Recent Landmark Decision in Cryptocurrency Law

A recent decision in the United States District Court for the Southern District of New York has sent shockwaves through the world of cryptocurrency investing.  In re Bibox Group Holdings Ltd. Securities Litigation, the Court ruled that a plaintiff did not have standing to assert class claims on cryptocurrency assets he did not own.  However, it was what the court didn’t rule on that made this a landmark case in the legal field developing around cryptocurrency, as the Court took no issue with the fact that the Plaintiff brought a case alleging securities violations against a cryptocurrency issuer and exchange.

The background on this matter is as follows.  In October 2017, Bibox Group Holdings Ltd. and their affiliates funded the launch of their new crypto exchange by launching a new ERC-20 cryptocurrency called BIX.  In this offering of BIX, Bibox raised approximately $19 million in funding.  Bibox told investors that they could exchange BIX for tokens on their exchange, and Bibox would use a portion of the funds raised in the offering to buy back some of the BIX that was issued.  BIX was one of six ERC-20 tokens on the exchange, with the others being EOS, TRX, OMG, LEND, and ELF.

The Plaintiff, Mr. Alexander Clifford, was one of the initial investors who bought BIX.  Mr. Clifford ended up exchanging his BIX for Bitcoin in December 2018.  Mr. Clifford never purchased or owned any of the other tokens.  On April 3, 2020, Mr. Clifford then filed an action in the Southern District of New York against Bibox and their affiliates.  In his complaint, Mr. Clifford alleged that Bibox had violated federal securities law and state Blue Sky law in connection with the trading activities of the six tokens.  Defendants moved for a motion to dismiss, arguing that Mr. Clifford lacked standing since he was asserting claims based on the five tokens he did not purchase, and that his claims pertaining to the one token he owned were time-barred.

Judge Denise Cote of the Southern District of New York granted the motion to dismiss as to all claims, ruling that Plaintiff lacked standing to assert claims based on the five tokens he had never purchased.  This was for two reasons.  First, the Plaintiff did not suffer any injury from the unpurchased tokens.  Second, the Court precluded standing on the grounds that “such conduct implicates the same set of concerns as the conduct alleged to have caused injury to other members of the putative class[1]” because all the tokens were made by different entities and had distinct characteristics and advertising history, meaning the injuries could not be proven in a similar enough way to allege standing.

The Court also dismissed the remainder of claims Plaintiff asserted on the token he did purchase, BIX.  In doing so, the Court rejected the argument that the one-year statute of limitations began to run when the cryptocurrency Plaintiff discovered the token could qualify as a security.  This is because the SEC had previously issued a publication on April 3, 2019 stating that cryptocurrencies may be qualified as securities under the Howey test in the right circumstances.  Rather, the Court held that the statute of limitations began to run when Plaintiff became aware of his injury, which was his last transaction in April 2018.

The main takeaway here is that the Court did not rule that securities laws did not apply to crypto, but rather took issue with the Plaintiff’s standing.  It makes it clear that cryptocurrency issuers and exchanges could be held liable under securities law for their actions.  In addition, while the Court precluded the “same set of concerns is implicated” argument, it is possible another court could find otherwise.  This is due to the fact that the six tokens were on the same exchange, used the same blockchain and were based on the same technological standard.  In conclusion, the rapidly developing field of law around cryptocurrency is one that continues to require close monitoring because of major developments such as this.

[1] Ret. Bd. of the Policemen’s Annuity & Ben. Fund of the City of Chicago v. Bank of N.Y. Mellon, 775 F.3d 154, 161 (2d Cir. 2014)

Pastore & Dailey Secures Settlement in Failed Systems Case

Pastore & Dailey recently secured a favorable settlement in a case involving the loss of server data from an accounting firm. The settlement, which was reached after the loss of vital data from the client’s computer network, helped the client offset substantial financial harm produced by the server failure.

