Business Interruption Insurance for COVID-19

Work InterruptionWith the government shutdown of businesses due to the COVID-19 virus, many business owners are wondering if there is insurance coverage for their revenue losses. As an insurance coverage lawyer who deals with these types of policies, here are some of my thoughts:

  1. Property policies vary widely in their language, and can be tailored to different kinds of businesses. For example, our firm’s policy is written on a form that is said to be tailored to lawyers. What is provided in one policy may not be provided in another.
  2. In order to obtain coverage under these policies, you normally need to show that the loss was due to “direct physical loss or damage” to the property. States construe that differently, but in New Jersey there are cases holding that as long as the insured is unable to use property because of a condition, there is direct physical loss or damage to the property even if there is no visible damage. In cases where a civil authority prohibits the business from being open, the argument may be strengthened. The question here is whether the virus makes the property in question unusable.
  3. Some, but not all property policies contain “virus” exclusions. Others may try to include this in the pollution exclusion, but in one version reviewed, those efforts may have rendered the policy language ambiguous and therefore ineffective. The New Jersey Legislature, and now the legislatures of other states, are considering whether to make these virus exclusions unenforceable. If enacted, the question would then be whether such laws would be constitutionally infirm for existing policies.
  4. If there is coverage for business interruption, it may be subject to sub-limits which in one sense favor the insurer, but also make it easier to establish coverage. If the insurer’s exposure is less, a court is more likely to side with an insured in a close case if there is a suit filed.
  5. There have already been suits filed concerning this issue. By no means is it clear that coverage will be afforded, but my suggestion generally is that, if in doubt, a claim should be made because unlike liability policies written on an occurrence basis, first party claims need to be filed promptly and procedures in the policy need to be timely followed.

Mitchell Kizner of Flaster Greenberg

Mitchell Kizner focuses his practice on environmental and insurance litigation. He represents clients in environmental, insurance and other commercial matters as part of his active litigation and commercial law practice. For more details on the legalities of Business Interruption Insurance, contact Mitchell or any member of Flaster Greenberg’s Insurance Coverage Practice Group.

 

 

To serve as a central repository of information and contributions from Flaster Greenberg attorneys on legal developments during the COVID-19 crisis, we have launched a COVID-19 Resource Page on our website.  Feel free to check back frequently for Flaster Greenberg’s ongoing analyses of important legal updates that may affect you or your business. 

Ten Tips for Avoiding Litigation: Tip #3 – Check Your Insurance Coverage Frequently to be Sure it Protects Your Business from Exposure to Risk

umbrella 2Although having adequate insurance coverage is not necessarily a way to avoid litigation, I have included it on my list of litigation-avoidance tips because it is so important in protecting you and your business from financial disaster when litigation does occur. Despite the important role it plays in a business’s defenses to litigation, I can’t tell you how many times I have asked a business owner for details about his company’s insurance coverage, such as “Do you have coverage for X?,” only to be met with the response, “I don’t know.” Similarly, when I ask when was the last time you reviewed your coverage with your insurance agent, the response is frequently a blank stare. I get it; many of us would prefer a visit to the dentist to sitting with our insurance agent to discuss our coverage. But, unfortunately, your mother was right when she taught you that delaying doing something because it is unpleasant doesn’t make it go away; it only makes it worse.

First, you need to find a bright, industrious insurance agent, who has experience working with companies of your size and in your industry. You will know if your agent fits that description by the insightfulness of the questions she asks you when you meet to review your coverage. Your agent should want to know everything about your business, such as: what does it sell; how does it generate revenue; who are its customers; how many and what kind of employees and independent contractors does it use and for what purposes; does it own or lease vehicles for business use; what intellectual property does it own and does it license the use of any of that property; does it hold or invest money or other property for its customers; and numerous other similar questions about the company’s business. If your agent is not customizing your company’s coverage to your specific business needs, you should find someone else.

Second, you will know if your agent is the right agent for you if she insists on a meeting with you periodically to review your coverage and learn if there have been significant changes in your company since the last review. Your agent should also discuss with you at that meeting changes in the law that might create new risks or opportunities for your company, and that might require more or different coverage. Finally, your agent should discuss with you new types of insurance coverage (e.g., cyber security insurance) that are now available and might be appropriate for your company.

Third, you will also know if your insurance agent is right for you if she contacts you on a regular basis when there has been a change in the types of coverage available for companies like yours or a change in the law that potentially affects your company’s risk exposure. If those changes are significant, your agent should not wait until the next regular meeting to discuss them with you. You can reciprocate by letting your agent know when there has been a change in the company that might affect the amount or type of coverage you need.

