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Courts Remain Hesitant to Regulate the Use of Generative AI in Litigation

30 Apr 2024

Last summer, an otherwise routine personal injury action vividly demonstrated the pitfalls of generative AI. Facing an unfamiliar issue on a motion to dismiss, two New York attorneys turned to ChatGPT to assist their research, unaware of its propensity for the occasional “hallucination.” The chatbot then conjured up non‑existent cases to support their position, which the attorneys relied on in their briefing.

In an order sanctioning the attorneys, Judge Kevin Castel of the federal Southern District of New York dryly noted that the chatbot’s fictitious work product “shows stylistic and reasoning flaws that do not generally appear in decisions issued by United States Courts of Appeals,” and less charitably described its legal analysis as “gibberish.” Mata v. Avianca, Inc., 678 F. Supp. 3d 443, 453 (S.D.N.Y. 2023). Yet these citations were facially passable enough to fool two seasoned litigators once they were outside their usual area of expertise. That is a problem.

Following the headline‑grabbing debacle in Mata, then, one might have expected the courts to start reworking the rules to limit the risk that the increasing use of AI in litigation would introduce similar errors. Legal research and briefing, after all, is not the only part of litigation that AI will both benefit and disrupt. E‑discovery platforms already make excellent use of non‑generative AI to collect, sort, and search documents, and will increasingly incorporate generative AI to summarize and analyze their content in written work product as the technology improves. AI‑enhanced imagery and digital analysis promises to enhance the quality of poorly recorded evidence.

Yet these tasks are also vulnerable to the “black box” nature of generative AI; that is, the inability of AI’s human interlocutors to fully understand and reproduce the methods through which it reaches its results. Indeed, AI data analysis and evidentiary enhancement is arguably more vulnerable to undetected error than AI assisted briefing and argument. Unlike with briefing and argument, where any AI-generated output can be easily checked against the federal reporter system and the text of the cases themselves, there is no settled and universally available reference point against which an adversary, court, or even the user itself can check an AI’s interpretation of controverted data or imagery in a specific case. And the amount of time and effort required to manually check the output against a full case record could largely defeat the time-saving purpose of AI.

Instead, the courts have moved slowly. Only a relative handful of courts and judges have adopted rules governing the use of AI. Most of these focus on the use of generative AI in research and writing, requiring attorneys to disclose whether they used AI in preparing court filings. Few apply to the use of AI processes more generally, and almost none outright ban the practice.

The courts are also far from consensus. A proposed rule requiring attorneys to disclose the use of generative AI in the Fifth Circuit Court of Appeals has sharply divided the legal community, with many public commenters doubting the need for newly crafted rules given the bar’s existing ethical obligations, and others suggesting that the rule did not go far enough.

In a reportedly first-of-its-kind decision issued in late March, meanwhile, a trial court judge in Washington state excluded seven AI-enhanced iPhone recordings from evidence. Applying the venerable standard of expert reliability set forth in Frye v. United States, the court reasoned that there is no scientific consensus yet on the reliability of AI-enhancement techniques. More pointedly, the court observed that the machine learning algorithms used to produce such images are “not reproducible” by forensic experts – an apparent allusion to the “black box” problem. While it is hard to fault the court’s reasoning given the current state of the art, applying Frye only postpones an eventual reckoning with that problem.

Earlier this month, the New York State Bar Association’s Task Force on Artificial Intelligence also weighed in with its long-awaited report on the legal, social, and ethical implications of AI. The Task Force identified many potential benefits and perils from the use of AI in litigation and provided ethical AI guidelines that practicing lawyers would do well to read in full. But it stopped short of proposing extensive new court rules and procedures, instead reaching the stark conclusion that “This report offers no ‘conclusions.’”

Finally, on April 19, the Advisory Committee on Evidence Rules – one of the five principal rule-making committees of the federal courts – met to consider one of the few concrete rule revisions currently on the table for regulating generative AI across the court system. That proposal would add a new provision to Federal Rule of Evidence 901(b) requiring the proponent of AI-generated evidence to authenticate such evidence by describing the software used to generate the evidence and showing that it produced “valid and reliable” results. The proposal would also add a new Rule 901(c) to address the problem of so‑called “deepfakes.” Under the new rule, a party may explicitly challenge electronic evidence by showing that it is “more likely than not” fabricated or altered, after which the proponent of the evidence would need to show that its probative value outweighs any likely prejudice in order to admit the item into evidence.

