Bank Lawyer's Blog

Blowing The Whistle On Foreclosure Lawyers

The Colorado Attorney General's Office has been investigating the major foreclosure law firms in that state for allegedly inflated billing practices. Most of you outside of Colorado may have heard little about it, since, as Housing Wire publisher Paul Jackson points out, the trade press has been strangely silent (other than Paul's Housing Wire). Paul suggests a reason for that silence: "at least one trade media outlet owns their own attorney guild."

Maybe yes, maybe no. Whatever the reason, it is odd that Housing Wire seems to be the only trade press publication that is running with the story.

The investigation centers around allegedly inflated charges for foreclosure costs, such as costs for posting of notices. Here's how Paul explains the issue.

At the core of the investigations, sources tell me, is how foreclosure law firms billed for allowable “costs” in conjunction with the foreclosure – with the lever being loans insured or guaranteed by Fannie Mae, Freddie Mac or the Federal Housing Administration.

While the GSEs set a public and fixed-fee schedule for foreclosures, they also allow law firms to bill for variable, additional reimbursable costs — typically things like process of service or posting and publication of notices, as well as filing fees with the courts. These pass-through costs are typically borne by the law firms and then billed back to their clients as an allowable cost; and in some cases, like filing fees, the fees are set by the court.

But in other cases, the fee structure is much more flexible. And it’s in these reimbursable costs that serious questions are starting to be asked by both Federal and state officials.

Here’s why: it turns out that many of the major law firms responsible for managing foreclosures for the GSEs also have a controlling interest in the ancillary service firms that generate the variable fees that appear as “costs” on the lawyer’s bill. Many law firms either outright own, or their partners have a significant interest in, the company that is posting and publishing notices; or they may own or have an interest in the company that manages process of service, as well.

It's not illegal for a law firm to own such a business, but it is illegal to inflate the "costs" of foreclosures by use of those firms, which is what is alleged to have happened. In one of the press reports that Paul links to (the Denver Post has been following the story as a matter of local interest), a whistleblower in one of the firms has alleged that is exactly what has occurred. The spread of the investigation to other firms indicates that the Colorado AG thinks that the practices may be widespread. According to Paul, Colorado may be the canary in the coal mine.

According to sources I’ve spoken with, similar investigations into foreclosure billing practices are already active in key states on the Eastern seaboard, too, even if the subpoenas haven’t been made public.

If there's substance to these allegations (and the fact that an attorney in one of these firms would risk her career by blowing the whistle gives some initial weight to the allegations), this is going to get very nasty. The law firms likely won't go down without scorching some earth, as the discussion indicates in one of the articles, where the law firm claims that the whistleblower was a "special counsel" to the law firm on the issue and, therefore, cannot divulge confidences of her "client" or breach attorney-client privilege.

If other states also make public similar investigations, maybe the rest of the trade press will begin to report on this, as well. After all, the story has all the elements the average American loves to hate: lenders, foreclosures, and attorneys.

UPDATE 08.19.13: EDITED TO FIX BROKEN LINK TO JACKSON'S BLOG POST.

Thrown Off The Gravy Train

"The Kids" have caught on to the law school over-enrollment shell game and the results are not pretty (paid subscription required), particularly for many law school professors.

Law schools across the country are shedding faculty members as enrollment plunges, sending a grim message to an elite group long sheltered from the ups and downs of the broader economy.

Having trimmed staff, some schools are offering buyouts and early-retirement packages to senior, tenured professors and canceling contracts with lower-level instructors, who have less job protection. Most do so quietly. But the trend is growing, most noticeably among middle- and lower-tier schools, which have been hit hardest by the drop-off.

[...]

Law schools faced with a dwindling pool of applicants confront a tough choice. They can fill seats by relaxing admissions criteria, a tactic that risks jeopardizing their standing in the influential annual rankings put out by U.S. News & World Report. Or they can maintain standards and just accept fewer students, making up for lost tuition dollars through deeper cost-cutting.

[...]

That wasn't a problem just a few years ago, when students flocked to law schools as the economy tanked. In 2010 national enrollment swelled to a record of more than 52,000, according to data compiled by the American Bar Association, which accredits U.S. law schools.

