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Keeping Things in Bounds: Private Company Owners Need to Abide by Clear Fiduciary Duties in Managing Their Companies

In February 2009, Pittsburgh Steelers wide receiver Santonio Holmes made a toe tapping catch in the back corner of the end zone[1] to secure a thrilling, come-from-behind win and crush the hearts of Arizona Cardinals fans in Super Bowl 43.  For private company owners running their own firms, the boundaries for their conduct are set by the fiduciary duties they owe to their companies.  But in both sports and the management of private businesses, team leaders can find it challenging to remain in bounds.  This post therefore reviews the legal lanes of proper conduct that owners will want to follow to avoid future claims.

The Scope of Fiduciary Duties

The fiduciary duties of corporate directors and officers are not included in the Texas Business Organizations Code (“BOC”), but Texas case law for more than a century makes clear that both directors and company officers owe duties of obedience, care, and loyalty, and these duties are owed to the company, not to the individual shareholders.  See Tenison, v. Patton, 95 Tex. 284, 67 S.W. 92 (1902); Ritchie v. Rupe, 443 S.W.3d 856, 868 (Tex. 2014).  These same fiduciary duties also apply to LLC managers and officers, and all of these parties are referred to in this post as “control persons.”

The Ritchie case focused on whether minority shareholders have a legal right to secure a court-ordered buyout of their minority ownership interest based on claims that control persons engaged in shareholder oppression.  The Court held no claim for shareholder oppression exists in the BOC or at common law that would authorize a trial court to order the company or majority owners to buy the minority owner’s stake in the business.  But, the Ritchie Court did uphold the right of minority shareholders to pursue claims against officers and directors for breach of their fiduciary duties, and recognized that these claims could be brought on a derivative basis.  In this regard, the Court stated that:

“Directors, or those acting as directors, owe a fiduciary duty to the corporation in their directorial actions,and this duty “includes the dedication of [their] uncorrupted business judgment for the sole benefit of the corporation.”  443 S.W.3d at 868.

The BOC permits the fiduciary duties of control persons to be limited in the company’s governance documents, but the statute does not permit a company to remove the duty of loyalty owed by control persons.  The remainder of this post focuses on what the duty of loyalty requires from governing persons in their business relationship with their companies.

Conflicts Transactions by Control Persons Can Lead to Claims

Owners of private companies commonly engage in transactions with their businesses in their capacity as control persons.  Majority owners may buy, sell and lease property from or to their companies, buy and sell products or services from other businesses they also own or control, and loan money to their companies to fund their business operations.  All of these transactions are not at “arm’s-length” and, instead, they are “interested party” transactions, which are sometimes referred to as “conflict transactions.”  These types of conflicts transactions may result in claims by the minority owners who allege that the transactions breached the control person’s fiduciary duties because they were not fair to the company.

Once again, the Supreme Court in Ritchie addressed this problem:

[T]he duty of loyalty that officers and directors owe to the corporation specifically prohibits them from misapplying corporate assets for their personal gain or wrongfully diverting corporate opportunities to themselves. Like most of the actions we have already discussed, these types of actions may be redressed through a derivative action, or through a direct action brought by the corporation, for breach of fiduciary duty.  443 S.W.3d at 887.

There is a “safe harbor” provision in the BOC for company control persons when they engage in business with their company for their personal benefit.  Section 21.418 of the BOC provides that when a control person enters into a transaction with the Company, which would otherwise be void or voidable, the transaction will be nevertheless be upheld as valid if certain conditions are met.  We discussed this safe harbor statute in more detail in a previous post (Read Here).  In summary, a conflict transaction by a control person will be upheld if (i) the details of the transaction were fully disclosed to and approved by a majority of the shareholders and/or by a majority of the disinterested directors or (ii) if the transaction is deemed to be objectively fair to the company.

Fairness is not defined in the BOC provisions, but fair is defined in Webster’s dictionary as “characterized by honesty and justice” and “free from fraud, injustice, prejudice or favoritism.  Once the minority shareholder brings a claim and demonstrates that a control person engaged in a conflict transaction, the control person will then bear the burden of demonstrating in the case that the terms of the transaction were fair to the company.  To avoid being forced to litigate the issue of fairness, control persons may want to avoid the following types of conflict transactions or, alternatively, they may want to take steps to head off the expected challenge from minority owners that the transaction was not fair to the company.

Examples of Conflicts Transactions

The following are the most common types of conflict transactions that control persons engage in with their companies, and for each of these, an approach is suggested that can either eliminate or reduce the potential for future claims.

  • Theft of corporate opportunity
    The duty of loyalty requires control persons not to take business opportunities for themselves that rightfully belong to the company.  When control persons take company opportunities, this is referred to as usurpation or misappropriation and it is a breach of fiduciary duty.  There is a clear way, however, for control persons to avoid this claim.  In 2003, the BOC was amended to allow for a company to include in its certificate of formation, bylaws or in its company agreement an express waiver of the control person’s duty not to usurp a company opportunity.  See. BOC Section 2.101(21).  The specific language gives the company the power to:

 . . . renounce, in its certificate of formation or by action of its governing authority, an interest or expectancy of the entity in, or an interest or expectancy of the entity in being offered an opportunity to participate in, specified business opportunities or a specified class or category of business opportunities presented to the entity or one or more of its managerial officials or owners. 