Cryptocurrency Mining and the Danger of Halving

As cryptocurrencies continue to grow more sophisticated and widespread, the economic possibilities offered by cryptocurrency mining have drawn greater attention from prospective investors. Cryptocurrency mining, which helps to ensure that “transactions for various forms of cryptocurrency are verified and added to the blockchain digital ledger,”1 is a potentially profitable activity because a small amount of cryptocurrency is awarded to the “miner” able to verify the transaction fastest. On a large scale, cryptocurrency mining could potentially provide a solid revenue stream to a company able to overcome hurdles related to capital and operating costs. In the first place, the capital costs (in terms of computers, software, and other tools) that deter many would-be cryptocurrency miners would not constitute major impediments to any well-funded company intent on entering the field. But operating costs, rather than capital costs, constitute a larger problem for large-scale cryptocurrency mining companies. Because a certain amount of power is consumed whenever cryptocurrency is successfully mined, ensuring that the cost of electricity does not exceed the value of the cryptocurrency awarded is necessary before any such mining can be profitable. The power required to validate one cryptocurrency transaction, while not large on its own, adds up quickly in the context of large-scale mining operations. According to a report compiled by Coinshares, which provides cryptocurrency-related research and investment tools, companies and individuals mining Bitcoin (a popular cryptocurrency) consume roughly 41 terawatts a year in power.2 And according to that same report, investing in higher-quality equipment will not reduce the power requirement because “only the value of the [cryptocurrency] reward[…]can impact the network’s total electricity draw.”2 The solution, then, is to locate sources of cheap electricity – a solution which many cryptocurrency mining companies have already hit upon. In fact, the report notes that bitcoin miners tend to cluster in “regions dominated by cheap hydro-power,” especially the Pacific Northwest and Northeast regions of the United States.3 Although the influx of cryptocurrency mining operations into these areas has produced a measure of political backlash,4 it is not unreasonable to assume that the economic benefits conferred by such activities will soon outweigh such resistance.

Despite the evident promise of large-scale cryptocurrency mining, some have suggested that the upcoming “halving” of the cryptocurrency awarded for mining Bitcoin might seriously eat into profits and upset the delicate balance of power costs.5 However, this is not likely to constitute a serious headache for the industry for several reasons. First, as a Forbes article on the “halving” notes, Bitcoin operates according to the basic principles of supply and demand. That is to say, as fewer and fewer Bitcoins are disbursed during the mining process, fewer are available to be traded, causing their price to increase. This would conceivably offset the “halving” somewhat. Moreover, the recent increase in miner fees6 (fees paid by blockchain users to miners which supplement the cryptocurrency awarded) could also counterbalance the “halving.” All in all, despite the obstacles posed by power costs, capital investment and the gradual reduction of cryptocurrency awarded, large-scale cryptocurrency mining promises both steady revenue and growth potential in the years to come.

  2. , pg. 6
  3., pg. 10

Technology Regulation in the Federal Securities Market

Pastore & Dailey LLC has an extensive RegTech practice, and Jack Hewitt, a P&D Partner, is one of the country’s authorities in this area.  In line with this, P&D is pleased to announce that Bloomberg BNA has just published Mr. Hewitt’s new treatise, Technology Regulation in the Federal Securities Markets.

The treatise is structured into three major segments – cybersecurity, the new market technologies and blockchain.  The cybersecurity segment provides a comprehensive review of all applicable federal and state regulations and guidelines while the market technology segment addresses, among others, the Cloud, robo-advisers and smart contracts.  The final segment, Blockchain, includes cryptocurrency, tokens and ICOs.  Mr. Hewitt, whose expertise extends to virtually all major business sectors, regularly reviews client cybersecurity and technology procedures and would be pleased to discuss performing one for your firm.

Please use the below link to view the Table of Contents and the chapters on Information Security Programs and ICOs of the new treatise.

Cryptocurrency Technology Is Driving Innovation

Interest in cryptocurrency and its underlying technology has steadily rose over the past several years. The final week of 2017 alone saw the debut of over a dozen new cryptocurrencies within the market. Moreover, Bitcoin’s explosive increase in value in 2017 from $1,000 to almost $20,000 has made “Bitcoin” and “cryptocurrency” household terms.[1] The accelerating rate of creation of new currencies and the fluctuation in value of various existing currencies have provided investors with substantial profit opportunities. Unsurprisingly, the financial services industry is making significant investments in the underlying block-chain technology. From individual programmers to large fintech firms, there is a race to secure the intellectual property rights for all aspects of block-chain and cryptocurrency technology.

