Aaron Morris' Business Law Alert

Employment Lawyers Warn Against Glowing Reviews on LinkedIn

amorris@toplawfirm.com (Aaron Morris) — Tue, 07 Jul 2009 17:45:17 -0800

Corporate employment lawyers can be real buzzkills. I'm reminded of the early days of the Internet when the corporate types were warning all us lawyers to take down our websites because they crossed state lines and therefore constituted the unlicensed practice of law in other states. Now, when everyone is hot on social networking through sites such as LinkedIn, the employment lawyers warn of dire consequences if employers post nice comments about their workers.

You see, when an employee is terminated and a lawyer is looking for a way to claim it was wrongful, they look first to the job evaluations and any awards and accolades. If it can be shown that the employee walked on water, then obviously there was no reason to fire the employee and the termination must have been based on some nefarious reason, such as discrimination.

Sadly, a company's compassion can get it in trouble. A company is forced to terminate an employee due to downsizing, so to give his job search a little boost it creates a recommendation for the employee's LinkedIn profile. An employment lawyer will spin that by arguing that at the very moment the employee was being terminated, the company was saying glowing things about him. When interviewed by Law.com, Philadelphia lawyer Carlyn Plump had this to say about that:

"Just don't do it," Plump said. "Generally, my advice is that I think employers are often better served by merely stating dates of employment, positions with the company and salary, and staying away from much more because there are so many potential ramifications if they say something." She added: "If they say something negative, there could be a lawsuit. If they say something positive, there could be a lawsuit." The entire Law.com article can be found here.

My philosophy? It's not all about avoiding lawsuits. Employers should not be fearful to heap some praise on good and faithful employees just because others file frivolous suits. In any event, for an unfortunate number of plaintiff's attorneys, wrongful termination actions are a form of legalized extortion. They will sue regardless of the merits of the case, hoping for a "cost-of-defense" settlement, and the fact that you said something nice about the employee on LinkedIn will not be the deciding factor.

City Requests Social Site Information from Applicants

amorris@toplawfirm.com (Aaron Morris) — Sun, 21 Jun 2009 16:55:14 -0800

It’s long been the case that employers check out the social websites of potential applicants to see the real nature of the people they are considering hiring. But trying to view an applicant’s MySpace listing, for example, can be problematic because there might be multiple listings under a given name, and the listing may be not be available for public viewing.

City officials in Bozeman Montana have decided to stop being sneaky about the whole process. When applying for a job there, applicants will find the following question on the employment form:

"Please list any and all current personal or business Web sites, web pages or memberships on any Internet-based chat rooms, social clubs or forums, to include, but not limited to: Facebook, Google, Yahoo, YouTube.com, MySpace, etc." The form also asks for the user names and passwords for all the requested sites.

Of course, organizations such as the ACLU are all up in arms, claiming privacy violations, but the desire of the City is understandable. As has been reported here and at my Internet Defamation Blog, people sometimes reveal amazing things in their blogs. I’ve reported a case involving a nurse and another involving a teacher where their blogs revealed some seriously dark sides and the employees suffered job actions as a result. No one balks when an applicant for the police department is seriously vetted, including reviews of banking records and interviews with friends and former employers. It should not be surprising, therefore, that a city would want access to this truly revealing information.

I offer no opinion on the matter, beyond to say there is just something troublesome about a government agency wanting personal access codes. However, it is also a bit disingenuous to claim an invasion of privacy when the employer is seeking only information that the applicant has chosen to publicly publish. In essence, any objecting applicant is saying that they have the right to reveal only the face they choose to reveal, and that the employer is not entitled to see the face that is shown to others.

Incidentally, the City says that applicants can refuse to provide the requested information, and that will not be held against them.

UPDATE: Responding to the public outcry, the City of Bozeman backpedaled -- slightly. In a press release, the City Manager announced that the City, for the time being, would not request user names and passwords from job applicants. Conspicuous in its absence is any mention that the city will stop requesting information regarding non-password protected sites, or that it will not review those sites.

Again, I think it was a bit much to request user names and passwords, but I applaud the City of Bozeman for being so upfront about the fact that, as an employer, it will seek out these social sites as a part of its background check.

Crunchberries Provide Proof Positive That the Legal System Works

amorris@toplawfirm.com (Aaron Morris) — Thu, 04 Jun 2009 10:46:36 -0800

Attracted by the nefarious Cap'n Crunch, calling out to her from his cereal box, holding a spoon chock full of crunchberries, Janine Sugawara bought said cereal and for four years continued to buy and consume it, all the while believing she was eating healthy fruit.

When she somehow came to realize that there was no fruit in Cap'n Crunch, she sued on behalf of herself and all the other consumers that believed that the cereal contained anti-oxidant rich crunchberries. She contended that the entire Cap'n Crunch presentation was likely to confuse consumers, especially given the way the Captain is aggressively "thrusting a spoonful of crunchberries at the prospective buyer." (See photo.)

On a motion to dismiss, Judge Morrison England, Jr., sitting in the Eastern District of California, ruled:

"In this case . . . while the challenged packaging contains the word "berries" it does so only in conjunction with the descriptive term "crunch." This Court is not aware of, nor has Plaintiff alleged the existence of, any actual fruit referred to as a "crunchberry." Furthermore, the "Crunchberries" depicted on the [box] are round, crunchy, brightly-colored cereal balls, and the [box] clearly states both that the Product contains "sweetened corn & oat cereal" and that the cereal is "enlarged to show texture." Thus, a reasonable consumer would not be deceived into believing that the Product in the instant case contained a fruit that does not exist. . . . So far as this Court has been made aware, there is no such fruit growing in the wild or occurring naturally in any part of the world."