The eight-member panel of the Advisory Committee, which includes both well‑respected practicing attorneys and experienced trial and appellate judges, expressed considerable skepticism about those revisions. The panel especially doubted whether the proposals were yet necessary, given the court system’s existing toolkit for managing evidence and regulating the conduct of attorneys. Judge Richard Sullivan of the Second Circuit Court of Appeals summed up that view: "I'm not sure that this is the crisis that it's been painted as, and I'm not sure that judges don't have the tools already to deal with this.”

So while AI technology advances at breathtaking pace, the legal system – not exactly known as an early adopter of new technology – has continued to move slowly and cautiously in response, awaiting new developments rather than trying to anticipate them. But perhaps this posture is for the best. After all, as Justice Holmes famously put it: “The life of the law has not been logic; it has been experience.”

We here at Wilk Auslander continually stay abreast of new developments in AI technology and its applications in litigation. If you would like to further discuss the latest developments, please reach out to Natalie Shkolnik at (212) 981-2294, nshkolnik@wilkauslander.com or Michael Van Riper at (212) 421-2902, mvanriper@wilkauslander.com.

About Wilk Auslander

Wilk Auslander's business and complex commercial litigators focus relentlessly on achieving our clients' objectives as quickly and painlessly as possible. We have the flexibility and focus to help a wide range of high‑net‑worth individuals and businesses, regularly representing investment banks, private equity, publicly traded companies, and state‑owned enterprises in their most demanding disputes.

Courts Continue Grappling With Whether Cryptocurrencies Are Securities and Whether Digital Trading Platforms Are Liable for Securities Violations

09 Apr 2024

The first week of April was a busy one for crypto litigation with key developments in two closely watched cases in the Southern District of New York (SDNY) and the Second Circuit that directly confront two critical questions with respect to digital assets: (i) Is the sale of cryptocurrency tokens on a digital trading platform a securities transaction that is subject to U.S. federal securities laws and regulations? (ii) Can digital trading platforms be held liable for violations of securities laws in connection with cryptocurrency transactions? These recent cases and their tension with other cases show that the interplay of U.S. Securities laws and digital assets is still awash with uncertainty.

On April 5, 2024, in the SDNY case SEC v. Terraform Labs Pte Ltd.,a jury found the cryptocurrency issuer, Terraform Labs, and its creator, Do Kwon, civilly liable for securities fraud.¹ This verdict comes after the presiding judge, Judge Rakoff denied defendants’ motion to dismiss the case on July 31, 2023.² In denying the motion to dismiss and applying the longstanding Howey test to determine whether an asset is a security, Judge Rakoff, ruled that the SEC had adequately pleaded that the defendants had promoted its cryptocurrency token, LUNA, as a profitable investment and was thus offering and selling securities requiring registration under U.S. Securities laws.³ Judge Rakoff’s determination that Terraform’s token was a security resulted in the case going to trial and in a securities fraud verdict. Terraform (which sought bankruptcy protection following Judge Rakoff’s denial of the motion to dismiss),⁴ has stated that it will appeal Judge Rakoff’s determination that it had offered and sold unregistered securities. The critical question on that appeal will be whether Judge Rakoff’s decision that Terraform was engaged in securities transactions was correct.

The likely Terraform appeal sets up a showdown with another cryptocurrency token case in the SDNY, SEC v. Ripple Labs, Inc. In that case, Judge Torres issued a summary judgment ruling—just over two weeks before Judge Rakoff denied the motion to dismiss in Terraform—in which she held that certain of Ripple’s sales of its XRP tokens were not securities transactions subject to securities laws.⁵ While facts and the applicable standards (motion to dismiss vs. summary judgment) in the Terraform and Ripple cases differ in substantial ways, the fact remains that Judge Rakoff considered (and rejected) Judge Torres’ reasoning in the Ripple case in reaching the opposite conclusion in the Terraform case. Given that the SEC has already sought leave to file interlocutory appeal in the Ripple case (which was denied), it is only a matter of time until the Second Circuit has an opportunity to confront and resolve the incongruencies between the Terraform and Ripple rulings. Until then, companies issuing or selling crypto tokens face a substantial possibility that they will be required to comply with all applicable U.S. securities laws or face substantial liability like the defendants in Terraform.