If your agent does not fit the above description, then you should consider making a change. Ask competitors and your trusted business advisors whom they recommend. Or ask me. I know several insurance reps at different market levels who are on top of their game and will give you the service you deserve and get you the coverage you need.

Finally, it is an added bonus if your insurance agent is able to offer your company and its employees loss prevention training. A physician’s insurers, for example, frequently provide training on avoiding medical malpractice, wrongful discharge, sexual harassment, and hostile work environment claims. Many insurers offer this type of training free of charge to help their insured clients reduce their exposure to certain types of risks. Your agent should discuss these opportunities with you, but, if not, be sure to ask what is available.

Click here for Tip #1: Always Have a Strong Written Agreement to Govern Your Business
Click here for Tip #2: Avoid Doing Business with Members of your Family

Phil Kirchner of Flaster Greenberg
Philip Kirchner is a member of Flaster Greenberg’s Litigation Department headquartered in Cherry Hill, NJ. He concentrates his practice on resolving business disputes, including complex litigation of all types of business issues in both the federal and state courts of New Jersey and Pennsylvania. He can be reached at 856.661.2268 or phil.kirchner@flastergreenberg.com.

 

 

 

 

 

4 Ways To Keep Your Business Secure During The COVID-19 Pandemic

Cyber security concept businessman Lock on digital screen, contrast, virtual screen with a consultant doing presentation in the background Closed Padlock on digital, cyber security, key WannaCrypt

On Wednesday, March 11, 2020, the World Health Organization declared the outbreak of the coronavirus to be a pandemic. This is significant for several reasons. The first is that the way we interact has drastically, and must necessarily, change because of the contagiousness of the coronavirus and its effect on public health. Secondly, a public health scare such as this can adversely affect the health of a business’s cybersecurity and data privacy. Hackers and other cyber threat actors are capitalizing on the global concern over COVID-19. For example, Check Point researchers found that coronavirus-themed domains are over fifty (50) times more likely to be malicious than other domains and over 4,000 coronavirus-related domains have been registered since January 2020. In fact, a malicious website purporting to be the live map for COVID-19 global cases run by Johns Hopkins has been found to be circulating.

What does all of this mean? It means that your business, including your employees and clients, could be in danger if you don’t take precautionary measures to prevent the risk of a data breach.

How can small and mid-size businesses adapt quickly to ensure effective cybersecurity and data privacy protection right now? If your workforce has gone largely remote, you should focus your cybersecurity and data privacy efforts mainly on the following four areas most susceptible to a breach. This may help to mitigate the risk of a breach actually happening and limit any potential liability.

Below are four ways to keep your business safe from hackers and data breaches during this tumultuous time:

  1. Email Security
    • Make sure you and your staff know how to keep your email secure. Avoid opening emails, downloading attachments, or clicking on suspicious links sent from unknown or untrusted sources.
    • Verify unexpected attachments or links from people you know by contacting them through another method of communication like a phone call or text message.
    • Do not provide personal information to unknown sources like passwords, birthdates, and especially, social security numbers.
    • Be especially cognizant of emails with poor design, grammar, or spelling as this can be a sign of a phishing attempt.
  2. Password Protection and Multi-Factor Authentication
    • Use strong passwords on all of your accounts, and encourage your staff to do the same.
    • Avoid easy-to-guess words like names of pets, children, and spouses as well as common dates like birthdays.
  3. Web Safety
    • As noted above, there has been a massive influx of fake websites, whose creators are looking to take advantage of the fear surrounding the coronavirus.
    • Make sure that any websites that require the insertion of account credentials like usernames and passwords, along with those used to conduct financial transactions, are encrypted with a valid digital certificate to ensure your data is secure. Secure websites like these will typically have a green padlock located in the URL field and will begin with “https.”
    • While your workforce is working remotely, ensure that they are not using public computers and/or logging into public Wi-Fi connections to log into accounts and access sensitive information.
    • You may want to connect with an IT company or your in-house IT department to implement ad-blocking, script-blocking, and coin-blocking browser extensions to protect systems against malicious advertising attacks and scripts designed to launch malware.
    • Sign out of accounts and shut down computers and mobile devices when not in use.
  4. Device Maintenance 
    • Keep all hardware and software updated with the latest, patched version.
    • Run reputable antivirus or anti-malware applications on all devices and keep them updated with the latest version.
    • Create multiple, redundant backups of all critical and sensitive data and keep them stored off the network in the event of a ransomware infection or other destructive malware incident. This will allow you to recover lost files, if needed.

