Elon Musk's X (formerly Twitter) remains on the hook for an approximately $400,000 fine after failing to respond to an Australia eSafety Commission 2023 inquiry, which largely sought to probe measures X is currently taking to combat an alleged proliferation of child sexual abuse material (CSAM) on its platform.
To void the fine, X tried to persuade Australian Judge Michael Wheelahan that X had no obligation to comply with an Online Safety Act notice issued to Twitter because Twitter "ceased to exist" a few weeks after receiving the notice—when Musk merged the app into his company X Corp.
Wheelahan summarized X's argument as saying that "X Corp was not obliged to prepare any report in Twitter Inc’s place, as X Corp was not the same person as the provider to whom the notice was issued."
But Wheelahan ruled Friday that the fine should be upheld, rejecting the "bare premise" that X assumed no legal responsibility to respond to the notice after Twitter ceased to exist.
X's argument failed because Wheelahan found that under Nevada law, merging Twitter into X turned Twitter into a "constituent entity," which then transferred all of Twitter's legal consequences to X Corp.
In his order, Wheelahan devoted a decent chunk of time to calling out testimony from X's expert on commercial business law, Scott Bogatz, as "molded to support the conclusions he expressed in his report."
Particularly "superficial" and requiring "leaps of logic," Wheelahan wrote, was Bogatz's attempts to persuade the court that the meaning of "liabilities" in Nevada merger law strictly applied to financial liabilities.
"It is clear under Nevada Law that the term ‘liability’ refers to monetary obligations," Bogatz had argued in court, but Wheelahan did not find this persuasive.
"I cannot accept this evidence without a much better explanation of Mr. Bogatz’s path of reasoning," Wheelahan wrote.
Wheelahan emphasized that the Nevada merger law specifically stipulated that "all debts, liabilities, obligations and duties of the Company shall thenceforth remain with or be attached to, as the case may be, the Acquiror and may be enforced against it to the same extent as if it had incurred or contracted all such debts, liabilities, obligations, and duties." And Bogatz's testimony failed to "grapple with the significance" of this, Wheelahan said.
Overall, Wheelahan considered Bogatz's testimony on X's merger-acquired liabilities "strained," while deeming the government's US merger law expert Alexander Pyle to be "honest and ready to make appropriate concessions," even while some of his testimony was "not of assistance."
Luckily, it seemed that Wheelahan had no trouble drawing his own conclusion after analyzing Nevada's merger law.
"I find that a Nevada court would likely hold that the word 'liabilities'" in the merger law "is broad enough on its proper construction under Nevada law to encompass non-pecuniary liabilities, such as the obligation to respond to the reporting notice," Wheelahan wrote. "X Corp has therefore failed to show that it was not required to respond to the reporting notice."
Because X "failed on all its claims," the social media company must cover costs from the appeal, and X's costs in fighting the initial fine will seemingly only increase from here.
Fighting fine likely to more than double X costs
In a press release celebrating the ruling, eSafety Commissioner Julie Inman Grant criticized X's attempt to use the merger to avoid complying with Australia's Online Safety Act."Had X Corp’s argument been accepted by the Court, it could have set the concerning precedent that a foreign company’s merger with another foreign company might enable it to avoid regulatory obligations in Australia," Inman Grant warned.
X has been on thin ice with Inman Grant since it responded to the initial 30-question inquiry into how the platform is monitoring and removing CSAM by leaving many questions blank. X then seemingly stalled, delaying responding to subsequent inquiries asking the company to either fill in the blanks or explain why it was unable to answer the questions.
So, when X refused to pay the non-compliance fine last October, Inman Grant seemingly had enough. She soon commenced an additional proceeding in December, this time "seeking the imposition of civil penalties," Wheelahan noted. And that can now move forward, as "the further progress of the civil penalty proceeding" has been awaiting the outcome of Wheelahan's ruling this week, the judge said.
There's little chance that eSafety will drop the civil proceeding. In the press release, eSafety confirmed that the commission "takes compliance with transparency notices seriously and looks forward to ensuring alleged non-compliance is adequately addressed."
According to an Australian government review of the Online Safety Act, X could owe civil penalties up to approximately $530,000 for failing to comply with the reporting notice, potentially more than doubling its costs after fighting the initial fine.
X might have been better off sharing more information on how it's fighting CSAM. Inman Grant reiterated Friday that eSafety is not just targeting X, but all Big Tech platforms failing to be transparent about steps taken to respond to CSAM.
“eSafety remains committed to exercising provisions available under the Online Safety Act to hold all tech companies to account without fear or favor, ensuring they comply with the laws of Australia and prioritize the safety and wellbeing of all Australians,” Inman Grant said.
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