Related to the question of whether cryptocurrency tokens are securities, is the question of who can be held liable for damages resulting from any potential securities violations involving cryptocurrency tokens. The most recent decision on that question is the Second Circuit’s April 5, 2024, unanimous summary order in Underwood v. Coinbase Global Inc. In Underwood, the three-judge panel reversed the district court and brought back to life a putative securities class action against the cryptocurrency trading platform Coinbase on the basis that plaintiffs had adequately pleaded that Coinbase—the digital trading platform, not the token issuer—had held title to the digital assets traded on its platform and was therefore subject to liability for securities violations.⁶

The Underwood ruling represents a significant development because it shows that not only can cryptocurrency issuers (like Terraform) be considered “sellers” of securities subject to securities regulations and liable for securities fraud, so too can secondary trading platforms like Coinbase in certain circumstances. If that conclusion is widely adopted by U.S. courts, legislators, and regulators, it will have serious implications for all secondary trading platforms who will be required to register as broker-dealers with the SEC and comply with securities regulations or risk civil (and potentially criminal) liability for securities violations.

The Underwood case is in tension with a different case from the SDNY that has also been appealed to the Second Circuit: Risley v. Universal Navigation Inc.⁷ In Risley, Plaintiffs filed a putative securities class action against a decentralized cryptocurrency trading platform and various of its investors alleging that they purchased fraudulent crypto tokens on the exchange. The court assumed without deciding (a growing trend in SDNY courts) that the cryptocurrency tokens in question were securities. The Court still dismissed Plaintiffs’ claims, however, because Plaintiffs could not identify who actually defrauded them, given the decentralized nature of the trading platform. In contrast to the Underwood holding, in Risley, the district court drew a stark line and held that the defendant trading platform and its investors cannot be held liable for simply creating or investing a trading platform that traders use to commit fraud.⁸ In this light, the Second Circuit’s forthcoming ruling in the Risley case will be very instructive, because regardless of the conclusion, it will undoubtedly reveal new contours on how courts will determine when a digital cryptocurrency trading platform can be held liable for securities violations.

While the regulation of digital assets in the United States remains a fast-evolving and competing patchwork of state and federal judicial, regulatory, and legislative initiatives, what is becoming very clear is that digital assets will be subject to increasing regulation at the federal level. It is also becoming increasingly clear that under any future regulatory/legislative/judicial regime, some substantial portion of participants in the digital asset ecosystem—whether issuers or exchanges—will be subject to securities regulations.

Stay tuned as we continue monitoring these cases and others and look out for our next article where we will delve more deeply into current legislative and regulatory initiatives and priorities in the digital asset space.

* * *

If you have any questions or would like to further discuss the legal developments in digital assets, please reach out to Natalie Shkolnik at (212) 981 2294, nshkolnik@wilkauslander.com or David Partida at (212) 981 2313, dpartida@wilkauslander.com.

[1] Verdict, SEC v. Terraform Labs Pte. Ltd., No. 1:23-cv-01346 (S.D.N.Y. July 31, 2023), ECF No. 229.

[2] Opinion and Order, SEC v. Terraform Labs Pte. Ltd., No. 1:23-cv-01346 (S.D.N.Y. July 31, 2023), ECF No. 51.

[3] Id. at pp. 40-41.

[4] Form 201, In re Terraform Labs Pte. Ltd., No. 24-10070 (D. Del. January 1, 2024), ECF No. 1.

[5] Opinion and Order, SEC v. Ripple Labs, Inc., No., 20-cv-10832 (S.D.N.Y. July 13, 2023), ECF No. 874.

[6] Summary Order, Underwood v. Coinbase Global Inc., No. 23-184 (2^nd Cir. April 5, 2024), ECF No. 110 at pp. 8-9.

[7] Id. 2023 WL 5609200 (S.D.N.Y August 29, 2023).

[8] Id. 2023 WL 5609200 at *11.

Representative Matters - Cybersecurity

01 Apr 2024

We represented an Argentinian mining company in connection with the successful recovery of payments totaling over $2 million wrongfully obtained through a sophisticated act of cyber fraud. The cyber-attacker had posed as an employee of a technology company with a long-standing business relationship with our client and set up a pseudo email account using a domain name similar to that of the technology company, thereafter extorting money from the client using bogus invoices. Working closely with the client and multiple federal agencies (FBI, Department of Homeland Security, U.S. Attorney General’s office, and U.S. Immigration and Customs Enforcement office), we investigate the cyberattack, identified its source, and obtained the return of over $2 million wrongfully obtained through cyber fraud.
We provided advice regarding legal and regulatory disclosure requirements, in the immediate hours following a cyber-attack, to a biotech company with thousands of customers spanning multiple jurisdictions. We worked closely with the client’s external IT support team to determine and remediate issues that directly affected the client’s immediate legal obligations, such as whether data exfiltration or infiltration occurred. We resolved the matter favorably and the applicable regulators ultimately declined to take any action against the client in connection with the cyber incident.
For a data company client, we assessed and determined their compliance with legal and regulatory obligations pertaining to cybersecurity, providing a review of the issues.
We counseled and advised several limited liability companies and business owners in connection with matters pertaining to compliance with New York cybersecurity laws and regulations, helping them establish company-wide preemptive and protective measures to ensure legal and regulatory compliance.