Lastly, if your business is not already protected by a cyber-insurance policy, now may be the time to consider obtaining coverage.

Small and mid-size businesses in the Delaware Valley should consider implementing the above cybersecurity and data privacy measures while adapting to a shifting health and security landscape in the wake of the coronavirus.

Stay safe, everyone!

corporate attorney philadelphia law firm


Krishna A. Jani
is a member of Flaster Greenberg’s Litigation Department focusing her practice on complex commercial litigation. She is also a member of the firm’s cybersecurity and data privacy law practice groups. She can be reached at 215.279.9907 or krishna.jani@flastergreenberg.com.

To serve as a central repository of information and contributions from Flaster Greenberg attorneys on legal developments during the COVID-19 crisis, we have launched a COVID-19 Resource Page on our website.  Feel free to check back frequently for Flaster Greenberg’s ongoing analyses of important legal updates that may affect you or your business. 

Ten Tips for Avoiding Litigation: Tip # 2: Avoid Doing Business with Members of your Family.

green dracaena plant with white pot on white wooden surface

Photo by Designecologist on Pexels.com

This tip might sound counterintuitive to you, and, in any event, it might be unachievable, given that most of the businesses in this country start out, at least, as family businesses, but let me explain. Business people make their best decisions when they are able to be objective, analytical, and emotionally detached from the issue. Now, think about disagreements you have had with members of your family. I rest my case!

If your family is like mine, family squabbles are usually highly subjective, irrational and overly emotional. It is difficult to be emotionally detached when family members are on the opposite side of a dispute. Overlaying family issues on top of business issues can lead to very nasty conflicts. Although it can be difficult to resolve a disagreement with your business partner of 20 years, it is even more difficult when your business partner is also your brother-in-law.

When family members are involved in a business decision, remaining emotionally detached and trying to make a rational decision can be impossible.  Too often, historic personal issues and feuds between family members rear their ugly heads. “Mom always liked you better!” This makes it more difficult to make the tough decisions with which business owners are faced on a daily basis. As a result, all too often the owner avoids making tough decisions just to avoid causing domestic strife. It is difficult enough having to fire an employee. How much harder is it to fire that employee when it is your brother’s son, the slacker, and you know, as a result, your mother might never speak to you again? And, when the owner makes a decision that implicates family politics, the result can be explosive and contentious litigation that combines the worst aspects of business litigation and family court.

Another problem faced by family businesses is that owners who are not actively involved in managing the business might lack the full knowledge needed to make informed decisions about crucial management and policy issues affecting the future of the company. Often, such owners are more focused on their own short term economic interests at the expense of the future growth and health of the company. They might, for example, choose to bypass an opportunity that could be very lucrative for the company in the future, such as adding a new product line or moving into a new geographic territory, because the opportunity requires an investment today of the company’s profits.

So how do you deal with these inherent problems as the owner of a family business? First, consider clearly defining management responsibility as separate and distinct from the ownership structure of the company. Allow the ownership to continue to be spread across members of the family, but focus management responsibilities in the hands of the people who understand the challenges and opportunities that the company must address if it is going to continue to be successful. Management of the company should be viewed as distinct from the ownership structure; just because someone owns a share of the company does not entitle him or her to be involved in management. The more you can isolate management from family disputes, the better for the company.

Second, the added complications of running a family business offer one more good reason why a strong business operating agreement is essential to any company, but especially a family business. Your family business operating agreement should include a detailed description of both the ownership structure and management responsibilities of your company.

These steps will help you avoid litigation and maintain peace and harmony in your family and growth and prosperity in your company.

 

Phil Kirchner of Flaster Greenberg

Phil Kirchner of Flaster Greenberg

Philip Kirchner is a member of Flaster Greenberg’s Litigation Department headquartered in Cherry Hill, NJ. He concentrates his practice on resolving business disputes, including complex litigation of all types of business issues in both the federal and state courts of New Jersey and Pennsylvania. He can be reached at 856.661.2268 or phil.kirchner@flastergreenberg.com.

 

Tip for Avoiding Costly Business Litigation: Always Have a Strong Written Agreement to Govern Your Business

Tips for avoiding litigation

As a career commercial litigation attorney, I have been asked by several people why I would write a column advising business people on how to avoid needing my services. That’s a good question for which I do not have a good answer, other than to say I believe, in our ever-more complex commercial world, there will be plenty of commercial litigation to keep me busy. At the same time, I hope my clients will benefit from using an ounce of prevention to avoid paying a pound for a cure involving litigation.

