The long running legal saga between Enterprise Products Partners (“Enterprise”) and Energy Transfer Partners (“ETP”) finally concluded on January 31, 2020, when the Texas Supreme Court unanimously decided that no partnership had ever arisen between the parties. (Read) This dispute between two of the major players in the energy industry focused on the legal standard for determining when a partnership is formed. ETP argued that the test should be based on the parties’ conduct, while Enterprise maintained that the parties had agreed that specific conditions in their contracts had to be established before a partnership was created, and those conditions were never met.
As the Supreme Court’s opinion brings to a close eight years of hard-fought litigation between Enterprise and ETP, we will share our third, and hopefully last, blog post about the case and also review some important lessons for business owners gleaned from this legal conflict. ¹
Predictable Legal Result
The staggering $535 million jury verdict that ETP secured against Enterprise in 2014 had always rested on tenuous legal ground because it conflicted with the terms of the parties’ written agreements. At trial, ETP claimed that Enterprise had breached its fiduciary duty as a partner when it ditched ETP to enter into a new pipeline deal with a competitor, Enbridge. The result at trial rested on the jury’s finding that the parties’ conduct had created a partnership between them, which gave rise to a duty of loyalty that was owed by Enterprise. The jury’s verdict, however, disregarded the parties’ written agreements, which set forth specific conditions precedent to the formation of a partnership, including approval by both companies’ boards. Enterprise therefore argued that it had become subject to a “partnership by ambush.”
The Texas Supreme Court has long championed the sanctity of contract. In numerous previous cases, the Court expressed the view that sophisticated business parties who enter into contracts must honor their bargain. Therefore, the Court’s decision on behalf of Enterprise was not surprising to Court watchers. In addition, a decision in ETP’s favor upholding its common law partnership claim would have created significant uncertainty in the business community as to when a partnership, and related partnership duties, would arise between contracting parties.
In its decision, the Court cited common law strongly favoring the freedom of contract, and held that parties can adopt conditions precedent that must be met before a partnership will be formed. The Court also cited language from a case it had decided more than a decade ago, and noted that: the Legislature did not “intend to spring surprise or accidental partnerships” on parties. While the Court acknowledged that the conditions precedent the parties agreed to could have been waived or modified, it held that ETP was required to either obtain a jury finding that the conditions had been waived or prove waiver conclusively at trial, and ETP had done neither. ²
Business Lessons Learned
While Enterprise ultimately prevailed in defeating ETP’s partnership claims, the legal battle required an enormous amount of time, caused considerable distraction and required each of the parties to incur millions of dollars in legal expense. Thus, the Court’s holding in ETP v. Enterprise provides some key take-aways for business owners. If the practices reviewed below are followed when parties are considering entering into a new business relationship, they may help to avoid future litigation. At a minimum, these practices will make it more likely that a court or an arbitration panel would grant a summary judgment dismissing before trial claims alleging that the parties entered formed a new partnership based on their conduct.
Get it clearly in writing — This is the clear guidance from the Supreme Court. If a party does not want to be saddled with partnership duties, it should confirm in writing that: (i) no partnership has been formed, and (ii) no partnership will be formed unless specifically stated conditions are met, e.g., the requirement that a written partnership agreement must be signed and approved by the company’s board and/or managers.
Address waiver — All agreements can be waived or modified, but the parties can expressly agree there will be no waiver or amending of any conditions to forming a partnership unless the waiver or amendment is signed and in writing;
Disclaim all fiduciary duties — In addition to making it clear that no partnership exists without specific conditions being met, the parties can also state that they do not owe each other any fiduciary duties unless and until they sign off on a binding written agreement between them;
Consider use of arbitration — The parties may require that all disputes arising between them will be decided by sophisticated business lawyers in an arbitration proceeding, and they can require that the arbitration hearing be held promptly, within 60 or 90 days;
Impose damage caps — The parties can agree to limit recoverable damages in a variety of days in any future dispute that arise between them, which can include their agreement to eliminate all claims for consequential damages, for lost profits and for punitive damages; and
Award fees to prevailing party — The parties can also award reasonable legal fees to the prevailing party, which will require the losing party to pay all of the legal fees that are incurred in the litigation or arbitration.
Conclusion
One man cannot summon the future. But one man can change the present!
Alternate Mr. Spock, “Mirror, Mirror”
The Supreme Court’s decision in the Enterprise case confirms the critical importance of securing written agreements that document the parties’ business relationship. Business owners who sign letters of intent, or enter into other preliminary documents before formally starting a new business relationship need to take care to ensure they are not forming a partnership or joint venture unless specific conditions are met. The failure to incorporate these conditions in a signed agreement may result in adverse consequences for the business owner, including being saddled with claims that a partnership was formed and that, as a result, they are now burdened with burdensome fiduciary duties.
¹ This post has a Star Trek reference based on the USS Enterprise, the name of the flagship in the show. As Star Trek fans know, the series was written in 1964, and first debuted on television in 1966. Perhaps it is a coincidence, but the first United States nuclear-powered aircraft carrier, the USS Enterprise, entered into service just a few years before, in 1962.
² In issuing its decision, the Supreme Court upheld the opinion of the Dallas Court of Appeals, which had overturned the trial court’s judgment. The appellate court had determined that ETP had not shown that it met the conditions precedent set forth in the parties’ agreements and, further, there was no jury finding these conditions had ever been waived or modified by the parties.
A 1031 Tax-Deferred Exchange (“§ 1031 Exchange”) is an extremely useful tax strategy for taxpayers that maintain real property for productive use in trade, business or for investment. It allows a taxpayer to defer payment of capital gains tax on investment properties that are sold.
A taxpayer continues to qualify for a § 1031 Exchange if the following rules are met: (1) the properties being exchanged must be “like-kind”; (2) the taxpayer must transfer property held for productive use in a trade, business or for investment (the “Relinquished Property”) and subsequently receives property to be held either for productive use in a trade, business or for investment (the “Replacement Property”)”; (3) the Replacement Property value must be greater than or equal to the Relinquished Property value; (4) the taxpayer must not receive “boot” in order for the exchange to remain tax-free; (5) the name on title of the Relinquished Property must mirror the name on the title of the Replacement Property; (6) the taxpayer must identify a replacement property within 45 days after the taxpayer transfers the Relinquished Property; and (7) the taxpayer must receive the Replacement Property within 180 days of the transfer of the Relinquished Property, or on the date the taxpayer’s tax return is due, whichever is earlier.
Section 1031 Exchanges, while an excellent tax deferral tool, are not without complications. Section 1031 Exchanges must be used exclusively for the exchange of real property held for investment or business purposes. Section 1031 Exchange rules also require the title of the Replacement Property to be under the same name as the title of the Relinquished Property. Any real property interests owned by a limited liability company or a partnership must be reinvested by the entity in real property of “like-kind” nature for investment or business purposes in order for it to qualify under § 1031. This is a problem if an individual member or partner of the entity wishes to “cash out” or reinvest in something other than “like-kind” real property. To remedy this problem, many transactions are structured as a “drop and swap” where the interests in the real property are transferred to the individuals as tenants in common and those tenants in common, as individuals, deed the Relinquished Property to the buyer. Because the taxpayers, as individuals, sold the Relinquished Property, it is the individuals that must reinvest in the Replacement Property to utilize the tax deferrals under § 1031. Because the individuals are tenants in common, each is able to choose independently whether to reinvest in a Replacement Property and defer tax under § 1031 or cash out and pay the tax on their individual earnings from the sale of the property.
However, this “drop and swap” technique is increasingly disfavored by the IRS and may create tax implications for the taxpayers if the real property is acquired by the individual taxpayers immediately prior to the sale. Since real property must be for investment or business purposes to be eligible under a § 1031 Exchange, it is best practice to distribute the interests in the property to the individuals well in advance of the date of the relinquishment so each individual holds the property long enough to constitute an investment. While the IRS has not provided guidelines on the length of the holding period, it is recommended that such transfer, or “drop” to the individuals occur at least a year in advance before the closing on the Relinquished Property and that records be kept of the transfer and the intent of the taxpayers to hold the real property for business or investment. Moreover, taxpayers need to take care when transferring (“dropping”) the interest in the real property from the entity to individual tenancy-in-common interests to ensure the taxpayers aren’t viewed as operating as a partnership and thus, subject to ownership constraints of a partnership (this would likely negate the drop and swap technique and require the individuals, as tenants-in-common but operating as a partnership, to all invest in the Replacement Property for some to benefit from tax deferral under a §1031 Exchange).
There does not appear to be any limitation on how an individual taxpayer uses their proceeds if they are cashing out, and have no intent to defer tax under a § 1031 Exchange. However, for a taxpayer to defer tax under a § 1031 Exchange the above requirements must be met, and there can be no actual or constructive receipt of money or other property before the taxpayer actually receives the Replacement Property. Even if the taxpayer may ultimately receive the like-kind Replacement Property, any receipt of cash or other property, including an interest in an additional entity or personal property, prior to that Replacement Property will make the transaction a sale rather than a deferred exchange and prevent the taxpayer from gaining the tax deferral under a § 1031 Exchange.
Copy equipment giant HP Inc. turned down the much smaller Xerox Holdings Corp.’s acquisition overtures twice in one week as the exchange of statements between corporate leadership grows increasingly hostile. From an anticompetition perspective, the case raises the interesting question of how the “failing firm” defense could come into play.
