Amazon must include shareholder proposals on facial recognition technology, hate speech, and sales of offensive products, but more generalized societal- or community-oriented proposals may be excluded.
The staff of the SEC’s Division of corporation finance stated that Amazon.com, Inc., may not exclude a pair of shareholder proposals on facial recognition technology from its proxy materials. The proponents had raised concerns about the potential for misuse of facial recognition technology and the impact such misuse may have on civil and human rights. SEC staff later declined to reconsider its conclusion that the proposals may not be excluded; Amazon had argued, in part, that facial recognition policy should be left to Congress. In March, a bipartisan group of senators proposed legislation that would address privacy worries surrounding facial recognition technology. As for other recent Amazon shareholder proposals, CorpFin staff said the company may not omit from its proxy materials a proposal on hate speech and offensive products, but it may omit proposals on general social issues.
Amazon’s Rekognition service. According to a letter from Amazon’s counsel, Gibson Dunn, Amazon’s Amazon Web Services (AWS) includes a machine learning unit that created Amazon Rekognition to perform a variety of services for customers who pay for access to the cloud-based service. The company’s letter explained that Rekognition exists "to help identify objects, people, text, scenes, and activities, as well as to detect inappropriate content" (footnote omitted). Amazon said Rekognition launched in 2016 and has been used for numerous law enforcement and commercial purposes, including the identification of "public figures who are speaking at large events or live on-air" and to combat human trafficking and child exploitation. Other uses cited by Amazon include creating childrens’ educational apps and allowing users to search for their celebrity look-alikes.
As the proponent’s analysis observed, the ACLU claimed to have discovered flaws in Rekognition, which the ACLU said misidentified 28 members of Congress. For its part, Amazon has defended its technology. For example, Dr. Matt Wood, general manager of artificial intelligence at AWS, blogged last year that Rekognition is just one of several facial recognition services available from different providers and he asserted that no reports exist that Rekognition had been misused by law enforcement. He also suggested that technology invariably brings risks and that responsible use is the key. "But we believe it is the wrong approach to impose a ban on promising new technologies because they might be used by bad actors for nefarious purposes in the future. The world would be a very different place if we had restricted people from buying computers because it was possible to use that computer to do harm," said Wood.
The facial recognition proposals. Amazon received two proposals on its facial recognition technology. One proposal submitted by the Tri-State Coalition for Responsible Investment asks Amazon’s board to ban the sale of such technology to governments unless the board conducts an investigation and concludes that independent evidence shows the technology does not aid civil and human rights violation. Another proposal submitted by John C. Harrington asks Amazon’s board to commission an independent study of Amazon’s Rekognition technology and to issue a report addressing three items: (1) the danger of the technology to privacy and civil rights; (2) the extent to which the technology is marketed or sold to foreign governments; and (3) the financial and operational risks inherent in the technology.
CorpFin staff concluded that Amazon could not exclude the twin proposals on the basis of the economic relevance exception, the ordinary business exception, or because of duplication of proposals:
- Economic relevance exception—The economic relevance exception contained in Exchange Act Rule 14a-8-(i)(5) allows for exclusion if the proposal is not significantly related to the company’s business (i.e., less than 5 percent of total assets, net earnings, and gross sales, respectively). The proponent asserted that Amazon’s facial recognition component of Amazon Web Services could reach $23 billion; the proponent also cited concerns the company could experience a "spillover effect" to Alexa and other products if consumers come to distrust the company. Amazon, by contrast, sought exclusion because Rekognition was just one of 165 AWS services, Rekognition’s financials fall below the numerical thresholds of the economic relevance exception, and the proponent had couched its claims about misuse of the technology as merely "potential" issues. SEC staff rejected this basis for exclusion.
- Ordinary business exception—Under the ordinary business exception in Exchange Act Rule 14a-8-(i)(7), exclusion is permitted if the proposal deals with a matter relating to the company's ordinary business operations. CorpFin staff said Amazon could not invoke this basis for exclusion. The proponent argued that, although Amazon was not obligated to issue an opinion on the matter, the company’s argument for exclusion sidestepped Staff Legal Bulletin 14I’s opportunity to provide such response. The proponent also decried Amazon’s "break-then-fix" business model and noted the high public visibility of concerns about facial recognition technology, including an Amazon spokesperson’s call for regulations, all of which suggest the proposal transcends Amazon’s ordinary business. Amazon claimed there was an insufficient nexus between the policy issue and the company’s business to invoke the significant policy exception under Rule 14a-8-(i)(7) because the proposals address only potential misuse by Amazon customers, something that would violate Amazon’s user agreements on acceptable use, so the proposals would not transcend the company’s ordinary business.
