When a party fails to pay for goods or services delivered, the other party will typically send a demand letter, followed by a lawsuit, if payment is not received. Depending on the circumstances, there may be
several grounds for a suit seeking payment, one of which is known as “account stated.” This cause of action is most often used by parties who have existing or regular dealings with each other to buy and sell goods or services and may not have a contract for each transaction. They simply invoice each other for payment.
WHAT IS AN ACCOUNT STATED CLAIM?“Account stated” is a cause of action for payment where one party sent an invoice to the other and the recipient of the invoice failed to object within a reasonable period. By failing to timely object, the recipient of an invoice may be liable for the entire amount of the invoice. The rationale is that a party who fails to dispute an invoice is deemed to have acquiesced and is bound by it as an account stated, unless fraud, mistake, or other equitable considerations are shown. If the transaction meets the requirements, the account stated claim provides a means for recovering moneys by preventing the party from objecting to the invoice long after the fact.Among the benefits of an account stated claim is that it precludes a dispute over the amount owed. The plaintiff does not have to prove the details of its performance since the party who received the invoice should have made any objections to performance or the amount of the invoice within a reasonable period of time after receipt.
WHAT ARE THE ELEMENTS OF AN ACCOUNT STATED CLAIM?There are three elements of an account stated claim: (1) the account was presented, (2) by mutual agreement, it was accepted as correct, and (3) the debtor promised to pay the amount so stated.The second and third elements may be shown by the debtor’s failure to object to the stated amount within a reasonable time. While there is no clear-cut rule as to what constitutes a reasonable amount of time, a delay of five months has been found to be unreasonable under New York caselaw.Notably, an account stated claim cannot be used to create liability where none exists. There must be an existing obligation.
HOW CAN A PARTY DEFEND AGAINST AN ACCOUNT STATED CLAIM?A party can raise various defenses to an account stated claim. First, objections can be made concerning the creditor’s evidence. For example, proof is needed, concerning transactions and invoicing. A creditor should have documentation of monthly or regular billing to show active communication between the parties. Absence of such proof is fatal to the claim. The debtor can also seek to refute the creditor’s claim that the debtor failed to respond in a timely manner.In addition, there are several affirmative defenses to an account stated claim, including fraud and mistake. The debtor has the burden of showing these exist. The fraud or mistake must involve an important fact, rather than an inconsequential fact. In the absence of fraud or mistake, the debtor may also be able to show other equitable considerations, which weigh against enforcement of the account stated claim. Equitable considerations are “legal speak” for considerations that a court can consider regarding fairness.The statute of limitations may also be a defense. In New York, the statute of limitations is six years, which starts to run on the date of the last transaction in the account.
HOW CAN PARTIES AVOID AN ACCOUNT STATED CLAIM?Parties should carefully review invoices in a timely manner. If the recipient of the invoice has an objection to the amount billed or to the performance of the other party, it is essential to notify the billing party in writing as soon as possible. In addition, all parties should keep complete records of transactions as they may become relevant in litigation. Legal counsel should also be consulted if it appears that litigation is likely.
ArbitrationArbitration is a form of voluntary or contracted private alternative dispute resolution, a way to resolve disputes outside of the public court system. Arbitration is often a “creature of contract,” because it is agreed to as part of a contract’s dispute resolution clauses. In contract dispute arbitrations, an arbitrator or a panel of arbitrators will conduct proceedings and make a decision based on the authority granted to them in the contract.
WHAT IS ARBITRATION AND WHO SHOULD USE IT?Arbitration is a private, sometimes binding, process for resolving disputes outside of the court system. In arbitration, disputes are resolved by an arbitrator or panel of arbitrators (sometimes called “neutrals,” an “arbitral tribunal” or simply the “tribunal” or “panel”). The arbitration ends when the arbitrator or arbitrators make a decision, called an “arbitration award.”
WHAT IS BINDING ARBITRATION?Binding arbitration is final and legally binding on both sides, and the award is enforceable in Court. When parties agree to binding arbitration, there is a very narrow scope of review and appeal right. Courts are highly deferential to the arbitrator’s decision and typically confirm the arbitration award. In some rare circumstances, as described below, a Court may “vacate” a binding arbitration award.
IS ARBITRATION BETTER THAN GOING TO COURT?There are advantages and disadvantages to arbitration. For parties that prefer a voluntary and private process, arbitration has some advantages. For example, parties can decide the scope of the arbitration and powers of the arbitrator. This may reduce time and cost to reach a decision. Parties can also choose the arbitrator, and can select arbitrators with expertise in the industry or subject matter of the dispute. Arbitration is also a private proceeding without the public filings associated with going to court.However, parties to an arbitration typically waive jury trial rights, and some might prefer public courtroom proceedings to deter wrongdoing or the public jury trial as a stronger inducement to settlement. Arbitration awards are also very difficult to appeal because Courts defer to the arbitrator’s fact determinations, and will usually defer even if the arbitrator makes legal errors.
WHO USES ARBITRATION?Arbitration is open to anyone but is usually used for contract disputes. Unlike a Court process, a person cannot be compelled to appear and respond in arbitration against their agreement. In arbitration, the parties agree to submit the dispute to arbitration before arbitrating. Usually, this agreement is already made as part of a goods or services contract. If you sign a valid contract which requires disputes be submitted to arbitration, or if you otherwise enter into an enforceable agreement to arbitrate a dispute, then you can be compelled to arbitrate by a court enforcing the contract or agreement.
WHAT ARE ARBITRATION ENTITIES AND WHAT ARE THEIR DIFFERENCES?There are several organizations that offer arbitration services, both domestically and for international arbitrations, such as the American Arbitration Association (the “AAA”), JAMS (f/k/a Judicial Arbitration and Mediation Services, Inc.), and the International Chamber of Commerce (“ICC”). There are also industry-specific organizations that offer arbitration services such as the Financial Industry Regulatory Authority (“FINRA”) and Independent Film and Television Alliance (“IFTA”).These organizations provide a set of rules and procedures to conduct arbitrations, and some include different rules depending on the type of dispute.
DOES ARBITRATION REQUIRE A FORMAL ORGANIZATION?You don’t have to use an organization such as JAMS or the AAA to conduct arbitration, sometimes called “institutional arbitration.” While this is typically how arbitration is conducted, arbitration can also be “ad hoc.” The essential elements of arbitration are the agreement to arbitrate, the submission of the dispute to an arbitrator or arbitrators, and an award or decision resolving the dispute.
WHAT HAPPENS IN ARBITRATION?Arbitration has stages similar to a
litigation, in which the parties first write out their claims, defenses, and counterclaims, then agree to procedures, and then exchange and present evidence for resolution by the arbitrator. However, arbitration processes are more flexible than litigating in Court and can be agreed to or changed by the parties. Therefore, arbitration typically involves less litigation activity than a judicial proceeding.
WHAT IS THE PROCESS OF ARBITRATION?Arbitration usually begins when one side to a dispute, called a “Claimant” prepares a document usually called “Statement of Claim.” The Statement of Claim explains the basis for the dispute and what the claimant is asking for. This Claimant then serves the statement on the counterparty, called the “Respondent.” Often the Claimant submits the Statement to an arbitral organization to serve the Respondent. The Respondent then files and serves a document, usually called a “Statement of Answer,” responding to the claims and including defenses and counterclaims. These documents are like the “pleadings” of a typical court case.After the parties have filed their pleadings, they typically select an arbitrator from a list of arbitrators provided by the arbitral organization or as otherwise agreed. The arbitrator and the parties then agree on procedures for exchanging evidence, preparing arguments, and holding hearings, or they may default to the rules used by the arbitral organization. The arbitration ends when the arbitrator or panel closes the record and issues an award.
WHAT EVIDENCE CAN BE PRESENTED IN AN ARBITRATION PROCEEDING?Arbitration is usually less formal than litigation, and the parties may create procedures for the arbitration by agreement or using the rules of the arbitral organization. Usually, any evidence that could be used in a Court proceeding can also be used in arbitration. This includes authenticated, admissible documents, witness testimony in the form of sworn statements or even live witness testimony involving direct and cross-examination. Usually, parties in arbitration do not engage in as much “discovery” of evidence as would be typical in a Court case, and would not search for or exchange as many documents as they would in a court case. However, arbitration parties can agree to extensive evidence and procedures in conducting the arbitration if they prefer.
WHAT IS THE OUTCOME OF AN ARBITRATION PROCESS?The arbitration concludes with an arbitration award, issued by the arbitrator or arbitral panel. Awards will state which side prevailed in the arbitration on the issues that were submitted to the arbitrator or panel for resolution. Depending on the agreement between the parties and the arbitrator, the award can include the arbitrator or panel’s reasoning. This may also discuss application of legal standards or laws, or “equitable” considerations, meaning issues of fairness. Typically an arbitration award will order a party to: (i) pay money to the other side (a “damages” award); (ii) do or refrain from doing some act (an award of “injunctive relief”); (iii) perform some contract or obligation (an award for “specific performance”); (iv) or amend or change a document (“rectification”). If the arbitration is “binding,” the award can be confirmed by a Court and turned into a Court judgment. In rare circumstances, a Court may “vacate” an arbitration award, which means it undoes the arbitrator or panel’s decision.
WHEN CAN A COURT VACATE AN ARBITRATION AWARD?A Court will rarely vacate an arbitration award. The standards that govern when the Court can vacate an award vary slightly between states and between state and federal law, but are usually substantially similar. These standards permit a Court to vacate an award only where one or more parties’ due process rights were severely compromised in the arbitration. This can happen where: (i) the arbitrator’s decision was outside the scope of the parties’ agreement; (ii) the arbitrator had a conflict of interest withheld from the parties; (iii) one or more parties committed fraud in the arbitration that influenced the arbitrator or panel’s decision; or (iv) the award did not resolve the dispute.
EXAMPLES OF ARBITRATIONArbitration happens all the time in a variety of situations, ranging from disputes between individuals (for example, in a contested divorce) to negotiations between countries (for example treaty and border disputes). Many contracts include arbitration clauses because the arbitration process is often more efficient and cost-effective than litigation. Because of this, arbitration is especially common for resolving contract disputes. For example, arbitration is commonly used to resolve disputes concerning broker commissions, insurance coverage, stockbroker and brokerage agreements, labor negotiations, software services agreements, shipping contracts, and other goods and services contracts.
ARBITRATION REPRESENTATIONOur experienced attorneys can represent you in arbitration with the hopes of avoiding the time, expense, and publicity of
litigation.
Breach of ContractI. BREACH OF CONTRACTA contract is an agreement between two parties that is enforceable by law. A contract is created through an offer by one party, acceptance of the offer by another party, and the exchange of consideration between the parties. Consideration is when the parties provide each other with something of value. A breach of contract occurs when one party to the contract does not fulfill their obligation to the other party.
II. ELEMENTS OF BREACH OF CONTRACTIn order to prevail on a breach of contract claim in New York, the party seeking to enforce the contract must prove (1) the existence of a contract between the parties, (2) the material performance of their contractual obligations, (3) the other party to the contract failed to materially perform their commitments under the contract, and (4) damages resulting from the other party not upholding their obligations under the contract.
III. TYPES OF BREACH OF CONTRACTA party can breach an agreement in several ways and not all breaches are treated the same under the law. Below are some examples of breaches and the legal consequences of each.
Minor Breach/Impartial BreachA minor breach arises when a party does not breach the whole contract but it fails to perform a part of the contract. The minor breach must not prevent the parties from completing the rest of their obligations under the contract for it to be considered minor. If there is a minor breach, the non-breaching party must continue to fulfill their obligations under the contract and they may sue for damages.
Material Breach/Total BreachA material breach occurs when the breach affects the parties so much that the contract obligations can no longer be fulfilled. In the event of a material breach, the non-breaching is entitled to stop performing their obligations under the contract and can sue for breach of contract damages.
Anticipatory Breach/Anticipatory RepudiationAn anticipatory breach arises when one party of the contract tells or indicates, either through words or actions, the other party that they will not be able to fulfill their contractual obligations. When there is an anticipatory breach, the non-breaching party should avoid incurring extra costs or expenses. If the non-breaching party does not attempt to mitigate their damages, they may not be able to recover the additional damages that they incurred.
IV. DAMAGES AND OTHER EQUITABLE REMEDIES FOR BREACH OF CONTRACT Generally, there are two types of damages that can be awarded in a breach of contract case: compensatory damages, sometimes called actual damages, and consequential damages, sometimes called special damages.
Compensatory DamagesCompensatory damages are designed to put the non-breaching party in the same place they would have been if the breach had never occurred. An example of compensatory damages is the reimbursement for goods or services purchased in order to replace the goods and services that should have been provided by the breaching party under the contract.
Consequential DamagesConsequential damages are related to the breach of contract “without direct correlation”. An example of consequential damages that a Court may award are reimbursement for lost business due to the breach of contract. To obtain these damages, the injured party must show that it was damaged either as a direct result of the breach or the damages were reasonably foreseeable as a result of the breach.
Nominal DamagesNominal damages are damages that are awarded when there was a breach of contract but no real harm resulted from that breach. These damage awards are very small, sometimes $1 or $10, and are granted to show that the non-breaching party was “in the right.”
Liquidated Damage AwardsThe parties’ contract may provide for “liquidated damages.” Liquidated damages are the amount the parties have agreed to pay in the event of breach. Liquidated damage provisions are often included in contracts where it would be difficult to quantify the amount of damages in the event of breach. Courts will enforce liquidated damage provisions when they are reasonably related to anticipated loss caused by the breach of contract.
Limitations on Monetary Damage AwardsA party enforcing a contract cannot recover damages that are speculative. There must be some basis for the damages that the party seeks.In the United States, each party is expected to bear their own legal fees and costs for breach of contract cases. However, some agreements provide that the prevailing party to a contract dispute is entitled to recover their legal costs and fees. In those instances, the prevailing party is entitled to recoup their reasonable legal costs and fees.In New York, there is also a duty to mitigate damages. The duty to mitigate requires the non-breaching party to take action to minimize their losses resulting from a breach of contract. If the losses incurred by a non-breaching party could have reasonably been avoided, the court may not award damages for that loss.Generally speaking, Courts applying New York law will not award punitive damages for breach of contract.
Specific PerformanceSpecific performance is when the court orders the breaching party to fulfill and perform their contractual obligations. Specific performance is typically awarded when money cannot compensate the injured party and when the contractual obligation is unique and difficult to value.A common case where specific performance is awarded is the sale of land. If a person owning land breaches their contract to sell land, an award of money cannot help the prospective purchaser. In this instance, a Court may order the owner or the land to sign over the deed to the land because land is unique and cannot be purchased elsewhere.Another example is when a company agrees to sell its product exclusively to a store. If the company subsequently agrees to sell the same product to the store’s competitor, specific performance would be appropriate because it will be difficult to measure the store’s lost revenue.In order to obtain specific performance in New York Court, the non-breaching party must prove (1) there is a contract, (2) the non-breaching party is “ready, willing, and able” to perform the contract, (3) the breaching party has the ability to perform the contract but has failed to do so, and (4) there is no other adequate remedy in order to grant specific performance.
RescissionRescission occurs when a court undoes the contract and puts all the parties back to the position they were in prior to executing the contract. The court typically only grants rescission of a contract when the non-breaching party has no other adequate remedy and they can go back to the position they previously occupied before entering the contract. A non-breaching party cannot obtain rescission of the contract and damages – it must choose one of these remedies, not both.
Contract ReformationContract reformation is a remedy that is rarely granted. A party seeking reformation is asserting that its contract does not accurately reflect the actual agreement reached by the parties. This remedy is permitted when the same contractual term was misunderstood by both parties or where one party is mistaken and the other commits fraud or engages in inequitable conduct.
V. DEFENSES TO BREACH OF CONTRACT CLAIMThere are many defenses to a breach of contract lawsuit. A few of these defenses are listed below.
ImpossibilityImpossibility is when a party can no longer fulfill their contractual obligation. For example, if a band has a contract to perform at a concert hall and then the concert hall burns down the day before the performance, it is impossible for the concert hall to host the scheduled concert.
Lack of CapacityCapacity is having the legal ability to enter into an agreement. If one party to the agreement lacked capacity when they entered into it, the court will likely not uphold the agreement. Examples of persons who lack capacity are children and persons that are intoxicated.
MistakeA contract may not be upheld if both parties were mistaken of the facts at the time they entered into an agreement. For example, if both parties mistake the authenticity of a work of art, the transaction may then be undone. If only one party is mistaken, it cannot always be undone.
Unconscionability A contract will not be upheld if it is ruled to be unconscionable. There are two types of unconscionability, procedural and substantive. Procedural unconscionability is when methods of how the parties entered the contract were unfair. Substantive unconscionability is when the terms of the agreement are unfair.
Illegality Illegality is when the contractual obligation is illegal. If the act you are contracting for is an illegal act the agreement will not be upheld in court.
Breach of ContractI. BREACH OF CONTRACTA contract is an agreement between two parties that is enforceable by law. A contract is created through an offer by one party, acceptance of the offer by another party, and the exchange of consideration between the parties. Consideration is when the parties provide each other with something of value. A breach of contract occurs when one party to the contract does not fulfill their obligation to the other party.
