A federal law that requires most business and facilities to provide reasonable access and accommodation for all disabled customers, clients, and members of the public. This law, the Americans with Disabilities Act (ADA), applies to almost all businesses that are open to the public, regardless of size. Below is an introduction to the ADA and its application to “public accommodations.”
The Americans with Disabilities Act
The Americans with Disabilities Act (ADA) is a federal civil rights law that prohibits the exclusion of people with disabilities from everyday activities, such as buying an item at the store, watching a movie in a theater, enjoying a meal at a local restaurant, exercising at the local health club, or having the car serviced at a local garage. To meet the goals of the ADA, the law established requirements for private businesses of all sizes. These requirements first went into effect on January 26, 1992.
In recognition that many small businesses cannot afford to make significant physical changes to their stores or places of business to provide accessibility to wheelchair users and other people with disabilities, the ADA has requirements for existing facilities built before 1993 that are less strict than for ones built after early 1993 or modified after early 1992.
Private Businesses that Serve the Public: “Public Accommodations”
Private businesses that provide goods or services to the public are called “public accommodations” under the ADA. The ADA establishes requirements for twelve categories of public accommodations, including stores and shops, restaurants and bars, service establishments, theaters, hotels, recreation facilities, private museums and schools, and others. Nearly all types of private businesses that serve the public are included in the categories, regardless of size. Existing facilities are not exempted by “grandfather provisions” that are often used by building code officials.
New Construction and Alterations
The ADA requires that newly constructed facilities, first occupied on or after January 26, 1993, meet or exceed the minimum requirements of the ADA Standards for Accessible Design. Alterations to facilities, spaces or elements (including renovations) on or after January 26, 1992, also must comply with the Standards. Renovations or modifications are considered to be alterations when they affect the usability of the element or space. For example, installing a new display counter, moving walls in a sales area, replacing fixtures, carpet or flooring, and replacing an entry door. However, simple maintenance, such as repainting a wall is not considered an alteration by the ADA.
Q: What is a “public accommodation” under the ADA?
A: Private businesses that provide goods or services to the public are called public accommodations under the Americans with Disabilities Act (ADA). The ADA establishes requirements for twelve categories of public accommodations, including stores and shops, restaurants and bars, service establishments, theaters, hotels, recreation facilities, private museums and schools and others. Nearly all types of private businesses that serve the public are included in the categories, regardless of size.
Q: Is a business automatically required to remove “barriers” to access under the ADA?
A: If a business provides goods and services to the public, it is required to remove barriers to access if doing so is readily achievable. Such a business is called a public accommodation because it serves the public. If a business is not open to the public but is only a place of employment like a warehouse, manufacturing facility or office building, then there is no requirement to remove barriers. Such a facility is called a commercial facility.
Q: How do I determine what is “readily achievable” for a business?
A: “Readily achievable” means easily accomplishable and able to be carried out without much difficulty or expense. Determining if barrier removal is readily achievable is, by necessity, a case-by-case judgment. Factors to consider include:
1) The nature and cost of the action;
2) The overall financial resources of the site or sites involved; the number of persons employed at the site; the effect on expenses and resources; legitimate safety requirements necessary for safe operation, including crime prevention measures; or any other impact of the action on the operation of the site;
3) The geographic separateness, and the administrative or fiscal relationship of the site or sites in question to any parent corporation or entity;
4) If applicable, the overall financial resources of any parent corporation or entity; the overall size of the parent corporation or entity with respect to the number of its employees; the number, type, and location of its facilities; and
5) If applicable, the type of operation or operations of any parent corporation or entity, including the composition, structure, and functions of the workforce of the parent corporation or entity.
Q: If an area of a store is reachable only by a flight of steps, is the owner required to add an elevator?
A: Usually no. A public accommodation generally would not be required to remove a barrier to physical access posed by a flight of steps, if removal would require extensive ramping or an elevator. The readily achievable standard does not require barrier removal that requires burdensome expense. Thus, where it is not readily achievable to do so, the ADA would not require a public accommodation to provide access to an area reachable only by a flight of stairs.
Q: Are restaurants required to have menus in Braille?
A: No, not if waiters or other employees are made available to read the menu to a blind customer.
Q: Is a clothing store required to have price tags in Braille?
A: No, not if sales personnel can provide price information orally upon request.
Q: Do businesses need to rearrange furniture and display racks?
A: Possibly. For example, restaurants may need to rearrange tables and department stores may need to adjust their layout of racks and shelves in order to permit access to wheelchair users.
Q: Do businesses need to install elevators?
A: Businesses are not required to retrofit their facilities to install elevators unless such installation is readily achievable, which is unlikely in most cases.
Q: When barrier removal is not readily achievable, what kinds of alternative steps are required by the ADA?
A: Alternatives may include such measures as in-store assistance for removing articles from inaccessible shelves, home delivery of groceries, or coming to the door to receive or return dry cleaning. Only readily achievable alternative steps must be undertaken.
The words “lawsuit” and “trial” usually conjure up images based upon either media coverage of recent, significant cases or trials depicted on television and in movies. A real lawsuit and trial are significantly different than what we see on television or in the movies. Media coverage of a trial does not delve into the frequent reality of a lawsuit – the months and possibly years of pre-trial “discovery” and motion practice that occur before a case can even go to trial.
This upcoming blog series is aimed at removing some of the mystery of a lawsuit and a trial, and also at informing entrepreneurs what really happens prior to and during all those trials you see on television. The next seven blogs cover the basics on a lawsuit, from filing of a “Complaint” through trial and, ultimately, the appeal process. It can provide a complete picture of the litigation process to alert the entrepreneur what to expect as a potential party to a lawsuit.
