Category: Litigation

For Small Business Owners, Suing in Small Claims Court Can Become a Big Headache

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I recognize that when a business owner believes a monetary debt of $5,000 or less is owed to the business, there may be a temptation to control litigation costs by filing a lawsuit in the Small Claims Division of a Virginia General District Court.  Admittedly, there are some benefits, including:

  • Expeditious justice between the litigants, so the cases are not protracted
  • Formal rules of evidence do not apply, and neither side can be represented by an attorney
  • A corporation or partnership has discretion to send the owner, general partner, officer or employee to handle the case
  • Limited discovery afforded to either side, and judges tend to allow all relevant evidence to be considered with a goal towards determining the merits of the dispute

What’s the downside?  I will name a few:

  • You are not guaranteed to stay in Small Claims Court even if you start off there. If the other side hires counsel, the case can no longer be adjudicated in the Small Claims Court and it will be removed to General District Court where there is greater formality and the rules of evidence apply.  Even if the other side does not hire counsel, a defendant still has the right to remove a case to General District Court prior to the court rendering a decision.
  • You could be countersued. There are often two sides to every story.  Be aware that if the defendant files a counterclaim against the business, you as the plaintiff no longer have the ability to unilaterally discontinue the litigation.
  • You could potentially enter a protracted and expensive appeal process. Even if you are awarded a judgment, the defendant has an automatic right to appeal the case to Circuit Court when the judgment exceeds $50.  If this happens, the litigation can go on for a year in a more formal forum with considerably broader discovery allowed.

Suing in Small Claims Court may be a valid choice in some cases. However, it is always wise that a business owner consult a litigation attorney before deciding to file a lawsuit in Small Claims Court.

Resale Price Maintenance in China: Enforcement Authorities Imposing Large Fines for Anti-Monopoly Law Violations

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Recently Shanghai High People’s Court reached a decision in the first lawsuit involving resale price maintenance (RPM) since China’s Anti-Monopoly Law (AML) came into effect five years ago.  Shortly thereafter, a key enforcement agency announced RPM-related fines against six milk powder companies, five of which are non-Chinese.  Both cases clearly show that RPM can be a violation of the AML, and that RPM is currently under much greater scrutiny by enforcement authorities.  It would be prudent for all foreign corporations active in China’s consumer markets to take heed of these changes in China and conduct an immediate review of any potential RPM violations.

On 1 August 2013 the Shanghai High People’s Court reached a decision in the first anti-monopoly lawsuit involving resale price maintenance (RPM) since China’s Anti-Monopoly Law (AML) came into effect in August 2008.  In addition to this judicial decision, on 7 August 2013 one of the key agencies in charge of enforcing the AML, the National Development and Reform Commission (NDRC), announced RPM-related fines of USD 109 million against six milk powder companies, five of which are non-Chinese.  Both the High People’s Court and the NDRC have been striving to clarify how they will treat RPM, and specifically have focused on the issue of whether RPM should be treated as a per se violation or should be evaluated according to a “rule of reason” analysis.

Judicial Decisions in Civil Lawsuits

According to the recent decision by the Shanghai High People’s Court, in order to hold that an RPM provision is a monopoly agreement, the court must find that the RPM provision has restricted or eliminated competition.  Furthermore, the burden of proof will be on the plaintiff to show a restriction or elimination of competition arising out of the RPM.  The High People’s Court explicitly stated that this burden is the opposite from the burden of proof for horizontal monopolies, such as a cartel, in which case the burden of proof falls on the defendant to show that the agreement does not have any effect of eliminating or restricting competition.  This burden for horizontal monopolies has been further examined and confirmed by the “Judicial Interpretation of Anti-Monopoly Disputes” that was issued by China’s Supreme People’s Court on 1 June 2012.

Administrative Decisions in Enforcement Actions—Liquor and Infant Milk Formula

There have been several key RPM enforcement actions in 2013.  In February, the NDRC imposed a fine of USD 80 million on the famous Chinese liquor brands Maotai and Wuliangye for requiring distributors to resell the products above a certain price, which is common in some sectors in China.  On 2 July, according to the Price Supervision and Anti-Monopoly Bureau of the NDRC, six milk powder companies came under investigation for RPM violations of the AML.  According to the NDRC’s statements on the case, “from the evidence obtained, the milk powder companies under investigation instituted price controls over distributors and retailers, which excluded and limited market competition and therefore are alleged to have violated the Anti-Monopoly Law”.  The NDRC later announced record fines in that case of USD 109 million, which were the equivalent of between 3 per cent and 6 per cent of the companies’ revenue in 2012.

