39
Speaker 2: So has the CFTC been regulating any of these prediction markets?
8:45
Speaker 2: Have they done anything?
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Speaker 3: So?
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Speaker 4: The CFTC under the Biden administration actually proposed a rule
8:51
Speaker 4: that would have essentially banned contracts related to elections and sports.
8:57
Speaker 4: When Kelsey first started offering election contracts leading up to
9:02
Speaker 4: the twenty twenty four presidential election, the Biden administration's CFTC
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Speaker 4: tried to stop those. That was litigated cal she won
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Speaker 4: in the trial court and never really litigated fully in
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Speaker 4: the peals court because then you had the Trump administration
9:15
Speaker 4: come in and so the case sort of went away.
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Speaker 4: And it was around that time that CALCI also started
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Speaker 4: getting into sports event contracts, and the CFTC at that
9:25
Speaker 4: point was a little bit in flux as leadership was changing.
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Speaker 4: It didn't do much until really very recently in the
9:31
Speaker 4: last couple of months, where it first revoked the Biden
9:35
Speaker 4: administration's proposed rule and then started going down a path
9:39
Speaker 4: where it would read to its own rule making. It
9:42
Speaker 4: issued staff advisory talking about, you know, contracts that might
9:46
Speaker 4: be susceptible to manipulation and how exchanges have to be
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Speaker 4: careful not to offer those and should really consult maybe
9:52
Speaker 4: with the CFTC before listing those, and it also issued
9:55
Speaker 4: an advanced Notice of proposed rule making, which is the
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Speaker 4: first step towards further rule making. The CFTC has started
10:01
Speaker 4: to get involved in this. It has taken the side
10:03
Speaker 4: of the prediction markets and the litigation in the Ninth Circuit.
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Speaker 4: It's filed in the amicus brief and support of the
10:09
Speaker 4: prediction markets because the CTC takes the position that these
10:12
Speaker 4: event contracts should be regulated by the CFTC, not by
10:15
Speaker 4: the States. The CFTC just last week sued three states
10:18
Speaker 4: to stop them from trying to regulate these products as gambling,
10:22
Speaker 4: and so, you know, we should see more developments in
10:25
Speaker 4: the area of rulemaking as well in the coming months.
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Speaker 4: I would say.
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Speaker 2: So, as you mentioned, the CFTC is suing Connecticut, Arizona,
10:33
Speaker 2: and Illinois. Why do you think they're taking this affirmative
10:36
Speaker 2: step instead of leaving the litigation to Calcy and the
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Speaker 2: other prediction market platforms.
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Speaker 4: Yeah, it's a little bit of pile on. I would say.
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Speaker 4: I'm not sure that their lawsuits add much beyond what
10:50
Speaker 4: the prediction markets lawsuits already are trying to do. But
10:54
Speaker 4: you know, it's just a further thumb on the scale,
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Speaker 4: I think. But I'm not sure it's going to change
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Speaker 4: the outcome of the cases all that much.
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Speaker 2: So we'll see what happens at the Ninth Circuit next week,
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Speaker 2: and we'll wait to see what action New Jersey takes,
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Speaker 2: whether it petitions the Third Circuit for a rehearing on
11:12
Speaker 2: bank or petitions the Supreme Court. Actually a decade ago,
11:17
Speaker 2: it was a Third Circuit case that the Supreme Court
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Speaker 2: took that led to the landmark decision allowing the states
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Speaker 2: to legalize betting on Sports. Thanks so much, Elliott. That's
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Speaker 2: Bloomberg Intelligence Senior litigation analyst Elliott Stein coming up next
11:33
Speaker 2: on the Bloomberg Lawn Show. It's called the Gods Squad,
11:37
Speaker 2: and its latest decision is putting critically endangered species at
11:41
Speaker 2: risk in favor of oil and gas drilling. I'm June
11:45
Speaker 2: Grosso and you're listening to Bloomberg.
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Speaker 5: The Committee, in doing this will be issuing an exemption
11:53
Speaker 5: from the requirements of the ESA for all oil and expiration,
11:56
Speaker 5: development and production activities associated with the Bone and Bessie
12:02
Speaker 5: Outer Continental Shelf.