But the pendulum is now swinging the other way.

The broader legal market has yet to fully recover from the economic downturn, when a number of big law firms laid off lawyers as demand for legal services cratered. Many legal experts think it will be years, and perhaps decades, before employment rebounds to the levels reached in the middle of the last decade.

Would-be lawyers have taken note. As of July 5, law-school applications for the entering class of 2013 were down 36% compared with the same point in 2010, according to the Law School Admission Council. Last year first-year enrollments fell 8.5% nationwide, according to ABA data, and law schools outside the elite top tier are seeing even steeper declines.

The smaller classes mean revenue drops of "millions of dollars every year," said Brian Tamanaha, a professor at Washington University School of Law in St. Louis. and the author of the 2012 book "Failing Law Schools."

Yes, that's right, "millions of dollars a year." Law schools have been cash cows for many universities for a few years. That led a number of them to increase enrollments beyond the level that the job market could absorb in order to milk that tuition cow while she was still in her prime. The sad results, in many cases (the elite law schools being, in many respects, less affected than the "lesser lights"), were reams of baby lawyers being thrown out of the nest with nowhere to land, and saddled with six figures in law school debt. They were sold a pig in a poke.

While I don't allege that law school faculty were involved in concocting or perpetuating this shell game, and while I also don't take any joy in law school professors being thrown out of work, the linked article certainly indicates that they benefited from it in the form of nice income levels. Therefore, there is a part of me that thinks: "It's about time."

Welcome to the wonderful world that so many of your former students have found themselves wandering about aimlessly. It kinda' sucks, doesn't it?

Going Rogue

I'm merely guessing, but I doubt that most of you have been to Ulysses, Kansas. I have been there, many years ago, and I can honestly say that the part of Kansas where Ulysses is situated seems to me what the surface of the moon must look like. The 2010 US Census states that the total population of Ulysses is just a wee bit north of 6,000. In other words, it seems an unlikely place where a gang of bank robbers would ply its trade, much less a gang of Bonnie Parkers who worked their illegal mojo from both inside and outside the institution.

According to The Garden City Telegram, four (now former) bank employees, who range in age from 28 to 59 (all of them, therefore, old enough to know better), embezzled over $84,000 from their employer from 2008 to 2010, staged a bank robbery in 2010 in an attempt to cover it up, and over the next three years embezzled another $24,000 and change before being caught. They each face decades in the federal slammer for embezzlement, bank robbery and--the worst sin of all--lying to the FBI.

Thirty-six years ago, shortly after I began my first stint as an in-house lawyer at a large financial institution, I was given the job of baby-sitting some bank branch employees while they testified as witnesses in the federal district court criminal trial in Denver of two bank robbers who had held up the branch with sawed-off shotguns and loud threats of violence. I remember the Assistant US Attorney who was trying the case telling me that while the FBI may not be top-notch at every task it attempts, one thing it has gotten down to a science is catching bank robbers and embezzlers. He claimed that it was the dumbest crime a crook could commit, because the odds were overwhelming that, sooner or later, you'd be nabbed. He also asserted that because of that, professional criminals look down on bank robbers as those of lesser talent.

And yet...in towns large and small, from The Big Apple to the wind-swept plains of wheat country, hope springs eternal in the larcenous heart. As long as that's the case, banks better have in place robust systems of checks and balances to catch those folks that banks fear the most: rogue employees.

The Help Was Not Helpful

I gave a presentation a couple of weeks ago in New York City to credit union officers about the legal risks of engaging in social media activities. One of the entities that I told my audience I thought was doing a decent job in social media was Bank of America's "Help" Twitter feed. From my personal observations, their "youngsters" seem to do a good job of handling customers who may be frustrated dealing with other segments of the giant bank's customer service octopus.