According to media reports, in the Maotai and Wuliangye cases, the NDRC provided clear indications about some of the factors that it will consider when determining whether the RPM has “eliminated or restricted competition”.   Specifically, when assessing the relevant market and market power of the two companies, the NDRC analysed the market structure and the role played by the two companies in the liquor industry, as well as the degree to which the products are substitutable with similar products and the loyalty of consumers towards the two liquors.  Based on this analysis, the NDRC concluded that the RPM provisions in the agreements with distributors of the two liquor giants eliminated and restricted competition, and thus were vertical “monopoly agreements”.

According to recent media reports, the NDRC has indicated it will “severely crack down” on and sanction vertical monopoly agreements such as RPM if they are maintained by business operators dominant in the market.  If business operators are not dominant, the NDRC reportedly indicated that it would still investigate all vertical monopoly conduct and determine if there has been any elimination or restriction of competition.

Conclusions

These civil lawsuits and administrative cases clearly show that RPM can be a violation of the AML and that RPM is currently under much greater scrutiny by enforcement authorities.  If RPM is an issue in civil lawsuits, a plaintiff will have to prove that RPM eliminates or restricts competition.  However, there are some indications that this burden of proof may be easily met.  In administrative cases, the NDRC will have to be satisfied that it has sufficient proof to show there is an elimination or restriction of competition.  However, it is unclear what level of evidence would be required to show such a restriction and it may not be a very high level, especially if the accused business operator is dominant in the market.

RPM has been a common feature of distribution agreements and other contracts in many sectors in China.  However, the recent cases clearly show there is a serious compliance risk if RPM continues to be part of a corporation’s normal practices.  This is particularly true for business operators that have a dominant market position or a group of business operators that are regarded as jointly dominant under the AML (in China, in certain circumstances, dominance is presumed with a market share as low as 10 per cent).  Unless the RPM conduct clearly falls within an exception in Article 15 of the AML, a company using RPM may face serious fines and confiscation of illegal gains.  It would be prudent for all foreign corporations active in China’s consumer markets to take heed of these changes to the enforcement priorities of the competition/antitrust authorities in China and conduct an immediate review of any potential RPM violations.

Alex An and Jared Nelson also contributed to this article.

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Zappos and It's Effect On "Browswrap" Agreements

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Key Takeaways For An Enforceable Terms of Use Agreement

In light of the recent Nevada federal district court decision In re Zappos.com, Inc., ‎Customer Data Security Breach Litigation, companies should review and update their ‎implementation of browsewrap agreements to ensure users are bound to its terms. MDL No. ‎‎2357, 2012 WL 4466660 (D.Nev. Sept. 27, 2012).

A browsewrap agreement refers to the online Terms of Use agreement that binds a web ‎user merely by his continued browsing of the site, even when he is not aware of it. Any ‎somewhat experienced web user is no stranger to the Terms of Use link that leads to the ‎browsewrap agreement. Yet, the users tend to ignore the link’s existence, and rarely think of it ‎as a “contract” with any practical effects. In Zappos, the court questioned the browsewrap ‎agreement’s validity particularly because of this tendency among web users. The court ruled the ‎arbitration clause in Zappos’ browsewrap Terms of Use was unenforceable because the users did ‎not agree to it and Zappos had the right to modify the terms at any time. ‎

Background of the Case

Founded in 1999, Zappos.com is a subsidiary of Amazon.com and one of the nation’s ‎biggest online retailers for footwear and apparel. Currently headquartered in Henderson, ‎Nevada, the company has more than 24 million customer accounts. In mid-January 2012, its ‎computer system experienced a security breach in which hackers attempted to access the ‎company’s customer accounts and personal information.

After Zappos notified its customers about the incident, customers from across the country ‎filed lawsuits against Zappos, seeking relief for damages arising from the breach. The cases were ‎transferred to and consolidated in Nevada. Zappos then sought to enforce the arbitration clause ‎contained in its Terms of Use, which would stay the litigation in federal court and compel the ‎case for arbitration. The court denied Zappos’ motion on two grounds: there was no valid ‎agreement to arbitrate due to the lack of assent by the plaintiffs and the contract was ‎unenforceable because it reserved to Zappos the right to modify the terms at any time and ‎without notice to its users.