12:03
Speaker 2: They're called the God Squad with good reason. They play
12:07
Speaker 2: God in deciding whether a species lives or dies. The
12:12
Speaker 2: Endangered Species Committee last met thirty four years ago until
12:16
Speaker 2: last week, when Interior Secretary Doug Bergham convened it why
12:22
Speaker 2: to consider waiving the protections for critically endangered whales, sea
12:27
Speaker 2: turtles and other species in the Gulf of Mexico to
12:30
Speaker 2: make way for more oil and gas drilling. Defense Secretary
12:34
Speaker 2: Pete Hegseth claimed that pending environmental litigation is a threat
12:39
Speaker 2: to oil and gas operations in the Gulf and a
12:42
Speaker 2: matter of national security.
12:44
Speaker 6: These legal battles waste critical government resources and make it
12:48
Speaker 6: impossible for energy companies to plan and invest in new projects.
12:52
Speaker 6: When development in the Gulf is chilled, we are prevented
12:56
Speaker 6: from producing the energy we need as a country and
13:00
Speaker 6: as a department.
13:01
Speaker 2: After fifteen minutes, without testimony from experts or discussion, the
13:05
Speaker 2: committee voted unanimously to exempt all oil and gas activities
13:11
Speaker 2: in the Gulf of Mexico from complying with the Endangered
13:14
Speaker 2: Species Act. Environmental groups are suing to cancel the exemption,
13:19
Speaker 2: saying it will push some species like the rice is
13:22
Speaker 2: wail into extinction. There are only fifty left on Earth,
13:27
Speaker 2: and they're all in the Gulf, which is the home
13:29
Speaker 2: to at least nineteen other threatened and endangered species, including
13:34
Speaker 2: the world's smallest and most endangered sea turtle. My guest
13:38
Speaker 2: is an expert in environmental law. Pat Parento a professor
13:42
Speaker 2: at the Vermont Law and Graduate School. He's tangled with
13:46
Speaker 2: the God Squad on several occasions. Pat tell us about
13:50
Speaker 2: the God Squad.
13:51
Speaker 1: So this is a cabinet level committee federal officers. It
13:56
Speaker 1: was created in nineteen seventy eight in response to the
14:00
Speaker 1: Supreme Court's decision in the infamous Teleco Damn case, where
14:05
Speaker 1: the Supreme Court said, if there's a violation of the
14:08
Speaker 1: Endangered Species Act that could result in the extinction of
14:12
Speaker 1: a species, the courts are basically powerless to do anything
14:17
Speaker 1: about that. Only Congress could exempt an action that might
14:22
Speaker 1: jeopardize a species. And so Congress responded to that decision
14:27
Speaker 1: by creating this cabinet level committee literally with the power
14:31
Speaker 1: of life or death over a species, which has now
14:35
Speaker 1: come to be known as the God Squad.
14:37
Speaker 2: The God Squad has only met three times in its
14:40
Speaker 2: history until last week. What was different about this meeting.
14:44
Speaker 1: Well, this time around, for the first time, Bergham convened
14:48
Speaker 1: the committee with just the federal officers, you know, and
14:52
Speaker 1: the other God Squad proceedings, there were always states involved,
14:56
Speaker 1: but this time it's just the Feds. And this time
14:59
Speaker 1: the the committee was convened at the request of Secretary Hegseth,
15:05
Speaker 1: who is claiming that there's a national security issue here
15:11
Speaker 1: with regard to oil and gas development in the Gulf
15:14
Speaker 1: of what we still call Mexico Gulf of Mexico. And
15:18
Speaker 1: so this is the first time that that kind of
15:23
Speaker 1: national security rationale has been invoked. And the law does
15:30
Speaker 1: say if the Secretary determines there is a national security
15:35
Speaker 1: threat as a result of some action that has been
15:39
Speaker 1: stopped by the Endangered Species Act, then the Committee must
15:44
Speaker 1: issue an exemption. So the real question is is there
15:48
Speaker 1: really a national security emergency in this situation? And the
15:51
Speaker 1: answer is no, there is not.
15:54
Speaker 2: You're anticipating my next question. Is there any evidence at
15:57
Speaker 2: all that the Endangered Species Act has resulted in any
16:02
Speaker 2: restrictions on the amount of oil produced in the Gulf.
