The Growing Scrutiny of Social Media by U.S. Courts and Agencies

The evolution of social media in business from “occasional accessory” to “integral component” has in turn forced the law itself to evolve in an attempt to address social media’s increasing relevance. Recent developments in two different areas of law show a newly evidenced recognition of social media’s importance in business.

The Importance of First Impression

In In re CTLI, LLC, a limited liability company (LLC) that sold guns and ammunition and operated a shooting range went into Chapter 11 reorganization. The former majority owner disputed the enforceability of a confirmation order requiring that he relinquish control of debtor LLC’s social media accounts to the bankruptcy estate. At a hearing, the former majority owner argued that all of the social media accounts (Facebook, Twitter) belonged to him personally and not to the debtor. He also argued that it would violate his privacy should he be required to share the accounts with the reorganized debtor. The Court noted that whether business social media accounts were the property of the debtor LLC’s bankruptcy estate was a matter of first impression in Texas courts. The Court indicated that only one other bankruptcy court, applying New York Law, had addressed this issue and treated social media accounts as property.

The Court went on to distinguish between individual and business social media accounts. Ultimately, the Court determined that the social media accounts at issue were much more of a business than personal nature. The Court noted that “[a] business social media account is in a sense a manifestation of the business’s accrued goodwill … whatever goodwill the individual caused to be associated with the business remains property of the business.” The Court concluded that the social media accounts were thus the property of the bankruptcy estate and held that the reorganized debtor would have full control over the social media accounts.

Staying True to Form

On May 20, 2015, the Securities and Exchange Commission (SEC) issued proposed rules that would require certain reporting and disclosure of information by investment advisers and companies. The proposed rules address the proposed amendments to the investment adviser registration and reporting form (Form ADV), and the proposed amendments to the Investment Advisers Act Rules. Notably, amendments would require an advisor to provide information on the use of social media and related information by the adviser. For example, Form ADV currently asks whether an adviser has one or more websites. The proposed amendment would ask whether the adviser has one or more websites or websites for social media platforms, such as Twitter, Facebook and LinkedIn, as well as request the social media addresses in addition to other websites. The discussion notes that collection of such information would help improve the depth and quality of information on investment advisers and facilitate risk monitoring initiatives. The discussion elaborates further:

“Along with websites, advisers increasingly utilize social media to communicate and it would be useful for this information to be available to us and the general public. Our staff could use this information to help prepare for examinations of investment advisers and compare information that advisers disseminate across different social media platforms as well as identifying and monitoring new platforms. Current and prospective clients could use this information to learn more about advisers and make more informed decisions regarding the selection of advisers.”

The SEC is also contemplating whether to ask advisers if they permit employees to have social media accounts associated with the advisers’ business. The SEC requested comments on the proposed changes, including whether there were any concerns with providing social media information for advisers and whether the information would be useful to investors. Because a company’s social media account can be considered advertising and relevant to its business activities, it would seem reasonable to require disclosure of such accounts. However, it might be worth clarifying that the social media account to be disclosed be predominantly associated with the company (and not those considered personal accounts of the officers or employees). The comment period ended on August 11, 2015.

This activity shows that the days of Twitter and other social networks being considered as somewhat frivolous accessories to business are over. And yes, plenty of people have known that for a while, but some areas of law are like grandparents. They may become aware of and adjust to a new technology later than the grandkids, but once they start to embrace it, watch out—the rules for your own use will change in response.