There are other, important considerations to litigation not addressed in this series, such as insurance coverage, if any, and confidentiality agreements (known as protective orders) between the parties to a lawsuit. Additionally, a corporation usually cannot appear by one of its owners, but must be represented by counsel. Certainly, anyone that is sued or is thinking about suing another, should consult with a lawyer as soon as possible. We hope this blog series helps entrepreneurs develop a better understanding of the litigation process.
On April 1, 2011, the U.S. Court of Appeals for the D.C. Circuit issued an opinion in CSI Aviation Services, Inc. v. U.S. Department of Transportation,in which it found that the Department of Transportation (DOT) violated the Administrative Procedure Act (APA) when the DOT failed to justify its authority to issue a cease-and-desist letter to CSI ordering CSI to terminate its business contractual relationships with various federal agencies.
The CSI case is significant on many levels. First, the case is the first successful challenge of the scope of DOT’s consumer protection regulatory authority and it established the first precedent limiting DOT’s broad interpretation of what constitutes “common carrier” in the context of the definition of “air transportation”. Second, the case involved an inter-agency dispute involving the General Services Administration (GSA), which strongly disagreed with DOT’s position on having the authority to regulate CSI’s ability to enter into government contracts with various federal agencies. Finally, the case is significant because the court held that the DOT does not possess the authority to interfere with business relationships between the federal government and air charter brokers unless and until the DOT provides a reasonable explanation for its actions.
Since 2003, CSI has been under contract with the GSA to broker air charter service for various federal agencies. On March 10, 2009, CSI won a competitive bid to renew its status as a GSA contractor through 2014. A few days prior, on March 6, the DOT sent CSI a letter requesting information to determine whether the company was engaging in “indirect air transportation” without the certificate of authority required by the Federal Aviation Act (FAvA). After the company provided the requested information, the DOT sent another letter, stating that based on the information CSI provided, CSI was acting as an unauthorized indirect air carrier in violation of the FAvA with respect to business transacted via its GSA schedule listing. The DOT also stressed that violations of the FAvA constitute unfair and deceptive practices and unfair methods of competition in violation of 49 U.S.C. § 41712.
Six other companies received similar letters. All six complied by terminating their status as contractors for GSA. Convinced that the DOT was exceeding its statutory authority, CSI alone chose to challenge DOT’s determination, asking the DOT to withdraw the cease-and-desist letter on the grounds that the Act requires a certificate of authority only for companies that operate “as a common carrier,”and that CSI’s charter flights for the federal government are not common carriage.
On November 25, 2009, seeking to avoid shutting down its business, CSI submitted a petition to DOT for an emergency exemption from the certification requirement. GSA supported CSI’s petition and in a letter to the DOT GSA explained at length why the Act’s certification requirements for common carriage should not apply to government contracts. “Acquisition [of air service] by the Federal Government . . . is distinct in several ways from acquisition in the private sector and does not present the consumer protection related concerns typically at issue in the private sector.”GSA also added that Federal agencies which purchase air charter broker services are protected from unscrupulous contractors in a number of ways.Although DOT granted CSI a temporary exemption, it indicated that it “remain[ed] of the view that . . . the provision of air services for U.S. Government agencies through the GSA contracting system constitutes an engagement in air transportation, necessitating that brokers conducting such business hold economic authority from the Department to act as indirect air carriers.”
The Court’s Decision
The primary issue in the case was whether DOT properly concluded that air charter brokers that operate under GSA contract engage in indirect air transportation and therefore require certification from DOT despite the statutory provision that requires certification only for those who provide air transportation “as a common carrier.”
Initially, DOT argued that its letter was not a “final order” and that the court did not have jurisdiction. The court, however, rejected the DOT’s position and held that the letter was indeed an order because (1) it marked the consummation of the agency’s decision making process; (2) it was not merely of a tentative or interlocutory nature; and (3) the order was an action in which “rights or obligations have been determined” or “from which legal consequences will flow.”The court noted that CSI was faced with a choice between costly compliance and the risk of prosecution. The court also stressed that “an agency may not avoid judicial review merely by choosing the form of a letter to express its definitive position on a general question of statutory interpretation.”
The court stressed that “at the very least, the DOT’s letter cast a cloud of uncertainty over the viability of CSI’s ongoing business. It also put the company to the painful choice between costly compliance and the risk of prosecution at an uncertain point in the future—a conundrum that we described in Ciba-Geigy as “the very dilemma [the Supreme Court has found] sufficient to warrant judicial review.”The court reasoned that the DOT’s action was sufficiently burdensome to make six other GSA contractors terminate their air charter operations for fear of prosecution. The court stressed that “having thus flexed its regulatory muscle, DOT cannot now evade judicial review.”
Next, the court explained why the DOT’s actions violate the Administrative Procedure Act. Specifically, the court explained that the fundamental question in reviewing an agency action is whether the agency has acted reasonably and within its statutory authority. The agency must not only adopt a permissible reading of the authorizing statute, but must also avoid acting arbitrarily or capriciously in implementing its interpretation,which requires the agency to “take whatever steps it needs to provide an explanation that will enable the court to evaluate the agency’s rationale at the time of decision.”In the CSI case, the DOT simply failed to explain why the Federal Aviation Act requires a certificate of authority for air charter brokers operating under GSA contract.
The court focused on the definition of air transportation under the Federal Aviation Act and stressed that the Act states that “an air carrier may provide air transportation only if the air carrier holds a certificate issued under this chapter […] The term “air carrier” means “a citizen of the United States undertaking by any means, directly or indirectly, to provide air transportation.”The DOT’s position was that, as a broker of charter flights for the federal government, CSI was engaged in the indirect provision of “air transportation.” But the DOT’s reading failed to engage with the special statutory definition of that term. Under section 40102(a)(5), “‘air transportation’ is defined to include ‘interstate air transportation,’ which in turn means the interstate ‘transportation of passengers or property by aircraft as a common carrier for compensation,’ id. § 40102(a)(25) (emphasis added).”“Common carrier” refers to a commercial transportation enterprise that “holds itself out to the public” and is willing to take all comers who are willing to pay the fare, “without refusal.”Some type of holding out to the public is the essential requirementof the act of “provid[ing]” “transportation of passengers or property by aircraft as a common carrier.”
