Congress Creates a New Cause of Action for Trade Secret Theft

On April 27, 2016, in a move lauded as the most significant expansion of federal intellectual property law in the last half-century, Congress passed the Defend Trade Secrets Act of 2016 (“DTSA”) and established the first civil remedy for trade secret misappropriation under federal law.   The bill was passed as an amendment to the Economic Espionage Act, 18 USCA § 1832, which currently permits the Attorney General to enjoin trade secret misappropriation, but does not provide equivalent standing to civil litigants. Following significant cross-partisan support and easy passage through Congress, the DTSA was today signed into law by President Obama.

The most ostensible feature of the DTSA is jurisdictional, as the bill forges a new road to federal court without the barriers that previously confined a great deal of trade secret litigation to state tribunals.  Since a trade secret dispute brought under the DTSA arises under federal law, litigants no longer need to worry about the state citizenships of parties to get their case into federal court for relief.  However, not every trade secret dispute will be eligible for adjudication under the DTSA. Unlike patents and copyrights, the bill is grounded in the legislature’s “commerce power,” so only trade secrets relating to a product or service intended for use in interstate commerce may qualify for federal protection.

A noteworthy aspect of the DTSA is its similarity to the current legal framework.  With few exceptions, almost all states have enacted misappropriation statutes modeled after the Uniform Trade Secrets Act (“UTSA”), albeit with some variation.   The DTSA uses strikingly similar language to the UTSA in defining what constitutes a “trade secret” and “misappropriation.”  In interpreting the federal law, courts will likely rely on the robust case law that has developed under UTSA for the past three decades.  With that said, this preexisting statutory framework across 48 states perhaps undercuts the need for uniformity in trade secret law, as touted by proponents of the bill.

Despite its continuation of this common statutory language, the DTSA does contain certain unique features.  Notably, it includes a provision for the pre-trial seizure of property related to the improper use or dissemination of a trade secret.  The bill allows a trade secret owner to present an “ex-parte” petition to the court requesting that certain property of a defendant be seized and retained by the court pending the outcome of the case.  Although such seizure should only issue in “extraordinary circumstances,” the availability of this powerful mechanism raises concerns as to its effect on the cost and complexity of trade secret lawsuits.  If trade secret litigation becomes unduly expensive, parties will be pressured to enter early settlements just to avoid the cost of defending against such actions.

Finally, the DTSA’s whistleblower provision is sure to keep human resources departments busy over the next few months. Under the bill, any agreement with an employee governing the use of trade secrets (i.e. many non-competition and non-disclosure contracts) must include a notification that an employee is immune from liability if information is disclosed to address a potential violation of law. If a contract does not contain this notification, an employer who sues an employee for trade secret misappropriation in violation of such an agreement will be unable to recover exemplary damages or attorney’s fees.  These kinds of new features ensure that the DTSA will have a big impact.

David Moon is an attorney with Washington, DC regional business law firm, Berenzweig Leonard. David can be reached at dmoon@berenzweiglaw.com.

What Is the Real Reason the FBI Canceled the Apple Hearing?

The FBI canceled the March 22 court hearing scheduled to take place in California that was aiming to force Apple to create code for unlocking an iPhone.  The FBI suddenly changed course and notified the judge, and Apple, that an unknown source may be able to crack the security encryption feature on the San Bernadino terrorist’s iPhone, without Apple’s help.  If that holds true, the government’s case could be withdrawn in the next few weeks and this historic chapter in one of the biggest technology cases in the nation could conclude.

This news raises the question whether there was something else going on which motivated the government to avoid this fight with Apple.  An answer can probably be found in the briefs both sides recently filed with the court.  As those legal arguments evolved, the FBI’s case became weaker as Apple’s rebuttals became more targeted.  Perhaps the most powerful argument was raised when Apple pointed out there is a federal statute demonstrating that Congress did not want to give the government the authority to force a way to break cellphone encryption.  Apple pointed to the Communications Assistance for Law Enforcement Act (‘CALEA’), which requires telecom carriers to enable the government the means to wiretap telephone traffic for law enforcement purposes.  CALEA has an exception for phone manufacturers such as Apple (section 1002 of the Act), confirming that cellphone developers cannot be forced to design an encryption master key.  The FBI asked Congress in 2013 to change this feature of CALEA, but Congress refused.  Therefore, Apple has persuasively argued, there is a federal law directly on point which overtakes the government’s attempt to argue that the All Writs Act of 1789 (that’s right, 1789) somehow gives general authority to the contrary.

Faced with this stark disparity in legal positions, it is not surprising that the FBI ducked the hearing and is searching for another solution to avoid an adverse ruling.  This development also means that consumers’ protection of their personal information stored on cellphones just became more secure, at least for now.  This case may soon come to a close, while the tech battle continues to challenge industry programmers to somehow design more sophisticated safety features to safeguard informational privacy in an increasingly hostile environment.

Seth Berenzweig is a founding and managing partner of Berenzweig Leonard, and has discussed the FBI-Apple case on television, covering the legal issues impacting technology companies and individuals.

Fantasy Sports Puts Its Cards on the Table for NY Court Hearing

The two biggest daily fantasy sports (‘DFS’) operators and the NY Attorney General will be placing big bets Wednesday in a New York courtroom, when they ask Judge Mendez for an injunction which could lead to the rescue or destruction of fantasy sports in New York.  Since the hearing addresses whether daily fantasy sports is a game of skill or a game of chance, the results will also spill over into the several other states whose Attorney Generals are investigating the industry and placing their own bets on the multi-billion dollar industry.

Observers of this legal battle got an interesting flavor of Judge Mendez’s perspective on the case a few days ago, when he denied DraftKing’s and FanDuel’s motions for a temporary restraining order. The requests to set aside NY Attorney General Eric Schneiderman’s recent cease and desist letter was denied, and the court set a hearing date of Wednesday, November 25th for all parties to present their arguments for a preliminary injunction.  The winner of this hearing will be dealt a strong hand, since a core part of the court’s analysis depends on which side the judge feels demonstrates a likelihood of success on the merits of their case.