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Speaker 1: None. In fact, oil and gas development in the Gulf
16:09
Speaker 1: is at an all time high. There is no action
16:15
Speaker 1: that has been stopped by the Endangered Species Act. There
16:18
Speaker 1: are lawsuits challenging the Trump administration's analysis of threats to
16:25
Speaker 1: various species, most prominently the Rice's whale, which is one
16:30
Speaker 1: of the most endangered whales and marine mammals in the world.
16:34
Speaker 1: There are only fifty or so of these whales left
16:38
Speaker 1: and they are all in the Gulf, and clearly oil
16:41
Speaker 1: and gas development poses a serious threat to these whales.
16:45
Speaker 1: But there are many other There's over a dozen listed
16:48
Speaker 1: endangered species in the Gulf. There are sea turtles, there
16:51
Speaker 1: are sperm whales, there are manatees, there are all kinds
16:55
Speaker 1: of iconic marine mammals on the list of endangered species.
17:00
Speaker 1: But the point is none of them have stopped any
17:04
Speaker 1: of the oil and gas, either exploration or development. So
17:09
Speaker 1: this is a made up, fictional crisis.
17:12
Speaker 2: Hegseth said that pending litigation threatens to shut down all
17:17
Speaker 2: oil and gas activities. But if it's pending, that means
17:21
Speaker 2: they don't even know what the decision will be and
17:24
Speaker 2: it could take years to get to it right.
17:27
Speaker 1: And the point is that Congress never intended or even
17:31
Speaker 1: considered the notion that lawsuits would be a trigger for exemptions.
17:36
Speaker 1: You have to understand if the entire oil and gas program,
17:40
Speaker 1: and that's what Hegseth is demanding an exemption for the
17:44
Speaker 1: whole operation in the Gulf. If a lawsuit and there's
17:47
Speaker 1: only one lawsuit right now, was enough to justify an exemption,
17:51
Speaker 1: that means there is no Endangered Species Act protection for
17:55
Speaker 1: any of these species. That's the dramatic impact of an exemption.
18:00
Speaker 1: And that's why Congress said it is to be emphatically
18:04
Speaker 1: a last resort mechanism where there is an irresolvable conflict
18:09
Speaker 1: between a vital federal action and the Endangered Species Act.
18:14
Speaker 1: We don't have anything like that. But the idea that
18:17
Speaker 1: an exemption could be granted could wipe out all kinds
18:21
Speaker 1: of protections for these species.
18:23
Speaker 2: So there are two lawsuits by environmental groups to cancel
18:27
Speaker 2: the exemption. What are the grounds they're alleging?
18:30
Speaker 1: The Endangered Species Act sets up a really complex series
18:34
Speaker 1: of steps for exemptions. I know this because I'm the
18:37
Speaker 1: only lawyer that's been involved in all four of the
18:40
Speaker 1: God Squad proceedings, all four of them. And I was
18:43
Speaker 1: the spot at Owl's lawyer in the last God Squad proceeding,
18:47
Speaker 1: and I was the Whooping Cranes lawyer in the first
18:50
Speaker 1: God Squad proceeding. So I've been with this point. You
18:52
Speaker 1: have good clients, Yeah, good clients, My favorite clients. They
18:57
Speaker 1: never complain in any event. So you know, there's multi
19:02
Speaker 1: steps involved in this process, including did you engage in
19:05
Speaker 1: good faith consultation? Did you make a diligent effort to
19:08
Speaker 1: identify alternatives to avoid jeopardy and avoid a conflict that
19:12
Speaker 1: would require an exemption? Did you write an adequate environmental
19:15
Speaker 1: impact statement? Did you ride an adequate biological assessment? You
19:19
Speaker 1: see what I mean. So there's there's all kinds of
19:21
Speaker 1: these safeguards and I know about these safeguards because I
19:24
Speaker 1: had a hand in lobbying Congress to include them. None
19:27
Speaker 1: of that's been done, none of those steps has been followed.
