Category: Regulatory

Federal Court Stops Serial Americans with Disabilities Act (ADA) Plaintiff’s Latest Effort: Payne v. Chapel Hill North Properties

Poyner Spruill

The United States District Court for the Middle District of North Carolina recently dismissed an Americans with Disabilities Act (“ADA”) case filed by Denise Payne, a Florida resident, and National Alliance for Accessibility, Inc. (“NAA”), a nonprofit Florida corporation (Payne is the founder of and a member of NAA).   Payne and NAA sued Chapel Hill North Properties, LLC (“CHNP”) alleging the company’s shopping center in Chapel Hill, NC did not comply with ADA requirements for accessibility to disabled individuals.  Poyner Spruill attorneys Nick Ellis and Kevin Ceglowski filed a Motion to Dismiss the case and a supporting brief for CHNP arguing that the court did not have subject matter jurisdiction because Payne lacked standing to proceed.

Payne was seeking injunctive relief, requesting CHNP to remedy the alleged ADA violations.  In order to seek injunctive relief, a plaintiff must have constitutional standing to proceed with the lawsuit, which depends on showing a likelihood of future harm from the alleged violations.  Payne alleged she encountered architectural barriers when she visited the shopping center on June 10, 2010, April 1, 2012  and on September 27, 2012.  Payne alleged only vague future plans to visit the shopping center, saying she “intends to visit North Carolina again in June of 2013” and “intends to visit Defendant’s property once again.”  Payne’s Complaint alleged she intends to continue to meet with existing NAA members in Asheville, Wilmington, and Fayetteville, none of which are near CHNP’s property.  After CHMP filed its Motion to Dismiss, Payne filed an affidavit, hoping to avoid dismissal of her case, and in which she stated she specifically intended to return to the shopping center in June 2013.  In her Complaint, she alleged she stopped at the shopping center on her visits to North Carolina because it “has an attractive selection of goods and services” and “is convenient based on her travel patterns.”

CHNP argued the plaintiffs failed to sufficiently show that Payne would return to the property and, therefore, that they were unable to demonstrate she was likely to suffer any harm in the future.  Specifically, CHNP argued Payne lives over 700 miles from the property, lacks a reliable record of past patronage, and her alleged intent to return to the property in the future is not credible.  In order to evaluate this argument, the court used what is known as the proximity test – a set of factors for determining standing that takes into account (1) the plaintiff’s proximity to the defendant’s business; (2) the plaintiff’s past patronage of the business; (3) definiteness of plans to return to the business; and (4) the frequency of the plaintiff’s nearby travels.

The court first examined the proximity factor because as the court said, “the further away a plaintiff ordinarily finds herself from a business, the less likely she is to suffer future harm.”  In this case, Payne lives over 700 miles from the shopping center, which the court decided weighed against finding she was likely to return and suffer harm.  More importantly, the court reviewed Payne’s filings in other ADA cases in North Carolina courts and determined her representations to the courts were not consistent from case to case.  Specifically as it related to this case, the court pointed out that Payne’s allegation that she passes through Chapel Hill on the way to see her attorney when traveling to North Carolina contradicted a sworn statement made in another case that her “first stop is always Greensboro.”  The court said, “the fact that Payne has submitted such clearly conflicting statements clearly calculated to avoid dismissal in these cases is very troubling and casts significant doubt on her claims.”

The court also examined Payne’s past patronage of the shopping center.  Although the court noted Payne had made only three past visits and did not explain why she chose this particular shopping center instead of many others on her route, it allowed this factor to weigh in her favor, if only slightly.

The court next examined Payne’s intent to return to the shopping center.  The court found this factor weighed against Payne and NAA because the shopping center is located on a 100-mile stretch of highway between the airport at which Payne arrives and her lawyer’s office, which is her alleged destination when she comes to North Carolina.  Moreover, several of the cities Payne alleged she intended to visit in the future (Fayetteville and Wilmington) are in the opposite direction from the shopping center. In sum, the court determined Payne did not express any definite reason she would return to the shopping center other than to test its compliance with the ADA.

Finally, the court assessed Payne’s frequency of travel to areas near the shopping center.  The court said Payne’s sporadic trips to North Carolina provided weak evidence she would suffer actual or imminent harm.  Beyond that, Payne’s frequent lawsuits worked against her efforts to maintain standing in this case.  The court noted it was implausible that in her one or two visits a year to North Carolina, Payne could return to each of the 80 plus properties she has sued in the state for alleged noncompliance with the ADA.  The court found this final factor weighed against finding that Payne had standing to proceed with her lawsuit.  After considering all the factors together, the court determined Payne was unlikely to suffer future harm at the shopping center and rules that she did not have standing to proceed and the lawsuit should be dismissed.

CHNP also argued that Plaintiff NAA lacked standing to proceed with the lawsuit because, as an association, its standing depended on an allegation that one or more of its members was suffering immediate or threatened injury as a result of the allegations in the Complaint.  Because Payne was the only member of NAA identified in the Complaint and the court decided she was not suffering immediate or threatened injury, the lawsuit was also dismissed as it related to allegations made by NAA.

The court’s opinion is a victory for CHNP, but also an example of how serial plaintiffs in ADA cases have credibility issues because the volume of lawsuits they file can create inconsistent “facts” they allege to be true.  The result in this case was also a strong rebuke against Payne’s dishonesty to the courts in an effort to maintain standing in her multitude of lawsuits against North Carolina companies.  (Payne has filed over 80 cases in NC.)  Businesses that find themselves facing ADA suits from out-of-state plaintiffs may find the arguments and result in this case helpful in defending those claims.