If DraftKings and FanDuel win the hearing they can continue operating in New York, one of the most crucial states to their business model and financial existence.  If the government wins, the fantasy sports operators will be ordered to follow Schneiderman’s demand to cease such operations and stop accepting bets in New York.  A loss for DraftKings and FanDuel could also have other harmful effects, since the ruling will be predicated on whether DFS is an illegal game of chance – a result other Attorney Generals could use to further their own agendas and bring new storm clouds to additional fantasy sports operators including internet giant Yahoo.  

Daily fantasy sports is facing several major challenges, including various class actions lawsuits and government investigations.  Those other headaches will need to take a back seat to the hearing in New York this week, as the parties in that case take off the gloves and step into the litigation ring with much on the line.  Faced with no immediate opportunity for a business discussion with government officials for some kind of middle ground, all bets are off as spectators take a seat and await Judge Mendez’s crucial decision.

Seth Berenzweig is the founding and Managing Partner of Berenzweig Leonard.  His business law practice includes representing companies, executives, entrepreneurs and former professional athletes to help them address business growth and compliance.  He is also a Director of The Corporate Huddle, a non-profit organization that aligns CEOs with former professional athletes for professional mentoring.

The Fantasy Sports Business – A Real Bet or Fantasy Fraud?

Just as daily fantasy sports (“DFS”) companies such as DraftKings and FanDuel have become huge multi-billion dollar businesses, breaking news has raised questions about whether fantasy sports is a soundly run responsible business or a clumsily disguised sham.  A recent scandal in the DFS industry arose when a DraftKings employee, Ethan Haskell, allegedly used sensitive betting information internally collected by his employer and utilizing it to his advantage, selected a fantasy lineup that won $350,000 on FanDuel, a competing DFS website. The money that Haskell collected was naturally won from the losing bets and cash of other DFS participants who were not as fortunate to have access to such information, leading some lawmakers as well as others to seriously question whether the rules of the game should change to protect consumers.

The legal background on this story begins in 2006, when the federal government created a law prohibiting internet gambling but deemed fantasy sports a game of skill and not chance, an important distinction which allowed fantasy sites to continue operation.  Classifying fantasy sports as a game of skill is a debatable notion that nonetheless survived the 2006 law thanks to aggressive lobbying from professional sports.  The fantasy sports industry as well as the technology enabling its growth subsequently exploded over the next several years, blossoming into a multi-billion dollar industry with high profile investors including lead sports figures such as Dallas Cowboys owner Jerry Jones and Robert Kraft of the New England Patriots owner Robert Kraft.  ESPN and Yahoo have also been participants in the fast growing industry.

FanDuel and DraftKings’ relentless marketing promotes users who have won millions of dollars in a single weekend, but for each user who does win, countless others walk away with nothing. For a participant to win a million dollar cash prize they must defeat hundreds of thousands of other competitors. Strategy is paramount, and salary cap limitations imposed by DFS sites means a participant cannot simply buy up all the best talent. Ideally, a participant would want to select players who few of his competitors have selected. By selecting these “under the radar” players and having those players post substantial statistics, a participant could drastically enhance his chances of victory in a mass entry contest. Information about the players that competitors have selected for their lineup are not available to the public, but having knowledge of the betting strategies of competitors would be advantageous.

The potential for abuse is more than theoretical here. Both DraftKings and FanDuel have acknowledged that Haskell won $350,000 on a $25 bet in a mass entry contest on FanDuel. Additionally, in his employment capacity, Haskell was privy to the betting information of competitors and could gain a competitive advantage by applying this information. A spokeswoman for DraftKings said that Haskell made a “mistake” and did not use information improperly, although this is probably of little solace to customers who place bets and rely on the soundness and ethics of DFS sites to operate responsibly.  DraftKings and FanDuel’s recent announcement of policies to prohibit their employees from betting may bring comfort to some, but others are not convinced that self-proclaimed policies are the best path to compliance.  As infamous companies such as Enron demonstrated, impressive looking ‘compliance programs’ are sometimes not worth the paper they are written on.  This legal backdrop explains why some legislators are now throwing the flag at the industry and suggesting it may be time for legislative hearings and new legislation.

This story will continue to evolve over the coming weeks, as DraftKings and FanDuel try to get a handle on the situation and try not to fumble their hold on an extremely lucrative industry.  In the meantime, people may wish to be cautious when placing their bets on fantasy sports, and consider whether such actions are a true bet or Hail Mary.

Seth Berenzweig is the Managing Partner of Berenzweig Leonard, who works with business executives including former professional athletes and appears on national television to discuss breaking business and sports news.  Drew Smith is the Director of Professional Sports Law at Berenzweig Leonard, LLP and also represents current and former professional athletes.

Independent Contractor or Employee? New DOL Guidance Concludes Most Independent Contractors are Misclassified.

The U.S. Department of Labor (“DOL”) recently issued an Administrator’s Interpretation addressing the common misclassification of employees as independent contractors under the Fair Labor Standards Act (“FLSA”). The misclassification of employees as independent contractors may lead to those employees failing to receive certain workplace protections, such as minimum wage and overtime compensation under the FLSA. The DOL concludes that most workers qualify as employees under the FLSA’s definition.

Employers often use the common law “control test” to determine whether a worker is an employee or an independent contractor. The “control test” analyzes whether a worker is an employee or independent contractor based on the employer’s control over the worker. While the “control test” has been adopted by courts in the context of other employment statutes, the DOL makes clear that the FLSA’s broad definition of “employ” as including “to suffer or permit to work” is more expansive than the control test. The agency says that for purposes of determining FLSA applicability, the focus must be on the economic realities of the relationship – that is, “whether the worker is economically dependent on the employer (and thus its employee) or is really in business for him or herself (and thus its independent contractor).” The guidance then discusses the six factors that courts have developed to determine whether a worker is an employee or independent contractor under this “economic realities” test.

