Nebraska’s New Standard for Special Litigation Committee Investigations

On July 12, 2024, the Nebraska Supreme Court clarified the standard for special litigation committee investigations in derivative actions involving limited liability companies, an issue of first impression in Nebraska. A derivative action is one brought by shareholders on behalf of a corporation that asserts a wrong against that corporation.

Under Neb. Rev. Stat § 21-168, when a limited liability company (“LLC”) is involved in a derivative proceeding, the LLC may appoint a special litigation committee (“SLC”) to investigate the matter to determine whether pursuing the action is in the best interests of the LLC. The SLC has the burden of showing its investigation was conducted independently, in good faith, and with reasonable care. If the Court determines the SLC met this burden, it must enforce the SLC’s recommendation as to whether the litigation should continue or be settled out of court.

In Tegra Corp v. Boeshart, 317 Neb. 100 (Neb. 2024), the Nebraska Supreme Court found that the SLC appointed by Boeshart had failed to use reasonable care in investigating Tegra Corp’s claims of breach of fiduciary duty and misappropriation of corporate assets. In this case, both Tegra Corp and Patrick and Sandra Boeshart own interests in Lite-Form Technologies, LLC (the “LLC”). Tegra Corp brought a derivative action against the Boesharts on behalf of the LLC. Pursuant to § 21-168, Patrick Boeshart appointed Cody Carse as a single-member SLC. The district court was satisfied with the SLC’s investigation and dismissed all claims against the Boesharts according to the SLC’s recommendation. Tegra Corp appealed.

The Nebraska Supreme Court reversed the district court’s ruling on the grounds that the SLC’s investigation was not conducted with reasonable care. The Court cited other jurisdictions that emphasize that thoroughness is the cornerstone of SLC investigations. Courts have noted that SLC’s weigh legal, ethical, commercial, promotional, public relations, fiscal, and other factors to come to a decision regarding a derivative action. Courts have considered the “length and scope of the investigation, the use of experts, the corporation or defendant’s involvement, and the adequacy and reliability of information supplied to the SLC.”

In Tegra Corp v. Boeshart, the Nebraska Supreme Court found that the SLC’s investigation was not conducted with reasonable care because the SLC did not consider the relevant law, failed to include a cost-benefit analysis, and deferred to the LLC’s members for its recommendation. The Court noted that determining whether pursuing the action is in the best interests of the company necessarily involves consideration of the “likelihood that the plaintiff will succeed on the merits, the financial burden on the corporation of litigating the case, the extent to which dismissal will permit the defendant to retain improper benefits, and the effect continuing litigation will have on the corporation’s reputation.” The Boesharts’ SLC did not conduct a legal or cost-benefit analysis and could not have done so because Mr. Carse did not gather the necessary data. Mr. Carse testified that he did not believe legal analysis was part of his duties and that his financial analysis consisted of estimations he made in his own mind, relying on intuition. His recommendation was that the LLC’s members vote on what to do about alleged misappropriation of assets and breach of fiduciary duties. The Court held that deferring to the LLC’s directors is not an exercise of reasonable care.

Finally, the Nebraska Supreme Court also clarified that, contrary to Mr. Carse’s understanding, it was not Tegra’s responsibility to provide the SLC enough evidence to support its allegations. Rather, when breach of fiduciary duties is alleged, the burden of proof is on the party holding that duty to establish its action was not such a breach. The committee bears the burden of proof.

Businesses in Nebraska now face a stricter standard when appointing an SLC under § 21-168. This standard enhances transparency and protects shareholder interests, while underscoring the importance of robust corporate governance practices. SLC’s are a rare feature of American jurisprudence by which defendants can escape litigation by appointing a committee that can control the court. In the future, courts will not be bound to enforce recommendations of SLC’s that conducted vacuous, cursory, or otherwise deficient investigations.

Navigating Copyright in the Age of AI

In 2023, the Copyright Office launched an initiative to explore the copyright issues created by AI-generated content, including whether AI-generated work is copyrightable. The Copyright Office announced their examination in the Federal Register in August 2023 and received thousands of comments in response. This year, the Copyright Office intends to release its interpretations of copyright law as it relates to the emerging technology in the realm of generative AI. As creators wait for the full report, many new developments in copyright law shed light on the relevant issues.