Financial Services

The block-chain technology functions to increase security and decrease inefficiencies regarding cyber transactions. The software accomplishes this by securely hosting a transaction between two individuals without the requirement of a third party to transfer and record the exchange of funds (i.e. banks, credit card companies, etc.). The transactions are then publicly memorialized in a distributed ledger as a link in the chain’s archive. At its core, the block-chain model is a peer-to-peer system; because of this, the software has the potential to revolutionize the financial services industry by reducing the number of parties required to send and receive payments. This decentralized model is one of the characteristics that makes block-chain unique, and financial firms have recognized the tremendous value of the software.

As the value of the block-chain model became more apparent, the United States Patent and Trademark Office (“USPTO”) was flooded with new patent applications concerning block-chain and cryptocurrencies. At the end of 2017, Bank of America, Mastercard, Paypal and Capital One were leading the field in research and development, and represented the top four patent holding entities in the realm of block-chain and cryptocurrencies.[2] The primary technological focus of these top four firms has been financial forecasting, digital data processing and transmission of secure digital data.[3] In fact, Bank of America was recently issued its latest patent from the USPTO, which outlined a cryptocurrency exchange system that would seamlessly convert one digital currency to another.[4] It may be no coincidence that the top four firms leading research and development on block-chain are those that stand to lose the most from the elimination of third-parties in cyber transactions. It is important, at this point in block-chain’s development, that such firms secure a position on the new playing field if cryptocurrency does displace traditional transaction models.

Internet Data Usage

The sprint to secure intellectual property rights does not, however, solely focus on the current block-chain technology; firms are also looking ahead on how to improve the software and how to benefit from future developments and applications. Several firms are focusing specifically on the distributed ledger aspect of block-chain in order to create a personal virtual identity for each of the software’s users.[5] This concept has significant potential to allow individuals to begin to profit off of their personal data. Currently, websites such as Google, Amazon and Facebook track individual’s internet usage and gain considerable value from their personal data with little to no benefit to the user. The creation of an online avatar that hoards this data in a ledger, and makes it available only with the user’s permission, could bring significance to an individual’s internet browsing data. Users could begin to charge companies a fee to gain limited access to this information, even in miniscule amounts. Cryptocurrency effortlessly weaves itself into the system because currencies like Bitcoin are divisible to the hundredth of a millionth degree. This divisibility makes it possible for you to extract value from as little as 0.00000001 of a Bitcoin for a company to see that you have been looking at Volkswagens on Craigslist all afternoon.

This virtual identity system may not be too far off. In 2017, the state of Illinois launched a block-chain pilot for the digitization of personal data, such as birth certificates.[6] The system has the potential to be the framework for the digital identities discussed above, and could further establish an extraordinarily convenient method of sharing verified personal documents.[7] Although this system immediately raises the question of cybersecurity in the minds of most, block-chain technology is, in fact, vastly more secure than our current systems.[8]

Cyber Security

In 2017, Equifax saw one of the largest cyber security breaches in history. The current method of storing millions of individuals’ personal data is piling it together on the same system, which is then encrypted and secured. The issue, as illustrated by Equifax, is that once the security mechanisms are breached, the cyber burglar then has access to the entirety of the stored data.[9] Block-chain, however, stores each individual’s data separately in its own encrypted and secured space. If a hacker wished to steal data from a block-chain, they would be required to decrypt each of the individual’s data separately; in the case of Equifax, the hacker(s) would have been required to bypass 140,000,000 encryptions.[10] For this reason, cyber security firms are becoming increasingly involved in block-chain technology as well.