Plaintiff's are usually given at least one opportunity to amend a complaint to address any deficiencies, but in this case the judge dismissed without leave to amend, concluding there was no way this case could be saved. As the court put it, "the survival of the instant claim would require this Court to ignore all concepts of personal responsibility and common sense." The only sad part of this otherwise humorous case is that plaintiff was able to find counsel willing to ignore that common sense.

Go here for more information, and here for the complete opinion by the court.

Appeal Court Says, "Hold the Foam" on Starbucks Tipping Case

amorris@toplawfirm.com (Aaron Morris) — Tue, 02 Jun 2009 19:17:52 -0800

Some plaintiffs attorneys received a huge pay cut today, after the California Court of Appeal reversed an $105 million judgment against Starbucks.

The case involved the ever-present tip jar that sits by the register at your favorite Starbucks. It is the procedure of Starbucks, like most every other business that has a tip jar, to split up the tips among all those that were working, including the “supervisors.” As we analyze this case, keep in mind that a “supervisor” at a Starbucks is most likely just another barista that has been there slightly longer than the other baristas, and as a result is put in charge. It’s not like this is someone at the corporate office.

Enter California Labor Code section 351, which states that no “employer or agent” shall take any part of the gratuity “left for an employee by a patron.” An “agent” is defined by section 350(d) as anyone who can hire or fire, or who controls the acts of the employees.”

These rascally class action attorneys thought they had Starbucks by the beans. First they created a somewhat fictional perception of the role of the “supervisors” and spent a great deal of time in the case arguing that they were agents of the employer because they directed the conduct of the other employees. From that viewpoint, it was easy to claim that Starbucks had violated section 351 by including the supervisors in the tip distribution. Judge Patricia Cowett in San Diego Superior Court must have skipped her coffee that day and bought that reasoning and awarded the class of 100,000 baristas $86.7 million, which grew to $105 million with interest.

But the Court of Appeal said, “hold the foam.” The flaw in the logic is obvious (understanding that I always have perfect 20-20 hindsight with court decisions). When I sit down at a restaurant, enjoy my meal and the service, and then leave a tip, I am leaving a tip for my specific server. However, when I order a latte at a Starbucks and drop my change into the tip jar, who am I tipping? I'm certainly not intending to tip only the barista. At that point, I don’t even know who is going to prepare my beverage (or even if it will be tip worthy). It is probably far more likely that I'm tipping the friendly cashier that accurately took my order and retrieved my scone. Or perhaps my intent was to tip the person that cleaned the washroom where I washed my hands before stepping up to the counter. As you can see, in the case of a community tip jar, we can never truly know who generated the tip, so it makes much more sense to assume that it is my intent to tip everyone working there, who have all joined to make this such a special coffee experience, from the supervisors down. Indeed, the Court of Appeal concluded that the purpose behind section 351 was to “prevent a fraud on the tipping public” by prohibiting an employer from giving a tip left for a server to someone not intended by the tipper. There is no such fraud with the Starbucks tip jar.

Further, the “supervisors” are not “agents” of the employer in the sense meant by section 350. The supervisors are not there to grab the tips on behalf of a greedy Starbucks organization; they are just more experienced baristas, probably earning 50 cents per hour more and completely entitled to share in those tips.

The ruling of the Court of Appeal reversed the judgment.

It's OK to Question Litigation Costs

amorris@toplawfirm.com (Aaron Morris) — Fri, 29 May 2009 20:09:57 -0800

After more than 20 years I can’t believe this sort of thing is still going on.

On-line legal research offered by Lexis and Westlaw used to be very expensive. These services charged by the hour and according to the database being used. Printing out what the research revealed was also expensive, with the services charging by the line. An intensive research session for a major motion could cost thousands of dollars.

The profits being realized by the research services were so high that at the first mega-firm I worked for they offered a free trip to Hawaii to the attorney at the firm that spent the most time using the service. The firm gladly passed along word of the contest and the associates obliged by signing on and staying on for days at a time. Only after I pointed out the conflict of interest in such an arrangement did the firm cancel the contest.

Flash forward a few years and the competition between LexisNexis and Westlaw – the two major services – became intense. They both began offering flat fee arrangements for law firms. For around $200 per month, an attorney can perform unlimited searches in specified databases and print to his heart’s content at no additional charge. But in a throwback to the earlier times, the services continued providing invoices that showed the charges under the old hourly system. The attorney would pay just $200 for the month, but the invoices would reflect, say, $8,000 in search fees, perhaps to make the attorney appreciate the incredible deal he was getting.

This proved too tempting for many large firms. Ignoring the actual cost, big firms continued to bill their clients at the rates reflected in the invoices, turning legal research into huge profit centers. Any other business would recognize that as highly unethical – like a contractor charging a home builder hugely inflated prices for materials – but the big firms just saw it as another in a long line of fictional charges, like billing for faxes.

Apparently the practice has not abated. In an action filed in Los Angeles Superior Court, the firm of Chadbourne & Parke is alleged to have engaged in this practice. According to court records, the firm’s client was billed $108,000 for the law firm's services, of which roughly $20,000 was for legal research fees. At the rate my firm pays for legal research services, it would take nine years to incur those fees.