Representative Matters - Intellectual Property Advisory

01 Apr 2024

Advising, negotiating and preparing numerous author, illustrator, work-for-hire, collaboration, and related agreements for bestseller books.
Advising, negotiating, and preparing agreements for the publication of a biography of a mid-20th century broadcast journalism pioneer. On behalf of the family of the late journalist, we assembled a team that produced the biography, including finding a professor of journalism to write the book and a well-known literary agent to present the book to publishers. We also negotiated and prepared the writer’s agreement with the author to prepare the manuscript, which was published in 2017.
Representing professional athletes and entertainers in negotiating endorsement contracts as well as sponsorship and licensing agreements and handling trademark registrations and prosecutions.
Advising, negotiating, and preparing agreements for the purchase and sale of domain names, including domain name transfer agreements in connection with resolving domain name disputes.
Successfully providing strategy and advice on U.S. trademark opposition to a specialty food distributor seeking to protect its U.S. trademark and registering its trademarks in multiple countries.
Preparing a sponsorship agreement for a consumer electronics company client engaging a well-known celebrity saxophonist.
Preparing and negotiating a license agreement for a client/licensor’s most valuable trademark to be used by a third-party carpet manufacturer.
Securitizing a copyrighted music portfolio, enabling a musician to obtain funding for a personal project.
Handling worldwide trademark registrations and portfolio management for a high-end textile manufacturer to provide coordinated protection and avoid third-party infringements.

Representative Matters - Intellectual Property Litigation

01 Apr 2024

Represented Samara Brothers, Inc. in its copyrights and trade dress infringement case against Wal-Mart, not only at trial and on appeal, but also in the United States Supreme Court. The Supreme Court’s decision established the outer bounds of trade dress protection under the Lanham Act.
Represented a children’s toy designer and manufacturer against knockoffs of a number of its lines of products, including dolls, doll accessories, and other toys.
Represented a fast-food chain to protect its trademarks in the chapter 11 case of a multi-location franchisee.
Represented a leading NBA player in preventing infringements of his trademarks as well as unauthorized uses, both in the US and abroad, of his image and likeness.
Represented a well-known MLB player in a copyright infringement claim.
Represented a hip-hop artist and entrepreneur in defending claims of copyright infringement.

Jay Auslander Comments on Trump Appeal Bond Ruling

27 Mar 2024

Webinar: Oral Hygiene - How to Prevent Foot-In-Mouth Disease in American Litigation

20 Mar 2024

Sweeping e-discovery and limitations imposed on attorney-client privilege in U.S. litigation make the maintenance of pristine oral and written hygiene critical. U.S. litigants can force parties and third parties to turn over virtually any kind of electronic information when that information is even loosely or barely related to a dispute.

In this one-hour webinar, seasoned cross-border litigation attorneys Jay Auslander and Natalie Shkolnik of Wilk Auslander and Julio César Rivera (h) of Marval O’Farrell Mairal provide you with the best practices for limiting your exposure to discovery in U.S. litigation.

Jay Auslander Comments on Dismissal of SEC Claims for Penalties In Securities Action Based on Short Sales

20 Mar 2024

Jay Auslander Comments for Bond Buyer on Puerto Rico Electric Power Authority Plan of Adjustment

19 Mar 2024

Wilk Auslander welcomes David J. Bleckner as a Partner in our Real Estate Department

02 Nov 2023

Wilk Auslander is happy to announce that David J. Bleckner has joined our firm as a Partner in our Real Estate Department. David has been one of the leading commercial leasing attorneys in New York City for more than 30 years. In addition to representing a broad range of institutional and individual landlords and tenants, he has been representing ownership of the properties in the Empire State Realty Trust portfolio since he started his career in 1986, including significant aspects of their office leasing, retail leasing and broadcaster and telecommunications licensing transactions.

David has a broad range of experience in all types of leasing and licensing matters, including representation of national chain retailers, museums and exhibitors, theater companies, co-working and executive suite operators, operators of broadcasting facilities, medical property owners and health care providers, industrial and warehouse property owners, real estate brokers and restaurant operators.