As indicated by this provision, the certificate, bylaw or provision of the company agreement needs to make clear the specific type or category of opportunities that are being excluded from the duty.  By including this limitation on the duty of loyalty, however, the control person will be immune from any liability for usurping a corporate opportunity of the company as it is defined in the bylaws or in the provisions of the LLC agreement.

  • Purchase or sale or lease of property to company, and loans to company 
    It is common for control persons to either sell, purchase or lease property, assets or services to/from the company they control or to provide loans to the company.  These are all conflict transactions that can, and often do, give rise to claims for breach of fiduciary duty and fights about whether the control person engaged in a transaction that was unfair to the company.  To avoid or at least limit claims related to these types of transactions, there are a number of common sense, practical steps that control persons can take before they engage in the transaction.

First, the control person should fully disclose all material terms of the transaction to other shareholders, the board and/or managers of the company and seek their approval, which if given, should eliminate all future claims.  Second, when there are objections raised to the transaction, the control person should consider securing input from outside experts to provide objective information.  For example, if the control person is selling or leasing property to the company, the control person should arrange for an independent appraiser to provide a written appraisal to set the property’s market value.  If a lease of property is at issue, an independent broker can provide market value lease rates for the type of property at issue.  Third, when the company is receiving loans from the control person, bankers can readily provide loan terms that reflect market rates.

Finally, the control person should consider structuring the transaction in a way that provides the company with a better deal on terms more favorable than market rates.  The control person does not need to give the company a gift in the transaction, but if the company receives a deal that is better than market rates, that will make it harder for the other shareholders or LLC members to complain that there was any lack of fairness in the transaction to the company.

  •  Compensation and bonuses 
    Finally, a hot button point with shareholders and members is often compensation, and more specifically, how much money is paid in base compensation and bonuses to the majority owner in his/her capacity as an officer, director or manager.  The obvious concern is that funds paid in compensation should, instead, be issued as dividends or distributions to all owners, and that the compensation paid to the majority owner is considered a “disguised distribution.”

If the other shareholders or members express concern regarding the compensation and bonuses that are being paid to the majority owners, this issue should be addressed by hiring an experienced and independent executive compensation expert.  The compensation expert will provide the company with a range of compensation that is being paid to executives at similarly situated companies in the same or similar industry and geographic region.  As noted above, rather than choosing a compensation/bonus level at the top end of the range determined by the expert, the majority owner is advised to select a range of compensation in the 70-80% range to limit the likelihood of any claim being brought by minority owners on this basis.

Conclusion

In King Henry IV, Shakespeare wrote: “Uneasy lies the head that wears a crown.”  One cause for this unease by private company owners who wear the mantle of leadership is that they are subject to suits by co-owners for breach of loyalty to the company.  But staying inbounds is by no means an insurmountable challenge for majority owners, as control persons, if they follow a few simple ground rules.  In short, majority owners need to be fully transparent in all of their transactions with the company, they should seek agreement when possible with other owners, but when an agreement is not possible, they need to secure specific input from outside experts who can validate the fairness of the transaction to the company before it takes place.  And regarding that Santonio Holmes TD catch, let’s look ahead and hope the Cardinals get another chance at a Super Bowl win soon led by their exciting QB and No. 1 Draft Choice, Kyler Murray.

_____________________________

[1] Cardinals fans like me continue to question whether Holmes actually managed to get his right toes down on the turf in the end zone before he was pushed out of bounds, and photographs of the catch prolong this debate.

© 2020 Winstead PC.
For more on Corporate Fiduciary Duties, see the National Law Review Corporate & Business Organization’s law section.

FTC Reports to Congress on Social Media Bots and Deceptive Advertising

The Federal Trade Commission recently sent a report to Congress on the use of social media bots in online advertising (the “Report”).  The Report summarizes the market for bots, discusses how the use of bots in online advertising might constitute a deceptive practice, and outlines the Commission’s past enforcement work and authority in this area, including cases involving automated programs on social media that mimic the activity of real people.

According to one oft-cited estimate, over 37% of all Internet traffic is not human and is instead the work of bots designed for either good or bad purposes.  Legitimate uses for bots vary: crawler bots collect data for search engine optimization or market analysis; monitoring bots analyze website and system health; aggregator bots gather information and news from different sources; and chatbots simulate human conversation to provide automated customer support.

Social media bots are simply bots that run on social media platforms, where they are common and have a wide variety of uses, just as with bots operating elsewhere.  Often shortened to “social bots,” they are generally described in terms of their ability to emulate and influence humans.

The Department of Homeland Security describes them as programs that “can be used on social media platforms to do various useful and malicious tasks while simulating human behavior.”  These programs use artificial intelligence and big data analytics to imitate legitimate activities.

According to the Report, “good” social media bots – which generally do not pretend to be real people – may provide notice of breaking news, alert people to local emergencies, or encourage civic engagement (such as volunteer opportunities).  Malicious ones, the Report states, may be used for harassment or hate speech, or to distribute malware.  In addition, bot creators may be hijacking legitimate accounts or using real people’s personal information.

The Report states that a recent experiment by the NATO Strategic Communications Centre of Excellence concluded that more than 90% of social media bots are used for commercial purposes, some of which may be benign – like chatbots that facilitate company-to-customer relations – while others are illicit, such as when influencers use them to boost their supposed popularity (which correlates with how much money they can command from advertisers) or when online publishers use them to increase the number of clicks an ad receives (which allows them to earn more commissions from advertisers).