Lesson for all businesses: If you find yourself embroiled in litigation, don’t be shy about questioning charges, and consider having another attorney audit the legal bills you are receiving. Most clients quite understandably have no point of reference for how long an activity should take or what is a proper amount for the costs. Clients are free to agree to any cost arrangement, but a firm cannot turn costs into a profit center without disclosing the costs in the fee agreement.

Trade Secret Claim Costs Company Over $17 Million

amorris@toplawfirm.com (Aaron Morris) — Wed, 27 May 2009 13:43:57 -0800

A case that illustrates how NOT to deal with company secrets.

An RV sales manager – we’ll call him Trealoff because that’s his name – was hired by Forest River, an RV company. Forest River was apparently on the cheap side, because it didn’t even provide Trealoff with a computer, forcing him to use his own laptop. According to Trealoff, the company also did not provide him with a promised raise, so he went looking for another job.

When the company got suspicious that Trealoff was looking for greener pastures, it was decided that Trealoff really should not be permitted to leave with all the data residing on his personal laptop computer, gained while he was an employee of Forest River. Reasoning that the data was, after all, the property and trade secrets of Forest River, the president of the company, according to the case, decided that the best course of action was to temporarily steal Trealoff’s laptop and erase the hard drive. Trealoff took exception when his erased hard drive was returned to him, especially given that it contained years of contact information that he acquired independent of Forest River, so he sued.

The San Bernardino jury took exception to the conduct as well, and in addition to awarding Trealoff damages for unpaid commissions, the jurors tacked on punitive damages of $7 million against the RV company and $8 million against the president. (Personally, despite the egregious conduct, I would have found Trealoff contributorily negligent for not backing up the data in the first place.)

Lessons for all businesses: First, get over this concept of trade secrets unless you really do have trade secrets. In many instances, when a company calls me ready to go to the mattresses over alleged trade secrets, I find that the information is not at all secret. For instance, I once represented a company that was being sued by one of their salesperson’s former employers, because the salesperson had contacted their customers. There was no non-solicitation or non-disclosure agreement; the entire basis for the suit was that the customer list was a trade secret. I went on-line and found that the company’s entire customer list was proudly displayed on its website. Case dismissed.

Second, proceed with caution when pursuing trade secret claims. Many companies file groundless lawsuits in an attempt to frustrate a former employee’s efforts to work for a competitor. They reason that even if the action ultimately fails, it may be sufficient to persuade the competitor that the employee is just too hot to handle. If the company decides to call your bluff and hires a firm such as ours, then you will likely be taken to the woodshed, as was Forest River.

Third, provide your employees with computers so that the information contained thereon remains yours.

Another Court Holds that Driving is Not a Major Life Activity

amorris@toplawfirm.com (Aaron Morris) — Fri, 24 Apr 2009 11:42:04 -0800

For there to be a successful claim of disability discrimination against an employer, there must first be a determination that the employee is, in fact, disabled. Under the Americans With Disabilities Act (ADA), a medical condition can be deemed a disability causes an impairment of a "major life activity." Many disability claims therefore turn on the interpretation of what is a "major life activity."

Such was the issue in the 7th Circuit case of Winsley v. Cook County. Plaintiff in that case was a nurse, and her position required that she drive to the homes of the patients. For medical reasons, the plaintiff became unable to drive, accept to and from work. The County could not continue to employer her with that restriction, and she claimed that was disability discrimination.

On a motion for summary judgment, the trial court concluded, and the District Court agreed, that driving is not a major life activity. The court noted that activities recognized as major life activities by the Equal Employment Opportunity Commission (EEOC) "are so important to everyday life that almost anyone would consider himself limited in a material way if he could not perform them." The court concluded, however, that "this is not the case with driving." The court noted that the 2nd, 10th and 11th Circuits have all reached the same conclusion.

As you can see, the determination of what is a "major life activity" can be very nuanced. Most of us would feel very limited if we could not drive, but the law looks more at the body than the activity. For example, if a medical condition made it difficult to sit for periods of time, the court might find that to be a sufficient impairment. But translating that inability to some external activity such as driving is less likely to pass muster.

Twitter Comments Can Land Businesses in Court

amorris@toplawfirm.com (Aaron Morris) — Tue, 07 Apr 2009 11:23:52 -0800

Twitter comments (along with others) have now become the basis for an Internet defamation lawsuit.

Courtney Love, always a class act, has been posting “tweets” about fashion designer Dawn Simorangkir, also known as Boudoir Queen. Simorangkir claims that Love failed to pay money that was owed to her. Love claims otherwise, and refered to Simorangkir as a “nasty lying hosebag thief”, as well as accusing her of being a drug addict and a prostitute, according to the Associated Press.

Assuming the comments were false, the statements are clearly defamatory, but the case will still present some interesting issues if it ever makes it to trial. Defamation is always about reputation, and defamatory remarks do not always translate to loss of reputation. Given the context of the statements and the person making them, will anyone believe that Simorangkir is guilty of the acts claimed by Love?

Lesson for all businesses: Are your employees "twittering" or sending instant messages from their computers at work? Plaintiff attorneys look for the deep pocket, and if an employee sends a defamatory tweet from an office computer, you can bet your company will be named in the action. One way to protect the company is to make such conduct outside the scope of employment, and it is only outside the scope of emploment if the company has a written and enforced policy against using company computers for such purposes.