Litigation is expensive, time-consuming, a distraction from running a successful business, and unpredictable. It is NEVER a good thing for a business to be involved in litigation; it generally means you owe someone money or someone owes you money. Either way, you are not happy, but you will be even less happy if you end up in litigation, regardless whether you are the plaintiff or defendant.

I plan to post one litigation avoidance tip per week for the next several weeks. I hope you find these tips helpful, and if you have questions or want to discuss any of them with me, I am happy to oblige. So, here is my first tip for avoiding litigation:

Tip #1: Always Have a Strong Written Agreement to Govern Your Business.

No matter what type of business you have, be it a pizza parlor or a high tech company, and regardless how your business is organized, as a corporation, partnership, LLC, or whatever, you should start your business with a well-drafted operating agreement. This is the document that governs all the important decisions and activities in the life of your business, such as ownership structure, voting rights, management responsibilities, resolution of disputes between owners, death or disability of an owner, adding new members, transfers of ownership interests, and, ultimately, dissolution of the business. For example, the death of one of the owners of the company need not automatically lead to the death of the business. A well-drafted agreement will spell out exactly how the deceased owner’s interest in the company will be distributed and valued and how the company will be managed going forward. Without such an agreement, however, an owner’s death could lead to a power struggle among the remaining owners, expensive litigation, and, eventually, dissolution of the company.

Business operating agreements are generally ignored until there is a significant event in the life of the business. When such an event occurs, however, you will be happy you have one. For example, many businesses with multiple owners reach a stage in their development where the owners develop different visions for the future of the business and how the business should be managed. They might disagree about whether to expand the company into a new line of business, take on additional debt, hire a new employee, or any number of other critical business decisions. Without a strong agreement that specifies how such disputes are to be resolved, the company could find itself in a stalemate position, requiring resort to a court to break the deadlock. The cost of a court battle alone (payment of attorney’s fees and costs of suit, plus the expenses associated with the possible appointment of a receiver to run the business while the owners and the court sort things out) is reason enough to avoid litigation. The other detriments inherent in business litigation, such as the business opportunities the company is unable to pursue, and the time spent by the business’s owners and key employees on the litigation that should be devoted to the business, reinforce the conclusion that litigation is not a desirable outcome. Finally, the litigation might very well produce a result that neither of the owners wants.

In short, every business should avoid litigation if possible, and one of the best ways to do that is to have a well-drafted, comprehensive operating agreement. Be sure to entrust this most important task in the life of your business to an experienced and able business attorney who has drafted many agreements of this kind.

Stay tuned for more tips in the coming weeks!

Phil Kirchner of Flaster Greenberg
Philip Kirchner is a member of Flaster Greenberg’s Litigation Department headquartered in Cherry Hill, NJ. He concentrates his practice on resolving business disputes, including complex litigation of all types of business issues in both the federal and state courts of New Jersey and Pennsylvania. He can be reached at 856.661.2268 or phil.kirchner@flastergreenberg.com.

 

 

Trends in Arbitration Agreements

Trends in arbitration agreementsThe New Jersey Supreme Court in late November 2019 heard oral argument in Flanzman v. Jenny Craig, Inc., 456 N.J. Super. 613 (App. Div. 2018), cert. granted, 237 N.J. 310 (2019), in which the Appellate Division boldly refused to enforce arbitration agreements that fail to identify a specific “arbitral forum.” At least one Justice hinted during the argument that Flanzman may have taken Atalese v. U.S. Legal Services Group, L.P., 219 N.J. 430, 447 (2014) – the Supreme Court’s landmark decision requiring arbitration agreements to waive unambiguously the parties’ “time-honored right to sue” in court – to an unintended extreme.

Atalese focused on the need for arbitration provisions to reflect, through unequivocal language, the parties’ understanding of the rights they give up by agreeing to arbitration. Id. at 443-45. Flanzman, by contrast, held they must also demonstrate they understand the process that will replace those rights. According to the Appellate Division, only a mutual assent to a specific “arbitral forum” – which it defined as the “mechanism” or “setting” for arbitration – reflects “a meeting of the minds about what rights the parties gave up and what rights they received.” 456 N.J. Super. at 624. Justice Patterson, noting this foundational gap in Flanzman’s premise, remarked, “Atalese is about what you’re giving up.”