19:30
Speaker 1: Heexcess showed up at this meeting, which lasted fifteen minutes,
19:34
Speaker 1: among the cabinet officers, you know, nodding in agreement with
19:37
Speaker 1: what Hegseth is saying. But nothing about whether there really
19:41
Speaker 1: was an irresolvable conflict, nothing about the fact that there
19:45
Speaker 1: had been steps taken to protect the risest whale. And
19:48
Speaker 1: those steps are very modest. They're common sense steps. They
19:52
Speaker 1: basically come down to keep a sharp lookout for whales
19:56
Speaker 1: when the vessels are moving through the gulf, and if
19:59
Speaker 1: there are whales in the vicinity, slow down, limit your speed,
20:05
Speaker 1: don't run them over. I mean, these are the kinds
20:08
Speaker 1: of very modest protections. In fact, I don't think they're
20:11
Speaker 1: totally adequate protections. But the point is those are the
20:15
Speaker 1: only protections that were imposed on oil and gas development. Now,
20:19
Speaker 1: the oil industry doesn't want to slow down. They want
20:22
Speaker 1: to speed up. They want to get as much oil
20:23
Speaker 1: out as fast as they can, particularly now, right, So
20:26
Speaker 1: that's kind of the context of what we're talking about
20:30
Speaker 1: very modest steps to protect these critically endangered species, and
20:35
Speaker 1: yet this administration is saying it's full speed ahead, damn
20:39
Speaker 1: the whales, drill the oil.
20:41
Speaker 2: There's a question of whether this kind of decision by
20:45
Speaker 2: the God Squad is even subject to judicial review.
20:49
Speaker 1: Yes, we'll find that out because this is the first
20:53
Speaker 1: time that a national security rationale has been used, and
20:57
Speaker 1: there's no precedent for how that gets reviewed. Hegcess determination
21:01
Speaker 1: gets reviewed. But the legislative history, and again I had
21:04
Speaker 1: a hand in this, of the nineteen seventy eight amendments,
21:08
Speaker 1: makes it really clear that that decision is subject to
21:11
Speaker 1: judicial review under the Administrative Procedure Act in the district courts.
21:17
Speaker 1: And both the NRDC and the Center for Biological Diversity
21:21
Speaker 1: have filed lawsuits in district court in DC challenging the
21:26
Speaker 1: exemption and challenging hegcess finding. So we will find out
21:31
Speaker 1: relatively soon, I think, whether the courts are going to
21:34
Speaker 1: take review. We do know this that when a national
21:38
Speaker 1: security reason is invoked, the courts are very careful about
21:43
Speaker 1: how to review that. In fact, they're very deferential generally
21:46
Speaker 1: on questions like that. But whether is zero evidence of
21:50
Speaker 1: a national security threat. That's a very different situation. We
21:54
Speaker 1: know that the Trump administration invoked national security when they
21:58
Speaker 1: issued stop world orders on offshore wind farms, all five
22:03
Speaker 1: of them off the East Coast this past year, and
22:06
Speaker 1: the courts uniformly in all five cases rejected hegst invocation
22:12
Speaker 1: of national security. Judge Lambert in the DC case actually
22:17
Speaker 1: looked at the classified documents that HEGSTH was citing for
22:22
Speaker 1: stopping work on these projects, and Judge Lambert said, I
22:26
Speaker 1: don't see any national security thread in here at all.
22:29
Speaker 1: So my expectation is we'll see something like that. To
22:33
Speaker 1: the extent that Hegseth has some kind of classified information
22:37
Speaker 1: he's relying on which he hasn't made public, the courts
22:40
Speaker 1: are going to demand to take a look at that
22:42
Speaker 1: and determine for themselves whether there really is a basis
22:45
Speaker 1: for it. If there were some evidence that the Endangered
22:49
Speaker 1: Species Act was somehow affecting military readiness military operations, that
22:56
Speaker 1: would be a different situation altogether. But we don't have
22:59
Speaker 1: any evidence of that.
23:00
Speaker 2: Do they want to start new drilling in the Gulf?
23:03
Speaker 2: Is there something actually on the agenda or is this
23:06
Speaker 2: just an opportune moment to do this?
23:09
Speaker 1: There definitely is drilling ongoing, and there is exploration for
23:14
Speaker 1: drilling projects, and now they're moving way off the coast
23:19
Speaker 1: into deep ocean waters of the Gulf and talking about
23:22
Speaker 1: drilling wells deeper than we've ever drilled them before. And
23:26
Speaker 1: that raises the prospect of a really catastrophic spill like
23:31
Speaker 1: what we had in deep Water Horizon. That spill killed
23:34
Speaker 1: twenty percent of the rice is whale that one spill.
