DV Journal

A federal district judge in California has enjoined the state’s Age-Appropriate Design Code Act (AADCA). Putatively to protect children from online harms, this sweeping 2022 law imposes a potpourri of duties and restrictions on websites’ collection and handling of children’s data. It further incentivizes websites to verify each user’s age — a gross privacy violation. However, these provisions and others likely violate the First Amendment, Judge Beth Labson Freeman ruled.

Although advocated to address the discrete issue of children’s online safety, the AADCA (if permitted to take effect) would essentially reshape the internet for all users. And it would threaten not just online privacy but free speech. “Self-censorship is (the AADCA’s) self-professed aim,” alleges NetChoice, a trade group representing tech companies, which brought the case.

The astoundingly broad AADCA regulates businesses (as defined by California statute) that host websites that are “likely to be accessed by children.” Legal minors are, of course, likely to access almost every type of website. The law provides websites two paths to avoid liability: extend to all users the law’s protections for children — which California self-admittedly designed to limit children’s access to certain content — or verify every user’s age.

Both options would likely chill speech. Applying speech-limiting children’s safety provisions to adults would “impermissibly ‘reduce the adult population … to reading only what is fit for children,’” Freeman reasoned. Alternatively, many websites implementing universal age verification would likely exclude children altogether to avoid further compliance costs. The judge writes that “the provision here would serve to chill a ‘substantially excessive’ amount of protected speech to the extent that content providers wish to reach children but choose not.”

Although she acknowledged the state’s interest in protecting children from online harm, Freeman correctly assessed that much of the AADCA likely cannot meet a moderately demanding level of scrutiny. California failed repeatedly to show that the law’s provisions would meaningfully protect children from online harms; in some instances, Freeman found that the law would, in fact, harm children and other users.

For example, the AADCA’s promotion of age verification impinges on all users’ privacy — directly contravening the law’s stated aims. To identify underage users reliably, websites must collect from all users either age-confirming documentation — e.g., a government-issued identification card — or biometric data such as a facial scan. (Some websites may outsource this to third parties.) “The … age estimation provision appears not only unlikely to materially alleviate the harm of insufficient data and privacy protections for children but actually likely to exacerbate the problem by inducing covered businesses to require consumers, including children, to divulge additional personal information,” Freeman wrote.

Likewise, provisions limiting websites from making certain targeted suggestions to minors fail to discriminate between protected and non-protected speech and would likely reduce young people’s access to beneficial content.

The law requires websites to document and report how their data practices could harm children and to create harm-mitigation strategies. It does not, however, require websites to act on those strategies. The reporting requirements “provide ‘only ineffective or remote support for the government’s purpose’ and do not ‘directly advance’ the government’s substantial interest,” Freeman concluded. Much else in the law fits this legally head-scratching mold.

Too many legislators in both major parties, although rightfully concerned for children’s safety, support astoundingly sweeping (and often unconstitutional)  regulatory schemes for the digital world. As with the AADCA, such proposals (when scrutinized) generally have little chance of achieving their objectives — at least not without also inflicting intolerable economic damage or constitutional violations. Over the past quarter century, courts have accordingly struck down several such laws.

More prudent policymakers would remember that noble intentions guarantee no good policy outcomes and that economic tradeoffs and constitutional norms apply as much in the digital world as in the physical one.

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When Receiver Michael T. Doweary filed for Chapter 9 bankruptcy last Thursday for the City of Chester, he said it was the only way to resolve the city’s ongoing fiscal crisis.

“Chester’s financial and operational problems are far worse than my team of professionals has ever encountered. The status quo has not worked, is not working, and will not work. The residents of Chester deserve better,” Doweary said in a press release. He pointed to a projected $46.5 million deficit in 2023, including $39.8 million in past-due pension payments.

But representatives for the Chester Water Authority (CWA), locked in a struggle against the city’s bid to sell the CWA to Aqua PA, it was just the latest misstep by the city’s state-appointed overseer. And it leaves far too many unanswered questions.

“The Receiver has had two and half years to turn Chester around,” said CWA attorney Frank Catania, pointing to several high-profile fiascos like the city losing $400,000 through an internet phishing scam on the Receiver’s watch.

And, Catania added, Doweary did not tell the Commonwealth Court that Chester stands to gain $70 million through the sale of DELCORA (Delaware County Regional Water Quality Control Authority) to Aqua or, alternatively, get its sewer systems back so it could sell them itself.

“It’s a robbery in progress,” said Catania of Doweary’s revised Receivership document. Doweary is “trying to shift the burden (of paying for water and sewer) from government to citizens,” both in Chester and in parts of Delaware and Chester counties. Some 80 percent of CWA customers are suburban and if Doweary has his way, those customers will subsidize the city.”

