Speaker 1: This is Bloomberg Law with June Brusso from Bloomberg Radio.
Speaker 1: It's four thousand, I know, and there's a waiting list.
Speaker 1: I assumed five years for a bag. It's not a bag,
Speaker 1: it's a Birken The Hermes broken bag the ultimate status symbol,
Speaker 1: instantly recognizable, hard to get with stunning prices ranging from
Speaker 1: ten thousand to more than three hundred thousand dollars, and
Speaker 1: of course it's been the subject of more than one
Speaker 1: storyline on Sex in the City, Broke my Broken Sort.
Speaker 1: So it's no surprise that French luxury brand air Mez
Speaker 1: sued for trademark infringement when a digital artist started creating
Speaker 1: and selling meta broken and f T s. They depict
Speaker 1: digital images of the broken bag covered a cartoonish colorful
Speaker 1: fur instead of leather. Is it art or a digital knockoff?
Speaker 1: The trial is the first to focus on how trademark
Speaker 1: rights will be applied to n f T s, and
Speaker 1: the outcome may have broader implications for whether n f
Speaker 1: t s are art or commercial assets. My guest is
Speaker 1: intellectual property litigator Terence Ross, a partner caton Uchen Rosenman.
Speaker 1: Terry set the stage for us about this trademark battle
Speaker 1: over the meta Burken n f T s So Hermes
Speaker 1: has put out for a decade now a type of
Speaker 1: pope bag for lack of better word that they branded
Speaker 1: the Birkin, and the Birken has literally become iconic in
Speaker 1: the fashion world. The least expensive one I could find
Speaker 1: online sold, but most of these are far more expensive
Speaker 1: and can run over a hundred thousand dollars each. The
Speaker 1: very high quality bag made out of only to find
Speaker 1: its materials, including esoteric things like ostrich and rocodile. The
Speaker 1: latches are made out of palladium or gold, you know,
Speaker 1: very expensive metal. The craftsmanship is absolutely the best in
Speaker 1: the world. It's a phenomenal handbag. Is to afford to
Speaker 1: spend that much for a tote bag. All the celebrities
Speaker 1: and brag about them. The Kardashians, Cardi b all have them.
Speaker 1: And so in December of one along comes a gentleman
Speaker 1: by the name of Ason Rothschild who is involved in
Speaker 1: fashion and art and entertainment in Los Angeles, and he
Speaker 1: puts out online what he describes as Meta Birken, and
Speaker 1: they are an FT non fungible token in the digital
Speaker 1: world of the metaverse. And for all practical purposes, they
Speaker 1: are a two dimensional image of the Birken in the
Speaker 1: form of n f T s. He embellished them in
Speaker 1: some ways trying to sell online m He finds out
Speaker 1: about this and the cease and desist letter accusing the
Speaker 1: trademark in the fringement, and when he refuses to comply
Speaker 1: with the season desist letter, Rmese files a lawsuit or
Speaker 1: trademark infringement and and other clauses of action in the
Speaker 1: United States District Card for the Southern District of New
Speaker 1: York as a January and a year later here we
Speaker 1: are beginning of February, and that lawsuit is now in
Speaker 1: trial in New York City in front of a jury.
Speaker 1: Or mist claims that consumers were duped into believing that
Speaker 1: the n f T s were created or endorsed by
Speaker 1: her mess. So this is fundamental to trademark law in
Speaker 1: the United States. Trademark law exists to protect consumers against
Speaker 1: being duped or tricked into buying goods or services under
Speaker 1: the mistaken assumption that they are being offered by someone
Speaker 1: other than the person actually offering. So in every trademark
Speaker 1: infringement case, it is necessary for the plant of the
Speaker 1: trademark owner. To establish what we call consumer confusion, you
Speaker 1: don't have to establish that every consumer is confused, just
Speaker 1: a significant portion of them, and most courts say that's
Speaker 1: in the range of ten to the consumers, depending on
Speaker 1: the type of good or service. And the argument here,
Speaker 1: which there seems to be some support for, is that
Speaker 1: people assume that Hermes had entered the metaverse and was
Speaker 1: putting out these meta berkins. There has been testimony that
Speaker 1: one Hermes executive was teaching a class at I think
Speaker 1: Columbia University in New York City and students came up
Speaker 1: to him after the class and asked about the new
Speaker 1: Hermes line meta burkins, and I think there are obviously
Speaker 1: the are Columbia University of smart kids, and you know,
Speaker 1: if they're being duped, that's the guest that the broader
Speaker 1: public probably is also being duped into thinking that somehow
Speaker 1: Hermes is affiliated or associated with these meta berkins. Rothschild said,
Speaker 1: as quote, my meta Berkin's project as a whole was
Speaker 1: an artistic experiment to explore where the value in the
Speaker 1: broken hand bag actually lies in the handcrafted physical objects
Speaker 1: or in the image it projects. So his story has
Speaker 1: changed over time. When he first put these out in December,
Speaker 1: he described them as a tribute to the iconic Hermes Berken. Apparently,
Speaker 1: after the lawsuit was filed and he got legal counsel,
Speaker 1: he started to describe the meta Berkins as a commentary
Speaker 1: on the fashion company's mistreatment of animals and a way
Speaker 1: to own a berkin without actually having to kill a
Speaker 1: crocodile and ostrich cow whatever the particular Berken is made
Speaker 1: out of. So the story shifted over time, and the
Speaker 1: reason for that is that the defense strategy is trying
Speaker 1: to bring itself within the Rogers v. Grimaldi test, which
Speaker 1: is a tricky test, and provide the First Amendment protection
Speaker 1: against trade mark infringement. And we've talked about that test before.