In fact, Flanzman rested not so much on Atalese as on the Appellate Division’s decision in Kleine v. Emeritus at Emerson, 445 N.J. Super. 545 (App. Div. 2016). In Kleine, the arbitration clause named the AAA, but when the suit arose the AAA no longer arbitrated claims of that type. The appellate court, finding no mutually agreed-on forum should the AAA prove unavailable, held the clause unenforceable for lack of mutual assent; it then proceeded to ground its holding in Atalese: “As Atalese instructs, the party . . . must be able to understand – from clear and unambiguous language – both the rights that have been waived and the rights that have taken their place.” Id. at 552-53. But Atalese spoke only of the waived rights; it said nothing about an understanding of the rights that will take their place.

As for how to adequately show the parties’ mutual understanding, Flanzman stressed the need to identify an arbitral forum. According to Flanzman, different sets of arbitral rules – for example, those of the AAA and JAMS – can mean different substantive and procedural rights for the parties. Flanzman, 456 N.J. Super. at 626-27. But the significance of that identification was not obvious to the Court. “How will knowing the name of the arbitrator assist your client in knowing the rules of the game?” Justice Albin asked. Flanzman itself conceded that parties, instead of actually naming a forum, may agree to decide later on a forum when the need arises, or to each select an arbitrator who would, in turn, select a third. Id. at 629. However, the court did not explain how such a broad provision would inform the parties of their rights in the arbitral process. Nor did it say how much detail an arbitration clause must contain, insisting only that parties “generally address in some fashion what rights replace those that have been waived.” Id. at 626. “The question is, what is essential?” Justice LaVecchia asked. In reply, respondent’s counsel tried to direct the Court’s focus towards Flanzman’s larger point: “How can you waive your right to a jury trial if you have absolutely zero information?”

The Justices’ comments and questions may have shown a reluctance to broaden Atalese, itself a bold decision that stopped just short of enforcing arbitration agreements more narrowly than other contracts, which the Federal Arbitration Act forbids. Interestingly, in a 2019 unpublished decision, the Appellate Division declined an opportunity to limit Atalese to consumer and employment agreements. The court explained that Atalese’s central concern – that waiver of the right to judicial resolution must be clear and unambiguous – applies to sophisticated parties, too. See Itzhakov v. Segal, No. A-2619-17T4, 2019 N.J. Super. Unpub. LEXIS 1829, *10 (App. Div. Aug. 28, 2019). That decision was in keeping with Atalese, which continues to control New Jersey courts’ enforcement of arbitration agreements. Nonetheless, the Court may well decide, under the Federal Arbitration Act and established principles of contract law, that it has gone far enough in requiring greater specificity in arbitration provisions.

Daniel Epstein Litigation Attorney
Questions? Let Daniel know.

Daniel C. Epstein is a member of Flaster Greenberg’s Litigation Department, where he represents corporate and individual clients in all aspects of litigation.

Federal Judge’s Comments In Willow Grove PFAS Case Suggest Time May Be Approaching When Pennsylvania (And Other States) Will Finally Deem These Chemicals “Hazardous Substances”

Fill the airplane with fire-fighting foam

Last week, Law360 reported on a hearing that occurred in the Federal District Court for Eastern Pennsylvania before Judge Gerald Pappert concerning PFAS.  The hearing concerned a motion to dismiss brought by the United States Navy of class action claims against it in two cases.  In each case, the plaintiffs sued the Navy demanding medical monitoring due to exposure to two PFAS compounds, PFOA and PFOS.  These two compounds are found in groundwater contaminated by the historical use of AFFF fire fighting foam by the Navy at the Willow Grove Naval Air Station in Montgomery County, Pennsylvania.  The two cases in question are Kristen Giovanni et al. v. U.S. Department of the Navy, case number 2:16-cv-04873, and Dorothy Palmer et al. v. U.S. Department of the Navy, case number 2:17-cv-00765.

The plaintiffs based their claim for medical monitoring of residents exposed to contamination (along with other potential claims) by referring to a Pennsylvania statute called the “Hazardous Sites Cleanup Act”, or HSCA.  Basically, this is Pennsylvania’s so-called “mini-Superfund” statute.  HSCA at the Pennsylvania state level is similar to Superfund or CERCLA at the federal level in that before HSCA claims even can be pursued, HSCA requires that the particular contaminant which is the source for the claim be designated as a “hazardous substance” under Pennsylvania’s Solid Waste Management Act (SWMA). To date, neither PFOA nor PFOS has been so designated.