Can Businesses Terminate Employees for Blog Posts?

amorris@toplawfirm.com (Aaron Morris) — Sat, 14 Mar 2009 13:38:47 -0800

The Internet, through social websites and blogs, offers fertile ground for employers that want to run an informal background check on current and prospective employees. And, since everything eventually ends up in court, the actions taken when something unacceptable is found during such a background check provide new issues for lawyers who deal with free speech and defamation.

Take the case of Nina Yoder. She was expelled by the University of Louisville's nursing school because of her Internet postings. Yoder has now sued the university, alleging that the expulsion violated her First Amendment rights.

The nursing school expelled Nina Yoder on March 2, saying her MySpace postings "regarding patient activities and identification as a University of Louisville School of Nursing student violates the nursing honor code which you pledged to uphold," according to a copy of her dismissal letter, which was attached to the suit.

In her blog postings, copies of which she attached to her own complaint, Yoder makes caustic comments about Christians and blacks. I attempted to go to the website to make my own determination about the appropriateness of her comments, but she appears to have taken down her MySpace page.

According to an article posted at courier-journal.com, the nursing school is upset because some of Yoder’s postings are about specific patients (although they are not mentioned by name). In one of her postings, she wrote about a birth she witnessed: "Out came a wrinkly bluish creature, all Picasso-like and weird, ugly as hell ... screeching and waving its tentacles in the air." I’m not sure a patient would want the miracle of her child’s birth described in that way by someone who should, like any medical professional, respect her privacy, but I can also see that as a failed attempt to humorously describe what she had seen.

But there was far more. The school officials were probably equally unimpressed when Yoder wrote about how the nursing school is in downtown Louisville, adjoining an area "inhabited by humanoids who have an IQ of 10 and whose needs and actions are basically instinctive. As in, all they do is ––––, eat, –––– and kill each other." She did, however, graciously concede, "OK, maybe I am generalizing yet again."

As discussed in a prior blog posting, Yoder and her supporters are using the "there’s so much trash on the Internet you can’t hold my trash against me" defense. As Yoder wrote in her petition requesting reinstatement to the nursing program, "If profanity was grounds for dismissal for the School of Nursing, the nursing school would go bankrupt." Her petition to the school for reinstatement can be seen here.

The court has not yet set a hearing date on Yoder’s request that the nursing school be ordered to reinstate her. We’ll know then if the trash defense worked. The standards are different in the academic arena than in the employment context. Under California’s at-will presumption, an employer would generally be safe terminating an employee for something said on a blog, but California’s Constitution affords more free speech protections than even the First Amendment, so tread carefully. For a more detailed analysis of employees and blogs, see You Write What You’re Told.

Defamed Businesses Finding More Barriers to Redress

amorris@toplawfirm.com (Aaron Morris) — Sat, 14 Mar 2009 00:19:48 -0800

A recent decision out of Maryland illustrates the legal tension that exists between anonymous Internet defamers and the businesses they victimize.

Someone trashed a Dunkin’ Donuts on-line, claiming it was unsanitary and dirty. DD didn’t appreciate that comment, and sought the identity of the person who had posted the comment. In deciding whether the message board was required to disclose that information, Maryland’s highest court decided that the victim of the comments must go onto the board and basically give notice to the defamer. This gives the defamer an opportunity to protect his anonymity by removing the offending comment (although some unscrupulous sites won’t allow the person that posted the comment to take down his own message). Then the victim must persuade the court that the comments constitute defamation. Defamatory comments are not protected speech, so the court can then require disclosure.

It’s a tough course for the victim, because being forced to go into the lion’s den will often only fan the flames. However, as this case makes clear, a victim may well be barred at the door if he does not have the fortitude to take that step.

For a more complete discussion of the Maryland case, go to Internet Free-for-All Promises An Ongoing Test of Free Speech.

Top Five Employee Suits

amorris@toplawfirm.com (Aaron Morris) — Fri, 13 Mar 2009 22:36:01 -0800

The EEOC recently identified the five most commonly filed employee suits, which are:

sex discrimination and harassment (30.1 percent);

retaliation (22.2 percent);

race discrimination (13.5 percent);

disability discrimination (12.8 percent); and

age discrimination (8.2 percent).

Sadly, many such cases are fomented by plaintiffs’ attorneys who don’t properly advise their clients. Never mind that in a huge number of cases there is not a scintilla of evidence that the termination was based on discrimination, it is enough that the employee belonged to a protected class. In most cases the employer ponies up some cost of defense settlement amount to avoid the uncertainty of trial.

Thus, no one can advise you how to keep your employees from pursuing legal action, but my first post on this site still remains solid advice on how to ultimately prevail if you decide to go the distance.

Act Natural When Contemplating Litigation

amorris@toplawfirm.com (Aaron Morris) — Mon, 23 Feb 2009 16:16:57 -0800

Changing the facts slightly to preserve confidentiality, I received a call from someone who had paid a company to create a website. When the website was up and running, the caller discovered that the web design company had, in essence, left a backdoor open. Someone with a little computer knowledge could have made changes to the website. The caller was outraged, saying that if this error had been discovered and exploited, it could have cost his company millions.

I asked if he had notified the company of the problem so it could be corrected. He told me he had not, because he wanted to keep the problem in place until he filed a lawsuit. In other words, he was leaving his company’s website vulnerable to vandals in order to preserve a possible action, rather than to fix the problem and avoid any damages. That’s a crazy case of the tail wagging the dog.