Lessons Learned from the Browsewrap

Mutual Assent Must Be Clear 

Arbitration provisions are a matter of contract law, and the traditional elements of a ‎contract must be met even though Zappos’ Terms of Use was presented in electronic, ‎browsewrap form on the website. An essential element of contract formation is mutual assent by ‎the parties to the contract, which the court found was missing in this case as there was no ‎evidence of the plaintiffs’ assent.

The court compared the browsewrap agreement with another popular form of online terms ‎of use agreement, the “clickwrap” agreement. Clickwrap agreements require users to take ‎affirmative actions, such as clicking on an “I Accept” button, to expressly manifest their assent to ‎the terms and conditions.‎

Since Zappos’ browsewrap agreement did not require its users to take similar affirmative ‎action to show their assent to the terms and conditions, there was no direct evidence showing ‎that the plaintiffs consented to or even had actual knowledge of the agreement, including the ‎arbitration clause.‎

Link It Front and Center 

Furthermore, the court found Zappos’ Terms of Use hyperlink was inconspicuous and ‎thus did not provide reasonable notice to its users. The link was a) “buried” in the middle or ‎bottom of each page and became visible when a user scrolls down, b) appeared “in the same size, ‎font, and color as most other non-significant links,” and c) the website did not “direct a user to ‎the Terms of Use when creating an account, logging in to an existing account, or making a ‎purchase.” The court concluded that under ordinary circumstances, users would have no reason ‎to click on the link.‎

Unilateral Right to Modify or Terminate Won’t Work

Another problem with Zappos’ browsewrap agreement was that it was illusory and thus ‎unenforceable. In the agreement, the company “retain[ed] the unilateral, unrestricted right to ‎terminate the arbitration agreement” and had “no obligation to receive consent from, or even ‎notify, the other parties to the contract.” Users would unsuspectingly agree to the changes by ‎continuing to use the site. Under this provision, Zappos could seek to enforce the arbitration ‎clause, as it did here, or not enforce it by modifying the clause without notice to its users when it ‎was no longer in its interest to arbitrate. In either circumstance, the users would still be bound to ‎the agreement.

Implications for Companies

As a result of this decision, companies should carefully reassess the display and content ‎of the online terms of use they adopt to ensure their enforceability. In a narrow sense, the ‎decision means an arbitration clause in a browsewrap agreement similar to Zappos’ may be ‎deemed unenforceable. More broadly, this decision threatens the validity and enforceability of ‎other terms and conditions contained in a browsewrap agreement, which may deprive the ‎company of the agreement’s protection and favorable terms. ‎

Clickwrap agreements seem to provide the solution to Zappos’ problem. The court ‎suggested a clickwrap agreement could obtain a user’s assent to the terms and conditions. A ‎company may implement the clickwrap agreement through account registration or purchase ‎check-out, tailored to the nature of the company’s business and user interaction. The system may ‎require a user to click “I Accept” to secure the user’s assent to be bound by the agreement before ‎he can proceed further on the website. ‎

On the other hand, the court did not conclude that browsewrap agreements are never ‎enforceable. Other courts have held that browsewrap agreements are generally enforceable. ‎Enforceability largely depends on how the company presents the link and terms to the users such ‎that the users would have reasonable notice of the information. Accordingly, a browsewrap ‎agreement may be enforceable if the hyperlink is conspicuously located and displayed. ‎

In addition, companies should communicate and secure a user’s assent to any ‎modification when the user has previously accepted the terms and conditions. The user may ‎consent through another clickwrap agreement showing the modified terms. With a browsewrap ‎agreement, notice of the changes should, at the minimum, be conspicuously displayed on the ‎webpage. ‎

What This Means 

The Zappos decision reflects a change in the public policy on web activities, and users ‎who do not affirmatively agree to the online Terms of Use may no longer be bound. Consumers ‎are increasingly turning to the web for goods and services. In reaction, courts are beginning to ‎look closer into the transactions and resulting issues that occur online. In this process, courts are ‎testing and requiring new standards for these Terms of Use agreements. Companies should be ‎aware of the court’s evolving attitude towards the different types of agreements. You are ‎encouraged to seek legal guidance to properly adapt your implementation of Terms of Use ‎agreements. Failure to update your Terms of Use agreements may leave you exposed to ‎unfavorable terms that the Terms of Use is designed to prevent.‎

Will Obesity Claims Be the Next Wave of Americans with Disabilities Act (ADA) Litigation?