II. ELEMENTS OF BREACH OF CONTRACTIn order to prevail on a breach of contract claim in New York, the party seeking to enforce the contract must prove (1) the existence of a contract between the parties, (2) the material performance of their contractual obligations, (3) the other party to the contract failed to materially perform their commitments under the contract, and (4) damages resulting from the other party not upholding their obligations under the contract.
III. TYPES OF BREACH OF CONTRACTA party can breach an agreement in several ways and not all breaches are treated the same under the law. Below are some examples of breaches and the legal consequences of each.
Minor Breach/Impartial BreachA minor breach arises when a party does not breach the whole contract but it fails to perform a part of the contract. The minor breach must not prevent the parties from completing the rest of their obligations under the contract for it to be considered minor. If there is a minor breach, the non-breaching party must continue to fulfill their obligations under the contract and they may sue for damages.
Material Breach/Total BreachA material breach occurs when the breach affects the parties so much that the contract obligations can no longer be fulfilled. In the event of a material breach, the non-breaching is entitled to stop performing their obligations under the contract and can sue for breach of contract damages.
Anticipatory Breach/Anticipatory RepudiationAn anticipatory breach arises when one party of the contract tells or indicates, either through words or actions, the other party that they will not be able to fulfill their contractual obligations. When there is an anticipatory breach, the non-breaching party should avoid incurring extra costs or expenses. If the non-breaching party does not attempt to mitigate their damages, they may not be able to recover the additional damages that they incurred.
IV. DAMAGES AND OTHER EQUITABLE REMEDIES FOR BREACH OF CONTRACT Generally, there are two types of damages that can be awarded in a breach of contract case: compensatory damages, sometimes called actual damages, and consequential damages, sometimes called special damages.
Compensatory DamagesCompensatory damages are designed to put the non-breaching party in the same place they would have been if the breach had never occurred. An example of compensatory damages is the reimbursement for goods or services purchased in order to replace the goods and services that should have been provided by the breaching party under the contract.
Consequential DamagesConsequential damages are related to the breach of contract “without direct correlation”. An example of consequential damages that a Court may award are reimbursement for lost business due to the breach of contract. To obtain these damages, the injured party must show that it was damaged either as a direct result of the breach or the damages were reasonably foreseeable as a result of the breach.
Nominal DamagesNominal damages are damages that are awarded when there was a breach of contract but no real harm resulted from that breach. These damage awards are very small, sometimes $1 or $10, and are granted to show that the non-breaching party was “in the right.”
Liquidated Damage AwardsThe parties’ contract may provide for “liquidated damages.” Liquidated damages are the amount the parties have agreed to pay in the event of breach. Liquidated damage provisions are often included in contracts where it would be difficult to quantify the amount of damages in the event of breach. Courts will enforce liquidated damage provisions when they are reasonably related to anticipated loss caused by the breach of contract.
Limitations on Monetary Damage AwardsA party enforcing a contract cannot recover damages that are speculative. There must be some basis for the damages that the party seeks.In the United States, each party is expected to bear their own legal fees and costs for breach of contract cases. However, some agreements provide that the prevailing party to a contract dispute is entitled to recover their legal costs and fees. In those instances, the prevailing party is entitled to recoup their reasonable legal costs and fees.In New York, there is also a duty to mitigate damages. The duty to mitigate requires the non-breaching party to take action to minimize their losses resulting from a breach of contract. If the losses incurred by a non-breaching party could have reasonably been avoided, the court may not award damages for that loss.Generally speaking, Courts applying New York law will not award punitive damages for breach of contract.
Specific PerformanceSpecific performance is when the court orders the breaching party to fulfill and perform their contractual obligations. Specific performance is typically awarded when money cannot compensate the injured party and when the contractual obligation is unique and difficult to value.A common case where specific performance is awarded is the sale of land. If a person owning land breaches their contract to sell land, an award of money cannot help the prospective purchaser. In this instance, a Court may order the owner or the land to sign over the deed to the land because land is unique and cannot be purchased elsewhere.Another example is when a company agrees to sell its product exclusively to a store. If the company subsequently agrees to sell the same product to the store’s competitor, specific performance would be appropriate because it will be difficult to measure the store’s lost revenue.In order to obtain specific performance in New York Court, the non-breaching party must prove (1) there is a contract, (2) the non-breaching party is “ready, willing, and able” to perform the contract, (3) the breaching party has the ability to perform the contract but has failed to do so, and (4) there is no other adequate remedy in order to grant specific performance.
RescissionRescission occurs when a court undoes the contract and puts all the parties back to the position they were in prior to executing the contract. The court typically only grants rescission of a contract when the non-breaching party has no other adequate remedy and they can go back to the position they previously occupied before entering the contract. A non-breaching party cannot obtain rescission of the contract and damages – it must choose one of these remedies, not both.
Contract ReformationContract reformation is a remedy that is rarely granted. A party seeking reformation is asserting that its contract does not accurately reflect the actual agreement reached by the parties. This remedy is permitted when the same contractual term was misunderstood by both parties or where one party is mistaken and the other commits fraud or engages in inequitable conduct.
V. DEFENSES TO BREACH OF CONTRACT CLAIMThere are many defenses to a breach of contract lawsuit. A few of these defenses are listed below.
ImpossibilityImpossibility is when a party can no longer fulfill their contractual obligation. For example, if a band has a contract to perform at a concert hall and then the concert hall burns down the day before the performance, it is impossible for the concert hall to host the scheduled concert.
Lack of CapacityCapacity is having the legal ability to enter into an agreement. If one party to the agreement lacked capacity when they entered into it, the court will likely not uphold the agreement. Examples of persons who lack capacity are children and persons that are intoxicated.
MistakeA contract may not be upheld if both parties were mistaken of the facts at the time they entered into an agreement. For example, if both parties mistake the authenticity of a work of art, the transaction may then be undone. If only one party is mistaken, it cannot always be undone.
Unconscionability A contract will not be upheld if it is ruled to be unconscionable. There are two types of unconscionability, procedural and substantive. Procedural unconscionability is when methods of how the parties entered the contract were unfair. Substantive unconscionability is when the terms of the agreement are unfair.
Illegality Illegality is when the contractual obligation is illegal. If the act you are contracting for is an illegal act the agreement will not be upheld in court.
Breach of Fiduciary DutyCertain types of business relationships can create fiduciary duties between parties. The existence of a fiduciary duty is significant because it imposes heightened responsibilities upon one party (the “fiduciary”) towards the party owed the duty, and subsequent liability in the event of a breach.
WHAT IS A FIDUCIARY DUTY?A fiduciary duty is an obligation that one person act in the best interests of another person or an entity. The duty can arise by law, contract, or by the circumstances underlying the relationship between the parties and the nature of the transaction at issue. Typically, there is a relationship between the parties involving special trust or reliance on the fiduciary to exercise his or her discretion or expertise for the benefit of the other party.
WHAT TYPES OF FIDUCIARY DUTIES EXIST?There are three categories of fiduciary duties: duty of care, duty of loyalty and duty of candor.Duty of CareA fiduciary must act as a reasonable and prudent person in a similar circumstance would act. In the corporate context, the duty of care means that the fiduciary is required to exercise informed business judgment in conducting a transaction or their oversight of the company. This duty can be limited or waived as discussed further below.Duty of CandorIn corporate settings, this duty typically arises between management, board members and shareholders. It requires that a fiduciary fully disclose material information that may harm the business or individual that is owed the duty.Duty of LoyaltyA fiduciary is required to act in the best interests of the party owed the duty. This has been interpreted to prohibit a fiduciary from putting his or her personal financial interests ahead of the party owed the duty.
The duty of loyalty also encompasses a duty of good faith and fair dealing, which obligates fiduciaries to act with honesty and in the best interests of the party owed the duty.
WHEN DOES A FIDUCIARY DUTY ARISE?As noted above, a fiduciary duty can arise by law, contract or by circumstance. It creates a principal-agent relationship between the parties. Generally, the law provides that agents owe fiduciary duties to their principals, but principals do not owe fiduciary duties to their agents. However, there are nuances in different settings.Partnership LawThe Revised Uniform Partnership Act of 1994 (RUPA) § 404 provides that the only fiduciary duties a partner owes to the partnership and the other partners are the duties of loyalty and care. While those duties cannot be waived, the partnership agreement can determine standards for measuring the performance of the duties, provided they are not manifestly unreasonable.A partner’s duty of loyalty applies to an accounting to the partnership for any property and profits derived by the partner, including the appropriation of a partnership opportunity. The partner also must refrain from having an interest adverse to the partnership or competing with the partnership in the conduct of the partnership business. The duty of care is limited to refraining from engaging in grossly negligent or reckless conduct, intentional misconduct, or a knowing violation of law. Furthermore, a partner must exercise his or duties consistent with the obligation of good faith and fair dealing.Corporate LawFiduciary duties are well-established under corporate law. Officers and directors owe fiduciary duties to shareholders and the corporation. Shareholders do not owe fiduciary duties to one another, except in the case of closely held corporations.Closely Held CorporationsOfficers, directors and shareholders of a closely held corporation are subject to more stringent fiduciary duties than other corporations. In jurisdictions like New York, the duties between shareholders are akin to that between partners. Corporate directors and controlling shareholders are held to a high standard of candor, loyalty and good faith. Shareholders may owe fiduciary duties to each other, including a duty to not usurp a corporate opportunity they became aware of in their corporate shareholder capacity. A minority shareholder is also owed a fiduciary duty by the majority shareholders.Limited Liability Companies (LLCs)Fiduciary duties within an LLC are usually tied to the company’s operating agreement. Members may provide for duties similar to a corporation or a partnership, or they can completely waive fiduciary duties, depending on the contents of the agreement.
HOW CAN FIDUCIARY DUTIES BE WAIVED?Certain entities are permitted to contract away their right to fiduciary duties. For example, many states allow corporations to insure and indemnify their directors and officers against breaches of the duty and limit or eliminate their personal liability in some instances.In New York, corporations can limit or eliminate the personal liability of directors for breach of their duty of care but not their duties of loyalty and good faith. LLCs similarly can limit or eliminate the personal liability of managers or members within the LLC operating agreement. The exception is where a manager’s “acts or omissions were in bad faith or involved intentional misconduct or a knowing violation of law” or the manager “personally gained in fact a financial profit or other advantage to which he or she was not legally entitled.” NY Ltd. Liab. Co. Law § 417(a)(1)
WHAT ARE THE SIGNS OF A BREACH OF FIDUCIARY DUTY?Breaches arise when the fiduciary did not act in the best interests of the other party. Common examples of a breach include the following:
· Self-Dealing. This can occur when a fiduciary is on both sides of a deal, creating a conflict between the fiduciary’s personal interest and his or her fiduciary duty towards the other party. Actions which indicate self-dealing include accepting excessive payments, selling/gifting/misappropriating assets to oneself, borrowing company funds as a personal loan, competing with the party owed the duty, or using insider or non-public information in a stock market transaction.
· Improperly Taking Advantage of Corporate Opportunity. New York law provides that fiduciaries of a corporation, LLC or partnership have a fiduciary duty not only to safeguard presently owned business assets, but also “business opportunities.” As a result, fiduciaries cannot, without consent, usurp an opportunity for themselves that should be deemed an asset of the corporation. They also cannot promote any personal interests which are incompatible with the superior interests of the business. However, determining what constitutes a corporate opportunity can be difficult. Several tests may be used in New York. The “tangible expectancy test” analyzes whether the corporation has an “interest” or “tangible expectancy” in the opportunity. The “line of business test” assesses whether the opportunity is the same as or is necessary for, or essential to, the line of business of the corporation. Other factors may also be relevant.
· Deception. Actions which would likely be considered deception include failure to provide important or sufficient information that may lead to misunderstandings, failure to disclose conflicts of interest, pursuing an opportunity meant for the company and not informing the party owed the duty, and misappropriating assets of the party owed the duty.
WHAT ARE THE REQUIREMENTS FOR BRINGING A CLAIM FOR BREACH OF FIDUCIARY DUTY?To bring a legal claim for breach, there are three basic elements that must be proven:A fiduciary relationship and duty existed,A breach of the duty occurred, andDamages were suffered as a result of the breach.Aiding and Abetting a Fiduciary BreachNotably, someone who aided and abetted a fiduciary breach can also be liable for damages. Typically, such claims are brought against advisors who knowingly participated in the breach. The requirements for bringing an action for aiding and abetting in New York are (1) a breach by a fiduciary of obligations to another, (2) that the defendant knowingly induced or participated in the breach, and (3) that plaintiff suffered damages as a result of the breach.The Business Judgement RuleWhere a fiduciary is a director or officer of a company, the plaintiff must overcome the business judgment rule, which provides a presumption that the defendant acted in good faith and with that degree of care which an ordinarily prudent person in a like position would use under similar circumstances. This is a high burden and it acts to deter frivolous lawsuits against directors and officers for every bad decision. However, the Business Judgment Rule does not apply if the plaintiff can show fraud, illegal or wrongful conduct, conflict of interest, bad faith, or a conscious disregard of one’s responsibilities. In addition, the rule does not protect the fiduciary from personal liability for a decision with no business justification or rationale to support it, an uninformed decision or for failure to make any decision when it would be reasonably required to do so.
WHAT REMEDIES ARE AVAILABLE FOR BREACH OF A FIDUCIARY DUTY?A party suing for breach may seek direct and indirect damages, injunctions, restitution, rescission, legal fees, and other appropriate remedies as provided under the law.
CONCLUSIONAlthough breach of fiduciary duty claims are fairly common in business litigation, they often involve complex factual situations. An experienced attorney can provide appropriate guidance on the strength of your claim or defense and help resolve your matter successfully.
Business Torts in New YorkWhen a person causes harm to another person, the injured party may be able to sue for compensation. The same is true for businesses – a business can be injured and obtain damages for the harm done, so long as certain requirements are met.
BUSINESS TORTS DEFINEDA tort is a wrongful act that causes harm and results in legal liability for the actor. Business torts refer to actions that cause economic harm to a business. Examples include theft of trade secrets, interference with business relationships and derogatory statements about a company. These causes of action are distinct from breach of contract claims. New York General Business Law recognizes several different types of business torts, some of which are outlined below.
MISAPPROPRIATION OF TRADE SECRETSNew York recognizes the right of a business to sue for misappropriation of its trade secrets under common law principles. A party must prove that (1) it possesses a trade secret, and (2) the defendant “used that trade secret in breach of an agreement, a confidential relationship, or duty, or as a result of discovery by improper means.” N. Atl. Instruments, Inc. v. Haber, 188 F.3d 38, 44 (2d Cir. 1999).A
trade secret is defined as a formula, process, device or compilation which provides an opportunity to obtain an advantage over competitors who do not know or use it. To be considered a misappropriation, the individual or entity must have acquired the trade secret through a relationship of trust (such as employment), or through fraud or other improper means, such as theft, bribery, espionage or hacking. Misappropriation may also be found where the person obtained the information from another party but was aware of facts that indicated the information was acquired improperly by the other party.Restrictive Covenants Not to CompeteRestrictive covenants are contract clauses which limit the activities of an employee after employment has ended. They are often used to prevent misappropriation of trade secrets. One of the most common types of restrictive covenants is a
non-competitionprovision, wherein the employee agrees to not work for a competitor or start a competitive business for a certain period of time and within a certain geographic area, after employment ceases.New York law recognizes that employers want to mitigate the risk that their employees will use or benefit from the employer’s confidential business information after employment has ended. However, courts carefully scrutinize these provisions, thus they are only enforceable to the extent they meet certain requirements for
reasonableness.
CONVERSION OF BUSINESS PROPERTY“Conversion” typically involves an intentional taking or unauthorized use of another’s property. Conversion of money occurs “where there is a specific, identifiable fund and an obligation to return or otherwise treat in a particular manner the specific fund in question.” Thys v. Fortis Sec. LLC, 903 N.Y.S.2d 368, 369 (1st Dep’t 2010).However, courts do not require plaintiffs to prove that the defendant “intended” to assume or exercise rights over the plaintiff’s property. It is enough to show that the defendant acted without authorization. Examples of conversion include improperly comingling the plaintiff’s and defendant’s funds or delivering the plaintiff’s property to someone not entitled to it. Damages for a conversion claim can be compensatory (paying the plaintiff for the converted property) or equitable (returning the plaintiff’s property).
TORTIOUS INTERFERENCE WITH A CONTRACT AND TORTIOUS INTERFERENCE WITH PROSPECTIVE ECONOMIC ADVANTAGEThese causes of action may arise when two parties contract or intend to contract, and a third-party tries to disrupt that relationship. A tortious interference with contract requires an existing contractual relationship, while tortious interference of a prospective economic advantage involves a business relationship that has not been finalized.Tortious Interference with a ContractIn order to bring a claim, a plaintiff must show it had a valid contract with another party, that the defendant knew about the contract and intentionally procured a breach of the contract, causing damage to the plaintiff.A successful plaintiff can recover monetary damages, including the loss of any benefits the plaintiff would have received under the contract that was interfered with. Injunctive relief may be available if monetary damages are not adequate.Tortious Interference with Prospective AdvantageA defendant that interferes with a contract that has not been signed yet may also be held liable for resulting harm to the plaintiff. Tortious interference in such cases requires proof that the defendant intentionally and knowingly induced the third party to act, and that the defendant acted by wrongful means, such as fraud, deceit, undue economic pressure or physical violence. In addition, the plaintiff must show that but for the defendant’s conduct, plaintiff would have received the contract.