That mentality is wrong on a couple of levels. It shows that the caller is not as interested in correcting the problem as he is in getting money. Consider how a jury would react. He was so upset by the negligence of the web design company that he is asking us to give him millions, but he did nothing to fix the problem?

Also, it fails to recognize the need for actual damages. This is a simple concept that sometimes alludes even my fellow attorneys. If there are no damages, then it’s no harm no foul. If no one found the open door, then how was the caller harmed? He may have a small case for breach of contract since the designer didn’t create a proper website, but with no damages there is no actionable negligence.

Don’t act in some artificial manner to “preserve” an action. When this caller discovered the open door, the natural thing to do would be to call the company and ask that the door be closed. To leave the door open while seeking out legal representation is a very unnatural reaction. By all means, he could take a few minutes to save some screen shots as evidence in case legal action becomes necessary, but acting intentionally to leave the problem in place or even to create damages where none exist, will hurt the case far more than it helps.

Stimulus Package Includes COBRA Health Insurance Subsidies

amorris@toplawfirm.com (Aaron Morris) — Sat, 21 Feb 2009 23:25:19 -0800

Before getting to today’s topic, I’m going to once again shout into the wind as I have for years that employers providing health insurance for employees was never a good idea. The conceptual flaw is apparent. Providing health insurance as a benefit puts a third party between the two real parties to the contract. The doctor is no longer in contract privity with his or her patient. When a patient is spending real dollars for health care, they have an incentive to bargain down the price. When uncle employer is paying, the sky’s the limit, and health care prices soar. The result is what we see today. Strikes are more often over health insurance than worker safety or pay, and when an employee is fired, the cost of maintaining the insurance under COBRA has grown too high. Employers can still offer health benefits, but it should be in the form of a monthly payment. “Here’s $500 a month for health insurance. Whatever you don’t spend, you can keep.” If that approach had been used, the push to offer health care at lower prices would have been far more intense than HMOs negotiating fees.

Which leads me to the issue at hand. The latest stimulus plan includes a COBRA subsidy for employees laid off between September 1, 2008 and December 31, 2009. If you have an employee that declined COBRA coverage after September 1, 2008, you must notify the employee of this subsidy. There is a needs test, but it’s pretty high – a maximum of $125,000 annual income for singles, $250,000 for couples. The employee can draw the subsidy for no more than nine months.

Incidentally, in line with what I said in my opening rant, many terminated employees call my office wanting to pursue wrongful termination actions, motivated most by the fear of losing their health insurance. They rail against the ridiculous cost of the COBRA plan, unaware that was the price their employer was paying. Often as not, they are unaware that they don’t need that COBRA coverage. COBRA only makes sense if the terminated employee is going to be uninsurable due to a pre-existing condition. Admittedly, something as simple as taking heartburn medication will constitute a pre-existing condition, but make certain your former employee knows that if they do not have such a condition, it will be far cheaper to get a bare bones bridge policy until they find another employer that is making the mistake of providing health insurance.

Ninth Circuit has Second Thoughts About Labor Law Decision

amorris@toplawfirm.com (Aaron Morris) — Sat, 21 Feb 2009 23:18:13 -0800

The Ninth Circuit has called for a take-back. In November the court decided and I reported that out-of-state employees are subject to California labor laws for any work performed in the state. That case involved instructors who traveled to various states, including California, to teach classes on software.

This week the Ninth Circuit withdrew its published decision in Sullivan v. Oracle, and asked the California Supreme Court for guidance on specified issues presented by the case. One of those questions was:

“Does the California Labor Code apply to overtime work performed in California for a California-based employer by out-of-state plaintiffs in the circumstances of this case, such that overtime pay is required for work in excess of eight hours per day or in excess of forty hours per week?”

We’ll have to wait to see if the Supremes agree to answer the question.

Don't Believe Your Bank When it Reports a Check has Cleared

amorris@toplawfirm.com (Aaron Morris) — Sun, 25 Jan 2009 01:20:26 -0800

At some point a scam becomes so old and tired that I assume no one would ever fall for it. Certainly one of my fellow attorneys could not be duped by, for example, the old "Nigerian trying to get money out of the country" scam, right?

Tell that to Houston attorney Richard Howell, Jr., a 23-year legal veteran and partner in the firm of Buckley, White, Castaneda & Howell. He fell for the oldest check fraud scam around. And he is not the only attorney victim of this variation on the Nigerian scam.

Here’s how it works. An attorney is contacted via e-mail from a foreign company ("FC"). FC did business with a company located near the lawyer’s office, and is looking for representation in collecting a huge unpaid account of, say, $900,000. The attorney is asked to handle the matter on a one-third contingency basis. The attorney is understandably intrigued by the possibility of collecting a $300,000 fee. But being wary of an email from a foreign company, he goes on line and confirms that there is in fact such a company located near his office, doing the sort of business discussed in the email.

Sometime later, perhaps even before the attorney has sent a fee agreement, FC sends another email stating that the local company has made a partial payment of, say, $300,000. FC still needs the attorney to collect the remaining $600,000, and it is honoring the contingency agreement. FC has instructed the local company to make the check payable to the attorney, and asks that the attorney please deposit the funds and wire $200,000 to FC’s account, keeping $100,000 for himself.

Sure enough, the check arrives a few days later, and the attorney deposits it in the firm’s account. But our savvy attorney is no fool. There is no way he is going to wire funds to FC until he is damn sure the check has cleared. He waits a full ten business days, and only after the bank confirms that the funds have cleared does he wire the money to FC. About six weeks later, the attorney gets a call from his bank stating the $300,000 deposit has been reversed. The attorney is now out $200,000.