AI is powerful. It can reproduce copyrighted works, like music and digital art, replicate voices and likenesses, and generate material when prompted by a user. Further, AI is trained on a massive body of work, much of which is protected by copyright requiring licensing for commercial use. Federal Courts must decide how to enforce copyrights, protect artists, and promote innovation against the backdrop of constantly evolving technology.

For example, in late 2023, publisher and copyright-holder the New York Times brought suit against OpenAI, the owner of Chat-GPT, for copyright infringement. Specifically, the New York Times alleged that OpenAI used millions of its articles to train ChatGPT without obtaining a license for such use. Recently, OpenAI made a discovery request to the New York Times seeking reporter notes and memos related to each article to prove the publisher has a valid copyright in every single article in question. This ongoing case will have far-reaching implications for how AI models can be trained and to what extent AI companies owe damages to various copyright holders for their unauthorized use of materials.

Another court recently held that images created by the AI-powered Midjourney image generator for a comic book were not copyrightable material because the author of the comic book claiming the rights was not the author of the images. The court decided that Midjourney, not a human, created the images and thus has no author and deserves no copyright protection.

The Copyright Office, through which artists register their work for copyright protection, has stated it will not give copyright protection to "works produced by a machine or mere mechanical process that operates randomly or automatically without any creative input or invention from a human author." The Office was unpersuaded by the argument that the output of AI models depends on the creative input of the artist writing the prompt.

On this topic, the US Copyright Office says:

"Digital art, poems, and books generated using tools like DALL-E, Stable Diffusion, Midjourney, ChatGPT, or even the newly released GPT-4 will not be protected by copyright if they were created by humans using only a text description or prompt, USCO director Shira Perlmutter warned."

The Copyright Office further stipulates that AI-generated content may be valid subject matter for copyright protection if a human author contributed enough creative expression to create the content. This may include cases where the author modifies the AI-generated content

to such an extent that the human can be said to have authored it. The analysis will be fact-specific, and the question will be analyzed case-by-case.

Chevron Overruled: Implications for Federally Regulated Businesses

On June 28, 2024, the United States Supreme Court ruled that courts must "exercise their independent judgment" when interpreting federal statutes and may no longer deference to agency interpretations simply because a statute is ambiguous. This ruling will substantially reduce the power of administrative agencies to exceed the boundaries of the authority granted to them by Congress and will ultimately reduce the regulatory burden on businesses and consumers alike.

The landmark rulings of Loper Bright Enterprises v. Raimondo and Relentless v. Department of Commerce overruled the Chevron doctrine that had been the law since 1984. Under Chevron, if a statute's meaning is ambiguous, a court reviewing an agency's action must defer to the agency's interpretation so long as it is reasonable, even if the Court would have chosen an alternative interpretation. But, as Chief Justice Roberts notes in his opinion in Loper Bright, Chevron is based on ambiguity, which has always evaded meaningful definition.

Loper Bright involved the Magnuson-Stevens Act, a law passed to address rampant unregulated offshore overfishing. This Act gave the National Marine Fisheries Service (NMFS) authority to require observers on board certain fishing vessels to collect data and ensure compliance with regulations. As an exercise of this authority, the NMFS enacted regulations that required some fishing operations to host and pay for such an observer. In this case, the fisheries would be required to pay the observer a salary of about $710 per day.

The petitioners in Loper Bright, four small family-operated fisheries in New England, challenged the regulation. They argued the Magnuson-Stevens Act did not authorize the NMFS to impose such excessive fees, which, in their case, took up a substantial part of already thin profit margins on herring.

The lower Court applied the Chevron doctrine and found that the statute's language was ambiguous and the NMFS's interpretation was not unreasonable. As such, the Court deferred to the interpretation that the NMFS had the authority to require fisheries to pay for their own compliance observers.