Poyner SpruillIn a new federal lawsuit in the U.S. District Court for the Eastern District of Missouri, Whittaker v. America’s Car-Mart, Inc., the plaintiff is alleging his former employer violated the Americans with Disabilities Act (ADA) when it fired him for being obese.  Plaintiff Joseph Whittaker claims the company, a car dealership chain, fired him from his job as a general manager last November after seven years of employment even though he was able to perform all essential functions of his job, with or without accommodations.  He alleges “severe obesity … is a physical impairment within the meaning of the ADA,” and that the company regarded him as being substantially limited in the major life activity of walking.

The EEOC has also alleged morbid obesity is a disability protected under the ADA.  In a 2011 lawsuit filed on behalf of Ronald Katz, II against BAE Systems Tactical Vehicle Systems, LP (BAE Systems), the EEOC alleged the company regarded Mr. Katz as disabled because of his size and terminated Katz because he weighed over 600 lbs.  The suit alleged Mr. Katz was able to perform the essential functions of his job and had received good performance reviews.  The case was settled after BAE Systems agreed to pay $55,000 to Mr. Katz, provide him six months of outplacement services, and train its managers and human resources professionals on the ADA.  In a press release announcing the settlement, the EEOC said, “the law protects morbidly obese employees and applicants from being subjected to discrimination because of their obesity.”

Similarly, in 2010, the EEOC sued Resources for Human Development, Inc. (RHD) in the U.S. District Court for the Eastern District of Louisiana, for firing an employee because of her obesity in violation of the ADA. According to the suit, RHD fired Harrison in September of 2007 because of her severe obesity.  The EEOC alleged that, as a result of her obesity, RHD perceived Harrison as being substantially limited in a number of major life activities, including walking.  Ms. Harrison died of complications related to her morbid obesity before the case could proceed.

RHD moved for summary judgment, arguing obesity is not an impairment.  The court, having reviewed the EEOC’s Interpretive Guidance on obesity, ruled severe obesity (body weight more than 100% over normal) is an impairment.  The court held that if a plaintiff is severely obese, there is no requirement that the obesity be caused by some underlying physiological impairment to qualify as a disability under the ADA.  The parties settled the case before trial for $125,000, which was paid to Ms. Harrison’s estate.

In June 2013, the American Medical Association (AMA) declared that obesity is a disease.  Although the AMA’s decision does not, by itself, create any new legal claims for obese employees or applicants under the ADA, potential plaintiffs are likely to cite the new definition in support of ADA claims they bring.  In light of these recent developments, obesity related ADA claims will likely become more common.

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Next Time, Buy the CDs, Re: Illegal Music Download

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Following the lead of other courts addressing statutory penalties for illegal music downloading, the U.S. Court of Appeals for the First Circuit upheld a $675,000 fine for downloading and distributing 30 songs.  Sony BMG Music Entertainment  v. Tenenbaum, Case No. 12-2146 (1st Cir., June 25, 2013) (Howard, J.).

For over eight years, Tenenbaum ignored the warnings of his father, his college and the music industry and continued to download and distribute thousands of songs he knew were copyrighted.  In 2007 five record companies sued Tenenbaum under the Copyright Act for statutory damages and injunctive relief.  The record companies only pursued claims for 30 songs, though Tenenbaum admitted at trial he had distributed as many as 5,000 songs.  The trial court held as a matter of law that Tenenbaum had violated the Copyright Act and the jury found his violations were willful.  The jury awarded $22,500 for each of Tenenbaum’s thirty violations (15 percent of the statutory maximum), for a total award of $675,000.  The district court reduced the award to $67,500 finding that the jury’s award violated due process.  The First Circuit vacated the district court’s judgment holding that the principle of constitutional avoidance required the court to first address the issue of remittitur before determining the due process question.  On remand the district court determined remittitur was inappropriate and that the original $675,000 award comported with due process. Tenenbaum appealed the decision solely on due process grounds.

musical notes

The Court reviewed two questions: what is the correct standard for evaluating the constitutionality of an award of statutory damages under the Copyright Act; and (b) did the $675,000 award violate Tenenbaum’s right to due process?