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Update on Advanced Micro Devices (AMD) Trade Secret Misappropriation Case: Judge Hillman Issues Narrow Interpretation of the Computer Fraud and Abuse Act (CFAA)

RaymondBannerMED

As originally discussed on this blog back in February, a lawsuit brought by Advanced Micro Devices (AMD) against former employees accused of taking AMD trade secrets with them to competitor Nvidia has been ongoing and a recent opinion in the case highlights the uncertainty surrounding the Computer Fraud and Abuse Act (CFAA).

A recent opinion issued by Judge Timothy S. Hillman narrowly interpreted the CFAA in this case. Judge Hillman declined a broad interpretation of the CFAA and held that AMD’s allegations in its complaint are insufficient to sustain a CFAA claim.

The relevant portion of the CFAA provides that it is a violation of the CFAA to:

Knowingly and with intent to defraud, [access] a protected computer without authorization or [exceed] authorized access, and by means of such conduct [further]the intended fraud and [obtain] anything of value, unless the object of the fraud and the thing obtained consists only of the use of the computer and the value of such use is not more than $5,000 in any 1-year period.

computer broadcast world

There exists a circuit split on the interpretation of this clause. As Judge Hillman noted, the 1st Circuit has not clearly articulated its position on the issue. The broad interpretation defines access in terms of agency or use. That is, whenever an employee breaches a duty of loyalty or a contractual obligation and acquires an interest adverse to their employer, then all subsequent access exceeds the scope of authorized access. Proponents of the narrower interpretation argue that the intent of the CFAA was to deter computer hacking and not to supplement common law trade secret misappropriation remedies and therefore fraudulent means must be used to obtain the information initially.

Judge Hillman utilized a narrow interpretation of the CFAA and held that AMD had not pleaded sufficient facts to maintain a cause of action under the CFAA. AMD had pleaded that the defendants used their authorized access to computer systems to download and retain confidential AMD information which they retained when they left to go work at Nvida. The complaint, while alleging the defendants had the intent to defraud AMD, provided no facts which support the allegation that the defendants obtained the information through fraudulent or deceptive methods.

Judge Hillman did not outright dismiss the claim given the truncated evidentiary record and has allowed AMD the opportunity to plead specific details indicating that some or all of the defendants used fraudulent or deceptive means to obtain the confidential information and that they intentionally defeated or circumvented technologically implemented restrictions to obtain the confidential information. If other judges in the 1st Circuit follow Judge Hillman’s approach, plaintiffs will need to ensure that they plead with sufficient detail that the defendants obtained the information through a fraudulent or deceptive method as opposed to simply obtaining the information through permissible access.

Estate Planning Opportunities Arising from Recent Landmark Supreme Court Decisions Concerning Marriages of Same-Sex Couples

Katten Muchin

On June 26, 2013, the US Supreme Court (the “Supreme Court”) struck down Section 3 of the federal Defense of Marriage Act (DOMA) as unconstitutional in the case of United States v. Windsor (“Windsor”). In a related case, the Supreme Court also dismissed an appeal from the federal district court ruling that struck down California’s Proposition 8 (which overturned marriages of same-sex couples in California) as unconstitutional in the case of Hollingsworth v. Perry (“Perry”), leaving intact the district court’s ruling that Proposition 8 is unconstitutional and cannot be enforced. This advisory summarizes the estate and income tax planning opportunities and other topics for consideration arising from the Windsor and Perry decisions. Married same-sex couples should consult with their advisors in light of their particular facts and circumstances in order to take maximum advantage of the change in the law. Unmarried same-sex couples should now consider whether to marry.

In Windsor, Edith Windsor and Thea Spyer, a same-sex couple, were married in Canada in 2007 after having been together in New York for over forty years. New York law did not permit marriages between same-sex couples at the time but recognized marriages of same-sex couples performed in other jurisdictions. Spyer died in 2009, and Windsor inherited all of Spyer’s estate as Spyer’s surviving spouse. However, because of DOMA, which defines “marriage” as “a legal union between one man and one woman as husband and wife” and “spouse” as “a person of the opposite sex who is a husband or a wife”, the federal government refused to recognize the couple’s marriage for federal estate tax purposes. As a result, Windsor’s inheritance from Spyer was not entitled to the unlimited marital deduction from federal estate tax that would have been available had Windsor and Spyer’s marriage been recognized by the federal government. After paying the estate taxes owed on her inheritance as a result of DOMA, Windsor sued for a refund of the estate taxes on the grounds that DOMA unconstitutionally discriminated against same-sex married couples. Windsor prevailed in the US District Court for the Southern District of New York and also in the US Court of Appeals for the Second Circuit. The Supreme Court has now agreed with Windsor, holding that “DOMA seeks to injure the very class [of married same-sex couples] New York seeks to protect. By doing so it violates basic due process and equal protection principles applicable to the Federal Government.” The Supreme Court further explained that DOMA’s “demonstrated purpose is to ensure that if any State decides to recognize same-sex marriages, those unions will be treated as second-class marriages for purposes of federal law.”