The Supreme Court, however, struck down Chevron as unworkable, incoherent, and inconsistent with the history of the Administrative Procedure Act (APA), which outlines procedures for judicial review of agency actions. The Court noted that federal agencies have no particular expertise in interpreting statutes. The Court also held that the APA articulates the "elemental proposition reflected by judicial practice dating back to [this nation's founding], that courts decide legal questions by applying their own judgment."

The overruling of Chevron will substantially reduce overreach by the administrative state and cut off its power to interpret the law in its favor. This means operating any business, small or large, will entail a reduced regulatory burden and a higher likelihood of obtaining much-needed relief from overregulation.

Safeguarding Your Estate: Addressing Undue Influence

In a recent estate case, the Nebraska Supreme Court applied a hearsay exception to allow the decedent's prior will as evidence of her testamentary capacity to execute the will contested by one of her sons. 

In the Estate of Walker, the decedent, Rita Walker, died at the age of 84 and left her estate to Mark Walker, her son, naming him sole beneficiary and personal representative. Rita's will excluded her three other sons. Michael Walker, one of these sons, sued to contest the will on the grounds that Rita lacked testamentary capacity to execute the will, which was executed on September 15, 2021, eleven days before her death. Michael alleged Rita was unduly influenced to execute the will. Undue influence can invalidate a will or contract when one party is unable to exercise his or her independent volition freely.

The county court determined the will was the product of undue influence and ordered that Rita's property proceed intestate, appointing Michael as personal representative. However, on appeal, the Nebraska Supreme Court held that the lower court erred in excluding evidence of Rita's prior will, signed in February of 2016. While this document was hearsay because it was not a statement of Mark himself, it fell within a hearsay exception and was relevant. The prior will served to demonstrate Rita's "constant and abiding scheme" for her property and was relevant to Rita's testamentary capacity at the time of the subsequent will's execution.

Therefore, the Nebraska Supreme Court reversed the lower court's rejection of Rita's will and remanded the case to the lower court to re-examine the issues of testamentary capacity and undue influence in consideration of Rita's prior will.

This ruling serves as a reminder to prioritize comprehensive estate planning methods to mitigate the risk of courts rejecting valid estate planning documents. Recognizing and addressing the risk that your will may be vulnerable to allegations of undue influence is crucial to ensuring your final wishes are honored.

Court Awards $1.6 Million in Landmark California Case Protecting NFT Creators from Counterfeit Sellers

On October 25, 2023, the United States District Court for the Central District of California awarded NFT creator Yuga Labs, Inc. (“Yuga”) $1.6 Million after counterfeits of its nonfungible tokens (NFTs) were sold online. Yuga owns the Bored Ape Yacht Club ("BAYC") collection of NFTs that feature cartoon monkeys that have sold for upwards of $3 million each at auction. The case arose from Defendants Ryder Ripps and Jeremy Cahen selling knockoff BAYC NFTs branded as "Ryder Ripps BAYC" or “RR BAYC.” Defendants sold exact copies of the BAYC NFT images with their own unique blockchain IDs purportedly as a form of satirical commentary. However, the court did not agree that the Defendants’ conduct was an act of free speech. This case highlights the complexity of free speech as it applies to the ever-changing digital landscape.

NFTs are digital assets that come in many forms, including art, music, videos, memes, gaming content, and more. NFTs are frequently traded in exchange for cryptocurrency and stored on the blockchain. While NFT values have since plummeted, the market for NFTs was valued at $40 Billion in 2021 according to Bloomberg. NFT Market Surpassed $40 Billion in 2021, New Estimate Shows - Bloomberg.

               In this California case, Defendants argued that RR BAYC was “satirical conceptual art” – an expressive work protected under the First Amendment. They claimed the art was aimed at bringing attention to what they believed to be racist imagery and “dog whistles” in Yuga’s art. Yuga Labs, Inc. v. Ripps, 2023 U.S. Dist. LEXIS 192487, *8, 2023 WL 7089922. The court remarked that the bar for satirical art using copyright marks is fairly low, but not infinitely low. In the court’s view, “Defendants’ sale of RR/BAYC NFTs is no more artistic than the sale of a counterfeit handbag.”

