New York & New Jersey Business Lawyer Blog

By Pictofigo (Own work) [CC BY-SA 3.0 (http://creativecommons.org/licenses/by-sa/3.0)], via Wikimedia CommonsGreat business successes often begin with a single idea, or so we often hear from people who have succeeded in business. It is certainly true that an idea can mark the beginning of a process that, hopefully, results in “success” by whatever metric a business owner wants to measure it. That process has many steps, and it requires the assistance and involvement of many other people, businesses, and organizations. How does a business owner or entrepreneur embark on this path while keeping others from stealing their idea? Intellectual property laws are not much help for something that is still in the “idea” phase, but New Jersey’s trade secrets law may provide some protection. Caution is still a good strategy, however, and no business venture is free of this sort of risk.

The first question to address, of course, is what we mean by a “business idea.” In order to qualify for legal protection, a business idea cannot be too general or vague. New Jersey law states that a “trade secret” must be kept secret, must have “actual or potential” economic value, and must not be something that a competitor could easily figure out on their own. N.J. Rev. Stat. § 56:15-2. New Jersey law allows a person to obtain injunctions and recover damages, including actual damages and unjust enrichment, for misappropriation of trade secrets.

If an idea must be kept secret in order to have protection under the trade secrets law, how does anyone ever work with other people on their business ideas? This is the part that involves some inherent risks. A person may ask other people, prior to meeting to discuss the idea, to sign a non-disclosure agreement (NDA). This can be effective, since it is enforceable both under the trade secrets law and breach of contract law. Some larger companies, however, may refuse to sign NDAs, often on the grounds that they do not want to risk exposure to a legal claim if they reject the idea, but then later develop a similar idea entirely on their own.

Continue Reading

geralt [Public domain, CC0 1.0 (http://creativecommons.org/publicdomain/zero/1.0/deed.en)], via PixabayThe attorney-client privilege, which safeguards communications between an attorney and a client, is a cornerstone of our legal system. Attorneys must maintain a high standard of confidentiality, and the attorney-client privilege builds on this by stating that a lawyer may not be compelled to testify about communications with a client, or to disclose such information in response to a subpoena or other demand. The privilege can apply to almost any sort of legal matter, not just communications related to litigation. Business clients face complicating factors that may not be present for individuals. For example, an employee of a business must be authorized to speak on behalf of the business in a conversation with the business’ attorney for the conversation to be privileged. A New York federal court issued a ruling earlier this year addressing whether documents transmitted by a business to its attorney constituted a privileged attorney-client communication. It held that the documents, which were not prepared by legal counsel for the business, were not privileged. Wultz v. Bank of China Ltd., No. 1:11-cv-01266, opinion and order (S.D.N.Y., Jan. 21, 2015).

The lawsuit’s claims arise from a suicide bombing in Tel Aviv, Israel in 2006. The plaintiffs, whose son died in the bombing, allege that the person responsible was a Bank of China (BOC) customer, and that BOC facilitated the attack by executing millions of dollars in wire transfers for the person. The documents at issue in the court’s recent order reportedly describe an internal investigation by BOC into the lawsuit’s allegations. The plaintiffs’ counsel sent a letter to BOC’s New York branch (BOC-NY) in January 2008, stating an intention to file suit in connection with the bombing and inviting BOC to enter into settlement negotiations. BOC-NY sent the letter to BOC’s head office (BOC-HO) in Beijing. The General Manager of the bank’s Legal Compliance Department in Beijing instructed the Chief Compliance Officer to investigate the plaintiffs’ allegations. According to the court, neither of these individuals were attorneys.

While BOC-HO was conducting an investigation, the Chief Compliance Officer at BOC-NY, who was also not an attorney, was conducting a parallel investigation. The two offices exchanged information and preliminary findings, and the executive at BOC-HO directed the New York office to continue investigating. The bank branch in Guangdong, China (BOC-GD) also conducted an investigation. At some point between January and March 2008, BOC executives discussed retaining outside counsel, but they did not formally do so until the end of March. No one involved in the investigation up to that point was an attorney, nor was any inside counsel for BOC involved in the investigation.