A deal would bring together the world’s second largest copier company, HP, a company whose leadership position was once so strong that its very brand name, derived from the word “xerographic” in 1938, became a verb used more often than the word “copy” itself. Xerox is also credited with innovations that brought us tools like the mouse and ethernet networks.
But Xerox, which has long since fallen from the top of the copier industry, was met with a flat-out rejection of its offer to get its mojo back by acquiring HP. Xerox offered HP $17.00 in cash and 0.137 Xerox shares for each HP share or $22 per share, or $27 billion overall. Skeptics wondered whether Xerox could execute such a deal, given it is “only” a $9.2 billion business, a third the size of HP. The skeptics were right. On Nov. 17 the HP Board of Directors informed Xerox that its offer was not in the best interests of shareholders as it “significantly undervalues” the HP business.
In its letter to Xerox Vice Chairman and CEO John Visentin, HP wrote that its board was concerned about the “potential impact of outsized debt levels on the combined company’s stock.” While saying it remained “ready to engage” with Xerox to better understand its business and its thinking around a merger, the HP board rejected the bid unanimously.
“We recognize the potential benefits of consolidation, and we are open to exploring whether there is value to be created for HP shareholders through a potential combination with Xerox. However,” the HP letter to Visentin continued, “… we have fundamental questions that need to be addressed in our diligence of Xerox. We note the decline of Xerox’s revenue from $10.2 billion to $9.2 billion (on a trailing 12-month basis) since June 2018, which raises significant questions for us regarding the trajectory of your business and future prospects. In addition, we believe it is critical to engage in a rigorous analysis of the achievable synergies from a potential combination. With substantive engagement from Xerox management and access to diligence information on Xerox, we believe that we can quickly evaluate the merits of a potential transaction.”
Xerox had said it could generate $2.3 billion by selling its 25% share in the joint venture, Fuji Xerox Co., Ltd., to FUJIFILM Holdings Corp. In a Nov. 8, 2019, statement, Xerox also said it was selling to a Fuji Xerox affiliate Xerox’s 51% stake in Xerox International Partners, a joint original-equipment-manufacturer venture between Xerox and Fuji Xerox. The companies also agreed to end the $1 billion lawsuit FUJIFILM filed against Xerox after last year’s terminated merger. “Total after-tax proceeds to Xerox from the transactions, which included accrued but unpaid dividends through closing, are approximately $2.3 billion. Xerox expects to use the proceeds opportunistically to pursue accretive M&A in core and adjacent industries, return capital to shareholders and pay down its $554 million December 2019 debt maturity,” according to Xerox.
Xerox did not take HP’s rejection well.
“We were very surprised that HP’s Board of Directors summarily rejected our compelling proposal ….” Xerox CEO Visentin responded, “claiming our offer ‘significantly undervalues’ HP. Frankly, we are confused by this reasoning in that your own financial advisor, Goldman Sachs & Co., set a $14 price target with a ‘sell’ rating for HP’s stock after you announced your restructuring plan on October 3, 2019. Our offer represents a 57% premium to Goldman’s price target and a 29% premium to HP’s 30-day volume weighted average trading price of $17.” Visentin added that the offer was not, as HP said, “highly conditional” or “uncertain.” “There will be NO financing condition to the completion of our acquisition of HP,” the Xerox CEO said.
Xerox gave HP until today (Monday, Nov. 25) to accept the offer, otherwise it would take the case directly to HP’s shareholders. “The overwhelming support our offer will receive from HP shareholders should resolve any further doubts you have regarding the wisdom of swiftly moving forward to complete the transaction,” Visentin said.
But HP didn’t need the whole weekend. Yesterday, on Sunday, Nov. 24, it rejected Xerox again via a letter signed by HP Chairman and CEO Enrique Lores and HP Board Chair Chip Bergh. They repeated that Xerox is undervaluing the company, adding that Xerox did not address HP’s concerns about Xerox’s ability to raise the cash or handle such a substantial debt burden. Lores and Bergh didn’t seem to appreciate Visentin’s attitude, either.
“It is clear in your aggressive words and actions that Xerox is intent on forcing a potential combination on opportunistic terms and without providing adequate information,” the HP leaders wrote. “When we were in private discussions with you in August and September, we repeatedly raised our questions; you failed to address them and instead walked away, choosing to pursue a hostile approach rather than continue down a more productive path. But these fundamental issues have not gone away, and your now-public urgency to accelerate toward a deal, still without addressing these questions, only heightens our concern about your business and prospects. Accordingly, we must have due diligence to determine whether a Xerox combination has any merit.”
And yet, things had seemed to be going so well. In June, Xerox and HP announced they were expanding their relationship. Xerox was to begin sourcing certain products from HP, many of which used Xerox software, and supplying toner for HP for these and other products. These printers use laser printing technology HP acquired from Samsung in 2017. Xerox and HP also agreed to partner in the Device as a Service (DaaS) market. Xerox said it would sell HP PCs and peripherals to its commercial customers under a DaaS model, and HP would make Xerox cloud-based content management available to its commercial PC customers in the United States.
As the HP leaders said, the relationship started to sour at least as early as August.
HP questions Xerox’s resources and innovation.
HP offered additional specifics as to why it didn’t find the deal attractive:
Xerox has missed consensus revenue estimates in four of the last five quarters.
Xerox’s revenue has fallen from $10.2 billion to $9.2 billion (on a trailing 12-month basis) since June 2018, and this is expected to continue. Xerox management projects revenue declines of 6% in fiscal 2019.
Given how much of the Xerox business is based on contractual revenue, HP is concerned about the decline in customer Total Contract Value (TCV) in excess of revenue declines, which suggests Xerox’s revenues may decline even faster in future years. HP noted that the TCV of enterprise signings (including renewals) in 2018 was down 13.9% in constant currency and Xerox’s churn for 2018 was 18%, both data points which Xerox has stopped providing publicly since the end of 2018.
After a review of synergies based on public information and the “limited information” Xerox provided, HP said it does not agree with the value of potential synergies. “[I]t appears that your assumptions include significant savings that are already included in each company’s independently announced cost reduction plans,” HP wrote.
When Xerox exited the Fujifilm joint venture, Xerox essentially “mortgaged its future for a short-term cash infusion.” HP feels this has “left a sizeable strategic hole” in the Xerox portfolio.
HP also took a shot that has to sting the once-heralded leader of innovation. “[W]e have concerns as to the state of Xerox’s technology resources, research and development pipeline, future product programs, and supply continuity and capability.
HP said Xerox has not accessed the great potential of the Asia Pacific market.
The ‘failing firm’ defense
What’s intriguing from an antitrust perspective is how the parties might use the “failing firm” defense in a hostile takeover scenario. The failing firm defense argues that a merger that substantially lessens competition is less harmful to competition than one party’s failure and exit from the market. The defense requires a showing that the acquired company cannot meet its financial obligations, would not be able to successfully reorganize in bankruptcy, has been unsuccessful efforts to elicit other reasonable offers, and is succumbing to the only available purchaser.
We would expect to see that defense raised here given the high post-merger market share and years-long decline of both parties. But how will Xerox make the required showing without the cooperation of HP management? And, in this case the acquirer is arguably the greater “failure” risk of the two firms, making this use of a “failing firm” case a rarity, if not a first.
Copier industry landscape.
Xerox’s global annual revenue was at $20.64 billion in 2011, $19.54 billion in 2014, and $9.83 billion in 2018. It’s now a $9.2 billion company, with revenues generated from a combination of services and equipment. In 2016, Xerox services accounted for roughly a third of the company’s global revenue. From 2012 to 2014 services generated more revenue than technology. That flipped in 2015 when service revenue dropped to a third of prior years.
HP’s net revenue from its printing business was at a high of $29.6 billion in 2008. It fell to $18.26 in 2016 and bounced up to $20.8 billion in 2018.
Worldwide, Canon is the market leader, with 24% of the market. HP is close behind with more than 21% of the market. Xerox has been in the low single digits for the past two years. After Canon and HP, market leaders are Brother (11%), Epson (10%), Kyocera (7%), NEC (5.6%), Ricoh (2.5%). Some 18.5% of the market is attributed to “other” companies.
Statistics provided by Statista based on data from IT Candor. Additional statistics from HP and Xerox.
The cannabis industry is rapidly expanding in the United States, with multiple jurisdictions and corporations seeking to accommodate the evolving cannabis market. Carlton Fields attorneys Kevin McCoy and Jennifer Tschetter discuss the emergence of cannabis as a billion-dollar, mainstream industry; explore its impact on corporate clients; and analyze the ever-evolving legal landscape in this space.
Transcript:
Kevin: It’s an exciting day here at Carlton Fields. My name is Kevin McCoy. I am a trial lawyer here in the Tampa office of Carlton Fields with a background in commercial litigation, and today I’m going to be speaking with Jennifer Tschetter out of our Tallahassee office, who is the co-chair of our Cannabis taskforce, which is a very exciting area of the law and one that we are happy to be working in and learning about and helping clients with. So without further ado, welcome, Jennifer.
Jennifer: Thanks, Kevin.
Kevin: Thanks for making the time today. First of all, why don’t you give us a little background about you?
Jennifer: Sure. I’ve been practicing law about 18 years and during that time I spent 10 of them in public service, primarily at the Department of Health here in Florida.
Kevin: Wonderful. In the Department of Health, what were some of the areas that you touched upon in particular with respect to health issues, or have you been involved in the medical marijuana and the marijuana push here in Florida?