While Judge Pappert has not yet ruled on the issue, the Law360 article contains strong quotes from last week’s hearing in which the Judge appears to be skeptical that a claim for HSCA-based medical monitoring can be sustained in Pennsylvania in the absence of a “hazardous substance” designation, either legislatively or regulatorily.  The following quote from Judge Pappert is highly instructive:  “This issue has been on the front burners in Pennsylvania for quite a while, I’m aware, but the General Assembly has to this point not addressed it.”  Judge Pappert then added, “I can’t rely on a law which doesn’t say what your claim needs it to say. Isn’t your remedy in Harrisburg?”

Based on those quotes, it is highly probable that Judge Pappert will not allow the plaintiffs’ medical monitoring claims to proceed unless one of two things happen.  Either the Pennsylvania Legislature must add PFOA and PFOS to that State’s “hazardous substances” list legislatively, or the Pennsylvania Department of Environmental Protection (PADEP) must do so from a regulatory capacity.  In Pennsylvania, the PADEP also has jurisdiction to so designate.

Neither of these two actions would be likely to happen quickly – even if there were the political will in Pennsylvania to do so.  Both take time, which means that the Giovanni and Palmer cases may be headed toward dismissal by Judge Pappert, at least temporarily.  Alternatively, the Judge might  decide to hold them in abeyance to give State governmental authorities time to consider their options and react.

No matter what Judge Pappert rules, it is likely to sharpen the highly charged emotions surrounding the Willow Grove PFAS contamination.  Unlike many other locations in Pennsylvania and indeed around the world where PFAS either currently remains an abstraction or PFAS concerns are just beginning to appear, the residents around the former Willow Grove Naval Air Station have been dealing with this issue for years.  The groundwater contamination already has resulted in public protests and other civilian unrest.

Outside of Pennsylvania, other states are moving on their own. For example, New Jersey already has made clear that it intends to move in this direction regardless of what happens in its neighbor Pennsylvania or nationally.

The predictable movement towards action by individual states is further bolstered by the inertia in Washington.  Neither the United States Congress nor the Environmental Protection Agency (EPA) has yet added substances like PFOA and PFOS to the federal hazardous substances list.  While bills have been introduced in Congress to do that, they have not progressed very far.

Should any compound make the federal Superfund list of “hazardous substances”, the effect would be significant.  First, liability for contamination would be strict, joint and several, without regard to fault, and with very few permissible defenses.  Second, similar liability would attach to most every state that has a separate mini-Superfund statute as well.

As PFAS concerns grow, it seems to be only a matter of time before PFAS substances like PFOA and PFOS wind up on both the federal list of “hazardous substances” and the separate lists of many states.  Therefore, all parties should act accordingly.

Contrary to what many property owners or PFAS dischargers think, there are options available to lessen both the scope and the likelihood of PFAS-related claims, or at least to minimize the costs and the potential health effects, ill will, bad publicity and other attendant issues.  These options should be taken carefully and proactively, and only after consultation with experienced professionals.

If you have questions on this blog post, please contact Marty M. Judge, or any member of the Flaster Greenberg’s PFAS Task Force.

End of Year Reminder – IRC Section 409A

New Year 2020 Loading Bar Concept

As the year is quickly coming to an end, it is especially prudent to review compensation arrangements from an Internal Revenue Code section 409A perspective. Generally, Section 409A applies to “deferred compensation” arrangements between a “service recipient” and a “service provider.”  The service recipient and service provider relationship may include the employer-employee relationship, and an employer’s relationship with its independent contractors.

Background.  Section 409A’s impact can be very broad and all-encompassing.  Effectively, any compensation arrangement where an employee (or other service provider) earns compensation by providing services to an employer in one taxable year, but is paid such compensation in a later taxable year, constitutes “deferred compensation” subject to Section 409A. Types of compensation arrangements that may be subject to Section 409A include (but are not be limited to) the following:

  • Annual or other multi-year bonuses earned in one year (g., 2019), but will be paid in a later year (e.g. 2020 or later)
  • Fringe Benefits provided by means of reimbursement of employee-incurred expenses if reimbursements occur in a later year than they were incurred
  • Severance arrangements paid (including health benefits) in years later than the year in which the employee separated employment
  • Non-qualified equity compensation plans that may provide for the grant of discounted equity (stock option plans, stock plans, phantom equity plans, etc.) with delayed vesting and exercise schedules

To be clear, “deferred compensation” arrangements are permitted under the Tax Code; however, such arrangements must be compliant with the complex rules underlying Section 409A.  In general, an election to defer compensation must be made in the year prior to which the compensation is earned, it must be in writing, and such compensation may then only be payable on “permitted distribution events” (i.e., death, disability, a specific date, change in control event, and separation of service) or within the “short-term deferral period.”  The “short-term deferral period” consists of the 21/2 month period following the end of the tax year in which an employee vests in compensation.