DECEPTIVE AND UNLAWFUL TRADE PRACTICESNew York General Business Law allows the state Attorney General as well as private citizens to bring an action for deceptive and unlawful trade practices. This law, known as the Consumer Protection from Deceptive Acts and Practices statute in New York, protects consumers from deceptive acts or practices in the conduct of any business, trade or commerce, or in the furnishing of any service in the state. Typically, claims under this law involve false or misleading advertising targeted to consumers.A private claim under the law must prove that the defendant’s act or practice was consumer-oriented, misleading in a material way, and the plaintiff suffered injury as a result of the deceptive act. A showing of intentional, fraudulent or reckless conduct is not required. However, the deceptive practice must be likely to mislead the reasonable consumer.DamagesPlaintiffs can recover compensatory damages; however, they must be different than damages for breach of contract. If the defendant acted willfully or knowingly, punitive damages may be awarded. Treble damages are available where a defendant’s actions were intentionally fraudulent.
COMMERCIAL OR TRADE DISPARAGEMENTCommercial, trade or business disparagement refers to situations when a business or person makes derogatory statements about another business to discourage the public from dealing with the disparaged business.A plaintiff must prove that the defendant made a false statement publicly which it knew was false or with reckless disregard for whether it was false. The statement must have been made with the intent or reasonable belief that it would cause financial loss for the business and it caused financial loss to the plaintiff.DamagesDamages can be difficult to prove because the plaintiff must show that the statement directly caused financial harm to a business, such as resulting in fewer customers for the business.
FRAUDULENT TRANSFERFraudulent transfers or conveyances are when a debtor in bankruptcy tries to shield its assets from creditors by transferring them to someone else. Such action is unlawful under New York’s Debtor and Creditor Law.To prove fraudulent transfer, assets must have been transferred or “conveyed” within a certain period prior to filing for bankruptcy and must have bene done with an intent to defraud creditors or involve a transfer which is made for less than reasonably equivalent value.
BREACH OF FIDUCIARY DUTYA
fiduciary duty is an obligation that one person act in the best interests of another person or an entity. Typically, there is a relationship between the parties involving special trust or reliance on the fiduciary to exercise his or her discretion or expertise for the benefit of the other party. There are three categories of fiduciary duties: duty of care, duty of loyalty, and duty of candor. Examples of actions that would breach a fiduciary duty include self-dealing or deception.To bring a legal claim for breach, the plaintiff must prove: (1) a fiduciary relationship and duty existed, (2) a breach of the duty occurred, and (3) damages were suffered as a result of the breach.A successful plaintiff may be awarded direct and indirect damages, injunctions, restitution, rescission, legal fees and other appropriate remedies as provided under the law.
TORT LIABILITY OF OFFICERS AND DIRECTORSGenerally, officers and directors are not personally liable to third parties for the corporation’s torts, unless they have personally acted in some way in furtherance of the wrongdoing. A plaintiff must show that the officer or director authorized, directed or otherwise participated in the tortious conduct, or knew or reasonably should have known that some hazardous condition or activity under their control could injure plaintiff and negligently failed to take action to avoid the harm. The officer’s or director’s conduct also must have resulted in damages to the corporation.
NEW YORK’S SPECIAL BUSINESS COURTSIn New York, plaintiffs can sue for most business torts in the Commercial Division of the Supreme Court provided they meet certain monetary thresholds.
CONCLUSIONBusiness torts can be difficult to prove but can result in significant liability for a defendant when a claim is successful. Parties should consult an attorney for advice on how best to procced.
Copyright InfringementCopyright law recognizes that those who create original works have the right to protect these works from exploitation by others, who use them without permission. As a result, unauthorized users of copyrighted material are subject to significant liability. However, not all works are subject to copyright protection and there are many defenses to copyright infringement.
WHAT ARE THE REQUIREMENTS FOR COPYRIGHT PROTECTION?Copyright is a form of intellectual property that applies to original works of authorship that are fixed in a tangible medium. Under the U.S. Copyright Act, an original work is one that is independently created by an individual and involves at least some degree of originality. A work is considered fixed in a tangible medium when, under the authority of the author, “it is sufficiently permanent or stable to permit it to be perceived, reproduced, or otherwise communicated.” For example, a literary work is “fixed” when it is written down. Music is “fixed” when its music and lyrics are written down, or when the song is recorded. Typical works include literary, musical, and dramatic works, motion pictures, and sound recordings. Works that appear solely online are also included.Copyright RegistrationA work automatically receives copyright protection – no registration is required. However, there are a variety of benefits to
registering a copyright with the U.S. Copyright Office including allowing the copyright owner to sue for infringement of the work and obtain statutory damages and attorneys’ fees. A registration also provides evidence of the validity of the copyright, which is necessary in an infringement action, as discussed further below.Work for Hire DoctrineThe owner of the work is typically the author or creator of the work. However, an exception to this is the
work-for-hire doctrine, which provides that the creator does not own the copyright to a work when certain requirements are met.Under Section 101 of the Copyright Act a work made for hire is either:a work prepared by an employee within the scope of employment, ora work specially ordered or commissioned, provided however, that the work falls into one of nine types of works listed in
the statute and the parties expressly agree in a written instrument signed by them that the work is considered a work made for hire.Works That Are Not Eligible for Copyright ProtectionCopyrights only protect original expressions of ideas and information. As a result, techniques, facts, concepts, or ideas alone cannot be copyrighted. However,
ideas may be protected under contract law. These lawsuits often arise in the entertainment and technology industries but can be challenging to prove.In addition, titles, names, short phrases, and slogans are also not eligible for copyright protection but may be enforceable under trademark law. Works that compile information that is commonly available and contain no originality are also not copyrightable.Exclusive Rights Granted Under Copyright LawCopyright grants the creator an exclusive legal right to determine when and under what conditions an original work can be used by others. The copyright owner has the following rights:the right to
reproduce the workthe right to
prepare derivative worksthe right to
distribute copies of the work to the publicthe right to
perform the copyrighted work publiclythe right to
display the copyrighted work publicly
HOW CAN A PARTY PROVE COPYRIGHT INFRINGEMENT?An individual who uses copyrighted material without permission may have committed copyright infringement. In order to prove infringement in court, the plaintiff must show that he or she is the owner of a valid copyright in the work or has the legal authority to bring a lawsuit and that the defendant actually copied the copyrighted work.A copyright registration is evidence of ownership. Courts have held that registration before, or within five years of publication of a work, establishes a presumption of ownership, that then shifts the burden of proof of ownership to any party who is challenging said ownership.Proof that the defendant copied the work typically involves showing that the defendant had access to the plaintiff’s work and that the defendant’s material is substantially similar to the copyrighted work.
ARE THERE DEFENSES AGAINST A COPYRIGHT INFRINGEMENT CLAIM?There are several common defenses available in copyright infringement. Fair use is the most commonly used. The fair use doctrine allows a party to use copyrighted material for certain purposes deemed beneficial to the public interest, such as criticism, news reporting, teaching, and research. Courts weigh the following four factors in determining whether a use constitutes fair use:The purpose and character of the use, including whether such use is of a commercial nature or is for non-profit educational purposes;The nature of the copyrighted work;The amount and substantiality of the portion used in relation to the copyrighted work as a whole; andThe effect of the use upon the potential market for or value of the copyrighted work.Another defense is that the defendant independently created the work and did not copy it. This may be difficult to prove where the works are very similar.The principle of scène à faire may also be a defense. It is used when certain elements of a work are customary to the genre of the work and as a result not protectable. An example of this is a spy novel that might employ stereotypical character types or commonly used scenarios.
WHAT REMEDIES ARE AVAILABLE IN COPYRIGHT INFRINGEMENT?A copyright owner is entitled to recover either their actual damages, including any profits the infringer made, or statutory damages. Statutory damages are between $750 to $30,000 per infringed upon work, unless the copyright owner can show that infringement was committed willfully. In instances of willful infringement, the owner can be awarded up to $150,000 per work. Willful infringement may be shown with evidence that the infringer removed a copyright notice when publishing the copyrighted work or failed to remove or retract the content after being notified that it was infringing.Note that the copyright owner may also be awarded their reasonable attorney’s fees if they prevail in litigation.Equitable RemediesA court can also issue an injunction against an infringer ordering him or her to cease infringing as well as seize infringing goods.
CONCLUSIONThe internet has made copyright infringement more prevalent and easier to identify. Owners should protect their interests by registering their works with the U.S Copyright Office and diligently enforce their rights. Those who use copyrighted material must ensure they have proper permission to avoid liability.
Consult an experienced intellectual property attorney for assistance with copyright matters.CybersquattingIn the early days of the Internet, it was fairly common for someone to try to register a domain name of a well-known brand since many brands lagged behind in registering their names. While companies are much savvier now about protecting their brands, “cybersquatting” still occurs in various forms and can be costly to a business causing financial and reputational harm.
WHAT IS CYBERSQUATTING?Cybersquatting is when someone registers the domain name of another entity with the intent to financially gain from the goodwill and reputation of the identity (or brand). The third party will register the name and then try to either sell the domain name back to the rightful brand owner or otherwise profit from diverting the brand’s customers to the cybersquatter’s website. Cybersquatting applies when the third party registers the same or similar name to the brand.In response to these practices, Congress enacted the Anticybersquatting Consumer Protection Act (ACPA) to protect brands from third parties seeking to misuse their brand in bad faith.
WHAT ARE THE ELEMENTS OF A CYBERSQUATTING CLAIM?The ACPA authorizes a trademark owner to sue an alleged cybersquatter in federal court to obtain a court order that transfers the domain name back to the trademark owner. In some cases, the cybersquatter must also pay monetary damages.A
trademark owner must prove
all of the following:Bad faith intent to profit from the use of the trademark;The trademark was distinctive at the time the domain name was first registered;The domain name is identical or confusingly similar to the trademark; andThe trademark qualifies for protection under federal trademark laws.In addition, the cybersquatter must be the party who registered the offending domain name.
DISTINCTIVENESSTrademarks must be distinctive in order to be protected under the ACPA. Courts consider trademarks that are famous, arbitrary, suggestive, or fanciful as inherently distinctive. In addition, names coined for the specific purpose of the trademark, without meaning beyond that context, also qualify. Among the factors which may be considered in determining distinctiveness are the duration and extent of the mark’s use, the geographical area in which the mark is used, the duration and extent of use and the degree of recognition of the mark in the parties’ trade channels.Business owners can, but are not required to,
register their trademarks. However, one of the benefits of federal registration on the principal register of the
United States Patent and Trademark Office (USPTO) is that the trademark is presumed distinctive.
IDENTICAL TO OR CONFUSINGLY SIMILARIn many cases, the offending domain name is the same as a registered trademark. However, ACPA may also apply when the domain is “confusingly similar.” Notably, whether a domain name is “confusingly similar” to a trademark is evaluated without regard to the goods or services of the parties. This is a different standard from the “likelihood of confusion” standard for
trademark infringement.To establish trademark infringement, a plaintiff must show the defendant’s use of the mark in commerce causes a likelihood of confusion about the source of goods or services. Among the factors used in determining likelihood of confusion is the similarity of the products and services offered by the plaintiff and defendant or likelihood that the plaintiff would expand into the defendant’s market. This analysis is not needed under ACPA.
BAD FAITH INTENTThe intent of ACPA was to prevent cybersquatters from registering domain names in bad faith. The law sets forth nine non-exclusive factors for courts to consider when weighing whether an infringer acts in bad faith. These include:i. The trademark or other intellectual property rights of the person, if any, in the domain name;
ii. The extent to which the domain name consists of the legal name of the person or a name that is otherwise commonly used to identify that person;
iii. The person’s prior use, if any, of the domain name in connection with the bona fide offering of any goods or services;
iv. The person’s bona fide noncommercial or fair use of the mark in a site accessible under the domain name;
v. The person’s intent to divert consumers from the mark owner’s online location to a site accessible under the domain name that could harm the goodwill represented by the mark, either for commercial gain or with the intent to tarnish or disparage the mark, by creating a likelihood of confusion as to the source, sponsorship, affiliation, or endorsement of the site;
vi. The person’s offer to transfer, sell, or otherwise assign the domain name to the mark owner or any third party for financial gain without having used, or having an intent to use, the domain name in the bona fide offering of any goods or services, or the person’s prior conduct indicating a pattern of such conduct;
vii. The person’s provision of material and misleading false contact information when applying for the registration of the domain name, the person’s intentional failure to maintain accurate contact information, or the person’s prior conduct indicating a pattern of such conduct;
viii. The person’s registration or acquisition of multiple domain names which the person knows are identical or confusingly similar to marks of others that are distinctive at the time of registration of such domain names, or dilutive of famous marks of others that are famous at the time of registration of such domain names, without regard to the goods or services of the parties; and
ix. The extent to which the mark incorporated in the person’s domain name registration is or is not distinctive and famous within the meaning of the statute.The infringer must intend to specifically profit from “squatting” on the domain name itself, rather than merely commit trademark infringement. For example, bad faith can be shown where a party registered a domain without using or having an intent to use that domain name in an actual offering of goods or services and then tried to sell the domain back to the brand owner for a high price. Other examples of bad faith include a party seeking to profit from diverting confused customers to the wrong domain, where they purchase the wrong services, or to defame the brand by directing people to a site with pornography.However, bad faith will not be inferred if the defendant believed or had reasonable grounds to believe that the use of the domain name was fair use or otherwise lawful.
CAN DAMAGES BE RECOVERED?The ACPA enables trademark owners to obtain a court order that transfers the domain name back to the trademark owner. In addition, damages may be awarded up to $100,000 per act of cybersquatting, as well as attorneys’ fees in exceptional circumstances.
ARE THERE ADDITIONAL REMEDIES?A trademark owner can also file a complaint under ICANN’s Uniform Domain Name Dispute Resolution Policy to bring the cybersquatting to arbitration. All domain names must be registered with ICANN. To succeed in the proceeding, claimants must show:The domain name is identical or confusingly similar to the claimant’s trademark or service mark;The alleged cybersquatter has no rights or legitimate interests in respect of the domain name; andThe domain name is being used in bad faith.To determine if a name has been registered in
bad faith, ICANN will consider several factors. While ICANN arbitration is less expensive than litigation under the ACPA, the only remedy available through ICANN is the cancellation or transfer of the domain name. No money damages will be awarded.
CONCLUSIONCybersquatters can cause a business significant harm. Companies should actively monitor the internet for parties using identical or similar names. If any are found,
an experienced attorney can help enforce your rights.
Debt CollectionDebt collection issues arise frequently. Business owners and service providers seeking payment of owed money or persons on the receiving end of harassing or inappropriate debt collection efforts will encounter legal issues relating to debt collection. There are many laws governing debt collection practices and they vary depending on the type of debt and other circumstances. An attorney can assist you in enforcing your rights and resolving collection matters in compliance with all applicable rules.
WHAT RULES APPLY TO CONSUMER DEBT COLLECTORS?Consumer debt is a significant issue in the U.S. Debt collection practices and consumers protections are heavily regulated by law. At the federal level, consumer debt collection is primarily regulated by the Fair Debt Collection Practices Act; while in New York, the New York State Debt Collection Procedures Law applies. Both statutes seek to protect consumers from abusive, unfair, or misleading practices by collection agencies. Debt collectors must take care not to violate these laws and to adequately train staff to avoid liability and resolve matters legally.
PROHIBITED PRACTICESFederal and State law prohibits “unfair or unconscionable means” in debt collection, including:· Calling a debtor at odd hours, at their workplace, or repeatedly with the intent to harass or annoy.· Threatening legal action when no such action is intended.· Threatening arrest.· Communicating a consumer’s debt to an employer or family member.· Misrepresenting one’s identity, including impersonating a law enforcement officer, government representative, judicial body, or attorney.New York law also prohibits debt collectors from seeking to collect a fee in addition to the debt owed.
REQUIRED PRACTICESFederal and state laws also require debt collectors to follow certain practices, including:· Notifying consumers that they are debt collectors and that the communication is an attempt to collect a debt.· Providing the name and address of the creditor on request.· Sending the consumer a notice of his or her right to dispute the debt.· Providing verification of the debt on written request.· Selecting the venue where the consumer lives or signed an agreement if initiating a lawsuit.
OTHER LEGAL REQUIREMENTSThere are several other regulations that apply to consumer debt collection. For example, laws governing
fraudulent transfers may empower a bankruptcy court to recover assets transferred to a third party to avoid paying creditors.In addition, the Uniform Commercial Code applies to
secured transactions where the amount owed is secured by the debtor’s property or assets, such as a home mortgage or car loan.