The court relied heavily on the fact that CSI performs under its contract with the GSA as a dedicated service provider, not as a common carrier. Under the GSA contract, CSI provides charter service to government agencies only, not to all comers. Thus, within the scope of the contract, CSI does not appear to provide “transportation of passengers or property by aircraft as a common carrier.”If CSI is not a common carrier under its GSA contract, then it does not engage in “air transportation” and its services for GSA do not fall within the certification requirement of the Federal Aviation Act.
The court chastised DOT for failing to address this critical issue both in its cease-and-desist order and in its brief to this court. “This failure is all the more baffling because CSI twice informed DOT that it does not believe it is covered by the “air transportation” portion of the Federal Aviation Act—once in CSI’s letter to DOT dated November 19, 2009, and again in CSI’s brief before this court.”Yet DOT’s brief inexplicably claims, ‘It is undisputed that CSI’s service is indirect air transportation.’The court emphasized that “not only is this a disputed point, it is at the very heart of the present controversy.”
In conclusion, the court stressed that “given DOT’s complete failure to explain its reading of the statute, we find it impossible to conclude that the agency’s cease-and-desist order was anything other than arbitrary and capricious, and hence unlawful. It appears to us that the law cannot support DOT’s interpretation, but we leave open the possibility that the government may reasonably conclude otherwise in the future, after demonstrating a more adequate understanding of the statute.”
Impact of the CSI Decision
The immediate impact of the CSI decision is that CSI, along with other air charter brokers, will be able to continue to enter into contracts to arrange air transportation as a principal without the fear of a potential DOT enforcement action. Air charter brokers will continue to perform a valuable service for the federal government. The federal government spends several million dollars annually procuring air transportation services and the use of brokers enables the federal government to obtain the best possible prices and options for air transportation services from FAvA and DOT certificated air carriers. For example, most of the nation’s Immigration and Customs Enforcement deportations and federal interstate prisoner movements are arranged by air charter brokers.
CSI’s position throughout the entire dispute was that DOT’s consumer protection regulations simply don’t apply because the federal government is not the “public,” and the court agreed. Indeed, the protections afforded the federal government under the Federal Acquisition Regulations are much more effective that DOT consumer protection regulations. Unscrupulous contractors may be prosecuted by the U.S. Department of Justice under a wide variety of civil and criminal fraud statutes.
England’s Blue Sky One case presents perplexing problems for bankers, aircraft operating lessors, airlines and their lawyers.This note discusses the fallout from Blue Sky One, and explains how parties can address these problems in their affected aircraft financing deals.
Following the Blue Sky One case, there is an issue as to whether an English law mortgage creates a valid security interest in an aircraft in certain situations. A valid security interest is created under English law without additional requirements only when an aircraft is located in England at the time of closing or where the location of an aircraft is unknown.
In all other situations there are now complicated legal and practical risks to address before parties can be comfortable that an English law mortgage is effective. In summary, the requirements are as follows:
- If an aircraft is outside England at closing, an English mortgage must be valid under the law of the jurisdiction where the aircraft is located in order to be effective.
- If an aircraft is over international waters at closing, best practice is to ensure the mortgage is valid under the law of the jurisdiction where the aircraft is registered to ensure the mortgage is effective.
These new requirements have cost, risk and timing implications for transactions using an English law mortgage. A best case scenario resolution addressing the new requirements is that local counsel in the jurisdiction where an aircraft is located or registered will be able to give a clean opinion confirming that the English law mortgage is valid under local law. At worst, local counsel will give an opinion containing assumptions or exclusions that push the risk of a mortgage being invalid back to the parties, or will not be able to give an opinion at all – potentially because the English law mortgage will not, in fact, be effective under local law (as was the case in Blue Sky One).
Whichever scenario applies, Blue Sky One means that using English law will now result in higher legal costs and potential timing and closing risk. Consequently, lenders, lessors and airlines should question their counsel carefully to understand new risks that may exist, even where a local law opinion has been provided.
The issues with Blue Sky One can be side-stepped by having an aircraft mortgage governed by laws other than English law. New York law is an alternative to consider, with a developed body of case law, and courts and a legislature that openly induce commercial contracts to designate New York law.
A choice of New York law in a commercial case will receive nearly absolute respect in New York courts. Section 5-1401 of New York’s General Obligations Law provides that:
“The parties to any contract, agreement or undertaking…covering in the aggregate not less than two hundred and fifty thousand dollars… may agree that the law of this state shall govern their rights and duties in whole or in part, whether or not such contract, agreement or undertaking bears a reasonable relation to this state.”
The general rule in Section 5-1401 leaves little scope for the type of uncertainty created by Blue Sky One. If an aircraft is worth more than $250,000, a mortgage under New York law will validly create a security interest in it regardless of aircraft location.
A second solution is to rely solely on a mortgage governed by the law of the jurisdiction where the aircraft is located or registered at closing.This will be less desirable if local rules on enforcement are not as familiar or as effective as the laws of a “moneycenter” jurisdiction like New York. Taking only a local mortgage may also necessitate local counsel and local courts becoming more involved in the enforcement process, potentially reducing certainty and increasing enforcement risk for lenders.
It is worth noting that, if the debtor is located in a country that has adopted the Cape Town Convention, then the parties arguably have a broader choice for the mortgage’s governing law. The Cape Town Convention provides that, so long as the relevant contracting state has made the election under Article XXX(1), the transaction parties are free to choose the governing law of their agreements.In this case, a New York law mortgage still would be a sensible choice, as this would give the parties the choice of law protections afforded by both The Cape Town Convention and New York law.