But how is that possible if the check "cleared"? This scam only works because the vast majority of people, even attorneys, do not understand what it means when a bank says "the funds have cleared." In our scam, FC printed up some fraudulent checks from a company it knew would have lots of money in its account; let’s call the local company Humongo Steel. The account information is easy to come by, either by dumpster diving or just by getting a legitimate check from Humongo Steel, perhaps by way of a merchandise refund or being one of the company’s vendors. Alternatively, Humongo Steel might be in on the scam. Let’s assume Humongo Steel banks with Bank of America. FC writes a fraudulent check to the attorney on Humongo Steel’s Bank of America account, and the attorney deposits it into his Citibank account. Citibank’s computer asks Bank of America’s computer, "is there sufficient money in Humongo Steel’s account to cover a $300,000 check?" Bank of America’s computer answers "yes" and credits the money to Citibank. This all takes place the same day the check is deposited, but banking regulations date back to a time when the checks had to be physically transported around the country, so the Feds allow Citibank to hold those funds for ten days. Citibank takes the full ten days so it can play the float. After the ten days, Citibank happily reports to the attorney that the funds have cleared and shows the $300,000 in his account.

But there is another step in the process. The check written on Humongo Steel’s account sits in the bank until the next time statements are sent out. If the check hits the bank right after statements were mailed, that check could sit there 29 days. Assuming Humongo Steel has not opted for checkless statements, the check is eventually stuffed into Humongo Steel’s account statement and mailed. The mailroom gets the statement and passes it along to accounting. Accounting goes to reconcile the account and finds the fraudulent $300,000 check. Humongo Steel has up to 30 days to report that fraudulent check. When it does, the bank has Humongo Steel sign a statement swearing to the fraud, and Bank of America then gets its $300,000 back from Citibank, who gets is back from attorney.

Did you do the math? The bank told the attorney the funds had cleared after just ten days, but it can take 59 days or more to know if funds have really cleared. Richard Howell, Jr. is suing Citibank, claiming it was negligent in reporting the funds had cleared, but he is going to lose. By law an account holder has 30 days to report a discrepancy in an account statement. The attorney should have known better.

Lesson for all businesses:

I’m reminded of teaching my young son about stranger danger. I told him not to get in the car with a stranger. I told him the stranger might temp him with candy, or a toy, or ask for help finding a lost puppy. One day my wife and I both got delayed, so we sent a stranger (to him) to pick him up. I told our friend that if he was resistant, tell him to go talk to the people in the office, who I had put on notice of the situation. He got in our friend’s car without hesitation or question, and when I later asked him why he did that despite all my warnings about stranger danger, he said, "I knew it was okay because she didn’t offer me candy or a toy, or ask for help finding a missing puppy."

The scam might not take the precise form just discussed, but if it involves you cutting a check or wiring funds from a deposited check, it might be a variation. Don’t do it. You now know that it can take two months for a check to truly clear. Even a cashier’s check can be bogus.

Following Wage Laws is Cheaper than Trying to Beat Them

amorris@toplawfirm.com (Aaron Morris) — Sat, 24 Jan 2009 16:55:19 -0800

Television networks and production companies behind some of the biggest names in reality programming - including "The Bachelor" and "Trading Spouses" - agreed on Wednesday to pay $4 million to writers and editors who claimed in a lawsuit they routinely worked 12-hour days or longer without overtime pay or meal breaks.

The settlement, three years in the making, covers an estimated 400 reality show employees who worked on programs for FOX, ABC, CBS, Turner Broadcasting System and the WB Broadcasting Network, among others. The nonunion workers, known as "story development employees," claimed supervisors made them turn in blank time cards or fill out their hours weeks in advance and always doled out the same weekly pay regardless of hours worked.

Lessons for all businesses:

Following the law ends up being cheaper than trying to bend it. We get calls every week involving businesses that were caught trying to game the overtime and wage rules. All I can do is shake my head when I hear the imaginative way the employer thought they would beat the labor laws as to overtime and wages. In one case, a retailer created an entry level "intern" position for new salespeople, paying them just $200 per week for full time work. The employer was certain that because these were not "real" employees, the wage laws didn't apply and they could be paid less than minimum wage. In another case, an elder care company thought it could pay its night shift employees for just eight hours even though they were working 12-hour shifts by telling them they should sleep four out of the 12 hours. These creative approaches often work in the short term because there are always people willing to work for less than the law requires. But that same employee will suddenly turn very strict on the law, right about the time he or she is fired. Then the company ends up paying all the past wages and overtime (up to three years!) plus heavy penalties and attorney fees.

Always Apply the Smell Test to Your Business Practices

amorris@toplawfirm.com (Aaron Morris) — Sat, 24 Jan 2009 14:23:25 -0800

When will financial institutions get it? We spanked Bank of America for a quarter million dollars after it closed our client’s checking account without notice, causing a dozen checks to bounce. With no consideration of the ethics of such a move, Bank of America simply claimed (unsuccessfully) it had the right to do what it did. Now Chase Bank USA ("Chase") is being sued for doing something equally sleazy, and also claims it has the right to act as it did, customer relations be damned.