Unpersuaded by the free speech arguments, the court found the Defendants’ conduct was not an expressive work because it was exactly the same product as what it purportedly sought to critique. The absurdity of the Defendants’ position was expressed succinctly by Yuga’s president, Greg Solano, during cross-examination at trial, who remarked, “it can’t be a parody of itself.” The court found Defendants had intentionally used the BAYC trademarks in an effort to profit off of Yuga's intellectual property.

Accordingly, the court found Yuga was entitled to disgorgement of Defendants’ profits (about $1.4 million), $200,000 for cyber-squatting, and a permanent injunction against Defendants to prevent them from using the BAYC marks. After finding this to be an exceptional case because the Defendants acted in bad faith and were obstructive and evasive throughout litigation, the court also awarded attorney’s fees. In total, the damages owed to Yuga amounted to over $1.6 million. This decision strongly discourages knockoff NFT trading by maintaining robust protections for intellectual property rights in digital markets.

EPA’s New Plastics Rule Imposes Recordkeeping and Reporting Requirements for Ubiquitous Toxic Chemicals

On September 28, 2023, the Environmental Protection Agency (“EPA”) released its final Toxic Substances Control Act (“TSCA”) rule containing new reporting and recordkeeping requirements for the manufacture and sale of certain plastics known as PFAS. Section 7351 of the 2020 National Defense Authorization Act required the EPA to issue a TSCA rule requiring any person who has manufactured perfluoroalkyl or polyfluoroalkyl substances (“PFAS”) in any year since January 1, 2011, to report and maintain records regarding their use of PFAS. The EPA’s rule reaches not only manufacturers of PFAS themselves, but also manufacturers of goods that contain PFAS.

According to the Centers for Disease Control, PFAS are a group of chemicals used to make coatings and products that resist heat, oil, stains, grease, and water. Per- and Polyfluorinated Substances (PFAS) Factsheet | National Biomonitoring Program | CDC. Also known as "forever chemicals," PFAS are a concern because they do not break down in the environment and have caused widespread contamination of the environment. In animal studies, PFAS negatively affect growth and development, reproduction, thyroid function, immune system responses, and liver injury. An NHANES study found four PFAS in the blood samples of nearly all the people participating. According to a notice given by the Consumer Product Safety Commission on September 20, 2023, PFAS are used in many common goods, including "non-stick cookware; water-repellent and stain-resistant clothing, carpets and other fabrics; some cosmetics; some firefighting foams; and common home products such as cleaning supplies, waxes, coatings, adhesives, paints, and sealants." Federal Register :: Per- and Polyfluoroalkyl Substances (PFAS) in Consumer Products. Due to serious concerns about PFAS in drinking water, the EPA has also recently released new standards that limit certain PFAS in drinking water to the extremely low level of 4 parts per trillion. Per- and Polyfluoroalkyl Substances (PFAS) | US EPA.

The EPA’s proposed rule will require companies to report extensive information about PFAS in their merchandise. Companies would be required to provide information relating to “chemical identity, categories of use, volumes manufactured and processed, byproducts, environmental and health effects, worker exposure, and disposal." 2022-25583.pdf (govinfo.gov). Companies would have 18 months to report this information if they have any amount of an estimated 1,462 chemical substances in the PFAS group.

Critics consider the burden of the rule to be high, especially considering how the time and cost of compiling information spanning more than a decade will affect small businesses. The EPA estimates the burden on small businesses to be $875 million and asserts that this will not have a significant impact on small entities. Id. Nevertheless, the proposed rule addresses this criticism by allowing companies to report “not known or not reasonably ascertainable” if the circumstances are such that the burden is too high. Whether the burden imposed by the EPA is reasonable may be the subject of litigation in the coming months.

               Additionally, the EPA’s authority to issue such a regulation may be affected by the Supreme Court’s upcoming review of Chevron's deference in January 2024. Overturning Chevron would reign in the regulatory power of governmental agencies. The EPA’s proposed rule regarding PFAS reporting is currently open for public comment.