Following Blue Sky One, lenders taking English law mortgages over aircraft that are not located in England at closing must take additional steps to ensure that they have an effective security interest including confirming that the English law mortgage is valid under the law of the jurisdiction of the location of the aircraft or considering a New York law governed mortgage.
On May 27, 2011, the Governor of the State of Texas signed into law amendments to the Texas choice-of-law statute that, effective September 1, 2011, will afford parties greater flexibility when choosing a governing law for many transactions involving at least $1,000,000.
The amendments expand and clarify existing statutory rules and include, among other things, an important change for syndicated loan and other multi-lender transactions, in that the amendments permit parties to a loan transaction to choose, as the governing law for the transaction, the law of any jurisdiction in the United States where a party to the transaction has an office, so long as the transaction also involves at least $25,000,000 of credit extended by at least three lenders.
These changes are contained in H.B. No. 2991, which amends the choice-of-law statute adopted by the Texas Legislature in 1993, later recodified in what is now Chapter 271 of the Texas Business and Commerce Code. Under the statute, parties to a transaction involving at least $1,000,000 may, with certain exceptions, agree in writing that their agreements will be governed by the laws of a particular jurisdiction if the transaction bears a reasonable relation to the chosen jurisdiction. Since its original passage, the statute has set out five safe-harbor factors as to what ─ under Texas law ─ constitutes a reasonable and enforceable choice of governing law. These safe harbors have never applied to certain types of transactions, such as those involving transfers of title to real property, methods of foreclosure, marriage, adoption and matters of inheritance, and H.B. No. 2991 does not change any of these exclusions from the coverage of the statute.
H.B. No. 2991 is intended to reflect modern business practice by adding to, and clarifying, the list of statutory safe harbors. In addition to the new safe harbor for multi-lender loan transactions noted above, H.B. No. 2991:
- amends an existing safe harbor ─ in recognition of the fact that negotiations are often conducted by telephone and e-mail without in-person meetings ─ to clarify that the parties to a transaction may choose the law of a particular jurisdiction to govern their transaction if a substantial part of the negotiations relating to the transaction occurs in or from that jurisdiction and an agreement relating to the transaction is signed in that same jurisdiction by one of the parties,
- clarifies that the statutory list of safe-harbor contacts is a non-exclusive list so that parties to transactions covered by Chapter 271 of the Texas Business and Commerce Code may also rely on other choice-of-law rules, such as those found in the Restatement (Second) of the Law of Conflict of Laws,
- expressly authorizes parties to choose the law of the jurisdiction of formation of an entity to govern any transaction involving at least $1,000,000 that relates to the governing documents or internal affairs of that entity, such as a transaction involving:
- a shareholder or other agreement among members or owners of the entity,
- an agreement or option to acquire a membership or ownership interest in the entity,
- the conversion of debt or other securities into an ownership interest in the entity, or
- any other matter relating to rights or obligations with respect to the entity’s membership or ownership interests, and
- clarifies that a choice of law may continue to apply to a transaction, notwithstanding changes in facts and circumstances (including changes in parties and amendments or restatements of agreements relating to the transaction), if the chosen law was reasonably related at the outset of the transaction.
H.B. No. 2991 leaves unchanged the following additional safe harbors contained in existing Chapter 271 for determining when a transaction bears a reasonable relation to a particular jurisdiction:
- a party to the transaction is a resident of that jurisdiction,
- a party to the transaction has the party’s place of business or, if that party has more than one place of business, the party’s chief executive office or an office from which the party conducts a substantial part of the negotiations relating to the transaction, in that jurisdiction,
- all or part of the subject matter of the transaction is located in that jurisdiction, or
- a party to the transaction is required to perform in that jurisdiction a substantial part of the party’s obligations relating to the transaction, such as delivering payments.
These amendments were part of a legislative package sponsored by the Texas Business Law Foundation, a non-profit organization founded in 1988 to support a favorable business climate in the State of Texas. The Foundation is currently chaired by Gail Merel, a partner of the Firm who also worked on drafting these amendments. Mike Jewesson, Counsel in the Firm’s Dallas office, serves as Secretary-Treasurer of the Foundation.
The 4th Circuit held this week that a federal district court has jurisdiction over a case challenging a local carbon tax, even though the Tax Injunction Act generally deprives federal courts of jurisdiction in state or local tax controversies. This case should be very helpful to companies challenging a local tax that is in the nature of a punitive regulatory fee, especially where the tax is structured to apply to a single company.
This case, GenOn Midatlantic, L.L.C. v. Montgomery County, No. 10-1882 (5th Cir. June 20, 2011), involves a Montgomery County, Maryland “tax” on carbon emissions. The county imposed a tax at the rate of $5 per ton of carbon dioxide emitted, but the tax only applies to companies that emit more than 1 million tons of carbon annually. If the 1 million ton annual threshold is reached, then the tax applies to the first ton emitted.
GenOn operates an electrical generating facility in the county. GenOn’s plant is the only plant in the county that would likely reach the 1 million ton annual threshold, so the tax essentially applied to this single company. GenOn determined that this tax could not be passed on to its customers.
GenOn brought an action in federal district court to enjoin enforcement of this carbon emissions tax. The district court ruled that it did not have jurisdiction, pursuant to the Tax Injunction Act, and dismissed the case.
The Tax Injunction Act (28 USC 1341) says that the federal courts do not have jurisdiction to hear state or local tax controversies if there is a speedy and efficient remedy is offered by the state court system. However, the 4th Circuit ruled that in a case like this one, where the “tax” is a punitive regulatory fee, that only applies to a single company, that the Tax Injunction Act should not be used to make the federal courts unavailable to protect companies against local discrimination, and concluded that GenOn’s challenge could be heard by the federal district court.