In Perry, two same-sex couples wished to become married in California. Though the California Supreme Court held in 2008 that the California Constitution required the State of California to recognize marriages of same-sex couples, California voters passed Proposition 8 later the same year, amending the California Constitution to provide that only “marriage between a man and a woman is valid and recognized in California.” As a result of Proposition 8’s passage, the two couples were unable to marry. They sued the California governor, attorney general and various other state and local officials responsible for enforcing California’s marriage laws (the “California officials”), claiming that Proposition 8 violated their rights to due process and equal protection under the US Constitution. In the US District Court for the Northern District of California (the “district court”), the California officials refused to defend Proposition 8, but the private parties who were the proponents of Proposition 8 (the “Proposition 8 proponents”) successfully intervened to defend the measure. After the district court held that Proposition 8 was unconstitutional, the California officials declined to appeal the decision and the Proposition 8 proponents appealed. The US Court of Appeals for the Ninth Circuit upheld the district court’s ruling that Proposition 8 was unconstitutional. The Supreme Court dismissed the appeal from the district court on the grounds that the Proposition 8 proponents lacked standing to appeal because they were merely private parties and were not properly authorized under state law to defend the constitutionality of Proposition 8. As a result of the Supreme Court’s ruling, the district court’s ruling that Proposition 8 is unconstitutional remains in place and California soon will be required to permit same-sex couples to marry. As a result of the Windsor decision, such marriages also will be entitled to federal recognition.

Estate Planning Opportunities Arising from Windsor 

The Supreme Court’s ruling in Windsor requires the federal government to recognize marriages of same-sex couples. Note, however, that the Supreme Court limited the scope of its decision to “lawful marriages”. Therefore, the decision likely will not be interpreted to require the federal government to recognize so-called “marriage equivalent” status that is not actually “marriage” under state law, i.e., civil unions, domestic partnerships and registered domestic partnerships. The District of Columbia and thirteen states permit marriages of same-sex couples. Those states are California (effective once the stay issued by the Ninth Circuit is lifted pursuant to the Perry decision, which is likely to be imminent), Connecticut, Delaware (effective July 1, 2013), Iowa, Maine, Maryland, Massachusetts, Minnesota (effective August 1, 2013), New Hampshire, New York, Rhode Island (effective August 1, 2013), Vermont and Washington.

Another unresolved issue is whether the Supreme Court’s decision applies to married same-sex couples who lawfully married in a jurisdiction that permits marriages of same-sex couples (e.g., New York), but who are domiciled and/or resident in a state that does not permit or recognize such marriages (e.g., Texas). Accordingly, until these issues are resolved as a result of subsequent litigation, legislation and/or regulation, it is not clear whether Windsor will be interpreted also to apply to same-sex couples with a marriage-equivalent status (but not marriage) or married same-sex couples who are domiciled and/or resident in a state that does not permit and/or recognize marriages of same-sex couples.

Against that background, at a minimum, married same-sex couples domiciled and/or resident in states that permit and/or recognize marriages of same-sex couples likely will be entitled to the more than 1,000 benefits available to married opposite-sex couples under federal law. Some of those 1,000 benefits present immediate estate planning opportunities, including the following:

1. Review estate planning documents to ensure that the amount and structure of any spousal bequests remain appropriate. 

Federal recognition of marriages of same-sex couples leads to the availability of the unlimited marital deduction from federal estate tax and gift tax for transfers between same-sex spouses. Existing estate planning documents may have been drafted with the assumption that any gift or bequest to a spouse of the same sex over and above the individual’s applicable exclusion amount from federal estate tax and/or federal gift tax (the “Applicable Exclusion Amount” —currently $5,250,000, adjusted annually for inflation) would be subject to federal estate tax (currently at a maximum rate of 40%). However, that assumption is no longer true. Indeed, such gifts and bequests, if properly structured, are now entitled to the unlimited marital deduction. In addition, under the so-called “portability” provisions of federal gift and estate tax laws, under certain circumstances a surviving spouse of the same sex will also be entitled to use any portion of the deceased spouse’s unused Applicable Exclusion Amount (the “DSUE”), allowing the surviving spouse to make additional tax-free gifts and/or reduce the amount of estate taxes owed upon the surviving spouse’s death (note, however, that DSUE does not increase the surviving spouse’s applicable exemption from the federal generation-skipping transfer tax (“Federal GST Exemption”)). Accordingly, a married same-sex couple may wish to modify their estate planning documents to provide that any assets included in their estates in excess of the Applicable Exclusion Amounts will pass to the surviving spouse, either outright or in a properly structured marital trust for the spouse’s benefit, thus deferring all federal estate taxes until the death of the surviving spouse.

Estate planning documents may also be revised, if appropriate, to include a separate marital trust that is designed to permit a spouse to use any of the individual’s unused Federal GST Exemption that remains after the individual’s death.

2. Review retirement account beneficiary designations and joint and survivor annuity elections to ensure that they remain appropriate. 

A surviving spouse is entitled to roll over a decedent spouse’s retirement account into the surviving spouse’s retirement account without being required to take minimum distributions or lump sum distributions until such time as the surviving spouse ordinarily would be required to take minimum distributions (usually upon reaching age 70½). As a result of the Windsor decision, this benefit is now available to married same-sex couples. Accordingly, married same-sex spouses should consider naming each other as the beneficiary of his or her retirement accounts in order to defer income tax on the rolled over retirement account as long as possible.