Jennifer: Yes, in fact, I was general counsel at the department when medical marijuana first came to this state. So, since the inception of the regulatory structure, I’ve either been intimately involved as a regulator, or since my move to private practice just a couple of years ago became more involved on the private side.
Kevin: Wow, so you’ve been in the front lines?
Jennifer: Yes.
Kevin: You’ve been in the front lines as the government has wrangled with this, I won’t say with the forbidden fruit anymore, because I don’t know that we’re in that land, but you’ve been fighting the fight for a while on both sides of the isle, I suppose?
Jennifer: Yes.
Kevin: So, you know, I use that term, the forbidden fruit, and it’s amazing to me, literally, that we are sitting here at a firm like Carlton Fields and we’re talking about Cannabis law, which, when I started here, I couldn’t have contemplated that that would be an area that we are growing and we are developing experience in and counseling clients on. But, it’s here. And, why don’t you talk to us a little bit about how here it is? I mean, in reality that this is no longer, you know, we don’t think of this anymore like this is two guys doing a drug deal in a parking lot, this is billion dollar industry. Is that fair to say?
Jennifer: Fair to say. So some of the things that I think are most interesting is to watch the evolution of this industry. If you’ve seen, I’m sure everybody has seen those maps, you know, that have varying colors of green based on, you know, are you a recreational state or a medical marijuana state, a low THC state and if you think about that 20 years ago there was one green state on that map and that was California and now you look at the states and there are only 3 that don’t have any color anymore. At least, in some form, 47 states have said you can use this on some level. Might be low THC. Might be full spectrum. Could be recreational. But, those types of statistics are interesting to me. The other ones that come to mind are 1 in 4 Americans right now live somewhere where purchasing recreational cannabis is legal. The farm bill’s delisting of hemp has opened another huge industry and they’re all derivatives of the cannabis plant which used to be forbidden.
Kevin: Let’s talk for a minute for those who are maybe new to this space, new to this industry, about that real distinction. Because that’s one that maybe I didn’t appreciate until recently. When we talk about cannabis, it’s easy to confuse some of the aspects of cannabis as it, as between marijuana or between CBD, which is all the rage of late. Can you just briefly give us an overview of the differences that happen between cannabis, between marijuana, between CBD? How does all that break down for somebody who’s really not deep in this space?
Jennifer: I’ll try. So, our definition in the United States of what constitutes the difference between hemp and marijuana, and they are both species of the same plant, cannabis. So they’re both cannabis, but what distinguishes them is their THC level and THC is the thing that most people think about as creating the euphoria typically associated with marijuana. In hemp, the THC level is .3% or less. If the cannabis plant, as it’s growing, has a THC level higher than .3%, it’s marijuana. So, that’s the distinction is the THC level in each.
Kevin: So, we’ve talked a little bit about some of the aspects that are happening and you talk about the delisting of hemp from the Controlled Substances Act. What has that or what have you observed the impact of that having as impacting some of the clients that we deal with in terms of, you know, these are corporate clients. These are big. They’re pharmaceutical. They are manufacturers. They are real businesses who are now looking at this. Can you just talk about what you’ve seen in industry as, for example, you mentioned CBD, as that has been delisted, or hemp I should say, has been delisted from a controlled substance.
Jennifer: So, CBD, I think there’s a place to start. So, hemp has opened the opportunity, not only for industrial uses for hemp, but it has created another potentially billion dollar industry in this country with the passage of the farm bill in 2018. So, those billion dollar industries don’t come around very often and one aspect of it is the CBD industry. Because hemp is low in THC, one of the other cannabinoids that’s very popular is CBD, which has been documented to relieve stress, anxiety, improve depression and can also alleviate some joint aches when applied topically. So, CBD is in high demand around the country and when it is extracted from the hemp plant, it can be infused in a variety of products: shampoos, lotions, gummy bears, drops. So, that created an enormous industry, but for every business in this country, the potential to at least contemplate whether a CBD additive would be helpful for their product and understanding how to navigate this new regulatory structure that’s kind of emerging, if you do chose to that, has been challenging.
Kevin: You mentioned the word challenging. What are some of the challenges that you are seeing as clients are coming to you for guidance as they’re entering, let’s just call it, the broad umbrella of cannabis without getting into whether it’s marijuana or CBD based on the .3% that you just described. But, what are some of the top, if you had to give us the top five challenges that people are coming to you, businesses, I mean we’re not talking little players here, we’re talking about real corporate clients, they need help, what are the areas that are the hottest right now that you are seeing?
Jennifer: So, compliance is one and the unfortunate part about that, and the challenge that goes with that, is the shifting sand that is the regulatory structure. When hemp was, when cannabis, I’m sorry, was put on the controlled substance act in the 70’s, it stopped all research, it stopped all production of both hemp and marijuana in this country. Because of that, everyone is just now putting brand new regulatory structures in place and research is ongoing and that continued compliance, I think that that is the number one challenge for a business trying to get in this market right now is that you can get a snapshot from a law firm as to whether your business is in compliance today, but the law in North Carolina can change tomorrow. The law in California can change next week and it’s that ongoing uneasiness and being willing to move in that space aggressively despite the potential for the bottom dropping out at any given moment.
Kevin: It sounds like on the compliance piece then, what folks are facing in this industry is right now, it’s you know, technology as I’ve seen it on, in any number of areas, whether it’s a plant, whether it’s a new gadget, a widget, whatever it may be, technology always moves faster than the law and the law is slow to catch up and that’s not necessarily a bad thing because we rely on law. But right now, what we’re dealing with is a regulatory patchwork, if you will, where step over the line from state X to state Y, you could be facing very different types of regulations, whether it’s labeling, whether it’s requirements and sourcing. Can you just talk about some of the things you’re seeing in that regard? I mean, for example, you know I think to the bill that we just passed here in Florida, the hemp bill, and some of the things that, for example, you would see here in terms of a Florida based hemp business that stick out to you that maybe could differ from other states around the country.
Jennifer: So, I think every state is going to have, and this will be a challenging piece of it, different rules on how you can bring that product into the state. And so, the USDA has issued some guidance that said everybody get ready, the farm bill said you can move this from state to state. It’s now a legal agricultural commodity. That’s great, except it does have an impact on agriculture and so, every agriculture department around the country right now is trying to figure out how to protect its farmers. And so the rules on how you bring product into this state, I think, will be one of the first challenges. That’s a patchwork where if you don’t know the law, you might not know that you need to be escorted into the state by our department of agriculture after you have an inspection, and when you get here, your truck needs to be a closed truck…
Kevin: Mm-hmm.
Jennifer: …in order to move about the state of Florida. Those are the proposed regulations.
Kevin: Sure.
Jennifer: We’ll see where they end up. Those will vary by state and part of it is that, I know here in Florida, it’s a perfect example. We’re so sensitive to invasive species. When you look at the cannabis plant, what the plant researchers have told you is that it’s a more invasive species, hemp, cannabis that would include hemp. It’s a more invasive species on their scale from 1 to 25, then Kudzu.
Kevin: Mm-hmm.
Jennifer: So, that should give us all pause as to whether we should be too quick to move so quickly in a space and eager, because it can have lasting implications.
Kevin: You know, it’s funny that you bring up this patchwork and states putting in place these kind of regulations to, maybe, protect their own, if you will. I think the last time I had ever thought about the commerce clause of the constitution was about a week ago when you and I were comparing notes on, I’m not so sure if this particular regulation doesn’t cut too close on protecting, you know, interfering with that. So, what are some of the legal issues that businesses are looking at as cannabis the plant impacts them? I mean, I would have to imagine, you’re dealing now, not only as a business dealing in cannabis, but, I mean, it’s gotta impact employment policies. It’s gotta be impacting, I mean, it’s actually, not to overstate it, but it’s almost like, what is this not going to impact, you know, in terms of policies, in terms of industry? Talk to us about some of the things that businesses have to be looking out for in terms of regulatory patchwork and you can interpret that or answer that in whatever way you want, because it’s a very broad question. But, based on what you’re seeing and what people are coming to you with, what are some of those top items outside of, maybe, compliance or regulatory?
Jennifer: There isn’t an item.
Kevin: Yeah.
Jennifer: This industry will touch almost all practice groups in law firms. When you think about it, because it’s both medicine and something that people want to use for recreational pleasure, it’s different than other things. That’ll make its impact on schools and Girl Scout troops. I mean, they’re gonna have to deal with issues related to cannabis and figure out what they can and can’t do for people that either have a prescription to take this medication, or CBD products limited, they’re not high in THC, so those are, there’s not an industry that I can think of that won’t be impacted by this.
Kevin: I tell you what, I have to agree and I am not anywhere near as versed in this space as you are. Admittedly, I’m a newcomer to understanding this as an industry. But, in the short time that I’ve been working with clients in this space, I mean, I have seen this touch land use. I have seen it touch rewriting employee handbooks which we’ve had to do, you’ve got tax issues. You’ve got money transmitter issues. You’ve got, how, where’s… great your business is doing well, but where are you going to put all that money? You know, US banks are slowly coming around. I think, part of that is because they’re pushing Congress to give them the clearance that they want to be able to touch some of this money.
You mentioned the USDA. You’ve got ongoing issues with the FDA and what are they going to do? And I think they, you know, they have been studying this and rightly so, which is, which is their task to do but, industry is crying out for them to make a move, to take a stand or at least a position and I think that will help industry in terms of knowing the rules of the road because right now, tell me if you disagree but, it’s almost like we are in the wild West in some regard because people are trying to predict what the regulatory framework will be and they’re not going to stop business while they’re waiting on government. So, they’re trying to do the best they can. Is that consistent with what you’re seeing?