The 1st Circuit looked to St. Louis, I.M. & S. Ry. Co. v. Williams, not BMW of North America, Inc. v. Gore, as the proper standard for reviewing the constitutionality of statutory damages under the Copyright Act, noting that Gore applies to punitive damages and the concerns regarding fair notice to the parties of the range of possible awards were “simply not present in a statutory damages case where the statute itself provides notice of the scope of the potential award.”  Under Williams, a statutory damage award only violates due process “where the penalty prescribed is so severe and oppressive as to be wholly disproportioned to the offense and obviously unreasonable.”

The 1st Circuit examined the purpose of the Copyright Act’s statutory damages and Tenenbaum’s behavior to determine if $675,000 metWilliams’ standard for constitutionality.  The 1st Circuit found that in 1999 Congress increased the Copyright Act’s minimum and maximum statutory awards specifically because of new technologies allowing illegal music downloading.  The record companies presented evidence that Tenenbaum’s activities had led to the loss of value of its copyrights and reduced its income and profits—precisely the harm Congress foresaw.  The Court went on to find that Tenenbaum’s conduct was egregious—he pirated thousands of songs for a number of years despite numerous warnings.  The Court held that “much of this behavior was exactly what Congress was trying to deter when it amended the Copyright Act.”  The 1st Circuit rejected Tenenbaum’s argument that the damages award had to be tied to the actual injury he caused, relying on Williams to find that the damages were imposed for a violation of the law and did not need to be proportional to the harm caused by the offender.

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International Trade Commission Addresses Use of Standard-Essential Patents in Section 337 Investigations

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The International Trade Commission (ITC) addressed for the first time the issue of whether infringement of a patent that has previously been declared “standard-essential” may form the basis for either a limited exclusion order or cease-and-desist order under a § 337, ruling that nothing in the ITC’s enabling statute prevents issuing an exclusion order, even if the complainant is under an obligation to license the patent.  Certain Electronic Devices, Including Wireless Communication Devices, Portable Music and Data Processing Devices, and Tablet Computers, Inv. No. 337-TA-794, (U.S. ITC, June 4, 2013) (ITC, per curiam); Commissioner Pinkert, dissenting).

The complainant, Samsung Electronics, held two patents that it had previously declared to be “standard-essential” to the Universal Mobile Telecommunications System promulgated by the European Telecommunications Standards Institute (ETSI).  ETSI’s Intellectual Property Rights policy required Samsung to offer licenses to such patents on fair, reasonable and non-discriminatory (FRAND) terms.  After licensing negotiations between Samsung and the respondent, Apple, broke down, Samsung filed a complaint at the ITC requesting a limited exclusion order against Apple’s mobile communication products.  After the administrative law judge ruled, on an initial determination (ID), that none of the patents at issue were valid and infringed, the ITC determined to review the ID and sought views from both the parties and the public as to whether Samsung’s declaration of the patents at issue as “standard-essential” should affect either the ITC’s analysis of whether there was a violation of § 337 or what relief should be provided.

In its final determination, the ITC found one of the two patents to be both valid and infringed, and that the proper relief was a limited exclusion and cease-and-desist order directed to the infringing articles.  The ITC first rejected Apple’s argument that the Commission should not investigate an alleged violation of § 337 based on infringement of patents subject to a FRAND undertaking, ruling that under § 337(b)(1), the ITC is required to investigate any alleged violation based upon a complaint under oath, whether or not those patents have been declared standard-essential.  The ITC also rejected Apple’s theory that the Commission “cannot address infringement of standard-essential patents other than in the exceptional scenarios such as where a potential licensee has refused to pay a royalty after a U.S. court has determined that royalty to be FRAND, or where no U.S. court has jurisdiction over the potential licensee in order to set a FRAND rate,” ruling that the remedies provided under § 337 could be imposed in addition to any damages or injunctions available from a district court.

