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THE MAGAZINE OF THE LOS ANGELES COUNTY BAR ASSOCIATION
DECEMBER 2018 / $5
Los Angeles lawyer Lisa Miller examinesCalifornia’s new ethics rules on accepting crypto-compensation
page 18
Cannabisat Workpage 12
CraftingSeparateStatementspage 14
Counsel forJusticepage 40
The“Bridge”is Back! page 34
Wild West ofCryptocurrencyPart 2page 26
EARN MCLE CREDIT
PLUS
Getting Paidin Bitcoin
18 Getting Paid in BitcoinBY LISA MILLER
California’s new ethics rules offer guidance to attorneys considering crypto-compensation for legal servicesPlus: Earn MCLE credit. MCLE Test No. 283 appears on page 21.
26 Policing the Wild West of Cryptocurrency—Part TwoBY NATHAN J. HOCHMAN
Enforcement agencies recognize the need to get in front of regulating andenforcing laws dealing with cryptocurrencies before the investor public is overrun with fraudulent, deceptive, and illegal activity
34 The “Bridge” is Back!BY JUDGE KELVIN D. FILER
Compton Superior Court Judge Kelvin D. Filer applauds the return of LACBA's"Bridging the Gap" program for new lawyers
F EATU RE S
Los Angeles Lawyer
the magazine of
the Los Angeles County
Bar Association
December 2018
Volume 41, No. 9
COVER PHOTOS CREDIT: TOM KELLER
12.18
8 President’s PageThe bench, the bar, and judicialindependenceBY BRIAN S. KABATECK
10 On DirectRob Hennig, employment attorneyINTERVIEW BY DEBORAH KELLY
12 Barristers TipsPot-protective employment laws loom in 2019 BY JINOUTH VASQUEZ SANTOS
14 Practice TipsCrafting separate statements in motionsfor summary judgment BY MICHAEL SHIPLEY AND DAVID KLEIN
38 By the BookMy Own WordsREVIEWED BY TYNA THALL ORREN
40 Closing ArgumentCounsel for Justice provides crucialassistance to Angelenos in need BY SUSAN KOEHLER SULLIVAN
DE PARTM E NTS
LOS ANGELES LAWYER (ISSN 0162-2900) is publishedmonthly, except for a combined issue in July/August, by theLos Angeles County Bar Association, 1055 West 7th Street,Suite 2700, Los Angeles, CA 90017 (213) 896-6503. Period -icals postage paid at Los Angeles, CA and additional mailingoffices. Annual subscription price of $14 included in theAssociation membership dues. Nonmember subscriptions:$38 annually; single copy price: $5 plus handling. Addresschanges must be submitted six weeks in advance of nextissue date. POSTMASTER: Address Service Requested. Sendaddress changes to Los Angeles Lawyer, P. O. Box 55020,Los Angeles CA 90055.
4 Los Angeles Lawyer December 2018
Visit us on the internet at www.lacba.org/lalawyerE-mail can be sent to [email protected] Los Angeles Lawyer on Twitter at @LALawyerMag
EDITORIAL BOARD
ChairTHOMAS J. DALY
Articles CoordinatorTYNA ORREN
Articles CoordinatorJUSTIN KARCZAG
SecretaryTBD
Immediate Past ChairJOHN C. KEITH
JERROLD ABELES (PAST CHAIR)TOM K. ARASCOTT BOYERNORMAN A. CHERNINCHAD C. COOMBS (PAST CHAIR)KEITH A. CUSTISGORDON K. ENGMICHAEL A. GEIBELSON (PAST CHAIR)SHARON GLANCZGABRIEL G. GREENSTEVEN HECHT (PAST CHAIR)DENNIS F. HERNANDEZHON. MARY HOUSETIFFANY BACI HUNTERMARY E. KELLY (PAST CHAIR)KATHERINE KINSEYDIANA HUGHES LEIDENLYDIA G. LIBERIOCAROLINE SONG LLOYDPAUL S. MARKS (PAST CHAIR)SANDRA MENDELLCOMM’R ELIZABETH MUNISOGLUCARMELA PAGAYGREGG A. RAPOPORTJACQUELINE M. REAL-SALAS (PAST CHAIR)SHAIL PANKAJ SHAHLACEY STRACHANTHOMAS H. VIDAL
STAFF
Editor-in-ChiefSUSAN PETTIT
Senior EditorJOHN LOWE
Art DirectorLES SECHLER
Director of Design and ProductionPATRICE HUGHES
Advertising DirectorLINDA BEKAS
Senior ManagerMELISSA ALGAZE
Administrative CoordinatorMATTY JALLOW BABY
Copyright © 2018 by the Los Angeles County Bar Assoc -iation. All rights reserved. Reproduction in whole or in partwithout permission is pro hibited. Printed by R. R. Donnelley,Liberty, MO. Member Business Publications Audit of Circula -tion (BPA).
The opinions and positions stated in signed material are those of the authors and not by the fact of publicationnecessarily those of the Association or its members. Allmanuscripts are carefully considered by the Editorial Board.Letters to the editor are subject to editing.
Los Angeles Lawyer December 2018 5
LOS ANGELES LAWYER IS THE OFFICIAL PUBLICATIONOF THE LOS ANGELES COUNTY BAR ASSOCIATION
1055 West 7th Street, Suite 2700, Los Angeles CA 90017-2553Telephone 213.627.2727 / www.lacba.org
LACBA EXECUTIVE COMMITTEE
PresidentBRIAN S. KABATECK
President-ElectRONALD F. BROT
Senior Vice PresidentTAMILA C. JENSEN
Vice PresidentBRADLEY S. PAULEY
TreasurerWILLIAM L. WINSLOW
Vice President Of Diversity/Affiliate OutreachPHILIP H. LAM
Assistant Vice PresidentFELIX THOMAS WOO
Assistant Vice PresidentDANIEL J. BUCKLEY
Assistant Vice PresidentKRISTIN ADRIAN
Immediate Past PresidentMICHAEL E. MEYER
Barristers/Young Attorneys PresidentJESSICA GORDON
Barristers/Young Attorneys President-Elect VICTORIA MCLAUGHLIN
Executive Director/Secretary STANLEY S. BISSEY
Chief Financial & Administrative OfficerBRUCE BERRA
BOARD OF TRUSTEES
SUSAN J. BOOTHJESSE A. CRIPPSGARY A. FARWELL TANYA FORSHEITJO-ANN W. GRACEJOHN F. HARTIGANAMOS E. HARTSTONDANIEL T. HUANG RICHARD L. KELLNERJENNIFER W. LELANDEVE LOPEZMATTHEW W. MCMURTREYF. FAYE NIAANN I. PARKMICHAEL R. SOHIGIANEDWIN C. SUMMERSKENDRA THOMASKEVIN L. VICK
AFFILIATED BAR ASSOCIATIONS
BEVERLY HILLS BAR ASSOCIATION
CENTURY CITY BAR ASSOCIATION
CONSUMER ATTORNEYS ASSOCIATION OF LOS ANGELES
CULVER MARINA BAR ASSOCIATION
GLENDALE BAR ASSOCIATION
IRANIAN AMERICAN LAWYERS ASSOCIATION
ITALIAN AMERICAN LAWYERS ASSOCIATION
JAPANESE AMERICAN BAR ASSOCIATION
JOHN M. LANGSTON BAR ASSOCIATION
THE LGBT BAR ASSOCIATION OF LOS ANGELES
MEXICAN AMERICAN BAR ASSOCIATION
PASADENA BAR ASSOCIATION
SAN FERNANDO VALLEY BAR ASSOCIATION
SANTA MONICA BAR ASSOCIATION
SOUTH BAY BAR ASSOCIATION
SOUTHERN CALIFORNIA CHINESE LAWYERS ASSOCIATION
WOMEN LAWYERS ASSOCIATION OF LOS ANGELES
6 Los Angeles Lawyer December 2018
Thomas J. Daly is the 2018-19 chair of the Los Angeles Lawyer Editorial Board. He is a partnerin Lewis Roca Rothgerber Christie’s Intellectual Property practice group in Los Angeles. Alitigator, he focuses on strategies to obtain and protect patents and trademarks.
I now have a much better understanding of cryptocurrency, it remains to beseen whether they are legitimate assets or an elaborate technological Ponzischeme.
Blockchain, the technology that enables cryptocurrencies, has also beenadvanced as a way to allow for secure transactions. Further, blockchain,coupled with artificial intelligence, has been suggested as a development thatwill eventually make lawyers obsolete. How ironic if the technology wecurrently struggle to regulate were to eventually render us obsolete.
Of course, this is not the first time the death knell has been sounded forthe legal profession in my recent recollection. When large accounting firmsbegan hiring numerous attorneys, it was conventional wisdom that accountantswould soon control the legal profession for the benefit of corporations. Big,independent law firms were expected to fade away. Then the Enron scandalcame along. The benefit of an independent legal profession was recognized,and few now believe that independent law firms will disappear to be replacedby large legal arms within accounting firms.
The legal self-help industry, represented by companies like Legal Zoom,also has been expected to dramatically reduce the amount of work being doneby attorneys. While it has seemed to reduce the amount of routine legal workbeing done by lawyers, and placed downward pressure on the amount thatcan be charged for such work, it does not look like it will completely replacethe legal profession. Lawyers will continue to be needed for complex and spe-cialized legal matters. Indeed, the self-help industry has created work forlawyers who provide guidance to those having further questions about theirmatters not addressed by the self-help program.
So, will self-learning machines, able to access mounds of legal precedent toreliably predict how further matters should be resolved, finally do us in as aprofession? I think not. Many times the value of the legal profession rests inknowing when a course correction is required, when we should depart fromestablished precedent. It seems unlikely to me that self-learning machineswould have been able to develop the right of privacy and the right of publicityas new legal doctrines. Could artificial intelligence have moved from con-tributory negligence to comparative negligence? Would an intelligent machinehave been able to formulate the Miranda warnings?
Blockchain and artificial intelligence undoubtedly will be—and in somecases already are—being used by the legal profession as tools to providebetter, more cost-effective service. But I believe compassionate, caring, andintelligent human lawyers will remain in control. What seems certain, however,is that the legal profession will continue to be both interesting and challengingfor the foreseeable future. n
Ihave always thought that cryptocurrency was an aptname for Bitcoin and similar digital assets. My initialefforts to understand such digital assets and how they
work only served to make them seem more cryptic. In thisissue, we continue our discussion of cryptocurrency. While
8 Los Angeles Lawyer December 2018
AS WE CONTINUE to look at ways that theLos Angeles County Bar Association canimprove its benefits to the legal community,we should take a closer look at the rela-tionship between the bench and bar. Oneof the promises made at the beginning ofour current presidential year was to lookat how we can have closer and better rela-tionships with our judges in Los AngelesCounty. LACBA already does a good job
of fostering strong relationships with ourlocal judiciary, and there are some specificways we can make that bond even stronger.
When it comes to building strong ties be -tween our membership and the bench in thecounty, LACBA is a preeminent organiza-tion. This pertains to not only the SuperiorCourt but also the Federal District Courtfor the Central District of California, theSecond District Court of Appeal, the NinthCircuit Court of Appeals, and the CaliforniaSupreme Court. We offer our members un -paralleled access to bench officers, and ourLitigation Section is incredibly successfulin promoting these relationships.
In addition to the Litigation Section, the Family Law andProbate sections are working hard to build positive relationshipswith judges. Virtually every section that has dealings with specificbench officers is doing a remarkable job improving those rela-tionships and offering members an opportunity to meet and learn.New lawyers have the opportunity to meet the very judges theywill appear before during their careers.
A major focus of our program this year is expanding accessto include law students, paralegals, and other paraprofessionals.We are working closely with the bench to provide other oppor-tunities for people to work with the courts. In the 140 years thatLACBA has existed, we have worked closely with the bench on anumber of important issues including our domestic violence, vet-erans, immigration, and HIV/AIDS projects. These charitableprograms allow our members to work closely with judges andprovide vital services to those in need. Many LACBA membersare not aware of all the opportunities available to them to interactwith the judiciary on a regular basis.
Open Courts Coalition
Of course, any discussion of this topic would be incompletewithout mention of the good work of the Open Courts Coalitionthat began during the brutal defunding of the courts over thepast 10 years. We hope that when the new governor is sworn in,he will work with LACBA to provide more funding and help us
build a state-of-the-art court system that will become the modelfor the entire United States.
Judicial Independence
We are also working with a task force made up of bar leaders andjudges throughout the state to deal with preserving the independenceof the judiciary in California. We may not like every judge, especiallythose who have ruled against us, but the vast majority of judgesin the State of California, and specifically in the County of LosAngeles, are hardworking men and women who have dedicated
their lives to public service and to providing justice for all.If you have ever spent time in a state where the judiciary is
elected, you can understand how judicial independence suffers.Judges running for office are raising money from the very lawyersand litigants who appear in front of them. Contested electionsbecome public spectacles. Voters watch as judges run ads appealingto the will and vagaries of public opinion.
Last summer, Santa Clara County Superior Court Judge AaronPersky was unseated by a recall campaign, the first in more than80 years. The judge was doing his job in a case that receivednational attention and was roundly criticized. The recall of fivejudges over the span of almost 100 years is not an epidemic.1
However, it serves to remind us we cannot let public opinioncontrol our judiciary. We must work to prevent this kind of attack.
Also, a longstanding sitting judge in Los Angeles County waschallenged for reelection. While respecting the election processand the ability of all citizens to participate in our democracy,challenging a sitting judge may well serve to undermine the inde-pendence of the judiciary. Lawyers must support the bench when
president’s page BY BRIAN S. KABATECK
The Bench, the Bar, and Judicial Independence
We hope that when the new governor is sworn in, he will work with
the Los Angeles County Bar Association to provide more funding
and to help us build a state-of-the-art court system that will become
the model for the entire United States.
The 2018-2019 president of the Los Angeles County Bar Association, BrianS. Kabateck is founder and managing partner of plaintiffs law firm KabateckLLC in Los Angeles where he practices in the areas of personal injury, insurancebad faith, pharmaceutical litigation, wrongful death, class action, masstorts, and disaster litigation.
Los Angeles Lawyer December 2018 9
this occurs. Judges are usually prohibitedby the canons of ethics from participatingin campaigns. While there is an exceptionfor the election, it is unseemly for judgesto become overtly engaged in the politicalprocess. Therefore, LACBA can serve a bet-ter function by protecting the judiciary andworking with them.
Judicial Appoint ments
LACBA has an active Judicial Appoint -ments Committee that works extraordinarilyhard to provide the governor’s office withinformation and advice about pro spectivecandidates. I have been told by the gover-nor’s office that Los Angeles County hasthe most sought-after judgeships in the statewith numerous applicants. LACBA does itsbest to vet the possible candidates and pro-vide the information to the governor andhis staff for their evaluation and concern.This is not idle work that is quickly putinto the round file in the governor’s officebut is used by the governor’s office in deter-mining which candidates will effectivelyrepresent the people of Los Angeles County.We continue to ask people to submit appli-cations to become part of this importantblue-ribbon committee.
LACBA also has a Judicial ElectionsEvaluation Committee that convenes everytwo years to evaluate candidates for judicialoffice on the open ballot. It is our job asthe leadership of LACBA to provide fairand independent evaluation of the judges.I have asked former Los Angeles CountyDistrict Attorney Steve Cooley to chair ablue-ribbon committee to look at how wecan do a better job of evaluating judicialelections and to provide input. While thatnext judicial election is not until 2020, itis important that we now evaluate how itoperates and how it can better do its job.
Continued Support
The Los Angeles Superior Court under out -going Presiding Judge Daniel Buckley,incoming Presiding Judge Kevin Brazile,and incoming Assistant Presiding JudgeEric C. Taylor will continue to find supportin LACBA. We will continue to worktogether and link arms to protect the inde-pendence of the judiciary. In whatever formthe practice of law takes for you andwhether you are a trial lawyer, transactionallawyer, litigator, or a judicial officer, theLos Angeles County Bar Associ ation is hereto ensure stability in our practice. We needto support each other. n
1 Tracy Kaplan, California's First Judicial Recall in86 Years to Appear on Santa Clara County Ballot,MERCURY NEWS, Feb.6, 2006, available at https://www.mercurynews.com/2018/02/06/5045019/.
Both of my parents are lawyers, so be -
coming a lawyer was sort of like go ing
into the family business. I graduated
from Vanderbilt University Law School
in Nashville, Tennessee, and have been
practicing for 10 years. In fact, I just went
to my 10-year law school reunion, which
seems impossible. Though I started out
practicing general business litigation,
over the years, I began to specialize in
entertainment litigation and am now associate general counsel for SAG-AFTRA,
the labor union representing over 160,000 actors and performers.
Having gone to law school in Tennessee, I did not have an alumni commun -
ity to support and mentor me when I arrived in Los Angeles. LACBA and the
Barristers/Young Attorneys Section stepped in to fill that role for me. Every
job since my first job out of law school, I got through a LACBA connection. It is
also how my husband and I got together, so it has played a huge role in my
personal life as well.
I would strongly encourage new attorneys to get involved with LACBA’s
Bar risters/Young Attorneys Section and to take advantage of all that it offers.
LACBA and the Barristers/Young Attorneys Section present opporunities to
work with—and prove yourself to—people you would not ordinarily get to
substantively interact with in the early stages of your career. A good impression
made when moderating a panel or helping to plan an event can lead to your
next job or client referral…or spouse! Also, it’s a lot of fun.
We invite you to explore all the benefits of LACBA and Barristers/Young Attorneys Section
membership, which is free to all first- and second-year attorneys. If you have questions
about your membership or how to get involved, please contact LACBA Member Services
at 213-896-6560..
From new attorney to associate general counsel for the Screen Actors Guild-
Am erican Federation of Television and Radio Artists (SAG-AFTRA), Sarah
Luppen Fowler joined the Los Angeles County Bar Association when she
was a law student in 2008, and went on to serve in numerous leadership
roles throughout the association including as Barristers/Young Attorneys
Section president and as a member of LACBA’s Board of Trustees. In a few
short words, Sarah shares her LACBA story and the impact that being an
active member of the association has had on her career and personal life.
This is Sarah’s story:
MY LACBA STORY
10 Los Angeles Lawyer December 2018
on direct
Rob Hennig represents individuals in litigationmatters involving employment discrimination,sexual harassment and discrimination, whistle-blower issues, government fraud (qui tam cases),and wage and hour issues. He has taught coursesin constitutional law and judicial politics at UCLA,including the first LGBT politics course at UCLA.Hennig served on the board of directors of theAmerican Civil Liberties Union of SouthernCalifornia, including as past president of itsLesbian and Gay Rights Chapter. He earned hisJ.D. from Berkeley (Boalt Hall).
