Legal News for Tues 7/23 - Ninth Circuit Model Case Management System, NY Ruling on Atty Misconduct Cases, DraftKings Noncompete, X Corp Trademark Suit and IRS Ignoring Crypto

Minimum Competence

This Day in Legal History: Province of Canada Created

On July 23, 1840, the British Parliament passed the Act of Union, a pivotal piece of legislation that led to the creation of the Province of Canada. This act merged the colonies of Upper Canada (present-day Ontario) and Lower Canada (present-day Quebec) into a single entity. The Act of Union was a response to the political unrest and demands for reform that had been growing in both colonies, particularly after the Rebellions of 1837-1838.

The Act of Union aimed to unify the administrative structures of the two colonies, addressing inefficiencies and fostering a more cohesive government. It established a single legislative assembly, with equal representation from both regions, despite significant differences in their populations and cultural backgrounds. This structure was intended to assimilate the French-speaking population of Lower Canada into the English-speaking majority of Upper Canada, though it often led to tension and conflict.

Taking effect on February 10, 1841, the Act marked the beginning of a new political era in Canadian history, laying foundational governance structures that would influence future developments leading up to Canadian Confederation in 1867. The Province of Canada would eventually split into the separate provinces of Ontario and Quebec, but the Act of Union remains a significant moment in the evolution of Canada's political landscape.

The Ninth Circuit’s updated case management system is being used as a model for the federal judiciary’s administrative office to modernize its electronic filing program, according to Chief Judge Mary Murguia. The US Court of Appeals for the Ninth Circuit is collaborating with the Administrative Office of the US Courts to replace the CM/ECF system with a new cloud-based system by the end of 2025. This modernization effort aims to enhance the efficiency of filing legal documents and accessing case information.

Since October, the Ninth Circuit has processed all new cases through its Appellate Case Management System, with older reopened cases still using the previous system. This development was a joint effort with the Second Circuit. Judge Murguia noted a significant decline in case filings over the past five years, with the Ninth Circuit now having fewer than 7,000 pending cases—a 23% reduction from 2019 and the lowest number in decades.

Ninth Circuit’s Case Filing System Used as Model for Judiciary

A New York appellate judge has affirmed that individuals who file complaints against attorneys in disciplinary cases have a First Amendment right to attend related hearings, view pertinent documents, and access some final decisions. This ruling emphasizes the importance of public scrutiny in holding judges accountable, particularly those serving fourteen-year terms appointed by elected governors. The decision, issued by Judge Victor Marrero of the US District Court for the Southern District of New York, specifically impacts the New York Supreme Court's Second Appellate Department, which disciplines attorneys based on recommendations from the Attorney Grievance Committee.

Judge Marrero asserted that transparency is essential for public trust in the judicial process. However, he allowed an exception for dispositions made by the chief attorney, whose role involves preliminary investigations. These do not need to be public to maintain investigation flexibility and protect attorneys from baseless accusations.

The case originated from complaints filed in 2021 against attorneys in the Queens County District Attorney’s Office. Despite these complaints being publicized online, none resulted in public discipline. The plaintiffs argued that public access was necessary, while New York City's former corporation counsel claimed it was a misuse of the process for political gain.

Marrero dismissed Presiding Justice Hector LaSalle's defense of legislative immunity, ruling that withholding information is not considered policymaking. He also refuted the state's claim that providing access to certain records would necessitate a substantial overhaul of court operations, stating that procedural adjustments, even if cumbersome, are not illegal.

New York Judge Peels Back Curtain on Attorney Misconduct Cases

The First Circuit appears likely to uphold a noncompete agreement against a former DraftKings executive, Michael Hermalyn, who sought to join rival sports-betting firm Fanatics. During oral arguments, Judge O. Rogeriee Thompson questioned why California’s worker-friendly policies should outweigh Massachusetts’ business protections. Hermalyn, who relocated to California, argued for the state’s ban on noncompete clauses to apply. However, the contract stipulates Massachusetts law, as DraftKings is based there.

DraftKings accused Hermalyn of violating the agreement by joining a competitor and stealing company secrets. Hermalyn’s legal team contended that California's interest in attracting workers should take precedence. Conversely, DraftKings' counsel argued that state laws are equal and California's stance should not override Massachusetts' policies.

A federal district judge previously prohibited Hermalyn from working for competitors, dismissing his reliance on California law. This case arises amid the Federal Trade Commission’s broader move to ban most noncompete agreements, although senior executives are currently exempt.