23:38
Speaker 1: So the idea that drilling can proceed without serious risk
23:43
Speaker 1: to these species is just wrong. There's a lot of activity,
23:47
Speaker 1: a lot of ship traffic. Ship traffic is the leading
23:50
Speaker 1: cause of injury and death to these whales. We know
23:54
Speaker 1: that also with the right whale off the east coast
23:57
Speaker 1: in the Gulf of Maine, Vessel strikes is the leading
24:00
Speaker 1: cause of mortality for those whales, and it's the same
24:04
Speaker 1: for the rice's whale, the sperm whale, and the others
24:06
Speaker 1: in the Gulf. So that's where we are. I mean,
24:08
Speaker 1: it isn't as if the Endangered Species Act is stopping
24:11
Speaker 1: oil and gas development, but it is supposed to require
24:15
Speaker 1: at least those kinds of precautions that can reduce the
24:19
Speaker 1: risk save some of these whales. Give them a chance
24:22
Speaker 1: to recover.
24:23
Speaker 2: We'll see what happens in the DC court. Thanks Pat.
24:26
Speaker 2: That's professor Pat Parento of the Vermont Law and Graduate School.
24:30
Speaker 2: Coming up fallout from the social media addiction litigation. I'm
24:34
Speaker 2: June Grosso and this is Bloomberg. This week, Meta began
24:39
Speaker 2: removing ads from Facebook and Instagram placed by trial lawyers
24:44
Speaker 2: recruiting clients to join lawsuits against the social media sites.
24:49
Speaker 2: Meta said, we will not allow trial lawyers to profit
24:52
Speaker 2: from our platforms while simultaneously claiming they're harmful. There are
24:58
Speaker 2: already thousands of lawsuits its targeting Meta, YouTube, TikTok, and
25:02
Speaker 2: Snap by individuals, state attorneys general, and school districts claiming
25:07
Speaker 2: the social media sites intentionally design their platforms to addict
25:12
Speaker 2: young users, leading to mental health issues. And you can
25:16
Speaker 2: expect many more similar lawsuits to be filed after last
25:21
Speaker 2: month's landmark social media addiction verdicts, a six million dollar
25:25
Speaker 2: verdict against Meta and Google in California and a three
25:29
Speaker 2: hundred and seventy five million dollar verdict against Meta in
25:32
Speaker 2: New Mexico. Is this the beginning of a public reckoning
25:36
Speaker 2: that poses a threat, potentially an existential one? To social
25:41
Speaker 2: media companies. Here to answer that question is one of
25:44
Speaker 2: the foremost experts on internet law, Professor Eric Goleman of
25:49
Speaker 2: Santa Clara University Law School. Eric, before we look at
25:52
Speaker 2: the big picture, let's talk about the appeals, because a
25:56
Speaker 2: successful appeal can turn things around for the social media
25:59
Speaker 2: company Beneze. Do they have what you'd consider good grounds
26:03
Speaker 2: for appeal?
26:04
Speaker 7: I do think that there's some important issues that the
26:06
Speaker 7: appellate court will have to weigh in on. The trial
26:09
Speaker 7: court in the state court case as well a federal case,
26:13
Speaker 7: have made a number of choices that were not obvious
26:16
Speaker 7: that in some ways broke new ground, and as a result,
26:20
Speaker 7: I don't really treat them as the final word on
26:22
Speaker 7: the matter until we hear from other judges, appellate judges
26:25
Speaker 7: if they actually even agree with those decisions. So I
26:29
Speaker 7: think that there are several bass on which the defendants
26:32
Speaker 7: have good grounds for appeal, But that doesn't mean that
26:35
Speaker 7: the appeal is likely to succeed. I kind of write
26:38
Speaker 7: it like a fifty to fifty I can't really predict.
26:41
Speaker 7: The crystal ball is unclear. I think that there's good
26:44
Speaker 7: grounds for appeal. I think that the plaintiffs have some
26:46
Speaker 7: precedent to support them, even if I disagree with the
26:48
Speaker 7: conclusions they reached. And so you know, this is exactly
26:51
Speaker 7: how the judicial system is supposed to work. Complex tough
26:55
Speaker 7: questions get posed to the first level of review, then
26:58
Speaker 7: the second overview, and almost only a third level of review.