Rob Hennig Founder and Managing Partner, Henning, Ruiz, and Singh
fect judicial system, but that doesn’tmean that it’s not useful. It doesn’t meanit’s not important.
Did you hope to right some of the wrongs?You have to work within the system. Theidea that you’re going to change how weadminister justice in this country in somebig way is a very, very big lift.
You spent years in the Bay Area doinggraduate work, but you live in Los Angeles.Are you an L.A. guy? Berkeley is beautifulin the fall, but then it gets cold. I camedown for a weekend in L.A. and thought,“This is much more what I had in mind.”The people in the Bay Area hate me forsaying that.
You founded your law firm in 2003. Who isa typical client? Someone who has beenfired, who thinks it was wrong, and whois upset about it. What we find out a lotof times is that it was legal.
Most of your clients come from communi-ties that have been marginalized. Howdoes this call to you? I think employmentis incredibly important because we as asociety have said that we are going totreat everyone equally, and that’s nothappening. There is implicit bias and explicit bias. We can’t do a lot about theimplicit bias, but we can do somethingabout the explicit bias.
Your Google reviews say that you fight forthe “little people.” Who are they? Whenclients come to us, this is generally one ofthe lowest points of their lives.
Your firm has a busy appeals practice. Doyou prefer litigation or appellate work?We’re very busy with appeals because wefeel there are quite a few wrong deci-sions. Appellate work is about the law.Trial work is about people, and I findpeople far more compelling.
You were the co-founder of Equality Cali-fornia, the largest LGBT state advocacy organization in the country. What is your
opinion of Trump’s ban on certain militarypersonnel? Trump wanted to eliminatetransgenders, particularly people whotransition.
Should the country have to pay for sex reassignment surgery in the military?There’s an assumption that every trans-gender person is going to get all of thesurgery done. Not necessarily. Peoplevary in how much surgery they want.
Yes, but who should pay for it? The issueis whether that’s part of health care cov-erage in general. We’ve found that moreand more health care programs are cov-ering it.
Why is society troubled by transgenders?Transgenders challenge our notions ofwhat it means to be male and female.The parents go through so much.
You’re a volunteer attorney for the Los Angeles LGBT Center’s Legal Services Pro-gram. What is a representative case? Menwho are more effeminate who are beingharassed at work, particularly in machowork environments.
In the LGBT community, there’s been a lin-guistic revolution as to pronouns. Why? Iavoid pronouns as much as possible, butpeople know if you’re approaching themas a person.
Is it a big deal? One of the things you seeis that there’s some gender fluidity. LQBTrights, very often, are not about whoyou’re having sex with, it’s about whoyou are presenting as.
Are the times a changin’? Talk to kids,talk to your average 20 year-old, itdoesn’t matter to them. This is all aboutan older generation holding on.
In 1999, you taught the first LGBT politicscourse at UCLA. What did you want to im-part to your students? Rights are not au-tomatic; you have to fight for them.
What is the difference between the federal
INTERVIEW BY DEBORAH KELLY
Describe the perfect day. A day in trial.
You don’t find them stressful? All goodthings are stressful.
You earned your law degree from Boalt in1994. Why did you want to become alawyer? Who knows what you wantwhen you want it when you’re young?
Good choice? It’s been an enormously funride because I’ve been able to do thingsthat I’ve always wanted to do and dothem pretty well.
You earned a Ph.D. in Jurisprudence andSocial Policy at Berkeley School of Law.One simple takeaway? We have an imper-
Los Angeles Lawyer December 2018 11
Americans with Disabilities Act (ADA) andCalifornia’s Fair Employment and HousingAct (FEHA)? The ADA has a more con-stricted view as to what’s protected interms of disabilities.
What do you look for in these cases? Welook to see if the employee was accom-modated. When an employer has some-one with a disability, approach that per-son by asking, “How can we make thatperson a vital part of the work force?”That doesn’t happen.
In a single individual case against CalTrans, your client recovered $600,000.What did Cal Trans do? The jury foundthey did not accommodate him. They didnot find for him for discrimination or forretaliation.
Cal Trans is a huge employer with morethan 18,000 permanent employees. Arelarger companies bigger offenders thansmaller companies? In larger companies,often there is a lack of accountability.Smaller companies don’t think they’rebreaking the law.
The U.S. Supreme Court ruled against thePGA as to a disabled golfer who requesteduse of a cart. Why? They said that walkingis not part of golf.
What is an example of a request for an un-reasonable accommodation? An employeewho has difficulty working with particu-lar people—you can’t tell employers whocan supervise you and who can’t.
What about the employers’ needs? Em-ployers normally don’t like it [reasonableaccommodation] because it makes it [theworkplace] less flexible. It’s a lot of bur-den on people, especially if you start yourown business.
Too burdensome? What is more expensivefor society: someone who is productive inthe work force or someone who is not?
Are mental disabilities harder fought thanphysical disability? Yes, they are often un-seen and unappreciated.
What is the good faith interactive processthat is required by FEHA? If the employeeproposes a reasonable accommodationand you can’t do that accommodation forwhatever reason, you have to talk to theemployee to figure out the next best rea-sonable accommodation.
You have helped recover over $750 millionin qui tam (whistle-blower) matters. Doyou have a favorite entity to sue? Rightnow, we have a lot of cases against
Pharma companies.
What is Pharma doing? They are not al-ways forthright when there are adverse ef-fects, and sales representatives are pro-moting the drug for off-label uses. Themost nefarious is kick-backs to doctors invarious forms.
What was your best job? Teaching. I taughtmore than 5,000 UCLA undergrads.
What was your worst job? Mowing thelawn.
Your best personality trait? My sense of humor. I try not to take myself too seriously.
If you were handed 10 million dollars tomor-row, what would you do with it? I wouldmake a substantial donation to the Amer-ican Civil Liberties Union.
Who is on your playlist? Adele. I wascrushing on “Someone Like You.”
What is your most valued personal posses-sion? A watch that my cousin gave me,because he died so young.
Which magazine do you pick up at the doc-tor’s office? The New Yorker.
What is your favorite vacation spot? Rio de Janeiro. If you’ve ever been to Car-naval there, you would never leave. It’samazing.
If you could live anywhere in the world,where would it be? Los Angeles. There’s a feeling of freedom here—it’s about theimagination.
What is your favorite meal and where?Roasted pork at Versailles.
What are your retirement plans? I want tokeep doing what I’m doing.
If just President Trump and you had a beertogether, what would you ask him? Whycan’t you be a little more civil? Whatwould be the harm?
What are your favorite movies? GodfatherII, Raising Arizona, Groundhog Day.
Who is your favorite world leader? LyndonJohnson. He was a very flawed man buthe uniquely was able to get the CivilRights Act passed. He did the right thing.
What is the one thing you would like tochange in the world? I would encourageeveryone to feel that we are all in this together.
12 Los Angeles Lawyer December 2018
MANY STATES NOW LEGALIZE the use of medical and recreationalcannabis—marijuana—as California does. More than a dozenstates have gone a step further by forbidding employers fromdiscriminating against employees’ unauthorized uses of medicalcannabis. California—usually at the forefront of employee-pro-tective legislation—lags behind here. California law currentlypermits employers to deny employment to cannabis users, evenwhen the user is authorized to use cannabis for medical purposes.That could soon change.
Proposed California legislation AB 2069, which died in committeethis year, would have pro hibited employers from discriminatingagainst an individual because the individual is a qualified patientusing cannabis or because such an individual has tested positivefor cannabis. A similar bill is expected to become law next year,when pot-friendly California legislators continue to hold the reinsof power with an even more liberal governor. Various issues areanticipated to arise.
First, how could California require employers to tolerateapplicants and employees using a drug that is still illegal underfederal law? In 1970, Congress passed the Controlled SubstancesAct (CSA) to ban or regulate certain controlled substances. Underthe CSA’s classification system, cannabis is a Schedule I drug,defined as illegal on the premise that it has no accepted medicaluse and has a high potential for abuse.1 Some employers, defendinglawsuits in pot-protective states, have cited the CSA to arguethat the cannabis discrimination law being invoked against themis preempted by federal law.
Judicial responses to the preemption argument have beenmixed, with the recent trend going against preemption. The CSAis not a strongly preemptive law like other federal laws, such asERISA. Rather, the CSA preempts state law only to the extentthat “there is a positive conflict between the CSA and that Statelaw so that the two cannot consistently stand together.”2
In a 2017 disability discrimination case, a Hawaii federaldistrict court ruled that the CSA preempts Hawaii’s cannabislaw. The court held that an employer did not need to accommodatean employee’s medical cannabis use because all cannabis—medicalor not—remains prohibited under federal law.3 A 2017 decisionby a Connecticut federal district court, however, held that theCSA did not preempt a Connecticut statute that protects employeesand job applicants from employment discrimination based onmedical marijuana use because the CSA does not specificallyregulate the employment relationship.4
In terms of current California law, the state took the lead inprotecting medical cannabis use in 1996, when voters enactedthe Compassionate Use Act.5 California took the next step bylegalizing recreational marijuana, effective January 2018. In itsAdult Use of Marijuana Act, California allows adults over theage of 21 to smoke marijuana recreationally. California has yet,though, to require employers to tolerate the use of cannabis by
applicants and employees. Employers can still drug-test employeesfor marijuana and discharge them for testing positive, eventhough marijuana is legal under state law.6 California employersneed not accommodate medicinal marijuana use either, irrespectiveof the Compassionate Use Act,7 because the Fair Employmentand Housing Act (FEHA) does not require employers to accom-modate illegal drug use, and cannabis, even medical cannabis,remains illegal under federal law.
Further, in every state, employers remain free to disciplineemployees whenever a drug—prescribed or not—impairs jobperformance. The special problem with cannabis, of course, isthat a user can test positive for drug use even after the impairingeffects of the drug have dissipated.
What’s on the horizon for 2019? In February 2018, Californialegislators introduced AB 2069, which would have amended theFEHA to create a new protected category: medical cannabisusers.8 The bill generally would have protected these users exceptwhen they are impaired on employer premises or when employingthem would cause the employer to lose benefits under federallaw. AB 2069 went up in smoke when it failed to advance out ofthe Appropriations Com mittee this past legislative session.However, the bill was held under submission, indicating that itcould be reintroduced next year.
If passed, the new pot-protective legislation in 2019 predictablycould raise a series of issues for California employers, including:• To which limited categories of employees (e.g., truck driversregulated by the U.S. Department of Transportation) will federalpreemption of state cannabis law apply?• Will California employers be required to accommodate employ-ees who, because they use medical cannabis, request adjustedwork schedules?• Will the heightened remedies available under the FEHA causesome employers to restrict drug-testing programs that cur rent -ly are subject to challenge only under California’s right to privacy?• Will there be special carve-outs for safety-sensitive job positions? n
1 21 U.S.C. §812(b).2 21 U.S.C. §903.3 Lambdin v. Marriott Resorts Hospitality Group, No. 16-00004-HG-KJM, 2017U.S. Dist. LEXIS 149570, at *18-22 (Sept. 14, 2017).4 Noffsinger v. SSC Niantic Operating Co., d/b/a Bride Brook Nursing &Rehabilitation Center, No. 3:16-cv-01938-JAM, 2017 U.S. Dist. LEXIS 124960,at *10-15 (Oct. 20, 2017).5 HEALTH & SAFETY CODE §§11362.5, 11362.5(a).6 HEALTH & SAFETY CODE §11362.45(f).7 Ross v. Ragingwire Telecomms., 132 Cal. App. 4th 590 (2005).8 A.B. 2069, 2017-2018 Leg. (Cal. 2018).
barristers tips BY JINOUTH VASQUEZ SANTOS
Pot-Protective Employment Laws Loom in 2019
Jinouth Vasquez Santos is an associate in Seyfarth Shaw LLP’s Cannabis andLabor and Employment practice groups in Los Angeles.
14 Los Angeles Lawyer December 2018
CIVIL LITIGATORS ARE FAMILIAR WITH the requirement that amotion for summary judgment or summary adjudication beaccompanied by a separate statement of undisputed materialfacts, but that requirement did not always exist.1 It arose 35 yearsago, when Code of Civil Procedure Section 437c was amendedto require “that the parties submit separate statements itemizingmaterial facts which they contend are undisputed or disputed, asthe case may be, supported by specific reference to the evidencewhich either establishes or contradicts each fact.”2 One law andmotion judge predicted at the time that “[t]hese separate statementsfacilitate review of the record by the courtand, if properly prepared, should help preventthe moving party from overlooking any factsor evidence necessary to support its appli-cation.”3 He went on to explain that “[i]fprepared correctly, the separate statementof the moving party should recite the assert-edly uncontradicted facts from which it fol-lows that the party is entitled to the requestedadjudication.”4
As this jurist observed, the separate statement of undisputedmaterial facts can and should be a highly useful document—bothfor the litigants and the court—if properly prepared. However, inthe years following the amendment of Section 437c, the inabilityto prepare appropriate separate statements became so widespreadand of such widely acknowledged mutual frustration to the benchand the bar that it led another jurist to proclaim rather defensivelythat “[s]eparate statements are required not to satisfy a sadisticurge to torment lawyers.”5 These conditions have not improvedmuch since then, notwithstanding the amendment of CaliforniaRule of Court 3.1350 in 2008 to clarify the requirement.6 Theymay even be worse. Indeed, in one well-known 2009 decision, theCalifornia Court of Appeal identified a summary judgment motionwith a 196-page separate statement setting forth hundreds of factsas “what may well be the most oppressive motion ever presentedto a superior court.”7
So what is the problem? Are the rules inherently unclear? Thatdoes not seem to be the issue. After all, the 2008 amendments tothe Rules of Court added not only written instructions for, butpictorial illustrations of, how to prepare separate statements sup-porting and opposing summary judgment, and the exemplarsprovided are easy to follow.8
The real issue does not seem to be the rules’ burdensome tech-nical requirements, bad faith of the parties, or even counsel’s lackof industry. Instead, it appears to be that the difficulty of applyingthe rules varies directly with the complexity of the motion. Themore complex the legal and factual framework surrounding themotion, the more difficulty lawyers will tend to have in framingat an appropriate level of generality what is, and what is not, amaterial fact. This difficulty, as well as lawyers’ tendency to fear
inadvertently waiving something by failing to include it, leads toseparate statements that improperly characterize as “materialfacts” scores, or even hundreds, of trivial and incidental facts,pieces of evidentiary material, and legal arguments and conclusions.9
This proliferation of ostensibly “material” facts can make it easierfor an opposing party to dispute facts and create the appearanceof triable issues.10
This need not happen. There are hundreds of published caseson summary judgment. Among those, while straightforward state-ments of what precisely is and is not “material” for the purpose
of summary judgment are unfortunately few and far between,they do exist. Perhaps the clearest statement comes from a pairof 1999 California Court of Appeal cases, which explain: “To be‘material’ for purposes of a summary judgment proceeding, afact must relate to some claim or defense in issue under the plead-ings, and it must also be essential to the judgment in some way.”11
These two cases are cited in Aguilar v. Atlantic Richfield Company,the California Supreme Court’s 2001 opus on summary judgment.12
Aguilar itself suggests that a fact is material when it “is necessaryunder the pleadings and, ultimately, the law[.]”13
Under this standard, a fact is material—and thus should beincluded in a moving party’s separate statement14—when its exis-tence or nonexistence is potentially outcome-determinative of acause of action, affirmative defense, claim of damage, or issue ofduty that has been pleaded by a party. That is, if the fact cannot beproven, the claim or defense that rests on it must necessarily fail.15
Generally, these facts should be framed at the level of “the ultimatefacts which constitute the cause of action” itself.16 Thus, the“material facts” in a separate statement should generally track theelements of a claim, stated in the factual context in which they areset out in the pleadings. Then the evidentiary facts and the actualevidence in which they are established should be cited as the “sup-porting evidence.”17
With that standard in mind, it is clear what should not belisted as a “material fact.” So-called “subsidiary” or “evidentiary”
practice tips BY MICHAEL SHIPLEY AND DAVID KLEIN
Crafting Separate Statements in Motions for Summary Judgment
Legal arguments are not facts, much less material ones, nor are
conclusions of law. This last category can prove difficult.
Michael Shipley, a partner in the Los Angeles office of Kirkland & Ellis LLP,practices in the areas of complex commercial litigation and white collar andregulatory matters. David Klein is a commercial litigation partner in the LosAngeles office of Kirkland & Ellis where his practice includes litigation beforefederal and state courts, arbitration, and private mediation.
facts that do not rise to the level of mate-riality should not appear as material facts.Nor, except in limited circumstances, shouldrecitations of procedural events in the liti-gation.18 Background facts and individualpieces of evidence—such as deposition tes-timony or interrogatory re sponses—shouldnot be listed as material facts. Legal argu-ments are not facts, much less materialones, nor are conclusions of law.
This last category can prove difficult,however. That is because, like a legal con-clusion, “an ultimate fact usually, if notalways, involves one or more conclusions.”19
Consequently, “[t]he distinction betweenconclusions of law and ultimate facts is notat all clear and involves at most a matterof degree.”20 The difference is historical,and frankly, somewhat formalistic.21 Butin practical application, so long as the infer-ences to be drawn are commonsensical andessentially framed by the underlying factsof the case, some implication of legal defi-nitions should not preclude their treatmentas material facts.22 For instance, that a partyacted “intentionally” can often be a materialfact for summary judgment purposes,notwithstanding jurisprudential nuance overthe meaning of “intentional.”23 In any event,it is clear that juries can draw only factual,not legal, conclusions.24 A safe way to iden-tify the material facts is to look to the juryinstructions and then frame the elementswith the factual particulars of the case.