Mobile Applications

The cyber security and financial services industries are not the only industries honing in on the cryptocurrency craze. It is also worth mentioning the flood of new applications from the mobile software market. The rapid origination rate of mobile applications, no matter how redundant or superfluous they may seem, is compelling United States intellectual property filings. Cryptocurrency mobile applications can provide a wide range of services for their users: market information through applications such as zTrader, Bitcoin Checker and Bitcoin Price IQ; portfolio services through Cryptonator, CoinDex and Mycelium; and trading platforms through Coinbase, CEX.IO and CoinCap. More significantly, many of the most popular websites which provide mobile application support are beginning to accept cryptocurrency as a payment method. Notably, online retailer, online dating service, electronics retailer, and travel booking agency are among the firms now accepting bitcoin as payment for their services.[11] Cryptocurrency also has the potential to transform the mobile gaming industry.

A dimension of mobile applications which has received a lot of negative publicity over the past few years is predatory in-app purchases. Many mobile gaming applications, which are typically marketed to children and teenagers, are free to download and play, but incentivize frequent micro-transactions from the user. These aptly dubbed “freemium” games result in cases of young users racking up a bill in the range of several hundreds of dollars, to their parent’s surprise. In fact, many applications offer purchases of in-game currencies up to $99 per transaction. This model may change, for better or for worse, with the rise of cryptocurrency. As discussed above, the Bitcoin is divisible to the hundredth of a millionth degree. The mobile gaming industry could see a transition from incentivizing young players to make frequent large transactions, to mobile games charging a fraction of a Bitcoin per minute (or second) of game time. The application would likely request access to your Bitcoin wallet and simply deduct fragments of a Bitcoin for as long as the game remains active. Whether this will be a welcome change is to be determined.


Cryptocurrency and block-chain technology are causing us to rethink our current financial and cyber-social systems. The characteristics that make block-chain unique—the decentralized model, distributed ledger, individual security, sense of virtual identity—are quickly being applied in new and innovative ways. The result is a surge in new intellectual property from forward thinking firms as we move into what may be an important technological shift for many of our country’s industries.


[1] Coindesk, Bitcoin (USD) Price, Coindesk (last visited Jan. 2, 2018)

[2] Jay Sharma, How Bitcoin Became a Game Changer Overnight, IPWatchdog (Dec. 4, 2017),

[3] Id.

[4] Nikhilesh De, Bank of America Wins Patent for Crypto Exchange System (Dec. 7, 2017, 3:00 UTC),; the Bank of America patent granted by the USPTO is identified by United States Patent No. 9,936,790.

[5] Michael Mainelli, Blockchain Could Help Us Reclaim Control of Our Personal Data, Harvard Business Review (Oct. 5, 2017),

[6] Michael del Castillo, Illinois Launches Blockchain Pilor to Digitize Birth Certificates, Coindesk (Aug. 31, 2017, 23:00 UTC),

[7] Id.

[8] See Mainelli, supra note 5.

[9] See Mainelli, supra note 5.

[10] Id.

[11] Mariam Nishanian, 8 surprising places where you can pay with bicoin, Business Insider (Oct. 11, 2017 6:00 PM),

SEC Issues Report on the Application of Federal Securities Laws to Crowdfunding Through Cryptocurrency

On July 25, 2017, the Securities and Exchange Commission issued a Report following their investigation of The DAO.  The DAO is an unincorporated organization that is just one example of a “Decentralized Autonomous Organization” –  a virtual organization embodied in computer code and executed on a distributed ledger or blockchain.

The DAO was formed in 2015 as unique form of crowdfunding whereby participants would vote on proposals and be entitled to rewards.  Between April and May of 2016, The DAO offered and sold approximately 1.15 billion DAO Tokens in exchange for approximately 12 million Ether.  Ether is a form of virtual currency.  These DAO Tokens gave the holder certain voting and ownership rights.

Token holders could vote on predetermined proposals deciding where The DAO invested its money, with each token holder’s vote weighted according to how many DAO Tokens he or she held.  On June 17th, 2016, an unknown individual or group attacked The DAO and appropriated approximately 1/3 of the total funds.  Although the funds were eventually recovered by The DAO, the SEC began investigating the attack and The DAO.  Ultimately, the SEC determined that an Enforcement Action was not necessary, however it issued a report laying out how the Securities Act and the Securities Exchange Act applies to The DAO and similar entities.