I guess I should monitor BofA Help more frequently. Digiday's Saya Weissman recounts a series of tone deaf tweets by a BofA Help "tweeter" that lead a casual observer to wonder whether someone was on Quaaludes and, if so, who. Responding to an allegation by Occupy LA that the bank should stop stealing people's homes by offering to review Occupy LA's account make you wonder about a number of things, including the following speculation by Ms. Weissman: "The immediate and understandable assumption was that the bank’s Twitter feed is run by a bot – a program that automatically replies to tweets that mention it. Bafflingly, this turns out not to be the case. A bank spokesperson explained to Digiday that real people are, in fact, behind all of the brand’s tweets."

A spokesperson for the bank insisted that real, live, human "bots" are tweeting those gems. Weissman claims that the bank's "utter lack of online competence...merely reinforced these angry tweeters’ view of the company as a faceless, heartless conglomerate." She concludes that if this is the best "help" that BofA can offer, "who needs enemies?"

I guess I wouldn't have been that harsh on the tweeter, who was likely proceeding in compliance with a carefully scripted line that he or she was required to follow. On the other hand, you have to wonder about the bank's guidelines for initiating "conversations" on Twitter. If it's whenever the bank's name is mentioned, then there ought to be some requirement that before the BofA employee "tweet"s, they be required to actually comprehend the content of the tweet to which they are "responding."

The proposed FFIEC Guidelines on social media compliance that we've previously discussed are shot through, from stem to stern, with concern about "reputational risk." Such risk is posed not only by technical violation of laws or regulations. It's also posed by ineptness.

You don't have to be perfect all of the time. However, if you're going to be incompetent any of the time, expect to pay a reputational price. Even (or, perhaps, especially) in cyberspace, it's hard to hide.

Sometimes, The News Seems Too Good To Be True

At first blush, I assumed that this was an article from The Onion. However, it is not only the real deal, it is the Platonic ideal form of the concept of "irony." From the plaintiffs' lawyers' press release:

Today, a diverse group of current and former members of the United States Department of Justice Civil Rights Division met with staff of the United States Senate both Republican and Democrat to outline substantial misconduct allegations against Assistant Attorney General Tom Perez. Mr. Perez is pending confirmation before the Senate as Secretary of Labor, and is rumored to be considered for a vote as early as this weekend.

Earlier this year, the Civil Rights Division, at the direction of Mr. Perez and his senior staff, began a widespread campaign of disparate treatment discrimination against Civil Rights Division employees who were disabled (mobility; hearing; vision; emotional; physical or mental condition); as well as of protected status based on race; gender; age; and/or parental status. Upon opposing this widespread, unlawful discrimination, DOJ employees have been subjected to an exceptionally hostile work environment and unlawful retaliation.

In addition, members of the Civil Rights Division also presented evidence to the Senate today of statistical evidence of disparate impact discrimination under the leadership of Mr. Perez. During Mr. Perez’ time as head of the Civil Rights Division, hiring and employment of Hispanic staff has decreased by a statistically significant percentage. But for discrimination, there is no legal explanation for the decline in minority hiring under Mr. Perez’ leadership.

As the whistleblowers' lawyer so ably notes, "[w]hile Mr. Perez and senior management of the Civil Rights Division sue private employers for discrimination and retaliation, they have no hesitance in discriminating against their own disabled, minority, whistleblowing staff."

The disparate impact chickens coming home to roost, eh? It couldn't happen to a more intellectually honest guy. In the employment arena, unlike the lending arena, disparate impact stands on solid ground. Watching Perez & Co. twist in the wind on this one, hopefully hoisted on their own petard, should provide entertainment for months to come.

How are those disparate impact apples tasting now, Tom?

Job Interview Suicide

When a close friend recently told me that her financial services company's human resources department was encountering Gen Y candidates for employment who, in the course of interviews, (a) talked like gum-popping adolescents, and (b) repeatedly checked their "smart" phones for email and text messages and, on occasion, actually texted, I thought that she might be exaggerating. I not only was unaware of the problem, I was completely clueless that it extended to law students.

Anna Ivey, former admissions dean at the University of Chicago Law School, had this to say (among many other things) about how law students could enhance their prospects of landing a job.

Talk like an adult. That means learning how to write a decent cover letter and sounding professional on the phone. It also means using grown-up speech patterns. Many law school students don't and won't, and it puts them at a disadvantage. (Reforming speech patterns is hard. I'm a product of my generation, too—Generation X—and I find myself slipping from time to time.) The client, boss, hiring partner, judge, etc., will be less inclined to listen to you if you sound like a high school babysitter.