If the standard is properly understoodand followed, the number of “undisputedmaterial facts” in a separate statementshould be relatively few. The number shouldcertainly be far fewer than appears in theall-too-common separate statement whereina lawyer simply pastes the recitation of thefacts from his or her brief into a table andthen makes each sentence an “undisputedmaterial fact.” Indeed, a defense-side sum-mary judgment motion asserting that theplaintiff cannot establish an element of acause of action will often have only a single,undisputed material fact at issue.25 A plain-tiff’s motion or a defense motion on anaffirmative defense should generally haveroughly the same number of material factsas the number of elements of the cause ofaction or defense.26
By way of example, a claim for the libelof a public figure can be presumed. ThePlaintiff, Polly, a well-known actress, claimsthat the defendant, Daisy, her recently ter-minated assistant, e-mailed Benny Bloggerand falsely claimed that Polly was arrestedfor driving under the influence. The genericelements of libel are: 1) the defendant pub-lished a statement, 2) the recipient knewthe statement referred to plaintiff, 3) it wasthe kind of statement that would tend to
be injurious to the plaintiff’s reputation,4) the statement was false, and 5) the defen-dant knew the statement was false or actedwith reckless disregard of the truth.27
Stated in the context of the complaint,the ultimate, material facts needed to provethe claim in the example provided are thus:1) Daisy sent an e-mail to Benny, 2) Bennyreasonably understood that the e-mail wasabout Polly, 3) a reasonable person wouldunderstand the statement to mean that
Polly had committed a crime, 4) Polly hadnever been arrested for a DUI, and (5)Daisy knew that the statement was falsebecause the incident never happened.
Daisy moves for summary judgment onthe ground that the arrest actually occurredand, therefore, her statement was true. Theevent was recorded on video, arrest recordsshow Daisy was detained for driving underthe influence, and Polly admitted to herpublicist that the arrest did, in fact, occur.Now, of course, when Daisy’s able attorneysdraft their motion, they will likely set outthe whole story in their brief to providecontext for the dispute. They will presentand describe the evidence that undisputedlyshows that the arrest occurred. But whatthey should not do is recite the evidenceor the so-called “subsidiary” facts as sep-arate, undisputed material facts in theirseparate statement. The evidentiary factsand supporting evidence are not dispositiveof the claim—they are not material.
For instance, if there was no video re -cording of the arrest, it does not automat-ically follow that the arrest never happened.That fact, while clearly relevant, is notmaterial at the proper level of generality.Thus, while there might be a great deal ofevidence and factual detail in support ofit, there remains exactly one undisputed
material fact that should be set out in thedefendant’s separate statement. Follow ingthe format required by Rule of Court3.1350(h), the left column28 of a movingdefendant’s separate statement would ap -pear as shown in Example A.
This will not always be easy. The law isrife with amorphous standards and fact-heavy multifactor or balancing tests thatcan make it difficult to express case-specificfact issues at an appropriate level of mate-
riality. When is a business practice “un -fair”?29 When is the use of a trademarklikely to cause confusion?30 When, on aclaim for nuisance, does the seriousness ofthe harm outweigh the social utility of thedefendant’s conduct?31 Resolving summaryjudgment motions on these issues will oftenrequire a court to examine the evidence inits totality and decide whether every rea-sonable or no reasonable jury could inferthat the standard was or was not met.32
Summary judgment can be difficult toobtain when a multifactor standard definesan element of a claim. A moving party doesitself no favors by turning factors into ele-ments, each of which could be disputed. Amoving attorney should thus resist the temp-tation to draft a separate statement thatbreaks a broad factual standard into numer-ous separate and supposedly “material”facts that are not in themselves claim-dis-positive.
Although it is not addressed in the textof the rule, when there are multiple evi-dentiary facts that support an assertion ofa material fact, it can be useful to state thesubsidiary evidentiary facts under the mate-rial fact, followed by a citation of the evi-dence. This is particularly appropriate whenthe moving party bears the initial burdento present evidence sufficient that, if unre-
Los Angeles Lawyer December 2018 15
Example A.
Moving Party’s Undisputed Material Facts and Evidence in Support
Undisputed Fact #1. Defendant’s statement that Plaintiff was arrested for driving underthe influence was true. Smith Decl. Ex. 1 (video); Ex. 2 (arrest records); Ex. 3 (PublicistDepo.) at 134:12-25 (“Polly told me that she was very drunk that night and was detainedby the police after she was pulled over.”).
Example B.
Moving Party’s Undisputed Material Facts and Evidence in Support
Fact # 1. At the time the contract was entered, Plaintiff was De fend ant’s attorney.
Evidence.
• There was a retainer agreement. Smith Decl. Ex. 1.
• Plaintiff defended Defendant at a deposition in 2004. See Smith Decl. Ex. 2 (depositiontranscript).
• Plaintiff drafted 25 contracts for Defend ant over a two-year period. Smith Decl. ¶ 4 &Exs. 3-25.
• Plaintiff wrote a letter in 2005 wherein he described himself as Defendant’s generalcounsel. Smith Decl. Ex. 26.
16 Los Angeles Lawyer December 2018
butted, would require any reasonable trierof fact to infer that the material fact hasbeen established under the applicable bur-den of proof.33
For example, a plaintiff’s status as thedefendant’s attorney could be an affirmativedefense to a claim for breach of oral con-tract because certain attorney-client con-tracts need to be in writing.34 For thatdefense, the attorney-client relationship isthe ultimate material fact in issue. Thereare many ways of showing an attorney-client relationship, however, with no indi-vidual way necessarily required to meetthe defendants’ burden of substantiatingthe material fact in issue.35 In this case, itmay prove helpful to set up the separatestatement as in Example B.
By framing the facts this way, the mov-ing party gives the court a clearer sense ofthe factual question to be decided. Whileit may sometimes appear difficult to properlystructure and format a separate statementthat correctly identifies the actual materialfacts in dispute and clearly lines up the evi-dence in support of and against those facts,only by taking the effort to do so can onemake the separate statement the “convenientand expeditious vehicle”36 for the trial courtthat it was meant to be. n
1 Rules governing summary judgment and summaryadjudication are materially the same with respect tothe facts required in a separate statement. For ease ofreference, hereinafter, references to summary judgmentwill also refer to summary adjudication.2 Stuart R. Pollak, Liberalizing SummaryAdjudication:A Proposal, 36 HASTINGS L.J. 419, 421 (1985) [here-inafter Pollak] (discussing Cal. Stats., ch. 490 §1 at1990–93 (1983)).3 Pollak, supra note 2, at 421.4 Id at 421 n.8; see also Collins v. Hertz Corp., 144Cal. App. 4th 64, 74 (2006) (noting that the separatestatement is supposed to be a “convenient and expe-ditious vehicle permitting the trial court to hone in onthe truly disputed facts.”).5 United Cmty. Church v. Garcin, 231 Cal. App. 3d327, 335 (1991).6 See CAL. R. CT. 3.1350.7 Nazir v. United Airlines, Inc., 178 Cal. App. 4th 243,248 (2009).8 CAL. R. CT. 3.1350(h).9 This fear of waiver is likely driven by what is called“the Golden Rule” of summary judgment and adju-dication, viz., “all material facts must be set forth inthe separate statement,” and, “if it is not set forth inthe separate statement, it does not exist.” Garcin,231 Cal. App. 3d at 337 (emphasis in original).10 See Nazir, 178 Cal. App. 4th at 252 (quoting WEIL
& BROWN, CAL. PRACTICE GUIDE: CIVIL PROCEDURE
BEFORE TRIAL, §10:95.1 (2009) for the propositionthat “the separate statement effectively concedes themateriality of whatever facts are included. Thus, if atriable issue is raised as to any of the facts in your sep-arate statement, the motion must be denied!”.11 Kelly v. First Astri Corp., 72 Cal. App. 4th 462,470 (1999) (citations omitted); Riverside County Cmty.Facilities Dist. No. 87-1 v. Bainbridge 17, 77 Cal.App. 4th 644, 653 (1999). The “essential to the judg-ment” standard appears to have its origin in the stan-
dard for which factual issues must be addressed in astatement of decision. See Kuffel v. Seaside Oil Co.,69 Cal. App. 3d 555, 565 (1977) (“A ‘material’ issueof fact is one which is relevant and essential to thejudgment and closely and directly related to the trialcourt’s determination of the ultimate issues in thecase.”); South Bay Irrigation Dist. v. Cal.-Am. WaterCo., 61 Cal. App. 3d 944, 992 (1976).12 Aguilar v. Atlantic Richfield Co., 25 Cal. 4th 826,843 (2001).13 Id.14 CAL. R. CT. 3.1350(d).15 See CODE CIV. PROC. §473c(o), (p).16 See Teselle v. McLoughlin, 173 Cal. App. 4th 156,172 (2009); FPI Dev., Inc. v. Nakashima, 231 Cal.App. 3d 367, 382 (1991); Juge v. County ofSacramento, 12 Cal. App. 4th 59, 65 (1993); Andalonv. Superior Ct., 162 Cal. App. 3d 600, 605 (1984).17 See CODE CIV. PROC. §437c(b)(1); see also Teselle,173 Cal. App. 4th at 172 (“The distinction betweena material fact and its supporting evidence lies in thedifference between an ultimate fact, an element of acause of action, and an evidentiary fact which supportsthe existence of the element.”).18 If the statute of limitations is at issue, the timing ofpleadings could be material. Or, if the proof of a mate-rial fact is based on judicial estoppel, it is conceivablethat a party’s prior assertion of that fact could bematerial.19 Krug v. Meehan, 109 Cal. App. 2d 274, 277 (1952).20 Burks v. Poppy Constr. Co., 57 Cal. 2d 463, 473(1962); see also 4 WITKIN, CALIFORNIA PROCEDURE,§378 (2018 online ed.).21 For those more academically inclined, the episte-mology of the distinction was explored extensively bythe California Supreme Court in 1886. See Levins v.Rovegno, 71 Cal. 273, 275–76 (1886).22 See Perkins v. Superior Ct., 117 Cal. App. 3d 1, 6(1981).23 See, e.g., Uhrich v. State Farm Fire & Cas. Co.,109 Cal. App. 4th 598, 623 (2003).24 CODE. CIV. PROC. §591; see also Stofer v. ShapellIndus., Inc., 233 Cal. App. 4th 176, 189 (2015).25 See CODE CIV. PROC. §437c(p)(2) (defendant meetsits burden if it “has shown that one or more elementsof the cause of action, even if not separately pleaded,cannot be established”); see, e.g., Andalon v. SuperiorCt., 162 Cal. App. 3d 600, 605 (1984) (resolvingissues of law that turned on a single undisputed materialfact).26 See CODE CIV. PROC. §437c(p)(1) (plaintiff meetsits burden on motion if it “has proved each elementof the cause of action entitling the party to a judgmenton that cause of action.”).27 See CACI 1700.28 The Rules of Court require a “two-column format.”See CAL. R. CT. 3.1350(d)(3), (h). The right-hand col-umn of the moving party’s statement, however, onlyprovides space for the nonmoving party to respond.29 See, e.g., Cel-Tech Commc’ns, Inc. v. L.A. CellularTel. Co., 20 Cal. 4th 163, 185 (1999).30 See, e.g., Mallard Creek Indus., Inc. v. Morgan, 56Cal. App. 4th 426, 435 (1997) (setting out an eight-factor test).31 See, e.g., Birke v. Oakwood Worldwide, 169 Cal.App. 4th 1540, 1551 (2009).32 See, e.g., Hayes v. San Diego, 57 Cal. 4th 622, 632(2013).33 See Aguilar v. Atlantic Richfield Co., 25 Cal. 4th826, 851 (2001).34 See, e.g., Arnall v. Superior Ct., 190 Cal. App. 4th360, 373-74, n.12 (2010).35 See Responsible Citizens v. Superior Ct., 16 Cal.App. 4th 1717, 1733 (1993).36 Collins v. Hertz Corp., 144 Cal. App. 4th 64, 74(2006).
18 Los Angeles Lawyer December 2018
HA
DI F
ARA
HA
NI
Internet is filled with news reporting ondigital assets (cryptocurrencies such as Bit -
coin, Ether eum, Ripple, and many others). What doesthis burgeoning market mean for California attorneysconsidering accepting cryptocurrency as compensationfor legal services? California’s new ethics rules offersome guidance. Counsel likely may accept payments inthe form of cryptocurrency so long as counsel adjuststhe law firm’s trust accounting procedures to complywith the requirements of the State Bar of California andalso track, protect, and manage digital asset depositsand payments.
Digital assets—including cryptocurrencies—are In ter net-based intangible assets that can be used totransfer value between and among parties.1 Digitalassets exist solely within digital environments. They areself-contained collections of binary data, composed ex clusively of numeric values of zero or one.2 “Digitaltokens,” such as cryptocurrencies, are one example.Crypto currency has commercial utility because digitalassets are uniquely identifiable (they can be counted andclassified) and generally have value attributed to them,which supports use in commercial transactions.
The intrinsic monetary value of crypto currency is itsimmutable entry on a public ledger (the “blockchain”).
These fundamental aspects are the primary reason thatentities, e.g., law firms and their clients, acquire andhold cryptocurrency. The most recognized cryptocurrencyis the digital token known as Bitcoin.
Cryptocurrency uses cryptography (a form of encod-ing) to authenticate transactions. Cryptocurrency hasno generally accepted physical presence, and no centralauthority administers the currency, thus it is not backedby any government and is not legal tender in any juris-diction. It also is not issued by or redeemable at mostU.S. financial institutions. Cryptocurrency has value onlybecause other individuals agree that it does. The authen-ticity data of a particular cryptocurrency or transactioninvolving cryptocurrency exists on the blockchain.
Each owner of cryptocurrency has a unique “publickey,” which is cryptographically linked to the owner’s“private key.”3 Private keys are always kept secret, forthey are how cryptocurrency transactions are mathe-matically “signed” and transferred. Tracking these keysis cumbersome, so cryptocurrency owners use software(a “wallet”) to manage their public and private keys.These programs exist on personal computers, smart-phones, or in the cloud.
Every cryptocurrency transaction is identified by theunique, individual public key and recorded on the
Lisa Miller is the chief executive officer of Lex Law Corporation and a California and New York attorney and administrative judge.
BITCOINThe
MCLE ARTICLE AND SELF-ASSESSMENT TEST
By reading this article and answering the accompanying test questions, you can earn one MCLE legal ethics credit.
To apply for credit, please follow the instructions on the test answer sheet on page 21.
blockchain. These transactions generallytake a few minutes to complete. Once writ-ten to the block chain, the transaction can-not be reversed.
Although linking a specific public keyto an individual or law firm is not easy, itcan be done. For this reason, counsel’s eth-ical obligations of confidentiality to theclient are implicated.
Counsel likely may ethically accept cryp-tocurrency as compensation for legal ser-vices so long as counsel understands thetechnology of digital assets and handlesthe technology proficiently.
Bitcoin Merchant Service Providers
Some attorneys who accept Bitcoin as pay-ment for legal services may want to relyon a Bitcoin merchant service provider(BMSP) to track tax accounting and record-keeping issues.4 The BMSP is a third-partybusiness that accepts payments in cryp-tocurrency and provides dollars (or otherrecognized currency) to the law firm. Ifdesired, some BMSPs can settle with lawfirms in cryptocurrencies. The BMSP ini-tiates the cryptocurrency transfer, notifiesthe law firm when the transaction is com-plete, and settles with the law firm on aprearranged schedule by electronicallytransferring funds to the law firm’s des-ignated bank account. BMSPs enableclients to pay counsel with cryptocurrency,a l though neither counsel nor counsel’slaw firm ever receives or holds cryptocur-rency. This reduces the accounting andrecord-keeping slog associated with thetax auth ority regulations and State Barrequirements.
Lawyers and law firms, however, mustbe clear regarding committing to acceptingthese potential risks and deciding whoshoulders the financial risk associated withthese Internet intermediaries. These risksshould be addressed before deciding toaccept payment via cryptocurrency. Similarto other internal costs, counsel who payvendor fees to enable cryptocurrency pay-ments likely may pass BMSP-relatedcharges to clients, so long as the retainerlanguage is clear.5
Before retaining a BMSP, law firmsshould check the requirements of the U.S. Depart ment of the Treasury Finan -cial Crimes Enforcement Network (Fin -CEN), which analyzes financial transactionsto combat financial crime—in cludingmoney laundering—and terror ism. Beforeengaging a BMSP, counsel can check if itis registered with FinCEN, complies withits requirements, and provides a writtenanti-money laundering policy. Counsel canalso determine if the BMSP is licensed asa “money transmitter” in the appropriate
states. Licensed money transmitters arerequired to post a bond or pledge collateral.With or without a BMSP agreement, coun-sel must understand the basic technologyassociated with cryptocurrency and thetransfers of these assets.6
Safeguarding Blockchain Confidences
California-licensed attorneys are under anoverriding duty to protect client confi-dences, and should feel just as protectiveof the confidentiality of counsel’s own workproduct.7 Financial information, how ever,is necessarily ex posed on the blockchain—this transparency is an at tractive and fun-damental aspect of cryptocurrency. Thisaspect of accepting crypto currency pay-ments nevertheless highlights the issue ofprotecting client confidences in the contextof the attorney-client relationship.
Public keys facilitate cryptocurrencytransfers among online accounts and arevisible on the blockchain. When counselinitiates a transaction, a unique public key-private key set is created. These keys arethe backbone of cryptocurrency security.Only the account-holder (counsel) knowsthe private key that authorizes transactions.If counsel loses a private key, the crypto -currency is lost. Cryptocurrency transac-tions mutually reveal public online ad -dresses to participants (in a manner similarto bank account numbers).
Once the transaction is approved, fundsmove to the payee’s public address (a hash -ed version of a payee’s public key). Thistransaction is communicated to the block -chain, where individuals at comput ers (“dis-tributed nodes”) confirm the validity of thetransaction, finalize it, and record it on theblockchain. Transactions record ed on theblockchain are viewable on the Internet.8
Similarly, if counsel refunds cryptocur-rency via the blockchain, the public keysare apparent to all visitors to the block -chain. Amounts of cryptocurrency movingamong parties are readily ascertainable,but the names of the parties participatingin the transaction and the work performedby counsel are not directly revealed on theblockchain.
Counsel should always examine the pri-vacy protections that the BSMP (if one isin place) uses as part of the cryptocurrencytransactions. Counsel should consider whatinformation the BSMP is demanding re -garding counsel’s client and what practicesregarding collecting and disclosing personalinformation it maintains about counsel’sclients. Counsel should closely examineand share with the client the BSMP’s pri-vacy practices.
