Legal News for Tues 7/16 - Trump Classified Docs Case Dismissed, Masimo Lawsuit Against Politan, Big Tech AI Transparency Push, SEC Updates Crypto Guidelines and Congestion Pricing in NYC

Minimum Competence

This Day in Legal History: The District of Columbia is Established

On July 16, 1790, the District of Columbia was established as the permanent seat of the United States government by the Residence Act. This pivotal legislation, signed by President George Washington, designated a new federal district along the Potomac River, which would be separate from any state and under the direct control of the federal government. The district originally included land donated by both Maryland and Virginia, reflecting a compromise between the northern and southern states to establish a neutral capital.

The creation of the District of Columbia was a significant event in American legal history, as it ensured that the federal government would not be beholden to any single state. This move aimed to prevent conflicts of interest and promote a balanced governance structure. The district was meticulously planned by French engineer Pierre Charles L'Enfant, who envisioned a grand capital with wide avenues and impressive public buildings.

However, by the mid-19th century, it became evident that major government buildings and developments were concentrated on the Maryland side of the Potomac River. In response, Virginia requested the return of its portion of the land. This request was granted, and the land was retroceded to Virginia in 1847.

The establishment and subsequent adjustment of the District of Columbia underscore the evolving nature of American governance and territorial organization. Today, the district stands as a symbol of national unity and a center of political power, home to iconic structures such as the Capitol, the White House, and the Supreme Court. The Residence Act's enactment on this day laid the groundwork for the vibrant and influential capital city that Washington, D.C., has become.

A U.S. judge dismissed a criminal case against Donald Trump regarding the mishandling of classified documents, citing the improper appointment of Special Counsel Jack Smith. Judge Aileen Cannon ruled that Attorney General Merrick Garland lacked the authority to appoint Smith or fund his work, deviating from long-standing legal practices. This decision is a significant victory for Trump, who recently survived an assassination attempt and accepted the Republican presidential nomination.

Garland appointed Smith in November 2022 to investigate Trump’s retention of classified documents post-presidency. Trump argued that special counsels are principal officers requiring Senate confirmation, while the Justice Department viewed them as inferior officers appointable by the attorney general. Cannon sided with Trump, stating that Smith's role undermines the separation of powers and disrupts the Justice Department’s structure.

This ruling breaks from historical precedent, as courts have typically supported the authority of special prosecutors. Cannon dismissed the relevance of the 1974 Supreme Court ruling requiring Nixon to release Watergate tapes, noting it doesn't bind the attorney general's appointment authority.

Cannon also referenced Justice Clarence Thomas’s opinion on presidential immunity in her decision. The Justice Department plans to appeal, arguing that the ruling deviates from previous courts' conclusions about the attorney general's authority. The appeal is expected to go to the 11th Circuit Court of Appeals, which previously overturned another of Cannon's decisions related to the classified documents investigation.

Trump Judge’s Ruling on Special Counsel Veers From Recent Cases

Masimo Corp has filed a lawsuit against activist investor Politan Capital, alleging "material misstatements and omissions" in Politan's proxy materials. Politan, which holds nearly a 9% stake in Masimo, has been critical of the company's capital allocation and board oversight, particularly concerning Masimo's $1 billion acquisition of Sound United. Politan has nominated two candidates for Masimo's five-member board, with two seats up for election this year.

This marks the second consecutive year Politan has proposed board candidates, with last year's nominees, including Politan's owner Quentin Koffey, being elected. Politan denies the lawsuit's claims, calling it "without merit."

Masimo postponed its annual shareholder meeting to September 19 from July 25, a move Politan criticized as an attempt to silence shareholders. Politan vowed to prevent further delays. Masimo's stock has dropped 27% over the past year, and Politan has promised to review the company's strategy, costs, and growth plans if its nominees are elected. Proxy advisory firms ISS and Glass Lewis support Politan's candidates, William Jellison and Darlene Solomon.

Masimo initiates legal action against activist investor Politan | Reuters

Major tech companies like Meta, Apple, and Microsoft are increasing transparency about their AI use amid pressure from regulators, oversight committees, and investors. Meta updated its AI labeling policy to better address misinformation, while Microsoft released its first responsible AI report in May. Apple has also pledged more disclosure about its AI plans after a shareholder proposal received significant support.

Shareholders are demanding that these companies reveal the risks their AI tools pose to finances, operations, employees, and society. The entertainment industry is also under scrutiny, especially after AI-related labor concerns during the Hollywood strikes. A recent AI proposal at Netflix received 43% shareholder support, indicating growing investor interest in ethical AI practices.