The ITC further determined that Apple had not “properly argued any affirmative defense that would preclude the Commission from finding a violation based on assertion of a declared-essential patent,” such as a breach of contract, promissory estoppel, laches or fraud  The ITC ruled that even if Apple had offered sufficient evidence that the FRAND declaration was a legally enforceable obligation, the patents at issue were actually necessary to practice the standard and that Samsung was required to grant irrevocable licenses under FRAND terms to any party, it still would not have found in Apple’s favor, because the parties’ final offers were sufficiently close to each other that Samsung did not violate its obligation to negotiate in good faith.  Importantly, the ITC found that Samsung was not under any obligation to make an initial offer that was FRAND, because “the SSO intends the final license to be accomplished through negotiation” and “even if it were true that a FRAND agreement that requires Apple to pay Samsung ultimately is not reasonable, the offers that Apple criticizes do not necessarily demonstrate that Samsung has violated its FRAND obligations by failing to negotiate in good faith” (emphasis in original).  Finally, the ITC rejected the theory that whether a patent has been declared standard-essential should be considered when the public interest is analyzed, finding that its consideration of the public interest is limited solely to the four factors listed in § 337(d)(1).

Uncommonly for a Commission opinion, Commissioner Dean Pinkert wrote a dissent arguing that the ITC should not issue an exclusion order based on Samsung’s obligation to license the patents on a FRAND basis, that the evidence indicated Samsung was unwilling to make a FRAND licensing offer with respect to the standard-essential patents and that the absence of a FRAND offer should have a bearing on whether relief under § 337 is in the public interest.  Specifically, Commissioner Pinkert found that it was neither fair nor non-discriminatory for a FRAND-encumbered patent holder to require licenses to non-FRAND-encumbered patents as a condition for licensing the FRAND-encumbered patent.  Commissioner Pinkert also would have found that the statutory language of § 337(d)(1), as well as the legislative history of the statute that “any evidence” of price gouging or monopolistic practices on the part of the complainant would be a proper basis for denying exclusion, suggests that the section should be read broadly.

Practice Note:  The Commission’s rejection of a per se rule barring exclusion orders for patents that have been declared standard-essential is likely to lead to have a number of effects, including increased litigation of standard essential patents at the ITC, counter-suits requesting that a district court rule determine what royalty rate is FRAND and/or requesting that a complainant be enjoined from proceeding before the ITC, presidential review taking on increased importance and potential legislative action to curb the ITC’s jurisdiction.

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In Largest Known Data Breach Conspiracy, Five Suspects Indicted in New Jersey

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On July 25, 2013, the United States Attorney for the District of New Jersey announced indictments against five men alleging their participation in a global hacking and data breach scheme in which more than 160 million American and foreign credit card numbers were stolen from corporate victims, including retailers, financial institutions, payment processing firms, an airline, and NASDAQ.  The scheme is the largest of its kind ever prosecuted in the United States.

The Second Superseding Indictment alleges the defendants (four Russian nationals and one Ukrainian national) and other uncharged co-conspirators targeted corporate victims’ networks using “SQL [Structured Query Language] Injection Attacks,” meaning the hackers identified vulnerabilities in their victims’ databases and exploited those weaknesses to penetrate the networks.  Once the defendants had access to the networks, they used malware to create “back doors” to allow them continued access, and used their access to install “sniffers,” programs designed to identify, gather and steal data.

Once the defendants obtained the credit card information, they allegedly sold it to resellers all over the world, who in turn sold the information through online forums or directly to individuals and organizations.  The ultimate purchasers encoded the stolen information on blank cards and used those cards to make purchases or withdraw cash from ATMs.

The defendants allegedly used a number of methods to evade detection.  They used web-hosting services provided by one of the defendants, who unlike traditional internet service providers, did not keep records of users’ activities or share information with law enforcement.  The defendants also communicated through private and encrypted communication channels and tried to meet in person.  They also changed the settings on the victims’ networks in order to disable security mechanisms and used malware to circumvent security software.

Four of the defendants are charged with unauthorized access to computers (18 U.S.C. §§ 1030(a)(2)(C) and (c)(2)(B)(i)) and wire fraud (18 U.S.C. § 1343).  All of the defendants are charged with conspiracy to commit these crimes.

Two of the defendants have been arrested, with one in federal custody and the other awaiting an extradition hearing.  The other three defendants, two of whom have been charged in connection with hacking schemes, remain at large.