Counsel should include appropriatelanguage in the retainer agreement to
adequately inform clients regarding theprocesses and risks of transacting businessusing cryptocurrency. The State Bar ofCal if ornia Standing Committee on Pro -fession al Responsibility and Conduct inFormal Opinion No. 2010-179 consideredconfidentiality and competence whencounsel manipulate client data via elec-tronic technology. Counsel must protectat “every peril” clients’ confidential infor-mation, so the Bar focused on what is rea-sonable under the circumstances.9 Counselshould ensure that communications aresecure, outline risks and security measurescounsel will be employing, and obtaininformed advance written consent regard-ing particular technology (e.g., e-mail).10
Language in the retainer agreements oflaw firms that accept payment for legalservices in cryptocurrency should be rea-sonably complete, accurate, and under-standable to a reasonable client regardingthe law firm’s cryptocurrency paymenttransactions.11
Retainer agreement language shouldinclude disclosures explaining the trans-action and, if relevant, the role of the BMSP.Clients should have enough data to under-stand the law firm’s digital transactionprocesses and the fact that the client mightbe paying a BMSP, and not the lawyer orthe law firm. Counsel may want to notifyclients via the retainer that cryptocurrencylacks the consumer protections that clientsmight ordinarily expect. Law firms canreview the federal government’s ConsumerFinancial Protection Bureau’s advisoryregarding virtual currency to guide theirdisclosures.12
Avoiding Unconscionable Fees
Counsel may accept payment for legal ser-vices via cryptocurrency so long as the feethe client pays is not unconscionable orotherwise improper. An unconscionablefee is one that is “so exorbitant and whollydisproportionate to the services performedas to shock the conscience.”13
As of November 1, 2018, new ethicsRule 1.5 (Fees for Legal Services), generallysucceeding former Rule 4-200, states:
(a) A lawyer shall not make an agree-ment for, charge, or collect an un -conscionable or illegal fee. (b) Un -con scionability of a fee shall bed e termined on the basis of all thefacts and circumstances existing atthe time the agreement is enteredinto except where the parties con-template that the fee will be affectedby later events.14
Fee agreements must be reasonable andwritten in a way that does not discourageclients from asserting their rights against
20 Los Angeles Lawyer December 2018
Los Angeles Lawyer December 2018 21
MCLE Answer Sheet #283
GETTING PAID IN BITCOIN
Name
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INSTRUCTIONS FOR OBTAINING MCLE CREDITS
1. Study the MCLE article in this issue.
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3. Mail the answer sheet and the $25 testing fee($35 for non-LACBA members) to:
Los Angeles County Bar Association Attn: Los Angeles Lawyer Test P.O. Box 55020 Los Angeles, CA 90055
Make checks payable to: Los Angeles County BarAssociation.
4. Within six weeks, Los Angeles Lawyer willreturn your test with the correct answers, arationale for the correct answers, and acertificate verifying the MCLE credit you earnedthrough this self-study activity.
5. For future reference, please retain the MCLEtest materials returned to you.
ANSWERS
Mark your answers to the test by checking theappropriate boxes below. Each question has onlyone answer.
1. n True n False
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8. n True n False
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MCLE Test No. 283The Los Angeles County Bar Association certifies that this activity has been approved for Minimum ContinuingLegal Education legal ethics credit by the State Bar of California in the amount of 1 hour. You may take testsfrom back issues online at http://www.lacba.org/mcleselftests.
1. Accepting cryptocurrency for legal services is per seunethical because cryptocurrency is not embodied intangible tokens.
True.False.
2. Attorneys cannot ethically accept cryptocurrencybecause commercial transactions involving compen-sation for legal services must always be completedusing currency backed by a government.
True.False.
3. Cryptocurrency has value only because financialregulators all agree that it does.
True.False.
4. Cryptocurrency transactions recorded on the block -chain do not implicate counsel’s ethical duty to maintainclient confidences because transactions on theblockchain are private and confidential.
True.False.
5. “Private keys,” the mechanism by which cryptocur-rency transactions are “signed” and completed, nec-essarily prevent counsel from accidentally revealingclient confidences.
True.False.
6. Cryptocurrency users, including lawyers and theirclients, should assume that cryptocurrency transactionsare publicly viewable, potentially implicating protectingclient confidences.
True.False.
7. Financial information is exposed on the blockchain,which can implicate counsel’s ethical obligation toprotect client confidences.
True.False.
8. It is unethical for counsel’s retainer agreement toinclude clauses addressing issues raised by counsel’sacceptance of cryptocurrency as compensation for legalservices.
True.False.
9. Counsel is not ethically prohibited from acceptingpayment in cryptocurrency for legal services.
True.False.
10. If counsel and client need to distribute a singlebitcoin to get counsel compensated for legal services,client and counsel could, for ethics rules purposes,become co-owners of a valuable asset.
True.False.
11. Barter as payment for legal services requires thata client use a currency recognized by the U.S. govern-ment.
True.False.
12. Counsel who accept cryptocurrency as compensationfor legal services must be able to process refunds forclients.
True.False.
13.When the cryptocurrency that counsel has acceptedas compensation for legal services becomes worthlessduring the course of the representation, counsel couldbe in a posture of conflict with the client.
True.False.
14. Cryptocurrency is easily deposited into traditionalclient trust accounts.
True.False.
15. Attorneys who accept property as compensationfor legal services must clearly label that client propertyand maintain it in a “place of safekeeping.”
True.False.
16. If counsel holds client property in trust as com-pensation for legal services, counsel must keep com-plete records of each item of property held, includingthe person on whose behalf the property is held, thedate counsel received the property, the date of distri-bution, and the person to whom distributed.
True.False.
17. Because cryptocurrency is not recognized as currencyby the Internal Revenue Service, it is not taxable.
True.False.
18. Cryptocurrency markets are subject to such sig-nificant regulatory uncertainty that attorneys cannotethically use it in their practices.
True.False.
19. Law enforcement sometimes monitors cryptocur-rency transactions for illegal activity.
True.False.
20. The regulatory landscape for digital assets, includ-ing guidelines on how lawyers can ethically managecommercial transactions using cryptocurrency, is likelyto change in the near future.
True.False.
counsel.15 Counsel must demonstrate thepropriety of counsel’s fees.16
The focus of the analysis is comparisonof fees charged to value received; the expe-rience, reputation, and ability of the attor-ney; and the informed consent of the clientto the fee.17 High fees are not synonymouswith “unconscionable” fees, but high feesmay be “unreasonable.”18
Reasonable Fee
Relevant to the issue of volatility of thevalue of cryptocurrency, a “reasonable” feemay never exceed the contract rate.19 Aswith many contract terms, the relevantexchange rate date is negotiable, but theresulting agreement must not cause anunconscionable or illegal result.20 Counselmay not realize a benefit for failing to com-ply with the law and allowing a fee greaterthan the amount the attorney negotiatedand expected to receive.
Although a contract amount may bereasonable, the fee may, retrospectively,be found “unreasonable” based on the ser-vices performed.21 Courts may refuse toenforce these agreements, or the fees maybe reduced.22
Although digital asset markets areknown for their value volatility, the issuescan be addressed via the ordinary rules ofcontract, and, if needed, the applicationof new Rule 1.5.23 Counsel and client canagree on which day they value the asset,and for how long that valuation applies,as memorialized in their agreement. Theycan also agree to a range of value for thepurposes of construing their agreement.
If the volatility of the asset, at the rel-evant time, is extreme enough to take thepayment terms into the realm of unrea-sonable or unconscionable fees, traditionalethics rules of analysis can be applied,despite the novel aspects of payment viacryptocurrency. Nothing in the cryptocur-rency markets is inherently antithetical tocounsel’s ethically accepting cryptocur-rency as payment, assuming the issues ofvolatility are addressed ethically in theretainer agreement.
Improper Business Arrangement
Counsel may accept cryptocurrency ascompensation for legal services so long ashe or she guards against accidentally enter-ing into an improper business arrangementwith the client, either by a direct barterarrangement with a client or via a thirdparty expected to receive a portion of thelegal fees or joint ownership of a singledigital asset that is not easily divis ible.Some digital assets—especially cryptocur-rency—are highly valued in comparisonwith dollars and not easily divisible. If
counsel and client need to distribute asingle bitcoin, for example, it could besplit, resulting in client and counsel as co-owners of a single asset, each owning afraction, arguably making them functionallypartners in a business arrangement.
In situations in which attorney andclient jointly own a portion of the samecryptocurrency coin or other digital assets,ethics issues are triggered. The fair valueof counsel’s legal services may not be theexact value of a single unit of, or even mul-tiple units of, the market value of the digitalasset in play. If a client transferred only afraction of a digital asset in exchange forlegal services, counsel would co-own thedigital asset with the nonattorney client,possibly implicating the rules against split-ting legal services fees with a nonlawyerand entering into a business transactionwith a client.24
For example, a single bitcoin has re -cently been valued at upwards of $6,500.The reasonable value of counsel’s serviceson the relevant contract date is unlikelyto be an exact multiple of $6,500. If a frac-tion of a bitcoin is transferred as compen-sation for counsel’s services, counsel likelyco-owns that bitcoin with the client. This
could trigger counsel’s ownership interestin jointly owned property, which is adverseto a client; this implicates new Rule 1.8.1.
New Rule 5.4 (b) prohibits lawyersfrom forming partnerships or other businessentities with nonlawyers if any of the activ-ities are the practice of law.25 Counselcould become a business partner of a non-lawyer through co-ownership of a valuableasset.
Rule 1.8.1 prohibits counsel from enter-ing into business transactions with clients,or knowingly acquiring an ownership, pos-sessory, security, or other pecuniary interestadverse to a client.26 Rule 1.8.1, Comment1, indicates that “other pecuniary interestadverse to a client” occurs when the lawyerpossesses a legal right to significantly impairor prejudice the client’s rights or interestswithout court action. The interests of thesecryptocurrency co-owners could diverge,setting up a prohibited ethics conflict forcounsel. This odd development also raisesthe issues of counsel’s owning part of anasset in contravention to the client’s interest,or counsel’s entering into a business trans-action with the client.
“Barter for services” generally connotesthe absence of exchange of traditional cur-
22 Los Angeles Lawyer December 2018
Account options are slim (to none) as financial institutions based in the United States cur-rently do not allow cryptocurrency transactions directly through customer bank accounts.Nevertheless, a few of them are making some progress:
San Antonio-based United Services Automobile Association (USAA) allows Coinbaseusers to check their Bitcoin balances through usaa.com and the USAA Mobile App. AlthoughUSAA does not maintain physical offices in California, it offers a number of ATMs throughoutthe state.1
The Goldman Sachs Group, Inc. is a New York-based global investment banking, securi-ties, and investment management firm. Goldman serves individuals, businesses, and govern-ments. The firm maintains offices in in Los Angeles and San Francisco, as well as all majorglobal financial centers. In 2018, Goldman announced plans for an Altcoin trading desk. As aprerequisite to offering cryptocurrency-related services, it is currently in the process of devel-oping an institutional-grade cryptocurrency custody product.2
Simple Bank (Simple Finance Technology Corp.), with headquarters in Portland, Oregon,refers to itself as The Digital Crypto Bank. Internet-only Simple is a U.S.-based direct, branch-less, virtual bank. Simple offers FDIC-insured checking accounts through a partnership withone of the largest banks in Europe. It serves customers via online, telephone, mail, andmobile phone banking, as well as ATMs (the STAR network). Simple plans to offer, in 2019, aworldwide cryptocurrency banking platform powered by blockchain technology, accessibleonline or via a smartphone app. Simple’s cryptocurrency banking program will allow any busi-ness to easily trade fiat currency for cryptocurrency, and crypto customers will be able to buyany cryptocurrency on the go.3
1 Financial Account Management, It’s Easy to Use Your Non-USAA Accounts, USAA, https://www.usaa.com/inet/wc/account_management_coinbase_landing?adID=VURL_externalaccounts (last viewed Oct. 23, 2018).2 David Meyer, “Fake News.” Goldman Sachs Denies Report About Its Cryptocurrency Trading Desk That Sent BitcoinPlunging, FORTUNE, Sept. 7, 2018, available at http://fortune.com/2018/09/07/bitcoin-goldman-sachs-cryptocurrency-trading-fake-news.3 A worldwide banking Platform on a Blockchain Net work, Simple Bank, Bitcoin Forum, https://bitcointalk.org/index.php?topic=3563816 (last viewed Oct. 23, 2018).
rency; it is a contract by which partiestrade for value and do not pay with money.Bartering is trading goods or services dir -ectly for other goods or services, withoutusing money or similar unit of account ormedium of exchange.27 Under these cir-cumstances barter contemplates an agree-ment in which counsel provides legal ser-vice and the client provides items of value,not recognized as currency, in place of afee. This is expected to include cryptocur-rency. In the context of attorney and client,bartering agreements are not consideredstandard commercial transactions, whichwould be exempt from the requirementsof ABA Rule 1.8(a) and, presumably, thenew California rule 1.8.1.
ABA Model Rule 1.8(a), equivalent tonew California rule 1.8.1, addresses bar-tering for legal fees as a business transactionwith a client. The rule applies a “reason-ableness” standard, which means counselshould consider a thorough discussion withthe client, including a suggestion that theclient seek advice from another lawyer andobtain written client consent.
Generally, California attorneys renderinglegal services may not participate in businessor financial transactions with clients; stan-dard commercial transactions, separatefrom legal services, are the exception. Attor -n ey compensation via barter implicates
consideration of whether this type of pay-ment is a “standard commercial transac-tion”under the Restatement (Third) of theLaw Governing Lawyers.28 Payment forlegal services via barter involves renderinglegal services, so it falls outside of the safeharbor of standard commercial transac-tions.29 Therefore, lawyers and law firmsaccepting digital assets, instead of a tradi-tional fee in the form of some fiat currency,must comply with Rule 1.8.1.
Considering the prohibitions on coun-sel’s entering into a business arrangementwith clients, based on digital asset barteractivity, counsel should discuss with theclient and include verbiage in the retaineracknowledging the possible volatility ofthe asset and ensure that the client had achance to learn the value range of thisvolatile digital asset on some realistic basis.
Refunds to Clients via Digital Assets
Counsel may accept digital assets in ex -change for legal services so long as he orshe has adequate processes in place allowingtimely refunds of unearned sums. Theseprovisions should be included in the retaineragreement signed by the client. The termsshould address whether refunds to theclient are contemplated via traditional fiatcurrency or via a designated cryptocur-rency. If by cryptocurrency counsel should
delineate the date of valuation to addresspossible volatility in the market betweenthe time the client paid the attorney viadigital assets and the date the refund wouldneed to be made, and in what form.
The discussion also should address re -fundable retainers and return of unearnedfees held in the trust account. Issues includehow counsel anticipates determining theexchange rate and how counsel disclosesthis data to the client. Counsel should dis-close how the exchange rate applied tothe client’s cryptocurrency transaction iscalculated and what if any fees are in -volved. This information should be dis-cussed with the client, be disclosed in writ-ing, and be fair.
Devaluation of Cryptocurrency
Counsel may ethically accept cryptocur-rency from clients as legal fees, but counselmust make arrangements to address thepossibility that the digital asset may becomeworthless during the representation. Whenthe digital asset becomes worthless, counselis in a posture of conflict with the client.In situations in which cryptocurrency coulddrop precipitously in value, counsel shouldkeep in mind how this could test an advo-cate’s duties of competence30 and loyalty31
When counsel accepts as compensationan item of property, rather than a govern-
Los Angeles Lawyer December 2018 23
ment-regulated legal currency, counselshoulders the risk of extreme swings invalue. As a result, counsel could eventuallybe providing legal services for very littlecompensation. Nevertheless, Rule 1.1 dir -ects that lawyers shall not intentionally,recklessly, with gross negligence, or repeat-edly fail to perform legal services withcompetence. This includes the mental andemotional ability necessary for the perfor-mance of such service.
If counsel accepts cryptocurrency ascompensation, counsel should understandand accept at the start of the representationthat significant volatility in value couldoccur. If the asset’s value drops sufficiently,this could create a reluctance by some busi-nesses to expend further resources on theclient’s behalf. In this type of situation inthe representation context, counsel’s andclients’ interests could diverge. Counselshould be especially sensitive to thesepotential conflicts in the context of cryp-tocurrency compensation analyses andclient-informed consent. To address thesepotential ethics challenges, counsel shouldfactor this possibility into the firm’s businessanalysis when deciding whether to acceptcryptocurrency. Counsel should provide aclear, documented explanation to clientsregarding the possibility of this volatility,with reasonable assurances regarding com-
petence and loyalty. Therefore, counselshould discuss the risks presented by cryp-tocurrency’s price volatility with the clientbefore counsel agrees to accept it as pay-ment for legal representation. If the clientseems to be unable to fully grasp the risksassociated with cryptocurrency, counselmust educate the client to ensure that theclient gives informed consent to the feearrangement, and this discussion shouldbe memorialized in the retainer.
Trust Accounting Procedures
Counsel may accept payments in cryp-tocurrency so long as counsel adjusts thelaw firm’s trust accounting procedures tocomply with the requirements of the StateBar of California and to track, protect,and manage cryptocurrency deposits andpayments. Safekeeping of cryptocurrencypresents unique technical challenges thatcounsel should understand before holdingcryptocurrency in trust for clients. NewRule 1.1 requires that counsel must per-form legal services with “competence,”meaning the learning and skill, and mental,emotional, and physical ability reasonablynecessary to render legal services.
In Ethics Opinion 2010-179, the StateBar of California directed that counseleducate themselves about security issuesbefore transmitting or storing confidential
client information. A similar duty can beexpected when transmitting or storingclient’s cryptocurrency.
However, cryptocurrency, as propertyrather than currency, is not easily depositedinto traditional trust accounts. Under Rule1.15, attorneys must clearly label clientproperty and maintain it in a “place ofsafekeeping.”32 Regarding client propertyheld in trust, counsel must keep a recordof: 1) each item of property held, 2) theperson on whose behalf the security orproperty is held, 3) the date of receipt ofthe security or property, 4) the date of dis-tribution, and 5) the person to whom dis-tributed. Cryptocurrency assets might bememorialized on an external (thumb) drive,for example. Proper safekeeping mightinclude deactivating the “delete” functionon this external drive, so no cryptocurrencyvalue could be accidentally deleted off thememory stick. The thumb drive would thenneed to be labelled, placed in a properlyclimate-controlled environment, and loggedinto the same location in which other prop-erty is logged. A duplicate drive might alsobe created, labelled “copy,” and maintainedin a different location.
Another alternative is for the law firmto establish a separate digital wallet foreach client making advance payments viacryptocurrency. To better protect crypto -
24 Los Angeles Lawyer December 2018
currency client trust accounts, counsel canenable multifactor authentications on theaccounts, securely maintain private keys,and regularly back up data.
Tracking for Tax Purposes
While counsel likely may ethically acceptcryptocurrency as payment for legal ser-vices, counsel also must competently trackthis income stream for tax payment pur -poses. Counsel may not fail to pay taxeson the equivalent value of cryptocurrencybased on a mistaken belief that these assetsare outside of ordinary tax bill calculations.