The word "like" is not a conversation placeholder among the erudite, I suppose.

A recent USA Today article had even more depressing stories about interview behavior among those "of a certain age."

Human resource professionals say they've seen recent college grads text or take calls in interviews, dress inappropriately, use slang or overly casual language and exhibit other oddball behavior.

"It's behavior that may be completely appropriate outside the interview," says Jaime Fall, vice president of the HR Policy Association. "The interview is still a traditional environment."

Fall and other HR executives say such quirks have become more commonplace the past three years or so, and are displayed by about one in five recent grads. They're prompting recruiters to rule out otherwise qualified candidates for entry-level positions and delay hiring decisions.

Among the types of other "oddball behavior" cited in the article are bringing your Dad into the interview, either in person or by telephone, to negotiate a better starting salary, and bringing your cat to an interview and playing with it. I suppose flossing and playing video games during job interviews are soon to follow.

This simply cannot be due entirely to "peer pressure." Aren't parents giving these kids a "heads up" on proper social interaction skills? I assume that a majority of them are, because these oddballs don't appear to constitute a majority of the interviewee "pool." However, the fact that they exist in numbers that merit comment from the main stream media is depressing.

As a "silver lining" kind of guy, I always wax upbeat when I consider that these folks will be the future competition for the clients' legal budgets. As a citizen of a country (and a civilization) I love, I wane a little more gloomy when I consider the long-term implications.

Let's hope that this is a temporary phenomenon that will soon pass, like bell-bottomed jeans and tie-dyed shirts. After all, the country has survived the Baby Boomers. At least it has thus far. How much worse could Gen Y be?

You Have Nothing To Lose But Your Chains

The latest edition of Ballard Spahr's "CFPB Monitor" starts off with an article by Barbara Mishkin about how CFPB employees have voted to unionize. Apparently, getting starting salaries of $173,000, plus tuition for courses in basic banking law, are not enough for the employees of the most powerful, poorly regulated federal government agency created since Joe Stalin went to (not) meet his (nonexistent) maker. No, their backsides are severely chapped over heinous office accommodations. It seems that the CFPB is in the process of renovating its Intergalactic Headquarters, aka, "The Death Star," and while that renovation is taking place, the "proles" are being asked to place their posteriors in...<gasp>...Dilbert-like "open space." Their current office space is sufficiently annoying, since more than one person has to share a private office, but cubicles???? Them's fightin' words, Pilgrims!

One "source" claimed that CFPB employees are worried about noise levels. Heck, they carry a pretty big stick, so why don't they learn to talk (and walk) softly?

Look, I understand that when you're threatening to lock and load on some beat-down community bank that issued a disclosure statement that said "may" instead of "will," and, therefore, was massively "deceptive," or you're telling an auto loan lender that if a dealer from which it buys paper ever causes emotional pain to a buyer's pet parakeet, the lender is on the hook for the vet's bill, you would be sensitive about cross-talk. Obviously, you need to keep the brow beating appropriately segmented. I mean, look what happened when Bugs Moran encroached on Al Capione's space. It wasn't pretty, and those guys were mere amateurs when it comes to wielding a Tommy Gun.

Now that the CFPB employees are represented by a union, though, I'm certain that office space is only the tip of the iceberg when it comes to workers' demands.

The union’s president is reported as having said that, in addition to workspace concerns, CFPB employees are concerned about travel policies and benefits, work schedules, reviews, promotions and alternative work schedules.  The report describes CFPB staffers as having “grown frustrated in recent months after putting in grueling hours as they raced to meet statutory deadlines” under Dodd-Frank.

I can imagine that working until 5:30 and even 6:00 pm can be wearisome if you have to do it day-after-day-after-day-my-god-will-this-never-freakin'-end!It wwould be suicide-induing if you had to grind it out in open space.

In the words of the last person to make the absolute best use of every second of every working day (and, especially, of every night) he spent in D.C, once intoned, "I feel your pain."