Such misuses generate significant ad revenue.

“Bad” social media bots can also be used to distribute commercial spam containing promotional links and facilitate the spread of fake or deceptive online product reviews.

At present, it is cheap and easy to manipulate social media.  Bots have remained attractive for these reasons and because they are still hard for platforms to detect, are available at different levels of functionality and sophistication, and are financially rewarding to buyers and sellers.

Using social bots to generate likes, comments, or subscribers would generally contradict the terms of service of many social media platforms.  Major social media companies have made commitments to better protect their platforms and networks from manipulation, including the misuse of automated bots.  Those companies have since reported on their actions to remove or disable billions of inauthentic accounts.

The online advertising industry has also taken steps to curb bot and influencer fraud, given the substantial harm it causes to legitimate advertisers.

According to the Report, the computing community is designing sophisticated social bot detection methods.  Nonetheless, malicious use of social media bots remains a serious issue.

In terms of FTC action and authority involving social media bots, the FTC recently announced an enforcement action against a company that sold fake followers, subscribers, views and likes to people trying to artificially inflate their social media presence.

According to the FTC’s complaint, the corporate defendant operated websites on which people bought these fake indicators of influence for their social media accounts.  The corporate defendant allegedly filled over 58,000 orders for fake Twitter followers from buyers who included actors, athletes, motivational speakers, law firm partners and investment professionals.  The company allegedly sold over 4,000 bogus subscribers to operators of YouTube channels and over 32,000 fake views for people who posted individual videos – such as musicians trying to inflate their songs’ popularity.

The corporate defendant also allegedly also sold over 800 orders of fake LinkedIn followers to marketing and public relations firms, financial services and investment companies, and others in the business world.  The FTC’s complaint states that followers, subscribers and other indicators of social media influence “are important metrics that businesses and individuals use in making hiring, investing, purchasing, listening, and viewing decisions.” Put more simply, when considering whether to buy something or use a service, a consumer might look at a person’s or company’s social media.

According to the FTC, a bigger following might impact how the consumer views their legitimacy or the quality of that product or service.  As the complaint also explains, faking these metrics “could induce consumers to make less preferred choices” and “undermine the influencer economy and consumer trust in the information that influencers provide.”

The FTC further states that when a business uses social media bots to mislead the public in this way, it could also harm honest competitors.

The Commission alleged that the corporate defendant violated the FTC Act by providing its customers with the “means and instrumentalities” to commit deceptive acts or practices.  That is, the company’s sale and distribution of fake indicators allowed those customers “to exaggerate and misrepresent their social media influence,” thereby enabling them to deceive potential clients, investors, partners, employees, viewers, and music buyers, among others.  The corporate defendant was therefor charged with violating the FTC Act even though it did not itself make misrepresentations directly to consumers.

The settlement banned the corporate defendant and its owner from selling or assisting others in selling social media influence.  It also prohibits them from misrepresenting or assisting others to misrepresent, the social media influence of any person or entity or in any review or endorsement.  The order imposes a $2.5 million judgment against its owner – the amount he was allegedly paid by the corporate defendant or its parent company.

The aforementioned case is not the first time the FTC has taken action against the commercial misuse of bots or inauthentic online accounts.  Indeed, such actions, while previously involving matters outside the social media context, have been taking place for more than a decade.

For example, the Commission has brought three cases – against Match.com, Ashley Madison, and JDI Dating – involving the use of bots or fake profiles on dating websites.  In all three cases, the FTC alleged in part that the companies or third parties were misrepresenting that communications were from real people when in fact they came from fake profiles.

Further, in 2009, the FTC took action against am alleged rogue Internet service provider that hosted malicious botnets.

All of this enforcement activity demonstrates the ability of the FTC Act to adapt to changing business and consumer behavior as well as to new forms of advertising.

Although technology and business models continue to change, the principles underlying FTC enforcement priorities and cases remain constant.  One such principle lies in the agency’s deception authority.

Under the FTC Act, a claim is deceptive if it is likely to mislead consumers acting reasonably in the circumstances, to their detriment.  A practice is unfair if it causes or is likely to cause substantial consumer injury that consumers cannot reasonably avoid and which is not outweighed by benefits to consumers or competition.

The Commission’s legal authority to counteract the spread of “bad” social media bots is thus powered but also constrained by the FTC Act, pursuant to which the FTC would need to show in any given case that the use of such bots constitute a deceptive or unfair practice in or affecting commerce.

The FTC will continue its monitoring of enforcement opportunities in matters involving advertising on social media as well as the commercial activity of bots on those platforms.

Commissioner Rohit Chopra issued a statement regarding the “viral dissemination of disinformation on social media platforms.” And the “serious harms posed to society.”  “Social media platforms have become a vehicle to sow social divisions within our country through sophisticated disinformation campaigns.  Much of this spread of intentionally false information relies on bots and fake accounts,” Chopra states.

Commissioner Chopra states that “bots and fake accounts contribute to increased engagement by users, and they can also inflate metrics that influence how advertisers spend across various channels.”  “[T]he ad-driven business model on which most platforms rely is based on building detailed dossiers of users.  Platforms may claim that it is difficult to detect bots, but they simultaneously sell advertisers on their ability to precisely target advertising based on extensive data on the lives, behaviors, and tastes of their users … Bots can also benefit platforms by inflating the price of digital advertising.   The price that platforms command for ads is tied closely to user engagement, often measured by the number of impressions.”