According to IRS guidance, for federaltax purposes, cryptocurrency is propertyand not foreign currency. For tax purposes,cryptocurrency should be treated as prop-erty, so the general tax principles that applyto property transactions govern the taxtreatment of cryptocurrency.
Generally, when counsel acquire prop-erty, counsel must record the fair marketvalue of the property (presumably, the valueat the time of recordation).33 This amountis the owner’s “basis” in the property. Ifthe asset is later exchanged and the fairmarket value has increased, the owner hasa taxable gain. If the sale price is less thanthe taxpayer’s basis, the taxpayer realizesa loss. Regarding cryptocurrency, if counselaccepts cryptocurrency valued at $500, thenbuys a good or service with that same cryp-tocurrency when the value has increased to$550, counsel has a $50 gain.
If counsel accepts numerous cryptocur-rencies as part of multiple transactionseach month, and the cryptocurrency’s valuefluctuates during the month that counselis holding the cryptocurrency, counsel’sbasis in each individual cryptocurrencywill vary, depending on the value at thetime of each transaction. Also, when coun-sel cashes out some cryptocurrency for dol-lars, counsel will have to decide both howmuch cryptocurrency to sell and whichparticular cryptocurrency to cash in. Ex -changing a particular cryptocurrency andnot another one held by the law firmdirectly affects the size of the taxable gainor reportable loss.
All of the law firm’s cryptocurrencymust be valued at its “fair market value,”according to the IRS, which can be basedon prices listed at the online exchanges.34
This does not solve the problem for lawfirms, however, because prices can fluctuatesignificantly and daily.
The volume of record-keeping to trackthe basis in each individual cryptocurrencyor part of a cryptocurrency and computegains and losses makes trade using thistype of barter impractical for most lawfirms. Nevertheless, automated procedures
to calculate exchanges simplify record keep-ing, and third-party providers who offerthese services can help protect lawyers fromdisadvantageous audit results.
Again, California practitioners likelymay ethically accept cryptocurrency ascompensation for legal services, so longas they understand and address all the spe-cific ethics concerns raised by cryptocur-rency transactions. Areas of special concerninclude technological competence in under-standing cryptocurrency and its transfer,sufficient terms in the re tainer agreementregarding cryptocurrency payment trans-actions, avoiding unconscionable fees, pro-viding refunds (if necessary), protectingconfidences, sufficient trust accountingprocedures for payments via cryptocur-rency, and payment of taxes.
Of special note is the fact that cryp-tocurrencies are subject to significant reg-ulatory uncertainty. Law enforcement insome jurisdictions study cryptocurrencytransactions for signs of possible illegalactivity, such as money laundering or salesof contraband. Lawmakers are still workingon crafting regulations to govern these assets,so practitioners accepting cryptocurrencyas payment should be sensitive to the factthat the regulatory landscape is likely subjectto change in the near future. n
1 See Satoshi Nakamoto, Bitcoin: A Peer-to-PeerElectronic Cash System, https://bitcoin.org/bitcoin.pdf(last viewed Oct. 23, 2018).2 Id.3 Rich Apodaca, Six Things Bitcoin Users ShouldKnow about Private Keys, Bitzuma, https://bitzuma.com/posts/six-things-bitcoin-users-should-know-about-private-keys (last viewed Oct. 23, 2018). See alsoSudhir Khatwani, Bitcoin Private Keys: EverythingYou Need To Know, Coinsutra, https://coinsutra.com/bitcoin-private-key/comment-page-1(last viewedOct. 23, 2018).4 Stephen T. Middlebrook, Bitcoin and Other VirtualCurrencies in Bankruptcy, ABA Business Law Section(Apr. 9, 2016), available at https://www.americanbar.org/publications/blt/2014/11/02_middlebrook.html.5 See sample attorney-client fee agreement, availableat http://www.calbar.ca.gov/Portals/0/documents/mfa/2015/2015_SampleFeeAgreements2-070115_r.pdf (feeagreement, hourly litigation, par. 6, p. 3), which pro-vides State Bar of California sample retainer language(last viewed Oct. 23, 2018).6 State Bar of Cal., Standing Comm. on Prof’l Re -sponsibility & Conduct, Formal Op. No. 2015-193.7 CAL. R. OF PROF’L CONDUCT R. 1.6 (effective Nov -ember 1, 2018), available at https://www.calbar.ca.gov/Portals/0/documents/rules/New-Rules-of-Professional-Conduct-2018.pdf.8 See, e.g., Latest Blocks, Blockchain, https://www.blockchain.com/explorer and Homepage, Etherscan,https://etherscan.io (both last viewed Oct. 23, 2018).9 BUS. & PROF. CODE §6068(e)(1); In Re Jordan 12Cal. 3d 575, 580 (1974).10 Los Angeles County Bar Ass’n, Prof’l Responsibility& Ethics Comm., Formal Op. No. 456.11 See State Bar of California sample fee agreementlanguage regarding e-mail and cloud services, availableat http://www.calbar.ca.gov/Portals/0/documents/mfa
/2015/2015_SampleWrittenFeeAgreementInstructions2-070115_r.pdf.12 Risks to consumers posed by virtual currencies,Consumer Financial Protection Bureau, http://files.con-sumerfinance.gov/f/201408_cfpb_consumer-advisory_virtual-currencies.pdf (last viewed Oct. 23, 2018).13 Goldstone v. State Bar, 214 Cal. 490 (1931).14 CAL. R. OF PROF’L CONDUCT R. 1.5, available athttp://www.calbar.ca.gov/Portals/0/documents/rules/Rule_1.5-Exec_Summary-Redline.pdf (red-line com -parison of new Rule 1.5 (effective as of November 1,2018) vs. former CAL. R. OF PROF’L CONDUCT R. 4-200).15 See Ojeda v. Sharp Cabrillo Hosp., 8 Cal. App. 4th1, 17 (1992); Los Angeles County Bar Ass’n, Prof’lResponsibility & Ethics Comm., Formal Op. No. 489.16 Clark v. Millsap, 197 Cal. 765, 785 (1926).17 Shaffer v. Superior Ct. (Simms), 33 Cal. App. 4th993, 1002 (1995).18 Aronin v. State Bar of Cal., 52 Cal. 3d 276 (1990).19 BUS. & PROF. CODE §§6147-6148. As with manycontract terms, the exchange rate measurement datecan be the product of negotiation. But the resultingagreement must not work to produce an unconscionableor illegal result. See CIV. CODE §§1635-1663.20 CIV. CODE §§1635-1663; Hefferman v. Bitton, 882F. 2d 379, 383-84 (9th Cir. 1989) (the date of sale ofproperty is when the party contracts to sell the propertyrather than the date of ultimate conveyance).21 People v. Pinedo, 60 Cal. App. 4th 1403, 1406 (1stDist., 1998) (citing People ex rel. Dept. of Transp. v.Yuki, 31 Cal. App. 4th 1754, 1769-71 (6th Dist.,1995) (quoting former CAL. R. OF PROF’L CONDUCT
R. 4-200(B) factors)).22 Isrin v. Superior Ct., 63 Cal. 2d 153 (1965) (con-tingent-fee agreements should be construed by appli-cation of rules relating to fiduciaries).23 Formerly CAL. R. OF PROF’L CONDUCT R. 4-200.24 New CAL. R. OF PROF’L CONDUCT R. 1.8.1 BusinessTransactions with a Client and Pecuniary InterestsAdverse to a Client succeeds CAL. R. OF PROF’L CON -DUCT R. 3-300 as of November 1, 2018.25 Effective November 1, 2018, succeeding CAL. R.OF PROF’L CONDUCT R. 1-310, 1-320, and 1-600.26 See Fletcher v. Davis, 33 Cal. 4th 61, 68 (2004).27 “Barter,” The Free Dictionary, https://legal-dictio-nary.thefreedictionary.com/barter and Barter Law andLegal Definition, USLegal, https://definitions.uslegal.com/b/barter (both last viewed Oct. 23, 2018).28 RESTATEMENT (THIRD) OF THE LAW GOVERNING
LAWYERS §126, cmt. c.29 Id. at §126(a).30 CAL. R. OF PROF’L CONDUCT R. 1.1, as of November1, 2018, succeeding CAL. R. OF PROF’L CONDUCT R.3-110. 31 Flatt v. Sup.Ct. (Daniel), 9 Cal. 4th 275, 289 (1994)(attorneys, as fiduciaries, owe a duty of loyalty totheir clients).32 Effective Nov. 1, 2018, succeeding CAL. R. OF PROF’LCONDUCT R. 4-100.33 The IRS discusses cryptocurrency in IRS RemindsTaxpayers to Report Virtual Currency Transactions,available at https://www.irs.gov/newsroom/irs-reminds-taxpayers-to-report-virtual-currency-transactions,which addresses I.R.S. Notice 2014-21, available athttps://www.irs.gov/pub/irs-drop/n-14-21.pdf (bothlast viewed Oct. 23, 2018).34 When computing gross income, lawyers who acceptcryptocurrency must calculate fair market value (inU.S. dollars or another real currency that can be con-verted into U.S. dollars) as of the date of receipt (I.R.S.Publication 525, Taxable and Nontaxable Income;Notice 2014-21). If the cryptocurrency is exchange-listed, with rates based on market supply and demand,the exchange rate value must be calculated in a rea-sonable manner, consistently applied (www.irs.gov/pub/irs-drop/n-14-21.pdf.
Los Angeles Lawyer December 2018 25
26 Los Angeles Lawyer December 2018
MIC
HA
EL C
ALL
AW
AY
Are cryptocurrencies a dangerous bubbleset to explode or the future of financial tech-nology? Should they be regulated andenforced as property, a security, a commodity,
or a virtual convertible currency? Presiding at the BerkshireHathaway 2018 annual shareholder meeting, famed investor andCEO Warren Buffet described the cryptocurrency Bitcoin as“probably rat poison squared.”1 Charles Munger, Berkshire’svice-chairman, added that cryptocurrencies are “just dementia.”2
Darren Marble, CEO of CrowdfundX, countered: “Years fromnow, when the dust settles, Warren Buffett’s miss on Bitcoin willbe the biggest miss of his career…. How could someone whodoesn’t use email possibly appreciate Bitcoin? They can’t.”3
With cryptocurrency prices soaring and falling tremendouslysince 2017 and new virtual currencies, blockchain-based companies,and Initial Coin Offerings (ICOs) coming out on a weekly basis,how will the “crypto-sheriffs” police this new financial Wild West?In addition to the Internal Revenue Service (IRS), the Securitiesand Exchange Commission (SEC), the Commodities Futures Trading
Commission (CFTC), the Department of Treasury’s FinancialCrimes Enforcement Network (FinCEN), and state regulators haveeach claimed authority to regulate and enforce a part of the “crypto-frontier,” at times creating overlapping jurisdiction. Their abilityto work together in this fluid environment and to create new rules,regulations, and law enforcement techniques to address the uniqueaspects of virtual currency will determine whether the Wild Westof cryptocurrency enforcement will be won.
ow has the SEC’s mission to “protect investors, maintainfair, orderly and efficient markets and facilitate capitalformation” intersected with the cryptocurrency world?4
On the one hand, the cryptocurrency world thus far hasbeen a miniscule but growing blip on the SEC’s radar. For instance,there was approximately $4 billion raised in ICOs in 2017 (manyICOs are similar to initial public offerings and operate as a meansfor blockchain-based businesses to raise funds for new projectsby selling digital tokens that confer some value or right to theusers).5 In contrast with this $4 bilaion raise, there were approx-
Nathan J. Hochman, the deputy chair of Morgan, Lewis & Bockius LLP’s White Collar Litigation and Government Investigations practice, formerly worked asthe assistant attorney general for the U.S. Department of Justice’s Tax Division and as an assistant U.S. attorney for the Central District of California.
The ability of federal and state regulators to work together will determinewhether the Wild West of cryptocurrency enforcement will be won
by NATHAN J. HOCHMAN
imately $75 trillion in securities traded annually on U.S. equitymarkets involving 4,100 exchange-listed public companies witha market capitalization of $31 trillion.6 Thus, though growingexponentially, the cryptocurrency market comparatively constituteswell less than one percent of the overall financial market.
On the other hand, the SEC realizes it needs to proactivelyget in front of regulating and enforcing laws dealing with cryp-tocurrencies before the investor public gets overrun with fraudulent,deceptive, and illegal activity. Thus, over the last number of years,the SEC has taken an expansive role of its jurisdiction, viewingthe issuance of virtual currencies as “securities” in most instances.In 2013, former SEC Chair Mary Jo White stated: “Regardlessof whether an underlying virtual currency is itself a security,interests issued by entities owning virtual securities or providingreturns based on assets such as virtual currencies likely would besecurities and therefore subject to our regulation.”7 The SECconcluded that cryptocurrencies constitute “securities,” regardlessof how they are labelled, if they fall within the “investment con-tract” category of securities.
ver 70 years ago, the U.S. Supreme Court in SEC v. W. J.Howey Company8 defined an “investment contract” as acontract, transaction, or scheme in which 1) a person investsmoney in a common enterprise, 2) with a reasonable expec-
tation of profits, 3) to be derived solely from the entrepreneurialor managerial efforts of others. The “Howey test” was designedto be “flexible” and “capable of adaptation to meet the countlessand variable schemes devised by those who seek the use of themoney of others on the promise of profits.”9 Simply calling cryp-tocurrency a “currency” or a “utility token” does not make it asecurity since the economic realities and substance of transaction,not its form, will control.10 Under this test, Jay Clayton, the currentSEC chair, has publicly stated in numerous settings that all thecryptocurrency offerings he has seen are securities, none of whichhave been registered and all of which have been traded on unlicensedand unapproved trading platforms. Since July 2017, warnings bythe SEC and Chair Clayton to the public have included:• In July 2017, the SEC issued investor bulletin warnings aboutICOs11 and a Report of Investigation under Section 21(a) of theSecurities Exchange Act of 1934 describing an SEC investigationof a decentralized autonomous organization (DAO) and its useof distributed ledger or blockchain technology to sell DAOTokens, a virtual currency, to raise capital; the SEC determinedthat DAO Tokens were securities and those who sold them hadto comply with federal securities laws.12
• In September 2017, the SEC created a new Cyber Unit to focus,among other things, on violations involving distributed ledgertechnology and ICOs.13
• In November 2017, Chair Clayton, speaking at an Institute onSecurities Regulation conference said, “I have yet to see an ICOthat doesn’t have a sufficient number of hallmarks of a secu-rity…. There is also a distinct lack of information about manyonline platforms that list and trade virtual coins or tokens offeredand sold in ICOs.”14
• In December 2017, Chair Clayton in an official SEC “Statementon Crypto currencies and Initial Coin Offerings” warned MainStreet investors: “By and large, the structures of [ICOs] that I haveseen promoted involve the offer and sale of securities and directlyimplicate the securities registration requirements and other investorprotection provisions of our federal securities laws.”15
• In January 2018, Chair Clayton at the Securities RegulationInstitute relayed a “simple” and “stern” message to securitieslawyers not to help clients structure cryptocurrency offeringswith many key features of securities offerings but advise the
clients that these products were not securities; he said the SECstaff would be on “high alert” for advice that ran contrary tothe “spirit of our securities laws and the professional obligationsof the U.S. securities bar.”16
• In February 2018, Chair Clayton testified before the SenateBanking, Housing and Urban Affairs Committee, opining: “Ibelieve every ICO I have ever seen is a security…. ICOs that aresecurities offerings, we should regulate them like we regulatesecurities offerings. End of story.”17
• In March 2018, the SEC’s “Statement on Potentially UnlawfulOnline Platforms for Trading Digital Assets,” warned investorsabout unregistered online trading platforms trading virtual cur-rencies and offered a lengthy list of questions investors shouldask before trading on such platforms.18
• In April 2018, Chair Clayton spoke at Princeton University on“Cryptocurrency and Initial Coin Offerings,” noting that whilenot all ICOs were fraudulent, the SEC must stop the ICO fraudstersin order to help the ICO industry mature overall.19
• In May 2018, the SEC set up a fake ICO website—howey -coins.com—complete with phony celebrity promoters that pur-ported to be the “only coin offering that captures the magic ofcoin trading profits and the excitement and guaranteed returnsof the travel industry” on an SEC-compliant exchange registeredwith the U.S. government. Through this website, the SEC hassought to educate the investing public about the various methodsof fraud used in similar offerings.• In June 2018, William Hinman, director of the SEC’s Divisionof Corporate Finance, spoke at the Yahoo Finance All MarketsSummit: Crypto and reemphasized that central to determiningwhether cryptocurrency is being sold as a security is whether itis part of an investment to nonusers by promoters to develop theenterprise.20 However, he made clear that when there is no longerany central enterprise being invested in—as with Bitcoin orEther—or when the digital asset is sold only to be used to purchasea good or service available through the network on which it wascreated, the sale of such digital asset most likely does not constitutea security.21
On the enforcement side, the SEC has brought enforcementactions relating to virtual currency against Ponzi schemers andfraudulent, unregistered virtual currency and ICO promoters. InJuly 2013, it filed its first action in SEC v. Shavers22 against anindividual who allegedly ran a Ponzi scheme based on Bitcoin-dominated investments. While the defendant argued that the SEClacked jurisdiction since the Bitcoin investments did not constitutesecurities, the court held that the transactions met the Howeytest as an investment contract subject to the SEC’s jurisdiction.23
Since Shavers, the SEC has brought numerous other enforcementcases focused on registration failures by operators of virtual cur-rency-related enterprises.24
Since late 2017, the SEC has brought numerous enforcementactions relating to ICOs. For example, in September 2017, theSEC filed a complaint against two companies and their owner,Maksim Zaslavskiy, for fraudulent conduct relating to two ICOsthat offered tokens for diamond and real estate investments withpromises of high profits, even though neither company had “anyreal operations,” lacked any of the purported “team of lawyers,”and could not pay investors any returns.25 In Novem ber 2017,the U.S. Department of Justice (DOJ) charged Zaslavskiy withfederal criminal securities fraud and conspiracy violations in con-nection with his alleged fraudulent cryptocurrency ICO scheme.26
In December 2017, the SEC obtained an emergency asset freezeto halt an ICO fraud by repeat securities law violator DominicLacroix that raised up to $15 million from thousands of investorsin four months by promising a 1,354 percent profit in less than
28 Los Angeles Lawyer December 2018
29 days.27 Also, in December 2017, the SEC obtained a cease-and-desist order against California-based Munchee, Inc., a com-pany selling unregistered digital MUN tokens for its blockchain-based food review service through an ICO that touted the effortsby the company to increase the value of the tokens and supporta secondary market for them.28
In April 2018, the SEC and DOJ brought parallel civil andcriminal cases against two Florida men who solicited investmentsin a $32 million ICO for the Centra Token that falsely claimed itwas backed by major payment processors like Visa, MasterCard,and Bancorp.29 The defendants are alleged to have completelyfabricated two company executives on its website, promised afictional dividend, and paid celebrities (music producer DJ Khaledand former boxing champion Floyd Mayweather) to promotethe Centra ICO.30
More recently, in September 2018, the SEC filed securitiescharges against an international securities dealer, 1pool Ltd., aka1Broker, and its Austria-based CEO Patrick Brunner in connectionwith security-based swaps funded with bitcoins.31 “Interna tionalcompanies that transact with U.S. Investors cannot circumventcompliance with the federal securities laws by using cryptocur-rency,”said Shamoil Shipchandler, SEC Director of the Fort WorthRegional Office.32
Understanding that it stands on the precipice of exponentialgrowth of cryptocurrency transactions and ICOs, the SEC hasshown that it will prosecute aggressively those who operate fraud-ulent cryptocurrency schemes, shut down expeditiously those whofail to register virtual currency securities and to license virtual cur-rency platforms and exchanges, and advise proactively the investingpublic about the dangers they face from cryptocurrency investments.However, as SEC Chair Clayton has ack nowledged, the SEC lacksauthority over transactions in currencies or commodities, includingcurrency trading platforms, as well as over utility tokens that donot have the hallmarks of securities.33 As such, the SEC’s abilityto regulate and enforce its laws in the cryptocurrency world isnecessarily limited, requiring it to work with other agencies and/orseek enhanced jurisdiction from Congress.
he CFTC has taken the position that virtual currency is acommodity and therefore subject to its oversight underthe Com modity Exchange Act (CEA).34 On March 6,2018, the CFTC’s cryptocurrency jurisdiction was con-
firmed in CFTC v. Patrick K. McDonnell and Cabbagetech,Corp. dba Coin Drop Markets, a case in which the CFTC hadsued the defendants under the CEA for operating a deceptiveand fraudulent virtual currency scheme.35 The defendants arguedthat the CFTC lacked authority to regulate cryptocurrency as acommodity or exercise its jurisdiction over fraud that does notdirectly involve the sale of futures or derivative contracts. U.S.District Judge Jack Weinstein ruled that since virtual currencieswere “goods” exchanged in a market for a uniform quality andvalue, they fell well within the common definition of “commodity”under the CFTC’s jurisdiction.36 Recently, in October 2018, aMassachusetts district court in CFTC v. My Big Coin Pay, Inc.,37
confirmed the CFTC’s authority to regulate virtual currency as a“commodity” under the CEA even when there were no currentfutures contracts for the virtual currency.