Jennifer: Yes, and also a lot of innovation. So, the sky is the limit. You know, I was telling someone the other day, think about how different this industry is than some other highly regulated industries. And I think part of that is the federal prohibition on it, which makes it confusing to talk about. There’s not that federal overlay that you see in some other industries which is why, for example, we maybe don’t see nicotine gummy bears and we don’t see other products that are innovative. I think that they can be helpful, enjoyable. Those are all good things and they’re all possible in this cannabis space.
Kevin: What other areas, you know, we talk, we think about this in terms of somebody who’s directly in this space in terms of you’re cultivating, in terms of you’re manufacturing or you’re distributing whatever that product may be, whether it’s biomass, whatever you’re doing, maybe textile, but, it seems like they’re, this is going to touch a lot of ancillary businesses too. So, for example, you know, you look at the Florida farm bill, you have to have an approved third party independent lab testing your batches of product. So, talk about some of the ancillary industries that you’ve been working with in that regard, and just, setting aside not actually being in directly in the space but maybe a secondary player and areas where you’ve been giving counsel and people have been coming to you for your knowledge.
Jennifer: Sure. The ancillary businesses that we work with most often are those that are directly related. I mean, they’re driven by the cannabis space. And you’re right; the independent testing labs are one of them. And so we work with them and, you know, try to set high standards for those labs whether it be through accreditation and then work with the regulators to put appropriate regulations in place. And I think that’s where when clients can be introduced as an asset, a subject matter expert. Who knows better how to test and what’s possible to test for in a parts per million or parts per billion than the lab folks? And that’s why it’s been a pleasure to represent them and learn a lot about that space.
Other ancillary businesses are the seed to sale tracker. So what some people might not know is that virtually every state that has put in place a medical marijuana program puts in a seed to sale tracking system, and that literally tags plants from the time that they are growing in a cultivation room and you track them with bar codes all the way through the production process so that when you’re all done you know exactly what product was made with that plant. And those type of tracking mechanisms are essential to prevent against diversion in states that don’t want to have a legal recreational adult use market yet. So, that’s another ancillary business that is all unto itself but, the technology and information technology that goes into that is highly complicated and sophisticated. I think you will see that on the hemp side as well. In that most, one of the greatest concerns in the hemp industry is, where are we growing this? And part of that is to understand just how far the reach will be. Can you cross pollinate an orange field 10 miles away or is it 5 miles away? We’re gonna just all learn together. I think it’s an orange grove, candidly. But, those are the things that I think will be interesting and those ancillary businesses are creatively looking for solutions.
There are also drone manufacturers that will be essential in the GIS mapping of hemp cultivation plots all over this country that will help us understand the impact on other crops and also be a tool for law enforcement because I think what can be confusing for people – we were talking about it before in interstate shipments – is that if you were to cut up, you know, grind up a batch of hemp and a batch of marijuana or you drive by a field of hemp the terpenes are the same and it will smell a lot like that smell that we all associate with adult use or recreational marijuana. And so, when you see a load of it coming over state lines, that’s confusing to law enforcement, and rightfully so. Rightfully so. I think that there’s a lot of entrepreneurs looking for innovative solutions to help regulators to help the industry do it better, do it faster. And this is an industry that seems receptive to all those things.
Kevin: You know, you touch on a really interesting point. I went to one of the recent rule-making sessions here in Tampa that the Department of Agriculture put on. And there was a lot of discussion over the disposal requirement and the rule. And it actually surprisingly got a lot of pushback from the audience and a lot of questions about why would you impose these costs. And I actually thought the response from the folks from the Department of Agriculture sitting on the panels was encouraging because their response was, “Listen, there’s two paths here. If you get a crop of hemp that, we come out and we test it and it’s above .3% because of whatever factor happened, inadvertently it was too hot, who knows, you got bad seed. We can make that a law enforcement issue and now you have an entire acre or acreage of plant that is technically now illegal because of something that was out of your control. Or, what we have done is come up with this disposal plan that we’re still trying to flesh out but we can have a plan where we go, ‘This is no good. We’re going to give you the opportunity to dispose of it in the appropriate way.’ And then we don’t need to call law enforcement.” But, your comments trigger to me, what are you seeing in terms of the give and take of what’s happening or the receptiveness of regulators whether it’s federal or state to take input and be receptive to the idea that we’re going to work together on this. It’s not us versus you. It’s imperative to have relationships there and to be part of that discussion and sitting at that table having those conversations.
Jennifer: Both the Department of Health and the Department of Agriculture and Consumer Services are very partner oriented. They’re looking for solutions. I think you find that the law enforcement community as well, and everyone is trying their best to disseminate information. So State Attorney Dave Aronberg this week released some guidance that things that smell like marijuana anymore aren’t necessary probable cause for a search of a vehicle.
Kevin: Sure, yeah.
Jennifer: It might not be, because there is smokeable hemp on the streets in Florida. So, you can’t just smell a car and think you can search it. That was distributed widely. Generous of the law enforcement community to not limit it to one particular jurisdiction but instead to share it more broadly. They’re also looking for solutions that work for everyone. Everybody wants the bad actors out of the space, but everybody knows that most of the actors that are coming here are looking for an opportunity and mean to do it the right way. And I think the state of Florida has had a position for a long time – and I have not seen it change – that the goal is always compliance. It’s not punishment, but instead compliance is our goal.
So, that didn’t surprise me. I, too, was very pleased to hear that Ag had taken the position that even though it’s .5% THC, it’s still hemp. You’re just going to destroy it in accordance with your waste management plan.
Kevin: Right.
Jennifer: And that is a very generous interpretation and one that is very farmer-friendly.
Kevin: Well, you touch on an interesting topic. And I don’t think us sitting here talking about this topic in Florida we could get through this first podcast without talking about the situation of the grandmother over at Disney. But, to me what was encouraging out of that entire issue was somebody made a law enforcement decision on the street, but after, maybe there was some talking and some education back in the State Attorney’s office, about the direction. We were on the verge at that time of the hemp bill passing, which would, that same instance right now, assuming that bottle was oil that was .3% or less, that would have been a no probable cause. That would have been a no arrest. And, so it was encouraging, while probably maybe the lady who was arrested could disagree about the experience there, it was encouraging to see that law enforcement with, given a little more time, was already thinking about this. And I think that’s maybe part of the education component that’s gonna come across the board. It’s not just industry, but it’s law enforcement, it’s government, and it’s, let’s, let’s not consume resources here unnecessarily, unless, as you say, we’re focusing on some of the bad actors who may be ruining it for the rest of us, so to speak.
So, the next thing I want to talk about today, Jennifer, is where do you think the opportunity is? We’ve talked about some of the regulatory headwinds and we’ve talked about how businesses might be facing some of those, which can be bad or good depending on what side you’re on. As lawyers, we love, that’s where we make our money, navigating that for folks. But, talk about the opportunities that are there, the opportunities for those who want to get in the space and are new to the space or contemplating getting in the space, whether they’re investors, they’re business, they’re start-ups. What are you seeing based upon the practice that you’ve built around cannabis?
Jennifer: The farm bill definitely changed the field in that when clients call now and they want to get into this space, they want to do something because these are two new burgeoning billion dollar industries that don’t come along very often. How do I get in is usually the question. And what I’ve been telling everyone since passage of the farm bill, and in Florida specifically the passage of our state hemp bill, is hemp is the way to go. It’s an unlimited number of licenses as opposed to marijuana which is a very limited number of licenses. We started with five total in the entire state of Florida. Five licenses would be given out for 20 million people. That’s slowly growing, but still there’s only 22 companies that get to participate in that space. Contrast that with hemp where you can pick just a part of it and as many people as want to participate can. So, I think if there’s opportunities right now, it’s in the hemp space.
And there are corollaries between the two industries that if ever, if marijuana ever turns out to be a space where there are more opportunities – they either remove the vertical integration requirement from the license so that you could have one person licensed to grow and one person licensed to sell and another person licensed to process. That may happen in this state and that would create more opportunities. But until it does, there’s only a few licenses out there and you have to do everything in that chain.
The nice part about these two industries is that those overlaps both require processing to get finished product that patients want to use. Both require retail sales and how to market that product in compliance with FDA regulations on, you know, making sure that you don’t claim they have significant health effects. So there are a lot of overlaps that I think for someone that wants to get involved in the industry right now, what I’m counseling them is that start in the hemp space. That’s the place to be. There are no opportunities in Florida right now in the medical marijuana space unless you want to buy one of those licenses for a significant amount of money. And, that’s the only way to get in that space right now and probably the only way to be there for the foreseeable future. With the state of litigation on the medical marijuana side of the industry, I don’t anticipate that we’ll see any new licensees. Certainly not in 2019 and it will be a long way into 2020 before we get to that place. So, for folks that want to get in right now and do something, they should look at hemp as that opportunity.
On the investment side, that can vary. I think that depends upon the quality of the company.
And, I think, one of the things we haven’t touched on today but I think will root itself out eventually in these industries are things like pretenders and frauds and burgeoning industries can attract those kinds of people. So, I think that’s where due diligence is really important on the investment side: understanding the regulatory structures, understanding whether they are scaled up. They can tell you they want to put 100 dispensaries in a state, but if they have a 100,000 square foot cultivation facility, that’s probably not even possible. You could never stock the shelves. So, those are the things that I think due diligence will help investors, and that’s why they’re consulting people like you and me to talk through those issues. But, for investment, I think both spaces are good. For people that want to work, make money, and be a part of something new, I’d take a good look at hemp.