Some Grim News Just Got Grimmer

As regular readers know, I have been on a mission over the past several years to encourage would-be law students to consider equally enjoyable employment prospects, such as being screamed at by that Hell's Kitchen buffoon for splattering a souffle, or acting as a lifestyle adviser and match-maker for Kim Jong-un, or even being a dance instructor for the trifecta of Wynonna Judd, Kirstie Alley, and Mark Cuban. Even a pessimist like myself didn't realize how bad things have become for law students, though.

Excluding jobs funded by law schools, only 55.1 percent of all 2012 law school graduates were employed in full-time, long-term lawyer jobs on Feb .15, according to the analysis by the law school reform group Law School Transparency.

That's 1.1 percentage points lower than the 56.2 percent figure cited by the ABA, which includes school-funded positions in the number of graduates holding full-time, long-term lawyer jobs, according to the analysis.

Moreover, a "devastating" 27.7 percent of 2012 graduates were either underemployed, meaning they were working in short-term, part-time or nonprofessional jobs, or not employed, meaning they were either unemployed or pursuing an additional degree, according to Law School Transparency's analysis.

The ABA data showed that 10.6 percent of last year's graduates were unemployed and seeking work, but didn't total up the number of graduates who were unemployed and underemployed.

The group's analysis of the data also shows that fewer than half of the graduates at 66 schools—one-third of all ABA-accredited schools—were working in full-time, long-term legal jobs; less than a third of the graduates of 11 schools, or 5.5 percent of total, were so employed.

Law School Transparency's Executive Director had some sound advice for lawyers to be.

"Law school is too expensive relative to job outcomes," he said. "If you plan to debt-finance your education or use hard-earned savings, seriously think twice about attending a law school without a steep discount. For the vast majority of prospective law students who have not received a sizable scholarship, it makes sense to wait for prices to drop."

Or it makes sense to think about medical school. Or, save the costs of post-graduate education altogether and latch on to one the fastest growing job segments in the country: "cost estimator." If graduating law school students had devoted more time to cost estimation (and benefits) before they borrowed money to go to law school, many of them would not be facing the bleak prospects currently staring them in the face.

Disparate Impact On Ex-Cons A No-No

Credit Union consultant and pundit Marvin Umholz has been hammering on the Obama administration's use of "disparate impact" theory in not only the fair lending context, but in the equal opportunity employment context, as well (previously discussed here). In his latest email newsletter "CU Strategic Hot Topics" (you can email Marvin at [email protected] to be added to the circulation list), Marvin discusses the use of disparate impact to undermine the use of by financial institutions of background checks on prospective employees. The following is the section of the newsletter that focuses on this problem.

The new U.S. Department of Housing and Urban Development (HUD) rule entitled, “Implementation of the Fair Housing Act – Disparate Impact Rule (FR 5508) was posted in the Federal Register February 15^th www.federalregister.gov/articles/2013/02/15/2013-03375/implementation-of-the-fair-housing-acts-discriminatory-effects-standard?utm_medium=section_news&utm_source=homepage.  However, HUD’s use of the disparate impact doctrine to statistically prove discrimination regardless of intent represents just the latest in the executive branch’s efforts to utilize the controversial effects test to enforce the Fair Housing Act, the Equal Credit Opportunity Act (ECOA), and other laws.  In addition to HUD, the CFPB, the U.S. Department of Justice www.justice.gov, and the Equal Employment Opportunity Commission (EEOC) http://www1.eeoc.gov//eeoc/newsroom/wysk/arrest_conviction_records.cfm are using the statistical disparate impact discrimination effects test in their regulatory enforcement actions.