While the SEC and CFTC have overlapping jurisdictions,rather than compete, they have publicly stated their commit mentto coordinate on enforcement efforts in the virtual currency arena.SEC Chair Clayton and CFTC Chair J. Christopher Giancarlo,in a show of coordinated action, jointly penned an article in TheWall Street Journal on January 24, 2018, stating: “The CFTCand SEC, along with other federal and state regulators and
criminal authorities, will continue to work together to bringtransparency and integrity to these [cryptocurrency] markets and,importantly, to deter and prosecute fraud and abuse.”38 Thisstatement of coordination in virtual currency enforcement actionsechoed the statement issued the week before by the SEC andCFTC Enforcement Directors.39 Indeed, the CFTC has formedan internal virtual currency enforcement task force that hasworked cooperatively with its counterparts at the SEC.40
Since late 2017, the CFTC has aggressively brought numerousenforcement actions against virtual currency defrauders. InSeptember 2017, it brought its first virtual currency anti-fraudenforcement action involving Bitcoin against Gelfman Blue print,Inc. and its chief executive officer Nicholas Gelfman for operatinga Bitcoin Ponzi scheme that obtained more than $600,000 fromat least 80 customers by falsely promising to employ a high-fre-quency, algorithmic trading strategy to trade Bitcoin and then mis-representing the results of the strategy.41 Then, in January 2018,the CFTC brought three cryptocurrency enforcement actionsagainst: 1) My Big Coin Pay, Inc., which charged the defendantswith commodity fraud and misappropriating over $6 million fromcustomers through its sale of a virtual currency (My Big Coin) by,among other things, transferring customer funds into personalbank accounts and using those funds for personal expenses andthe purchase of luxury goods;42 2) The Entrepreneurs Head -quarters, Ltd., which charged the defendants with engaging in afraudulent scheme to solicit Bitcoin and making Ponzi-style paymentsto commodity pool participants from other participants’ funds,among other allegations;43 and 3) CabbageTech, Corp., whichcharged the defendants with fraud and misappropriation in con-nection with purchases and trading of Bitcoin and Litecoin.44
Not only has the CFTC actively engaged in enforcementactions, it also has encouraged the growth of regulated virtualcurrency derivatives (futures, options and swaps) trading platforms.In 2016, just one year after sanctioning the same trading platformfor wash trading, the CFTC granted formal registration to TeraEx -change, an early entrant in the market for Bitcoin financial deriv-atives.45 In July 2017, the CFTC approved LedgerX LLC, thefirst federally regulated Bitcoin options exchange platform in theUnited States.46 In December 2017, the CFTC allowed the CMEGroup Inc. and Cboe Global Markets Inc. to start offering Bitcoinfutures, an action that helped spike an 80 percent jump in thespot market.47
Like the SEC, the CFTC has recognized the limitations of itsauthority as it does not have jurisdiction under the CEA overmarkets or platforms conducting cash or “spot” transactions invirtual currencies or over participants on such platforms; indeed,no U.S. federal regulator has any oversight authority over spotvirtual currency platforms in the United States or abroad.48
Without such authority in these areas, the CFTC cannot imposeregistration requirements, surveillance and monitoring, transactionreporting, capital adequacy, trading system safeguards, or cybersecurity examinations on the participants.49
inCEN, a federal agency in charge of protecting theintegrity of the U.S. financial system, has joined otherfederal regulators to assert authority to regulate virtualcurrency pursuant to its mandate under the Bank Secrecy
Act (BSA) to police money laundering. Like other governmenten forcers, FinCEN proclaims its desire to “promote the positivefinancial innovations associated with [virtual currency’s] technology,while protecting our financial system from criminals, hackers,sanctions-evaders, and hostile foreign actors.”50 In guidanceissued in March 2013, FinCEN classified persons who create,obtain, distribute, exchange, accept, or transmit virtual currencies
Los Angeles Lawyer December 2018 29
into three groups: users, administrators, and exchangers.51 Userswho obtain virtual currency and use it to purchase real or virtualgoods or services are not subject to FinCEN’s regulations. Ad -ministrators who engage as a business in issuing, putting intocirculation, or redeeming a virtual currency, and exchangers whoengage as a business in the exchange of virtual currency for tra-ditional currency, funds, or other virtual currency, are subject tothe full panoply of FinCEN’s registration, reporting, and record-keeping requirements for “money services businesses” (MSBs).Those MSB requirements include registration, know your customer(KYC) regulations, anti-money laundering (AML) programs,obtaining customer identification information, and filing suspiciousactivity and currency transaction reports.52
FinCEN has taken an expansive view of the type of activitythat falls under its jurisdiction. In an advisory ruling in October2014, FinCEN stated that a virtual currency trading platformthat matched buyers and sellers of virtual currency acted as amoney transmitter subject to FinCEN’s regulations, even thoughthe trading platform did not transact directly with either partyand served only as facilitating broker.53 FinCEN explained thatthe “method of funding the transactions is not relevant to thedefinition of money transmitter” and that the term encapsulatesany person that accepts currency in whatever form “with theintent and/or effect of transmitting” currency in whatever formto another person or location.54 Thus, any entity that plays arole in the movement of virtual currency from one party toanother may be subject to FinCEN’s jurisdiction.
The power of FinCEN’s MSB requirements to mandate admin-istrators and exchangers of virtual currency to obtain identificationinformation of the virtual currency’s user and source of funds isthat they provide law enforcement with the ability to work itsway through the blockchain to track down the actual personidentified in potentially illegal cryptocurrency transactions.FinCEN regularly re ceives over 1,500 Suspicious Activity Reports(SARs) per month from MSBs and financial institutions describingpotentially illegal activity involving virtual currency.55 This illicitactivity has encompassed abusing virtual currency to facilitatecybercrime, black market sales of illicit products and services,and other high-tech crimes. FinCEN maintains a team of analyststo examine BSA filings from virtual currency MSBs includingfilings pertaining to digital coins, tokens, and ICOs to “proactivelyidentify trends and risks for money laundering, terrorist financing,and other financial crimes, and provide this information to U.S.law enforcement and other government agencies.”56 These analystsalso have worked with the IRS to comprehensively examine todate approximately one-third of the over 100 virtual currencyexchangers and administrators that have registered with FinCEN.
In addition to these examinations, starting in 2015, FinCENhas brought significant enforcement actions against exchangesand individuals who operate exchanges. In May 2015, FinCENinitiated its first action against a U.S. virtual currency exchange,Ripple Labs, over allegations that Ripple Labs failed to registeras a MSB in connection with selling its virtual currency, XRP,and failed to maintain an AML program. Ripple Labs agreed topay a civil money penalty of $700,000 and also resolved potentialcriminal charges with the DOJ by forfeiting $450,000.57 In 2015,the FinCEN working with the DOJ brought criminal chargesagainst Anthony Murgio and his co-conspirators for operatingCoin.mx, an unregistered Internet-based Bitcoin exchange, throughwhich he processed more than $10 million in illegal bitcoin trans-actions; he pled guilty and in June 2017 was sentenced to 5½years in prison.58 In July 2017, FinCEN brought its first caseagainst a foreign virtual currency exchanger, BTC-e, and assessedits largest penalty to date—$110 million—against BTC-e for vio-
lating U.S. AML laws.59 BTC-e was one of the largest virtualcurrency exchangers by volume in the world and facilitated trans-actions involving ransomware, computer hacking, identity theft,tax refund fraud schemes, public corruption and illegal drug saleson dark net markets like Silk Road, Hansa Market, and Alpha -Bay.60 FinCEN coordinated with the DOJ, IRS, FBI, U.S. SecretService, and Homeland Security Investigations to bring criminalcharges of money laundering and operating an unlicensed moneyservice business with a potential sentence of well over 10 years’imprisonment against Alexander Vinnik, one of BTC-e’s operators,and assess him a $12 million penalty.61 This action leaves nodoubt that FinCEN is willing to pursue virtual currency activitythat subverts U.S. law, regardless of where the offender is incor-porated or domiciled.
FinCEN also has worked in tandem with state licensing author-ities around the country to regulate those who are permitted tohandle people’s virtual currency. These state money transmittinglicensing regimes typically require detailed information about thecryptocurrency exchange’s business plans, financial statements,and compliance and cybersecurity programs, as well as requiringthe entity to be bonded and have the executives submit to back-ground checks and regular auditing. For instance, starting in 2015,New York instituted a “Bit License,” a business license that coverssubstantially all “virtual currency business activity” to the extentit touches New York or its residents. Through March 2018,however, the New York Department of Financial Services hadonly issued four BitLicenses, after a comprehensive review of eachcompany’s anti-money laundering, capitalization, consumer pro-tection and cybersecurity policies.
iven the overlapping jurisdictions and gaps in enforcement,there are many steps that Congress and law enforcementagencies can take to address the potential cryptocurrency-related crimes, ranging from Ponzi and other fraudulent
schemes to tax evasion, money laundering, terrorist financing,and outright theft. On one extreme, the U.S. can follow theenforcement and regulatory models of countries like Bang ladesh,Bolivia, Ecuador, Kyrgyzstan, Mor occo, Nepal, Vietnam, and,more recently, China and South Korea that have banned cryp-tocurrencies and/or shut down virtual currency online exchangesand ICOs completely.62 Such a black-and-white enforce mentmodel offers certain immediate advantages since it does notrequire lengthy and detailed examinations of virtual currencyexchangers or online trading platforms or a taxpayer’s basis in avirtual currency—it simply bans and criminalizes all actions asso-ciated with cryptocurrencies. It is a strategy consistent with thatadopted by certain financial institutions like Bank of America,Citigroup, Lloyds Banking Group, and J.P. Morgan Chase, all ofwhich have agreed to no longer allow cryptocurrencies to bepurchased with their credit cards.63 Internet companies, likeGoogle, Facebook and Twitter, also have stated that they willban all online advertisements for cryptocurrencies. The disad-vantages of this “complete ban” strategy, however, are thoserepeatedly voiced by all government regulators themselves. Sincethis financial technology has the potential, if properly regulated,to revolutionize financial markets and bring increased transparency,efficiency, and access not only to Wall Street but also to MainStreet investors and consumers, completely banning virtual cur-rencies will stunt innovation and divert these currencies ontounregulated, unlicensed platforms and facilitate illicit uses.
Another enforcement path lies with Congress either providinggreater jurisdiction to the SEC, CFTC, and FinCEN to addressthe gaps in their oversight or creating a new agency, like aCryptocurrency Exchange Commission (CEC), and invest it with
30 Los Angeles Lawyer December 2018
powers to cover all aspects of virtual cur-rency transactions.64 Such an agency wouldnot have the SEC’s limitations of beingunable to regulate utility tokens or moneytransmission businesses, the CFTC’s lackof jurisdiction to regulate participants,markets, or platforms conducting cash or“spot” transactions in virtual currencies,or FinCEN’s inability to impose uniformnational regulation and enforcement ofmoney services businesses currently subjectto the myriad of state licensing regimes.This type of an agency would be able tobetter centralize policy-making and enforce-ment, work with domestic constituents andits international counterparts since virtualcurrencies know no boundaries, and pro-vide clearer and more enhanced protectionsto consumers and participants in the cryp-tocurrency world going forward.65 Con -gress created the SEC in 1934 to implementgreater federal regulation of the securitiesmarket, while the CFTC was formed in1974 to improve regulation of the futuresand options markets and the FinCEN wasestablished in 1990 to combat money laun-dering, terrorist financing and other finan-cial crimes. Now, it is time for Congressto create the CEC as the federal “crypto-sheriff” to strike the right balance in reiningin the Wild West of Cryptocurrency.
As CFTC Chair Giancarlo accuratelyexpressed, such a balance is crucial intaking advantage of the potential that cryp-tocurrency has to offer while mitigatingits downside risks:
We are entering a new digital era inworld financial markets. As we sawwith the development of the Internet,we cannot put the technology genieback in the bottle. Virtual currenciesmark a paradigm shift in how wethink about payments, traditionalfinancial processes, and engaging ineconomic activity. Ignoring thesedevelopments will not make them goaway, nor is it a responsible regulatoryresponse…. With the proper balanceof sound policy, regulatory oversightand private sector innovation, newtechnologies will allow Americanmarkets to evolve in responsible waysand continue to grow our economyand increase prosperity.66 n
1 Tae Kim, Warren Buffet Says Bitcoin Is “ProbablyRat Poison Squared,” CNBC, May 6, 2018, https://www.cnbc.com.2 Id.3 Panos Mourdoukoutas, Warren Buffett Is WrongAbout Bitcoin, FORBES, May 7, 2018, available athttps://www.forbes.com.4 See testimony of SEC Chairman Jay Clayton, VirtualCurrencies: The Oversight Role of the U.S. Securitiesand Exchange Commission and the U.S. Commodity
Futures Trading Commission, before the U.S. SenateCommittee on Banking, Housing, and Urban Affairs(Feb. 6, 2018), available at https://www.banking.sen-ate.gov/imo/media/doc/Clayton%20Testimony%202-6-18.pdf [hereinafter Clayton Testimony].5 Id.6 Id. Indeed, the total value of all Bitcoin is approxi-mately $130 billion (based on a Bitcoin price of $7,700)which is approximately the same as a single “largecap” business like McDonalds (around $130 billion).While the total value of all outstanding virtual cur-rencies is estimated to be about $365 billion, the totalvalue of all gold in the world is estimated to be about$8 trillion. See testimony of CFTC Chair J. ChristopherGiancarlo before Senate Banking Committee (Feb. 6,2018), available at https://www.cftc.gov/PressRoom/SpeechesTestimony/opagiancarlo37 [hereinafterGiancarlo Testimony).7 Letter from Mary Jo White, SEC Chair, to Hon.Thomas P. Carper, Chairman, Senate Committee onHomeland Security and Governmental Affairs (Aug.30, 2013), available at http://online.wsj.com/public/resources/documents/VCurrenty111813.pdf.8 SEC v. W. J. Howey Co., 328 U.S. 293, 301 (1946).9 Id. at 299.10 Tcherepnin v. Knight, 389 U.S. 332, 336 (1967). SeeSEC Chair Jay Clayton, Statement on Crypto currenciesand Initial Coin Offerings (Dec. 11, 2017), available athttps://www.sec.gov/news/public-statement/statement-clayton-2017-12-11 [hereinafter Clayton Statement].SEC Chair Clayton emphasized how the substance ofthe virtual currency rather than its label as a token orcurrency will control, e.g., if a token represents a par-ticipation interest in a book-of-the-month club, thatmay not implicate the securities laws and be an efficientway to fund the future acquisition of books for tokenholders. However, if the token is more analogous toan interest in a yet-to-be-built publishing house withthe authors, books and distribution networks all tocome and the offering emphasizes the secondary markettrading profit potential of the tokens based on theefforts of others, these are key hallmarks of a securityand securities offering. 11 Investor Bulletin: Initial Coin Offerings, InvestorAlerts and Bulletins, SEC (July 25, 2017),https://www.sec.gov/oiea/investor-alerts-and-bulletins/ib_coinofferings.12 Press Release, SEC No. 2017-131, SEC Issues In -vestigative Report Concluding DAO Tokens, a DigitalAsset, Were Securities (July 25, 2017), available athttps://www.sec.gov/news/press-release/2017-131.13 Press Release, SEC No. 2017-176, SEC AnnouncesEnforcement Initiatives to Combat Cyber-Based Threatsand Protect Retail Investors (Sept. 25, 2017), availableat https://www.sec.gov/news/press-release/2017-176.14 Dave Michaels & Paul Vigna, SEC Chief FiresWarning Shot against Coin Offerings, WALL ST. J.,Nov. 9, 2017, available at https://www.wsj.com/arti-cles/sec-chief-fires-warning-shot-against-coin-offerings-1510247148. Joseph Grundfest, a former SEC com-missioner, echoed SEC Chair Clayton’s warning aboutICOs: “ICOs represent the most pervasive, open andnotorious violation of the federal securities laws sincethe Code of Hammurabi.” Nathaniel Popper, InitialCoin Offerings Horrify a Former SEC Regulator, N.Y.TIMES, Nov. 26, 2017, available at https://www.nytimes.com.15 Clayton Statement, supra note 10.16 Opening Remarks of SEC Chair Jay Clayton at theSecurities Regulation Institute (Jan. 22, 2018), availableat https://www.sec.gov/news/speech/speech-clayton-012218.17 Stan Higgins, SEC Chief Clayton: “‘Every ICO I’veSeen Is a Security,” Coindesk, Feb. 6, 2018, https://www.coindesk.com/sec-chief-clayton-every-ico-ive-seen-security.