Section 5 of the Securities Act prohibits entities not registered with the SEC from engaging in the offer or sale of securities in interstate commerce.  Upon investigation of the circumstances surrounding The DAO, the SEC stated that The DAO qualifies as an “issuer” and thus must register as such with the SEC in order to sell DAO Tokens – which the SEC considers to be securities – in compliance with federal securities laws.  Given the SEC’s flexible interpretation and application of the Act, this Report is a caution to virtual entities that the federal securities laws are applicable and that the SEC intends to pursue enforcement of these laws in the field of virtual currencies and securities.

Initial Coin Offerings and the Securities Environment

A new financial instrument is arising in the capital markets and it provides both benefits and challenges to the equity environment. Variously denominated as initial coin offerings, crowdsales, token launches, and crowdfunding, this mechanism, rather than offering equity in a start-up venture, offers discounts on cryptocurrencies before they become available on the several exchanges.

Such offerings are made into a fraught landscape where they risk being interpreted as securities offerings that are subject to regulation, oversight, and enforcement by the Securities Exchange Commission. While the innovative characteristics of digital currency ought be encouraged, the SEC may, for reasons I explore in this note, be inclined to bring this device within their purview.

ICOs generally hold their offerings to be outside the conventional definition of securities and, so, outside the legal framework applicable to securities. Nevertheless, there is an expressed sense in the marketplace that government regulation of cryptocurrency will be necessary for the mechanism to be fully utilized.

This paper will review briefly two reasons that U.S. law will likely conclude that cryptocurrency is a security subject to the American regulatory scheme, First, I argue that the offerings made via ICOs are in effect, if not name, securities subject to the associated law. Second, I present my view that the Securities Exchange Commission is likely to find it to be in the public interest to conclude that digital currencies should be characterized as securities.

  1.     The Offering of Digital Currencies by Companies Seeking to Raise Capital Fits the Legal

Construct of a Security

The law defining securities, for purposes of federal regulation, has evolved in considerable nuance and complexity. The Securities Act of 1933 rather quaintly defines a “security” as

any note, stock, treasury stock, security future, security-based swap, bond, debenture, evidence of indebtedness, certificate of interest or participation in any profit-sharing agreement, collateral-trust certificate, preorganization certificate or subscription, transferable share, investment contract, voting-trust certificate, certificate of deposit for a security, fractional undivided interest in oil, gas, or other mineral rights, any put, call, straddle, option, or privilege on any security, certificate of deposit, or group or index of securities (including any interest therein or based on the value thereof), or any put, call, straddle, option, or privilege entered into on a national securities exchange relating to foreign currency, or, in general, any interest or instrument commonly known as a “security,” or any certificate of interest or participation in, temporary or interim certificate for, receipt for, guarantee of, or warrant or right to subscribe to or purchase, any of the foregoing.

The Securities Exchange Act of 1934 uses a somewhat similar definition.

Section 5 of the Securities Act makes it unlawful to offer or sell any security unless a registration statements is in effect for that security or there is an exemption from registration available. That section also requires the use of a statutorily prescribed prospectus document.

Finance is, in the practice, much more intricate than the plain language of the statutes appears to acknowledge, and, so, the courts have articulated considerable law particular to a wide range of circumstances encountered in application an in an evolving industry. Controlling these interpretations is the Supreme Court case SEC v. W.J. Howey Co. That case articulated both the priority of substance over form in evaluating whether a device is a security, as well as a test consisting of four distinct elements:

The first Howey test looks for an investment of money into some enterprise. Court cases has since broadened that notion to include any form of consideration;

Such an investment must be made into a common enterprise. Court rulings have articulated both “horizontal commonality” and “vertical commonality.”

Horizontal commonality describes the pooling of value from several investors who share in the profits and risks. Most circuits that have considered the issue of what is a common enterprise find it satisfied where a movant shows horizontal commonality, that is the pooling of investors’ funds as a result of which the individual investors share all the risks and benefits of the business enterprise] These circuits focus on whether the scheme involves a “pooling” of assets. For the common enterprise test to be satisfied, horizontal commonality requires that an investor’s assets be joined with another investor’s assets into a joint venture where each investor shares the risk of profit and loss according to their individual investment.

Vertical commonality is split into “Narrow” verticality and “Broad” verticality.