A February 15^th opinion essay in The Wall Street Journal reminded this correspondent that the EEOC

http://online.wsj.com/article/SB10001424127887323701904578276491630786614.html?KEYWORDS=perform+criminal+background+checks+at+your+peril is also a disparate impact activist in the extreme.  The op-ed began, “Should it be a federal crime for businesses to refuse to hire ex-convicts?  Yes, according to the Equal Credit Opportunity Commission, which recently released 20,000 convoluted words of regulatory ‘guidance’ to direct businesses to hire more felons and other ex-offenders…Last April, the agency unveiled its ‘Enforcement Guidance on the Consideration of Arrest and Conviction Records in Employment Decisions,’ declaring that ‘criminal record exclusions have a disparate impact based on race and national origin’…These statistical disparities inspired the EEOC to rewrite the corporate hiring handbook to level the playing field between ‘protected groups’ and the rest of the workforce…Most businesses perform criminal background checks on job applicants, but the EEOC guidance frowns on such checks and creates new legal tripwires that could spark federal lawsuits…If a background check discloses a criminal offense, the EEOC expects a company to do an intricate ‘individualized assessment’ that will somehow prove that it has a ‘business necessity’ not to hire the ex-offender (or that his offense disqualifies him for a specific job).”  Ex-offenders were disproportionately represented in the “protected groups” setting the stage for the EEOC’s statistical disparate impact effects test to the hiring process.

The op-ed continued, “Former EEOC General Counsel Donald Livingston, in testimony in December to the U.S. Commission on Civil Rights, warned that employers could be considered guilty of ‘race discrimination if they choose law abiding applicants over applicants with criminal convictions’ unless they conduct a comprehensive analysis of the ex-offender’s recent life history.  It is difficult to overstate the EEOC’s zealotry on this issue.  The agency is demanding that one of Mr. Livingston’s clients – the Freeman Companies, a convention and corporate events planner – pay compensation to rejected job applicants who lied about their criminal records…The EEOC is confident that its guidance will boost minority hiring, but studies published in the University of Chicago Legal Forum and the Journal of Law and Economics have found that businesses are much less likely to hire minority applicants when background checks are banned.  As the majority of black and Hispanic job applicants have clean legal records, the new EEOC mandate may harm the very groups it purports to help…The EEOC’s new regulatory regime is likely to chill hiring across the board and decrease opportunities for minority applicants.”  Did the EEOC run a cost-benefit analysis on this dangerous legal contortionism before it dove into these ideologically-questionable waters?  Does the EEOC consider its mission as being to inhibit job creation by exacerbating workplace uncertainty?

As recently as February 20^th CFPB Director Richard Cordray reminded everyone that the CFPB is committed to the disparate impact doctrine in executing its rulemaking and enforcement mission www.consumerfinance.gov/speeches/prepared-remarks-by-richard-cordray-at-a-consumer-advisory-board-meeting.  In his prepared remarks for delivery to the CFPB’s Consumer Advisory Board, Director Cordray said, “A final and consistent problem that can hijack consumers on the pathway to opportunity is the evil of discrimination.  For some people, the greatest challenges they face do not come from deceptive materials, debt traps, or market structures, but rather are rooted in something much more basic – unequal, invidious treatment based on characteristics such as race or gender or other bases prohibited by law.  The statistics show very clearly that communities of color were hit especially hard during the financial crisis.  All Americans saw drops in their household wealth, but African-Americans and Hispanics experienced the steepest drops.  This inequity is compounded by unequal access to responsible credit, which makes it difficult or even impossible to achieve their financial goals…We made it clear last year that – like other banking regulators and the Justice Department – we will pursue discrimination in consumer financial markets based on disparate impact as well as on intentional violations.  From the perspective of a consumer disadvantaged by policies that have a discriminatory effect, it makes no practical difference whether a lender consciously intended to discriminate.  Every consumer, regardless of race, gender, or other characteristics protected by federal law, should have equal access to credit and an equal chance to pursue the pathway to opportunity.”  The disparate impact doctrine is unconstitutional at best and a collection of counter-productive left-wing class warfare victimization claptrap at worst.

It was quite obvious from his remarks that CFPB Director Cordray believed that the United States was a nation statistically overflowing with victims and some were more victimized than others.  That is a distorted concept of what a level playing field should be.  The zealous application of the disparate impact effects test is unlikely to assure anyone access to increased prosperity and instead could bring the financial services marketplace to a screeching halt – and subsequently trigger widespread non-discriminatory austerity as a result.  Would that be consistent with the disparate impact doctrine?  Talk of social responsibility needs to be realistic.  It is more dangerous to promise too much than too little.  Despite the real social and economic advancement that has been made by ethnic minorities and other “protected groups” in this country, the federal government is still stuck in the 1960s.  Hopefully contemporary Americans believe in equal opportunity, not statistically-driven equality-mongering.  When it comes to the disparate impact doctrine, one can certainly hope that the U.S. Supreme Court Justices are true believers in equal opportunity rather than statistical quotas.