The six factors to be considered in determining whether a worker is an employee or an independent contractor for purposes of the FLSA are: “(A) the extent to which the work performed is an integral part of the employer’s business; (B) the worker’s opportunity for profit or loss depending on his or her managerial skill; (C) the extent of the relative investments of the employer and the worker; (D) whether the work performed requires special skills and initiative; (E) the permanency of the relationship; and (F) the degree of control exercised or retained by the employer.” The guidance states that these factors are not a checklist, but are to be “examined and analyzed in relation to one another.” The analysis is qualitative, not quantitative, and the FLSA’s intended expansive covered must be considered.

Given the broad statutory definition of “employ” under the FLSA, the DOL concludes that most workers are employees that are economically dependent on their employer, and would not qualify as an independent contractor that is truly in business for him or herself. The DOL is concerned about the trend of misclassification of employees as independent contractors, especially in industries with low-wage workers.

While an employer may have independent contractor agreements with its workers, such agreements are not relevant to the analysis of the workers’ status under the FLSA. In light of this guidance from DOL, employers should review whether their independent contractors are properly classified, or if they are employees under the “economic realities” test. If these workers are misclassified, employers should take proactive steps to avoid or minimize potential litigation that could result in significant liability for unpaid wages and overtime.

Stephanie Wilson is an attorney at the Washington, DC business law firm, Berenzweig Leonard, LLP. She can be reached at SWilson@BerenzweigLaw.com.

Hadeed Carpet’s Subpeona Against Yelp Gets Swept Under the Rug

The Virginia Supreme Court made it harder for businesses stung by anonymous social media postings to fight back and get information identifying the people who post online comments.  In Yelp v. Hadeed Carpet Cleaning, the court threw out a Virginia Subpoena and Contempt Order against Yelp after the social media giant refused to turn over documents identifying people who anonymously posted negative social media comments about Hadeed.

In a decision that sidestepped free speech issues presented by going after negative social media commentary, the court concluded that in order to force Yelp to fork over the identifying documents that were stored in San Francisco, Hadeed had to go to a San Francisco court and get a subpoena there to get the documents.  This decision yields a convoluted result, since such a business trying to unmask an anonymous social media purveyor of defamatory online statements needs to go ‘coast to coast’ in order to get a Virginia court to obtain documents in California.  This is not an efficient use of company resources already suffering from false online commentary.  Also, as the dissenting justices pointed out, this result is clearly outdated since companies like Yelp probably have documents electronically available all over the country, and treating these materials like they are sitting in a 1950’s file cabinet seems absurd.

Businesses and executives need to be aware of this decision, and the fact that they can still go after anonymous online social media postings that are false and defamatory.  They just need to go through an extra hoop to get a subpoena that is issued from the jurisdiction where such information is located to get the information identifying who posted false online information.  Companies can still get their day in court to fight false online social media postings, but will have to do so more methodically as they fight back to maintain their online reputations.

Seth Berenzweig is managing and founding partner of Berenzweig Leonard, LLP, and often appears in the national media to discuss breaking business news.

Yelp Gets a Pass On Negative Social Media Post

The Fourth Circuit Court of Appeals recently issued a decision having a big impact on how businesses must deal with disparaging commentary on social media.  In Westlake Legal Group v. Yelp, Inc., the court rejected a Virginia law firm’s claim against Yelp complaining about defamatory comments on the firm posted on Yelp’s website.  Yelp asserted that the case should be dismissed, arguing that federal law provided it and other social media companies immunity from such lawsuits.

The Fourth Circuit Court of Appeals agreed with Yelp and dismissed the firm’s case, rejecting the argument that the victim of a false social media post can sue computer service providers.  Citing the Communications Decency Act (‘CDA’), the court ruled that the CDA bars such businesses “from holding interactive computer service providers legally responsible for information created and developed by third parties.”  Basically deeming Yelp an electronic billboard immune for posts that could be defamatory, the court ruled that Yelp could not be sued without facts showing that “that any alleged drafting or revision [by Yelp] … was something more than a website operator performs as part of its traditional editorial function.”

The Westlake decision is significant for several reasons.  It shows that if any individual or business wants to legally challenge defamatory social media, it should ‘keep its powder dry’ and not waste time and money suing the social media company posting the content.  Social media providers like Yelp will likely get a broad pass of immunity for such claims.  Rather, anyone challenging anonymous false statements on social media should focus on so-called ‘unmasking’ cases which could permit subpoenas for business records from the Yelps of the world (such as recently allowed in the Madeed Carpet case) to identify and attack the actual author of the post.  Understanding these rules of the road for challenging disparaging social media can make the difference between protecting one’s reputation and wasting valuable time and money.

Seth Berenzweig is the founding and Managing Partner of Berenzweig Leonard, LLP, and often appears on national media to discuss breaking news business developments.

Will Jonathan Gruber’s Comments Impact the Supreme Court?

Jonathan Gruber, the MIT professor who was paid by the government to consult on the creation of the Affordable Care Act, recently made headlines with his controversial ObamaCare comments about the “stupidity of the American voter.”  His other comments, however, deserve a second look.  One comment shows how the Chief Justice may have been misguided by the government in his tie-breaking vote to support the Affordable Care Act, while another comment could have a big impact when the Supreme Court soon decides a landmark case.

The Supreme Court’s narrow vote supporting the Affordable Care Act depended on Chief Justice Robert’s conclusion that the Act created a tax, and thus fell within one of the constitutionally enumerated powers of Congress to support its creation of the Act.  However, Gruber’s controversial comments included his assertion that the bill “was written in a tortured way to make sure CBO did not score the mandate as taxes.”  If this comment was accurate, it conflicts with the Justice Department’s argument, accepted by the Chief Justice in casting his tie-breaking vote to support the law, that the Act created a tax and Congress therefore had the authority to enact it.