Hermalyn's attempts to establish California residency involved leasing an apartment, buying a car, and other actions. Massachusetts law typically enforces contract terms unless they violate public policy. Hermalyn’s counsel asserted California has the most substantial interest in this matter, urging respect for its policies. However, Judge William Kayatta expressed concerns about prioritizing one state’s laws over others in similar circumstances.

DraftKings' attorney warned that ruling in favor of Hermalyn could enable others to evade contractual obligations by relocating to California, stressing the need to protect Massachusetts businesses from such tactics. DraftKings also alleged Hermalyn’s residency claim was a ploy and accused him of downloading sensitive files before departing.

DraftKings’ Noncompete Clause Meets Supportive First Circuit

Elon Musk's social media platform, X (formerly Twitter), is being sued by the PR firm Multiply for trademark infringement. Filed in a California federal court, the lawsuit claims that X's use of the "X" trademark for social-media marketing services causes consumer confusion and infringes on Multiply's established trademark rights. Multiply's spokesperson accused Musk of stealing their established identity and stated the necessity to protect their mark in court.

X rebranded from Twitter to X last year under Musk’s ownership. This rebranding has already resulted in confusion among Multiply's clients, who overlap with X Corp's clientele. Multiply, which has worked with brands like Arizona, Corona, and Liquid Death, adopted the "X" branding in 2019 and holds a federal trademark for its "X" logo.

Multiply is seeking an injunction to stop X Corp from using the "X" trademark and is asking for monetary damages. This lawsuit is one among several, as other companies, including X Social Media, have also filed infringement claims against Musk's rebranded platform. The case is DB Communications LLC d/b/a Multiply v. X Corp, U.S. District Court for the Northern District of California, No. 3:24-cv-04402.

X Corp hit with lawsuit from PR firm over 'X' trademark | Reuters

In my column this week, I discuss the pressing need for the IRS to bolster its cryptocurrency compliance measures to close the crypto tax gap and combat illicit activities. Cryptocurrencies are often used for illegal activities, and many tax evaders in the crypto space prefer to remain anonymous to distance themselves from their actions.

A recent report from the Treasury Inspector General for Tax Administration (TIGTA) highlights significant gaps in the IRS’s cryptocurrency tax enforcement. By improving compliance, the IRS can enhance transparency in financial transactions, address the crypto tax gap, and reduce illegal activities facilitated by digital currencies.

Enforcing cryptocurrency taxes could yield substantial revenue and mitigate black market activities that harm the economy. Despite the potential benefits, the IRS’s current efforts are inadequate. The TIGTA report notes that the IRS investigated only 390 cases involving digital currency between 2018 and 2023, with just 224 cases recommended for prosecution. The IRS’s broader operation, “Hidden Treasure,” has focused more on training and tool acquisition than on actively pursuing crypto tax evaders.

The use of digital currencies has exploded, with over 26,000 different types and a total market value exceeding $1.7 trillion. Estimates suggest that 21% to 40% of US adults have owned some form of virtual currency. Yet, auditing just 390 files is like pulling a few blades of grass from an acre and assuming a complete understanding of the field.

Enhanced cryptocurrency compliance can significantly disrupt illicit activities reliant on digital currency anonymity. Cryptocurrencies are linked to crimes such as drug and human trafficking, ransomware, and terrorism. The IRS’s $625,000 bounty for cracking the anonymity of Monero underscores the value of identifying cryptocurrency tax cheats.

The IRS needs a coordinated approach to data sharing and analysis, leveraging artificial intelligence to handle vast data sets and uncover patterns. Financial or asset tracing, previously unfeasible on a large scale, becomes possible with advanced technology. Form 1040 already asks filers about digital assets; this data should be cross-referenced with information from exchanges and audits, focusing on high-income individuals for maximum audit returns.

The TIGTA report emphasizes the urgency for the IRS to develop comprehensive compliance strategies, employing advanced data analytics and collaborating with blockchain analytics firms. The IRS must also work with other agencies to curb illegal cryptocurrency activities. While individual cryptocurrencies may remain untraceable, large transactions leave traces in the traditional banking system, providing crucial data points for analysis.

The IRS has ample information on digital currency holders but may lack the context needed to connect taxes owed to individual taxpayers. Contextualizing existing data is key to closing the crypto tax gap and disrupting criminal enterprises reliant on cryptocurrency anonymity.

To Improve Crypto Tax Gap, IRS Must Enhance Compliance Efforts

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