Plaintiff Timothy Hauk opened a Chase credit card account and received a Cardmember Agreement ("CMA"). After Hauk had maintained his Chase account for about sixteen months, Chase sent him a balance transfer offer ("BTO") in October. The BTO offered Hauk a promotional fixed annual percentage rate (APR) of 4.99% for any balances he transferred to his Chase account. It also incorporated the terms of the CMA and indicated that Chase could impose an increased rate ("Non-Preferred APR") in lieu of the promotional rate if Hauk made a late payment to Chase or any of his other creditors, the obvious implication being that Hauk would receive the low rate unless and until he made a late payment after accepting the offer. Hauk transferred a $10,200 balance with another creditor to his Chase account, thereby accepting the BTO. When Hauk received his October statement, he found that Chase had applied a Non-Preferred APR of 28.74% on the transferred balance. Why? Because Chase ran a credit check and found that Hauk’s mortgage company reported that a mortgage payment had been one day late three months before Hauk accepted the BTO. Hauk’s attorneys brought a class action for violations of California’s Unfair Competition Law ("UCL") and False Advertising Law ("FAL").

Counsel for Chase argued with a straight face that Chase had the right to do this, because if they had known of the late payment, they would have never extended the BTO to Hauk. Since he was not eligible under Chase’s own rules, Chase was free to stick it to him, Chase argued. Incredibly, the District Court Judge agreed, and granted Chase’s motion for summary judgment, claiming that Chase’s disclosure defeated those claims.

Fortunately, on appeal common sense prevailed. The Ninth Circuit Court of Appeals properly recognized that under the FAL, the standard is simply "whether the public is likely to be deceived." If the FAL was violated, then the UCL would follow. The appellate court reversed the summary judgment as to the FAL and UCL causes of action.

Lessons for all businesses:

Don’t do something just because you are convinced you have the legal right to do so, if it doesn’t pass the smell test. Some day you may find yourself in front of a jury, and jurors have a very keen sense of smell. And as a corollary, always remember that the biggest shortcoming of attorneys is that they think too much like attorneys and often lose sight of common sense. In our prior case against Bank of America and this case against Chase, I have no doubt that the attorneys told the bank officers, from the day they received the demand letter to the day their appeal was denied, that the law was on their side. But they should never have listened, because it was obvious that no jury would tolerate what the bank had done.

When Trademark Infringement Isn't

amorris@toplawfirm.com (Aaron Morris) — Sun, 11 Jan 2009 16:42:53 -0800

In what has caused some concern in certain sections of the legal community¹, on November 5, 2008 the 9^th Circuit Court of Appeals set forth another ruling on how to assess whether 1^st Amendment protection is afforded to what is otherwise trademark infringement.² Beginning in 1997 the 9^th Circuit adopted a likelihood of confusion test in making the determination in a case that involved use of Dr. Seuss trademarks in a parody of O.J. Simpson.³ Five years later in Mattel v. MCA Records⁴ the Court was faced with a uniquely different set of facts, and ruled that use of the "Barbie" trademark for the catchy song "Barbie Girl" was constitutionally protected because the expressive interest in commenting on Barbie outweighed any likelihood of confusion posed by the use of the trademark.⁵

Finally, in E.S.S. Entertainment 2000 Inc. v. Rockstar Videos Inc.⁶ the Court held that use of trademarks in an expressive work is permissible unless it has no artistic relevance to the underlying work or the use explicitly misleads as to the source or content of a work. Dr. Seuss and its progeny have led to the obvious question: What test applies? In an abundance of caution, all three approaches must be considered. Although E.S.S. proceeded Mattel and Dr. Seuss, it would not be unlogical to apply the various tests in a staggered approach similar to the following.

First, parties would like to address the extent to which use of the trademark bears artistic relevance to the source. As highlighted by Mr. Lee of the L.A. Daily Journal, considering that in E.S.S. the issue revolved around the use of a strip club’s trademarked name in the video game Grand Theft Auto for no apparent purpose other than to make a reference to it, this prong should be easily satisfied.⁷

The second issue to be argued would be the extent to which use of trademark by the proponent causes a likelihood of confusion, followed by a balancing of the two competing issues in a manner consistent with Mattel. This approach, though simple and redundant, would ensure that the parties duly consider all major aspects of each of the 9^th Circuit’s rulings, leaving them prepared for the certain scrutiny they will face from the Court.

1. Mark S. Lee, The 9^th Circuit’s Doublespeak, L.A. Daily Journal 5 (Dec. 2, 2008).

2. See E.S.S. Entertainment 2000 Inc. v. Rock Star Videos Inc., 2008 WL4791705 (9^th Cir. Nov. 5, 2008).

3. Dr. Seuss Enterprises, LP v. Penguin Books USA Inc., 109 F.3d 1394 (9^th Cir. 1997).

4. 296 F.3d 894 (9^th Cir. 2002).

5. Id.

6. E.S.S., Supra, n. 2.

7. Lee, Supra, n. 1 at ¶10.

Small Businesses At Risk of Being Liable for Their LLC's Debts & Obligations

amorris@toplawfirm.com (Aaron Morris) — Sun, 11 Jan 2009 15:15:34 -0800

I just scored a big victory on behalf of a client in Los Angeles Superior Court, and it reminded me to remind you of the importance of observing business formalities with your corporations and LLCs.

In the late 90s, my client had loaned about $200,000 to an acquaintance (we’ll call her Lauren), for use in a business Lauren was forming with a business partner. Lauren and her partner took the money and formed an LLC, but never paid back a dime of the loan. Of course, to keep the matter challenging for me, the loan agreement was entirely verbal. Thus, I not only had to prove an oral agreement, I had to deal with the statute of limitation problem from this decade old debt.