Continue Reading

QWERTY_keyboard.jpgA lawsuit against a New Jersey insurance company sought damages for a November 2013 data breach that reportedly resulted in the theft of personal information of hundreds of thousands of policyholders. The plaintiffs sought to certify the suit as a class action on behalf of other policyholders whose information was compromised. They asserted causes of action for breach of contract, negligence, and violations of the Fair Credit Reporting Act (FCRA), 15 U.S.C. § 1681 et seq., and the New Jersey Consumer Fraud Act (CFA), N.J. Rev. Stat. § 56:8-1 et seq. In March 2015, however, the district court dismissed the lawsuit, holding that the plaintiffs lacked standing to sue under the FCRA. In re Horizon Healthcare Services Inc. Data Breach Litigation, No. 2:13-cv-07418, opinion (D.N.J., Mar. 31, 2015).

The defendant is a New Jersey-based health insurance company that provides services to about 3.7 million individuals. At some point over the weekend of November 1-3, 2013, an unknown individual stole two laptop computers from the defendant’s office in Newark. The laptops, which were protected by passwords, contained the personal information of over 839,000 policyholders, including names, dates of birth, member numbers, and addresses. The computers also contained Social Security numbers and clinical information for some policyholders.

The defendant issued a press release several days after the theft describing the extent of the data breach. It stated that it was not clear if the thief or thieves would be able to break the password protection to access the information on the laptops. It individually notified the policyholders whose information was contained on the laptops, and it offered free identity theft protection and credit monitoring services to policyholders whose Social Security numbers might have been compromised.
Continue Reading

10939979096_cab7741637_z.jpgTitle III of the Americans with Disabilities Act (ADA) of 1990, 42 U.S.C. § 12181 et seq., prohibits businesses classified as “public accommodations” from discriminating against individuals with disabilities, and it may require them to make modifications to their facilities and services to allow reasonable access. The definition of “public accommodation” has been a matter of dispute for all 25 years of the law’s existence. Several recent court cases have addressed whether businesses that provide services exclusively via the internet may be considered “public accommodations” within the meaning of Title III. Federal courts have reached different conclusions, so the dispute is likely to continue.

“Public accommodation” is broadly defined by Title III to include hotels, restaurants, theaters, public meeting spaces, retail stores, service establishments, train and bus stations, museums, parks, and schools, to name but a few. 42 U.S.C. § 12181(7). A common Title III claim might involve the alleged inaccessibility of a business’ physical location, such as due to a lack of wheelchair ramps. What about businesses that provide all their services online, with no physical facilities for customers? Claims against this type of business have included claims that video-streaming services do not accommodate deaf customers, and that websites do not accommodate blind customers.

Whether a web-based business meets the definition of a “public accommodation” is still a matter of dispute in the federal court system. The Third Circuit Court of Appeals, which has jurisdiction over New Jersey, has ruled that Title III only applies to physical locations. Ford v. Schering-Plough Corp., 145 F.3d 601, 613 (3rd Cir. 1998). That case involved loss of access to insurance benefits, not services offered by a web-based company, but the decision could apply to that sort of business. The court based its ruling on the definition of “public accommodation” found in Title II of the Civil Rights Act of 1964, which is limited to “places.” Id., citing 42 U.S.C. § 2000a(a).
Continue Reading

S&P500_(1950-12).jpgA superior court in New Jersey denied a motion by the credit rating agency Standard & Poor’s Financial Services (“S&P”) to dismiss a lawsuit brought under the New Jersey Consumer Fraud Act (CFA), N.J. Rev. Stat. § 56:8-1 et. seq. Hoffman, et al v. McGraw Hill Financial, Inc., et al, No. ESX-C-216-13, opinion (PDF file) (N.J. Super. Ct., Essex Co., Dec. 31, 2014). The New Jersey Attorney General is alleging financial and advertising fraud involving mortgage-backed securities, which were a major factor in the 2008 financial crisis. The case, which should be of interest to New Jersey small businesses and consumers alike, has traveled to federal court, to a multidistrict litigation (MDL) matter, and back to state court.

S&P publishes research and analysis of stocks and bonds, maintains indices like the S&P 500, and issues credit ratings for private companies and government entities. The New Jersey Attorney General alleges that, from at least 2001 to 2008, S&P based its ratings of various mortgage-backed securities on its own financial interests, and gave favorable ratings to companies that were paying clients, even if they did not merit such a rating. Numerous other states and the federal government have sued S&P over the same general allegations.