Click here to read the Report.

© 2020 Hinch Newman LLP

Striking for Black Lives While Striking a Balance Between Business Needs and Employee Concerns

Plans are underway in multiple cities across the country for employees to participate in a Strike for Black Lives on Monday, July 20. The initiative encompasses the efforts of Black Lives Matter, the Movement 4 Black Lives, and a union-organizing effort by the Service Employees International Union. Strike for Black Lives encourages employees to “rise up for Black Lives” by walking off their jobs to march; and for those who can’t march, to take an “8:46 Pledge” in recognition of the death of George Floyd. The 8:46 Pledge asks supporters to take 8 minutes and 46 seconds at noon on July 20 to either take a knee, walk off the job, or observe a moment of silence.

Challenged by the threats of COVID-19, economic uncertainty, and now striking employees, employers should be prepared. As a reminder, the National Labor Relations Act (NLRA), which governs both union and non-union workplaces, protects most private sector employees who engage in concerted, protected activities to object to working conditions or terms of employment. On the other hand, employees who miss work without a good reason or for one’s own personal grievances may be subject to companies’ regular policies. Regardless, it is prudent for employers to proceed with caution in taking action against employees who join the Strike for Black Lives. If you have questions or doubts, consult with counsel.

Meanwhile, the Strike for Black Lives and similar events present opportunities for businesses to bolster their commitments to diversity and inclusion beyond standard statements of support. A recent Harvard Business Review article outlines recommendations for employers standing against racism. Others suggest allowing time off on short notice for last-minute marches and demonstrations. Showing flexibility in the application of company policies reflects a willingness to identify with employees’ concerns and reinforces a business’s own support for racial justice.

Although the convergence of extraordinary events in 2020 presents challenges for employers, in the words of John Adams, “Every challenge is an opportunity in disguise.”

© 2020 BARNES & THORNBURG LLP

For more on Black Lives Matter, see the National Law Review Civil Rights law section.

Review of Chiafalo and Baca: The “Faithless Electors” Supreme Court Cases

The role the Electoral College plays in American life has confused and confounded many, especially since the U.S. Presidential election of 2016, when the winner of the national popular vote, Hillary Clinton, actually lost the election to President Donald Trump by vote of State-appointed electors in the Electoral College.

The Electoral College was intended by the Founding Fathers to be a buffer between the passions of the masses and the rule by edict of only an elite few, but how much of a buffer and how autonomous the electors within the Electoral College actually are was never fully addressed by the Supreme Court until its decisions late this term in Chiafalo v. Washington, 19-465, (Decided July 6, 2020) and Colorado Dept. of State v. Baca, 18-1173 (Decided July 6, 2020). (The Supreme Court issued its full opinion in Chiafalo).

As a country, we have grown accustomed to watching the national news on election night as states are called for each candidate, and electoral vote tallies are updated to show to us who is “winning” the election when, in reality, all of this is a mere projection, as none of those “electoral votes” are assured, or even cast, until the electors actually cast those votes at a time and place long after November 4.

So who are these “electors” who vote in the Electoral College? Are they “rubber stamps” bound to follow the popular vote of the State who appointed them? Can the State require the electors to sign a pledge to vote consistent with their state’s popular vote winner? If so, can the State punish that elector, including removal as an elector if they violate that pledge and vote for someone else? Or is an elector more of a “free agent” in the vein of those elected as State representatives in Congress? Congressional representatives, of course, are not bound by the State or its citizens’ desires when casting a vote in Congress (though they are held to account for their votes in the next congressional election). If electors are not to use their own judgment, then why does the Constitution call them an “elector” (which connotes some amount of discretion) instead of a delegate, or a proxy, or any number of other terms that would signify a lack of individual authority? Or, more simply, why have electors at all?

In Chiafalo and Baca, electors in Washington and Colorado were appointed by their respective States and were required to make, and did make a pledge when they were appointed as electors to vote consistent with the popular vote of their states. Yet, when the time came to cast their vote in the Electoral College, they didn’t vote consistent with the winner of the State’s popular vote as they had pledged. They voted for another candidate instead, forever earning the moniker of “faithless electors”.  They weren’t the first electors ever to have done that. In fact, it has happened 180 times in our country’s history. The question presented to the Court then was – can they do that?

As it turns out the answer isn’t that simple. To understand how we got here, you need to go back to the Founding Fathers and the debates that forged the U.S. Constitution and the country itself. Let’s start with the misconception that the Constitution provides for a direct popular election of the President by the vote of its citizens.  It doesn’t. At the birth of our country, there was fierce debate over who would elect our President. One group argued for a free and democratic vote, where the (white) (male) citizens directly chose their nation’s leader based upon a direct popular vote. Another group, more skeptical about the passions (and frankly, the ability) of the masses, called instead for a group of wise men to be tasked with choosing the President.  This debate was resolved in an “eleventh hour” compromise at the close of the Constitutional Convention, which attempted to bridge the gap by expressly stating only:

Each State shall appoint, in such Manner as the Legislature thereof may direct, a Number of Electors, equal to the whole Number of Senators and Representatives to which the State may be entitled in the Congress: but no Senator or Representative, or Person holding an Office of Trust or Profit under the United States shall be appointed an Elector.