Generally, businesses that hire independent contractors are absolved from any liability for the wrongful acts of those independent contractors unless the work is “inherently dangerous activity.” The concept is that businesses cannot contract away the responsibility for dangerous activities. This concept was recently addressed in Stout v. Johnson, 159 Wn. App. 344 (2011), where a criminal sued a bail bond company for injuries that he sustained when the bail bond company’s independent contractor – i.e., the bounty hunter – apprehended him after he failed to appear in court for a scheduled hearing.
In Stout, the plaintiff-criminal had posted a $50,000 bail bond for felony drug charges. He missed his court appearance, so the bail bond company retained a bounty hunter to apprehend him. When he tried to escape by car, the bounty hunter blocked his pathway, causing him to drive off the road and collide with a tree, sustaining injuries which resulted in the amputation of his leg. The criminal sued the bail bond company, claiming that it was liable for the acts of the bounty hunter since bounty hunting is inherently dangerous. The bail bond company defended claiming that, because the bounty hunter was an independent contractor and not its employee, it was not responsible for his actions. The trial court agreed and dismissed the plaintiff-criminal’s claims against it.
On appeal, the criminal argued that the “inherently dangerous activity” doctrine makes businesses responsible for the actions of their independent contractors. The Stout court started its analysis with the general rule that respondeat superior does impose liability on an employer for the torts of an employee who is acting on the employer’s behalf. Thus, if the bounty hunter had been the bail bond company’s employee the bail bond company could have been liable. However, a business that hires an independent contract is not generally vicariously liable for the actions of that contractor. The Stout court did recognize that an exception exists when an employer of an independent contractor attempts to delegate its duty of care to an independent contract and escape liability in inherently dangerous situations. The Stout court accepted, for purposes of argument, that bounty hunting was an inherently dangerous activity, yet it still held in favor of the employer.
The Stout court explained that, when a person takes part in an activity with knowledge that there is unavoidable risk of injury, he or she is not protected by the “inherently dangerous activity” exception to the independent contractor rule. In other words, the criminal assumed the risk by running and was not an innocent third party who had been injured by an independent contractor engaged in an inherently dangerous activity. When the plaintiff drove his car down the gravel road in an attempt to avoid the apprehension, he was aware that the bounty hunter could ram his car and force it off the road. He knew there was a risk of at least some peril when he absconded.
The takeaways from Stout are that, while employers are legally responsible for the acts of their employees, generally they are not liable for the acts of their independent contractors. That is often a reason why businesses retain independent contractors to perform certain functions, and in most cases, there is a cost savings to the business. However, in certain situations, the Stoutcourt emphasized that businesses will be liable for the acts of their independent contractors when it is an “inherently dangerous activity.” Nonetheless, the Stout court emphasized that, when the person who is injured by the inherently dangerous activity has caused and/or brought the harm from the dangerous activity on himself or herself, he or she will not be able to recover damages from the employer for injury resulting from the dangerous activity.
On May 23, in SEC v. Reserve Management Co. Inc., the U.S. District Court for the Southern District of New York ruled that an employee does not have a reasonable expectation of privacy with respect to communications with a spouse through an employer’s email system. In reaching its decision, the court employed the four-part test from In re Asia Global Crossing Ltd. to determine if the employee had a reasonable expectation of privacy. Key to the court’s analysis was the presence and actual notice to employees of an email policy that both forbade personal communications and warned employees of possible disclosure of company-controlled email communications.
Reserve Management Co, Inc. (RMCI), under the leadership of its president, Bruce Bent II, managed a money market mutual fund known as the Reserve Primary Fund (Fund). RMCI invested $785 million of the Fund’s assets in Lehman Brothers debt. Just days after Lehman Brothers’ bankruptcy announcement, the Fund’s net asset value dropped to less than $1 per share. In response to RMCI’s handling of communications with investors regarding the Fund’s vulnerability to Lehman Brothers and its effect on investor assets, the Securities and Exchange Commission (SEC) filed fraud charges against RMCI. During discovery, RMCI withheld approximately 60 emails between Mr. Bent and his wife, asserting the marital communications privilege. The SEC subsequently moved to compel production of these emails.
In determining whether there was a valid marital communications privilege claim, the court found that it was undisputed that the Bents were married and that they intended to convey messages to each other. However what was in dispute was whether their communications were made in confidence.
Privacy of “Personal” Data in the Courts
The question of whether an employee has a privacy interest in “personal” data on company systems has been addressed by many courts in the past decade. Generally, courts have held that content maintained on company-owned systems is the property of the company. However, there have been some notable exceptions. In the Stengart case, the Superior Court of New Jersey found that company ownership of a computer was not determinative of whether an employee’s otherwise privileged emails were company property. Instead, the court balanced the employer’s legitimate business interests against the attorney-client privilege.
Additionally, a growing line of cases affords protection to employees who may reasonably have expected privacy when using company IT systems. In Asia Global Crossing, the court set forth a four-factor test to assess the reasonableness of an employee’s privacy expectation in personal email transmitted over, and maintained on, a company server. The test poses four questions:
1. Does the company maintain a policy banning personal or other objectionable use?
2. Does the company monitor the use of the employee’s computer or email?
3. Do third parties have a right of access to the computer or emails?
4. Did the company notify the employee, or was the employee aware, of the use and monitoring policies?
This test has been adopted by a number of courts faced with the task of determining the reasonableness of privacy expectations. As the Reserve Management court pointed out, “the cases in this area tend to be highly fact-specific and the outcomes are largely determined by the particular policy language adopted by the employer.”