18 SEC Public Statement on Potentially Unlawful OnlinePlatforms for Trading Digital Assets (Mar. 7, 2018),available at https://www.sec.gov/news/public-state-ment/enforcement-tm-statement-potentially-unlawful-online-platforms-trading.19 Nikhilesh De & Mahishan Gnanaseharan, SECChief Touts Benefits of Crypto Regulation, Coindesk,Apr. 6, 2018, https://www.coindesk.com/sec-chief-not-icos-bad.20 Speech of William Hinman, Director, SEC Divisionof Corporate Finance, Digital Asset Transactions:When Howey Met Gary (Plastic) (June 14, 2018),avail able at https://www.sec.gov/news/speech/speech-hinman-061418.21 Id.22 SEC v. Shavers, No. 4:13-CV-416, 2013 WL4028182 (E.D. Tex. Aug. 6, 2013).23 Id. at *2.24 See, e.g., In re Erik T. Voorhees (Order InstitutingCease-and-Desist Proceedings, June 3, 2014), availableat https://www.sec.gov/litigation/admin/2014/33-9592.pdf (sanctioning the co-owner of two websitesfor soliciting investments in offerings of unregisteredsecurities valued in Bitcoin); In re BTC Trading, Corp.,et al., (Order Instituting Cease-and-Desist Proceedings,Dec. 8, 2014), available at https://www.sec.gov/litigation/admin/2014/33-9685.pdf (sanctioning oper-ator of two online platforms that traded securitiesusing virtual currency without registering them as bro-ker-dealers or stock exchanges); In re Sand Hill Ex -change, et al., (Order Instituting Cease-and-DesistProceedings, June 17, 2015), available at https://www.sec.gov/litigation/admin/2015/33-9809.pdf (sanc-tioning a company that accepted virtual currency inconnection with the purchase and sale of complexderivatives products outside the regulatory frameworkof a national securities exchange and without therequired registration statements).25 Press Release, SEC No. 2017-185, SEC ExposesTwo Initial Coin Offerings Purportedly Backed byReal Estate and Diamonds (Sept. 29, 2017), https://www.sec.gov/news/press-release/2017-185-0.26 United States v. Zaslavskiy, No. 1:17-cr-00647-RJD (E.D. N.Y. Nov. 21, 2017), available at https://ia802803.us.archive.org/35/items/gov.uscourts.nyed.409850/gov.uscourts.nyed.409850.7.0.pdf. In Sep -tember 2018, the court rejected Zaslavskiy’s argumentin his motion to dismiss that he could not be chargedwith securities fraud because the digital tokens he soldwere not securities. Id., Doc. 37, Memorandum &Order (Sept. 11, 2018).27 Press Release, SEC No. 2017-219, SEC EmergencyAction Halts ICO Scam (Dec. 4, 2017), available athttps://www.sec.gov/news/press-release/2017-219.28 Press Release, SEC No. 2017-227, Company HaltsICO after SEC Raises Registration Concerns (Dec. 11,2017), available at https://www.sec.gov/news/press-release/2017-227.29 United States v. Sohrab Sharma and Robert Farkas,No. 18 Mag 2695 (S.D. N.Y. Mar. 31, 2018); SEC v.Sohrab Sharma and Robert Farkas, No. 1:18-cv-02909(S.D. N.Y. April 2, 2018).30 Jody Godoy, Crypto “Visa” Card Duo Accused of$32M ICO Fraud, Law360 (Apr. 3, 2018), https://www.law360.com/articles/1029085/crypto-visa-card-duo-accused-of-32m-ico-fraud.31 SEC v. 1Pool Ltd a.k.a. 1Broker and Patrick Brunner,Case No. 1:18-cv-02244 (Sept. 27, 2018), availableat https://www.sec.gov/litigation/complaints/2018/comp-pr2018-218.pdf.32 Press Release, SEC Charges Bitcoin-Funded SecuritiesDealer and CEO (Sept. 27, 2018), available at https://www.sec.gov/news/press-release/2018-218.33 Clayton Testimony, supra note 4.34 See In re Coinflip, Inc., et al., CFTC No. 15-29(Sept. 17, 2015), available at https://www.cftc.gov/sites
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/default/files/idc/groups/public/@lrenforcementactions/documents/legalpleading/enfcoinfliprorder09172015.pdf.35 CFTC v. Patrick K. McDonnell, et al., No. 1:18-cv-00361-JBW, Memorandum & Order (E.D. N.Y. Mar.6, 2018), available at https://www.cftc.gov/sites/default/files/idc/groups/public/@lrenforcementactions/documents/legalpleading/enfcoindroporder030618.pdf. 36 Id. at *24.37 CFTC v. My Big Coin Pay, Inc., Case No. 1:18-cv-10077-RWZ, Doc. 106 (D. Mass Sept. 26, 2018),avail able at https://www.scribd.com/document/379774783/CFTC-v-My-Big-Coin-Pay-Plaintiff-Oppo sition-5-18-18.38 Jay Clayton & J. Christopher Giancarlo, RegulatorsAre Looking at Cryptocurrency: At the SEC and CFTCWe Take Our Responsibility Seriously, WALL ST. J., Jan.24, 2018, available at https://www.wsj.com/articles/regulators-are-looking-at-cryptocurrency-1516836363.39 SEC Public Statement, Joint Statement by SEC andCFTC Enforcement Directors Regarding VirtualCurrency Enforcement Actions (Jan. 19, 2018), avail-able at https://www.sec.gov/news/public-statement/joint-statement-sec-and-cftc-enforcement-directors.40 Giancarlo Testimony, supra note 6.41 CFTC Release No. 7614-17, CFTC Charges NicholasGelfman and Gelfman Blueprint, Inc. with FraudulentSolicitation, Misappropriation, and Issuing FalseAccount Statements in Bitcoin Ponzi Scheme (Sept. 21,2017), https://www.cftc.gov/PressRoom/PressReleases/pr7614-17.42 CFTC Release No. 7678-18, CFTC Charges RandallCrater, Mark Gillespie, and My Big Coin Pay, Inc.with Fraud and Misappropriation in Ongoing VirtualCurrency Scam (Jan. 24, 2018), https://www.cftc.gov/PressRoom/PressReleases/pr7678-18.43 CFTC Release No. 7674-18, CFTC ChargesColorado Resident Dillon Michael Dean and His
Company, The Entrepreneurs Headquarters Limited,with Engaging in a Bitcoin and Binary Options FraudScheme (Jan. 19, 2018), https://www.cftc.gov/PressRoom/PressReleases/pr7674-18.44 CFTC Release No. 7675-18, CFTC Charges PatrickK. McDonnell and His Company CabbageTech, Corp.d/b/a Coin Drop Markets with Engaging in FraudulentVirtual Currency Scheme (Jan. 19, 2018), https://www.cftc.gov/PressRoom/PressReleases/pr7675-18.45 Stan Higgins, CFTC Grants Full Registration toBitcoin Swaps Trading Platform, Coindesk, May 26,2016, https://www.coindesk.com/us-swap-platform-registration-cftc.46 Michael Del Castillo, CFTC Formally RegistersNew Cryptocurrency Swap Execution Facility, Coin -desk, July 7, 2017, https://www.coindesk.com/bitcoin-ether-cftc-formally-registers-first-cryptocurrency-swap-execution-facility.47 Benjamin Bain, CFTC Warns of Bitcoin-FuturesDangers, After Allowing Them, BLOOMBERG, Dec. 15,2017, available at https://www.bloomberg.com/news/articles/2017-12-15/cftc-warns-of-dangers-from-bitcoin-futures-after-allowing-them.48 Giancarlo Testimony, supra note 6.49 Id.50 Letter from Drew Maloney, Assistant Secretary forLegislative Affairs, U.S. Dep’t of Treasury to SenatorRon Wyden (Feb. 13, 2018), available at https://coincenter.org/files/2018-03/fincen-ico-letter-march-2018-coin-center.pdf [hereinafter FinCEN Letter].51 Application of FinCEN’s Regulations to PersonsAdministering, Exchanging, or Using Virtual Cur -rencies, FIN-2013-G001, U.S. Dep’t Treasury Fin.Crimes Enforcement Network (March 18, 2013),https://www.fincen.gov.52 Id. An MSB must report transactions that the MSB“knows, suspects, or has reason to suspect” are sus-
picious, if the transaction is conducted or attemptedby, at, or through the MSB, and the transaction involvesor aggregates to at least $2,000.00 in funds or otherassets. A transaction is “suspicious” if the transaction:1) involves funds derived from illegal activity; 2) isintended or conducted in order to hide or disguisefunds or assets derived from illegal activity, or to dis-guise the ownership, nature, source, location, or controlof funds or assets derived from illegal activity; 3) isdesigned, whether through structuring or other means,to evade any requirement in the Bank Secrecy Act orits implementing regulations; 4) serves no business orapparent lawful purpose, and the MSB knows of noreasonable explanation for the transaction after exam-ining the available facts, including the backgroundand possible purpose of the transaction; or 5) involvesuse of the MSB to facilitate criminal activity. 31 C.F.R.§1022.320(a)(2).53 Request for Administrative Ruling on the Applicationof FinCEN’s Regulations to a Virtual Currency TradingPlatform, FIN-2014-R011, U.S. Dep’t Treasury Fin.Crimes Enforcement Network (Oct. 27, 2014), https://www.fincen.gov.54 Id.55 Prepared Remarks of FinCEN Director Kenneth A.Blanco delivered at the 2018 Chicago-Kent Block (Legal)Tech Conference (Aug. 9, 2018), available at https://www.fincen.gov/news/speeches/prepared-remarks-fincen-director-kenneth-blanco-delivered-2018-chicago-kent-block.56 FinCEN Letter, supra note 50.57 FinCEN Fines Ripple Labs Inc. in First Civil En -forcement Action against a Virtual Currency Ex -changer, U.S. Dep’t Treasury Fin. Crimes EnforcementNetwork (May 5, 2015), https://www.fincen.gov. Asof 2015, XRP was the second-largest cryptocurrencyby market capitalization after Bitcoin.58 Press Release, U.S. Dep’t Justice, Operator ofUnlawful Bitcoin Exchange Pleads Guilty in Multi -million-Dollar Money Laundering And Fraud Scheme(Jan. 9, 2017), https://www.justice.gov/usao-sdny/pr/operator-unlawful-bitcoin-exchange-pleads-guilty-multimillion-dollar-money-laundering.59 FinCEN Fines BTC-e Virtual Currency Exchange$110 Million for Facilitating Ransomware, Dark NetDrug Sales, U.S. Dep’t Treasury Fin. Crimes Enforce -ment Network (July 27, 2017), https://www.fincen.govnews/news-releases/fincen-fines-btc-e-virtual-currency-exchange-110-million-facilitating-ransomware.60 Id.61 Press Release, U.S. Dep’t Justice, Russian Nationaland Bitcoin Exchange Charged in 21-Count Indictmentfor Operating Alleged International Money LaunderingScheme and Allegedly Laundering Funds From Hackof Mt. Gox (July 26, 2017), https://www.justice.gov/usao-ndca/pr/russian-national-and-bitcoin-exchange-charged-21-count-indictment-operating-alleged. Adefendant is presumed innocent until and unless thegovernment proves him guilty beyond a reasonabledoubt; an indictment is not evidence and only indicatesthat a grand jury found by probable cause that thedefendant committed the crimes.62 Giancarlo Testimony, supra note 6, at n.4.63 Arjun Kharpal, UK Bank Lloyds Follows USCounterparts in Banning People from Buying Crypto -currencies with Credit Cards, CNBC, Feb. 5, 2018,https://www.cnbc.com/2018/02/05/lloyds-bans-use-of-credit-cards-to-buy-cryptocurrencies-like-bitcoin.html.64 See Peter J. Henning, Should Congress Create aCrypto-Cop?, N.Y. TIMES, Feb. 14, 2018, https://www.nytimes.com.65 Jennifer Ruther, The United States May LicenseBitcoin and Cryptocurrency Exchanges, Oct. 3, 2017,https://bankinnovation.net/2017/10/the-united-states-may-license-bitcoin-and-cryptocurrency-exchanges.66 Giancarlo Testimony, supra note 6.
32 Los Angeles Lawyer December 2018
34 Los Angeles Lawyer December 2018
I was pleasantly surprised to learn that the
Los Angeles County Bar Association has
brought back the Bridging the Gap program.
For the uninitiated, “Bridging the Gap” is
an all-day orientation program specifically
geared towards the very new attorney (bar-
rister), recently successful bar applicants,
or recent law school graduates. The aim of
the program is to assist the new lawyer in
“bridging the gap” from law school to actu-
ally practicing law. Last April, LACBA rein-
troduced the program in an event, “Bridging
the Gap: From Books to Billables,” that took
place at Loyola Law School. I understand
that LACBA plans to sponsor a similar event
in the early part of the coming year, and I
wholeheartedly support and encourage this
plan.
I am not quite sure how or why it hap-
pened, but several years ago I was invited
to be a presenter for another Bridging the
Gap program on the course for those “new-
bies” who desired to open their own law
offices and handle criminal defense cases.
It is important at this point to explain that I
had made the decision to be a lawyer when
I was in the third grade at Rosecrans Ele -
men tary School in Compton. My father,
Maxcy D. Filer, was very involved in the
civil rights movement of the 1950s and
1960s. My mother, Blondell Filer, and he
were founding members of the Compton
Branch of the NAACP, and my dad served
for several years as president of the local
branch. During this time, my father also
was attending law school in the evenings
at the small (now defunct) Van Norman
University Law School.
The NAACP meetings were held in our
living room, which served as the headquar-
ters for the newly organized branch. I fre-
quently sat in (i.e., spied) on the meetings.
I distinctly remember their discussions about
boycotts, picket lines, and discrimination
lawsuits with the rhetorical inquiry at the
end of every discussion being “Have we run
this by our lawyers?” or “What did the attor-
ney say about this strategy?” So, I immedi-
ately learned (and liked) that this “lawyer
person” seemed to carry a lot of authority.
PROFILE
The “Bridge”is BackA judge reflects on how powerful mentorshipbridged the gap from his own childhood to alegal career, appointment to the bench, andeventual mentoring in “Bridging the Gap”
The Honorable Kelvin D. Filer is ajudge in the Superior Court ofCalifornia for Los Angeles County,currently serving in Compton. Healso is a longtime member of the LosAngeles County Bar Association.
by the Honorable Kelvin D. Filer
Los Angeles Lawyer December 2018 35
As my dad had legal aspirations of his own,
he, of course, encouraged me to pursue
being an attorney. Hence, my ultimate
dream was to become a lawyer in private
practice with my dad in my hometown of
Compton, California.
I graduated from UC Berkley’s School
of Law in 1980, passed the California Bar
Examination, worked for two years with
the California Office of the State Public
Defender, and in 1982, opened my own
general law practice in Compton with an
emphasis on criminal defense work. I hired
my dad as my law clerk and my mom as my
secretary. (My father had graduated from
Van Norman Law School in 1967 but was
not yet a lawyer at the time that I set up
practice. His story is worth an entirely sep-
arate article. Google “Maxcy D. Filer,” and
it will soon be apparent why.)1 I maintained
a private law practice for 11 years. I loved
practicing law and made a good living for
me and my family; however, in December
1993, I was hired as a Compton Municipal
Court Com mi ssioner. This event initiated
my career as a judicial bench officer. In
2002, Governor Gray Davis appointed me
to be a Superior Court judge.
My background reflects the importance
of having mentors for our profession. I know
that the success of my private law practice
was due first to the example and encour-
agement I received from both my parents.
Beyond that, I am deeply indebted to the
guidance, support, and mentorship of
dozens of attorneys that I met via my dad’s
involvement with the NAACP, including
Roland Hall, Johnnie Cochran, Carl Jones,
Phil Jefferson, Arnold Widener, Nelson
Atkins, and Dean Farrar, just to name a few.
In different ways they all shared suggestions
and helped me to prepare to be a solo prac-
titioner. I am fully aware that I stand on
their shoulders and have always believed
in the commitment of “giving back.” We
all should recognize a commitment to help
others, particularly those who are just start-
ing their journey. Thus, when I was asked
to participate as a presenter for that earlier
Bridging the Gap program many years ago,
I readily agreed to serve. I was asked to
present practical tips and insights to ‘’bridge
The Honorable Kelvin D. FilerLos Angeles Superior Court Judge Kelvin D. Filer, was “born, raised, and educated” in
Compton, California, which he likes to emphasize in order to send a message to young
people from the area that “if I made it, so can you.” He majored in political science at
the University of California at Santa Cruz where he received a Bachelor of Arts degree
in 1977, graduating with honors. After receiving his J.D. from UC Berkeley (Boalt Hall)
in 1980, Filer practiced law as a California deputy state public defender for two years.
Then, in 1982, he opened a private law practice in his hometown with an emphasis on
criminal defense work. He became a commissioner for the Compton Municipal Court in
July 1993, later serving as a Los Angeles County Superior Court commissioner after uni-
fication of the courts in 2000. Upon being appointed as a judge of the Superior Court
in Los Angeles, in 2002, Filer asked that his assignment remain in Compton. He cur-
rently presides over a long cause felony trial court.
During Filer’s term as deputy state public defender he argued and won a landmark
case before the California Supreme Court in 1980. The case was People v. Taylor,1 a
unanimous decision holding that criminal defendants have a right to wear civilian
clothing—”the garb of innocence”—during their trials. Moreover, as a judge, Filer,
issued a high-profile ruling in September 2011 in the case of Obie Anthony, in which
Loyola Law School’s Project for the Innocent played a major role in uncovering new
evidence that exonerated Anthony.2 Filer found that Anthony had been wrongfully
convicted of murder in 1995, and after holding an evidentiary hearing, Filer reversed
the conviction.3 In Filer’s words, “An injustice had been done by this man’s conviction”
and he ordered Anthony released from custody. Judge Filer subsequently made a judi-
cial determination that Anthony was “factually innocent” of all charges. Since Filer’s
ruling, the State of California has implemented legislation that increases the penalties
for California prosecutors who hide exculpatory material from the defense.