Gruber also asserted that Congress “want[ed] to sort of squeeze the states” to feel pressure to set up their own insurance exchanges, and that “if you’re a state and you don’t set up an exchange, that means your citizens don’t get tax credits.”  Once again, Gruber is conflicting with the Administration’s position in the upcoming King v. Burwell Supreme Court case.  In King, the Supreme Court will decide if the government exceeded its authority in promoting tax credits and subsidies for residents of states that did not create their own exchange.  According to the language of the Affordable Care Act and Gruber’s own comments, such credits are not allowed – for two thirds of the states that never gave in to the ‘squeeze’ to set up their own exchange - and therefore a big part of ObamaCare’s financial engine should fail.  This contrasts with the Administration’s argument pulling the Court in the opposite direction, asserting that the Act intended to allow credits and subsidies for all such states in order to fund ObamaCare.

Both sides cannot be right, and the Justices will need to resolve this in a few months. If the majority of the Court follows the language of the statute and takes professor Gruber’s comments to heart, a big part of ObamaCare’s funding will be disallowed since the credits and subsidies challenged in King will be struck down.  In the meantime, the next time a former consultant for the Administration makes sarcastic comments about the American voter and the law, he may want to consider whether the nine people wearing robes in the Supreme Court building will hear what he has to say before they cast their next vote.  Time will tell if his words will influence the Supreme Court to reach a different result.

Seth Berenzweig is the founding and Managing Partner of Berenzweig Leonard, LLP, and is a Fox Business and Bloomberg TV contributor on breaking news such as ObamaCare and Supreme Court cases.

Handling Workplace Concerns Over the Ebola Crisis

Concerns associated with the spread of Ebola are growing. The World Health Organization has declared the virus an “international health emergency” and the Centers for Disease Control confirmed that the U.S. has now experienced several cases of the virus. Although it’s still too early to deem this a major health crisis in the United States, concerns are growing and employers need to be prepared to address questions about the transmission and handling of Ebola.

Though the media attention surrounding Ebola continues to grow, health authorities are still advising that the risk of actually transmitting the disease is low, and therefore, employers should be mindful not to overreact and risk running afoul of discrimination laws that can come into play when dealing with infectious diseases. Of particular note, the Americans with Disabilities Act (“ADA”) prohibits employers from discriminating against people with disabilities. Given its severity, and the broad interpretation of “disability,” Ebola arguably qualifies as a disability under the ADA. Though the ADA restricts employers from making disability-related inquiries, an employer is allowed to conduct a medical examination if they have a reasonable belief that a particular employee’s disability poses a direct threat to the workplace. A direct threat is defined as significant risk of substantial harm to the health or safety of that employee or others in the workplace and such risk cannot be eliminated or reduced by a reasonable accommodation.

The direct threat exception cannot be based on fears or misconceptions, but rather, the employer must take into consideration current medical knowledge from health authorities and objective evidence. For example, an employer could not require a medical examination simply because one of its employees recently traveled to West Africa. That could open an employer up to a so-called “regarded as” discrimination claim under the ADA, or a potential national origin discrimination claim.

Though the EEOC has not issued anything specific to Ebola, the agency did issue guidance during the H1N1 pandemic in 2009 that employers should note in addressing Ebola. The guidance provides useful information if Ebola spreads to a pandemic similar to H1N1, including:

• If an employee shows Ebola-like symptoms, employers may advise such employee to go home;
• Employers may ask employees if they are experiencing Ebola-like symptoms, yet all information must be kept confidential;
• Employers may ask whether employees have traveled to an area where Ebola has been present, such as West Africa;
• Employers can encourage employees to telework; and
• Employers may inquire into why an employee has been absent from work if the employer suspects it was for a medical reason.

Ultimately, if current fears of Ebola expand into a broader reality in the United States, employers must be equipped with various actions they can take to provide a safe working environment. If employers are considering conducting medical examinations or making employment decisions based on a suspected case of Ebola, employers should first consider consulting with an attorney as well as engaging with a medical provider familiar with this disease.

Nick Johnson is an attorney with Washington, DC business law firm Berenzweig Leonard. He can be reached at njohnson@BerenzweigLaw.com. 

Court Weighs In On Validity of Liquidated Damages Clauses

It is not uncommon for business contracts to contain a liquidated damages clause that provides a set amount to be paid in the event a party breaches the contract. However, a recent decision from the Fairfax County Circuit Court could significantly impact how companies structure liquidated damages provisions in their contracts. In Sagatov Builders LLC v. Christian Hunt, the Seller (Sagatov Builders) and Buyer (Christian Hunt) entered into a contract for the purchase of real property.  As part of the contract, the Buyer was obligated to deliver a deposit of $50,000. The Seller subsequently filed a lawsuit alleging that the Buyer breached the contract and sought to retain the deposit as liquidated damages based upon a damages provision in the contract. The damages provision provided that—in the event of the Buyer’s default—the Seller would have the option to either retain the deposit as liquidated damages or pursue actual damages against the Buyer. The Buyer sought to dismiss the lawsuit arguing that an optional liquidated damages clause is a penalty as a matter of law, and the Seller was required to prove actual damages.

In considering the enforceability of the option clause, the Fairfax Circuit Court noted that to be enforceable, the liquidated amount must (1) be a reasonable estimation of actual damages which by their nature are difficult to ascertain, effectively avoiding all future questions of damage, and (2) not function as a penalty.
The court determined that the damage provision clearly did not avoid all future questions of damage and therefore the arrangement “fails to achieve the fundamental purpose of a stipulated damage provision.”  The provision also functioned as a penalty since it was intended only to be operative where the deposit exceeded the actual damages incurred, “establishing the implication that the parties intended to punish the defaulting party.”