Speaker 1: There's a case before the Supreme Court that we discussed
Speaker 1: involving Jack Daniels and their trademark bottle. We have June
Speaker 1: talked about this before, and I think just in December
Speaker 1: when the case you're referring to, which goes by the
Speaker 1: title Jack Daniels Versus v. I P. Products, was first
Speaker 1: accepted by the Supreme Court, they granted cert cr on it.
Speaker 1: And it's one of the confusing things here clearly Jed
Speaker 1: Draycoss is the trial judge on this case. Very smart man,
Speaker 1: very good judge. You must know that the Supreme Court
Speaker 1: is considering the Rogers e. Grimaldi test, and I would
Speaker 1: have thought, indeed, if I were the judge, I would
Speaker 1: have simply stayed this lawsuit pending Supreme Court guidance on
Speaker 1: whether the Rogers test even exists anymore, and if it
Speaker 1: does exist, what are the parameters for it. When I
Speaker 1: heard about this, I thought, who would have bought these
Speaker 1: n f T s if it was you know, these
Speaker 1: fur lined bags not shaped like a birkin, but also
Speaker 1: about Andy Whirlhol's silk screens of Campbell soup cans. If
Speaker 1: this was a painting in a gallery of birken hambag,
Speaker 1: you know, would there be any question that it was
Speaker 1: considered art. So, June, I can't help you with the
Speaker 1: question of who it's bocking, and it's not just the
Speaker 1: meta Birken. I don't understand why anyone buys any n
Speaker 1: f T s, and I understand that some of these
Speaker 1: n f T s sold for as much as an
Speaker 1: actual Burken So I'd rather have the handbag. I agree
Speaker 1: with you as for the Campbell suit, the Andy Warhol
Speaker 1: famous painting. That has been a trope that the defense
Speaker 1: has trotted out from a very early point in the case.
Speaker 1: They want to sell the notion that this is artwork
Speaker 1: and therefore an expressive work within the Rogers test that's
Speaker 1: protected by the First Amendment. That argument took a body
Speaker 1: blow in trial when Arakoff barred the defenses expert witness
Speaker 1: from testifying that the Meta Berkins were nothing more than
Speaker 1: the digital equivalent of Andy Warhol's Campbell Soup painting. But that,
Speaker 1: in terms of trial strategy, was very serious blow to
Speaker 1: the defense and that they weren't going to be allowed
Speaker 1: to present this key witness and probably weren't going to
Speaker 1: be able to talk about the Campbell Soup argument. Why
Speaker 1: did Judge Rakoff make that decision, Well, the Supreme Court
Speaker 1: number of years ago established a very tough test for
Speaker 1: allowing expert witnesses to testify uh and under that test,
Speaker 1: the disrecord judge, the trial judge has to determine that
Speaker 1: first the witness is qualified in whatever field to gran testify.
Speaker 1: It too, that the opinion they intend to offer is
Speaker 1: um based on solid methodology and grounded in some form
Speaker 1: of scientific approach, and third that the results obtained by
Speaker 1: the expert in coming to opinion are replicable by other experts,
Speaker 1: because that's ultimately under science the way new theories are
Speaker 1: established and accepted in scientific community. Somebody does the procedure,
Speaker 1: reports upon it in a peer review journal. Other scientists
Speaker 1: go out, they repeat the exact procedure, and they come
Speaker 1: up with the same result that therefore it becomes accepted
Speaker 1: the scientific community. And what Judge ray Cost said here
Speaker 1: is you maybe have the qualifications and experience to offer
Speaker 1: expert testimony, but there's nothing about how you reached your
Speaker 1: opinion that's based through grounded in any scientific approach, let
Speaker 1: alone replicable by other experts, And therefore it doesn't pass
Speaker 1: the Supreme Court tests and I cannot allow it indevidence.