Despite these pressures, companies continue to pursue AI for its financial potential. Over 40% of S&P 500 companies mentioned AI in their recent annual reports, showing a marked increase since 2018. However, shareholder campaigns are prompting changes, as seen when the AFL-CIO withdrew AI-related bids at Disney and Comcast after they agreed to more disclosure.

Microsoft faced shareholder proposals last year demanding more detailed AI risk reports, even after committing to a responsible AI report. Alphabet, Google's parent company, encountered three AI-related proposals at its June meeting, reflecting investor concerns about misinformation, governance, and human rights impacts.

Meta, having faced its own shareholder proposal in May, updated its AI labeling to provide clearer information about manipulated media. The company’s new digital assistant and AI-generated content features continue to draw scrutiny.

The entertainment industry is particularly sensitive to AI's impact on labor, with Netflix’s shareholder proposal highlighting potential hiring discrimination and job losses. The AFL-CIO emphasized the importance of engaging workers in discussions about AI's use to mitigate such risks.

Globally, AI regulation is evolving, with the EU's AI Act set to take effect, imposing stringent ethical guidelines on AI use. In contrast, the US has been slower to adopt comprehensive AI laws, though an executive order last year introduced significant security and privacy measures. Companies are also establishing new roles and committees to manage AI ethics and transparency, tailoring communication to various stakeholders to navigate the complex regulatory landscape.

Meta, Apple, Microsoft Move to Fend off Mounting AI Concerns

The SEC has eased its stance on accounting for certain crypto assets, but critics argue its two-year-old guidance remains unclear and hampers digital currency adoption. Recently, the SEC informed some large banks and brokerages that they could offer certain crypto products without adding them to their balance sheets, circumventing Staff Accounting Bulletin 121 requirements. Despite this, crypto advocates remain dissatisfied, citing a lack of open dialogue with industry leaders. Banks, seeking more clarity, have turned to their Capitol Hill allies, though a recent legislative attempt to overturn the 2022 guidance failed.

The SEC's bulletin has posed challenges for banks aiming to tap into the $2 trillion digital asset market, raising concerns about securing customer holdings while regulatory issues are sorted out. The SEC hasn't provided exceptions to the bulletin but noted some entities presented different circumstances from those described in the guidance. Since the bulletin's release in March 2022, significant changes, like the collapse of crypto exchange FTX, have highlighted the need for better security of digital assets.

The SEC’s guidance aimed to enhance asset security, crucial for mainstream adoption. Discussions between companies and the SEC have opened doors for banks to serve crypto holders. Despite this, the bulletin had a chilling effect, halting some well-regulated entities from participating in the digital asset market. Political interest in crypto has surged, with figures like Donald Trump and the Republican Party showing support, while the SEC continues to enforce compliance with securities laws.

In late 2023, the SEC began privately consulting with large banks and brokerages, suggesting that with proper safeguards, certain services wouldn't require booking the value of customer assets as a liability. This approach allows banks to serve the crypto market without inflating their balance sheets, which could trigger capital reserve requirements. The SEC's new guidelines are seen as a step forward, though critics believe the Financial Accounting Standards Board should ultimately address customer-held crypto assets to ensure consistent and comprehensive standards.

SEC’s Relaxed Stance on Crypto Guidance Fails to Appease Critics

In my column, I discuss New York Gov. Kathy Hochul's decision to reconsider congestion pricing in Manhattan, illustrating the political challenges of such fees compared to taxes. Hochul's initial plan involved charging drivers up to $15 to enter parts of the city to reduce traffic and raise funds for infrastructure and climate change initiatives. Faced with political backlash, she is now exploring a payroll tax to cover a $1 billion revenue gap, highlighting the greater acceptability of taxes over fees.

I suggest taxing privately owned parking spaces as an alternative to congestion pricing. This could achieve similar revenue goals with less political resistance. Parking taxes can discourage driving in congested areas and raise funds for public transit, although they wouldn’t affect rideshare drivers or those who don’t park, making it a temporary solution.

The public generally prefers taxes over direct fees like congestion pricing, which are more visible and provoke strong reactions due to their clear costs. A payroll tax, though affecting more people, is less direct and thus more politically viable. A parking space tax could also distribute costs more broadly, including to parking facility owners, offering a less visible means of raising revenue.

Ultimately, I argue that congestion pricing, despite its initial unpopularity, has proven effective globally in cities like London and Stockholm. New York should consider revisiting congestion pricing, supported by public education on its benefits and a phased implementation to gain public acceptance.

New York Should Tax Parking Spaces, Not Streets, to End Standoff

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