  1. The narrow vertical view is held by the Ninth Circuit. The narrow vertical approach finds a common enterprise if there is a correlation between the fortunes of an investor and a promoter. Under narrow vertical commonality a common enterprise is a venture in which the fortunes of the investor are connected with and dependent upon the efforts and success of those seeking the investment. It is not necessary that the funds of investors are pooled; what must be shown is that the fortunes of the investors are linked with those of the promoters, thereby establishing the requisite element of vertical commonality. Thus, a common enterprise exists if a direct correlation has been established between success or failure of the promoter’s efforts and success or failure of the investment. Under this view, the test is satisfied if the promoter and the investor are both exposed to risk and the profits and losses of investor and promoter are correlated.
  2.   The broad verticality test finds a common enterprise if the success of an investor depends on a promoter’s expertise. “Broad vertical commonality … only requires a movant to show that the investors are dependent upon the expertise or efforts of the investment promoter for their returns.” The Fifth Circuit and the Eleventh Circuit (because of the Eleventh Circuit’s adoption of pre-split Fifth Circuit opinions) both follow this view. These courts focus on the expertise of the promoter in the industry of the alleged security. If the investor relies on the promoter’s expertise, then the transaction or scheme represents a common enterprise and satisfies the second prong of the Howey test.

The third prong of the Howey test requires an expectation of profits. Profits can be in the form of a cash return on the principal investment, capital appreciation, dividends, interest, or other earnings. For purposes of the Howey test, “profits” mean return to the investor, and not to the success of the enterprise. For example, a Ponzi scheme has no possibility of real prosperity, but certainly involves a security. This test looks to the motivation of the investor.

The fourth test in Howey calls for the expectation of profits to be derived solely from the efforts of the promoter or some third party. The efforts of the promoter or third party must have a clear role in the success or failure of the enterprise.

We can examine just what it is that ICOs are offering by reviewing their descriptive so-called “White Papers” which offer the promoters’ outlines of the business model and goals of the enterprises. I have reviewed dozens of such white papers and find these elements in common among them:

-A description of the rapid growth presently occurring in the market space the enterprise proposes to enter

-A description of the unique value proposition the enterprise claims to possess (generally using rhetoric focused on results, rather than specific methods and always couched in highly technical language

-Many falsely claim their descriptive language or process is trademarked or otherwise lawfully protected from cooption

-In return for the solicited investment, the promotions offer early or discounted access to some form of digital currency, sometimes the promoter’s own brand of such digital currency

-A vague growth model is postulated, based on such things as “activity” within the proposed business ecosystem, transaction fees derived from cyptocurrency trades, or growth of other users’ participation in the system itself

-Investment in the offering is virtually always through some existing digital currency or, in some cases, precious metals, such as gold

I found no ICO White Paper that did not articulate, or at least imply, satisfaction of all four of the Howey tests for a security. Most satisfied both the horizontal and both vertical tests for a common enterprise. Often, the efforts by promoters to avoid using language they might have considered admissions of Howey criteria worked to render the rhetoric of those white papers cumbersome and incomplete.

In short, the promoters of ICOs conspicuously promote their own skills, insight, and claims to exclusive intellectual property as the value drivers of the enterprise upon which their respective enterprises will generate returns to investors, whose pooled investments are sought to capitalize the business. While nearly all of the white papers I reviewed were cautious to avoid references to specific return values or rates investors might expect, without exception, they all make repeated mentions of “profits” or some synonym thereof By either direct evidence, or by implication, then, these ICO white papers describe “securities” that meet the Howey tests.

  1.     The Digital Currency Market Space Exhibits Characteristics Which May Make it a Good

Subject of Regulation

The statutory authority to regulate these offerings aside, the SEC has an imperative to examine them in detail. Indeed, the SEC has, on more than one occasion, suggested that digital offerings are securities.

At least two other U.S. supervisory entities have articulated their views that digital currencies are subject, to varying extents, regulatory oversight.

The Commodities Futures Trading Commission has designated bitcoin as a commodity, subjecting it to the CFTC’s trading rules. As well, the IRS has characterized cryptocurrency as “property” and not “currency,” thereby disqualifying it for treatment with exchange gain or loss under Reg. §1.988-2.