Speaker 1: And I thought Judge ray Costs decision was absolutely correct
Speaker 1: in that regard. He also said that the um as
Speaker 1: experts explanation of n f T S was over complicated
Speaker 1: and that the jury appeared puzzled to join the crowd.
Speaker 1: He said it was far more confusing than helpful. So
Speaker 1: this is the most common criticism of trial lawyers that
Speaker 1: you get from juries and individual drawers. When you interviewed.
Speaker 1: The map to this fact built my career on the
Speaker 1: ability to explain very complex things in very simple ways
Speaker 1: to lay people such as jurors or judgets. That is unusual.
Speaker 1: The vast majority of trial lawyers in the intellectual property
Speaker 1: space seemed to um fall into the trap of over
Speaker 1: explaining in very unnecessary detail how things work. And n
Speaker 1: f t s are fundamentally about digital source codes, and
Speaker 1: the lawyers and the expert they put on explained this
Speaker 1: when did the great detail about how would write source
Speaker 1: code and and about digital coding and things that were
Speaker 1: really unnecessary instead of talking about n f T s
Speaker 1: in the way that most human beings talk about it
Speaker 1: in in terms of analogies to real world objects. You know.
Speaker 1: Of day one of the trial, of the of the
Speaker 1: evidence of the trial, it seemed like both sides suffered
Speaker 1: significant blows. The loss of the expert was a blow
Speaker 1: the defense um this dreadful approach to testifying about explaining
Speaker 1: fts by the planets expert was a mistake and a
Speaker 1: blow to their case. So neither side got off to
Speaker 1: quick starts in this trial. So I mean, what does
Speaker 1: ers have to prove that it's confusing? In the marketplace
Speaker 1: that it's like, you know, the rip off handbags that
Speaker 1: we see on the street. What exactly is is its
Speaker 1: burden of proof? Hear the law, the land of Act
Speaker 1: is the name of the trademark law in the United States,
Speaker 1: and it prohibits anyone from and I'm just reading here
Speaker 1: now causing confusion or deceit as to affiliation, connection, or
Speaker 1: association in or as to origin, sponsorship, or approval of
Speaker 1: their goods or services with a trademark because their services.
Speaker 1: And so you have to show that the consuming public,
Speaker 1: which I think would be someone in the luxury goods marketplace,
Speaker 1: that the consuming public would be thinking that somehow the
Speaker 1: meta burkin was affiliated with, connected with, associated with, sponsored by,
Speaker 1: or approved by Hermes. And so what we're in here
Speaker 1: a lot of is testimony on the planet side of
Speaker 1: instances in which consumers reported that sort of confusion to them.
Speaker 1: And the example of this one executive going and teaching
Speaker 1: at Colombian being approached by students about the Hermes new
Speaker 1: meta burkin is a classic example of the sort of
Speaker 1: consumer confusion that's required to established trademark infringement. And we'll
Speaker 1: just have to wait for the trial to go on
Speaker 1: to see how much more of that is and then
Speaker 1: it will be up to the jury to decide whether
Speaker 1: that's sufficient or not. And then there's the Rogers v.
Speaker 1: Grimaldi test, which would be a defense even if there
Speaker 1: was consumer confusion. So if this jury believes that these
Speaker 1: n f T s are in fact art, then the
Speaker 1: defense would win. So let's just remember what the Rodgers v.
Speaker 1: Grimaldi test is all about and remind people even then.
Speaker 1: We just did an episode in the back in December.
Speaker 1: This was a lawsuit by Ginger Rogers, the famous dancer,
Speaker 1: against the producers of a movie who had titled the
Speaker 1: movie Friend and Ginger I think was the name of
Speaker 1: Ginger referring to her. Went up on appeal of Second Circuit,
Speaker 1: and they held that the use of a celebrity name
Speaker 1: in an expressive work, if artistically relevant to that expressive
Speaker 1: work and not intentionally misleading, is protected on of the
Speaker 1: First Amendment against trademark infringement. And so it was a
Speaker 1: relatively narrow ruling. You know, it was limited to US
Speaker 1: celebrity names. It's been expanded beyond that to a broader
Speaker 1: range of trademarks. But again, the requirement has always been
Speaker 1: in connection with the use of that trademark connection with
Speaker 1: an expressive work, if it's really artistically necessary to use
Speaker 1: that trademark, and if it's not misleading, intentionally misleading, And
Speaker 1: there's a lot of factual predicates there that and facts
Speaker 1: are determined by jury, not judges or lawyers. And so
Speaker 1: the first thing juries going to have to decide is
Speaker 1: whether or not the Meta Birkin is an expressive work.