This conspiracy is noteworthy for its massive scale, and for the patience the hackers demonstrated in siphoning data from the networks.  The U.S. Attorney “conservatively” estimates more than 160 million credit card numbers were compromised in the attacks, and alleges that the hackers had access to many victims’ computer networks for more than a year.  Many prominent retailers were targets, including convenience store giant 7-Eleven, Inc.; multi-national French retailer Carrefour, S.A.; American department store chain JCPenney, Inc.; New England supermarket chain Hannaford Brothers Co.; and apparel retailer Wet Seal, Inc.  Payment processors were also heavily targeted, including one of the world’s largest credit card processing companies, Heartland Payment Systems, Inc., as well as European payment processor Commidea Ltd.; Euronet, Global Payment Systems and Ingenicard US, Inc. The hackers also targeted financial institutions such as Dexia Bank of Belgium, “Bank A” of the United Arab Emirates; the NASDAQ electronic securities exchange; and JetBlue Airways.  Damages are difficult to estimate with precision, but they total several hundred million dollars at least.  Just three of the corporate victims suffered losses totaling more than $300 million.

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A Checklist for Employee Reference Checks

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Thorough research during an employer’s hiring phase can prevent undesirable employees from becoming part of a workforce. There is no better way to get an accurate assessment of job applicants than by speaking with people who have actually worked with them. Before picking up the phone, however, potential employers should keep a few things in mind:

Who should inquire?

Someone in HR may typically perform reference checks, but the supervisor or manager who will be interacting with and interviewing the applicant should consider making the calls.  A supervisor or manager will not only benefit from getting the information directly, but they may also have an easier time getting high-level references to speak candidly about the applicant.

Consider obtaining consent

Getting the applicant’s consent before obtaining potentially sensitive information can help insulate you from liability. Further, former employers may be more at ease discussing the applicant if they know the applicant has approved of the contact.

What should be discussed?

Keep it at a professional level; not personal. Anything you ask should be relevant to the position with the goal being to find out about the applicant’s ability and how they will interact with others. Obviously, avoid any questions that could inadvertently lead to a discrimination or unfair hiring practices claim, such as inquiring about the person’s age or religion.

Know what you want to find out beforehand. People provide references whom they believe will say positive things, but this is not always the case. In the event a reference thinks poorly of the applicant, try to find out if their negative opinion is based on articulable, business-related reasons. While comments like, “she just was not a good fit at our company” can be appreciated, it is better to hear comments such as, “she was not a good fit at our company because she was repeatedly absent and needed constant oversight.”

Take notes

Information obtained during a reference check can be valuable evidence if a negligent hiring claim is later made by a third-party. For example, if the applicant is hired and subsequently is violent towards a customer, having records to show that none of the employee’s references offered any indication of violent behavior will support your defense that the hiring was not negligent.

Get necessary releases before going further

An applicant’s express permission is necessary before accessing some records, such as a credit report or criminal background check. Some records may be completely inaccessible, such as workers’ compensation information or medical records. If you have conducted the reference checks and are ready to take your interview process to the next level, make sure that you know what kind of releases are required.

 Maegan Pirtle and Shawn Beloin, Law Clerks for McBrayer, contributed to this article.

Federal Energy Regulatory Commission (FERC) Orders $435 Million Civil Penalty to Barclays Bank and $1-15 Million to Four Traders

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On July 16, 2013, the Federal Energy Regulatory Commission ordered Barclays Bank PLC to pay one of the largest civil penalties in its history — $435 million, 144 FERC ¶ 61.041 (2013). Four traders were also assessed penalties — $15M for trader Scott Connelly, and $1M each to traders Daniel Brin, Karen Levine and Ryan Smith. The Commission also found that Barclays should disgorge $34.9M, plus interest, in unjust profits. Barclays and the traders had elected FERC procedures that require FERC to assess the penalty without formal administrative adjudication, and then pursue enforcement of its assessment in an action in federal district court. The district court action includes a de novo review of the Commission’s findings. Early reports indicate that Barclays will fight the penalty in court.

These penalties were issued after FERC found that Barclays and its traders violated the Commission’s Anti-Manipulation Rule, 18 CFR §1c.2 (2012). The Commission found that Barclays and the traders manipulated California energy markets from November 2006 to December 2008 at the four most liquid trading points in the western U.S. — Mid-Columbia, Palo Verne, North Path 15 and South Path 15, Order at 2. Specifically, the Commission found that Barclays and the traders built a “significant volume of monthly index or fixed-price physical products” at a trading point “in a direction — long or short — opposite to fixed-for-floating financial swaps they held at that point.” The Commission noted that establishing these positions “had the effect of creating physical delivery or receipt obligations which Barclays was unable to meet in actual practice,” and that Barclays and the traders were able to “flatten” these positions (“achieve zero net physical obligations”) at the end of each day through the use of next-day fixed-price or cash physical products traded on the Intercontinental Exchange platform. FERC found that the trading activity at issue was “intended to move the Index rather than respond to market fundamentals and was generally uneconomic.” Order at 4.