True to his belief in the commitment of “giving back,” Filer works very closely with
the youth of the community by participating in the Courthouse Interchange program
as a presenter/lecturer at Compton High School and serves as a judge for the Teen
Court Program at Jordan and Compton high schools. Filer serves as a member of the
California Judges Association and is a founding member of the Association of African
American California Judicial officers. A life member of the NAACP, he is also a life
member of both the California Association of Black Lawyers and the John M. Langston
Bar Association. He served several years as a member of the Board of Directors for the
Compton Chamber of Commerce beginning in 1984. In 2007, Judge Filer was the recipi-
ent of the UC Santa Cruz “Distinguished Social Services Alumni Award” in recognition
for his achievements in community, education, and service. Among the many other
honors and recognitions he has received, Judge Filer cherishes that in 2016 he was rec-
ognized as an “Outstanding Father” by the Long Beach Branch of the NAACP and, in
2017, he was the recipient of the Unsung Hero: Community Judiciary Award by the City
of Compton. Also, in 2017, Judge Filer was inducted into the John M. Langston Bar
Association Hall of Fame.
1 People v. Taylor, 31 Cal. 3d 488 (1982).2 Aaron Smith, Trial and Error, LMU MAGAZINE, Fall 2011, available at https://magazine.lmu.edu/articles/trial-and-error.3 Jack Dolan, Judge overturns murder conviction in 1994 slaying, L.A. TIMES, Oct. 10, 2011, available at
latimes.com.
36 Los Angeles Lawyer December 2018
the gap” for aspiring solo practitioners. I
was very fortunate and had the great honor
of co-presenting with some of our brightest
legal minds: the Honorable Lance A. Ito,
the Honorable Victoria M. Chavez, and famed
attorney Mark J. Geragos.
In that presentation, a variety of topics
were discussed, including starting a law
office, the basic necessities that are re -
quired, why choose criminal defense work,
standard library materials, and how to get
cases. Telephone numbers and procedures
to locate individuals who are being detained
in the county jail were also provided. The
presenters made it a point to give practice
tips for court appearances that are not
provided in law school. For example, before
appearing in court, counsel should try to
get some background information about
the judge from the published “judicial
profiles” in the Daily Journal. Once a court
date is assigned, counsel needs to arrive
at the courtroom early and talk to the pub -
lic defender, other defense counsel, the
prosecutor, the bailiff, and the judicial
assistant—they are all excellent sources of
information in the courtroom to discover
what to expect once the case is called. We
pointed out that there are certain items to
have handy in one’s briefcase—business
cards, calendar datebook, camera, cassette
recorders, court directory with telephone
numbers. Of course, with today’s technol-
ogy these items or their equivalent can all
be maintained on a cellphone or iPad.
We talked about respecting courtroom
etiquette, to wit, counsel should always
make an introduction to the bailiff, the
jud i cial assistant, and the court reporter.
The bailiff should always be asked for
permission to approach the judicial assis-
tant’s desk. Counsel should always provide
a business card to the judicial assistant and
spell his or her name for the court reporter.
Counsel should always know the client’s cal-
endar number on the court’s docket so
counsel will be ready to answer when the
case is called. Counsel should always be an
advocate for his or her client but at the same
time be respectful to the court and courteous
to opposing parties and counsel.
These were some of the practical tips
and suggestions that were provided “back
in the day” at that former Bridging the Gap
program. I can attest that there is still very
much a need for this type of mentorship. I
also feel gratified that there are individuals
who are ready and willing to serve as pre-
senters for the various classes. I am confident
that all of us will benefit from the exchange
of this type of information. That is why I am
grateful to hear that “the bridge is back”!
1 See, e.g., David Margolick, At the Bar; A Man's Pride and
Persistence Conquer the California Bar Exam's Most Fam ous
Losing Streak, N.Y. TIMES, Sept. 13, 1991, available at
https://www.nytimes.com/1991 /09/13/news/bar-man-s
-pride-persistence-conquer-california-bar-exam-s-most
-famous-losing.html andAnn M. Simmons, Maxcy Dean Filer
dies at 80; 'Mr. Compton' served on City Council and sought
to empower blacks, L.A. TIMES, Jan. 15, 2011, available at
http://articles.latimes.com/2011/jan/15/local/la-me-maxcy
-filer-20110115.
Judge Filer mentoring students at Bunche Elementary School in Compton at their annual “Career Day” event.
38 Los Angeles Lawyer December 2018
Justice Ruth Bader Ginsburg’s My OwnWords, first published in 2016, cameout in paperback this August. The reis-suance could not have come at a bettertime. What Justice Ginsburg has to sayoffers an antidote to all that was poi-sonous in the recent drama surroundingwhat Oyez.org dubs the return, afterhalf a century, of “a solid conservativemajority” to the U.S. Supreme Court.Both those who applaud and those whoabhor that return will gain perspectiveon the long-range life of the Court fromthis readable volume.
My Own Words collects some threedozen of Justice Ginsburg’s speeches,essays, briefs, and bench announce-ments—a minute selection from her
writings but one that illuminates much about her mind andheart. Edited by law professors Mary Hartnett and Wendy W.Williams, My Own Words was intended as a follow-up to abiography to be authored by Hartnett and Williams. But theauthors are deferring the biography until, as the Justice explainsin the preface, “[her] Court years neared completion,” so theorder of publication has flipped. The collection is a sampler ofJustice Ginsburg’s early essays and op-ed pieces; commentaryon constitutional law; and excerpts from briefs and opinions,including bench announcements for seven resounding Ginsburgdissents. It provides an overview of all she stands for, seenthrough her eyes.
The Justice’s insights on history, the Constitution, and judicialdecision-making, as represented in My Own Words, are thought-provoking, persuasive, and packaged in writing that is spirited,clear, and witty. Take, for example, Justice Ginsburg’s discussion,in a 2008 lecture, of the impact of the 1976 case, Craig v. Boren.1
In Craig, the Supreme Court recognized a heightened level ofscrutiny for laws creating gender-based discriminations. Applyingthat standard, the Court struck down a law allowing women topurchase “near beer” at a younger age than men. Justice Ginsburgcalls Craig a key doctrinal advance but wishes the Court hadannounced the advance in “a less frothy case.” Other writingsin the sampler range in subject from opera to Supreme Courtlife off the bench to tributes to Justices Sandra Day O’Connorand Louis Brandeis, as well as others Justice Ginsburg calls“Waypavers and Pathmakers.” Wit, clarity, and persuasive rea-soning pervade them all.
Of particular interest are Justice Ginsburg’s reflections onattorney Ginsburg’s Supreme Court victories in the cause ofwomen’s rights. Beyond their general interest, these carry animportant reminder as the Supreme Court enters a phase that
some hope, and some fear, will drastically change the directionof constitutional law—Those victories were not handed downby a “liberal” Court but by the Burger Court of the 1970s,with its Republican-appointed majority. The last of them, Durenv. Missouri effectively overruled, 8 to 1, a decision of the (usually)liberal Warren Court, Hoyt v. Florida. The same Court thathad decided Brown v. Board of Education approached genderequality in a way diametrically opposite to its approach to racialequality in Brown. Hoyt unanimously upheld a state law thatdisproportionately excluded women from jury venires.
Justice Ginsburg also reminds, through remembrances of herclose friend, the late Justice Antonin Scalia, that progressivesand originalists can work together. She calls the Court “a palerplace” without him, revealing as much about the way JusticeGinsburg believes the Supreme Court should function as aboutthe two justices’ friendship. Their fiery and not infrequent dis-agreements on the law were not, to her, an ideological war but acollegial and constructive dialectic. A case in point is UnitedStates v. Virginia, an 8-1 decision authored by Justice Ginsburg,from which Justice Scalia dissented. In it, the Court ruled thatthe exclusion of women from the Virginia Military Institute vio-lated the Equal Protection Clause of the Fourteenth Amend ment.Justice Ginsburg relates how her opinion evolved through anexchange of a dozen drafts of her opinion and Justice Scalia’sdissent. By the time the two “agreed to say ‘Basta!’” the opinionof the Court was, in the Justice’s modest words, stronger (p.281). Otherwise stated, it was an opinion worthy of the momen-tous decision it embodied. That, the Justice avers, happenedevery time she wrote for the majority and Scalia dissented.“Justice Scalia honed in on the soft spots and gave me just thestimulation I needed to strengthen the Court’s decision.” (p. 40)
This brings up Part Five of My Own Words, “The JusticeOn Judging And Justice.” There, Justice Ginsburg distills herview of the way “judging” and “justice” connect. Starting withthe fourth piece, “Speaking In A Judicial Voice,” the 1993 JamesMadison Lecture on Constitutional Law at New York University,the Justice charts a judicial philosophy that is both bold andnuanced. She endorses the concept of an evolving Constitution,but she hews to an essentially conservative approach to judicialinnovation, favoring “measured motions” for constitutionaladjudication. She is not, for example, a fan of Roe v. Wade—astance that lost her considerable support from women’s rightsleaders when President Clinton nominated her for the SupremeCourt a few months after the Madison lecture. She explainsthat Roe, in her view, addressed women’s reproductive rightsfrom a constitutionally weak perspective and, in that way, fueled
by the book REVIEWED BY TYNA THALL ORREN
Tyna Thall Orren is an appellate attorney and a partner in the firm of Orren& Orren in Pasadena, California. She is a member of Los Angeles Lawyer’sEditorial Board and former book editor at the University of Minnesota Press.
My Own Words
By Ruth Bader GinsburgEdited by Mary Hartnettand Wendy W. WilliamsSimon & Schuster, 2016$30.00; 400 pages
Los Angeles Lawyer December 2018 39
rather than resolved the nation’s rancorousabortion battles.
“Human Dignity And Equal JusticeUnder Law,” a collection of three shortspeeches, sets forth three pillars of JusticeGinsburg’s vision of the Constitution: 1)her conviction that an ideal of dignity andequality for all is implicit in the Con -stitution, although not mentioned in itstext; 2) her gratitude for the strides towardthe ideal that are represented by Brownv. Board of Education and Loving v.Virginia; and 3) her conviction that, goingforward, measures falling under the rubricof “affirmative action” are essential tothe accomplishment of the ideal, despitethe collateral unfairness to many individ-uals not responsible for society’s pastwrongs.
In “The Role Of Dissenting Opinions,”Justice Ginsburg discusses three ways inwhich dissents advance the cause of amore perfect society. Draft dissents maypersuade the original majority to com-promise its position. Dissents over theconstruction of a statute may persuadelegislators to amend the statute. Then,there also are the dissents that formerChief Justice Charles Evans Hughes called“appeal[s]…to the intelligence of a futureday.” Justice Ginsburg pays homage todissents of that kind, including the dissentof Justice Benjamin Curtis in Dred Scottv. Sandford.
Seven of Justice Ginsburg’s own appealsto the intelligence of a future day follow.These are a delight to read: they are impas-sioned without being passionate, and theyare strenuously reasoned.
At the end of each Supreme Court term,Justice Ginsburg presents a summary of theterm’s highlights at the Sec ond Cir cuit’sannual conference. Her high lights of the2015–2016 term are the final words in MyOwn Words.However, they are hardly herfinal words. Williams and Hartnett reportthat, as of 2016, the Justice was continuingto do her job “full steam.” Nothing suggeststhat has chang ed. The Court issued 145decisions in the 2016-2017 and 2017-2018terms. Justice Gins burg wrote opinions in26 of them. Eight were dissents. n
1 Citations and footnotes in a book review, whileunavoidable when reviewing a book by and about aSupreme Court justice, are annoying. Here, then, toget it all over with in one footnote, are citations to allthe cases referenced in this review, in the order thecases appear: Craig v. Boren, 429 U.S. 190 (1976);Duren v. Missouri, 439 U.S. 357 (1979); Hoyt v.Florida, 368 U.S. 57 (1961); Brown v. Board Of Educ.Of Topeka, Kan. 347 US 483 (1954); United States v.Virginia, 518 U.S. 515 (1996); Roe v. Wade, 410 U.S.113 (1973); Loving v. Virginia, 388 U.S. 1 (1967);Dred Scott v. Sandford, 60 U.S. 393 (1857).
David Acalin
Charles Thomas Anderson
Orlando Arellano
Edwin Barnum
Michael Beauregard
Jasmin B. Bhandari
Richard Blasco
James Blatt
Andrea Valdez Brandon
Uletas Greene Carter
Stephanie Grace Chau
Amy J. Choe
Catherine Coble
Michael Delune
Paulette Shepard DePaulo
Bridget Devoy
Kevork George Dulgeryan
Susan L. England
Michael Faber
Thomas Fallgatter
Sarah Cristina Fernandez
Stephanie Forman
Paul Loren Garcia
Sarah Gerst
John Gherini
Cecil Griffin
Audrey Grossman
Dalal Hasan
Kevin Andrews Hoang
Belle Hsu
Nathaniel Patrick Johnson
Carol Johnston
Emelike Igwe Kalu
Yun Hee Kim
Rebecca Kwan
Jonah Jose Lalas
Jin Ho Lee
Brittany Lichtig
Mary Lu
Samuel Wut-Leung Lui
Thomas McAndrews
Heather McConnell
Silva L. Megerditchian
Brian D. Mitchell
Zein Obagi
Richard Patterson
Adam Reich
Kimberly D. Rice
Gretchen AlexandraRobbins
Benjamin Rose
Vitaly Sigal
Helena Sung
Danielle Butler Vappie
Jessica Weizenbluth
Robin Yanes
Clarke Logan Young
WELCOMETO OUR NEWEST MEMBERS
40 Los Angeles Lawyer December 2018
AS 2018 WINDS DOWN, along with your window to make chari-table contributions, consider donating to the four legal servicesprojects run by the Los Angeles County Bar Association’s Counselfor Justice (CFJ) that together provide crucial assistance toAngelenos in need. The Domestic Violence, Immigration,Veterans, and AIDS projects provide immediate, life-saving, andtransformative services to thousands of clients and their familiesthroughout Los Angeles. However, the projects are only able tosurvive from year to year based on donations from individualslike you, as well as your companies and law firms.
Every contribution to the CFJ is highly leveraged toprovide legal assistance to those most vulnerable in ourcommunity. The following stories illustrate the differ -ence your donation of time or money to CFJ can make.
He Pointed a Gun at Her
When Karen, a young mother, arrived at LACBA’sDomestic Violence Legal Services Project (DVP), she was scaredand shaken. Her ex-boyfriend had arrived at her home demandingto be let in. When Karen refused, John became enraged and beganyelling and cursing. He pulled out a gun and pointed it at Karenwhile their six-year-old son stood next to her. John screamed, “Iam going to end this now!”
With the help of the DVP, Karen obtained a restraining orderto protect her and her young son. Sadly, Karen’s story is notunique. Last year, more than 4,200 victims came to the DVPseeking help. Many were granted Temporary Restraining Orders,which not only provide life-saving protection to victims but alsoassist the LAPD and Los Angeles County Sheriff’s Department byproviding another tool to deal with the numerous domestic violencecalls they handle everyday. That is why police officers, sheriff’sdeputies, and county hospitals regularly send victims to the court -house and to the DVP to seek help.
“Florist to the Stars” Gets a Helping Hand
Rogelio was born in Mexico and came to Los Angeles in theearly 1980s. His brother and he built a successful florist shop inHollywood and were known as “florists to the stars.” In 1992,Rogelio got his green card and became a lawful permanentresident under the 1986 amnesty act. But times changed andRogelio and his brother lost their business. Rogelio could notfind work and lost his home. While homeless, Rogelio lost hisgreen card and identification documents, and eventually wasarrested for vagrancy because he didn’t have photo identificationto show to the police.
The Immigration Legal Assistance Project of LACBA knewthat Rogelio could qualify for public housing if he could obtainsocial security benefits and proof of his green card status butthat it would require many hours of legal work and follow-upwith government agencies. After months of sustained effort by
the project and Rogelio, Rogelio recovered his green card, obtainedID permitting him to seek work, and became eligible for low-cost housing. Now in his sixties and after years on the streets,Rogelio has a home of his own.
Vet Gets a Fresh Start
Johnson, a veteran of the U.S. Coast Guard, first came into contactwith LACBA’s Veterans Legal Services Project by way of walk-inhours at Bob Hope Patriotic Hall. At the time, Johnson was on
probation for a felony conviction. Due to his proba-tionary status and conviction, Johnson was unable toobtain work despite a bachelor’s degree in psychologyand a master’s degree in industrial organizational psy-chology, and numerous efforts to obtain employment.
With the assistance of the project, Johnson was ableto get his probation terminated and his felony convictionreduced to a misdemeanor and expunged. With the
case resolved, Johnson can obtain employment and become eligiblefor long-term housing. With the project’s assistance, Johnson saidhe finally feels like a “normal citizen,” and is grateful that theproject’s services were made available to “people like him” withoutthe resources to pay for legal assistance.
Discriminatory Landlord No More
RB, a long-time survivor of HIV and stage-four cancer who hasbeen disabled for many years, walks with a cane and often needsa wheelchair to get around. She had been living in a non-rentcontrolled apartment for six years, and when she asked herlandlord for permission to add a tenant as a live-in aide, the land-lord, who had who raised RB’s rent by a whopping 19 percentthe previous year, responded by giving her a 60-day notice tovacate. With everything else going on in her life, RB now facedan upcoming surgery with the prospect of losing her housing.
Since LACBA’s AIDS Legal Services Project had helped RBbefore, she turned to the project for assistance again. Luckily, RBwas able to find new housing and move out. The project assembleda pro bono team (Orrick) which filed a complaint with theCalifornia Department of Fair Employment and Housing andworked with their mediation team to reach a settlement. A yearlater, RB received a check for $12,000, and the landlord wasordered to attend four years of landlord training and to postsigns in his building that it is illegal to discriminate against peopleliving with disabilities.
For more information and to make your year-end contributiononline, go to LACBA’s homepage at www.lacba.org and click onthe “Donate CFJ” bar. n
closing argument BY SUSAN KOEHLER SULLIVAN
Counsel for Justice Provides Crucial Assistance to Angelenos in Need
Susan Koehler Sullivan, a partner at Clyde & Co in Los Angeles, practices inthe area of commercial litigation with a focus on corporate insurance matters.She is the president-elect of LACBA's Counsel for Justice.