Speaker 1: And that's why you see the plainiff trying to push
Speaker 1: the notion that Mr ross Shaw was just about to
Speaker 1: make money here, and you see on the other side,
Speaker 1: on the defense side, the argument Mr Rothschild is an
Speaker 1: artist and this is an artistic work. I mean, they
Speaker 1: want to bring it within this Rodgers test and the
Speaker 1: requirement established it was an expressive work and artistically relevant,
Speaker 1: not intentionally misleading. And we'll just have to see how
Speaker 1: that plays out. I mean, Judge Rakoff said on a
Speaker 1: motion to dismiss brought by the dependants that he thought
Speaker 1: Rogers v. Grimaldi applied here. I think there's a big
Speaker 1: question mark about that. The case accepted by the Supreme Court,
Speaker 1: which came out of the Ninth Circuit is the very
Speaker 1: first case in which the Rogers test was applied to
Speaker 1: a commercial product there it was a dog shoot toy,
Speaker 1: and other circuit courts have consistencies. Was said that Rogers
Speaker 1: test is not applied to commercial products. N f T
Speaker 1: s are really a type of commercial product. And that's
Speaker 1: why this is at the intersection of technology and art.
Speaker 1: I mean, is the n f T work of art?
Speaker 1: Is it? Technology is a bunch of source code? I mean,
Speaker 1: what is it? And I think Judge Rickoff may have
Speaker 1: sort of jumped the gun by saying that the Rodgers
Speaker 1: test applies when I think there's a lot of factual
Speaker 1: issues about that. And I really think it's going to
Speaker 1: depend on what Supreme Court says in the Jack Daniels case,
Speaker 1: because the Supreme Court good one option for them is
Speaker 1: to say, hey, you know, there is no such thing
Speaker 1: as Roger's test that was made up by a court
Speaker 1: that's not in the statute. Statute already has a fair
Speaker 1: use test that should be applied instead of this Roger's test.
Speaker 1: I don't know what's going to happen. That's why I
Speaker 1: think it's very curious to allow this case to go
Speaker 1: forward when it all could become moot in June. Which
Speaker 1: side do you think has the better argument. Which side
Speaker 1: would you rather be representing? I always prefer repressing the
Speaker 1: side that has the money to pay me, and I
Speaker 1: doubt Mason rots Sound has that money is apparently using
Speaker 1: a new law firm that I think it's sort of
Speaker 1: a public interest type firm called Lex Lumena. But as
Speaker 1: far as the law and the fact this is the case,
Speaker 1: the first impression, I think it's fair to say my
Speaker 1: gut reaction is that the Hermes side of the argument
Speaker 1: is a bit stronger. Particularly, I don't like the way
Speaker 1: that the defendant story kept changing over time, apparently in
Speaker 1: a sort of post hoc attempt to fit itself within
Speaker 1: the Rogers test. You lawyer up and you go, oh,
Speaker 1: you know what I should have been saying all along,
Speaker 1: that this is artistically relevant, is an expressive work. I'm
Speaker 1: not just trying to make money less. I mean, they
Speaker 1: seem to be trying to force fit this into the
Speaker 1: Rogers test, and I not so sure that it fits.
Speaker 1: Quite Frankly, who would buy this if it didn't have
Speaker 1: the burke In name on it? If these were just
Speaker 1: called handback, would any consumer actually buy these? I mean,
Speaker 1: isn't it the association with the Birkin iconic handbag that
Speaker 1: makes it purchasable and people interested in it. I don't know.
Speaker 1: I mean, it's an interesting question. This case to be
Speaker 1: a game change. You're right, this is a really important
Speaker 1: case to trademark law as the metaverse expands and more
Speaker 1: companies move into it. And we've heard a lot of
Speaker 1: testimony already, and her Knees has plans to move into
Speaker 1: the metaverse, and therefore this would directly impact their ability
Speaker 1: to do that. We need to probably update the Land
Speaker 1: of Act to really address this sort of issue. You're
Speaker 1: absolutely right, June. It is a cutting edge haste and
Speaker 1: just the first of many. I think we're seeing this field.
Speaker 1: We'll keep track of what happens here, and that Jack
Speaker 1: Daniels case is going to be heard by the Supreme
Speaker 1: Court on March two, so maybe we'll learn more about
Speaker 1: their take on the Rogers test at that point. Thanks
Speaker 1: so much, Terry. That's intellectual property litigator Terence Ross, a
Speaker 1: partner at Caton Euten Rosenman. Republican state attorneys general are
Speaker 1: trying to kill a climate friendly retirement investment rule they
Speaker 1: derived as WOKE. More than two dozen states are suing
Speaker 1: to block the rule which permits private sector employers to
Speaker 1: consider environmental, social, and corporate governance factors when choosing pension investments,
Speaker 1: and the US Labor Department is facing litigation deja vu
Speaker 1: because it has to defend its rule in a conservative
Speaker 1: Texas jurisdiction known for striking down consequential employee benefit regulations.