U.S. Constitution, Article II, §1, cl. 2.  Originally, the Article continued on to describe the process for the vote, but that process was quickly found unworkable and the States scrapped it.

Instead, in 1804, the States replaced the process the electors were to follow with the Twelfth Amendment:

The Electors shall meet in their respective states and vote by ballot for President and Vice-President…, they shall name in their ballots the person voted for as President, and in distinct ballots the person voted for as Vice-President, and they shall make distinct lists of all persons voted for as President, and of all persons voted for as Vice-President, and the number of votes for each, which lists they shall sign and certify, and transmit sealed to [Congress, where] the votes shall then be counted.

Yet even after this amendment, the Constitution remained silent as to what the electors’ role beyond merely casting their vote was to be.

In Chiafalo, the “faithless electors” argued that electors could vote for whomever they wished, based on three main arguments: (1) a textual argument that focused heavily on the word “elector”; (2) a historical argument based upon the fact that from early on there were electors who voted contrary to their state’s popular vote; and (3) the “federal function” argument, that once they had been appointed by the State as an elector, that the State no longer had the power to control their vote since they were now engaged a “federal function” of electing the President and Vice President. Central to their arguments was the concept that the right to vote inherently includes the discretion to choose whom they will vote for. And more, that an elector should not be subject to punishment by the State based upon how they cast their vote. While a State can set requirements for electors, i.e. that they be state residents, etc., the electors argued that those requirements end when it comes to the electors’ exercise of their appointed function – the vote.  The faithless electors argued that electors were akin to legislators and that discretion by the voter was inherently part of the Electoral College process. Once the State appointed an elector, they argued, the State did not have the power to “stand over the shoulder” of the elector as they carried out their constitutional function of voting for President and Vice-President. Otherwise, why have electors?  Why not have the States simply report who they had voted for?

The States countered that, consistent with Supreme Court precedent, along with the express power to appoint the electors, came with it the reciprocal and concurrent power to also remove the electors, and therefore States could set conditions of removal on its electors, including punishments for the way in which they vote, such as a pledge that they vote as the state’s voters had in the popular election or suffer a $1,000 fine.  The States argued that this outcome was dictated by a plain textual reading that these powers had been delegated to the States, that the federal government has limited power and authority, and that any powers not expressly given to the federal government in the U.S. Constitution, remain forever within the States’ exclusive right to control.

The gravity of the question the Supreme Court faced in these cases was real. While the outcome of the 2016 election was not changed by these faithless electors’ actions, with our country so closely divided, it is quite possible that faithless electors could change the outcome of future elections.  If the Court had decided that electors were “free agents” who, once appointed, could vote (or not vote) as they wish, then not only could an elector or group of electors “switch sides” and change the winner of the Presidential election, but also, if they instead chose not to vote, they could deny both candidates the 270 votes necessary to win the election, and the matter would be sent to the House of Representatives for a “contingent election.” In a contingent election, each State must cast a single vote, and the victor of that vote becomes President regardless of who won the national popular vote or won States with more than 270 electoral votes combined.

As many publications recognized in advance of the Court’s ruling, this case legally presented a close call.  The Founding Fathers provided little help, as even they couldn’t agree on the best approach – hence the compromise – and essentially just “kicked the can down the road.” A dispositive purely textual analysis (which this Court in its current make-up is increasingly fond of) was unavailing.  The sole clear point is the unconditional power given to the States by the Constitution to choose the electors.

In deciding Chiafalo and Baca, the Supreme Court struck a pragmatic approach. Listening to the oral arguments, once could sense the concern with potential for “chaos” – the “chaos question” Justice Breyer called it – about the “chaos” that could ensue if the Supreme Court suddenly declared all electors to be “free agents” untethered from the will of the States and their citizens, to be instead courted and lobbied by nefarious actors from both home and abroad to vote for candidates regardless of who won the actual popular vote of each State’s elections. A fear that once may have seemed far-fetched, seems much more real today, after 2016, when foreign actors clearly engaged in attempts to manipulate the Presidential election. Consider, as the Court did, the risk of a foreign power hacking the computers of electors and blackmailing them to change their votes. Or the risk of a rich and elite few enticing electors to switch their votes for personal gain. It was these practical rather than legal concerns that seemed a loud and constant undercurrent of the entire debate.

In the end, the Justices, even the most fervent originalists among them, appeared to look more at how electors and the Electoral College is understood today than how the Founding Fathers had actually potentially intended it to work at the beginning.

Writing for the majority, Justice Elena Kagan quoted James Madison’s maxim that “a regular course of practice” can “liquidate & settle the meaning of” disputed or indeterminate “terms & phrases.”  She then reviewed that regardless of what may or may not have been envisioned as an elector’s role 200 years ago, the historical reality is that over time electors have evolved into merely a “rubber stamp” for the vote of the people within their States. (The faithless electors stressed that since the founding, electors have cast some 180 faithless votes for either President or Vice President without objection, but the Court shrugged off this inconvenient fact, concluding “that is 180 out of over 23,000” electoral votes cast).