As a result of this holding, parties must now show caution in designing a liquidated damages provision.  Since liquidated damages are intended to reflect future harm that is inherently difficult to calculate, contracting parties are now in the awkward position of needing to accurately determine a stipulated amount beforehand, or relying on litigation to prove actual damages. If parties decide upon a liquidated damages provision, this case should serve as guidance to no longer include the option to pursue actual damages if damages end up amounting to far more than the amount stipulated in the contract. This case should also serve as a good reminder to business owners and executives to revisit your commonly used boilerplate language that may be found in your contracts to ensure they are compliant and up-to-date with existing case law.

Nick Johnson is an attorney with Washington, DC business law firm Berenzweig Leonard. He can be reached at njohnson@BerenzweigLaw.com. 

Supreme Court Allows Closely-Held Corporations to Opt Out of Obamacare Birth Control Mandate

On June 30, 2014, the Supreme Court ruled in a 5-4 decision that closely-held for-profit corporations may opt out of regulations issued under the Patient Protection and Affordable Care Act (ACA) mandating insurance plan coverage for certain contraceptive drugs. 

Three corporations brought the action under the Religious Freedom and Restoration Act of 1993 (RFRA), which prohibits the Government from substantially burdening a person’s exercise of religion unless the government shows that such a burden is the least restrictive means to further a compelling governmental interest.  In Burwell v. Hobby Lobby Stores, Inc., the Court not only considered the legality of the contraceptive mandate under the RFRA analysis, but also addressed whether a for-profit corporation has standing as “a person” under the statute.

Writing for the majority, Justice Alito ruled that the contraceptive mandate was unlawful under the RFRA and constituted a substantial burden on a corporation’s right to conduct business in accordance with its religious beliefs. The Court concluded that, in enacting the RFRA, Congress intended to provide broad protection to the exercise of religion, including religious exercises practiced by the natural persons associated with closely-held corporations.  The majority noted that the legal fiction in which a corporation is considered a person for certain purposes is really intended to provide protection for the natural persons associated with that company since corporations, “separate and apart from the human beings who own, run, and are employed by them, cannot do anything at all.”  Extending the scope of protection offered by the RFRA is therefore intended to benefit the human beings comprising the corporation, rather than the intangible entity itself.  

In her dissenting opinion, Justice Ginsburg disagreed that a for-profit corporation qualified as a “person” under the RFRA because a corporation is artificial and has no conscience, and therefore cannot practice religion.   The dissent noted that religious entities and other nonprofits are exceptions to this principle because they “exist to serve a community of believers.”  For-profit companies, on the other hand, are likely composed of workers of diverse religions and are motivated by commercial profit. In the dissent’s view, upon incorporating a for-profit business and escaping personal liability for its obligations, the owners essentially sever their right to contest government regulation of that business based upon their religious beliefs.  Justice Ginsburg expressed further concern that providing for-profit closely-held corporations a cause of action would proliferate RFRA claims by encouraging “corporations of any size, public or private…to seek religion-based exemptions from regulations they deem offensive to their faith.”

Although the majority only considered whether a closely-held for-profit corporation could constitute a person, Justice Ginsburg’s observation that the ruling would likely proliferate claims from corporations of all sizes is worthy of note.  Despite tailoring the language of its holding to closely held corporations, the Hobby Lobby decision technically does not preclude the extension of RFRA protection beyond the close corporation context.  The majority expressly acknowledged this possibility by refusing to interpret “person” to include natural persons and “some but not all corporations.”  Furthermore, although the holding centers upon four specific contraceptive drugs, the majority does not suggest that these are the only medical treatments and procedures mandated by the ACA which may be actionable under the RFRA.  Perhaps mandatory insurance coverage for vaccinations and blood transfusions will be next on the chopping block.  Since the decision is not constrained within Obamacare regulation, maybe religiously inclined businesses will seek to opt out of anti-discrimination regulations.  The Hobby Lobby decision ultimately provides corporations carrying out business in a manner reflecting sincere religious beliefs with the means to challenge any number of government regulations that burden its operation.

David Moon is a summer intern with Berenzweig Leonard, LLP.  He can be reached at dmoon@berenzweiglaw.com.

Virginia Orders Uber and Lyft to Pull Over

In the latest conflict between technology and government regulation, Virginia’s DMV has issued a cease and desist order to Uber and Lyft, claiming that their businesses are illegal and cannot pick up passengers in Virginia.  Undeterred, Lyft has responded that it intends to continue operating there, stating in a press release that Virginia residents and others have embraced it “as an affordable and reliable transportation alternative.”  Lyft also points out that the current regulations for taxis and limos are outdated and do not account for this new tech-based industry.  Uber also criticizes Virginia’s move, stating that it “hurts thousands of small business entrepreneurs who rely on [them] to make a living, create new jobs and contribute to the economy.”

This is an interesting development for Virginia, which has enjoyed a reputation as a business friendly venue but is now taking a stand many consider to be against free markets.  The DMV has already fined Uber and Lyft thousands of dollars, and contends their businesses violate Virginia regulations since they allegedly do not “have proper operating authority.”  Virginia’s move is in line with a recent trend by other governments in Los Angeles, Portland and San Francisco, where taxicab companies have wielded influence to try halting competition in those markets as well.  Uber, which has raised over $300 million in venture capital, is also currently appealing a Maryland judge’s ruling that it must file an application to operate as a traditional for-hire carrier in order to operate there.

Virginia’s action as well as those of governments on the West Coast shows how old government regulations can stand in the way of free market technological innovation and cut down consumer choice.  Regulations should evolve over time to enhance creativity, not stifle markets.  The government too often has a heavy handed reputation of putting up barriers to entry, rather than supporting new technology and creativity that can increase profitability and decrease unemployment.  Small businesses should be encouraged to expand consumers’ freedom of choice, which appears safe given Uber’s unique online consumer rating system that weeds out problems in a business model that does not apply for legacy carriers like taxis.  Their drivers also use interactive apps with consumers in a manner that is more responsive but does not fit neatly into old-model government regulations.