WHAT LEGAL RIGHTS DO CONSUMER DEBTORS HAVE?Debtors have specific legal rights under Federal and New York State law. As noted above, they have the right to written verification of the alleged debt upon request and to proper notice of any legal actions filed against them. They also have the right to receive an accurate credit report. This information helps ensure debts are legitimate and that debtors have an opportunity to defend themselves.In addition, debtors are entitled to retain an attorney and require the collection agency to cease contacting them and address matters to their attorney. This is an important right as a lawyer can assist in disputing the debt or negotiating a settlement.
DEFENSESConsumers have the right to challenge their debt and may have several defenses to a collection action. Debtors can dispute a debt if they believe the debt is not owed, it has been paid, or the amount is incorrect. For example, a debt based on a contract claim may be subject to defenses of unconscionability, mistake, impossibility and other defenses. Alternatively, a payment claim may be time barred even if the debt is valid. An old debt may no longer be enforceable because the statute of limitations has expired. Creditors should be aware of these potential defenses when seeking to enforce a payment obligation or collect a debt. An attorney can assist creditors or debtors to ensure successful resolution of debt collection matters.Where debt collectors have engaged in prohibited conduct, an attorney may also be able to bring legal action against the collector and recover damages. Consumers can also file a complaint with the Federal Trade Commission, which can sue collection agencies for violations.Creditors and consumers should consult an attorney to evaluate their matter and determine the best course of action for eliminating or minimizing the amount owed.
HOW ARE COMMERCIAL DEBTS COLLECTED?Commercial debt collection is not covered by the Fair Debt Collection Practices Act. Instead, commercial debt is typically negotiated by the parties, negotiated through counsel, or resolved in business bankruptcy proceedings.
DEBTS ARISING FROM COMMERCIAL CONTRACTSWhen payment issues arise from a commercial contract, parties must consider the contractual language governing their rights and obligations. Where disputes arise, the contract may provide for the method resolution (e.g., arbitration, or litigation in a specific forum) as well as specify what damages are recoverable and whether there are security interests guaranteeing the debt. Creditors may also send the debt to a commercial debt collection agency to try to get payment.As with any
breach of contract action, there may be several available grounds and defenses, which should be evaluated by an experienced attorney.In addition, certain types of contracts may be governed by the Uniform Commercial Code, such as secured transactions, governed under Article 9. In a secured transaction, a creditor obtains a contractual right to property or assets to satisfy or secure a debt. Any debt collection activities must comply with contractual agreements, applicable Uniform Commercial Code requirements and other applicable laws or rules.
BANKRUPTCYWhen a commercial debtor files for bankruptcy, other laws apply to debt collection. Bankruptcy proceedings may involve many creditors seeking to be paid from the debtors’ assets and creditors may only recover a portion of what is owed. Creditors have specific rights under
fraudulent transfer and conveyance laws, such as The Uniform Fraudulent Transfer Act and The Uniform Fraudulent Conveyance Act, which permit a bankruptcy trustee to recover assets improperly transferred by the debtor. Moreover, a bankruptcy court may require a creditor who has been paid before the bankruptcy filing to return those funds as a
preferential transfer, even if the underlying debt is valid.
CONCLUSIONDebt collection is a heavily regulated area of law and debtors and creditors should be well-counseled about the laws governing debt collection. Parties in debt collection disputes should consult experienced legal counsel to assist them and ensure efficient, legal resolution to debt matters.
DefamationDEFAMATION IS A CLAIM ABOUT DAMAGE TO ONE’S REPUTATION. WHAT IS DEFAMATION?Defamation is the publication or communication of a false statement of fact about a person to a third party, which causes harm to the subject-person’s reputation or constitutes defamation per se (more on that below), without privilege or the subject-person’s consent.
Defamation is a very fact-specific claim. Not all statements made, even some that harm another person’s reputation, constitute defamation.
FORMAT – WRITING OR VERBALDefamation can be either be published or communicated in writing (called “libel”), or verbally (called “slander”). While both commonly occur in society, “libel” cases are far more common, simply because verbal “slander” is often more difficult to prove.
CONTENT – FACTS, NOT OPINIONSThe first step in evaluating whether a statement constitutes defamation is to examine the content of the statement itself.An
opinion (e.g., “In my opinion, this restaurant has food that does not taste very good.”) – which is not a fact – is typically
not defamation. Most opinion is speech protected by the First Amendment of the United States Constitution. (Defamation is based in state law, which is trumped, or “pre-empted,” by the United States Constitution.)
CONTENT – FALSE STATEMENT, NOT TRUE STATEMENTA defamatory statement must be false. Even a statement that may be harmful to one’s reputation, if true, does not constitute defamation.
WHO IS THE INJURED PARTY?Higher standards apply to
public figures (i.e., celebrities) bringing a defamation claim. Private figures must only prove negligence by the party who published or communicated the statement; however, public figures need to prove “actual malice,” or a reckless disregard for the truth or falsity of the statement (a higher standard than proving negligence).
WHAT IS DEFAMATION PER SE?Defamation per se are certain statements that are deemed so inherently injurious that damages to the subject-person’s reputation are presumed. New York has four categories of statements which constitute defamation per se, including statements charging a person of committing a “serious crime,” and statements which tend to injure a person in the person’s business, trade, or profession.
STATUTE OF LIMITATIONSDefamation claims in New York have a relatively short statute of limitations. Claims must be filed within one year of the publication or communication of the defamatory statement.If you believe that a false, defamatory statement of fact has been published or communicated about you, please contact an experienced defamation attorney who may be able to help.
THE SINGLE PUBLICATION RULENew York follows the single publication rule. Pursuant to this rule, a party that causes the mass publication of defamatory content may only be sued once for its initial publication of that content. For example, if a newspaper or magazine publishes a defamatory article that is circulated to thousands of people, the newspaper or magazine may only be sued once. The Statute of Limitations (discussed above) begins to run at the time of first publication.
REPUBLICATION, AN EXCEPTION TO THE SINGLE PUBLICATION RULEThe act of republication resets the Statute of Limitations for defamation claims. This is an exception to the single publication rule.When determining whether material has been republished, Courts examine whether the republication was intended to and actually reached new audiences. Other factors that Courts may examine include whether the second publication was made on an occasion distinct from the first publication and whether the defamatory content has been modified between publications.Below are a few examples where a Court has found in favor of republication and did not apply the single publication rule:The maker repeated a defamatory statement in a later edition of a book, magazine or newspaper.The maker rebroadcast defamatory material on a television.The maker caused articles to be published in morning and afternoon editions of the same newspaper.
ARE THE STATEMENTS PRIVILEGED?If a statement is privileged or a defense applies, the maker of that statement may be immune from any lawsuit arising out of those privileged statements. Below are common privileges and defenses that are asserted in defamation lawsuits.
ABSOLUTE PRIVILEGEStatements protected by absolute privilege allow the maker to be free from all liability surrounding those statements. In other words, the maker is seen as having the right to make the statement, regardless of the impact. In order for a statement to qualify for this protection, the statement must first be made by an individual participating in a public function. Examples of public functions are judicial, legislative or executive proceedings. Second, the person at whom the statement is directed must have the opportunity to challenge the statements. For example:In
Toker v. Pollak, 44 N.Y.2d 211, 219 (1978), the Court of Appeals (New York’s highest appellate court) held that grand jury testimony was protected by absolute privilege. The Court ruled that a judicial proceeding is “a proceeding in a court or one before an officer having attributes similar to a court” and grand jury testimony clearly falls within this definition.In
Wiener v. Weintraub, 22 N.Y.2d 330, 332 (1968), the Court of Appeals similarly held that a complaint made to a bar association grievance committee was absolutely privileged. The Court ruled that the grievance committee is a subsection of the New York Court system. Therefore, this type of procedure is one which is before an officer having attributes similar to a court and falls within the definition of a judicial proceeding.
QUALIFIED PRIVILEGEQualified privilege offers less protection than absolute privilege. Qualified privilege does not grant the maker automatic immunity. For a statement to qualify for this privilege, the statement must be made while the maker is exercising a legal or moral duty to make the statement, and the recipient must have an interest in receiving the information. Statements may lose this protection if the opposing party is able to demonstrate that the statement was made with the intent to cause harm.In
Toker, the Court held that communications made between an individual and law enforcement receive qualified privilege. Specifically, the Court ruled that these statements are not entitled to complete protection, but the statements do receive some protection. To balance the need the court afforded these statements the lesser qualified privilege.
COMMON INTERESTTo obtain protection under the common interest privilege, there must first be a legitimate communication about a subject matter. Second, these communications must be between two individuals sharing a similar interest in that subject matter.In
Liberman v. Gelstein, 80 N.Y.2d 429, 437 (1992), the Court held statements made by the Board of Governors of a tenant’s association regarding a landlord were protected. The Court held this because the conversation was within a common interest of the defendant and his colleague, and there was nothing to suggest this communication was about anything other than advancing their common interest.
FAIR COMMENT PRIVILEGE/FAIR REPORT PRIVILEGEUnder New York Civil Rights Law § 74, a defamation lawsuit cannot be sustained against any person making a “fair and true report of any judicial proceeding, legislative proceeding or other official proceeding.” In
Briarcliff Lodge Hotel, Inc. v. Citizen-Sentinel Publishers, Inc., 260 N.Y. 106 (1932), the Court held that for the report to be “fair and true” it must be substantially accurate. In other words, courts review cases for any substantial and contextual accuracy of news reporting.In
Rakofsky v. Washington Post, 39 Misc. 3d 1226(A) (Sup. Ct. New York County 2013), the Court held that a report regarding a judge’s ruling on a motion was entitled to this privilege. The Court held that although the wording was not identical, the wording was similar enough to convey a fair reporting of a judicial proceeding.
TRUTHTruth is an absolute defense to defamation. In other words, the maker cannot be held liable for saying things that are actually true. The party asserting the defense bears the burden of showing the truthfulness of those statements.Statements can also be defended as being substantially true. In
Fleckenstein v. Friedman, 266 N.Y. 19, 23 (1934) the court articulated the “workable test”. This test looks to whether the statement, as published, would have a different impact on the reader or listener than the truth.In
Mitre Sports Int’l, Ltd. v. HBO, Inc., 22 F. Supp. 3d 240, 253 (SDNY 2010), HBO asserted that because there was a possibility of Mitre’s use of child labor in one country, then the statements about the same practices in another country are protected via substantial truth. The court rejected this defense as there would have been a different impact on reader if the statements published were indeed true.
DAMAGESGenerally, damages for defamation claims are proportionate to the harm suffered by the plaintiff. The three types of damages for defamation claims are compensatory damages, nominal damages, and punitive damages.
COMPENSATORY DAMAGESCompensatory damages are awarded to compensate for actual harm resulted from the defendant’s defamation. Some types of actual harm include impaired reputation and standing in the plaintiff’s community, personal humiliation, mental anguish and suffering, loss of employment opportunities, and the cost of trying to mitigate the harm from defendant’s libel. There are two types of compensatory damages – (1) special damages and (2) general damages.Special damages are based on economic harm where there are losses or injuries to the plaintiff’s property, business, occupation or profession. To claim special damages, the specific amount of economic harm must be identified.General damages are for other damages that are not under special damages. The amount of general damages may be difficult to assess and the jury generally has the discretion to determine the award amount after weighing all the facts.
NOMINAL DAMAGESIn defamation per se claims, a plaintiff may be able to recover nominal damages even if the plaintiff does not show any actual injury resulted from the defamation per se. Nominal damages are small monetary awards to vindicate a plaintiff’s good name.
PUNITIVE DAMAGESPlaintiffs can seek punitive damages in defamation claims. Punitive damages are intended to punish the defendant and meant to deter the defendant from repeating the defamatory conduct. The amount in punitive damages depend on several factors, such as degree of defendant’s malice or wanton or willful conduct.Keep in mind, the damages a plaintiff may seek depends on the type of defamation, whether the plaintiff is a public or private figure and whether the defamatory statement is related to a private or public concern. For example, in Zaidi v. United Bank Ltd., 747 N.Y.S.2d 268 (Sup. Ct. 2002), the Court held that a defamation claim, where the defamation involves a private person and a private matter, requires a fair preponderance of credible evidence of common law malice. In other words, a private person seeking punitive damages for defamation must show the defendant made such defamatory statement out of hatred, ill will or spite.If you would like more information on defamation – either because you want to pursue a defamation claim or want to defend against an existing claim – please contact an experienced defamation attorney who may be able to help.
Digital Millennium Copyright Act (DMCA)With platforms and mobile apps providing online services that allow users to generate or upload content, copyright infringement is a concern for both copyright owners and online service providers. Copyright owners want to protect the rights to their works and recover damages when those works are infringed upon. However, online service providers simply cannot fairly be held liable for every piece of infringing content users post, particularly when providers are not aware of that content. Online service providers would be forced to spend an impossible amount of time and resources to properly monitor user content, rendering business economically infeasible. The compromise enacted by Congress is known as the Digital Millennium Copyright Act (DMCA). To strike a balance between protecting copyright owners and service providers, the DMCA strives to protect the rights to copyrighted works without running online service providers’ businesses into the ground by providing specific mechanisms for both copyright owners and online service providers. A DMCA takedown notice is one such mechanism that can be issued by copyright owners. Another mechanism is the DMCA’s safe harbor provisions that online service providers can follow to remain protected against secondary liabilities.
WHAT IS A DMCA TAKEDOWN NOTICE?To enforce their rights, owners of copyrighted works can provide written notices to request online service providers to remove content that infringes on those owners’ copyrighted works. The DMCA requires the takedown notices to include specific information to allow the online service providers to locate and remove the allegedly infringing content. Although online service providers may not necessarily be the party who generated the content, online service providers must comply with the DMCA takedown notices in order to remain exempt from copyright infringement liabilities under the DMCA safe harbor protections.Notice RequirementsA DMCA takedown notice must include certain information to be enforceable. This includes:Physical or electronic signature of the copyright owner or authorized agent of the owner;Identification of each copyrighted work claimed to have been infringed;Description or information of where the claimed infringing content is located, such as the URL;Contact information of the copyright owner or authorized agent of the owner, including the name, address, telephone number and e-mail (if any);A statement that the person sending the takedown notice has a good faith belief that the use of the content in the manner complained of is not authorized by the copyright owner, its agent, or the law; andA statement under penalty of perjury, that the information contained in the DMCA takedown notice is accurate.Sending a DMCA Takedown NoticeA DMCA takedown notice is typically sent to the host of the online service provider. The host can be located by looking up the IP address of the online service provider’s website using ARIN Whois Service or a similar tool. Once the host is identified, the host should provide details on where to submit the takedown notice. The copyright owner may also send a takedown notice directly to the individual infringer who provided the infringing content to the online service provider.Note that the DMCA only applies to copyrighted material hosted in the U.S. However, international service providers may honor a DMCA takedown notice.
HOW SHOULD A PARTY RESPOND TO A DMCA TAKEDOWN NOTICE?Upon receiving a takedown notice, the receiving party must promptly remove or disable access to the claimed infringing content or risk a lawsuit for copyright infringement. For online service providers, a copy of the takedown notice should be promptly forwarded to the user who is allegedly infringing. In addition to sending a copy of the takedown notice to the posting user, online service providers must inform the posting user that they may submit a counter notice if they believe their content was mistakenly taken down or misidentified as infringing content. Users should carefully review the takedown notices and carefully consider whether to send counter notices.DMCA Counter NoticeThe DMCA permits a party to contest a takedown notice by sending a counter notice to the sender of the takedown notice as well as the online service provider. The counter notice must include:Physical or electronic signature of the party who is contesting the takedown notice;Identification of the content that was removed;Description of where the content was located before removal, such as the URL;Contact information of the party who is contesting the takedown notice, including the name, address, telephone number and e-mail (if any);A statement under penalty of perjury that the contesting party has a good faith belief that the content was removed by mistake or misidentification; andA statement that the contesting party consents to the jurisdiction of the Federal District Court where the contesting party is located, or where the online service provider is located if contesting party is located outside the United States, and that the contesting party will accept service of process from the person who provided the takedown notice or an agent of such person.Online service providers must then forward a copy of the counter notice to the sender of the DMCA takedown notice. The removed content must be restored within 10-14 days of receiving the counter notice, unless the copyright owner initiates a lawsuit within that period.
WHAT IS THE DMCA SAFE HARBOR?Online service providers who host content provided by users (e.g., social media platforms, peer-to-peer sharing platforms, forums, etc.) may be exempt from secondary liability under the DMCA safe harbor provisions. The purpose of the safe harbor is to protect such providers when they are unaware of the infringement and are not actively engaging in the infringement. As a result, providers cannot have actual knowledge of the infringing material or be aware of “red flag” conduct that may indicate infringement.The safe harbor provisions are applicable to online service providers that allow users to post content. Another safe harbor provision is applicable to online service providers that simply transmit, route, connect or store user material through an automatic technical process, without the online service provider modifying or selecting that process.In order to take advantage of the exemption from secondary liability, an online service provider must have a DMCA policy, which includes the contact information for its designated copyright agent for service of copyright claims and its “repeat infringer” policy. Most importantly, to remain under the DMCA safe harbor protections, the online service provider must implement the procedures for the DMCA takedown notice process and repeat infringer policy.