Kevin: That’s a fantastic insight. You know, and from what I’ve seen and just some of the market research and then in some of the other things that you can just find on the Internet, you know, you go back to where we started in the medical marijuana versus the hemp side, and then in terms of CBD, that whole dichotomy that’s happening there in terms of people who hear the word “cannabis” have always associated it with marijuana. And it’s, you know, I may or may not be interested in that, but the whole concept of the CBD space now is coming out where essentially, at least from the marketing standpoint, you can have the benefits of marijuana without the THC and without the high. And the market that I’m seeing in terms of opportunity – I think this is what you’re talking about, too, with hemp – is that this market’s gonna explode. I mean, because more people who would never even contemplate for whatever reason that they would ever touch a cannabis product are now saying, “What’s so bad about this one?” You know, “I can still function, I’m not gonna be a pothead, if you will. I’m just gonna take the benefits from this plant that have been forbidden maybe for no good reason, we’re coming to find out, for such a long time.” So, I’m glad to hear you talk about that as an opportunity because even beyond, you know, the CBD and the ingestible space or the topicals, you get into textiles, you get into manufacturing of ropes, and everything else that goes with it. And so…
Jennifer: Drywall, concrete, I mean, all those hemp-based products. I heard Ag say the other day there are 25,000 known hemp-based products ready to go as soon as we have enough hemp in this country. And when you talk about drywall that is mold and fire resistant and I think about that in beach houses, that’d be perfect, right? So, I’m really excited about the opportunities that this space presents. And hemp, I think, is the future.
Kevin: I tell you what. This entire industry, to me, is just so exciting because it’s new, it’s fresh, it’s one of those opportunities that in the law, to have something that is just so untamed come along, you don’t see that very often. And I don’t know about you, I had a great time today. I hope you would join me again because next time I would really like to get into some of the Florida-specific stuff we’re seeing, including you’ve talked about some of the appellate issues maybe that the Florida Supreme Court will be asked to weigh in on some stuff. So, will you join me again? Maybe we can try a next session?
Jennifer: Absolutely. And if it’s after August 8th, we should know more answers. So.
Kevin: Fantastic. And thank you, again. You are definitely very, very deep in this industry and I’ve learned a lot today, so thank you so much for joining us.
Jennifer: It was a pleasure. Thanks, Kevin.
Kevin: I also want to thank our audience for joining us today. We had a great time. We hope you did, too. We hope you will check out more about our practice at carltonfields.com. There you can find the landing page for the cannabis taskforce that Jennifer is the co-chair of and you can learn more about what we are doing in this space as it impacts businesses that are running throughout this industry.
In light of these recent successes, the meat industry is grappling with how to address the new food phenomenon. With the long-term viability of the alternative meat market yet to be seen, traditional meat companies are taking both an offensive and defensive approach.
Many Big Food companies view cell-based meat as an opportunity rather than a liability. Taking the “if you can’t beat ’em, join ’em” approach, these companies are integrating plant-based protein investments into their own portfolio. For example, Tyson was an early investor in Beyond Meat. Tyson recently sold its 6.52% stake in the company, but Tyson is still fully committed to competing in the plant-based protein space. Tyson announced that it plans to launch an “alternative protein product” with market testing as early as this summer. The fact that Tyson is a household name synonymous with meat could impede its ability to build brand loyalty in the alternative meat space. That said, the producer’s well-established distribution networks and manufacturing facilities will enable them to hit the ground running—an advantage that start-up companies in the emerging market necessarily lack.
Simultaneously, however, the meat industry is taking active measures to hedge against what, on its face, appears to be an impending threat of market erosion.
The meat industry is also lobbying for laws banning any non-slaughterhouse-derived protein product from being labeled “meat.” Last year, Missouri was the first state to formally do so. Lawmakers in 17 states—including Arkansas, Kentucky, Mississippi, North Dakota, South Dakota, and Wyoming—have followed suit. Laws in Montana, Georgia, Nebraska, and Oklahoma are also on the horizon.
Legislators and meat industry lobbyists are touting these laws as necessary consumer protection measures. Not surprisingly, proponents of plant-based meat disagree and are fighting back against legislation they say is aimed to protect cattle and livestock producers’ bottom line. Tofurkey, the Good Food Institute, the American Civil Liberties Union of Missouri, and the Animal Legal Defense Fund are challenging the Missouri law on constitutional grounds. Jessica Almy, director of policy for the Good Food Institute believes that the appeal should put other states on notice “that there are significant constitutional problems with these laws” because labeling is a form of “commercial speech, which is protected as long as it’s truthful.” The constitutional issue has yet to be resolved.
If Big Food is on board as a champion of plant-based protein rather than an opponent, the future for the protein industry certainly looks bright. But, it appears—at least for the time being—that meat alternative companies will have their work cut out for them as they navigate a newly developing (and often times conflicting) patchwork of state laws designed to stifle their marketing efforts. These uncertainties will continue to trigger disputes about what producers (that often operate in multiple states) can say about their products without misleading consumers, and just how far states can go to regulate commercial speech.
Step 1: Have LinkedIn import your address book and search your email account.
The site will then suggest some connections based on who you already know. Send those suggested connections a connection request and you are on your way.
Step 2: Find and connect with potential clients.
Search by industry first to see if you already have any connections at companies you are targeting for potential new business.
If you find that you have a first-degree connection to a prospective client, call or email your first-degree connection and ask them to make an introduction.
If the connections you find are further down the scale (2nd or 3rd tier connections), use the InMail feature to invite those people to connect with you. Customize your request to provide context for the connection.
Be sure you have opted in to LinkedIn alerts for all your connections. Once you receive an alert that someone you’re connected with has published an article or has a new job, send them an email to reconnect and rekindle the relationship.
If you receive an alert that someone has viewed your profile who could be a potential new client, send that person an InMail message asking if you can help.
Step 3: Cultivate new referral sources.
Find LinkedIn groups that match up with your practice area and join them. Participating in these groups helps drive traffic to your LinkedIn profile page.
Showcase your expertise by starting your own LinkedIn group and inviting your connections to join.
Post blogs, articles, firm announcements, press releases, videos on your profile page and in your groups.
Examine your client’s networks to see if there are any potential prospects you’d like to be introduced to and then ask your current or former client if they would be a referral source for you.
Once you get the hang of how things work on LinkedIn — and how easy it is to connect — you will find that it is ripe for networking successfully. And you don’t even have to leave home or the office to do it!
Tropical Storm Harvey has forced manufacturers and producers across Southeastern Texas to shut down operations while repairing their damaged facilities. These companies will turn to their business interruption carriers to recoup their business income lost during this period. However, for companies doing business in that region, but physically located outside the reach of Harvey, business interruption coverage may not protect them from lost profits caused by the storm.
For example, say a company owns a manufacturing facility in California where it assembles cars. The manufacturer purchases its engines from a company located in the flood-ravaged portions of Texas. If the Texas company is unable to build and deliver engines to California, the manufacturer might be unable to assemble cars for days, possibly weeks. Any business income losses incurred by the California company are unlikely to trigger standard business interruption coverage because the California manufacturing facility did not suffer any physical damage. To fill the gap, manufacturers and producers often purchase contingent business interruption coverage (CBI).
CBI coverage is, in effect, an extension of business interruption coverage to the business activities of suppliers and customers. If an upstream supplier or downstream customer suffers an interruption in business activities, CBI coverage should kick in to reimburse the policyholder for certain lost profits. CBI coverage can be written on specific properties owned by suppliers or customers and/or on a blanket basis.
The value of CBI coverage may vary depending on the precise language of the coverage grant.
Compare Millennium Inorganic Chems. Ltd. v. National Union Fire Ins. Co., 744 F.3d 279, 285-86 (4th Cir. 2014) (CBI coverage was expressly limited to “direct contributing properties” therefore, the presence of an intermediary between policyholder and supplier precluded coverage) to Archer-Daniels-Midland v. Phoneix Assur. Co., 936 F. Supp. 534, 544 (S.D. Ill. 1996) (CBI coverage was not limited to “direct suppliers,” therefore, CBI coverage was appropriate despite an intermediary in the supply chain).
There are a myriad of issues that arise when a company tenders a claim for CBI coverage, all of which need to be carefully considered on a case-by-case basis. For manufacturers and producers that rely on companies in Southeastern Texas, CBI coverage may become vital.
No matter the business you operate, modern commerce increasingly takes place online, rarely putting the consumer and your business face-to-face. A recent study revealed that approximately 80% of American consumers buy products online, and 74% of consumers think it is extremely or somewhat important to read online reviews before making a purchasing decision.[1] The average consumer reviews three online sources for information before soliciting a local business, typically: a search engine, the business’s website, and a website containing reviews or testimonials.[2] Small and local businesses are not immune to the internet’s influence, as nearly 40% of consumers seek out online testimonials, ratings, or reviews to evaluate when considering whether to engage a local business for products or services.[3] In fact, consumers cite negative online ratings and reviews as the second greatest reason not to consider a local business for products or services, behind only high prices.[4]
Because consumers consistently turn to online resources to determine whether to do business with you, managing your online reputation is an essential task. You must actively control information about your products, address negative reviews, optimize search engines, and improve your customers’ online experience. In fact, many companies employ full time personnel solely to manage their social media presence.