The Four-Factor Test and RMCI
Applying the four-factor test to determine whether Mr. Bent had a reasonable expectation of privacy in his emails with his wife, the court analyzed whether RMCI maintained a policy regarding personal use of company email. The court rejected RMCI’s contention that any policy was merely aspirational, finding that the policy clearly banned personal use of the company email system:
Employees should limit their use of the e-mail resources to official business. . . . Employees should . . . remove personal and transitory messages from personal inboxes on a regular basis.
Focusing intensely on the policy’s language, the court cited prior opinions analyzing obligatory policy language, as well as dictionary definitions. Ultimately, the court determined that RMCI’s policy unequivocally banned the personal use of company email, and that Mr. Bent violated this policy by communicating with his wife over RMCI’s systems.
The court next addressed the second factor of the Asia Global Crossing test-whether the employer monitors the employee email. While stating that the company will not “routinely monitor employee’s e-mail and will take reasonable precautions to protect the privacy of e-mail,” RMCI’s policy further stated that RMCI reserved “the right to access an employee’s e-mail for a legitimate business reason . . . or in conjunction with an approved investigation.” Because RMCI reserved the right to access email accounts, the court found that RMCI satisfied the second factor of the Asia Global Crossing test. Elaborating, the court pointed out that where an employer reserves this right, courts often find the employee has no reasonable expectation of privacy.
The third factor of the Asia Global Crossing test asks whether third parties have rights to access employee emails. Once again, the RMCI email policy addressed this, stating:
Employees are reminded that client/public e-mail communications received by and sent from Reserve are automatically saved regardless of content. Since these communications, like written materials, may be subject to disclosure to regulatory agencies or the courts, you should carefully consider the content of any message you intend to transmit.
The court found that this provision gave clear notice to Mr. Bent that his communications over the company email system were subject to disclosure. In its analysis, the court noted that RMCI operates in the heavily regulated financial sector, and that regulatory action was reasonably foreseeable.
The fourth factor-employer notice and employee awareness of the company use and monitoring policy-was not in contention. The defendants conceded that Mr. Bent was aware of the policy.
Having answered all four questions in the affirmative, Mr. Bent was deemed not to have had a reasonable expectation of privacy in emails he sent or received over RMCI’s email system. Consequently, the communications with his wife were deemed not confidential and the marital communications privilege did not apply. Granting the SEC’s motion, the court ordered RMCI to produce the withheld emails between Mr. Bent and his wife, which resided on the RMCI email servers and data archives.
This case serves to remind organizations of the importance of email policies and compliance. The commingling of business and private communications can expand the scope of discovery and expose a company to liability for an employee’s casual, careless remarks, which the employee may have considered to be private. Even though Mr. Bent believed that his emails with his wife were not business related, and would never be read by anyone else, the court found that this was not a reasonable belief and ordered disclosure.
As in Stengart, companies may be at a disadvantage in litigation with an employee or former employee whom the court finds had a reasonable expectation of privacy. In such cases, not only will a company have no right to emails on its own system, but it may also need to sequester any privileged communications identified during discovery and to disclose the discovery to opposing counsel.
The overarching lesson from these cases is that companies should have in place comprehensive, robust computer and email usage policies. Of course, these policies are only effective when they are clearly articulated and publicized. As well as increasing compliance, a formal training program can eliminate questions regarding notice. Finally, companies should strongly consider using an acknowledgement mechanism to demonstrate that employees received, reviewed, and understood the policy.
Commercial general liability (CGL) policies typically provide coverage for, among other risks, bodily injury, property damage and advertising/personal injury. Many CGL policies exclude coverage for liability stemming from an insured’s “professional services.” These exclusions are utilized because it is thought that such risks should, in theory, be covered under the insured’s professional liability policies. Professional liability insurers, in turn, are careful not to accept coverage for risk they believe should be covered under the insured’s CGL policy, so they sometimes exclude coverage for bodily injury and property damage.
While one would think that obtaining separate coverage for bodily injury, property damage and personal/advertising injury, on one hand, and professional liability, on the other, would eliminate any gaps in coverage, in practice the coverages do not always perfectly dovetail, nor is it always clear which coverage is applicable to a given situation. While these kinds of coverage issues are nothing new, they have become much more commonplace as companies have become more diversified, e.g., as product-driven companies seek to support sales by providing a broader range of technical services. And, such categorization issues can become critical where the company not only engages in activities that blur the distinction but has purchased coverage for only one of the risks, usually general liability coverage.
Companies that run into problems with the potential crossover of CGL and professional liability coverage generally fall into two basic risk profiles. The first profile includes those companies that acknowledge that their business activities involve risks covered by both CGL and professional liability policies and have therefore purchased both types of coverage, but whose policies have not been properly tailored to avoid gaps between the coverages. The second profile includes those companies whose business activities are evolving to become more or less akin to “professional services,” but whose coverage has not adapted to reflect the changing nature of their activities.
Identifying these potential risks and finding solutions can help avoid unwanted surprises when a claim arises and also make sure that a company?s insurance will be available as intended.
A Malleable Concept
Outside of traditional categories of “professionals” like doctors, architects and engineers, no clear consensus exists as to what constitutes “professional services.” Policies usually define “professional services” as “providing services to another for compensation,” but that definition is far from universal and, in those instances when it is adopted, the scope of the definition is not always self-evident. Thus, the issue of whether an activity constitutes professional services boils down to a “you will know it when you see it” standard, offering little comfort to a policyholder. Examples from a sampling of industries illustrate the problem:
A company develops and sells to commercial airlines a device used to measure airspeed. In addition to the sale of the product, the company provides the airline with consulting services for an additional fee. The device is implicated in a large-scale disaster, and the passengers’ families bring suit against the technology company.