WHAT IS A REPEAT INFRINGER POLICY?A repeat infringer policy is the procedure that the online service providers adopt and implement to deter users from repeatedly infringing on any copyrights. Users are generally informed of the DMCA takedown procedures and repeat infringer policy in the online service provider’s terms and conditions, copyright policy or other appropriate location on the online service provider’s website.Online service providers must reasonably implement the adopted repeat infringer policies to remain eligible for the DMCA safe harbor protections. To reasonably implement such policies, online service providers must terminate the accounts of users who are deemed as repeat infringers or are repeatedly charged with infringement as well as retain an accurate record of users who have allegedly infringed on copyrighted works.
DAMAGESDamages for copyright infringement liability can be calculated by actual damages or statutory damages. Actual damages can be determined based on any actual damages the copyright owner suffered from the copyright infringement and any profits made from the infringement.Alternatively, copyright owners can seek statutory damages. Statutory damages for copyright infringement ranges from $750 to $30,000 per copyrighted work. For willful copyright infringement, the statutory damages can increase up to $150,000 per copyrighted work.
ATTORNEY’S FEESNote that the Copyright Act also allows the prevailing party to seek reasonable attorneys’ fees for copyright infringement if the copyright owner has registered the copyright with the US Copyright Office. Further, an award of attorneys’ fees is up to the discretion of the court. Courts judge an application for attorneys’ fees in copyright infringement cases on the “objective reasonableness” of the parties’ arguments: parties advancing reasonable arguments are more likely to be awarded attorneys’ fees; similarly, a party advancing an unreasonable position is likely to pay the prevailing side’s attorneys’ fees due to its obstinance. Courts also consider a party’s litigation misconduct or overaggressive assertion of copyright claims when awarding attorneys’ fees. Parties are therefore encouraged to litigate only when they have reasonable arguments, or risk paying their opponents’ fees as a result.The DMCA safe harbor and takedown notice provisions are complex. The parties must comply with the specific requirements in order to receive protection and failure to do so can result in significant liability. Best practice for following the DMCA requirements and implementing the repeat infringer policy is for online service providers to develop internal guidelines in consultation with an experienced copyright attorney.
Fraud ClaimsFraud claims can arise in a variety of settings. Businesses may be defrauded by owners, managers, employees, or outside parties, such as vendors and customers. Consumers may be victimized by businesses or individuals seeking to steal their money or cause other harm. For perpetrators, liability can be both criminal and civil.
WHAT IS FRAUD?Fraud is conduct which deliberately deceives someone with the intent of causing damage. Common types of fraud involve healthcare, tax, bankruptcy, insurance, securities, mail, telemarketing, and wire.
WHAT ARE THE REQUIREMENTS FOR ALLEGING FRAUD?To plead a claim for fraud In New York, a plaintiff must allege: (1) a material misrepresentation of a fact, (2) knowledge of its falsity, (3) an intent to induce reliance, (4) justifiable reliance by the plaintiff, and (5) damages.The defendant must have made a statement that was false or untrue and the false statement must have been material, meaning that it was about something essential to the transaction. Fraud requires misconduct. As a result, the defendant must have known the statement was false when it was made and had an intent to deceive, manipulate, or defraud the plaintiff, or have acted so recklessly as to constitute an intent to defraud. The plaintiff must show that he or she justifiably relied on the misrepresentation and exercised ordinary intelligence in ascertaining the truth of the representation made by the defendant. Finally, there must be a direct link between the fraudulent act and the loss that the plaintiff alleges.
SPECIAL CONSIDERATIONS WHEN BRINGING A FRAUD CASEIn filing a civil fraud action in court, New York law requires that the plaintiff plead each element of the fraud claim in detail. Essentially, the plaintiff must provide enough facts to support a reasonable inference that the allegations of fraud are true. For example, the complaint must identify who made the misrepresentation, when it was made and what was communicated. Similarly, there must be specific allegations regarding the falsity of the allegations, the knowledge of the defendant, reliance by the plaintiff, and circumstantial evidence of an intent to defraud. With respect to causation and damages, the plaintiff must provide facts to show that
but for the defendant’s wrongful acts, the plaintiff would not have entered into the transaction and the defendant’s fraud directly caused the harm. The plaintiff also must allege sufficient facts from which the amount of damages can be inferred.While specificity is required in the complaint, New York courts do not require a plaintiff to provide the details of a fraud if those details are uniquely within the knowledge of the defendant.
HOW CAN A PARTY DEFEND AGAINST A CLAIM OF FRAUD?There are a variety of defenses to fraud, including the following:
Statement was not false. As noted in the previous section, the plaintiff must demonstrate that the representation was false when it was made. Where there is no evidence that a statement was in fact false, it cannot be inferred.
No intent to deceive. Intent or scienter is typically inferred by the circumstances surrounding the allegedly fraudulent act. For example, in the bankruptcy context, intent to defraud creditors can be shown by certain
badges of fraud such as transferring assets for less than fair market value or to insiders (family, friends, etc.). Intent may also be shown by reckless conduct. However, such conduct must be highly unreasonable and represent an extreme departure from the standards of care such as to show an actual intent to defraud.The misrepresentation required for fraud must be of a present or historical material fact. Generally, statements of opinion, exaggeration, or future expectations do not qualify. They are considered puffery that no reasonable person would take seriously. Examples include claims of being the “best” or having the “lowest” cost. However, it can be difficult to establish when marketing claims cross the line into fraud. Among the considerations are the sophistication of the audience to whom the statements are targeted as well as the nature of the relationship between the parties. Where there are mixed statements of puffery and fact, however, fraud may exist if the misrepresentation of fact meets the requirements of fraud.
Reliance was not justified. As discussed previously, the plaintiff must have justifiably relied on the misrepresentation. Courts look at whether the plaintiff exercised ordinary intelligence in ascertaining the truth of the representation by the defendant. Where the plaintiff is “sophisticated” in the sense of having experience with similar transactions or having access to resources to verify statements by the defendant, this becomes more difficult. Such parties are held to a higher standard and expected to exercise more due diligence in a transaction as compared to someone less accustomed to business dealings. Sophisticated parties must show they took affirmative steps to protect themselves by employing what resources for verification were available at the time.
Fraud claim is duplicative of a breach of contract claim. Where fraud is alleged in the context of a breach of contract claim and arises out of the same facts, the two claims must be separate and not duplicative. The plaintiff must allege (1) that the fraud was collateral or extraneous to the contract, or (2) a breach of duty separate from a breach of the contract, or (3) there are special damages “not recoverable under a contract measure of damages. Essentially, the misrepresentation must involve a promise to undertake some action separate and apart from the party’s obligations under the contract to be viable. Otherwise, the fraud claim will be dismissed as duplicative of the contract claim.
Statute of limitations. The statute of limitations for fraud causes of action is the greater of (1) six years from the date of the fraud, or (2) two years from the date it was discovered or reasonably could have been discovered through due diligence. However, there are instances where the court may “toll,” or extend, the limitations period.
CONCLUSIONFraud claims are very fact-specific and require extensive proof. The parties should compile all documentation regarding a transaction in order to substantiate their case and consult experienced counsel for assistance.
Fraudulent Conveyance in BankruptcyWhen facing financial problems, some individuals may try to preserve assets by transferring title to third parties for little or no money. In this way, they believe they can avoid losing the property in bankruptcy. Alternatively, they may use the money from a sale to pay certain creditors and not others. However, such transfers are not permitted by bankruptcy law because it places those assets outside the reach of all the creditors in bankruptcy.
WHAT IS A FRAUDULENT CONVEYANCE?When a person files for bankruptcy, a trustee is appointed to determine all the assets of the debtor available to creditors. Among the trustee’s tasks is to review any transfers of property made by the debtor to a third party within a certain period before the bankruptcy filing. Assets transferred or “conveyed” within the designated period with the intent to delay or defraud a creditor are considered
fraudulent transfers or fraudulent conveyances. The trustee has the power to set aside such transfers and recover the assets for the benefit of all the creditors of the bankruptcy estate.There are two types of fraudulent transfers in bankruptcy law. Actual fraud requires an intent to defraud creditors, while constructive fraud, involves a transfer, which is made for less than reasonably equivalent value.
HOW IS ACTUAL FRAUD DETERMINED?Actual fraud requires a transfer of property with the intent to hinder, delay, or defraud a creditor. The creditor challenging the transfer must prove intent, which can be difficult to do. As a result, certain “badges of fraud” can be used to help establish circumstantial evidence of intent.
BADGES OF FRAUDWhen there is no overt evidence of intent, courts have held that certain facts and circumstances are suggestive of actual fraud. These are known as badges of fraud. Typically, the badges are situations where the relationship between the parties or the details of the transaction raise suspicion that the transfer was not legitimate. The existence of a single badge of fraud is not determinative of fraudulent intent. However, the presence of several badges can constitute conclusive evidence of an actual intent to defraud.
EXAMPLES OF BADGES OF FRAUDCommon badges of fraud include:Transfer for less than the fair market valueTransfer to family, friends, or close associate relationships (also referred to as “insiders”)Transfer of ownership to a third party, but retaining possession and control of the property for the debtor’s useWorsening of the debtor’s financial condition after the transferPattern of transactions or conduct by the debtor after incurring debt or pendency or threat of lawsuits by creditorsSuspicious timing of the transaction in questionConcealing facts about or failing to disclose a transaction.
HOW IS CONSTRUCTIVE FRAUD DETERMINED?Constructive fraud has two elements. First, the debtor must have received less than reasonably equivalent value in exchange for such transfer or obligation. Second, the debtor must have been insolvent at the time of the transfer or become insolvent because of the transfer.Unlike actual fraud, there is no requirement to prove fraudulent intent of the debtor. The key issue is showing that the transfer was not made for reasonably equivalent value.
WHAT CONSTITUTES A TRANSFER FOR REASONABLY EQUIVALENT VALUE?Bankruptcy law does not define reasonably equivalent value. There may be legitimate reasons why a debtor sells property for less than it may appear to be worth. As a result, courts will consider various factors surrounding the transfer to determine if it was for reasonably equivalent value. These factors include the fair market value of the property, whether the transfer was made in good faith in the ordinary course of business, the existence of a special relationship between the parties, other offers or competitive bidding for the property, and the impact of the sale on the funds available to other creditors. In addition, transfers that offered additional businesses opportunities to the debtor may also be considered as part of the determination of reasonably equivalent value.Notably, a foreclosure sale amount is typically considered a legitimate transfer unless there was collusion, a special relationship, or violation of law.
WHAT IS THE “LOOK BACK” PERIOD FOR FRAUDULENT CONVEYANCES?Transfers by the debtor to a third party are reviewed for a certain period prior to the filing of the bankruptcy. This is known as the “look back” period. Generally, the trustee is limited to a two-year lookback. However, the period is four years if the state where the bankruptcy was filed has enacted laws, like the Uniform Voidable Transactions Act (UVTA), which allows for a longer look back period. The UVTA was formerly known as the Uniform Fraudulent Transfer Act (UFTA) and has been adopted by all but a few states.New York State enacted the UVTA in 2019. It provides that actions to avoid a constructive fraudulent transfer must be brought within four years of the transfer or obligation to be avoided, while actions to avoid an intentional fraudulent transfer must be brought within either four years of the transfer or obligation to be avoided or within one year of when the transfer or obligation was or reasonably could have been discovered, whichever is later.
HOW ARE FRAUDULENT CONVEYANCES RECOVERED?The bankruptcy trustee has the power to set aside a fraudulent conveyance and recover either the property transferred or the value of such property for the benefit of the bankruptcy estate. Action may be taken against the immediate recipient (initial transferee) of the property or subsequent transferees. However, there are a few exceptions. First, the trustee cannot recover from a bona fide purchaser who purchases for value, in good faith, and without notice of the rights of others, or any subsequent transferee from a bona fide purchaser. In addition, an exception is made for those who made improvements to the property. They are given a lien on the property securing their interest.
CONCLUSIONFraudulent conveyance law is complex, and determinations are highly fact-specific. Both debtors and creditors should consult experienced bankruptcy counsel to evaluate their options in refuting or challenging such claims.
FreelancersOn May 15, 2017, New York City’s Freelance Isn’t Free Act (the “Act”) took effect, offering new protections to freelancers. The Act gives most freelancers the right to obtain a written agreement for their work and receive timely payment. The regulation also prohibits certain types of retaliation against freelancers for seeking a written contract or payment. Violations of this law can result in significant liability. As a result, if you are a freelancer or a business that hires them, it is important to understand when the Act applies and what rights and obligations apply.
WHEN DOES THE ACT APPLY?The Act provides potentially powerful remedies but also limits the individuals it covers.
FREELANCER DEFINITIONA freelancer is any individual retained as an independent contractor, with the exception of certain sales representatives, lawyers, and doctors. Additional exemptions include freelancers hired as employees, working for no pay, or hired by the government. The freelancer may have an LLC, S-Corp or C-Corp, or use a trade name, but it may not have other employees. Freelancers can exist in any industry and may be referred to by other names, such as consultant, gig worker, contractor or subcontractor, or contract worker.It is important to note that while the parties may refer to a worker as a freelancer, that designation is not definitive under labor and employment laws. The hiring party must take care that a worker is properly categorized as an independent contractor because
employee misclassification can result in substantial damages and penalties.
WORK COVEREDThe work agreed to must total $800 in any 120-day period to fall under the Act. In addition, the worker must perform the work in New York City, although the Act may also apply to work performed outside the city, depending on the circumstances. The court will look at whether the worker performed the work in the New York City, a business actually hired the worker, and the business had significant operations.
WHAT RIGHTS EXIST UNDER THE FREELANCE ISN’T FREE ACT?The Act provides certain protections for freelance workers including:
· Written contract. Contracts that total at least $800 in any 120-day period must be in writing and clearly state the agreed upon work, the rate and method of compensation, and the payment date or the mechanism by which the payment date will be determined.
· Timely and full payment. Businesses must pay freelancers for all completed work on or before the date that is in the contract or, if there is no specified payment date, within 30 days of completion.
· Right to file a complaint. Individuals can file a complaint with the Office of Labor Policy & Standards (“OLPS”). OLPS will notify the hiring party about the complaint and the hiring party must respond to the complaint within 20 days. Individuals can also bring an action in state court.
· Protection from retaliation. A hiring party may not retaliate against a freelancer who exercises his or her rights under the law. This includes threats, intimidation, harassment, blacklisting, or other actions.Freelancers cannot waive their rights under the Act. Hiring parties who fail to comply with the law may be subject to penalties, including statutory damages, double damages, injunctive relief, and attorneys’ fees. Where there is evidence of a pattern or practice of violations, the New York City Corporation Counsel can also seek a civil penalty of not more than $25,000 against the hiring party.
HOW ARE RIGHTS ENFORCED UNDER THE FREELANCE ISN’T FREE ACT?If a freelancer believes a hiring party has violated the law, he or she can file a complaint with the OLPS or go directly to court. Where the worker chooses to go to the OLPS, the Office will notify the hiring party of the complaint. The hiring party has 20 days to respond in writing. If the hiring party does not respond, the freelancer can sue in court and the court will presume the hiring party violated the law because of the lack of a response. As a result, the hiring party would have the burden of proving it did not violate the Act. Freelancers who choose to go to court first cannot thereafter file a complaint with the OLPS. For those who go to court, the OLPS has a navigation program where it provides information to freelancers to help them understand how to enforce their rights, but it does not give legal advice or represent parties in litigation.
RETALIATIONThe Act expressly prohibits retaliation against freelancers seeking contracts or payment. A hiring party may not use threats, intimidation, discipline, harassment, blacklisting, or take other actions reasonably likely to penalize or deter freelancers from exercising their rights. Freelancers can file a complaint with the OLPS or sue in court and recover damages.
NON-PAYMENT AND LATE PAYMENTHiring agents must pay freelancers in accordance with the date that is in the contract or within 30 days of completion if the contract does not specify payment. Freelancers who do not receive payment can file a complaint with OLPS or go to court, as explained above. Freelancers can obtain double damages, attorneys’ fees, and other remedies.
HOW CAN HIRING PARTIES ENSURE COMPLIANCE WITH THE ACT?To avoid liability under the Act, business owners should be proactive. Best practices include the following:· Update standard freelancer contracts to comply with the Act and review revised contracts carefully to ensure they do not violate the Act
· Develop and mandate internal payment procedures to ensure timely payment
· Notify and train those responsible for hiring freelancers on the rulesFreelancers cannot waive their rights under the Act. Hiring parties who fail to comply with the law may be subject to penalties, including statutory damages, double damages, injunctive relief, and attorneys’ fees. Where there is evidence of a pattern or practice of violations, the New York City Corporation Counsel can also seek a civil penalty of not more than $25,000 against the hiring party.
COST OF NON-COMPLIANCEHiring parties may be liable for damages, attorneys’ fees, and various penalties, including:· Failure to enter into a written contract: $250 if no other violation of the Act or the value of the contract if there is another violation
· Non-payment or late payment: double damages, injunctive relief, and other appropriate remedies
· Retaliation: damages equal to the value of the contract for each retaliation violationIn addition, courts may award freelancers reasonable attorneys’ fees and costs.Where a hiring party violates the law on multiple occasions, New York City may also sue and obtain penalties of up to $25,000 and other remedies.