Speaker 1: Will his to re repeat itself? Joining me to answer
Speaker 1: that question is Josh Lichtenstein, partner and head of the
Speaker 1: ARISCA fiduciary practice at Ropes and Gray. So, Josh tell
Speaker 1: us about this rule that's being challenged. The rule that
Speaker 1: we're talking about here, it's often referred to as an
Speaker 1: e x G investing rule, but it's really broader than that.
Speaker 1: This is actually a rule that governs the way that
Speaker 1: produciaries to arista plans, and that's both the traditional defined
Speaker 1: benefit pensition plans and define contribution plans like a following
Speaker 1: Cave plan. It's the rule that governs the way that
Speaker 1: produciaries to those plans make all of their investment decisions.
Speaker 1: And so the rule will cover how plan produciaries select
Speaker 1: a particular fund that they either want to invest assets
Speaker 1: in or want to make available to four along participants,
Speaker 1: and it goes to how they're supposed to determine what
Speaker 1: criteria are relevant interesting those funds, and then how they're
Speaker 1: supposed to wait those criteria. And while people are generally
Speaker 1: thinking about this in terms of whether a plan sponsor
Speaker 1: can use E s G factors as part of their
Speaker 1: investment decision or not, it's really much broader than that,
Speaker 1: and it goes to every financial or potentially financial factor
Speaker 1: that might be utilized by a plan producer. So Texas
Speaker 1: and other Republican led states are suing, what are their allegations,
Speaker 1: what's their cause of action? Basically it's very interesting, right,
Speaker 1: you know, And I think that this is important to
Speaker 1: sort of be clear about because there are a lot
Speaker 1: of headlines about various of these states, including Texas, having
Speaker 1: passed laws the government how their own retirement plans get invested.
Speaker 1: And generally speaking, you know, these laws are limiting the
Speaker 1: ability to use E s G considerations for ind USTs
Speaker 1: and purposes is or are restricting the state pensions from
Speaker 1: investing with certain asset managers based on levels of participation
Speaker 1: in certain industries like the uscile fuels industry. But the
Speaker 1: Department of Labor's rule does not actually impact those government
Speaker 1: plans are making all of these headlines. The Department of
Speaker 1: Labor's rule only impacts private pension plans. Of these are
Speaker 1: pension plans that are either maintained by a private employer
Speaker 1: or that are maintained by a union that covers employees
Speaker 1: of private employers. So it's not obvious necessarily, you know,
Speaker 1: why it would be the States that would want to
Speaker 1: bring a lawsuit like this because doesn't directly impact their plans.
Speaker 1: You know, what the States are claiming at heart as
Speaker 1: the basis for why they should be able to sue
Speaker 1: is an alleged detrimental impact on residents of the states
Speaker 1: and on the tax receipts of the states. But there
Speaker 1: are also some private plaintiffs, you know, that are part
Speaker 1: of the suit, and there's ending might be somewhat more
Speaker 1: obvious as a plan sponsor alleging that they will be
Speaker 1: um you know, more work and more costs associated with
Speaker 1: money their plan under the rule of plan participants and
Speaker 1: energy company. But at heart, what all of these allegations
Speaker 1: really are about. They're basically allegations that the rule put
Speaker 1: forward by the Biden administration's Department of Labor will have
Speaker 1: the effects of devoting more retirement assets towards E S G.
Speaker 1: GOLs and away from the fossil fuels industry and certain
Speaker 1: other sectors, and that that will have a detrimental impact
Speaker 1: on the states that are joining this letter, and that
Speaker 1: it would be sort of a being appropriate use of
Speaker 1: retiring assets to pursue non retirement related goals. I know,
Speaker 1: I started this answer by saying that the duos rules
Speaker 1: do not govern the state plans, and that's correctly, it's
Speaker 1: not covering them. But it's interesting the state laws that
Speaker 1: government state pension plans are all modeled on the federal law.