For a Court that has tacked toward textualism and divining the original intent of the Founding Fathers, its decision as expressed in Chiafalo and Baca was instead a square and practical one. If a State holds an election for President, and the State declares “winner take all” for its electoral votes, then the State has the power to require the electors to vote as the States wants, including the power to condition their service and to mete out punishment on the electors if and when they do not comply. The country has evolved to a place where it is now assumed by the general public that their votes count, and that electors will simply carry out the proxy of the State who appoints them. To change that assumption now would not just upset the apple cart – but may well have destroyed it – disenfranchising millions of citizens and creating grave risks of political corruption that, in the Justices’ eyes, was too much to bear.

© The National Law Forum LLC
Article by David K. TeSelle Trial Lawyer at Burg Simpson and
The National Law Review’s Guest Contributor.
For more on the Electoral College see the National Law Review Election Law & Legislative News section.

Thieves Breach Twitter Security to Commandeer Famous Accounts

The Twitter accounts of major companies and individuals were briefly taken over as part of a bitcoin scam. Former and current heads of states, global corporations, and presidential candidates had their twitter accounts compromised. The tweet from many of the twitter account said similar things, for example Kanye West’s feed stated that he is “giving back to my fans”; the message from Bezos’, Barack Obama, and Joe Biden’s account said that they had “decided to give back to my community”; while Elon Musk’s account said “feeling greatful” and provided a link to a Bitcoin wallet to send money to. The tweets would indicate that they would send double the money back to a limited number of contributors.

Twitter, through its Twitter Support account notified users that an internal investigation was conducted into the matter. The investigation revealed that several employees who had access to internal systems had their accounts compromised in a “coordinated social engineering attack.” Twitter’s internal system was then exploited to tweet from high-profile accounts. The attack was at least moderately successful considering the Bitcoin wallets promoted in the tweets received over 300 transactions and Bitcoin worth over $100,000.

These tweets began at about 4 P.M. (Eastern Standard Time) on Wednesday, July 16. The first wave of attacks hit the Twitter accounts of prominent cryptocurrency leaders and companies, but expanded quickly after that. Along with Vice President Biden, President Obama, Kanye West, Bill Gates, Michael Bloomberg, and Elon Musk, large company accounts were also targeted including Uber and Apple. Twitter’s initial response was to take down the offending tweets, but those were quickly replaced by new ones – – an indication that the hackers maintained access to the individual accounts.

The persistence of the attacks led to Twitter disabling some the platform services including the ability of blue-checked (verified) twitter users to tweet. The services were restored around four and a half hours after the suspicious tweets began. However, that shutdown period was not insignificant. Several National Weather Service Twitter accounts were shut down as a line of severe weather and possible tornadoes moved across the Midwest. The National Weather Service felt severely hampered in its ability to communicate with people about the impending storm.

In a tweet, Twitter’s CEO Jack Dorsey said that the company feels  “terrible this happened” and that they are “diagnosing and will share everything we can when we have a more complete understanding of exactly what happened.” The nature of this attack is yet to be determined. The legal implications will hinge on the findings of the investigation, including whether there were sensitive direct messages accessed by the attackers. Considering the compromised accounts includes current and former heads of state (Prime Minister Benjamin Netanyahu, President Obama, and Vice President Biden), there are also questions of national security involved.

The United States does not have a comprehensive federal data breach notification scheme. These obligations are provided by the fifty states and sector-specific laws. More than 40 of the state breach notification laws contain a harm threshold pursuant to which notification is not required unless harm to affected individuals has occurred or is reasonably likely to occur. The EU’s GDPR also includes a similar assessment. As more information is disclosed, we will get a better understanding of Twitter and the attacked users’ incident response processes.

Copyright © 2020 Womble Bond Dickinson (US) LLP All Rights Reserved.

Building a Successful Law Firm—Without an Office

Rent is one of the largest expenses for law firms, sometimes taking up as much as 10 percent of their gross revenue. Too, it’s not uncommon for workers in large cities to have hour-plus commutes to their offices. The majority of today’s clients are more interested in efficiency and reasonable prices than how glamorous their lawyer’s office is. As a result, firms are choosing another way to work: virtual offices.

Marcia Watson Wasserman, Founder and President of Comprehensive Management Solutions, Inc., serves as a consulting COO for boutique and mid-sized law firms, helping numerous lawyers develop and sustain virtual offices. She joined the Law Firm Marketing Catalyst podcast to share her expertise and advice for lawyers considering moving toward virtual work.

Know who you’re working with

With a virtual office, you can’t pop into a colleague’s office or bump into them in the hallway. You won’t see what they’re doing on a daily basis, so you need to trust that they share the same goals, work ethic and commitment to firm culture as you. Marcia finds that people who have worked together at a brick-and-mortar firm before going virtual tend to work best, because an in-person relationship and sense of trust is already established. If you’re going virtual, find colleagues you already know personally, or at the very least, spend plenty of in-person time with them before committing to anything.

Understand your tech tools

 It’s impossible to have a virtual firm without the help of cloud-based technology tools. To have a successful virtual firm, everyone must be an expert on those tools. Law firms are notorious for buying software, then failing to learn how to use it—that won’t fly with a virtual firm. You need remote systems and procedures that streamline your practice and benefit your clients, and everyone must be comfortable using them. At a minimum, you’ll have to invest both money and training time in document management software, video conferencing software, client portals for paying bills, collaboration tools and, of course, encryption and data security tools.