27:01
Speaker 2: Do you think one of the grounds for appeal will
27:03
Speaker 2: be based on Section two thirty that generally immunizes online
27:08
Speaker 2: platforms for liability for user generated content.
27:12
Speaker 7: I think that Section two thirty is one of the
27:14
Speaker 7: solid grounds for appeal in this case. Essentially, the plaintifs
27:18
Speaker 7: have had to argue that they're not suing over the
27:22
Speaker 7: content that any individual victim was exposed to, but the
27:25
Speaker 7: way in which that content was delivered, the various design
27:28
Speaker 7: features that help get the content in front of the victim.
27:33
Speaker 7: To me, that line between the content and the method
27:37
Speaker 7: of presentation of the content is illusory. They're all the
27:40
Speaker 7: same thing in my mind. They're all part of the
27:43
Speaker 7: general publication or editorial decisions that the service made about
27:47
Speaker 7: how to best and engage with its users. So, from
27:50
Speaker 7: my perspective, that effort to navigate around what is third
27:54
Speaker 7: party content and what is the service's first party design
27:57
Speaker 7: choices really sophisticated, nuanced argument, but they're not clear to
28:01
Speaker 7: me at all that the trial court got it right.
28:03
Speaker 2: So do you think that this will lead social media
28:05
Speaker 2: companies to change the way they operate.
28:09
Speaker 7: I think that it would be remarkable if social media
28:13
Speaker 7: doesn't change substantially over the next few years. If the
28:16
Speaker 7: final outcome in a few years from now is that
28:19
Speaker 7: social media has retained this status quote has today, I
28:22
Speaker 7: think that would be remarkable. And it's not just because
28:25
Speaker 7: of the litigation, though. If the plaintiffs win any part
28:29
Speaker 7: of litigation, almost certainly the court will order changes to
28:33
Speaker 7: the service, or any settlement agreement would require changes to
28:36
Speaker 7: the services. But the reason why I'm so confident that
28:40
Speaker 7: social media is under extraordinary pressure to change is because,
28:43
Speaker 7: in addition to the litigation, state legislatures throughout the country
28:47
Speaker 7: are passing laws that are requiring structural and tactical changes
28:52
Speaker 7: to how the services operate. And unless the services can
28:57
Speaker 7: also overturn all of those laws, those laws are actually
29:01
Speaker 7: the governing rules that will dictate how social media services operate.
29:05
Speaker 7: So as a practical matter, the litigation is only one
29:08
Speaker 7: path where it's change. I think it would be foolhardy
29:11
Speaker 7: on the part of any of your listeners to assume
29:13
Speaker 7: that the social media services they have today, whether they
29:16
Speaker 7: love them or hate them, it's going to be the
29:18
Speaker 7: social media services they have in a few years from now,
29:20
Speaker 7: and we should talk about what that means for all
29:23
Speaker 7: of us, because we're not in the courtroom to express
29:26
Speaker 7: what we want from social media, but our ability to
29:29
Speaker 7: use the services is being dictated right now in courts
29:33
Speaker 7: and in the legislatures around the country.
29:35
Speaker 2: Will it be the social media companies putting in safe cards,
29:39
Speaker 2: age verification, parental control, or will they have to change
29:44
Speaker 2: what the jury found were addictive features.
29:47
Speaker 7: All of the above and possibly more. In other words,
29:51
Speaker 7: the litigation puts in play a number of very specific
29:54
Speaker 7: tactical choices that the services have made, things like auto
29:58
Speaker 7: play or in fits scrolling or algorithmic personalization. These are
30:04
Speaker 7: tactical changes that might need to be changed in order
30:07
Speaker 7: to avoid liability going forward. All of those features are
30:11
Speaker 7: also being regulated by the legislators who are saying you
30:14
Speaker 7: cannot have infinite scrolling, you cannot have auto play, and
30:18
Speaker 7: so on. So either way, one way or another, those
30:21
Speaker 7: services are going to have to evaluate the functions that
30:24
Speaker 7: they have, but the plaintiff's basic argument doesn't rely on
30:27
Speaker 7: any specific design feature. The basic argument is the way
30:31
Speaker 7: in which you designed the service overall was intended to
30:34
Speaker 7: addict your users and cause them harm. And to the
30:38
Speaker 7: extent that that general statement becomes part of the law,
30:43
Speaker 7: whether in legislation or litigation, we could get there either way.