Speaker 1: They're all modeled on ARISSA, and so the Biden administration
Speaker 1: and many of these states that are involved in this
Speaker 1: lawsuit have actually themselves come to very different interpretations of
Speaker 1: the same statutory language around few Sharry standards, and so,
Speaker 1: you know, sort of separate and apart from the question
Speaker 1: about the interests of the states have in directly bringing
Speaker 1: this lawsuits, they're sort of a secondary question of who
Speaker 1: really has the right interpretation of this statutory language when
Speaker 1: you have multiple government bodies, you know, at the state
Speaker 1: in paral level, interpreting the same language that brings up
Speaker 1: a couple of things. The Texas Attorney General Can Paxton
Speaker 1: said that this kind of investing what's hard working Americans
Speaker 1: retirement savings at risk. The rule reverses restrictions on socially
Speaker 1: conscious investing that we're adopted by the Trump administration. Can
Speaker 1: you compare the rules for US? So, I find the
Speaker 1: allegations in the complaints to be somewhat opposite to what
Speaker 1: my read of the actual rule is, because the allegations
Speaker 1: of the complaints are basically that the Department of Labor's
Speaker 1: current rule will have the effect of making it more
Speaker 1: difficult and more costly for planned sponsors to have to
Speaker 1: evaluate different investment options, and that it will have the
Speaker 1: effect of driving more assets into e s G type funds.
Speaker 1: But I think that the reality is that the Biden
Speaker 1: administration's rule is very neutral. I actually think it's the
Speaker 1: most neutral version of this guidance that we have seen
Speaker 1: from the Department of Labor, and the Department of Labor
Speaker 1: has been putting guidance out on this topic for decades,
Speaker 1: literally for decades. It may have the longest history of
Speaker 1: any of you US regulator regulating the E s G
Speaker 1: type investment decisions, and the guidance has gone back and
Speaker 1: forth over time as administrations have changed, but you know,
Speaker 1: there's sort of core principles that have been in the
Speaker 1: guidance from the start. I've really been that fiduciaries are
Speaker 1: supposed to invest solely based on what's in the best
Speaker 1: interests of the planned participants, and that you know, they're
Speaker 1: only supposed to consider sort of non economic collateral factors
Speaker 1: like the positive externalities or the social good created by
Speaker 1: E s G investing in very limited circumstances where the
Speaker 1: fiduciary otherwise can't choose between two different investment options, and
Speaker 1: so rather than flipping a coin to choose which of
Speaker 1: the two they can select m the investing option actually
Speaker 1: considering those non economic considerations like the positive externalities. And
Speaker 1: that's what the guidance has said, with varying levels of
Speaker 1: emphasis for years. The Trump administration rule came out a
Speaker 1: little bit different because the Trump administration rule, both the
Speaker 1: proposed rule and then also the final rule, and with
Speaker 1: a viewed as being very very restrictive on the ability
Speaker 1: to consider E s G factors as pure economic factors.
Speaker 1: And so that was really the reason why the Trump
Speaker 1: adminstrator rules having impact on the market, and why it
Speaker 1: was causing plan sponsors so much angst and worried because
Speaker 1: it made them worry that entire classes of economic data
Speaker 1: could be prohibited, I mean, part of their decision space
Speaker 1: because the Trump administration rule was so skeptical of the
Speaker 1: ability for E s G factors to the economic considerations.
Speaker 1: And that's really strange because if you look at institutional
Speaker 1: investors behavior more broadly in the market, it's just become
Speaker 1: very common practice, as I understand it, to incorporate E
Speaker 1: s G data the same way that other financial data
Speaker 1: is incorporated as just the means of assessing different types
Speaker 1: of risks. And so, but the Trump administration rule, you know,
Speaker 1: one of the fears that people had was that the
Speaker 1: rule was basically going to force pension plans from being
Speaker 1: able to invest into mainstream like not you know, E
Speaker 1: s G impact funds, just sort of mainstream investment funds
Speaker 1: which are incorporating E s G risk factors as part
Speaker 1: of their economic analysis the same way that they consider
Speaker 1: any other risk factor. So when you see the Attorney
Speaker 1: General saying that that this is going to create extra
Speaker 1: risk or be harmful to plan participants. To me, that
Speaker 1: doesn't really ring true because, based on my understanding, in
Speaker 1: almost every case you know, where a plan sponsor or
Speaker 1: plan producer is going to be considering E s G
Speaker 1: factors as part of their investment process, it's because they're
Speaker 1: just behaving the same way that other similarly situated institutional
Speaker 1: investors would behave in you know, considering the full range
Speaker 1: of economic criteria. And the other thing that I think
Speaker 1: is interesting is that you know, even within these states,
Speaker 1: right like Texas State Planned have themselves, you know, adopted
Speaker 1: E s G considerations as part of their own risk
Speaker 1: evaluation framework. And there are questions now under state law