“The Receiver uses bank robber’s logic: I need money. You have money. I’m taking it.”

Doweary declined to respond to repeated requests for comment. In a press release, he said he avoided bankruptcy as long as possible, and he pointed fingers at city officials.

“Since my appointment over two-and-a-half years ago, I have worked to avoid this day,” Doweary said. “However, Chester has a severe structural deficit that cannot be addressed by one-time fixes, has unaffordable retiree benefit liabilities, and cannot reliably provide vital and necessary services to its residents.”

According to Doweary, Chester’s elected officials and employees are not cooperating with his stewardship. For example, Councilman William Morgan lost the money to the phishing scam — involving a fake request for payment — in June, but he was not notified until three months later. He also pointed to a $750,000 IRS penalty against Chester for incorrect payroll taxes and to a salary being paid to an incarcerated former employee.

Doweary acknowledges he is seeking more control over city operations and also wants the court to award him control over the CWA. He also asked the court to tell employees and elected officials that they must not interfere with the directives of the chief operating officer or the Receiver.

What the Receiver won’t discuss, however, is the city’s outstanding debt for the high-powered law firm, Greenberg Traurig, for a $1 million contingency fee. How could Chester, struggling to pay its bills, afford to pay $1 million?

DVJournal has requested the underlying documents related to retaining Greenburg Traurig, but the Receiver has declined to provide them or explain what work the firm was supposed to provide to the taxpayers of Chester.

CWA is in litigation with the Receiver. Oral arguments in that case are scheduled before the state Supreme Court on Nov. 30.  However, a bankruptcy filing stays other court cases. Lawyers are meeting with a bankruptcy court on Tuesday.  Also, at 1 p.m. on Tuesday, the Municipal Financial Recover Advisory Committee will meet. That meeting will be streamed. 

“[Doweary] is court shopping,” said Catania. “He wants to avoid the Supreme Court and go to Commonwealth Court.”

“He’s going to try to convince (the Commonwealth Court) judge that he should be in charge of CWA,” added Catania.  “He couldn’t even make sure the city that Chester had proper insurance coverage and he wants to sell the water authority and serve 200,000 customers fresh drinking water? It’s outrageous. He’s got to be stopped. He did not tell the court the whole story that Chester stands to get $70 million from the sale of DELCORA.”

Instead of a Receiver, the state should step up for Chester, like it previously did Philadelphia, Pittsburgh, and Harrisburg, said Catania.

“This is an orchestrated crisis,” said Catania. “And whenever it’s convenient, Doweary brings the city retirees out for public relations purposes.

“He treated Chester retirees as hostages,” he said.

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The sale of DELCORA remains snared in litigation. The latest salvo was by Chester City receiver Michael Doweary to make sure the city receives its share of compensation if the pending $276.5 million DELCORA sale to Aqua PA goes through.

The suit argues that a previous contract signed in 1973 says Chester must agree to a sale and the city should also be paid a portion of the proceeds. DELCORA (Delaware County Regional Water Quality Control Authority) is also required under that 48-years-old agreement to return the city’s sewer system to the city. A later agreement said DELCORA must pay the city 10 percent of any sale, the complaint said.

DELCORA serves 46 municipalities in Chester and Delaware Counties.

Doweary asks the court to impose a declaration of judgment and an injunction.

Doweary tried to intervene in the sale before, but the Public Utilities Commission (PUC) refused, telling Chester it was too late. The DELCORA sale to Aqua had been approved by Delaware County’s former Republican-controlled council. The Democrats now in control are fighting the deal and passed an ordinance to permit the county to take over the utility.

Vijay Kapoor, Doweary’s chief of staff, said the new complaint is to make sure that Chester is protected if a sale goes through or DELCORA stops operations.

“There are assets that used to belong to the city,” he said. “These would revert back to the city or the city would receive adequate compensation.” The suit will “preserve Chester’s rights.”

A spokeswoman for Aqua PA said, “Although the action was filed/dated Aug. 17, Aqua only recently received a copy and has not had the chance to thoroughly review it in order to make substantive comment. Aqua is not a named party in the action. We are aware of similar relief the receiver sought before the PUC but the PUC determined he was not permitted to participate in that process. We previously asked the receiver several times for a list of the supposed assets potentially subject to the old agreement, and the supposed valuation of those assets. To date, we have not received a response.”

Kapoor said the PUC ruled they were too late to file but did not rule on the merits of their claims.

“It’s like watching a medieval castle siege,” said Frank Catania, a lawyer for the Chester Water Authority. “If they just starve them out they will eventually yield and sell to Aqua. Harrisburg has a $4 billion surplus. Delaware County has $100 million. It’s disappointing that nobody can use some of that money to help the City of Chester.”