The New Jersey lawsuit (PDF file), originally filed on October 9, 2013, asserts three causes of action against S&P and its parent company: (1) Misrepresentations and knowing omissions of material fact under the CFA, N.J. Rev. Stat. § 56:8-2; (2) unconscionable commercial practices under the CFA, id.; and (3) misrepresentation and knowing omissions of material fact in violation of the Advertising Regulations, N.J. Admin. Code § 13:45A-9.2(a)(9).
Continue Reading

4517840289_e6558e6f0a_z.jpgA little-known federal agency within the Department of Commerce, the Bureau of Economic Analysis (BEA), revived a reporting requirement last year for U.S. companies receiving foreign investments. It also expanded the reporting requirements for U.S. companies that directly invest in foreign businesses. Prior to the recent amendments to these rules, the reporting requirements only applied to companies directly contacted by the BEA. Now they apply to any U.S. company that meets the benchmarks for reporting.

The International Investment and Trade in Services Survey Act authorizes the Executive Branch “to collect information on international investment and United States foreign trade.” 22 U.S.C. § 3101(b). The BEA is charged with carrying out this purpose. It revived Form BE-13, the “Survey of New Foreign Direct Investment in the United States,” in a final rule published in August 2014, after having discontinued the survey in 2009. 79 Fed. Reg. 47573, 15 C.F.R. § 801.7. Another final rule, published in November 2014, changed the requirements for Form BE-10/11, the “Benchmark Survey of U.S. Direct Investment Abroad.” 79 Fed. Reg. 69041, 15 C.F.R. § 801.8.

Information provided in the surveys may only be used “for analytical or statistical purposes” by the federal government, to enforce reporting requirements, and for “augmenting and improving the quality of data collected by the Bureau of the Census.” 22 U.S.C. §§ 3104(c), (d). Failure to file reports as required can result in civil penalties of $2,500 to $25,000, as well as criminal penalties of up to one year’s imprisonment and a fine of up to $10,000. 22 U.S.C. § 3105.
Continue Reading

345829246_a7434a76dc_z.jpgElecting “subchapter S” status has many benefits for a corporation and its shareholders, although it is subject to certain limitations on the number and type of shareholders. If a corporation’s S status is revoked, it may be able to make the election again at a later date, but that raises the question of whether tax benefits available to shareholders during the original subchapter S election are still available. The Office of Chief Counsel for the Internal Revenue Service (IRS) recently issued a memorandum on this question with regard to corporate earnings for which shareholders paid income tax, but that they did not receive as dividends. IRS regulations assign a special account for these funds and allow shareholders to withdraw them tax-free in later tax years. The account does not, however, survive the revocation of subchapter S status, meaning that shareholders lose tax-free access to those funds.

Shareholders of S corporations pay taxes on corporate income, similar to partnership taxation. They are responsible for paying income tax on their pro rata share of corporate income even if they do not receive dividends during that tax year. The IRS allows S corporation shareholders to withdraw dividends for previous tax years without incurring additional tax liability, since that money was already taxed. IRS regulations define an “accumulated adjustments account” (AAA) as containing the amount of corporate earnings taxed to shareholders but not yet paid out to them. 26 U.S.C. §§ 1366(a)(1), 1368(e)(1); 26 C.F.R. § 1.1368-2. The account is not apportioned among the shareholders.

The question presented to the IRS was whether an S corporation’s AAA survived “beyond the post-termination transition period into a subsequent S period.” In Memorandum No. 201446021 (PDF file) (“IRS Memo”), issued on November 14, 2014, the IRS concluded that the AAA does not survive this transition.
Continue Reading

Analyzing_Financial_Data_(5099605109).jpgFund transfers between business subsidiaries could be considered interest-generating loans under New Jersey tax law, according to a series of court cases culminating in a decision by the New Jersey Supreme Court. The shipping company United Parcel Service (UPS) appealed the assessment of late fees and penalties against five of its subsidiaries by the New Jersey Division of Taxation (NJDOT). The New Jersey Tax Court affirmed the NJDOT’s findings regarding imputation of interest income, but it held that the late fees and penalties were in error. UPS v. Dir., Div. of Taxation (“UPS I“), 25 N.J. Tax 1 (2009). The Superior Court, Appellate Division and the Supreme Court of New Jersey affirmed the Tax Court’s ruling. UPS v. Dir., Div. of Taxation (“UPS II“), 61 A.3d 160 (N.J. App. Div. 2013); UPS v. Dir., Div. of Taxation (“UPS III“), No. A-16/17, Sep. Term 2013 072421, opinion (N.J., Dec. 4, 2014).