This is a hot and emerging issue impacting cities throughout the United States, since Lyft is currently operating in sixty US cities and Uber has a presence in 100 cities.  It is interesting that various governments take the position these technology based companies are not in trend with regulations, when it appears the government is not keeping pace with new technology.  These trends appear to be on a collision course in Virginia, and this heated dispute will probably require a court to step behind the wheel and decide how far governments can go to head off technological advancement.  Watch closely as this dispute heats up, as some resolution lies down the road.

Seth Berenzweig is a managing partner at the Washington, DC regional business law firm, Berenzweig Leonard, LLP. He can be reached at SBerenzweig@BerenzweigLaw.com.

Cautionary Tale: When Contemplating Live Music at Your Venue, Get a License

Last summer, a small band performed at a bar called 69 Taps in Medina, Ohio, near Cleveland. That evening, the band covered a number of popular songs that the mostly middle-aged audience had grown up listening to. The bar had not asked for a set list, nor had the band provided one. The band took requests, playing hits like “Brown Eyed Girl” and “Freebird” for a small audience. The problem? “Freebird” and nine other songs that the band covered that evening are protected by Broadcast Music, Inc. (“BMI”), a performing rights organization tasked with collecting royalties, and 69 Taps did not have a license to present music from BMI’s catalog.

 The bar was slammed with a lawsuit brought by BMI and the copyright holders of each of the ten covered songs, demanding that 69 Taps pay significant damages and attorneys’ fees. While it may seem harsh to sue a small-time bar for copyright infringement over an amateur cover band’s decision to take requests on a summer evening, this lawsuit is a testament to the fact that BMI (one of the “big three” American performing rights organizations along with ASCAP and SESAC) takes aggressive steps to protect the intellectual property of its artists. Because 69 Taps did not ask for a set list or post one on its website, BMI could only have found out about the performance of the infringing works through its survey process—by actually having a representative in the audience to keep tabs on the performance. Any venue that presents live music, no matter how small or obscure, should expect to be “surveyed” by the three performing rights organizations. 

The solution to avoiding these lawsuits is for venues to purchase a “blanket license.” For example, if 69 Taps had purchased BMI’s blanket license, it would have had unfettered permission to present any of the roughly 8.5 million songs in BMI’s catalog for a flat annual fee. BMI allocates shares of the licensing fee to the artists whose work is represented in the venue’s programming, as determined by the same survey methodologies that discovered 69 Taps’s unlicensed performances. The cost of the blanket license is much less than the cost of defending just one copyright infringement lawsuit, so if your business plans on offering live music, the safe bet is to purchase blanket licenses from all three major performing rights organizations. Otherwise, businesses may have to “face the music.”

Frank Gulino is an associate attorney with Washington, DC business law firm Berenzweig Leonard. He can be reached at FGulino@BerenzweigLaw.com.

Selling Your Company? Make Sure Your Deal Protects Privileged Communications.

The Delaware Court of Chancery, one of the most sophisticated and influential venues for the resolution of corporate disputes, has held that when one company acquires another, privileged communications between the acquired company and its attorneys are not protected during subsequent litigation between the companies unless the merger agreement contained a term providing otherwise. While the acquired company holds the privilege as long as it remains a separate entity, control over privileged communications passes to the acquiring company at the time of the acquisition, along with other company assets.

This issue arose recently in Great Hill Equity IV, LP v. SIG Growth Equity Fund I, LLLP, in which the acquiring company had a case of “buyer’s remorse” following the deal after discovering what it believed to be evidence of fraud on the part of the acquired company. The evidence consisted of pre-acquisition communications between the acquired company and its legal counsel. In a subsequent lawsuit between the two corporations, the acquired company cited attorney-client privilege in its efforts to prevent the introduction of those communications into evidence. In holding that those pre-acquisition communications were no longer privileged, the Court of Chancery noted that “all property, rights, privileges, and all and every other interest shall be thereafter as effectually the property of the surviving or resulting corporation.”

Because “privileges” are specifically listed under the Delaware statute, otherwise-protected communications between the acquired company and its counsel are available for use by the acquiring company during litigation in the absence of a clear carve-out in the acquisition agreement that preserves the privilege. Because the Delaware Court of Chancery handles so many corporate law matters and operates in the state of incorporation of a majority of Fortune 500 companies, the holding in Great Hill Equity provides a roadmap that should interest all business owners. In order to ensure the continued privilege of pre-acquisition communications, the parties should take steps to negotiate, agree upon, and include in their acquisition agreement a term that provides for such a continuation of the privilege. Otherwise, the rights to those communications will be transferred to the acquiring company just like any other property, and could cause serious problems.

Frank Gulino joined Berenzweig Leonard as an associate attorney in 2013. He can be reached at FGulino@BerenzweigLaw.com.

It's Your Birthday and You Can Sue If You Want To

If you are one of the handful of people who loved the short-lived Aaron Sorkin show Sports Night, you might remember the scene where Dan (played by Josh Charles) gets called to the network lawyer’s office because the network has been billed $2,500 by the representatives of Mildred and Patty Hill. The bill came because Dan sang Happy Birthday to You to his co-anchor on the air. Dan is surprised to find that the song is copyrighted and the storyline continues with Dan trying to come up with songs in the public domain that he can sing for each of his coworkers’ birthdays. I remember laughing with friends about what our public-domain birthday songs should be, although we never got around to deciding. And now we may not have to.

Good Morning to You Productions Corp. has sued Warner/Chappell Music claiming that, despite years of collecting royalties based on two 1935 copyright registrations, Warner/Chappell does not actually own a valid copyright to the popular version of the song Happy Birthday to You that we all know. The case, pending in the U.S. District Court for the Central District of California and styled Good Morning to You Productions Corp. v. Warner/Chappell Music, Inc., No. CV-13-04460-GHK, will be one to watch this year. Filed as a putative class action with multiple claims, the case has been bifurcated so that the court will first decide the claim for declaratory judgment as to ownership of the song.

It took how many people to write that song?