CWA is also a litigant because Doweary may sell that entity to Aqua for $410 million, which would help with the city’s pension obligations. However, that case is pending before the state Supreme Court.

CWA serves 49,000 customers in 33 towns in Delaware and Chester counties.

Samantha Newell, with Rudolph Clarke, the law firm representing DELCORA, did not reply to a request for comment Thursday. The politically-connected law firm has Democratic state Reps. Mike Zabel and Benjamin Sanchez and Democratic state Sen. Maria Collett and Steven Santarsiero as “of counsel” lawyers.

The Common Pleas court has scheduled a hearing on September 7th to hear arguments regarding the Order the Court will issue, in response to the Commonwealth Court’s decision on this matter.

Delaware County Solicitor William Martin could not be reached for comment.

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A disturbing trend continues to infiltrate courtrooms across the country where third-party groups — including Wall Street hedge funds, institutional investors and private companies — provide money to trial lawyers in return for a part of any financial recovery from litigation. These groups pour millions of dollars into funding class-action lawsuits like they are betting on stocks — often with little to no transparency. 

This trend, better known as third-party litigation funding (TPLF), is perpetuating a toxic cycle of turning our civil justice system into a for-profit business, focusing on maximizing the value of cases to fund more lawsuits instead of serving justice.

Even more disturbing is that the National Association of Attorneys General (NAAG) is getting in on the action, using its extensive resources to drive lucrative multi-state litigation targeting various deep-pocketed industries.

Historically, NAAG has played an influential role in managing multi-state investigations and lawsuits. The organization claims to be a “nonpartisan national forum providing collaboration, insight, and expertise to empower and champion America’s attorneys general.” 

But over time, NAAG’s focus has shifted from promoting collaboration to promoting entrepreneurial litigation. NAAG has primarily turned into an organization that has only one goal: suing businesses for profit.

Far from being a neutral entity, NAAG massively benefits financially from these lawsuits and, in turn, uses its accumulated wealth and resources to help coordinate and facilitate even more lawsuits. The NAAG playbook is starting to come out of the shadows after the recent departure of several of its disgruntled members, including attorneys general from Montana, Texas and Missouri. Additionally, seven other attorneys general joined Kentucky AG Daniel Cameron in sending a letter to NAAG’s executive director outlining their concerns about how the organization is funded.

Currently, NAAG has more than $200 million in assets. The organization distributes these funds as grants to states to help litigation get off the ground. States receive grants to fund research and other expenses to determine participation in a multistate lawsuit. In return, NAAG buys an interest in the outcome of a lawsuit and receives an agreed-upon financial carve-out from the final settlement.

This TPLF process diverts settlement money away from actual victims and provides it to NAAG — putting profits before the public interest. It also allows state attorneys general to avoid using state-appropriated funds or having to go to their respective state legislatures for more funds to pursue financially lucrative or ideologically driven litigation. NAAG’s grant process allows state attorneys general to participate in a multistate action to gain funding to pursue the research and litigation required without having to directly dip into the state appropriation process. This funding side-steps and weakens the checks and balances a state legislature should want to exercise in these situations.

The injection of a third party’s financial interest in litigation threatens a state’s ability to exercise independent judgment in cases where the funder can influence litigation or settlement decisions — changing litigation involving plaintiffs and defendants into a multi-party process with a behind-the-scenes mega-donor. As Cameron explains in his letter to NAAG’s executive director, this process likely violates many state laws that exclusively vests the power of the purse with their legislatures.

Beyond the lack of accountability and transparency of the litigation funding from NAAG, their internal coordination demonstrates how the organization has become a lawsuit factory. When a state pays dues to NAAG, that state attorney general’s office gets access to all the resources of NAAG — including their training and working groups.

The NAAG training classes focus on best practices for filing lawsuits to instructional classes on using new software and analytics to generate new leads. This helps state attorneys general learn how to be more effective at filing large, class-action and mass tort lawsuits against anyone thought to have deep pockets. The NAAG working group serves as a sounding board for case generation focusing almost exclusively on multi-state ligation. Once a litigation target is found, the working group strategizes on which states are best positioned to take the lead on cases. The states are then allowed to trade information on this litigation through information-sharing agreements so that others can lend resources and profit from any settlement.

The exodus of NAAG members who oppose this exploitation of our civil justice system for financial gain should serve as a stark warning. Manufacturing entrepreneurial litigation devastates our economy, takes resources away from actual victims, and further distorts our legal system. NAAG must immediately realign its priorities if it wishes to salvage its original mission of being a credible, non-partisan organization. 

Instead of perpetuating more third-party litigation funding, NAAG needs to get back to its core purpose of promoting efficiency and coordination between state attorneys general.

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