The plaintiffs belonged to two groups of UPS subsidiaries: a group consisting of “internal service companies” that support other subsidiaries, and a group of companies “that transported packages and documents.” UPS I, 25 N.J. Tax at 11. The UPS parent company maintained a “cash management system” for its subsidiaries that involved transferring all cash received by the subsidiaries into a bank account maintained by the parent company on a daily basis. Id. at 14-15.

The NJDOT treated these transfers as loans from the subsidiaries to the parent company and imputed interest income to the subsidiaries that was not reported. It assessed late payment penalties and five-percent amnesty penalties, N.J. Rev. Stat. §§ 54:53-17, 54:53-18, against the subsidiaries. UPS appealed these actions.
Continue Reading

Dr_Martens,_black,_old.jpgNew York and New Jersey laws provide a wide range of options regarding the organization and structure of businesses, with recognition that the needs of a small, one- or two-person operation are likely to be substantially different from those of a much larger business. Businesses with no formalized legal structure are known as sole proprietorships if they have only one owner, and general partnerships if they have two or more. An informal business structure works for many business owners, but the business entities defined by state law have certain benefits that everyone should consider. Converting a business from a sole proprietorship to a limited liability company (LLC) can be an effective way for a business owner to protect both the business and themselves.

Sole Proprietorship vs. LLC

Operating a business as a sole proprietorship may offer some advantages:

– Simplicity: There is no need to file any specific paperwork with the state to maintain the business, aside from an assumed business name, also known as a “DBA.”

– Only one tax return: A sole proprietorship, unlike a corporation, does not file its own tax return. The business owner includes business income and expenses in a schedule attached to his or her personal return.

These possible advantages, however, come with some distinct disadvantages:

– The owner of a sole proprietorship is personally liable for any and all business debts.

– Similarly, business assets are susceptible to claims against the owner as an individual.

– A sole proprietor must keep meticulous records distinguishing personal and business assets, debts, and expenses.
Continue Reading

US-DeptOfCommerce-Seal.svg.pngThe U.S. Department of Commerce (DOC) recently released a digital tool to help businesses engaged in the export of goods abroad. Federal export laws require a substantial amount of due diligence regarding the intended recipients and end users of export shipments. The DOC may hold an export business liable for violations of these requirements. The White House has enacted a policy of reforming controls on exports. Part of this initiative involves streamlining the screening process with the Consolidated Screening List (CSL), a collection of “watch lists” from various federal agencies. In November 2014, the DOC announced the release of an application program interface (API) that allows export businesses to search the CSL much more efficiently.

Under the Export Administration Act (EAA) of 1979, 50 U.S.C. App. § 2401 et seq., the U.S. President has the authority to regulate U.S. exports for national security and other reasons. Congress has placed restrictions on exports directly through laws like the Arms Export Control Act (AECA) of 1976, 22 U.S.C. § 2751 et seq. Exports may also be restricted by sanctions against specific countries and laws or regulations related to terrorism and other international criminal matters.

In 2013, the DOC’s Bureau of Industry and Security (BIS) charged the University of Massachusetts at Lowell with violations of the Export Administration Regulations (EAR) for shipping atmospheric testing equipment to an entity in Pakistan on the BIS Entity List, 15 C.F.R. Supp. 4. This list identifies entities that the federal government believes may have indirect connections to weapons of mass destruction (WMD) programs. The BIS claimed that the university violated the EAR by shipping the equipment without a required license. 15 C.F.R. §§ 734.3(c), 744.11, 764.2(a); 63 Fed. Reg. 64322 (Nov. 19, 1998). In this case, the equipment itself was not a controlled item, but the recipient was subject to government restrictions. The university agreed to a $100,000 civil penalty, suspended for two years. See also United States v. Roth, 642 F.Supp.2d 796 (E.D. Tenn. 2009), 628 F.3d 827 (6th Cir. 2011).
Continue Reading