With regard to any retirement plans that are covered by the Employee Retirement Income Security Act of 1974 (ERISA), the spouse of a participant in such a plan may automatically be a beneficiary of the retirement plan as a result of the Windsor decision. Accordingly, if a participant in an ERISA-covered plan (e.g., a 401(k) plan) wishes to designate someone other than his or her spouse as a beneficiary, such participant will need to obtain the consent of his or her spouse to make such a designation effective. Prior to Windsor, consent was not needed from a spouse of the same sex. However, afterWindsor, such consent is now required. Separately, if a participant previously made an election to waive joint and survivor annuity benefits after the date of the marriage, the participant may be able to make a new election at this time, and a new election may be required in order to be valid if the marriage is newly recognized under Windsor.

3. Consider replacing individual life insurance policies with survivor policies. 

Many same-sex spouses previously purchased individual life insurance policies of which the other spouse is the beneficiary (either directly via beneficiary designation or indirectly through a life insurance trust) in order to provide the surviving spouse with sufficient liquid assets that may be used to pay federal estate taxes due upon the death of the first to die. With the unlimited marital deduction and DSUE now available to married same-sex couples, as explained above, there may be little or no need for such liquidity upon the death of the first spouse to die. Thus, a married same-sex couple should consider replacing such individual policies with so-called “survivor” or “second-to-die” policies that pay benefits only upon the death of the surviving spouse. Such policies will still provide liquidity to children or other beneficiaries of the married same-sex couple and are generally less expensive than individual policies having the same death benefits.

4. Consider splitting gifts between spouses. 

Until now, each spouse could make gifts only up to the annual exclusion amount from federal gift tax and/or federal generation-skipping transfer tax (the “Annual Gift Tax Exclusion Amount” and the “Annual GST Exclusion Amount”, respectively—each currently $14,000) without using any portion of his or her Applicable Exclusion Amount. Going forward, however, each spouse may now make gifts from his or her own assets and, with the other spouse’s consent, have such gifts deemed to have been made one-half by the other spouse for purposes of federal gift tax and GST tax laws. Both spouses acting together in this way currently may give up to $28,000 to any individual without using any portion of either spouse’s Applicable Exclusion Amount (note that the Annual GST Exclusion Amount does not always apply to gifts made in trust).

5. Amend previously filed federal estate, gift and income tax returns and/or file protective claims as appropriate.

Gifts made to spouses. If one spouse previously made taxable gifts to the other spouse and reduced the donor’s Applicable Exclusion Amount by the amount that the gift exceeded the Annual Gift Tax Exclusion Amount and/or the donor’s Federal GST Exemption by the amount that the gift exceeded the Annual GST Tax Exclusion Amount, it may be possible to amend the donor’s prior gift tax returns (subject to the limitations period discussed below) and retroactively claim the marital deduction for the gifts made in those years, thus increasing the donor’s Applicable Exclusion Amount and/or reclaim the Federal GST Exemption used. By doing so, the donor may make additional tax-free gifts and/or reduce federal estate and/or GST taxes due upon his or her death. Similarly, any gift taxes or GST taxes actually paid may be refundable.

Gifts made to third parties. To the extent that either spouse previously used a portion of his or her Applicable Exclusion Amount and/or paid gift taxes or GST taxes by making gifts to third parties over and above his or her Annual Gift Tax Exclusion Amount and/or Annual GST Exclusion Amount, it may be possible to amend prior federal gift tax returns in order to retroactively split such gifts with the other spouse, thus increasing the donor’s Applicable Exclusion Amount and/or Federal GST Exemption. Again, doing so will allow the donor to make additional tax-free gifts and/or reduce federal estate taxes and GST taxes due upon the donor’s death. Similarly, any gift or GST taxes actually paid may be refundable.

Inheritances from decedent spouses. In cases where a decedent spouse’s estate paid federal estate taxes on assets that were inherited by a surviving spouse of the same sex, it may be possible to amend the decedent spouse’s federal estate tax return (subject to the limitations period discussed below) and retroactively claim a refund for the estate taxes paid. If the decedent spouse’s estate did not pay estate taxes and he or she died in 2010 or a subsequent year, under the portability provisions of federal estate tax laws, the surviving spouse may be able to claim the deceased spouse’s DSUE, thus allowing the surviving spouse to make additional tax-free gifts and/or reduce the amount of estate taxes owed upon the surviving spouse’s death (note, however, that DSUE does not increase the surviving spouse’s Federal GST Exemption).

Income taxes. Both spouses may also amend prior year income tax returns to change their filing status from single to married filing jointly and obtain a refund if the amount of tax owed based on their married filing status is less than that owed based on their prior single status.

Retroactivity. The extent to which married same-sex couples will be allowed to amend prior tax returns depends on the extent to which Windsor is applied retroactively and whether the applicable limitations period has passed with regard to each tax return (i.e., ordinarily three years from the date the tax return was originally due or filed (if on extension) or two years from the date the tax was paid, whichever is later). For example, it may no longer be possible to amend a 2009 individual income tax return due on April 15, 2010, that was not put on extension, but individual income tax returns for 2010, 2011 and 2012 likely may be amended. That said, it is conceivable that the Internal Revenue Service (IRS) will permit amendments as far back as the year of the marriage on the basis that neither spouse lawfully could have amended his or her tax returns prior to theWindsor decision. In either case, it will take some time for the IRS to develop policies and procedures to implement Windsor, and amended returns should be filed in accordance with applicable published guidance from the IRS, if available. In any situation where the limitations period is about to expire for a particular tax return, a married same-sex couple should consider filing a protective claim for a refund with the IRS in order to preserve the ability to obtain such a refund after the IRS has provided a means to amend the return.