Cultivate communication

How to delegate work, how to offer feedback, how to manage work among teams, when and how to have meetings—these questions are equally important at virtual or brick-and-mortar firms. But at virtual firms, it becomes even more critical that you discuss them openly and have communications systems in place. When communication is only happening by email, it can easily break down. Video conferencing, phone calls and planned communication are the antidote to this problem. Virtual connection also needs to be backed up with in-person events like retreats and social gatherings, at least annually. Maintaining communication at a virtual firm isn’t just important for client work, it’s also crucial to maintain firm culture.

Working from home sounds great, but it’s not for everyone. Some people get lonely working remotely. Others get distracted or they lack the motivation to work if they’re not in an office. Just like lawyers, support staff must have the right personality and skillset to work virtually. Another element to consider with support staff is wage and hour law in your location. Most support staff are non-exempt, and you have to consider supervision, insurance and the myriad of issues that arise when you have staff working remotely. Management issues don’t go away when support staff is out of sight.

Take advantage of time to network

Virtual work doesn’t mean staying home staring at your computer all day. The majority of work might be done from your home office, but networking can still happen in person. Join organizations, go to meetings and attend events to stay connected to your profession and your colleagues. Virtual work also offers more flexibility to meet with clients and attend events important to their industry. You’ll get to know your clients at a deeper level, which they’ll appreciate, and it will get you out of your work-from-home routine—a win for everyone.

If you can’t go fully virtual, start small

Not every firm is suited to virtual work, but many firms can use some of its elements to their advantage. Especially in large cities, more firms are using co-working spaces or opening small satellite offices that are more convenient for lawyers to get to. With more attorneys working outside of the main office a few days a week, the next logical step for some firms is to encourage office sharing. It’s a huge cultural shift for partners to share an office, but it can offer tremendous space and cost savings, and this concept typically doesn’t faze young associates.

© 2020 Berbay Marketing & Public Relations

For more on running a law firm, see the National Law Review Law Office Management section.

Adding “.com” to Generic Term May Open Route to Trademark Protection According to Supreme Court

Generic terms—those words that actually name a product or service—are ineligible for trademark protection under current United States trademark law. The United States Patent and Trademark Office (USPTO) decided that adding “.com” to an otherwise generic term was not sufficient to allow trademark registration of the “generic.com” composition. In the matter at hand, the internet website Booking.com was refused trademark registration of its name based on this decision by the USPTO.

On June 30, 2020, however, the United States Supreme Court reversed this decision, holding that adding “.com” to an otherwise generic—and thus ineligible for registration—term may be registered. The Court said, a generic.com term is only generic if consumers and customers take the term, as a whole, as generic. The Court noted that, in the lower court proceedings, evidence had been presented that consumers do not view Booking.com as a generic website to book hotels and such, but rather associated it with a particular company.

The USPTO raised the concern that allowing such trademarks to be registered would be akin to allowing a business to add the word “Company” to a generic term and noted that this is not permitted. The Court, however, noted that, unlike business names, domain names are single use—only one “generic.com” domain name exists for each possible generic term. In addition, the Court said, the USPTO has other tools in its arsenal, such as insistence of a disclaimer of the generic term, to guard against a particular generic.com trademark holder from exerting undue control over other trademarks that include the generic term. This, the Court said, further shows that there is no basis to deny Booking.com the protection of a federally registered trademark.

This decision opens the door to a new category of potentially protectable trademarks: generic terms with “.com” added to the end. However, it is important to note that whether a generic.com trademark could be registered depends in large part on how that trademark is viewed by consumers. Booking.com is registerable because consumers attribute that trademark to a specific company; however, this may not be true in every case. Much of whether a generic.com brand name is going to be able to be trademarked is likely to depend on evidence showing how consumers view the name; such evidence could include consumer surveys, evidence of marketing efforts, and evidence of long-term use. Nevertheless, companies who wish to use their most basic and generic description of the goods and services they offer as a part of a trademark now have another avenue by which to seek protection. However, it will be important to consider and prepare for questions that will likely be raised by the USPTO, including why the particular generic.com trademark is not viewed by consumers as generic, in order to raise the likelihood of obtaining trademark protection.

© 2020 Davis|Kuelthau, s.c. All Rights Reserved

For more on the recent Booking.com decision, see the National Law Review Intellectual Property Law section.

Supreme Court Decides to Rule on FTC’s Disgorgement Authority

As previously blogged about here, the Supreme Court recently upheld the SEC’s disgorgement authority but imposed certain limits, including consideration of net profits.  FTC defense practitioners immediately began to consider how the ruling might potentially impact FTC investigations and enforcement actions, including how it might bear upon other judicial challenges to whether Section 13(b) of the FTC Act authorizes the FTC to obtain equitable monetary relief.

On July 9, 2020, the Supreme Court granted certiorari in the AMG Capital Management and Credit Bureau Center matters that should now decide the issues of whether Section 13(b) permits courts to award disgorgement.

In AMG v. FTC, the Ninth Circuit held that courts’ equitable powers include awarding equitable monetary relief, including disgorgement.  In contrast, the Seventh Circuit in FTC v. Credit Bureau Center recently disregard years of precedent when it held that the express terms of Section 13(b) illustrate that Congress only authorized injunctive relief, not equitable monetary relief or disgorgement.