But monitoring your online reputation becomes even more critical when an anonymous user (aka a “troll”) begins posting harmful or false information. The danger lies in the very nature of the internet, as “any person with a phone line can become a town crier with a voice that resonates farther than it could from any soapbox.”[5] When that voice spreads false information, interferes with your business, or divulges your trade secrets, what can you do to identify the anonymous user and hold them liable for the harm caused?
Understanding The First Amendment and Anonymous Online Speech
To pursue a claim against an anonymous online user, you must first understand the First Amendment protection afforded online speech. Internet speech is generally granted the same protection as traditional offline speech; that is, most types of speech on the internet are protected to some degree.[6]
The right to free speech online also includes a right to remain anonymous.[7] Far from being hostile to such online secrecy, the courts have held that careful safeguards to protect anonymous online speech are important to preserve “the robust exchange of ideas and allows individuals to express themselves freely without fear of economic or official retaliation [or] concern about social ostracism.”[8]
As in the traditional offline arena, some categories of speech, such as fighting words, obscenities, and false statements, are not protected by the First Amendment.[9] Thus, when trolls exploit the anonymous nature of the internet to post false or damaging information about you, they often exceed the First Amendment’s protections for anonymous online speech. For example, anonymous online users may step beyond the boundaries of protected speech by:
• Creating an email account to distribute your CEO’s sensitive personal emails to senior management.[10]
• Creating online accounts to conduct a smear campaign against you with the objective of inducing employees to quit.[11]
• Posting reviews about working for you that disclose confidential or trade secret information.[12]
• Creating a website using your name to complain about your business practices and post negative reviews.[13]
• Posting false reviews of you online by posing as a former customer.[14]
If not for the use of an anonymous online persona, each of these actions could be addressed by filing a lawsuit against the troll. However, anonymity adds a layer of complication as you must either first find a way to unmask the troll’s identity or stop the harmful conduct by some other means.
Strategies to Address Harmful Online Comments Short of Litigation
Before filing a lawsuit to unmask your troll, first consider whether less costly means might stop the conduct or remove the harmful comments. This approach typically depends on the voluntary compliance of companies hosting the content, and thus is not guaranteed to succeed. However, the low cost of this initial step makes it worth considering. Further, pursuing these strategies, whether successful or not, may cause the troll to stop harming you, or to remove the content voluntarily, thereby accomplishing the end goal.
One alternative to litigation is to determine whether the online statements violate the online service provider’s “Terms of Service.” For example, Facebook’s® Terms of Service prohibit users from posting content that “infringes or violates someone else’s rights or otherwise violates the law” and authorizes Facebook to “remove any content or information” posted on Facebook that “violates this Statement or our policies.”[15] Twitter® also requires users to ensure that posts comply “with applicable laws, rules, and regulations” and permits Twitter to remove “any Content.”[16] Large online service providers typically offer reporting platforms where you can report a violation of the terms of service and ask to have the false or harmful content removed.[17] Thus, where a post or comment violates the terms of service, a letter to the internet service provider bringing the issue to its attention may be all that’s needed to get the offending content removed.
Another option is to request that search engines, such as Google® or Bing®, “de-index” the page on which the comments appear. “De-indexing” is a request that the search engine voluntarily remove a website from its index, thereby ensuring it will not appear in response to a search about you. Most search engines retain the right to remove offensive content. For example Google’s ® Terms of Service state that Google “may review content to determine whether it is illegal or violates our policies, and . . . may remove or refuse to display content that we reasonably believe violates our policies or the law.”[18] The result is that, while the website containing the false statement still exists, it can’t be accessed in response to a search. The effectiveness of this step depends on whether the content clearly violates the applicable terms of service or is blatantly unlawful, and a search engine may require a court order finding the content to be unlawful before it will agree to de-index the website.
A final alternative is to address the comments from a public relations perspective. You can choose to simply engage the troll in the online forum itself, to address the falsity of the comments or steer the
discussion in a more beneficial direction. However, this approach carries significant risk that your comments may be used against you, or may even incite a more passionate, negative response. Thus, this approach should be reserved for unique factual situations that justify a public relations response instead of a legal one.
Identifying the Anonymous Online User
If you cannot stop the harmful online comments through one of the strategies above, you should consider filing a lawsuit to identify the troll and assert the appropriate claims against them. First, however, you need to analyze the conduct and determine whether you have a legal claim against the anonymous user. If so, you can file a lawsuit against the troll and attempt to uncover his or her identity.
Step One: Determine Whether the Conduct is Actionable
The types of claims available to combat online misconduct are generally the same as those available in traditional offline situations.
The most common claim pursued against trolls is a claim for defamation. When a person publishes false, harmful statements of fact about your business ethics or financial integrity, they are likely liable for defamation.[19] Libel—defamation in writing—consists of publishing a false written statement, either deliberately or with at least a negligent disregard for the truth.[20]
In evaluating whether you have a claim for defamation, you must candidly consider whether there is any truth to the comments, as truth is an absolute defense.[21] Likewise, opinions are not actionable. So, if the statements are arguably just opinion, as opposed to a statement of fact (or an opinion that could reasonably be interpreted as stating facts), the anonymous speaker will not be liable.[22] Finally, you must evaluate whether you will be deemed a “public figure,” in full or in a limited capacity.[23] If you are a public figure, whether limited or not, you will be required to prove that the speaker acted with “reckless disregard of the truth.” Because this is a higher standard than negligence, there is a greater likelihood that the troll will not ultimately be held liable for defamation.
In addition to defamation, there are a number of other claims that you may be able to pursue against your troll:
• If the user is directing its harmful comments at a vendor, business partner, or potential customer, the user may be liable to you for tortious interference with a contract or a business expectancy. To succeed, you must have a valid contract or business expectancy; the anonymous user must both know about it and interfere with it, so as to cause its breach or termination; and have no legal justification for doing so.[24]
• If the user publishes false information about your products or services, the user may be liable for trade libel or business/product disparagement. Each of these claims has similar elements, requiring proof that the anonymous user posted a false statement concerning your products or services to dissuade a potential customer from doing business with you.[25]
• If the user is a competitor, and the comments contain false or misleading advertisements about your products or services, the user may also be liable for unfair competition under the Lanham Act.[26]
• If the user posts information containing your trade secrets, the user may be liable under state or federal trade secret laws.[27]
• If the user is a former employee, or had a contractual relationship with you, then the online conduct may violate provisions of that contract, such as nondisclosure or non-compete provisions.
This list is not exhaustive and there may be other potential claims to assert against an anonymous online user.
Step Two: File An Anonymous Lawsuit to Unmask the Troll
Once you identify a viable claim or claims against the anonymous online user, the next step is to file a lawsuit to discover the troll’s identity.
Such a lawsuit is typically filed against an anonymous defendant—John Doe for example—and a subpoena is then issued to the service provider or to the website hosting the content requiring it to identify the user. The service provider or website will likely object, and you will need to ask the Court for an order compelling disclosure of the user’s identity.
There is no universal standard governing when a court will order the disclosure of an anonymous user’s identity. However, most courts apply one of two generally-accepted tests, both of which require a significant showing early in the case that you are likely to succeed on your claims.
The less stringent test requires that you allege facts that—assumed to be true—demonstrate that the anonymous user committed an act giving rise to civil liability.[28] Because the Court is looking only at whether you have sufficiently alleged a valid claim, your initial complaint is the operative document that the court will consider. You must also demonstrate to the Court’s satisfaction that (1) you have identified the anonymous user and the user is subject to personal jurisdiction; (2) you have made a good faith effort to locate and identify the anonymous user; and (3) the discovery sought is sufficiently limited to identify the appropriate user or users.[29] This test, or some variation of the test, is used in some Federal Courts—typically in cases involving less protected forms of speech, like commercial speech—and state courts in Wisconsin, and Illinois.[30]
Most jurisdictions apply the second, more stringent test, which requires you to present facts, in the form of admissible evidence or sworn testimony, establishing that you can prove each element of your claim.[31] This test requires you to provide more than just the pleadings, typically in the form of a statement of facts with supporting documents and testimony. Most states employing this test also require some further steps as well, such as proof that you attempted to notify the anonymous user of the pending proceeding[32] or satisfaction of an additional balancing test to justify unmasking the troll.[33] Federal Courts, and many state courts—including Arizona, Kentucky, Michigan, New York, Pennsylvania, Texas, California, Maryland, New Hampshire, and the District of Columbia—have adopted some version of this more stringent test.[34]
If it is not obvious from the nature of the statements that they are actionable, some courts may also require an evidentiary showing that you can prove a valid claim before they will order the troll’s identity disclosed.[35]
Thus, if you file a lawsuit to identify the anonymous user, you must be prepared to present the facts that support your claim much earlier than in traditional litigation. Since most states apply the more stringent “evidentiary” test, the best practice is to prepare to satisfy that test, even if the less stringent test might be applied.
The factual evidence necessary to compel disclosure of an anonymous user’s identity will likely include, at a minimum: (1) copies of the offending posts; (2) sufficient evidence to demonstrate the posts are false, unlawful, or violate the terms of an agreement; (3) sufficient evidence to show that the comments are directed at you, if necessary; and (4) evidence demonstrating that you have suffered damage as a result of the comments. You should be careful to save copies of the offending posts before alerting the anonymous user that action is being taken, in order to guard against any attempt to edit, delete, or restrict access to the comments.
Step Three: Sue The Troll!