CONCLUSIONAs the gig economy continues to grow, it is imperative that freelancers and businesses are aware of their rights and responsibilities. Speak to an attorney regarding freelance agreements.
WHAT IS INSURANCE LAW?“Insurance law” includes regulatory, contract, and other areas of law. Insurance and reinsurance are highly regulated industries with specific laws addressing business insurance, insurance policies, and claims handling. Common regulatory issues for insurers involve formation and licensing, filed rates and the filed rate doctrine, and premium rates and rate audits. In addition, there are varying rules for different types of insurers including life, property and casualty, public mutual and nonprofit insurers, and reinsurers.Various laws also affect coverage and claim litigation, premium payment disputes, corporate regulatory and transactional issues, and loss recovery.
WHAT RULES APPLY TO INSURANCE POLICIES?Insurance policies are contracts between a policyholder (the insured) and an insurer. They are governed by the rules of contract law.The typical insurance policy has four parts:This sets forth the parties (insured and insurer), policy number, the properties or risks covered by the insurance, the policy period, premiums, limits, and deductibles.Insuring agreement. The agreement describes what specifically is covered such as the activities, perils, and types of damage or costs for which the insurer will pay.Any activities or losses not covered by the policy are stated here.The conditions describe the obligations of each party to the contract.Exclusions and Conditions for CoverageThe insurance policy will set forth exclusions and conditions for coverage. Policyholders must review these carefully to ensure they understand the scope of their coverage and what they must do to make a claim. Where certain activities or losses are excluded, an insured may be able to purchase additional specialized insurance or an umbrella policy to cover those risks.Conditions may apply to the insured or insurer. For example, an insurer may be required to give notice before cancellation. An insured typically has obligations related to making a claim and cooperating in an investigation or litigation. Failure to meet these obligations can jeopardize coverage.Making a ClaimInsurance policies set forth terms which govern when and how to make a claim. Compliance is essential in order to receive coverage. When policyholders suffer a covered loss, they are required to make a timely claim to the insurer (generally to their insurance agent). An untimely or late claim can give the insurer the right to deny coverage as provided in the language in the policy. The notice should provide documentation or any other evidence that supports the claim for coverage.While policyholders must notify insurers of the loss, they should take care not to prematurely admit fault, make statements of fact as to which they lack information or are uncertain, or attempt to ascertain damages without sufficient information. Insurers can use this information against the insured to deny coverage.Bad Faith Denial of CoverageInsurers have an implied duty of good faith and fair dealing. If an insurer denies a claim with malice, fraud, or oppression, it may constitute bad faith and the insured can sue for what is owed under the policy as well as potentially obtain punitive damages, damages for emotional distress, attorney’s fees, court costs, and interest as permitted under state law.The laws governing what constitutes bad faith vary from state to state. As a result, it is important to consult an attorney regarding a possible bad faith claim.
WHEN ARE INSURANCE DISPUTES MOST LIKELY TO ARISE?The most common insurance related disputes involve coverage or premiums. However, issues can arise in other contexts as well.Insurance CoverageWhen an insurer denies a claim, the insured may bring a suit alleging breach of contract. The litigation will often focus on the language of the policy with both sides arguing their position on the scope of the policy, exclusions, and/or conditions. A claim of bad faith may also be made as discussed in the previous section.PremiumsMany businesses have policies with variable premiums. When the policy is issued, it is based on an estimate of an “exposure basis” multiplied by a rate determined by the classification of the exposure. Subsequently, a “premium audit” is performed which examines business records to establish the actual exposure basis and verify the correct classification codes and rates are used to calculate the final premium. An audit may result in a refund of previous premium overpayments, or a request for additional payment of premium.Common examples of this type of exposure basis premium include auditing payroll records to calculate worker’s compensation insurance or alcohol sales for commercial liability polices for bars and restaurants. Disputes over the calculation of premiums can occur and may go to litigation if they cannot be otherwise resolved.Duty to Defend; Settlement RightsInsurance issues may also arise in other lawsuits due to insurance coverage for defending and settling those lawsuits. For example, if the insured is a party to litigation, a best practice is to investigate the existence of insurance coverage that could apply, especially coverage of any defendant or respondent party. The insurer may have a duty to defend and will hire and pay for an attorney. Insurance coverage may lead to faster settlement in the litigation and availability of funds to pay claims. However, as discussed previously, an insured is obligated to give prompt notice of claims so insurance companies may have the right to decline coverage where litigation has progressed without notice of a claim.Insurance coverage may also play a role in bankruptcy as debtor policies may fund payments to creditors. This can be of critical importance in cases with future creditors, such as asbestos or tort victims whose injuries will only be known at a later date. In such cases insurance policies may be used to create trusts to pay out future claims.Insurer-Reinsurer ClaimsInsurers may transfer some of the risk in their portfolios to a reinsurer to minimize the financial impact of large claims. In effect, reinsurance is insurance for insurers. As with any insurance policy, disputes may arise over the scope of coverage and other issues.
HOW DO INSURANCE ISSUES ARISE IN TRANSACTIONAL LAW?Insurance can be an integral part of business transactions. Some businesses are required by law to have insurance coverage to operate. Insurance may also be required by lenders. Common examples of corporate transactions that include a provision for insurance coverage are:Agency licensingPublic and private offerings of securities or debtSEC ReportingDirectors and Officer’s LiabilityMerger and Acquisition transactionsTransfers of books of business through assumption or indemnity reinsuranceVerifying insurance coverage is part of the due diligence process in many business deals. Parties may be required to provide a certificate of insurance or other documentation.
WILL INSURANCE COVER COVID-RELATED CLAIMS?COVID-19 has created new insurance issues. One of the first to arise involves business interruption coverage. Many businesses were forced to close in response to public health orders enacted at the city, state, and federal level. Some are seeking coverage under business interruption policies. Such policies are supposed to protect losses incurred by businesses from interruptions or disruptions to their operations caused by events listed in their policy.The availability of coverage depends on the terms of the policy. Relevant issues raised by COVID-19 related claims include whether pandemics or epidemics are excluded under the policy, how long the interruption must last before the insurance coverage is available, and whether the policy require that the interruption be a result of damage to property.State laws regarding coverage are changing in response to COVID-19. As a result, it is important to talk with an attorney regarding coverage or insurer obligations for COVID-19 related losses.
CONCLUSIONInsurance law can affect many aspects of our personal and business lives. Reviewing policies carefully before signing is crucial. If a claim arises, policy holders should document the details and give prompt notice to the insurance carrier. Both insurers and policy holders should consult attorneys for counsel regarding insurance claims, regulations, premium disputes, policy interpretations, and other insurance law issues.
Limited Liability Company (LLC) DisputesLimited liability companies (LLCs) are popular choices for many individuals looking to start a business. While there is
flexibility in how owners can decide to manage the LLC, conflicts can arise among the owners. There are laws, such as New York Limited Liability Company Laws, that apply to LLCs, but the parties can contract to avoid disputes or minimize disruptions to the business. Best practice is for LLC members to consult an attorney to help ensure the LLC’s operating agreement addresses essential issues that could become problems in the future.
WHAT DUTIES DO LLC MEMBERS HAVE TO EACH OTHER AND THE LLC?The LLC members’ duties to each other and to the LLC are usually set forth in the LLC’s operating agreement. This includes
fiduciary duties. A fiduciary duty is an obligation that one person act in the best interests of another person or an entity. The three types of duties are duty of care, duty of loyalty and duty of candor. LLC members may either provide for these duties or others, or completely waive any fiduciary duties, in the operating agreement.
WHY IS AN LLC OPERATING AGREEMENT ESSENTIAL TO THE BUSINESS?While an LLC operating agreement may not be required in some states, the New York Limited Liability Company Law (LLCL) § 417 requires an LLC’s members to adopt an operating agreement addressing the business of the LLC, the conduct of its affairs and the rights, powers, preferences, limitations or responsibilities of its members, managers, employees or agents.Regardless of whether it is a legal requirement, best practice is to draft an operating agreement to serve as a contract governing how the LLC will be run and avoid disputes over the terms of the business arrangement. Items that should be included in the agreement include capital contributions, voting requirements, decision-making procedures, restrictions on transferring and selling, how profits and losses will be divided, who will manage the business and the way the company will be dissolved, if necessary.If there is no written operating agreement, or the agreement fails to address a disputed matter, courts will turn to applicable “default” statutes or caselaw to decide the conflict. In New York, the LLCL is the default statute. Courts’ interpretations of default statutes may lead to a resolution that is vastly different from what members intended through their verbal agreement, which is why it is so important to have a written agreement.
HOW CAN LLC DISPUTES BE PREVENTED?The best way to prevent conflict is to address potential problem areas in advance in the operating agreement. The members must clearly define their unique arrangement, rights and responsibilities and not rely on boilerplate or standard form contracts. A well-drafted operating agreement can save the company significant time and money by avoiding costly litigation, minimizing interruptions to business operations and preserving limited liability protection for members. In addition, it is important for members to seek legal advice as soon as possible if there is a conflict to determine the best course of action.
CAN LLC MEMBERS SUE ON BEHALF OF THE LLC?LLC members can bring a derivative claim on behalf of the LLC against the company’s directors or third parties. However, the claim must arise from damages suffered by the LLC due to a director’s or officer’s misconduct. While any member can attempt to bring a derivative claim, the operating agreement often limits the type of member who may do so. Thus, the court has discretion to decide whether to allow the claim to continue.In New York, courts have held that LLC members may sue derivatively, even though the LLCL does not expressly allow such actions. This applies to derivative suits against other LLC members who breached their fiduciary duties.
RIGHT TO AN ACCOUNTINGAs with derivative claims, New York’s LLCL does not expressly provide for the right of a member to bring an action to obtain an accounting. However, at least one New York court has found that LLC members may seek an equitable accounting.
HOW CAN DEADLOCKS BE ADDRESSED?A deadlock among LLC members can arise any time the members have dispute concerning a major decision. However, the operating agreement can establish mechanisms to help resolve deadlocks. Absent such provisions, the LLC may need to go to court to seek judicial dissolution of the LLC or an alternative remedy, as discussed further below.
DEADLOCK PROVISIONSThere are several mechanisms which can be set forth in the operating agreement to resolve deadlocks, including:Buyout (or Buy/Sell) allowing members to buy out the interests of deadlocked membersReferral of the decision to “tie-breakers” who decide the matterForced partition or sale of the companyThere are also various options whereby individual members rotate the right to be the tie-breaker or have the right to exercise a put or call.
CUSTODIANSHIP/RECEIVERSHIPWhen conflicts are so severe as to threaten operation of the business, a court can appoint a custodian to manage the business while the dispute is resolved in litigation. This keeps the LLC from becoming insolvent but puts the company in third-party hands. If the issues are resolved, the custodian will step down. If liquidation of the company is needed, the court will appoint a receiver.
INJUNCTIONAn LLC member can petition a court for an injunction prohibiting or requiring certain actions by another party. There must be a risk of irreparable harm to the company or its members and no other adequate remedy at law.
SPECIFIC PERFORMANCEWhere there has been a breach of contract, the nonbreaching party may be able to obtain specific performance – that is, the breaching party will be forced to perform under the contract.
EXPELLING MEMBERSSome states allow judicial expulsion of an LLC member in the case of misconduct, although there is a high burden of proof. However, New York’s LLCL does not allow judicial expulsion. The only way to expel a member is in accordance with the LLC’s operating agreement.
JUDICIAL DISSOLUTIONCourts may order dissolution of an LLC whenever it is not reasonably practicable for the business to continue on in accordance with the articles of organization or operating agreement. New York courts will look to whether (1) the LLC’s management cannot or will not reasonably permit the identified purpose of the LLC to be realized, or (2) continuing the business is financially impractical.Dissolution is an extreme remedy, often sought by members of an LLC who allege they are victims of a “freezeout.” A freezeout occurs when controlling members of an LLC take actions which cause other members of the LLC to lose voting power and/or the ability to receive income from the LLC.
ALTERNATIVE DISPUTE RESOLUTIONThe operating agreement can require that disputes be resolved through some form of alternative dispute resolution. In
mediation, a neutral third party helps facilitate discussion and agreement between parties, but does not impose a decision. In
arbitration, a neutral party acts as a private judge, rendering a decision in the matter. However, whether the award is legally binding depends on the parties’ agreement. Where it is legally binding, the courts can enforce the arbitration award.
CONCLUSIONTaking proactive steps can significantly reduce disputes among LLC members. Where conflict cannot be avoided, there are still options that could save the business. By working with an attorney from the time the LLC is formed, measures can be taken to prevent conflicts or minimize the harm they can do to the business and/or the individual members.
LitigationLawsuits are adversarial proceedings by and between parties in civil courts of law. The process of a lawsuit is called “litigation,” and the parties to a lawsuit (plaintiffs and defendants) are called “litigants.” Litigation is an expansive term, which includes any number of activities before, during, and after a lawsuit. These activities include pre-suit negotiations, appeals, the filing of motions, and collection of a judgment.
WHAT DO YOU DO IF YOU’RE DEALING WITH A LAWSUIT?Whether you wish to initiate a lawsuit, or one has been commenced against you, our experienced attorneys can help you navigate the litigation process. Our litigation attorneys take extensive care during the initial analysis period to pinpoint a case’s strengths and weaknesses. Our goal is to provide you clear assessment of your claims or possible liabilities.
MATTERS WE HANDLE Our firm has experienced litigation attorneys who can handle a variety of matters, including: breach of contract cases, employment disputes, entertainment and royalty disagreements, business and corporate litigation (including disputes between shareholders of a corporation or members of a limited liability company), and intellectual property disputes.We are practiced in highly complex commercial litigation including civil fraud actions, copyright and trademark disputes, securities litigation, and actions brought under the Civil Racketeering Act, also known as Civil RICO.We also have a network of counsel attorneys with years of experience navigating the court system, and distinct focuses on specific areas of litigation, mediation, and arbitration.
LITIGATION REPRESENTATIONWe can file suit on your behalf, or defend your rights in court, and will ensure your interests are both aggressively yet appropriately represented before a court of law.Our office often operates on “parallel tracks,” such as exploring client-approved settlement while continuously advancing the litigation, until a highly satisfactory resolution can be reached. We also have experience before New York’s state and federal appellate courts, should you require appellate counsel.At Romano Law, we pride ourselves on prompt communication and expert handling of time sensitive and confidential communication. We always aim for practical solutions to complex problems that require strategic vision, and work to establish an attorney client relationship that will be long-lasting.
WHAT IS MEDIATION?Mediation is a structured, interactive process through which a neutral third party assists parties in resolving conflict. All participants in mediation are encouraged to actively participate in the process.Mediation is a “party-centered” process, meaning it is focused primarily upon the needs, rights, and interests of the parties. In mediation, a neutral third party, called the mediator, uses a wide variety of techniques to guide the dispute resolution process in a constructive direction and to help the parties find their optimal resolution. Many courts offer free or lower-cost mediation programs. Private organizations also provide mediation services for varying degrees of costs.Mediation is also evaluative in that the mediator analyzes issues while refraining from providing prescriptive advice to the parties.
WHAT ARE THE BENEFITS?The mediation process is private and confidential, and participation is voluntary. The mediator facilitates, rather than directs, the process. Any participating party is free to end their participation in the process at any time unless and until an amicable resolution is reached. The process itself is “non-binding,” meaning the parties do not create any obligations for themselves by participating unless and until a mutually-acceptable agreement reached and a binding settlement agreement signed by the parties.Additionally, settlement communications made between the parties during a mediation, absent few exceptions, are typically inadmissible in court, should the mediation, despite mediation’s high success rate, happen to be unsuccessful and litigation results instead.
MEDIATION IS AN IMPORTANT ALTERNATIVE TO CONSIDEROur experienced attorneys can help you navigate the mediation process. We can represent you at mediation and develop a strategy to achieve a positive result. If it becomes clear that the parties cannot or will not settle, then Romano Law’s litigation team is prepared to represent you more forcefully through arbitration or litigation.
Partnership DisputesWhen a partnership is first formed, the focus is usually on how to get the business going. No one likes to think about possible problems that may occur sometime in the future. However, the best time to plan for the worst is when all is going well, so everyone is thinking logically about how they would resolve potential conflicts. Whether a partnership dispute is major or minor, it pays to establish guidelines in advance to minimize disruptions to the business and loss of revenue.
WHAT ARE COMMON CAUSES OF PARTNERSHIP DISPUTES?There are many reasons conflicts arise among partners. Typically, they involve disagreements over how the business is being run, allegations of partner misconduct or a breach of a partner’s obligations to the partnership.
BREACH OF CONTRACTPartnership agreements are complex, establishing the roles and responsibilities of the partners as well as the financial arrangements governing their relationship. In addition, partners may sign other contracts related to the partnership, such as employment, confidentiality, non-compete and operating agreements. If a partner violates a contract term, a
breach of contractaction can result.
BREACH OF FIDUCIARY DUTYPartnerships create
fiduciary duties between the partners and the partnership. A fiduciary duty is an obligation that a person act in the best interests of another person or an entity. Typically, there are three categories of fiduciary duties: duty of care, duty of loyalty and duty of candor. However, the Revised Uniform Partnership Act of 1994 (RUPA) § 404 provides that a partner only owes the duties of loyalty and care to the partnership and the other partners. A party suing for breach may be awarded direct and indirect damages, injunctions, restitution, rescission, legal fees and other appropriate remedies as provided under the law.