The LLC was defunct, so a judgment against that entity would have been worthless. In any event, it had always been my client’s understanding that these were personal loans to the individuals, not to the company.

I tried the case to a jury, and I called the defendants as my first witnesses, even before my own client, because I anticipated that they would acknowledge the debt (and thereby avoid all those problems of proving the oral agreement), but would try to push it off to the LLC. They testified as expected, and I was then able to show through the testimony of my client why the debts that they had just admitted to were in reality personal debts. The total judgment awarded by the jury and court exceeded a million dollars.

The Defendants, in their minds, may well have intended that the debts be company debts, but they did not observe the necessary formalities. They may have thought they hit the jackpot when they found someone willing to loan them $200,000 with no documentation, but that contributed to their own downfall. If these had been real company debts, then we would expect to see the usual formalities such as promissory notes issued by the company, and company minutes reflecting the terms of the loans. Most LLCs operate in a small business fashion and as a result run a high risk of inadvertently losing their liability shield under what is known as the Alter Ego Doctrine. The Alter Ego Doctrine is generally based on the idea that the member(s) of the LLC have acted as one and the same in a manner that works a fraud or injustice on another, and therefore should share the same liabilities. In determining whether the individual members are personally liable for the debts and obligations of the LLC under this doctrine the courts consider several factors, the most significant of which is failure to follow organizational formalities.

A failure to follow formalities has been seen to include improperly organizing an LLC, not timely filing required forms or paying required fees and taxes, not having a continuous presence in the home state, and not having a designated agent to receive legal documents. There are a few specific activities that commonly cause problems under the "failure to follow organizational formalities" factor: (1) Commingling of Assets; and (2) Failing to Keep Company Records.

A simple and common example of commingling and failing to keep records is where a member uses LLC funds or assets for personal use without documenting the transaction, and with no proof of authorization under the LLC’s articles. The lack of any formal procedure in the expenditure will make plain to any deciding judge that the LLC was no more than a name, and at all times the member and the business were one and the same entity.

These issues are of particular concern for the small business oriented LLC because they tend to operate on more limited budgets, have less management personnel, and, as a result of the primary focus being profits, generally have less time to ensure the LLC is complying with nuanced and complicated business laws. While the best answer to avoid the above mentioned pitfalls is of course what the small business person would most love to avoid, the high risk of inadvertently putting all personal assets at stake requires that they bite the bullet and consult with a business planning attorney. While doing so may serve a frustrating cost, it must be remembered that the above mentioned concerns are only a few of the many an LLC member must be wary of. In the end, the business person’s choice on whether to forgo professional consultation will most likely make the difference between walking away from any future financial disaster, or bringing it home.

Take Privacy in Your Own Hands

amorris@toplawfirm.com (Aaron Morris) — Sun, 11 Jan 2009 14:37:08 -0800

You may recall reading of the case of Judge Kline from the Orange County Superior Court. A hacker hacked his computer, found child pornography and alerted police. The issue raised by the case was whether this illegally obtained information could be used to prosecute Kline, given that there was a connection between the hacker and police by way of certain watchdog groups.

Privacy is a fundamental interest that society has long championed in the United States, and it is that reverence that has caused some to react negatively to a recent 9^th Circuit holding that seemingly abridged the constitutionally protected right.¹ In the unpublished decision of U.S. v. Kline², the 9^th Circuit held that a Canadian hacker who had used Internet "watchdog" groups to communicate with law-enforcement personnel in furtherance of obtaining evidence of child pornography, was not an agent of the state sufficient to raise constitutional protections.

It appears that the reason the court so held was because the hacker was not in direct communication via the Internet "watchdog" group with the law enforcement agency he ultimately provided the incriminating evidence to; the Irvine Police Department of Orange County, California. The Court was not persuaded that communications with and knowledge of the intrusive investigation techniques by some government bodies was sufficient to make the hacker an agent of the state with respect to the Irvine Police Department. Rather, the Court indicated that in order to find the hacker an agent of the state the Irvine Police must have known or should have known of the hackers activities prior to the search, and further must have acquiesced in some manner to thereto.

How one interprets the effects of the holding will largely depend on their own disposition. Should one be of the inclination that constitutional rights must be guarded with fire and sword, it may be disturbing that law enforcement could passively affiliate themselves with Internet watchdog groups in order to circumvent the 4^th Amendment’s protections. Or, one could also consider that there has yet to be a level of social involvement paralleling that in ousting child-predators. When the holding is viewed in that light, the likelihood that law enforcement would have such vigorous intermediaries to work with on other criminal matters becomes increasingly slim, and the holdings impact on privacy rights abroad lessens accordingly.

Regardless of one’s position on the issue, Kline highlights the need for intensive discovery in ascertaining precisely where incriminating evidence came from, how it was obtained, and who participated in acquiring it. Moreover, even though Kline was not selected for publication, it dually reminds of the need to have secure computer storage regardless of criminal or civil settings, for the 9^th Circuit has clearly demonstrated an inclination to find in favor of admissibility where the connection between the government and the actor is particularly tangential.

1. See Sagi Schwartzberg, Hacking Away at The 4^th Amendment, L.A. Daily Journal 4 (Dec. 2, 2008).

2. U.S. v. Kline, 112 Fed.Appx. 562 (9^th Cir. 2004) (not selected for publication).