Once you have an order compelling disclosure of the anonymous user’s identity, you can serve that order on the service provider or website and expect a response. However, the response may not always identify the user, but may only give you the user’s IP address or other electronic information. You may need to issue additional subpoenas to service providers in order to identify the user of the IP address and ultimately discover the anonymous user’s identity.
Despite having an order in hand compelling disclosure of the anonymous user’s identity, you may still face obstacles from the service provider or website. Typically, large companies that host comments online resist disclosure of their users’ personal information for as long as possible. Thus, they may raise objections to disclosure, justified or not, ranging from invocation of the Stored Communications Act to the Video Privacy Protection Act. But, with the order in hand, you should be able to dispose of these objections through letter-writing, involving the court only if necessary.
Once you know the identity of the anonymous user, you can now amend the lawsuit to substitute the appropriate person for “John Doe.” With an actual defendant named, you can then begin the lawsuit in earnest to hold the no-longer-anonymous user liable for trolling online.
Conclusion
The prospect of trying to identify an anonymous online user can be daunting. But, armed with an understanding of the First Amendment and the applicable procedure, you can readily evaluate whether an anonymous user has engaged in unlawful conduct and whether you can successfully hunt down the troll to hold him or her liable. Good hunting!
References:
[1] Pew Research Center, December, 2016, “Online Shopping and E-Commerce.”
[2] YP Marketing Solutions, 2016, “The Why Before the Buy.”
[3] Id.
[4] Id.
[5] Reno v. ACLU, 521 U.S. 844, 897, 117 S. Ct. 2329, 2344 (1997).
[6] In re Anonymous Online Speakers, 661 F.3d 1168, 1173 (9th Cir. 2011) (citing Meyer v. Grant, 486 U.S. 414, 422, 425, 108 S. Ct. 1886, 100 L. Ed. 2d 425 (1988)).
[7] McIntyre v. Ohio Elec. Comm’n, 514 U.S. 334, 342, 115 S. Ct. 1511, 1516 (1995) (“[A]n author’s decision to remain anonymous, like other decisions concerning omissions or additions to the content of a publication, is an aspect of the freedom of speech protected by the First Amendment.”); Anonymous Online Speakers, 661 F.3d at 1173 (“Although the Internet is the latest platform for anonymous speech, online speech stands on the same footing as other speech—there is “no basis for qualifying the level of First Amendment scrutiny that should be applied” to online speech.”); Doe v. Reed, 561 U.S. 186, 218, n.4, 130 S. Ct. 2811, 2831 (2010) (recognizing that the freedom of speech “can be burdened by a law that exposes a speaker to harassment, changes the content of his speech, or prejudices others against his message”)
[8] Anonymous Online Speakers, 661 F.3d at 1173.
[9] Chaplinsky v. N.H., 315 U.S. 568, 571-72, 62 S. Ct. 766, 769 (1942).
[10] Mobilisa, Inc. v. Doe, 217 Ariz. 103, 106-7, ¶¶ 2-9, 170 P.3d 712, 715-16 (Ct. App. 2007).
[11] Anonymous Online Speakers, 661 F.3d at 1173.
[12] Glassdoor, Inc. v. Superior Court, 9 Cal. App. 5th 623, 626-27, 215 Cal. Rptr. 3d 395, 399-400 (Cal. App. 6th Dist. 2017).
[13] Salehoo Group, Ltd. v. ABC Co., 722 F. Supp. 2d 1210, 1212-13 (W.D. Wash. 2010)
[19] Seitz v. Rheem Mfg. Co., 544 F. Supp. 2d 901, 907 (D. Ariz. 2008) (“Although a corporation may maintain an action for libel, it has no personal reputation and may be libeled only by imputation about its financial soundness or business ethics.”).
[21] Read v. Phoenix Newspapers, 169 Ariz. 353, 355, 819 P.2d 939, 941 (1991) (“In a civil action for libel, the truth of the contents of the allegedly libelous statement is a complete defense.”)
[22] Yetman v. English, 168 Ariz. 71, 76, 811 P.2d 323, 328 (1991) (“The key inquiry is whether the challenged expression, however labeled by defendant, would reasonably appear to state or imply assertions of objective fact.”)
[23] Makaeff v. Trump Univ., LLC, 715 F.3d 254, 270 (9th Cir. 2013) (recognizing that a limited liability company can be an all-purpose public figure or a limited purpose public figure)
[24] Dube v. Likins, 216 Ariz. 406, 411, ¶ 8, 167 P.3d 93, 98 (Ct. App. June 28, 2007) (citing Miller v. Hehlen, 209 Ariz. 462, 471, ¶ 32, 104 P.3d 193, 202 (App. 2005)).
[25] W. Tech. v. Sverdrup & Parcel, Inc., 154 Ariz. 1, 4 (Ct. App. 1986)
[26] POM Wonderful LLC v. Coca-Cola Co., 134 S. Ct. 2228, 2234 (2014) (“The Lanham Act creates a cause of action for unfair competition through misleading advertising or labeling.”)
[27] 18 U.S.C. § 1836; A.R.S. § 44-401, et seq.
[28] Columbia Ins. Co. v. Seescandy.com, 185 F.R.D. 573, 578-80 (N.D. Cal. 1999); see also Anonymous Online Speakers, 661 F.3d at 1177 (recognizing that “[t]he lowest bar that courts have used is the motion to dismiss or good faith standard.”).
[29] Id. at 578-80.
[30] Anonymous Online Speakers, 661 F.3d at 1176-77; Salehoo, 722 F. Supp. 2d at 1216 (finding that “the prima facie standard is appropriate in order to guarantee that the plaintiff has brought viable claims in connection with his or her attempt to unmask the anonymous defendant.”); Lassa v. Rongstad, 294 Wis. 2d 187, 215 (Wis. 2006) (applying the motion to dismiss standard before compelling disclosure of anonymous identity); Hadley v. Doe, 2015 IL 118000, ¶ 27 (Ill. 2015).
[31] John Doe No. 1 v. Cahill, 884 A.2d 451, 460 (Del. 2005)
[32] Cahill, 884 A.2d at 460; Mobilisa, 217 Ariz. at 110, ¶ 22; Solers, Inc. v. Doe, 977 A.2d 941, 954 (D.C. 2009); Doe v. Coleman, 497 S.W.3d 740, 747 (Ky. 2016); Ghanam v. Does, 303 Mich. App. 522, 541-42 (2014); Ottinger v. Non-Party The Journal News, 2008 N.Y. Misc. LEXIS 4579, **4-7 (N.Y. Sup. Ct. 2008); Pilchesky v. Gatelli, 12 A.3d 430, 442 (Pa. Super. Ct. 2011); In re Does 1-10, 242 S.W.3d 805, 821-23 (Tex. App. Texarkana 2007); Krinsky v. Doe 6, 159 Cal. App. 4th 1154, 1167-73 (2008); Indep. Newspapers, Inc. v. Brodie, 966 A.2d 432, 457-58 (Md. 2009); Mortgage Specialists v. Implode-Explode Heavy Indus., 999 A.2d 184, 193, ¶ 13 (N.H. 2010).
[33] Mobilisa, 217 Ariz. at 112, ¶ 28; Coleman, 497 S.W.3d at 747; Ottinger, 2008 N.Y. Misc. LEXIS at **4-7; Brodie, 966 A.2d at 457-58;Mortgage Specialists, 999 A.2d at 193, ¶ 13.
[34] Mobilisa, 217 Ariz. at 112, ¶ 28; Solers, 977 A.2d at 954; Dendrite Intern., Inc. v. Doe No. 3, 342 N.J. Super. 134, 156-58 (2001); Ghanam, 303 Mich. App. at 541-42; Ottinger, 2008 N.Y. Misc. LEXIS at **4-7; Krinsky, 159 Cal. App. 4th at 1167-73; Brodie, 966 A.2d at 457-58;Mortgage Specialists, 999 A.2d at 193, ¶ 13.
[35] Glassdoor, 9 Cal. App. 5th at 636, 215 Cal. Rptr. 3d 395, 407.
President Obama will release his Fiscal Year (FY) 2016 budget proposal today, requesting roughly $4 trillion in spending for the upcoming year and specifying the Administration’s views on how and from what sources the federal government should be raising money and how and on what it should be spending it for the fiscal year beginning October 1. The President’s budget sets off a fiscal showdown with the Republican-led Congress, whose members generally view the Administration’s proposals as higher taxes and higher government spending. Many of President Obama’s cabinet members will be on Capitol Hill this week and in the coming weeks, testifying before House and Senate committees as to the merits of the budget proposal and highlighting areas of potential compromise as Congress develops its own budget for FY 2016. Treasury Secretary Jacob Lew will be before the House Ways and Means and Senate Budget Committees on Tuesday, while IRS Commissioner John Koskinen will be before the Senate Finance Committee. On Wednesday, Shaun Donovan, Director of the Office of Management and Budget, is scheduled to appear before the House Budget Committee and Sylvia Mathews Burwell, Secretary of the Department of Health and Human Services, appears before the Senate Finance Committee. In addition, the Senate Armed Services Committee will hold the confirmation hearing this week for Ashton Carter to serve as Secretary of Defense. With Committee Chairman John McCain’s strong desire for increased defense spending, the budget will no doubt be front and center in that hearing as well.