Speaker 1: about whether they're allowed to really do that or not,
Speaker 1: But it's just a very accepted part of institutional invest
Speaker 1: things that you would consider E s G risk factors
Speaker 1: like you consider other risk factors. We've seen the State
Speaker 1: of Texas and other Republican led states bring all kinds
Speaker 1: of suits against the Biden administration, everything from immigration to
Speaker 1: healthcare issues. So what do you think the real reason
Speaker 1: is for bringing this suit? Well, I mean, it's impossible
Speaker 1: to get inside of people's heads you know exactly why
Speaker 1: they're bringing it, right, But I think it's hard to
Speaker 1: ignore the political dimension here at E s G has
Speaker 1: obviously become a very political topic. I all so think
Speaker 1: that part of it maybe that, as I was saying before,
Speaker 1: you know, a lot of these states have adopted or
Speaker 1: are adopting their own E s G restrictive views of
Speaker 1: investing for their state retirement plans. And because the states
Speaker 1: are operating under the same statutory language as the federal government,
Speaker 1: is here the fact that the Biden administration's rule has
Speaker 1: a very different interpretation of the way that produciary duties
Speaker 1: should be discharged. We're making investments, you know, because the
Speaker 1: Biden administrations rule is basically from its prefuducers to choose
Speaker 1: any factor that they think is an important financial factor
Speaker 1: in the considerations, and a lot of these state rules
Speaker 1: are restricting consideration of the s G even there would
Speaker 1: be a financial factor, or her skeptical the ability of
Speaker 1: the s G to the financial factor. So I think
Speaker 1: that there may be a motivation here from these states
Speaker 1: that if they're either able to get the Biden rule
Speaker 1: not own, or even if you're just able to sort
Speaker 1: of put the argument out there into the world that
Speaker 1: their interpretations are also sort of valid or consistent with
Speaker 1: historical interpretations of the standards, notwithstanding that they differ so
Speaker 1: much from the Biden administration rule. Now, we could talk
Speaker 1: about the accuracy of the account that the complaints gives
Speaker 1: of sort of historic interpretations of the rule, and I'm
Speaker 1: not really sure that they get the rights to be frank,
Speaker 1: but I think that that may be part of what
Speaker 1: the motivation is here, that the states are trying to
Speaker 1: protect their own somewhat radical interpretations of the statutory language
Speaker 1: by challenging the Biden administrations more traditional interpretation of the
Speaker 1: statutory language. This lawsuit is going to be heard by
Speaker 1: federal Judge Matthew Kismarik, and he's a trumpet pointee who's
Speaker 1: struck down Biden administration rules on immigration and health care
Speaker 1: protections for LGBT people. I mean, we've seen the fact
Speaker 1: that the Texas a g they file in a friendly venue,
Speaker 1: just as the Democratic a g s would file on
Speaker 1: a friendly venue under Trump. So how likely is it
Speaker 1: that this judge will issue an injunction blocking the rule.
Speaker 1: I can't speak to how likely they are to issue
Speaker 1: an a junction, but I agree with you, if they've
Speaker 1: selected a very friendly venue and I wouldn't be taking
Speaker 1: this lawsuit as seriously as a threat to the rule
Speaker 1: if it were in the left friendly jurisdiction, because I
Speaker 1: really do think that the Biden administration rule is very
Speaker 1: sort of neutral, and that's the arguments put forward in
Speaker 1: the complaints about it driving more assets towards d s
Speaker 1: G are incorrect. But I do think that the fact
Speaker 1: that's in front of this judge, and the fact that
Speaker 1: it's you know, within the Fifth Circuit, anything vision lights
Speaker 1: up being appealed to wind up in front of the Circuit,
Speaker 1: and that does create a greater risk of an adverse
Speaker 1: finding for the Department of Labor than if it was
Speaker 1: in another court. And you know, I always come back to,
Speaker 1: you know, this division of the Department of Labor that's
Speaker 1: responsible for retirement. It had you know, an expansive rulemaking
Speaker 1: on the definition of a fiduciary under arrissa, and that
Speaker 1: was struck down by the Fifth Circuit back in And
Speaker 1: that was a pretty surprising decision to a lot of
Speaker 1: people because irrespective of what somebody might have thought of
Speaker 1: the merits of the rule the Department of Labor had
Speaker 1: gone through, it seemed like a very painstaking process and
Speaker 1: despite that very painstaking process, the rule was found to
Speaker 1: be arbitrary and deprecias and so here again, I think
Speaker 1: that the administration has gone through an extensive process. If anything,
Speaker 1: people were wondering what was taking them so long to
Speaker 1: come out with final rule, because there was a long
Speaker 1: time that elapsed between the end of the comment period
Speaker 1: on the proposal and when the final rule came out.
Speaker 1: But you know, it all just goes to the rigor
Speaker 1: of the process and consideration of the comments became in.
Speaker 1: But you know, I think it's very very hard to
Speaker 1: predict how how this particular court and how the Fifth Circuit,
Speaker 1: also on an appeal, will react to these types of arguments.