6. Reside in a state that permits and/or recognizes marriages of same-sex couples. 

If a married same-sex couple was lawfully married in a jurisdiction that permitted the marriage but now reside in a state that does not permit and/or recognize the marriage, that couple should consider moving to a state that either permits marriages of same-sex couples or recognizes such marriages lawfully performed in other states if they wish to be certain to enjoy the federal benefits now potentially accorded to marriages of same-sex couples.

7. Non-citizen spouses should consider seeking permanent residency and/or becoming citizens. 

Until now, non-citizen spouses were not eligible for citizenship or permanent residency on the basis of their marriage to a spouse of the same sex who was a US citizen. As a result of the Windsor decision, however, non-citizens may be eligible for permanent residency and/or citizenship on that basis. Though there are many benefits to becoming a permanent resident or citizen, there are also numerous tax and non-tax consequences that should be carefully considered before making such an important decision.

Estate Planning Opportunities Arising from Perry 

California will now be required to permit marriages of same-sex couples, but other states that do not permit and/or recognize marriages of same-sex couples will not be required to do so. California married same-sex couples will enjoy all of the benefits available to married couples under federal law and thus should consider the above recommendations. In addition, married same-sex couples in California should consider the following recommendations:

1. Amend previously filed California income tax returns and/or file protective claims as appropriate. 

Married same-sex couples may be permitted to amend prior year California income tax returns to change their filing status and obtain a refund for any income taxes that were overpaid. Note that the normal limitations period for amending California returns expires four years after the original due date of the return (or the actual filing date if the return was put on extension) or one year from the date the tax was paid, whichever occurs later. If the limitations period for any particular tax return is about to expire, a married same-sex couple should consider filing a protective claim for a refund until such time as the State of California provides appropriate guidance for amending prior returns. Note that, as discussed above with regard to the limitations period for federal tax returns, it is conceivable that a married same-sex couple may be permitted to amend their returns through the first year of their marriage.

2. Amend previously filed tax returns and/or file protective claims with other states as appropriate. 

Married same-sex couples may also be entitled to amend prior gift tax and/or estate tax returns filed with other states that recognized marriage but not marriage equivalents (e.g., California registered domestic partnerships) at the time in question and receive a refund of taxes paid and/or reclaim any state gift tax and/or estate tax exemption. Again, the limitations period (if one applies) for amending such returns will vary by state. If the limitations period for any particular tax return is about to expire, a married same-sex couple should consider filing a protective claim for a refund until such time as the state provides appropriate guidance for amending prior returns.

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Defense of Marriage Act (DOMA) Goes Down – Copyright Goes Up – U.S. v. Windsor, Supreme Court, No. 12-307, Decided June 26, 2013

Sheppard Mullin 2012

The Supreme Court handed down a far reaching decision throwing out an attempt by Congress to deny the benefits conferred by federal law on same sex couples legally married under state law holding that the Defense of Marriage Act (“DOMA”), as so applied, constituted a deprivation of the equal liberty of persons protected by the Fifth Amendment. In so doing, and perhaps without realizing it, the Supreme Court was also writing an important copyright case.

Much of copyright law is devoted to legal protection for intellectual property under a social contract allowing authors to exclusively benefit for a limited time from the fruits of their creative endeavors in exchange for enhancing the marketplace of ideas. The presently effective Copyright Act of 1976, and its predecessors including the Copyright Act of 1909, further establish a mechanism for succession assuring that certain defined classes of individuals, the author’s “statutory heirs”, may continue to enjoy those benefits following the author’s death. These classes generally include the author’s surviving spouse and children and, in certain circumstances, the grandchildren next of kin and/or the author’s executor. Since copyrights are expressly solely a matter of federal law for the federal courts, any such federal benefits would have likely been denied by DOMA had it survived judicial scrutiny.

For example, the renewal copyright provisions allow the recapture of a deceased author’s original term copyright (copyrights secured prior to 1978) by an author’s surviving spouse and children as a class. Should there be no surviving spouse or child, the renewal right passes to the author’s executor, if there is a will, or to the author’s next-of-kin in the absence of a will. Clearly DOMA would have denied the benefits of renewal to a surviving, non-author, gay spouse even though such was legally married under state law. What would instead have happened is that an author’s children (possibly by a first marriage) would have enjoyed the entire renewal copyright to the exclusion of the legal, non-author spouse. It should, in this regard, be noted that, much to the surprise of many estate attorneys even today, the renewal and other copyright privileges flow directly from the statute to the statutory heirs without regard to the author’s plan of testamentary distribution or the state laws of intestacy.

Another example would have been the right of termination of transfers by which the author’s statutory heirs are allowed to serve Notices of Termination on prior transferees. In most cases, the author’s surviving spouse and children must jointly exercise the termination. Of course, if DOMA had survived instead of the non-author gay spouse, the children would have exclusively owned the termination rights with no legal obligation to a possibly disfavored second spouse who might be left with nothing from the estate of his or her devoted marital partner.

Neither of these scenarios will now happen…at least not from a direct application of DOMA to the provisions of the Copyright Act. Instead, the Copyright Act will continue to neutrally apply to all legally married spouses regardless of their sexual orientation.