The argument that the marketplace will serve to govern itself in this sector is somewhat belied by the fact that the marketplace in Bitcoin does not operate with an even hand.

As shown in Figure 1, the volatility of the conversion price of the pairs of Bitcoin/U.S. Dollar and Bitcoin/China Yuan has been growing at a faster rate for the Yuan than for the Dollar, especially since April of 2017. This has created a structural opportunity for arbitrage and can leave investors subject to unregulated speculation in cryptocurrency. Given that bitcoin and similar devices trade anonymously, the opportunity to generate large profits, outside the purview of the tax authorities, could, no doubt, attract any number of participants with obscure intent to the marketplace.

The attraction of a market so apparently open to manipulation by substantial participants may also be worth consideration.

The Facebook-FTC Settlement and the Future of Privacy Regulation

In the wake of a landmark Federal Trade Commission (FTC) settlement imposed on the social media giant Facebook, it is fair to speculate whether other companies will be forced to pay hefty fines and prioritize compliance with privacy standards in order to escape punishing federal regulation. The settlement, which was announced on Wednesday, July 24th, compels Facebook to pay a five billion dollar fine, the largest ever penalty leveled on a social media company in connection with privacy violations.1 Though the fine is relatively trivial in the context of Zuckerberg and co.’s multi-billion dollar annual earnings, the settlement also forces Facebook to “submit to quarterly certifications from the FTC to acknowledge that the company is in compliance with the [settlement’s] privacy program,” a major defeat for a company whose business model revolves around the collection and analysis of user data.2 The settlement also forces Facebook to reform its corporate structure and submit to oversight from an internal “privacy committee” tasked with ensuring the integrity of user data, among other impositions.2

All in all, the settlement is important not so much for its impact on Facebook as its implications for legal scrutiny of other technology companies. Although the federal government lacks the congressional mandate required to more expansively scrutinize the privacy standards of technology companies, such a mandate may well be in the offing, especially considering that political interest in privacy violations is cresting among members of both parties. Moreover, even if Congress elects not to craft a comprehensive online privacy law, future settlements imposed by the FTC could cripple rival companies lacking the social media giant’s seemingly inexhaustible resources.

Although the FTC settlement represented a major shift in the regulatory landscape, social media companies innocent of the sort of grave violations committed by Facebook can rest easy for the moment, given that the agency must target offending companies one-by-one in the absence of a sweeping congressional privacy mandate. In fact, the sort of stringent legal protections for user data commonplace in the European Union have not yet been approved by American lawmakers, who have so far refrained from devising a tough privacy law in the mold of the E.U.’s General Data Protection Regulation. Specifically, the European regulation requires social media companies to “inform users about their data practices and receive explicit permission before collecting any personal information,” a level of government oversight unheard-of stateside.3 Without the sweeping powers afforded to their European counterparts, American regulators have chosen to target serious individual offenses – like the unauthorized collection of user data by third party programs that sparked the inquiry into Facebook.2

But it would be a mistake to assume that the legal and political landscape will become more favorable to technology companies in the foreseeable future. Conservatives and liberals alike have entered into an uneasy alliance to promote a stringent new privacy law,4 and both Marco Rubio and Ron Wyden – lawmakers on distinct poles of the ideological spectrum – have proposed new regulations on social media giants.5 As a consequence of broad-based political support for privacy restrictions, future settlements reached with technology companies are bound to be at least as costly as the one recently reached with Facebook – a prospect that should trouble smaller companies that lack the ability to maintain profitability in the wake of a federal crackdown. Although federal regulation may prove burdensome and costly, compliance seems to be the vastly more preferable alternative.




Pastore & Dailey Successfully Represents Fortune 500 Pharmaceutical Corporation

Pastore & Dailey successfully obtained a withdrawal of all claims brought in Connecticut State court against our Fortune 500 pharmaceutical client.  Our client was accused of distributing an asbestos tainted product sold in the 1970s.  Following discovery efforts and extensive discussions, we were able to satisfy plaintiffs that there was no evidence linking our client to a contaminated product.