Speaker 1: I will say, though, that if the deals current rule
Speaker 1: is struck down by a court on the basis of
Speaker 1: the process that they went through, that I wouldn't necessarily
Speaker 1: expect the results of that to be that we wind
Speaker 1: up back at the Trump administration's rule, because I would
Speaker 1: expect the Trump administration's rule, if that was then put
Speaker 1: back into place, to be challenged itself on similar grounds.
Speaker 1: And I would expect that any claim that the Trump
Speaker 1: administration rule, you know, didn't go through an appropriate process
Speaker 1: would be much stronger an arguments of the Biden administration
Speaker 1: didn't go through an appropriate process because the Trump administration
Speaker 1: had very short comment periods and a much faster turnaround
Speaker 1: time between the close of the common period on the
Speaker 1: proposed rule and when they came out with a rule,
Speaker 1: and the Trump administration final rule was very different from
Speaker 1: the proposed rule, and they had had to respond to
Speaker 1: a much larger number of individual comment letters which themselves
Speaker 1: were starkly sort of negative and disapproving of the Trump
Speaker 1: administration rule. So I think that if the Biden administration
Speaker 1: rule is struck down, then the ultimate outcome it might
Speaker 1: be a reversion to the prior law. And then again
Speaker 1: I would probably expect that we've lined up with the
Speaker 1: rule that still remains sort of neutral, not anti E
Speaker 1: s G consideration like the Trump administration rules. So how
Speaker 1: much of a setback would it be for the Biden
Speaker 1: administration if there was an adjunction issued against this rule?
Speaker 1: Would it be a great setback? I mean, I think
Speaker 1: it would be a pretty significant set back to my mind,
Speaker 1: because the Department of Labor put a lot of resources
Speaker 1: into this rule, similar to how they put a lot
Speaker 1: of resources into the prior produciery rule which are struck down.
Speaker 1: The agency had limited resources, r a limited number of employees,
Speaker 1: and they have a lot of responsibilities. They have a
Speaker 1: lot of rules they need to put out, and they
Speaker 1: oversee something very important, right They oversee private retirements in America,
Speaker 1: which is critically important. So you know, I think that
Speaker 1: the loss of the time that they put into this rule,
Speaker 1: plus the need to vote more resources, would be a
Speaker 1: real set back. I will also say that I think
Speaker 1: that it would be very unfortunate for pretty much every
Speaker 1: stakeholder if the rule was struck down, because I really
Speaker 1: do believe that the Biden administration rule gets it right
Speaker 1: in a way that administrations both Democratic and Republicans have
Speaker 1: failed to do so in the past. Because it's so neutral.
Speaker 1: It makes it so abundantly clear in my mind that
Speaker 1: plan producers are supposed to be able just to choose
Speaker 1: what they think is appropriate in making their investment decisions.
Speaker 1: That I think that's the right rule. I think that's
Speaker 1: the way things are supposed to be. That the regulators
Speaker 1: shouldn't be putting it some on the scale for or
Speaker 1: against any particular set of economic considerations, and should let
Speaker 1: the plant producers make their choices. See, I think it
Speaker 1: would be a pretty big setback not just to the administration,
Speaker 1: but to plan sponsors, retirement didaver's, asset managers, consultants, really
Speaker 1: everybody if the rule was to be struck down. I
Speaker 1: will also just say, you know, as another note on
Speaker 1: that point, that while the Trump administration rule was sort
Speaker 1: of wildly unpopular among basically every constituency, we had consumer advocates,
Speaker 1: trade organization drifting in the active management industry, and plan
Speaker 1: sponsors all lining up together just saying that the Trump
Speaker 1: administration rule was a harmful rule in a lot of ways,
Speaker 1: and it had a negative impact on the market of
Speaker 1: chilling effects is the language that people use the Biden rule.
Speaker 1: The only detractors I'm aware of really of this rule
Speaker 1: elected Republican officials. I'm really not aware of any market
Speaker 1: participants or planned sponsors who are unhappy with this rule.
Speaker 1: I think it's noteworthy that when they were gathering private
Speaker 1: plaintiffs for this plan, just one plan sponsor and not
Speaker 1: like one of the most noteworthy plan sponsors in America
Speaker 1: or anything. So I think, from my perspective, I think
Speaker 1: that having a settled, neutral rule benefits everybody and creating
Speaker 1: more chaos in the space only hurts retirees. Thanks for
Speaker 1: being on the show, Josh. That's Josh Lichtenstein, a partner
Speaker 1: in Ropes and Gray. And that's it for this edition
Speaker 1: of The Bloomberg Law Show. Remember you can always get
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