The children, whatever their feelings may be about their father or mother’s choice of marital partner, should not feel deprived. The Supreme Court had already long ago shown favor to them. In an often forgotten decision, De Sylva v Ballentine, 351 US 570 (1956), the Supreme Court determined that even children born out of wedlock were entitled to the benefits conferred by the copyright laws on “children” as a class. However, the Supreme Court just as clearly stated that identifying who qualified as a “child” was a matter left to the states, hence, entirely consistent with the DOMA ruling. Following, De Sylva, the New York federal appellate court, the Second Circuit, applied the ruling of the Alabama Supreme Court to hold that Cathy Yvonne Stone, the out of wedlock daughter of the famous country singer, Hank Williams, was entitled to share the benefits of Williams’ renewal copyrights. Once Alabama state law identified Stone as a legal child, the Copyright Act then extended renewal copyright benefits to her as a member of the federally defined class of “children”. Stone v. Williams, 970 F2d 1043 (2d Cir. 1992).

Trusts and Estates attorneys, however, are not entirely out of business. The DOMA decision leaves substantial need for their services if only to determine the impact on pre-planned and future estates. The Supreme Court, both in De Sylva and Windsor, has made it clear that state law still governs who will be considered a legal spouse or child. In fact, Windsor expressly leaves intact the state law provisions of DOMA. If that were not enough, the Supreme Court’s companion decision, Hollingsworth v Perry, No. 12-144, decided June 26, 2013, leaves in place a determination, under California state law, that same-sex partners could not be denied the benefits of marriage. In short, DOMA is one piece in the same-sex marriage mosaic, but not the final piece…not close to it. Instead, the Windsor and Hollingsworth decisions will only increase the need to carefully examine the impact of state law on the effective and predictable management of literary and artistic estates.

China to Strictly Regulate Secondment/Staffing Business Model

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Amendments to the PRC Labor Contract Law take effect on July 1, adding limitations on employment structures.

On July 1, 2013, amendments to the People’s Republic of China (PRC) Labor Contract Law will take effect. The amendments increase the regulation of staffing and labor service businesses and discourage the use of secondment arrangements to avoid employer-related liabilities. The new law was published on December 28, 2012 and is an important development in China’s business community.

In recent years, increasing numbers of labor-intensive businesses, including state-owned banks and large multinationals, have used secondment services provided by staffing firms due to the difficulties involved in terminating employees and increased compliance costs in China. The secondment arrangements became attractive options among employers because the termination of such an arrangement was not subject to the numerous restrictions set forth in the labor law and regulations and avoided triggering severance obligations.

In light of the Chinese government’s amendments to the PRC Labor Contract Law, companies with operations in China should keep in the mind the below major requirements when formulating or executing compliance plans.

Qualification of Staffing Firms

To engage in a staffing business for the provision of secondment services, a company must meet the new law’s requirements, which include a minimum registered capital of at least RMB$2 million. In addition, a company must apply for a special permit before conducting any staffing business. As the law is silent on the qualifications of an applicant to obtain such a permit, the approval authorities have broad discretion. It is possible the Chinese government will control the number of service providers in a particular geographic area by limiting the number of permits issued. In practice, firms without permits may structure their business models as outsourcing businesses by arguing that they are not providing staffing services. However, because the distinction between “secondment” and “outsourcing” is not defined in any law or regulation, the regulatory authorities may treat the outsourcing model as secondment in substance and thus require a permit.

Equal Work, Equal Pay

The new law requires that the recipients of secondment services compensate the secondee for his or her services on the principle of “equal work, equal pay.” Although this concept has been in existence since the promulgation of the PRC Labor Law in 1994, it is not a defined term in any labor regulation, including the new law. Traditionally, benefits and other nonsalary items, such as equity incentive awards, have not been considered when applying the principle of equal work, equal pay. It remains to be seen how the courts and labor arbitration organizations will interpret the principle in the context of the new law.

Limitation on the Role of Secondees

The new law expressly states that, as a general principle, employers should hire employees through signed labor contracts and that secondment can be used only if the position is of a temporary, auxiliary, or replaceable nature. A position will be treated as temporary if it lasts no more than six months, but it is not clear whether the secondment term can be renewed upon expiration. “Auxiliary positions” are defined as noncore business positions without further explanation. In practice, it may often be very difficult to distinguish between core and noncore positions. For instance, while it can be argued that only bankers are core to the banking business, it can also be asserted that in-house lawyers should be core personnel as well because of their role in controlling and managing risks, which is critical to banks. The new law defines “replaceable positions” as those left vacant because the formal employees are on leave for personal or business reason, but it is not clear if replacement positions can be renewed.

Percentage Limitation on the Number of Secondees

The new law requires employers to strictly limit the number of secondees to a certain percentage of the total number of personnel (including secondees). Specific percentages will be announced by the State Council. It is generally understood that the percentage should be within a 10% to 30% range. A literal reading of the language of the new law suggests that any percentage limitation should be in addition to the requirement that the positions for secondees should be of a temporary, auxiliary, or replaceable nature. Thus, an employer may not argue that it complies with the law by limiting the number of secondees below the maximum percentage, regardless of the nature of a secondee’s position. In practice, however, employers or regulatory authorities may take the percentage cap as a safe harbor due to the difficulties of defining the nature of a secondee’s position.

Consequences of Breach

For staffing firms without a permit, the Chinese government may take away all illegal revenue and impose monetary penalties of up to five times the amount of the revenue. If a staffing firm or employer fails to comply with the law, the labor regulatory authority will order it to take corrective measures. A per person penalty ranging from RMB$5,000 to RMB$10,000 will be imposed if no remedial measures are adopted by the employer or staffing service provider. The new law is silent on whether a secondee may request that the employer convert him or her into a formal employee if the employer is found to be noncompliant. If the answer is no, what will happen to the existing secondment? Should the parties terminate the secondment and should the actual user of the employee’s service formally employ someone for the same position? May the secondee have a right of first refusal if the actual user is required to do so? These and other similar questions remain to be answered by further implementing rules from the State Council or judicial interpretation from the Supreme People’s Court.