Section 409A Penalty. If subject to a Section 409A violation, the employee (or service provider) will be required to pay a current tax on any vested amounts of deferred compensation whether or not such compensation has been actually paid to the employee.  Additionally, the employee will be subject to an additional tax equal to 20% of the applicable deferred compensation amount, plus another interest-based tax amount (i.e., underpayment tax).  Deferred Compensation arrangements must be compliant from a documentary perspective as well as an operational perspective.

Not too late to correct potential issues Section 409A for 2019.  Employers and employees should review their compensation arrangements – from a documentary and operational perspective – to determine if they may be paying “deferred compensation.”  If employees earning their compensation in 2019 will be paid such compensation in 2020, then a deferred compensation arrangement may exist unless it is paid within the “short-term deferral period.”  Employers and their employees should review these plans or consult with an attorney to ensure these arrangements are compliant with Section 409A.  It is important for employees to review their compensation arrangements as well because the Section 409A penalty is assessed on the employee, and not the employer.

Additionally, employers and service recipients who intend to pay deferred compensation based on services being provided in 2020, (i.e., compensation earned during 2020 will be paid in 2021 or a later year), should make sure that such arrangements are compliant with Section 409A.  As previously mentioned, elections to defer compensation must be in place in the tax year prior to the year in which the compensation is earned – this would mean that compensation being deferred on account of services performed during 2020 should generally be in place by the end of the 2019 tax year.

If you have any questions or need more information about IRC Section 409A, please contact Eric Loi, member of Flaster Greenberg’s Taxation and Employee Benefits & Executive Compensation Departments. 

 

 

What the %@#&? Supreme Court Strikes Down Ban on Immoral or Scandalous Trademarks

istock-136562318-trademark.jpg

The Supreme Court struck down the Lanham Act’s prohibition on registering “immoral or scandalous” trademarks in its recent decision in Iancu v. Brunetti. Erik Brunetti is an artist who created a clothing line that uses the trademark FUCT. When he sought to register the mark, the U.S. Patent and Trademark Office (“USPTO”) denied his application, citing the Lanham Act’s prohibition on registering trademarks that contain immoral or scandalous matter. It is not hard to imagine that the mark would bring to mind perhaps the most famous four-letter curse word in American culture. Brunetti appealed and argued that the prohibition violates the First Amendment.

The Supreme Court agreed with Brunetti and held that the Lanham Act’s prohibition on registering immoral or scandalous trademarks is unconstitutional because it discriminates on the basis of viewpoint. By way of example, the Court pointed out how the USPTO registered the mark “D.A.R.E. TO RESIST DRUGS AND VIOLENCE” but refused to register “BONG HITS 4 JESUS” because it “suggests that people should engage in an illegal activity [in connection with worship]” and since “Christians would be morally outraged by a statement that connects Jesus Christ with illegal drug use.”

The Supreme Court’s rationale follows the same line of thinking from its decision in Matal v. Tam, two years ago, when the Court held that the ban on registering marks that “disparage” any person living or dead was unconstitutional. In that case, the Court also held that if a trademark registration bar is viewpoint-based, then it is unconstitutional under the First Amendment.

Does this mean that American consumers are likely to see an influx of brand names containing lewd, sexually explicit, and profane slogans? Not necessarily. While the Lanham Act’s prohibition had prevented the registration of immoral or scandalous marks, there is nothing that previously prevented individuals or businesses from using immoral or scandalous marks in commerce and enforcing the mark against potential infringers. Registration simply provides trademark owners with additional, valuable benefits such as the legal presumption of national ownership of a trademark. In other words, the landscape for offensive marks being used in the marketplace is unlikely to change too much, but owners will have an easier time protecting and enforcing these types of marks.

Questions? Let Eric know.

Eric ClendeningEric Clendening is a member of Flaster Greenberg’s Intellectual Property and Litigation Departments. He focuses his practice on intellectual property litigation and commercial litigation, including contract disputes, employment litigation, and other commercial disputes. He also advises clients on protecting and enforcing intellectual property rights online, including the resolution of domain name disputes and matters concerning e-commerce, online speech and conduct, and related intellectual property issues involving trademarks and copyrights.