30:47
Speaker 7: Then the services have to review everything that they do
30:50
Speaker 7: and consider how that might impact potential victims. As a result,
30:54
Speaker 7: there's no limit or boundary to what structural changes could
30:58
Speaker 7: be forced through the leg or the litigation. In either case,
31:03
Speaker 7: everything is in play. And that's why again I'm so
31:06
Speaker 7: concerned ad or confident that social media services will not
31:09
Speaker 7: look the same in a few years from now.
31:11
Speaker 2: If the addictive features are changed, does that mean that
31:16
Speaker 2: the value to advertisers changes as well.
31:20
Speaker 7: The short answer is, we don't know how the changes
31:24
Speaker 7: to any particular product features will affect the revenue or
31:27
Speaker 7: profits of the services, and I think it's actually impossible
31:31
Speaker 7: to model. There is some set of secret sauce that
31:34
Speaker 7: drives user engagement in social media, and it might be
31:37
Speaker 7: that small changes to that secret sauce, or changes that
31:40
Speaker 7: don't relate to the secret sauce have no impact on
31:43
Speaker 7: the bottom line. It is also possible that even the
31:46
Speaker 7: smallest change might have dramatic impact on the bottom line
31:49
Speaker 7: and really change the value proposition for the services, how
31:52
Speaker 7: they structure their offerings and how they are able to
31:55
Speaker 7: profit from them. But we do know that in the end,
31:58
Speaker 7: if the plaintiff's lawyers or the legislators have absolute power
32:03
Speaker 7: to dictate over whether or not something is going to
32:05
Speaker 7: cause victims harm, I don't know that there is a
32:08
Speaker 7: profitable model at that point. In other words, at that
32:10
Speaker 7: point the services can no longer design their offerings for
32:14
Speaker 7: their customers. Somebody else external to the conversation is going
32:18
Speaker 7: to come in and dictate how that will work, and
32:20
Speaker 7: if so, the niche becomes much less lucrative, maybe not
32:24
Speaker 7: even profitable.
32:26
Speaker 2: Eric, you've said that it's the Internet that's on trial here,
32:29
Speaker 2: not social media. Explain what you mean by that.
32:33
Speaker 7: In addition to the lawsuits against social media services, the plaintiffs'
32:37
Speaker 7: lawyers have taken the same basic legal paradigms that they're
32:41
Speaker 7: advancing those cases and advance them against other parts of
32:44
Speaker 7: the Internet. I'll mention three, although it's not limited to
32:48
Speaker 7: these three generative AI, model makers, video game makers, and
32:52
Speaker 7: social gaming in all three. In those cases, the plaintiffs
32:56
Speaker 7: are essentially arguing that the services are designed to addict user,
33:00
Speaker 7: that addiction causes harm, and therefore the services should be
33:03
Speaker 7: liable for the resulting harm. The same exact set of
33:06
Speaker 7: arguments in the social media addiction cases. So if the
33:09
Speaker 7: arguments work in social media addiction, they will be advanced
33:14
Speaker 7: and have a greater degree of likelihood of succeeding against
33:17
Speaker 7: these other major segments of the Internet. And in fact,
33:21
Speaker 7: if the arguments work, there's no segment of the Internet
33:24
Speaker 7: that couldn't be potentially susceptible to the exact same arguments
33:28
Speaker 7: that some function on the Internet is designed to addict
33:30
Speaker 7: the users, it causes harm, they should be financially responsible.
33:34
Speaker 7: So if the arguments work in social media addiction, they
33:38
Speaker 7: will be potentially more successful everywhere else on the Internet,
33:42
Speaker 7: and that could dramatically change not just social media, but
33:45
Speaker 7: the entire innet. And that's why the stakes are so
33:47
Speaker 7: high for these Bellweather trials.
33:50
Speaker 2: Lexi Haszam, one of the lead attorneys representing plaintiffs and
33:54
Speaker 2: school districts in similar cases, said, we have the wind
33:57
Speaker 2: at our backs going into the next trials. These companies
34:00
Speaker 2: are under a lot of pressure. I mean, does one
34:03
Speaker 2: trial affect the next trial.