2. Life sciences.
A pharmaceutical company enters a joint venture with a biotechnology company to perform a clinical trial of an HIV vaccine in Argentina. As a result of a data breach in the United States, all of the participants’ names and contact information are published on the internet as persons infected with HIV. The plaintiffs file suit in the United States alleging defamation and breach of privacy under various common law and statutory theories.
A construction firm provides on-site construction management services. Following a request for information from the company doing the excavation work, the on-site team collectively decides additional shoring is needed. During the course of this work, there is a collapse which causes significant project delays and damage to an adjacent structure. The owner files suit for cost-overruns and delays and the adjacent property owner sues for damage to its building.
Each of these examples involves a risk covered under most commercial general liability policies. There also is, however, an element of “professional services” in each of the examples. Which program would respond to each of these losses? The CGL program? The professional liability program? Both? Neither? The answer of course depends on numerous factors, some of which are discussed below.
Why It Matters
Before discussing the factors that influence which coverage will respond to the loss, it is important to consider why it matters.
1. Loss of coverage.
While it is possible for a mixed professional services/general liability claim to fall completely into a gap between an insured’s professional and general liability programs, the more likely cause of a total loss in coverage would be if the loss resulted from an insured acting in some capacity arguably not contemplated by its carriers. In that regard, it is possible for a professional service provider to lose coverage under its professional policy as a result of a business activity arguably not “professional” in character, such as an architecture firm that begins designing and selling furniture that causes bodily injury. In general, however, more professional service providers carry CGL coverage than non-professional service providers carry professional liability insurance. Therefore, problems are more likely to occur when a company not generally regarded as a professional services provider (e.g., a distributor) engages in some activity that arguably could be characterized as “professional” in nature (e.g., point-of-sale consulting services).
A total loss of coverage may also result if the insured fails to timely notify the appropriate carrier of its loss. The risk of a notice-related loss of coverage is much greater under a professional liability policy, as such policies are typically written on a claims-made or claims-made-and-reported basis (see additional discussion of this below). And, the risk of a notice-related loss is only exacerbated when the “professional services” aspect of the claim is subtle or the party responsible for notifying the carrier does not understand or appreciate the scope of coverage afforded under the company’s professional liability policy.
2. Available limits/cost.
As a general matter, policyholders carry significantly higher limits for CGL coverage than for professional liability coverage, and typically secure the higher CGL limits at a relatively lower cost per dollar of coverage. If a professional liability program is the only source of insurance for a serious multiple-person bodily injury or large-scale property damage case, the limits of such policy therefore are likely to be insufficient unless the program was specifically designed to handle such losses.
3. Defense costs.
CGL policies frequently provide for supplemental defense costs, i.e., the payment of defense costs without eroding policy limits. Professional liability policies, by contrast, usually provide defense costs within the limits; these are often referred to as “burning limits” policies, as the payment of defense costs reduces (burns) the policy limits. With monthly defense costs often reaching $500,000 to $1 million in high-stakes cases, this difference can be substantial as many professional liability policies do not have sufficient limits to cover defense costs being incurred at these levels let alone subsequent adverse judgments or settlements.
4. Occurrence v. claims-made-and-reported.
CGL policies are typically written on an occurrence-basis, whereas professional liability policies are almost always written on a claims-made-and-reported basis. Therefore, prompt and timely reporting of claims or potential claims is typically much more important under professional liability policies than under CGL policies. This distinction could prove very important when, for example, a particular suit is initially identified as a CGL loss, but further review reveals a basis for coverage under the professional liability program. If sufficient time passed for the professional liability program in effect when the suit was filed to lapse and a new program to incept, the failure to provide notice might result in a lost opportunity for coverage under either year?s professional liability program.
Key Policy Provisions
1. Definition of professional services.
The definitions of “professional services” in a policyholder’s CGL and professional liability policies should be coextensive to ensure perfect dovetailing of coverage. If, for example, the definition of “professional services” is narrower in the insuring provisions of the professional liability policy than in the exclusion in the CGL policy, a gap in coverage will likely result. Further, the definition in both policies should make clear the specific types of activities the insurer considers to be “professional services.” Disputes frequently arise when a company traditionally regarded as a service provider (like an architecture firm) performs work not traditionally regarded as “professional services” (like construction work under a design-build contract), and is later sued in a claim involving property damage or bodily injury. In the absence of a clear definition of “professional services,” the commercial general liability insurer will argue that the work was excluded “professional services” while the professional liability insurer will argue that the work was non-covered bodily injury or property damage, resulting in a gap in coverage for the policyholder.
2. Nexus wording.
Both CGL and professional liability insurers can alter the scope of coverage for a mixed risk by making seemingly imperceptible changes to the policy wording concerning the nexus required between two concepts, and the concepts between which there must be a nexus.
- The nexus required: The phrase “damages because of bodily injury or property damage arising from your professional services” is susceptible to being construed more broadly than “damages because of bodily injury or property damage caused by your professional services” because “caused by” is frequently considered to require a closer nexus to the loss than “arising from.”
- The concepts linked: The phrase “damages because of bodily injury or property damage arising from your professional services” differs from “bodily injury or property damage that results in liability arising from your professional services” in that the former requires a connection between the “bodily injury or property damage” and the “professional services” rendered while the latter requires a connection between the “liability” and the “professional services.”
These slight differences can have a significant impact on the scope of coverage for a given claim. Oftentimes, liability is imposed on an insured even when the insured?s conduct giving rise to liability is remote from the actual cause of bodily injury or property damage (e.g., in strict liability or conspiracy claims). In these situations, an insuring agreement that requires a close nexus between the conduct of the insured (i.e., the professional services rendered) and the bodily injury or property damage might not be triggered. Conversely, an exclusion that provides for a broad nexus between the insured?s liability and the bodily injury or property damage can bar a broader scope of claims. In simpler terms, even a minute asymmetry in these provisions could result in purported gaps in coverage.