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New Data Breach Class Action has Two Million Plaintiffs

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Cyber breaches resulting in the release of personal identifiable information (PII) are increasingly common and now we are starting to see class action lawsuits filed as a result. In what will likely be the beginning of a wave of lawsuits filed as a result of cyber breaches, Schnucks Markets, operator of 100 supermarkets across the Midwest, recently removed a class action lawsuit filed against it to federal court stemming from a data breach that occurred in March in which 2.4 million credit card numbers were stolen.

The Class action complaint alleges Schnucks failed to properly and adequately safeguard its customer’s personal and financial data. In addition to common law negligence and disclosure, the plaintiffs allege a violation of the Illinois Personal Information Protection Act which requires a data collector of personal information to notify individuals in the most expedient manner possible and without unreasonable delay. The complaint alleges Schnucks waited over two weeks to notify its customers and then did so only through a press release as opposed to providing actual notice to individual consumers. Apparently Schnucks struggled to find the source of the breach and this delay may have continued to expose the PII of people who shopped at its stores.

cybercrime graphicSchnuck’s notice of removal to federal court states the grounds for removal include a class size of more than 100 people and damages at issue are greater than $5 million. Schnucks also explains that the data breach was the result of criminals hacking into its electronic payment systems at 23 stores. Further, during the relevant period, 1.6 million credit or debit card transactions took place at these stores. Schnucks calculates that 500,000 unique credit or debit cards were involved thus the putative class has at least 500,000 members.

Damages alleged by the plaintiffs include having their credit card data compromised, incurring numerous hours cancelling their compromised cards, activating replacement cards and re-establishing automatic withdrawal payment authorizations as well as other economic and non-economic harm. Given that data breaches are becoming increasingly common it is likely that there will be more lawsuits filed similar to Schnucks in the near future. Legal counsel experienced in cyber risk and insurance can assist retailers and insurance companies with handling such problems as they arise.

Final Section 336(e) Regulations Allow Step-Up in Asset Tax Basis in Certain Stock Acquisitions

Sheppard Mullin 2012

Final regulations were issued last month under IRC Section 336(e). These regulations present beneficial planning opportunities in certain circumstances.

For qualifying transactions occurring on or after May 15, 2013, Section 336(e) allows certain taxpayers to elect to treat the sale, exchange or distribution of corporate stock as an asset sale, much like a Section 338(h)(10) election. An asset sale can be of great benefit to the purchaser of the stock, since the basis of the target corporation’s assets would be stepped up to their fair market value.

To qualify for the Section 336(e) election, the following requirements must be met:

  1. The selling shareholder or shareholders must be a domestic corporation, a consolidated group of corporations, or an S corporation shareholder or shareholders.
  2. The selling shareholder or shareholders must own at least 80% of the total voting power and value of the target corporation’s stock.
  3. Within a 12-month period, the selling shareholder or shareholders must sell, exchange or distribute 80% of the total value and 80% of the voting power of the target stock.

Although the rules of Section 338(h)(10) are generally followed in connection with a Section 336(e) election, there are a few important differences between the two elections:

  1. Section 336(e) does not require the acquirer of the stock to be a corporation. This is probably the most significant difference; and, to take advantage of this rule, purchasers other than corporations may wish to convert the target without tax cost to a pass-through entity (e.g., LLC) after the purchase.
  2. Section 336(e) does not require a single purchasing corporation to acquire the target stock. Instead, multiple purchasers—individuals, pass-through entities and corporations—can be involved.
  3. The Section 336(e) election is unilaterally made by the selling shareholders attaching a statement to their Federal tax return for the year of the acquisition. Purchasers should use the acquisition agreement to make sure the sellers implement the anticipated tax strategy

Section 336(e) offers some nice tax planning opportunities, by allowing a step up in tax basis in the target’s assets where a Section 338(h)(10) election is not allowed.

Example: An S corporation with two shareholders wishes to sell all of its stock to several buyers, all of which are either individuals or pass-through entities with individual owners. A straight stock purchase would not increase the basis of the assets held inside the S corporation, and an LLC or other entity buyer would terminate the pass-through tax treatment of the S corporation status of the target. A Section 338(h)(10) election is not available since the purchaser is not a single corporation. However, a Section 336(e) election may be available, whereby the purchase of the stock would be treated as a purchase of the corporation’s assets (purchased by a “new” corporation owned by the purchasers). The purchasers could then convert the purchased corporation (the “new” corporation with the stepped-up assets basis) into an LLC, without tax, thereby continuing the business in a pass-through entity (single level of tax) with a fully stepped-up tax asset basis.

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Consumer Financial Services Basics 2013 – September 30 – October 01, 2013

The National Law Review is pleased to bring you information about the upcoming  Consumer Financial Services Basics 2013.

CFSB Sept 30 2013

When

September 30 – October 01, 2013

Where

  • University of Maryland
  • Francis King Carey School of Law
  • 500 W Baltimore St
  • Baltimore, MD 21201-1701
  • United States of America

Facing the most comprehensive revision of federal consumer financial services (CFS) law in 75 years, even experienced consumer finance lawyers might feel it is time to get back in the classroom. This live meeting is designed to expose practitioners to key areas of consumer financial services law, whether you need a primer or a refresher.