The complaint contains a fairly detailed description of the alleged evolution of the song Happy Birthday, beginning in 1893, when the song Good Morning to All was published. The plaintiffs, all of whom paid royalties to Warner/Chappell to use the song, claim that the melody to Mildred and Patty Hill’s Good Morning to All passed into the public domain when the publisher who initially registered the copyright failed to renew the copyright and published the work with no copyright notice. They further allege that Mildred and Patty Hill did not author the lyrics to Happy Birthday to You, as evidenced by publication of the lyrics in 1911 and 1912 by various sources. The complaint alleges that the lyrics and music to Happy Birthday to You were first published together in 1924 and again in 1928 with no claim of copyright or attribution to the Hill sisters and that the song was used in 1933 in the world’s first singing telegram.

In 1935 Clayton F. Summy Co. registered two work-for-hire copyrights for Happy Birthday to You that did not reference Good Morning to All or the Hill sisters but instead attributed the music and lyrics to R.R. Forman and Preston Ware Orem. Eventually in 1998, those registered copyrights became Warner/Chappell’s property and are the basis for Warner/Chappell’s pursuit of royalties for use of the song. The plaintiffs claim that those two copyrights are either invalid because the music and lyrics were already in the public domain and were not authored by either Forman or Ware or are valid but limited only to the specific piano musical arrangement and the added second verse that appears in one of the registrations. Warner/Chappell of course disagrees and argues that the plaintiffs do not have enough evidence to overcome the presumption of validity of the two copyrights.

At stake for Warner/Chappell is roughly two million dollars in royalty payments per year. More importantly, the case will involve some really interesting issues of copyright validity and the scope of copyright protection for musical composition works. Discovery is underway and summary judgment motions are due in November of this year. Stay tuned for more discussion of the issues raised by this case in future posts.

Jennifer Atkins is of counsel to the Washington, DC business law firm, Berenzweig Leonard. She can be reached at jennifer.atkins@cloudigylaw.com.

The President’s Minimum Wage Announcement Ignores Current Rates

President Obama recently announced his intent to sign an Executive Order which would unilaterally increase the minimum wage for certain workers on federal projects. The current federal minimum wage rate is $7.25 an hour, and President Obama is looking to raise it to $10.10 per hour. At first glance, one may think that such an increase will have a widespread impact on the Washington, DC metro area, given its large concentration of federal contractors.

This will not be the case. Such a change would only apply to new or revised federal contracts, and not to current federal contracts. More significantly, the majority of federal contractors are already being paid wages that are over the proposed minimum $10.10 rate, depending on their wage classification.

For example, a bulldozer operator on a federal project in Fairfax County can make a minimum rate of $20.40 per hour, and a court security officer in Washington, D.C. can make a minimum rate of $24.72 per hour. These rates are controlled by the Department of Labor through the Davis-Bacon Act and the Service Contract Act. Additionally, many federal contractors are union members, meaning that their wage rates and benefits are controlled by collective bargaining agreements. As a result, the President is targeting an issue that is already largely covered by federal law, wage determinations and collective bargaining.

President Obama plans to highlight his Executive Order in tonight’s State of the Union address. While the potential increase may derive from good intentions, it imposes a requirement on an already heavily-regulated industry, and many business owners know that they are already in compliance with the increase.

Katie Lipp is an attorney with the Washington, DC regional business law firm Berenzweig Leonard, LLP. Katie can be reached at klipp@berenzweiglaw.com.

Is It Time to Pop the Hood and Update Your Social Media Policy?

You've sat down with your lawyer, put together a stellar social media policy for your business, and made sure that all your employees are aware of the rules. At this point, you might think that you've reached a safe harbor and can put the issue of social media to bed for the next few years. In reality, though, because people are continuing to find new and unexpected ways to make use of social media outlets, the law is constantly shifting and changing in response. If business owners and managers are not vigilant, they may find themselves with social media policies that are not only outdated, but ineffective and even dangerous.

Social media content can translate into serious value. The size of a company’s Twitter following or number of Facebook likes are considered to be markers of prestige as well as practical means for marketing companies’ products and services. Recent court decisions, however, are beginning to suggest that traditional social media policies may permit disgruntled former employees to walk away with all or part of the online capital that they have generated for their former employers. There is also a growing trend in content generator attempts to enforce their intellectual property rights against social media users. Employees’ innocent yet infringing posts could lead to demand letters or even the shutdown of a company’s social media accounts in the event of multiple infractions. And, as we have noted before on this blog, the federal government’s recent characterization of social media as the “digital water cooler” means that social media policies that were considered acceptable just a few years ago may no longer be enforceable.

To ensure that your company stays on the right side of the cutting edge, IT guru Todd Thibodeaux recommends that companies revisit their social media policies one or two times each year. “Waiting too long between policy evaluations can put your business at risk of missing a new trend, use, or vulnerability within the fast-paced social media world,” Thibodeaux cautions. “You might not make sweeping changes (or any at all) at each checkpoint. Nevertheless, it’s smart to make regular assessments a habit.” Considering periodic review of your companies’ social media policy is a sound idea.

Ryen Rasmus is an associate attorney for the Washington, DC regional business law firm Berenzweig Leonard, LLP. He can be reached at RRasmus@BerenzweigLaw.com.

Companies Can Now Fight Back Against Anonymous Online Criticism

It is every company’s worst nightmare: An anonymous poster goes online and makes negative and disparaging statements about the company.  In the social media age we are in, this unfortunate scenario has played out countless times on such sites as Yelp, Rip-Off Report, and other online review sites.  Companies faced with this situation have largely felt powerless to counteract anonymous posters or even find out who the posters are.  But a recent decision by the Virginia Court of Appeals will now give companies some much needed leverage to fight back.