This is scary stuff. A number of my financial institution clients deem it a matter of safety and soundness to include within their contracts with vendors a provision that requires the vendor to perform background checks on employees who will perform services for the institution, especially if the employees will be involved in the handling of funds or sensitive information. Does that contractual requirement provide the vendor a legitimate business reason for performing the checks notwithstanding the potential disparate impact upon members of a protected class that contains a high number of ex-cons? On the other hand, is the financial institution subjecting itself to potential liability by imposing such a requirement and, if so, is it inserting itself between the rock of disparate impact and the hard place of unsafe and unsound practices?

The ideologues that are running the funny farm are forcing all of us to jump through the looking glass, head first.

Taking Social Media Access "Personally"

Professor Eric Goldman is an astute observer of the legal risks of both using social media and of trying to regulate its use. One of his most recent commentaries in Forbes concerns a new California law that restricts an employer's right to access an employee's "personal social media accounts." Professor Goldman thinks that, while the impetus for the legislation may be admirable, the execution is a pile of bat guano.

Superficially, both laws sound like a good idea.  It’s ridiculous to force people to disclose social media content if they don’t want to do so; not only can that violate the accountholder’s privacy, but it can violate the privacy rights of innocent third parties.  Demanding access to a social media account can be just as invasive as demanding access to an email account, something we all already knows is off-limits.

Still, new legislation is a blunt tool, and it’s not the right solution to every problem.  In this situation, California’s new laws create two problems, one big and the other bigger.

The "big problem" is that the law too broadly defines "social media." Here's the definition:

“social media” means an electronic service or account, or electronic content, including, but not limited to, videos, still photographs, blogs, video blogs, podcasts, instant and text messages, email, online services or accounts, or Internet Web site profiles or locations.

To say that definition is "overly broad" is a gross understatement. As Goldman observes, that breadth is sure to have "unintended consequences."

In other words, the law governs effectively all digital content and activity, both on the Internet and stored in local storage devices, not just social media.  After all, what digital resource isn’t “an electronic service or account, or electronic content”? 

Here's the "bigger problem": the law restricts an employer's access to "personal" social media, but doesn't define "personal."

Thus, the law assumes that social media accounts have only two states: personal or not-personal. Sadly, that’s completely contrary to the cases I’m seeing in court right now. Instead, social media accounts fit along a continuum where the endpoints are (1) completely personal, and (2) completely business-related–but many employees’ social media accounts (narrowly construed, ignoring the statutory overbreadth problem) fit somewhere in between those two endpoints. Indeed, employers and employees routinely disagree about whether or not a social media account was personal or business-related.

So, while it's advisable, even imperative, that an employee "cough up" his access information for business-related social media accounts, the employer may be unintentionally violating state law if it asks for those credentials and the employee can make a case that the account is "personal." Goldman cites several cases where employer and employee are slugging it out in court right now over the business/personal dichotomy. While trial lawyers might regard this ambiguity as a good thing, the rest of us consider it a pain in the "personal" nether regions.

Goldman asserts that this confused state of affairs is par for the course.

Speaking for myself, I always assume that a state legislature trying to “fix an Internet problem” will botch the job. After all, state legislatures have a virtually unbroken history of poorly designed Internet regulations.

Change "state" to "federal" and "Internet" to "financial institution" and you have Dodd-Frank.

Those of us who do not live in California might chalk this up to the typical dysfunctionality of life in the land of fruits and nuts. Unfortunately, other states are adopting similar laws. Legislators can't help themselves. Screwing up the lives of their citizens, and especially those ctizens who attempt to conduct business, is what they do. It's embedded in their DNA. As in many areas, The Golden State sheds a light on America's future.

Thank God for Shiner Bock...