It is time to take a step back and think through some of these complex issues with a faculty that combines decades of practical experience with law school analysis. The classroom approach is used to review the background, assess the current policy factors, step into the shoes of regulators, and develop an approach that can be used to interpret and evaluate the scores of laws and regulations that affect your clients.

Handbags and High-Heeled Shoes: Recent Trademark Disputes in the World of Fashion

Dickinson Wright Logo

When Paul Simon first sang about “diamonds on the soles of her shoes” in the 1980’s, he was apparently more fashion forward than we realized.  Less than a decade later, in the early 1990’s, the fashion house of Christian Louboutin began selling women’s high-fashion designer footwear displaying a distinctive red, glossy sole on the bottom of high-heeled shoes. Legend has it, Louboutin came up with the idea when he painted red nail polish on a pair of women’s shoes because they “lacked energy.”  These shoes soon became highly sought after by celebrities and consumers of haute couture everywhere.

Louboutin federally registered its red-colored sole for footwear as a trademark with the U.S. Patent and Trademark Office in 2008. In 2011, Louboutin sought to enforce those rights by suing Yves Saint Laurent for selling red shoes that displayed red soles. In its Resort 2011 collection, the American branch of YSL featured purple, navy, green…and red shoes that all had soles of matching color. Louboutin took exception to the red-soled shoes and tried to stomp out YSL’s allegedly infringing activity.

At the district court level, a New York judge ruled against Louboutin’s request that YSL be enjoined from selling red-soled shoes. On appeal in September of 2012, the U.S. Court of Appeals for the Second Circuit expressly held that Louboutin could protect its iconic red-soled shoes, except when the entire shoe itself is red.  Therefore, YSL was allowed to continue selling its monochromatic red shoes. Both parties have claimed victory and the case was dismissed in December.

The defendant in a case brought by Coach, Inc., and recently decided, did not fare quite so well. In 2010, Coach sued the owner of the Southwest Flea Market located in Memphis, Tennessee for contributory trademark infringement, claiming he knew, or should have known, that some of the vendors at the flea market were selling counterfeit Coach Handbags and other infringing products. Prior to filing suit, Coach had sent letters to the defendant, putting him on notice of the infringement. Even after the filing of the suit, multiple raids were conducted at the flea market, and more than 4,600 counterfeit Coach products were seized.

In the case pending in the U.S. District Court for the Western District of Tennessee, the magistrate judge granted summary judgment to Coach in 2012, ruling that the owner of the flea market was contributorily liable for the infringement, and the jury awarded Coach more than $5 million in damages. The case was appealed and last month the U.S. Court of Appeals ruled, for the first time ever, on the question of whether the owner of a flea market can be held liable for contributory trademark infringement. The answer was a resounding “yes”, as the court upheld the lower court’s ruling and the $5.04 million damage award. In its ruling, the court admonished the flea market owner for engaging in “ostrich-like behavior”, willfully ignoring the infringing activities occurring at the market, showing that the high price of fashion applies not just to the cost of the merchandise, but also to not respecting the trademarks by which that merchandise is known.

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Yahoo!/Tumblr Deal and the Tax Cost of Cash Acquisition Payments

McBrayer NEW logo 1-10-13

When Yahoo! recently acquired the blogging service Tumblr, the two companies structured the deal so that virtually all of the $1.1 billion price tag for Tumblr will be paid in cash. In the current economy, many companies, particularly tech companies, have a lot of cash available, making the more traditional payment in stock appear less desirable. However, tax planning during mergers or acquisitions can be invaluable because, with proper counsel, the organizations can anticipate and mitigate the tax ramifications for the companies, individuals and shareholders.

Specific information about any tax planning in the Yahoo!/Tumblr deal hasn’t been released, but let’s consider the potential tax consequences of an essentially all-cash deal.

Most of Tumblr’s existing shareholders likely purchased their stock for substantially less than it was valued at the time of Yahoo’s acquisition. Since capital gains taxes are levied on the difference between the purchase price and the sale price, those Tumblr shareholders may be facing a hefty capital gains tax bill that will come due as soon as the transaction is complete.

If the deal had been structured as a stock transaction, on the other hand, it might have been structured to defer the capital gains tax for those shareholders until they actually sell their stock to Yahoo! There are a number of methods, such as 1031 exchanges, Section 368 tax-free reorganizations, and or 338(h)(10) stock purchase elections, that might also be effective in mitigating the tax burden.

An all-cash deal also presents challenges for Yahoo! in that it could affect the incentives for Tumblr’s founder and senior management going forward. In a tax-free reorganization, for example, they would generally be compensated in Yahoo! stock, which automatically creates an incentive for Tumblr’s leadership to build value for Yahoo! Without stock, a different incentive plan is needed.

According to The New York Times’ DealBook blog, Yahoo! may not need to worry about incentivizing Tumblr’s leadership, however, as it plans to continue to run the blog service as a separate company with the same group of executives. That may leave the existing incentives for success in place.

In this particular case, we don’t have enough information to determine why Yahoo! and Tumblr structured the acquisition as an all-cash deal. Well-considered tax planning, however, is essential for any business considering a merger or acquisition, stock sale, or major asset sale. Anticipating and minimizing transactional taxes, including business transfer taxes and business succession taxes, can help ensure that companies garner all potential benefits of the deal.

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