Stairway to Retrial: 9th Circuit Court of Appeals Cites Error in Led Zeppelin Infringement Ruling

Vintage Radio Microphone with Vinyl Records

In 2016, a California jury decided that Led Zeppelin’s “Stairway to Heaven” did not infringe on Randy Wolfe’s “Taurus”.  However, the 9th Circuit Court of Appeals reviewed that decision and has now called for a do-over, citing reversible error in evidentiary rulings by the trial judge.  In particular, the Court of Appeals stated that the trial judge erred by failing to advise the jury that, while specific elements of a song are not protected, a combination of those elements could be protected, as well as prohibiting Wolfe’s camp from playing the actual recordings.

It has long been accepted that individual notes, chords, scales, rhythms and harmonies, as well as content in the public domain, are not protectable elements of a song.  However, the trial judge, U.S. District Judge R. Gary Klausner, failed to instruct the jury that, while these elements may not individually or separately constitute copyrightable material, a combination of these elements could well be original enough to make out a case for a protectable copyright.  Ninth Circuit Judge Richard Paez stated, in pertinent part:

Nowhere did the jury instructions include any statements clarifying that the selection and arrangement of public domain elements could be considered original. Jury Instruction No. 20 compounded the errors of that omission by furthering an impression that public domain elements are not protected by copyright in any circumstances. This is in tension with the principle that an original element of a work need not be new; rather, it need only be created independently and arranged in a creative way. See Feist Publ’ns, 499 U.S. at 345, 349; see also Swirsky, 376 F.3d at 849. Jury Instruction Nos. 16 and 20 in combination likely led the jury to believe that public domain elements—such as a chromatic scale or a series of three notes—were not protectable, even where there was a modification or selection and arrangement that may have rendered them original.

This error was compounded by the trial court, according to the Ninth Circuit, when it also barred the jury from hearing the actual songs during the trial.

The district court excluded the sound recordings under Federal Rule of Evidence 403, finding that “its probative value is substantially outweighed by danger of . . . unfair prejudice, confusing the issues, [or] misleading the jury . . . .” Fed. R. Evid. 403. Here, the district court abused its discretion in finding that it would be unduly prejudicial for the jury to listen to the sound recordings in order to assess Page’s access to “Taurus.” The district court acknowledged that the recordings were relevant to whether Page had access to “Taurus,” as Page would have heard and allegedly copied a recording of “Taurus.” The district court was concerned, however, that allowing the jury to hear the recordings would confuse them.

While it is understandable for the trial judge to be concerned that listening to both songs in their entirety, when many of the individual elements are not protectable, could confuse the jury, the Ninth Circuit did not feel that this potential prejudicial effect outweighed its probative value.  While not explicitly stated, the Ninth Circuit may well have been suggesting that there would be no prejudice if the parties and their experts do their job in properly explaining the permissible and non-permissible elements.

However, the Ninth Circuit also suggested another reason that the songs should be played to the jury; specifically, that there could be probative value in the jury merely observing the reactions of the parties while the songs are being played.

Although the jury could still draw conclusions and inferences from Page’s demeanor during his testimony, allowing the jury to observe Page listening to the recordings would have enabled them to evaluate his demeanor while listening to the recordings, as well as when answering questions. Limiting the probative value of observation was not proper here, as the risk of unfair prejudice or jury confusion was relatively small and could have been reduced further with a proper admonition. For example, the district court could have instructed the jury that the recordings were limited to the issue of access and that they were not to be used to judge substantial similarity.

It seems inconceivable that Jimmy Page, Robert Plant and/or John Paul Jones are going to have any reaction while listening to the recordings, let alone any reaction that should lead a juror to draw any conclusion.  All of the parties have heard both versions numerous times prior to trial and, thus, there will certainly be no surprise.  The parties will also be even better prepared for testimony during the new trial.  They will be cognizant that any reaction could impact the outcome, as the court has signaled that any reaction is now something to look out for.

As the song goes, “There’s a feeling I get, when I look to the west.”  In this case, that feeling is that playing both songs in this California Federal Courthouse may confuse the jury and lead to a different result.

Questions? Let Jeff know.

Jeff Cohen is a member of Flaster Greenberg’s Litigation, Intellectual Property, Corporate and Real Estate Practice Groups. He has been a trial attorney for more than 23 years, counseling and representing a diverse range of clients in matters related to commercial contracts, shareholder and partnership agreements, trademarks, copyrights, patents, including Hatch-Waxman, insurance coverage, franchise disputes and commercial construction.

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