Yelp was forced this week by the Virginia Court of Appeals to “unmask” anonymous posters who posted negative, and possibly false, reviews about a local Virginia carpet cleaning company, Hadeed Carpet Cleaning. Hadeed believed that seven negative Yelp reviews of its services were false, and so it filed a defamation lawsuit against the anonymous posters, naming them as “John Does.” In order to unmask the anonymous posters, Hadeed then sent a subpoena for documents to Yelp, which Yelp objected to on First Amendment grounds.

The Virginia Court of Appeals ruled that Yelp had to comply with the subpoena and provide information about the identities of the online posters.  The Court balanced the First Amendment rights of the anonymous posters versus the rights of companies to protect their reputations, and stated that false statements are not protected by the First Amendment. Yelp argued that Hadeed Carpet Cleaning had to prove its defamation case before Yelp could be forced to unmask its posters – even though Virginia law does not require companies to meet that burden. The Court clarified that Virginia’s unmasking procedure only requires a company to have a legitimate good faith basis to contend that it has been a victim of defamation. Yelp now has to produce the records and disclose the people who posted the negative reviews.

This is a very significant decision in the social media arena, and provides some much-needed leverage for businesses seeking to protect their online reputations against false and often faceless posters. Businesses often need to protect themselves against online attacks by posters who post false reviews, and this recent decision clarifies the legal avenues available to companies in Virginia and potentially elsewhere to protect against malicious posters seeking to damage business reputations.

Seth Berenzweig is a managing partner at the DC regional business law firm, Berenzweig Leonard, LLP. Seth can be reached at sberenzweig@berenzweiglaw.com. Katie Lipp, an attorney with the firm, co-authored this post. Katie can be reached at klipp@berenzweiglaw.com.

Is Your Business’s E-mail Marketing Compliant?

In today’s economy, most businesses do a substantial part of their marketing on the Internet, and use e-mail marketing to advertise their products and services. In an attempt to stem the flow of unwanted, unsolicited junk e-mail ("spam"), Congress enacted the Controlling the Assault of Non-Solicited Pornography and Marketing Act, known as the "CAN-SPAM" Act, 15 U.S. Code Sec. 7701. Despite its name, the CAN-SPAM Act does not just apply to bulk e-mail. It covers all commercial messages, which the Act defines as “any electronic mail message the primary purpose of which is the commercial advertisement or promotion of a commercial product or service,” including e-mail that promotes content on commercial websites. Thus, companies that do not think of themselves as “spammers” are in fact subject to the Act if they use e-mail in their direct marketing efforts. Notably, there is no exception for business-to-business e-mail so it is important that companies understand the law.

The Act imposes hefty penalties for violations, and in addition, allows private internet service providers (ISP’s) to sue businesses who use their facilities or servers to send spam that violates the Act and to recover statutory damages. As such, noncompliance can be costly, and before embarking upon an e-mail marketing campaign, businesses should take steps to ensure that any unsolicited e-mail to potential or existing customers is compliant with a number of very specific federal guidelines.

Among the Act’s the main requirements:

• Subject lines, e-mail headers, and domain names must be accurate and not misleading
• You must provide a way for recipients to opt-out or unsubscribe from your communications and clearly explain the process in your e-mails
• You must actually honor the requests to opt-out or unsubscribe within 10 business days
• You must include a valid postal address in your e-mail
• You must disclose if your message in an advertisement

Virginia, as well as many other states, also has a statutory framework governing commercial e-mail and spam. The CAN-SPAM Act generally preempts state anti-spam laws, but provides some exceptions to state law preemption and the exact scope of preemption has been the subject of litigation. Businesses that engage in direct e-mail marketing should review their marketing practices for legal compliance with the CAN-SPAM Act, as well as state law.

Sara Dajani is an Associate Attorney with the DC region business law firm of Berenzweig Leonard, LLP. Sara can be reached at sdajani@BerenzweigLaw.com.

Do you have an Enforceable Forum Selection Clause?

For companies that do business in multiple states, a forum selection clause can minimize the risks and expenses associated with being hailed into a distant and unfamiliar court. A forum selection clause in a contract allows the parties to agree that any litigation resulting from that contract will be initiated in a particular court in a certain state. Generally speaking, state and federal courts will consider a forum selection clause to be reasonable as long as any party to the contract has maintained offices or conducted activities in the chosen state, or the contract was executed or performed in that state. But what happens when a party to the contract then files suit in a court other than the one agreed to in a forum selection clause? This issue has created a circuit split among the United States courts of appeals as to the proper standard for enforcing such clauses.

The majority of federal courts, including the Fourth Circuit, which has appellate jurisdiction over the district courts in Virginia and Maryland, strictly enforce forum selection clauses without questioning convenience of the parties and witnesses. When a plaintiff files suit in a forum other than the one chosen by the forum selection clause, the forum is automatically improper and dismissal is appropriate under FRCP 12(b)(3). On the other hand, a minority of federal courts use the multi-factor balancing test under 28 U.S.C. § 1404(a), the federal venue transfer standard, that involves several private and public interest convenience factors, making the enforcement of a forum selection clause discretionary to the district court judge, and as a consequence, unpredictable. Under this approach, the existence of a forum selection clause is only one factor to consider in whether to transfer the case to the contractually selected forum, provided that the current venue is otherwise proper.

The U.S. Supreme Court granted review of In re Atlantic Marine Construction Co., 701 F.3d 736 (5th Cir. 2012), to resolve this circuit split. The Fifth Circuit Court of Appeals’ opinion involved a Texas construction project with a subcontract that required litigation to be brought in Virginia. Despite the fact that the subcontract’s forum selection clause was clear and otherwise enforceable, the Fifth Circuit affirmed the district court judge’s decision not to enforce it on convenience grounds, joining the minority of federal courts on how such clauses should be enforced.

The Supreme Court’s decision is expected to be issued sometime in 2014, and will hopefully provide guidance on how heavily businesses can rely on such clauses.  If the Court adopts the majority approach, businesses can be more confident that the forum selection clauses they insert in their contracts will be enforced and will help provide certainty to companies as they move their business forward.