The Commission further concluded that Barclays and the traders not only engaged in this manipulative trading scheme, but “they did so with the intent to commit fraud.” The Commission identified seven facts found during its investigation to support its conclusions:

  1. Barclays’ and the traders’ consistent pattern of building substantial positions directionally opposite their large swap positions and the subsequent flattening which would tend to move prices to benefit those swap positions;
  2. how the trading behavior in the “Manipulation Months” differed from months where there was no alleged manipulation;
  3. traders’ communications which discuss and describe the fraudulent scheme;
  4. Barclays and the traders responding to certain allegations, but completely failing to respond to FERC Office of Enforcement staff allegations regarding the building of positions as a manipulative scheme;
  5. the uneconomic nature of the trading;
  6. inconsistency in trader testimony and trader explanations presented in submissions;
  7. the failure of economic, statistical and legal analysis provided by Barclays and the traders to otherwise explain or defend the positions, swaps or trading.

In addition, FERC noted that it “considered various evidence to reach its conclusion concerning intent,” and provided examples of some of the compelling “speaking” evidence that it found demonstrates that the traders understood that they were making the trades to “drive price,” “protect” their positions and ”move” or “affect the Index.”

The parties have 30 days to pay the civil penalties assessed after which, the Commission can pursue enforcement of its assessment in federal district court. The parties continue to have the opportunity to settle the matter with the Commission. Absent a settlement, and unlike the DC Circuit’s decision in Hunter v. FERC, 711 F.3d 155 (D.C. Cir. 2013), this case may produce the first fully-adjudicated case on the merits of the Commission’s market manipulation theories.

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Employment as Consideration in Employee Non-Competes: Less than Two Years is Not Enough

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The Illinois Appellate court very recently clarified a budding dispute among practitioners regarding what type of consideration is necessary to enforce a non-compete or non-solicitation agreement. In Fifield v. Premier Dealer Services, Inc., in which our firm represented the employee and his new employer, the First District Illinois Appellate Court set forth this bright line rule — if the only consideration for a restrictive covenant is employment, then an employee has to work at least two years after signing the agreement before the non-compete or non-solicitation agreement can be enforced. This is true even if the restriction meets all other requirements (e.g., legitimate interest, reasonable scope).

This rule applies whether or not the agreement is signed at the beginning of employment or during, whether the employee quits or is fired. It simply doesn’t matter. Unless the employee has worked two years, the company will not be able to enforce that agreement unless some other adequate consideration is given for the restrictive covenant.

What does this mean to you? It means that if you hire a new employee and require her to sign a non-compete and that employee leaves a year after being hired, you will not be able to enforce that non-compete agreement no matter what. Indeed, based on the Fifield case, if the employee works one year and eleven months and then leaves, the agreement would still not be enforceable.

The same rule would apply if you ask an employee to sign a non-compete during his or her employment. After that agreement is signed, the employee has to work an additional two years for the agreement to be enforceable, provided that the only consideration for the agreement is employment.

And that is the loophole that the court has left employers: providing some other consideration besides employment. For example, if a company gives a real (not an illusory or nominal) signing bonus, the employer would have a fairly good argument that it has provided adequate consideration to enforce the agreement. Perhaps a promotion would work as well, although that is more problematic since a promotion is still basically employment. After promoting its employee, nothing prevents the company from then firing the employee, if employment is at will. If, on the other hand, the employee was hired for a particular amount of time (at least two years) during which he or she could not be fired without cause, that could itself be sufficient consideration since it would arguably constitute two years of employment even if the employee quit early.

Another, albeit untested possibility would be to draft the restrictive covenant in such a way that the post-employment restriction would be equal to the length of time that the employee actually works. So if the employee leaves after one year, then she or he is restricted for one year. To be enforceable, the restriction would likely have to have some maximum period of time. Probably two to three years at the most.

As you can see, this new ruling has significant implications. At the very least, every company should carefully review its non-compete and non-solicitation agreements to see if they are supported by adequate consideration. If they don’t, then you should discuss with your attorneys how best to rectify the situation. You certainly do not want your former employees going to competitors singing, “I can’t get no consideration.”

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