The House of Representatives returns to legislative business on Monday taking up three bills concerning programs at the Department of Homeland Security. On Tuesday, the House will vote on H.R. 596, a bill that would repeal the Affordable Care Act while directing House committees to develop alternatives. Since the Affordable Care Act was signed into law in 2010, Congress has voted 54 times on measures to repeal, revamp, or make technical changes to it. On Wednesday, members will consider H.R. 50, the Unfunded Mandates Information and Transparency Act of 2015, sponsored by Rep. Virginia Foxx. This legislation, which passed the House in 2014 by a vote of 234-176, would impose stricter requirements for how and when federal agencies must disclose the cost of federal mandates and equips both Congress and the public with tools to determine the true costs of regulations. On Thursday, the House will vote on H.R. 527, the Small Business Regulatory Flexibility Improvements Act of 2015, sponsored by Representative Steve Chabot, which requires federal agencies to consider the economic effects of regulations on small business before imposing overly burdensome mandates that prevent growth and job creation. This legislation has also passed the Republican-controlled House in the two previous Congresses.
The Senate returns on Monday and is expected to vote on H.R. 203, the Clay Hunt Suicide Prevention for American Veterans Act, a bill that the House passed unanimously. The bill would require annual evaluations of the Department of Veterans Affairs’ mental health and suicide prevention programs. The Senate will then seek to turn to H.R. 240, an appropriations bill that will fund the Department of Homeland Security for the remainder of 2015; the current budget for DHS expires Feb. 27. While the bill provides $40 in funding for DHS, it also blocks any of the funds from being used to carry out President Obama’s new immigration and deportation policy announced in an executive order last November. President Obama has pledged to veto the measure if the immigration rider is included. Leader McConnell is unlikely to be able to get the 60 votes needed on cloture on the motion to proceed to the appropriations bill. Once the cloture vote fails, he will need to figure out an alternative means of considering the legislation. He has put a clean Democratic DHS appropriations bill on the Senate Calendar under Rule 14, so moving to that bill after the failed cloture vote is one possibility.
In addition to the hearings focused on the President’s budget and on the Defense Secretary nomination, a list of other key congressional hearings this week is included below:
Feb. 3
House Committees
Global Threat Assessment
House Armed Services
Full Committee Hearing
Feb. 3, 10 a.m., 2118 Rayburn Bldg.
Flu Preparation and Prevention
House Energy and Commerce – Subcommittee on Oversight and Investigations
Subcommittee Hearing
Feb. 3, 10 a.m., 2123 Rayburn Bldg.
U.S. Interests in Western Hemisphere
House Foreign Affairs – Subcommittee on the Western Hemisphere
Subcommittee Hearing
Feb. 3, 11 a.m., 2172 Rayburn Bldg.
Immigration Law Assessment
House Judiciary
Full Committee Hearing
Feb. 3, 11 a.m., 2141 Rayburn Bldg.
Inspectors General Oversight
House Oversight and Government Reform
Full Committee Hearing
Feb. 3, 10:15 a.m., 2154 Rayburn Bldg.
NSF Research Facility Oversight
House Science, Space and Technology – Subcommittee on Oversight; House Science, Space and Technology – Subcommittee on Research and Technology
Committee Joint Hearing
Feb. 3, 10 a.m., 2318 Rayburn Bldg.
Energy and Transportation Issues
House Transportation and Infrastructure – Subcommittee on Railroads, Pipelines and Hazardous Materials
Subcommittee Hearing
Feb. 3, 10 a.m., 2167 Rayburn Bldg.
Fiscal 2016 Budget Issues – Treasury Secretary Jacob Lew
House Ways and Means
Full Committee Hearing
Feb. 3, 10 a.m., 1300 Longworth Bldg.
Airport Access Control Measures
House Homeland Security – Subcommittee on Transportation Security
Subcommittee Hearing
Feb. 3, 2 p.m., 311 Cannon Bldg.
Wounded Warrior Program
House Armed Services – Subcommittee on Military Personnel
Subcommittee Hearing
Feb. 3, 3:30 p.m., 2118 Rayburn Bldg.
Senate Committees
Military Compensation and Retirement Modernization Commission
Senate Armed Services
Full Committee Hearing
Feb. 3, 9:30 a.m., G-50 Dirksen Bldg.
Fiscal 2016 Budget – Treasury Secretary Jacob Lew
Senate Budget
Full Committee Hearing
Feb. 3, 10 a.m., 608 Dirksen Bldg.
U.S.-Cuba Relations
Senate Foreign Relations – Subcommittee on Western Hemisphere, Transnational Crime, Civilian Security, Democracy, Human Rights and Global Women’s Issues
Subcommittee Hearing
Feb. 3, 10 a.m., 419 Dirksen Bldg.
IRS Fiscal 2016 Budget Request – John Koskinen, Commissioner, Internal Revenue Service
Senate Finance
Full Committee Hearing
Feb. 3, 10:30 a.m., 215 Dirksen Bldg.
No Child Left Behind and Student Needs
Senate Health, Education, Labor and Pensions
Full Committee Hearing
Feb. 3, 10 a.m., 216 Hart Bldg.
Military Compensation and Retirement Commission
House Armed Services
Full Committee Hearing
Feb. 4, 10 a.m., 2118 Rayburn Bldg.
Fiscal 2016 Budget Issues – Shaun L.S. Donovan, Director, Office of Management and Budget
House Budget
Full Committee Hearing
Feb. 4, 10:30 a.m., 210 Cannon Bldg.
U.S. Schools and Workplaces
House Education and the Workforce
Full Committee Hearing
Feb. 4, 10 a.m., 2175 Rayburn Bldg.
HUD Ethical Oversight
House Financial Services – Subcommittee on Oversight and Investigations
Subcommittee Hearing
Feb. 4, 10 a.m., 2167 Rayburn Bldg.
U.S.-Cuba Policy Assessment
House Foreign Affairs
Full Committee Hearing
Feb. 4, 10 a.m., 2172 Rayburn Bldg.
Legal Workforce Act
House Judiciary – Subcommittee on Immigration and Border Security
Subcommittee Hearing
Feb. 4, 10 a.m., 2141 Rayburn Bldg.
Furthering Asbestos Claim Transparency Act
House Judiciary – Subcommittee on Regulatory Reform, Commercial and Antitrust Law
Subcommittee Hearing
Feb. 4, 1 p.m., 2141 Rayburn Bldg.
Palestinian Authority and International Criminal Court
House Foreign Affairs – Subcommittee on the Middle East and North Africa
Subcommittee Hearing
Feb. 4, 2 p.m., 2172 Rayburn Bldg.
Senate Committees
Secretary of Defense Nomination
Senate Armed Services
Full Committee Confirmation Hearing
Feb. 4, 9:30 a.m., G-50 Dirksen Bldg.
HHS Fiscal 2016 Budget Request – Sylvia Mathews Burwell, Secretary, United States Department of Health and Human Services
Senate Finance
Full Committee Hearing
Feb. 4, 10 a.m., 215 Dirksen Bldg.
Cybersecurity and Private Sector Issues
Senate Commerce, Science and Transportation
Full Committee Hearing
Feb. 4, 10 a.m., 253 Russell Bldg.
Implications of Immigration Action
Senate Homeland Security and Governmental Affairs
Full Committee Hearing
Feb. 4, 10 a.m., 342 Dirksen Bldg.
Vessel Discharge Regulations
Senate Commerce, Science and Transportation – Subcommittee on Oceans, Atmosphere, Fisheries and Coast Guard
Subcommittee Hearing
Feb. 4, 2:30 p.m., 253 Russell Bldg.
Indian Affairs Legislation
Senate Indian Affairs
Full Committee Markup
Feb. 4, 2:30 p.m., 628 Dirksen Bldg.
Loan Leveraging Issues
Senate Indian Affairs
Full Committee Oversight Hearing
Feb. 4, 2:30 p.m., 628 Dirksen Bldg.
Financial Exploitation of Seniors
Senate Special Aging
Full Committee Hearing
Feb. 4, 2:15 p.m., 562 Dirksen Bldg.
Joint Committees
Proposed Waters Rule
Senate Environment and Public Works; House Transportation and Infrastructure
Committee Joint Hearing
Feb. 4, 10 a.m., HVC-210 Capitol Visitor Center
Feb. 5
House Committees
Drinking Water Protection Act
House Energy and Commerce – Subcommittee on Environment and the Economy
Subcommittee Hearing
Feb. 5, 10 a.m., 2123 Rayburn Bldg.
Stock sell-off, a term which our readers may have come across before, refers to the selling of securities by a company, whether stocks or bonds or other commodities. According to Investopedia.com, sell-offs can occur for a variety of reasons, such as after a less than satisfactory earnings report or when oil prices significantly increase. A sell-off can be a smart way for companies to deal with uncertainties in the stock market, depending on how they are handled.
Recently, GoPro—the company famous for designing and manufacturing high-definition personal cameras—announced that it would be selling off $100 million worth of stock in order to free up capital to expand its business. The company went public in June, and it is not uncommon for companies to sell stock after a successful initial public offering, particularly when there is still a need to raise capital to launch the company to greater success.
In addition to the $100 million sell-off, existing shareholders are going to sell off $700 million. In total, the sell-off could increase the company’s capital by over 40 percent. That money will reportedly be going toward investment in human capital, technology, as well as infrastructure and potential acquisitions.
There are a variety of ways companies can utilize sell-offs to better position themselves in the marketplace. Regardless of the approach used, it is critical that the sell-off is situated in the context of a long-term plan for the company’s success. Companies considering a sell-off should, naturally, work with an experienced legal team to ensure the success of their efforts.
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