- Duplication—Exchange Act Rule 14a-8-(i)(11) permits exclusion of a shareholder proposal if the proposal would be duplicative of a previously submitted proposal that will be included in the company’s proxy materials. According to CorpFin staff, Amazon may not exclude the Harrington proposal on this basis. The proponent argued that, although multiple proposals exist, they actually are distinct rather than duplicative because one focuses on stopping sales to governments (prohibition) while the other focuses on social issues regarding facial recognition technology (disclosure). Amazon had argued that the TriSate proposal arrived first, so the Harrington proposal was duplicative; the company also had stated that it planned to include the TriState proposal if the staff disagreed with its other bases for excluding it.
Congressional action on facial recognition. The Commercial Facial Recognition Privacy Act of 2019 (S. 847), introduced in March 2019 and co-sponsored by Sen. Brian Schatz (D-Hawaii) and Sen. Roy Blunt (R-Mo), would limit the use of facial recognition technology by making it unlawful for a "controller" to knowingly use the technology to collect facial recognition data without first obtaining an end user’s "affirmative consent" and, to the extent possible, providing notice that the technology is present along with documentation stating the capabilities and limits of the technology. A controller also would be prohibited from using the technology to discriminate in violation of federal and state law, using the technology for any purpose not disclosed to end users, and sharing facial recognition data without affirmative consent that is separate from the end user’s initial consent.
The Federal Trade Commission would be the primary regulator enforcing the proposed Act. However, state attorneys general and certain other state officials could bring civil suits on behalf of state residents, although the FTC could intervene in these suits.
"Our faces are our identities. They’re personal. So the responsibility is on companies to ask people for their permission before they track and analyze their faces," said Sen. Schatz, ranking member of the Senate’s Subcommittee on Communications, Technology, Innovation, and the Internet. Committee member Blunt noted that the bill would give consumers choices. "That’s why we need guardrails to ensure that, as this technology continues to develop, it is implemented responsibly. This bill increases transparency and consumer choice by requiring individuals to give informed consent before commercial entities can collect and share data gathered through FR," said Sen. Blunt in a separate press release.
In February 2019, before the Commercial Facial Recognition Privacy Act was introduced, an Amazon blog post by Michael Punke, vice president of global public policy at AWS, said the company welcomed a "national legislative framework" that would protect civil rights and ensure government transparency, while suggesting that "outside groups" that obtained false results from Rekognition may have used the service incorrectly. Punke also suggested five criteria for using facial recognition technology: (1) follow the law; (2) law enforcement should employ human review of images and not allow for an "automated, final decision;" (3) law enforcement should use the 99 percent confidence threshold and use facial recognition as only one factor in investigations; (4) law enforcement should ensure transparency in its use of facial recognition technology; and (5) notice should be given when video surveillance and facial recognition are used together in public or commercial spaces.
Hate speech and offensive products. CorpFin staff also recently issued responses to Amazon requests to exclude additional shareholder proposals. In one matter, the proponent asked Amazon to report on how it handles hate speech and the sale of offensive products. Amazon had argued that the proponent failed to meet the eligibility requirements (continuous ownership of shares) and that the proposal was nevertheless excludable under the ordinary business exception (deals with product selection). Amazon also said: "Under the processes outlined above, the Company has removed hundreds of thousands of product listings from its stores during the past 12 months, including products that promote, incite, or glorify hatred, violence, racial, sexual, or religious intolerance or promote organizations with such views." CorpFin staff, however, said the proponent appeared to have met the eligibility requirements of Exchange Act Rules 14a-8(b) and 14a-8(f), while also noting that the proposal focused on an issue that is significant to Amazon for purposes of the ordinary business exception.
Excludable Amazon shareholder proposals. Moreover, the CorpFin staff concluded in two other instances that Amazon could exclude shareholder proposals under the ordinary business exception. One of these proposals calledfor the company’s board to annually report to shareholders on Amazon’s community impact. The proponent argued that the proposal dealt with the significant social policy of inequality, while Amazon countered that the proposal focused on the location of the company’s facilities, which Amazon said is part of its ordinary business. The SEC staff observed that the proposal was very general in nature and did not focus on an issue that transcended ordinary business. A second proposal also could be excluded under the ordinary business exception because it too was too general in nature. The proponent had called for Amazon’s board to create a committee on "societal risk oversight."
Attorneys: Ronald O. Mueller (Gibson Dunn)
Companies: Amazon.com, Inc.; Tri-State Coalition for Responsible Investment; Sisters of St. Joseph of Brentwood
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