The two matters have been consolidated and with a total of one hour allotted for oral argument.   The importance of these matters cannot be overstated as they conclusively resolve splits of authority relating to whether or in what circumstances FTC lawyers are entitled to seek equitable monetary relief in the form of disgorgement.

© 2020 Hinch Newman LLP

The DOJ and SEC Have Updated Their Foundational Foreign Corrupt Practices Act Resource

The U.S. Department of Justice (DOJ) and Securities and Exchange Commission (SEC) recently published an updated guide to the Foreign Corrupt Practices Act (FCPA), a key resource for corporate whistleblowers around the world.

The FCPA is a U.S. law that prohibits the payment of anything of value to foreign government officials in order to obtain a business advantage. The FCPA also requires publicly traded corporations to make and keep books and records that accurately reflect transactions of the corporation to ensure that no bribes were paid.

This singular law is extremely important to global corporate accountability because it ensures that U.S. companies can be held accountable for corrupt actions abroad. Additionally, because this law is a part of the Dodd-Frank Act, whistleblowers from around the world may anonymously and confidentially report such corruption to the SEC and receive an award for successful tips. The U.S. government has successfully prosecuted many foreign corporations under the FCPA and has issued millions of dollars in rewards to both U.S. and non-U.S. whistleblowers.

This new guide adheres to this standard by providing significant, easy to follow information on the scope of the FCPA, potential consequences for FCPA violations, and whistleblower protections. In this new edition, the DOJ and SEC expand their guidance on a number of issues citing new cases and the new DOJ FCPA Corporate Enforcement Policy, which all anticorruption advocates, including potential whistleblowers, and corporate compliance professionals should review and understand.

The complete list of topics on which updated definitions and guidance is provided is as follows:

  • Intermediaries

  • Gifts as bribes

  • Instrumentalities of foreign governments

  • Third party payments

  • The “local law defense”

  • Successor liability for corporations

  • Conspiracy liability

  • Applicable statutes of limitations

  • Criminal liability for accounting violations

  • Factors that the Justice Department considers in determining how to resolve a corporate criminal case

  • DOJ FCPA Corporate Enforcement Policy (a new official DOJ policy), including examples of when the DOJ will decline to prosecute

  • How corporate and individual cooperation is evaluated

  • Components of an effective compliance program

Copyright Kohn, Kohn & Colapinto, LLP 2020. All Rights Reserved.

For more on the Foreign Corrupt Practices Act, see the National Law Review Antitrust and Trade Regulation section.

How To Stay Safe On a Boat This Summer

The weather is already heating up, and you may be thinking about getting out on a boat to enjoy some summer fun with your friends and family. Despite the ongoing COVID-19 pandemic, many people may choose to safely enjoy their time on the water. However, boating accidents can lead to significant injuries for those on board. During the latest reporting year of data, the US Coast Guard states that there were 4,145 total boating accidents across the country. These incidents led to thousands of injuries and more than 600 deaths. If you are going to be spending any time on the waterway this summer, there are various safety tips then we want to discuss with you today.

Always Have a Life Jacket

Life jackets are an essential part of boating safety, whether you are on a motorized or non-motorized water vessel. Statistics from the US Coast Guard show that approximately 75% of all boating deaths are due to drowning and that 84% of drowning victims were not wearing a life jacket when they went into the water.

We need to point out that even skilled swimmers need to wear life jackets when they are on a boat. A fall from a boat can lead to a personal injury that involves an individual hitting their head and becoming disoriented or injured, making these kinds of boat injuries difficult to stay above water. Every life jacket needs to be the appropriate fit for the wearer’s size and weight. Always ensure that the life jacket properly fastens.

Use Good Judgment

When boating, good judgment goes a long way. This can include the following:

  • Never operating a boat while under the influence of alcohol or drugs as this can affect judgment, vision, balance, and coordination.
  • If the weather looks rough or if the forecast for the day does not look good, you need to consider not going out on the boat. Bad weather conditions can create tremendous hazards for boaters.
  • Always operate at a safe speed. Open waters can be deceptively dangerous, and operating at high speeds increases the risk of a collision with other boats, docks, the shoreline, and obstacles in the water.

Be Careful When Participating in Water Sports

Many people in and around our area like to participate in various popular water sports, including water skiing, tubing, wakeboarding, kneeboarding, etc. If you or your family members will be participating in these activities, you need to thoroughly understand how to safely use all materials and objects involved.

  • Learn how to get out of the water safely and how to use the tow rope.
  • Understand basic hand signals and how to use a spotter in the boat.
  • Make sure that the tow line does not get caught in the propeller of the boat or wrapped around any person.
  • Wait for a propeller to stop moving before getting back on the boat.
  • Only participate in water sports during the daytime.

Ensure a Boat has Been Properly Maintained

The truth is that boats are high maintenance vessels. If you and your family own a boat or are enjoying time on a friend’s boat, ensure that the vessel has been properly inspected and maintained. If you will be enjoying boating activities or water sports on a rented boat, make sure you only work with accredited businesses with extensive experience handling boats.

Be Mindful of Social Distancing

Boats are not conducive to the social distancing measures necessary to stop the spread of COVID-19. This summer, you should consider only going out on a boat with those who live within your household. Failing to do so could risk you or somebody you love contracting the virus, which is not something you want to experience.

© 2020 by Console and Associates. All rights reserved.

See the Personal Injury law section of the National Law Review for similar topics.