MISAPPROPRIATION OR OTHER PARTNER MISCONDUCTA partner’s misconduct can be harmful to the business. Partners are prohibited by law from misappropriating company funds, assets or partnership opportunities. In addition, partners cannot compete with the partnership or have an adverse interest. Other types of misconduct include concealing information about the business, gross negligence or recklessness in managing the business, or committing a crime or fraud whether it relates to the business or not.
WORKLOAD IMBALANCETypically, the partnership agreement sets forth the responsibilities of the partners with respect to the work required to operate the business. However, if the agreement is not sufficiently clear or detailed, disputes can arise among partners regarding their respective share of the workload.
DISAGREEMENT OVER OPERATIONS OF THE BUSINESSConflicts can arise among the partners regarding how to run the business. This can consist of disputes over day-to-day operations, investments in and allocation of resources to the business, and decision-making authority.
HOW CAN PARTNERSHIP DISPUTES BE AVOIDED?A well-drafted partnership agreement is the best way to avoid disputes. It should establish the parties’ rights and obligations, clarify expectations and provide guidelines for how disputes should be resolved to minimize adverse impacts on the business. However, the partners must also cooperate. Honesty, transparency and a willingness to compromise are essential in any business relationship.
BUYOUT AGREEMENTA buyout agreement can also help avoid disputes. It sets forth when a partner can buyout another partner’s interest or force out a partner. The provisions should explain under what circumstances the buyout can occur and the partner’s and partnership’s rights to purchase the interest. The agreement should also indicate how the partner’s interest should be valued.
HOW CAN PARTNERSHIP DISPUTES BE RESOLVED?Some conflict among partners is probably inevitable, but in most cases, it should be able to be resolved amicably. Negotiation is the first step and allows the parties to come to a settlement where everyone wins and loses something.
ALTERNATIVE DISPUTE RESOLUTIONWhere the parties cannot settle the matter themselves, the partnership agreement may require that disputes be resolved through some form of alternative dispute resolution.
Mediation and
arbitration both rely on the use of neutral third parties. In mediation, the neutral helps facilitate discussion and agreement between parties, but he or she does not impose a decision. Arbitration results in a decision by the neutral party, but whether the award is legally binding depends on the parties’ agreement. Where it is legally binding, the courts can enforce the arbitration award.
DISSOLUTION OF THE PARTNERSHIPThe dissolution of the partnership is a final solution to disputes. If all partners agree to dissolve the partnership, it is considered a voluntary dissolution. Where only some of the partners want dissolution, it is involuntary, and the partner requesting dissolution must get a court order to dissolve the partnership and divide the assets and debts of the business.In either case, it is important to
wind downthe business properly, which includes dealing with existing contracts, vendors, clients, bank accounts, intellectual property rights and other matters. A receiver may be appointed by the court to manage the business until the dissolution is final.
CONCLUSIONPartnership disputes can lead to a disappointing end to a business. However, the right planning can make a significant difference in avoiding or minimizing conflict. Working with an attorney can help partners understand their rights and responsibilities and quickly address potential problems before they do irreparable harm to the business.
Partnership DisputesWhen a partnership is first formed, the focus is usually on how to get the business going. No one likes to think about possible problems that may occur sometime in the future. However, the best time to plan for the worst is when all is going well, so everyone is thinking logically about how they would resolve potential conflicts. Whether a partnership dispute is major or minor, it pays to establish guidelines in advance to minimize disruptions to the business and loss of revenue.
WHAT ARE COMMON CAUSES OF PARTNERSHIP DISPUTES?There are many reasons conflicts arise among partners. Typically, they involve disagreements over how the business is being run, allegations of partner misconduct or a breach of a partner’s obligations to the partnership.
BREACH OF CONTRACTPartnership agreements are complex, establishing the roles and responsibilities of the partners as well as the financial arrangements governing their relationship. In addition, partners may sign other contracts related to the partnership, such as employment, confidentiality, non-compete and operating agreements. If a partner violates a contract term, a
breach of contractaction can result.
BREACH OF FIDUCIARY DUTYPartnerships create
fiduciary duties between the partners and the partnership. A fiduciary duty is an obligation that a person act in the best interests of another person or an entity. Typically, there are three categories of fiduciary duties: duty of care, duty of loyalty and duty of candor. However, the Revised Uniform Partnership Act of 1994 (RUPA) § 404 provides that a partner only owes the duties of loyalty and care to the partnership and the other partners. A party suing for breach may be awarded direct and indirect damages, injunctions, restitution, rescission, legal fees and other appropriate remedies as provided under the law.
MISAPPROPRIATION OR OTHER PARTNER MISCONDUCTA partner’s misconduct can be harmful to the business. Partners are prohibited by law from misappropriating company funds, assets or partnership opportunities. In addition, partners cannot compete with the partnership or have an adverse interest. Other types of misconduct include concealing information about the business, gross negligence or recklessness in managing the business, or committing a crime or fraud whether it relates to the business or not.
WORKLOAD IMBALANCETypically, the partnership agreement sets forth the responsibilities of the partners with respect to the work required to operate the business. However, if the agreement is not sufficiently clear or detailed, disputes can arise among partners regarding their respective share of the workload.
DISAGREEMENT OVER OPERATIONS OF THE BUSINESSConflicts can arise among the partners regarding how to run the business. This can consist of disputes over day-to-day operations, investments in and allocation of resources to the business, and decision-making authority.
HOW CAN PARTNERSHIP DISPUTES BE AVOIDED?A well-drafted partnership agreement is the best way to avoid disputes. It should establish the parties’ rights and obligations, clarify expectations and provide guidelines for how disputes should be resolved to minimize adverse impacts on the business. However, the partners must also cooperate. Honesty, transparency and a willingness to compromise are essential in any business relationship.
BUYOUT AGREEMENTA buyout agreement can also help avoid disputes. It sets forth when a partner can buyout another partner’s interest or force out a partner. The provisions should explain under what circumstances the buyout can occur and the partner’s and partnership’s rights to purchase the interest. The agreement should also indicate how the partner’s interest should be valued.
HOW CAN PARTNERSHIP DISPUTES BE RESOLVED?Some conflict among partners is probably inevitable, but in most cases, it should be able to be resolved amicably. Negotiation is the first step and allows the parties to come to a settlement where everyone wins and loses something.
ALTERNATIVE DISPUTE RESOLUTIONWhere the parties cannot settle the matter themselves, the partnership agreement may require that disputes be resolved through some form of alternative dispute resolution.
Mediation and
arbitration both rely on the use of neutral third parties. In mediation, the neutral helps facilitate discussion and agreement between parties, but he or she does not impose a decision. Arbitration results in a decision by the neutral party, but whether the award is legally binding depends on the parties’ agreement. Where it is legally binding, the courts can enforce the arbitration award.
DISSOLUTION OF THE PARTNERSHIPThe dissolution of the partnership is a final solution to disputes. If all partners agree to dissolve the partnership, it is considered a voluntary dissolution. Where only some of the partners want dissolution, it is involuntary, and the partner requesting dissolution must get a court order to dissolve the partnership and divide the assets and debts of the business.In either case, it is important to
wind downthe business properly, which includes dealing with existing contracts, vendors, clients, bank accounts, intellectual property rights and other matters. A receiver may be appointed by the court to manage the business until the dissolution is final.
CONCLUSIONPartnership disputes can lead to a disappointing end to a business. However, the right planning can make a significant difference in avoiding or minimizing conflict. Working with an attorney can help partners understand their rights and responsibilities and quickly address potential problems before they do irreparable harm to the business.
Preference Claims in BankruptcyDoing business with an individual or company with financial problems may have unintended consequences. If they file for bankruptcy, you could be required to return money they legitimately paid to you months earlier, even if you were not aware of their difficulties at the time. This is because bankruptcy law may treat you as having received an impermissible preference as a creditor.
WHAT IS A PREFERENCE CLAIM?Section 547 of the
Bankruptcy Code sets forth rules regarding the payment and discharge of debts of a debtor. An important public policy underlying bankruptcy law is the equal treatment of similarly situated creditors in bankruptcy. One creditor should not be given a “preference” over others in the same class of creditors. If the debtor paid some bills but not others before filing for bankruptcy, those paid creditors may have received a preference. They did not have to wait for payment or risk having their debt reduced or eliminated because there was not enough money to pay all creditors. To avoid unfairness, bankruptcy law allows a preference claim, which seeks to recover moneys paid to a creditor before a bankruptcy was filed to become part of the pool of money used to pay all creditors. Only certain payments need to be refunded. Bankruptcy law sets forth requirements as well as defenses.
WHO CAN BRING A PREFERENCE CLAIM?A preference claim is brought by the bankruptcy trustee against creditors paid within a certain period prior to the debtor filing for bankruptcy. These claims are sometimes colloquially referred to as “claw-back” claims.
HOW IS A CLAIM INITIATED?Before the claim is filed, a creditor will typically receive a “demand letter” stating how much is owed and demanding immediate payment. If the funds are not repaid, the trustee may commence a lawsuit in Bankruptcy Court. However, creditors may be able to negotiate a settlement or convince the trustee to drop the claim, either because the money is not a preference payment or the creditor has a defense. In these instances, the money does not have to be refunded. Even if the trustee is unwilling to accept the creditor’s defense, it may help in encouraging settlement for a lesser amount.
WHAT HAPPENS IF THE PAYMENT IS DEEMED TO BE A PREFERENCE?If a payment is determined to be a preference payment, it must be repaid. Such funds become part of the pool of available assets that will be distributed to creditors in accordance with bankruptcy law. Creditors in bankruptcy may receive only a portion of what they are owed.
WHAT ARE THE REQUIREMENTS OF A PREFERENCE CLAIM?Only certain payments are considered preferential. The transaction must meet the following requirements:A transfer of an interest of the debtor in property. The creditor must have received something of value from the debtor, such as the payment of money, a security interest, or a guaranty.To or for the benefit of a creditor. This goes one step further than the first requirement in that the debtor did not have to give the creditor the payment; it could have been made to another party for the creditor’s benefit.For or on account of an antecedent debt. The payment to the creditor must have been for a debt that was already due. It does not include a current debt, prepayments, or advance payments for goods or services.Made within 90 days of the bankruptcy filing (or within 1-year if the transfer was to an insider). This requirement limits the lookback period for transactions. The payment to the creditor must have been made in the 90 days prior to the bankruptcy filing for ordinary creditors, and 1 year for “insiders” such as family members or general partners of the debtor, or, in the case of corporations, officers, directors or other persons, in control of the company.Made while the debtor was insolvent. An insolvent debtor is one who has more liabilities than assets. Notably, under the Bankruptcy Code, a debtor is presumed to have been insolvent during the 90 days prior to the filing of the bankruptcy.Which allows the creditor to receive more than it would have received if the payment had not been made, and the claim was paid through the bankruptcy process. Essentially, the transaction meets the requirement if the payment was more than the creditor would get in bankruptcy.The trustee has the burden of proving all the above requirements by a preponderance of the evidence.
WHAT DEFENSES ARE AVAILABLE IN A PREFERENCE CLAIM?If the payment meets the requirements for a preference payment, a creditor may still be able to avoid refunding the money. There are several affirmative defenses to a preference claim. The burden of proof is on the creditor to show the requirements of the defense have been met.
ORDINARY COURSE OF BUSINESS DEFENSEPayments made in the “ordinary course of business” between the creditor and debtor need not be refunded as preferences. In order to take advantage of this defense, the creditor must show that (1) the payment was on account of a debt incurred in the ordinary course of business or financial affairs of the debtor and the creditor; (2) payment was made in the ordinary course of dealings between the debtor and the creditor;
or (3) payment was made according to ordinary business terms. Essentially, the creditor will need to demonstrate that the payments were made under similar terms and conditions as previous, non-preference period payments, or, if there is no course of dealing between the creditor and the debtor, then that the transfer is ordinary in the industry.Evidence of the parties’ account history and collection activities and industry practices may be relevant in proving the defense.
NEW VALUE DEFENSEWhere a creditor provides additional goods or services after a preference payment is made, the value of new goods may be used to offset the preference payment. The creditor must prove: (1) the new value was given to the debtor after the preferential payment was received; and (2) the creditor did not receive any other payment for that new value.
CONTEMPORANEOUS EXCHANGEThis defense applies when the debtor and creditor intend for a transaction to be a contemporaneous exchange of payment for goods or services. For example, cash-on-delivery (“COD”) payments would fall into this category. However, if payment was intended to pay for a previous invoice, this defense would not apply. Immediate payment is not required but should be made relatively quickly after the sale.
OTHER DEFENSESWhere a creditor has a security interest in loaned funds or the debtor’s assets, a defense of Purchase Money Security Interests or Floating Lien may be available. In addition, de minimis transfers that are deemed too small also need not be returned.
WHAT IS THE STATUTE OF LIMITATIONS FOR A PREFERENCE CLAIM?A preference action must be commenced within the Statute of Limitations, otherwise, it can be dismissed as untimely. The limitations period for preference claims is the later of (1) two years from the date the bankruptcy case was commenced, or (2) one year from the date the trustee was appointed if the court-appointed a trustee. Sometimes, there are other grounds to extend the limitation periods of a claim. Accordingly, always consult an attorney when determining whether a claim is time-barred.
CONCLUSIONAnyone considering whether to do business with an individual or company that may be filing for bankruptcy should consider the law regarding preference payments. The limited definition of preference payments and available defenses can protect moneys paid in many instances, but each situation is unique.
Right of PublicityTHE RIGHT OF PUBLICITY IS THE RIGHT OF AN INDIVIDUAL TO CONTROL THE COMMERCIAL USE OF HIS OR HER NAME, IMAGE, LIKENESS, OR OTHER SIMILAR ASPECTS OF THE INDIVIDUAL’S IDENTITY. In the US, the right of publicity is right based in
state law (rather than federal law). About half of the states in the US recognize a right to publicity. New York is one of them. In New York, the right of publicity is codified by statute in New York Civil Rights Law Sections 50 and 51.Subject to several exceptions addressed below, Section 51 provides protection for a person’s “name, portrait, picture or voice” which is used within New York “for advertising purposes or for the purposes of trade” without the
written consent of that person.Section 51 provides for both injunctive and monetary remedies (primarily for emotional distress), as well as occasional exemplary (also known as punitive) damages subject to a jury’s discretion if the use was done knowingly and with knowledge that the subject did not consent to the use, and if there is an objective to deter future similar conduct. Like defamation claims in New York, right of publicity claims in New York have a relatively short statute of limitations, which is only one year.Note a few caveats to the New York law:The right applies to
persons and does not protect business entities (although entities may have recourse under other bodies of law).
Voice was added to the scope of protection of Section 51 in 1995.The scope of protection regarding one’s “portrait” or “picture” has been held to include sculptures, mannequins, and other three-dimensional “likenesses.”New York’s right of publicity does
not survive death.Additionally, there are several exceptions to the scope of “advertising purposes” and “purposes of trade,” both in the statute and in developed case law, including:Professional photographers are exempt from suit under Section 51 by the subjects of their work due to the exhibition of the photographer’s work in or about the photographer’s establishment, unless the photographer first receives written objection by the person portrayed and the photographer continues to display it despite the written objection;The use of an author’s name, in connection with the exploitation of the work of that author, is permitted (i.e., if a publisher otherwise has permission to exploit the work itself, the author cannot bring a right of publicity claim for use of his or her name as part of the exploitation);The use by owners of copyrights in sound recordings otherwise properly exploiting the sound recordings with permission (e.g., like the above, if the copyright owner her permission to exploit the sound recording, the performer cannot bring a claim alleging a right of publicity violation due to exploitation of the performer’s voice);Using a person’s identity in connection with products, if the person at issue manufactured or sold those products under their own identity;Use in connection with a “newsworthy” article (even if the publisher intends the use to attract advertising or promote revenue). “Newsworthiness” is interpreted broadly; however, one limitation of the newsworthiness exception is if there is a “severe” degree of falsity or if the publisher acted with “actual malice” (which exceeds the scope of this webpage).Please bear in mind that, though one use may not constitute a right of publicity violation, it is possible, based on the facts, that a claim under another body of law could be made. Please also note that, when the use is online (or otherwise in multiple states), this issue may become far more complex, and various additional factors exceeding the scope of the above must be considered.If you would like a better understanding of New York’s right of publicity law – either because you want to prevent a claim in the future, you feel you have a claim, or you want to defend against an existing claim – please contact an experienced right of publicity attorney who may be able to help.
Shareholder DisputesShareholders have a financial interest in protecting the value of their investment in a company. As such, conflicts can arise when shareholders disagree about what is good for the business or their personal interests. These disputes can be detrimental to a company, resulting in disruptions in operations, legal expenses and other damages. This is why businesses must do their best to prevent shareholder disputes. Shareholders have certain protections under most state laws, but as with
partnerships and limited liability companies, the business’s ownership agreement governs much of the rights and remedies of the parties. While shareholder disputes may be impossible to avoid in some instances, they can be minimized with good legal advice.