34:05
Speaker 7: It doesn't, and that's in fact, the whole nature of
34:07
Speaker 7: the Bellweather trials is to do basically a statistical sampling
34:11
Speaker 7: of the entire corpus of claims and try to get
34:15
Speaker 7: a sense about how to value that entire corpus based
34:18
Speaker 7: on some independently chosen data points. So the plaintiffs are
34:23
Speaker 7: I think excited because their arguments worked and that gives
34:27
Speaker 7: them more confidence that the arguments are going to work
34:28
Speaker 7: in the next case. But they're independent, and it entirely
34:32
Speaker 7: possible that the next trial will reach a completely different result,
34:36
Speaker 7: maybe massive liability far beyond six million, or maybe zero dollars,
34:40
Speaker 7: or no liability at all. Now, having said that, each
34:43
Speaker 7: side has now heard the other side's best evidence and
34:46
Speaker 7: they're going to iterate. Both sides will change their messaging
34:50
Speaker 7: to try to reach a different outcome or a better
34:53
Speaker 7: outcome for them. So the plaintiff's lawyers may be feeling
34:56
Speaker 7: confident that having seen the best evidence of the defendants,
35:00
Speaker 7: they have a better sense about how they can reach
35:03
Speaker 7: it to better outcome for them.
35:04
Speaker 2: The social media cases are being compared to the tobacco
35:09
Speaker 2: litigation with the global settlement and the opioid litigation. Do
35:13
Speaker 2: you see a direct comparison.
35:15
Speaker 7: Yes, and no, there's some kernel of truce to it.
35:18
Speaker 7: So in general, I'll start with something like tobacco. Tobacco
35:22
Speaker 7: has no known health benefits to its consumers. It's only
35:26
Speaker 7: either neutral to their health or it's negative, whereas with
35:29
Speaker 7: social media, we know that it has substantial benefits to
35:33
Speaker 7: its users, in addition to some users driving potentially significant
35:37
Speaker 7: detriments from it. And so trying to take the regulation
35:41
Speaker 7: or the legal treatment of something that has no known
35:44
Speaker 7: health benefits to something that has substantial benefits that need
35:49
Speaker 7: to be accommodated and accounted for, I just think it's
35:51
Speaker 7: like apples and oranges. I also think that it's not
35:54
Speaker 7: an out of comparison because cigarettes are a physical space
35:58
Speaker 7: problem that causes physical health, whereas social media is an
36:02
Speaker 7: intangible venue for publishing content. And trying to draw analogies
36:07
Speaker 7: between offline physical space items to online intangile items, including
36:13
Speaker 7: the publication of content which gets special constitutional protection, I
36:16
Speaker 7: just think it's an apt Now the reason why the
36:19
Speaker 7: big tobacco analogy might be relevant is first, because both
36:23
Speaker 7: sides are approaching this as if it is a litigation war.
36:26
Speaker 7: And normally, when you think about people litigating against big
36:29
Speaker 7: giants like Google or Meta, you just assume that the
36:32
Speaker 7: plaintiffs are going to be outgunned financially or in terms
36:36
Speaker 7: of their legal expertise. But that's not the case at all. Here.
36:39
Speaker 7: You have an extraordinarily well funded group of plaintiffs who
36:42
Speaker 7: have spared no expense at trying to get to successful outcomes.
36:47
Speaker 7: Just like in Big Tobacco, the amount of money on
36:49
Speaker 7: both sides was extraordinary, and that's true here as well.
36:52
Speaker 7: This case is going to be litigated to the very
36:55
Speaker 7: nth degree by both sides. There's no imbalance in the
36:59
Speaker 7: power relationship. There. The other reason why it could be
37:02
Speaker 7: like the big tobacco cases because it could change the industry.
37:05
Speaker 7: It is possible that social media as an industry will
37:08
Speaker 7: look different at the end of this litigation, just like
37:11
Speaker 7: the tobacco industry looked different. So that sounds the stakes
37:14
Speaker 7: are super high and I can see the analogy on
37:17
Speaker 7: that front.
37:18
Speaker 2: A lot to think about. Thanks Eric. That's Professor Eric
37:20
Speaker 2: Golman of Santa Clara University Law School and that's it
37:24
Speaker 2: for this edition of The Bloomberg Law Show. Remember you
37:27
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