WHAT ARE COMMON CAUSES OF SHAREHOLDER DISPUTES?Disputes can arise for a wide variety of reasons. Often, they result from a shareholder’s objection to the operation or management of the business. There may also be conflicts arising from the actions of a sole or group of shareholders, which can adversely affect other shareholders.
BREACH OF THE SHAREHOLDER AGREEMENT OR BYLAWSThe shareholder agreement outlines and defines the distribution and nature of the shares in a company, including identifying the different types of shares and the rights provided to the holder of each type. Disputes may arise when a shareholder breaches one of the terms of the agreement, such as selling shares in violation of the relevant terms.The company’s bylaws specify how the corporation’s internal affairs are governed. For example, it sets forth how directors will be appointed, when shareholders will meet, and how finances will be managed and reported. The failure of a shareholder or the company to follow the rules and regulations in the bylaws is a frequent source of conflict.
BREACH OF FIDUCIARY DUTYA
fiduciary duty is an obligation that one person act in the best interests of another person or an entity. Where a fiduciary duty exists, there is a heightened duty of care and significant liability can result if the duty is breached. Officers and directors owe fiduciary duties to shareholders and the company. However, shareholders do not owe fiduciary duties to one another, except in the case of closely held corporations. Examples of a breach of fiduciary duty include misappropriating company assets, insider trading, usurping a corporate opportunity for oneself, and failure to disclose a conflict of interest.
COMPENSATION OR CONTRIBUTION DISCREPANCIESWhere shareholders are also employees, conflicts may arise if there are differences in how they are compensated and there is no reasonable justification for the discrepancies.
DISCREPANCIES IN TREATMENT OF MAJORITY VS MINORITY SHAREHOLDERSMinority shareholders are at a disadvantage because they lack the votes to ensure their voices are heard. As a result, most states give minority shareholders some protection against oppressive treatment by majority shareholders. This varies from state to state however and certain states, like Delaware, are considered “majority shareholder friendly.”
MISAPPROPRIATION OF COMPANY ASSETSIf a shareholder misappropriates company assets, he or she may still be subject to liability even if no fiduciary duty is owed. Misappropriation can come in many different forms, including skimming cash before funds are officially recorded on the company’s books, using company credit cards for personal use, abusing expense reimbursement and overstating hours worked.
DISAGREEMENT OVER COMPANY’S DIRECTIONShareholders have a financial stake in the success of the company and may disagree with decisions made by those running the corporation when they feel it may damage the value of the business. A wide variety of actions may precipitate conflict, including the board’s or management’s decision to continue or discontinue product lines, move into new markets, relocate facilities or make capital investments.
HOW CAN SHAREHOLDER DISPUTES BE RESOLVED?The first step in resolving a shareholder dispute is to understand the terms in the shareholder agreement and other relevant controlling documents. Often, there are provisions to aid in conflict resolution, such as the following:· Removal of a director. Where permitted by the parties’ legal agreements, a conflict with a director may be resolved by voting out the director.
· Appointment of a new director or advisor. The board may be permitted to bring a new disinterested voice into discussions to assist the parties in coming to an agreement.
· Alternative dispute resolution. Both mediation and arbitration rely on neutral third parties to help resolve disputes without resort to litigation.
· Buyout (or Buy/Sell). This allows the company, shareholders, or a third party to buy out the interests of shareholders involved in the dispute.
· Shareholder resolution. A shareholder can propose a resolution to try to settle the conflict through discussions or a vote of the shareholders.
WHAT ARE THE MOST EFFECTIVE WAYS TO PREVENT SHAREHOLDER DISPUTES?The best way to prevent shareholder disputes is to address potential problem areas in advance in the shareholder agreement and other relevant legal documents (e.g., employment agreements, articles of association, bylaws, etc.). A well-drafted agreement can save the company significant time and money by avoiding disputes or minimizing the cost of resolving those that do arise.The agreement should include detailed provisions regarding the following:· Shareholder rights and responsibilities, including minority shareholder provisions
· Fiduciary duties of officers, directors, and executives
· Transfers of shares
· Disclosure obligations
· Corporate formalities (shareholder meetings, corporate records, etc.)
· Buyout (or Buy/Sell)
· Dispute resolution
CONCLUSIONConflicts cannot always be avoided, but by taking proactive steps, companies can minimize the damage to the business. Experienced legal counsel can guide companies as to the most effective way to prevent or solve disputes while still protecting shareholder rights.
Trademark InfringementA trademark is the word, symbol, design, slogan or phrase that is used as a source identifier, which helps consumers identify and distinguish the goods or services offered by one business from others. Businesses generally invest substantial amounts of money in their branding as a way to build a stronger source identifier for the goods or services those businesses provide.
Trademark law establishes standards for creating a valid mark and enables owners to enforce their rights against others attempting to use their trademarks or similar marks that may cause consumer confusion or dilute the value of their brands. As business owners, it is important to
protect and enforce your trademark rights against possible infringers.
WHAT IS TRADEMARK INFRINGEMENT?Essentially, trademark infringement is the unauthorized use of another’s valid trademark. Enacted in 1946, the Lanham Act is the federal law that governs trademarks. The Lanham Act provides statutory protections for trademark owners against consumer confusion that would allow them to
enforce their rights against infringers. Trademark registration is not required but it offers many benefits to an owner looking to prevent or remedy infringement.It is possible to receive common law trademark protection for an unregistered mark. However, the protection is limited to the trademark laws of the specific geographic location in which the goods or services are sold. Moreover, since the trademark is unregistered, the owner must prove that the trademark is a source identifier for consumers. Thus, protection for trademark infringement is possible for an unregistered mark, but it is not as strong as the statutory protections afforded to registered trademark owners.Notably, while the US Patent and Trademark Office (the USPTO) handles federal trademark registrations, and each state oversees its own state trademark registration process, neither the USPTO nor the states police or monitor trademark infringement. The owner of the trademark is responsible for protecting and enforcing its marks.
HOW CAN TRADEMARK INFRINGEMENT BE ESTABLISHED?To establish a trademark infringement claim, there must be proof that (1) the trademark owner owns a valid and protectable trademark, and (2) there is a likelihood of confusion from the alleged infringer’s use of the owner’s mark in commerce.The first part of the test determines whether the plaintiff has the right to make a complaint. Not all marks used by a brand are
trademarkable. Trademark registration provides the benefit of helping a business establish that its mark is enforceable.The second part of the test addresses how the alleged infringer is using the mark. Some uses of a mark do not constitute infringement, such as those considered fair use or parody, as discussed further below.The use “in commerce” requirement means that the alleged infringer’s use must have a substantial effect on interstate commerce. For example, if the alleged infringer advertises across state lines, that is considered use in commerce.The alleged infringer’s use also must result in a likelihood of confusion, which generally looks at whether a consumer would assume the product or service offered by the alleged infringer is associated with the plaintiff. If the trademark in question is both so sufficiently similar from the plaintiff’s and in direct competition for sales with the plaintiff’s services or goods, then courts are likely to find a likelihood of consumer confusion. But, if the services or goods in question are similar but not in direct competition with each other, then courts will consider various other factors when determining a likelihood of confusion.
LIKELIHOOD OF CONFUSION FACTORSCourts analyze eight factors to determine whether there is a likelihood of confusion as to the source of goods or services. These factors are known as the
Polaroid factors, which are:1. Strength of the trademark owner’s mark;
2. Similarity between the trademark owner’s mark and the alleged infringer’s mark;
3. Proximity of the products and competition with one another;
4. The trademark owner’s likelihood of expanding or entering into the alleged infringer’s related market (bridging the gap);
5. Evidence of actual confusion by consumers;
6. Alleged infringer used the mark in bad faith;
7. The quality of the products or services of both parties; and
8. The sophistication of the consumers in the relevant markets.Polaroid Corp. v. Polarad Elecs. Corp., 287 F.2d 492 (2d Cir. 1961).How these factors are weighed vary, but the focus is always on whether a consumer would reasonably be confused under the circumstances.
ARE THERE DEFENSES TO TRADEMARK INFRINGEMENT?There are several defenses to trademark infringement. As noted previously, the trademark must be valid and enforceable, so an alleged infringer may defend against infringement by contesting the validity of the trademark. The Lanham Act also allows the following defenses:1. The registration or the right to use the mark was obtained fraudulently;
2. The mark has been abandoned by the plaintiff;
3. The mark is being used with permission of the plaintiff;
4. The mark is descriptive of the product or service and is therefore not protected under the Lanham Act;
5. The mark was used by the alleged infringer without knowledge of the plaintiff’s prior use, before the date the mark was registered with the USPTO;
6. The mark has been or is being used to violate antitrust laws;
7. That equitable principles, including laches, estoppel and acquiescence, are applicable.In addition, the affirmative defenses of fair use (or nominative use) and parody are available.
FAIR USE OR NOMINAL USEThe Fair Use Doctrine allows a party to use a trademark as a descriptive term, rather than for its association with a brand, goods or services. Such use only incidentally or nominally involves the use of a trademark and consumer confusion is unlikely. Fair use may also apply where the trademark is used in the context of commentary or criticism.
PARODYArtistic or editorial parody may be allowed so long as it is not closely tied to commercial use and its existence clearly will not lead to confusion. The more a parody seeks to leverage an owner’s trademark for commercial purposes, the more likely it will constitute infringement.
WHAT IS THE DIFFERENCE BETWEEN TRADEMARK INFRINGEMENT AND TRADEMARK DILUTION?Trademark law also protects owners from third party use of their marks by blurring or tarnishing, which dilutes the value of the trademark. Trademark infringement and dilution can seem similar in the sense that a business is using a similar trademark as another business. However, there are key differences between the two. For instance, trademark dilution only applies to “famous” marks. There is no need to show a likelihood of consumer confusion in a dilution claim. Moreover, the goods or services sold by the alleged diluter do not need to be in competition or bear similarity with the trademark owner.
REQUIREMENTS FOR TRADEMARK DILUTIONCourts will look at several factors in determining whether a mark is famous, including:1. The duration, extent and geographic reach of advertising and publicity of the mark, whether advertised or publicized by the owner or third parties;
2. The amount, volume and geographic extent of sales of goods or services offered under the mark;
3. The extent of actual recognition of the mark;
4. Whether the mark is registered.Assuming a mark is famous, then the owner can sue for dilution by “blurring” or “tarnishment.” Blurring occurs when the distinctiveness of the brand is impaired by association with the other party’s use. Tarnishment occurs when a mark similar to a famous trademark harms the reputation of such famous trademark.
HOW CAN A PARTY AVOID A TRADEMARK INFRINGEMENT CLAIM?Trademark law is confusing, and it is easy to run afoul of the rules. The first step is for business owners to educate themselves on trademark rules. Next is to conduct an online search to determine if anyone has similar marks to the potential ones the business wants to use. An attorney should also be consulted to assist with additional analysis and help register the trademark. As discussed previously, registration is not required but is advisable because it offers various benefits. By being proactive, parties can protect themselves from costly infringement claims.
WHAT DAMAGES OR REMEDIES ARE AVAILABLE FOR TRADEMARK INFRINGEMENT CLAIMS?The Lanham Act provides for both monetary and injunctive relief. A successful plaintiff can obtain damages for their losses as well as receive the alleged infringer’s profits in connection with the infringement. Attorney’s fees may be awarded in certain cases. Treble damages may also be available when the alleged infringer acts intentionally and in bad faith.
CONCLUSIONDetermining whether your trademark has been infringed on, or defending against such a claim, is complex. It usually requires a detailed analysis of the law and facts.
Consultation with an attorney is the best course of action to ensure your rights are protected.
212.865.9848 BOOK NOWTrade SecretsBusinesses often have confidential information that they want to protect from competitors or other parties that could use the information to the business’ detriment. Such “trade secrets” can include formulas, recipes, customer data, manufacturing processes and other information. Trade secret law provides a way for owners to obtain legal recourse from someone misappropriating those secrets. What constitutes a trade secret, however, is not always easy to understand. Parties must be aware of the rules, as well as how to protect their rights in the case of misappropriation.
HOW ARE TRADE SECRETS PROTECTED?Both federal and state law protect trade secrets. On the federal side, the law is called the Defend Trade Secrets Act of 2016 (DTSA). Under the DTSA, the “owner of a trade secret that is misappropriated may bring a civil action . . . if the trade secret is related to a product or service used in, or intended for use in, interstate or foreign commerce.”Most states have adopted some version of the Uniform Trade Secrets Act (UTSA), although New York relies on common law to protect trade secrets. The requirements for bringing an action can vary from state to state. Notably, federal law does not preempt state law so a party can bring claims under both federal and state law.
WHAT QUALIFIES AS A TRADE SECRET UNDER THE DTSA?The DTSA defines a trade secret as “all forms and types of financial, business, scientific, technical, economic, or engineering information, including patterns, plans, compilations, program devices, formulas, designs, prototypes, methods, techniques, processes, procedures, programs, or codes, whether tangible or intangible, and whether or how stored, compiled, or memorialized physically, electronically, graphically, photographically, or in writing.” In addition, to qualify as a trade secret, the owner must have taken reasonable measures to keep the information secret, the information must have an independent economic value from being not disclosed, and the information must not be readily ascertainable by someone else who can obtain economic value from disclosing or using it.
FACTORSCourts look at various factors in determining whether the information is a trade secret, including whether the information is known outside of the business, its value to the owner and its competitors, the effort or money spent in developing the information, the difficulty for others to get or create the information and the actions taken to guard the secrecy of the information.
WHAT CONSTITUTES MISAPPROPRIATION UNDER THE DTSA?The DTSA defines misappropriation as follows:(A) Acquisition of a trade secret of another by a person who knows or has reason to know that the trade secret was acquired by improper means; or
(B) Disclosure or use of a trade secret of another without express or implied consent by a person who:(i) Used improper means to acquire knowledge of the trade secret;
(ii) At the time of disclosure or use, knew or had reason to know that the knowledge of the trade secret was:(I) Derived from or through a person who had used improper means to acquire the trade secret;
(II) Acquired under circumstances giving rise to a duty to maintain the secrecy of the trade secret or limit the use of the trade secret; or
(III) Derived from or through a person who owed a duty to the person seeking relief to maintain the secrecy of the trade secret or limit the use of the trade secret; or(iii) Before a material change of the position of the person, knew or had reason to know that:(I) The trade secret was a trade secret; and
(II) Knowledge of the trade secret had been acquired by accident or mistake.
18 U.S.C. § 1839(5).Essentially, courts examine the circumstances surrounding how the trade secret was obtained. There must have been something improper, such as fraud, theft, or other facts showing that the defendant knew or had reason to know that the information was a trade secret or that there was a duty to maintain the secrecy of the information.Note that the DTSA also requires that the trade secret be used in interstate commerce.
REQUIREMENTS FOR A SUCCESSFUL LAWSUITTo bring a successful misappropriation claim, the owner of the trade secret must allege, with sufficient facts, how the information qualifies as a trade secret. The owner of the trade secret, however, can ask the court for permission to file the complaint, setting forth these facts, “under seal” to keep its trade secret private.
WHAT REMEDIES ARE AVAILABLE UNDER THE DTSA?The DTSA gives an owner a range of remedies in misappropriation cases, including monetary damages and other relief.
DAMAGESOwners can obtain monetary damages to compensate them for the economic harm they suffered. This includes the recovery of direct losses and any profits the defendant made from the trade secret. The owner may also obtain a reasonable royalty for the unauthorized disclosure or use of the trade secret.If the trade secret was willfully and maliciously misappropriated, the owner may receive exemplary damages up to two times the amount of the damages.
INJUNCTIVE RELIEFWhere appropriate, the court may also issue an injunction to prevent any actual or threatened misappropriation. A defendant may be ordered to cease further use or disclosure of the trade secret. However, there are limitations in using an injunction in the employment context to stop a former employee from revealing trade secrets to their new employer. The injunction cannot prevent the former employee from entering an employment relationship and any conditions on employment must be based on specific evidence of threatened misappropriation.
APPLICATION FOR A SEIZURE ORDER WITHOUT NOTICE TO THE OTHER PARTYThe DTSA allows a trade secret owner to seek an “ex parte” seizure order to prevent the propagation or dissemination of the trade secret while the case is pending. This means the trade secret owner can file an application for seizure with the court without the court seeking the input from the party who is alleged to have misappropriated the trade secret. Seizure is only permitted in “
extraordinary circumstances” and ex parte seizure is not granted as a matter of course. The owner, however, may also pursue seizure using other methods if certain requirements are met.
ATTORNEYS’ FEESA prevailing party may be awarded attorneys’ fees where the other party acted in bad faith in misappropriating the secret, bringing the claim of misappropriation, or making or opposing a motion to terminate an injunction.
IMMUNITYThe DTSA provides for criminal and civil immunity for employees, consultants and contractors who are whistleblowers.
STATUTE OF LIMITATIONSThe DTSA has a statute of limitations of three years to bring a claim. It begins to run when the misappropriation is discovered or, with the exercise of reasonable diligence, should have been discovered.
CONCLUSIONBusiness owners have a compelling reason to protect their trade secrets, but the law can be complex. Best practice is to consult an attorney regarding what types of information constitute a trade secret and how to best protect this information.