Professional services exclusions in CGL policies, while common, are not a mandatory feature. Insurers sometimes will agree to remove such an exclusion. If the carrier is unwilling to entirely remove the professional services exclusion, it may be amenable to issuing conditional limitations on coverage for claims involving “professional services,” such as provisions specifying that the commercial general liability policy is excess to or not applicable when coverage exists under the insured?s professional liability policy.
Some professional liability insurers include in their policies limitations or exclusions for bodily injury or property damage. Although these exclusions can be absolute, they most often reflect an attempt by professional liability insurers to merely ensure that the CGL carrier is assuming primary responsibility for general liability exposures like bodily injury and property damage. These limitations or exclusions should be avoided at all costs, unless the CGL carrier has clearly acknowledged that its policy covers mixed claims involving, on the one hand, bodily injury or property damage, and, on the other, professional services. That said, and all else being equal, it is generally better for mixed claims to be covered under CGL policies than professional liability policies as the market for the former typically has greater capacity at a lower price.
Monitoring Your Coverages
For the reasons highlighted above, it is imperative that companies consistently reassess the mix of their business activities and make sure their insurance matches that risk profile. As for those companies already aware of the risk of mixed professional and general liability claims, close attention should be paid to policy language to ensure that their coverage programs actually dovetail as intended. And, lastly, it is important to keep in mind that having the best coverage program in the world does no good if there is not an effective system for providing timely notice of claims to the appropriate carriers.
In general, if a lawsuit is covered or potentially covered by a commercial general liability (CGL) insurance policy, the insurer has a duty to defend that claim. If the insurer provides that defense without reserving its rights to deny coverage, the insurer is entitled to select defense counsel and control the defense. But when the insurer defends under a reservation of rights, that reservation may create a conflict of interest between the insurer and the insured.
The leading Illinois Supreme Court case on this subject is Maryland Casualty v. Peppers, decided in 1976. According to Peppers, when an insurer defends an insured, but reserves the right to deny coverage based on an exclusion in the insurance policy (the applicability of which could be established during the course of defending the insured), there is a conflict of interest that gives the insured the right to select independent counsel to defend it at the insurer’s expense. But the Illinois Supreme Court did not say that this is the only conflict of interest that could give rise to the insured’s right to select independent defense counsel.
In R.C. Wegman Construction Company v. Admiral Insurance Company, decided in 2011, the United States Court of Appeals for the Seventh Circuit answered a question that has vexed Illinois insureds for a long time. Although the case involves a relatively uncommon set of facts, the court’s ruling in Wegman recognizes the conflicting interests that can arise between insureds and insurers when an insured faces a claim in which there is a “non-trivial probability” that there could be a judgment in excess of policy limits.
The Nuts and Bolts of Wegman
R.C. Wegman Construction Company was the manager of a construction site at which another contractor’s employee was seriously injured. Wegman was an additional insured under a policy issued by Admiral Insurance to the other contractor. When the worker sued Wegman, Admiral acknowledged its duty to defend, apparently without reserving any rights, and undertook the control of Wegman’s defense. The Admiral policy provided $1 million in per-occurrence limits of liability. Although it soon became clear that there was a “realistic possibility” that the underlying lawsuit would result in a settlement or judgment in excess of the policy limits, Admiral never provided this information to Wegman.
Shortly before trial, a Wegman executive was chatting about the case with a relative who happened to be an attorney. That relative pointed out the risk of liability in excess of policy limits, and mentioned that it was important for Wegman to notify its excess insurers. But by then it was too late, and the excess insurer denied coverage because notice was untimely. A judgment was entered against Wegman for more than $2 million. Wegman sued Admiral for failing to give sufficient warning of the possibility of an excess judgment so that Wegman could give timely notice to its excess insurer. According to the Seventh Circuit, the key issue was whether this situation—in which there was a risk of judgment in excess of the limit of liability, and where the insurer was paying for and controlling the defense—gave rise to a conflict of interest.
Admiral’s explanation for failing to inform Wegman was ultimately part of its downfall. Because there were other defendants in the underlying lawsuit, there was a good chance that Wegman would not be held jointly liable and that if a jury determined that Wegman was no more than 25% responsible for the worker’s injury, Wegman’s liability would have been capped at 25% of the judgment. Admiral’s trial strategy was not to deny liability, but to downplay Wegman’s responsibility. Admiral, however, never mentioned this litigation gambit to Wegman!
In the Seventh Circuit’s view, this was a textbook example of “gambling with an insured’s money.” And that is a breach of an insurer’s fiduciary duty to its insured.
When a potential conflict of interest arises, the insurer has a duty to notify the insured, regardless of whether the potential conflict relates to a basis for denying coverage, a reservation of rights, or a disconnect between the available limits of coverage and the insured’s potential liability. Once the insured has been informed of the conflict of interest, the insured has the option of hiring a new lawyer whose loyalty will be exclusively to the insured. In reaching its Wegman conclusion, the Seventh Circuit cited the conflict-of-interest rule established by the Illinois Supreme Court’s Peppersdecision. Thus, a potential conflict of interest between an insured and an insurer concerning the conduct of defense is not limited to situations in which the insurer has reserved its rights.
In rejecting Admiral’s arguments, the Seventh Circuit explained that a conflict of interest (1) can arise in any number of situations and (2) does not necessarily mean that the conflicted party—the insurer—has engaged in actual harmful conduct. A conflict of interest that permits an insured to select independent counsel occurs whenever the interests of the insured and the insurer are divergent, which creates a potential for harmful conduct.
The conflict between Admiral and Wegman arose when Admiral learned that a judgment in excess of policy limits was a “non-trivial probability.” When confronted with a conflict of this type, the insurer must inform the insured as soon as possible in order to allow the insured to give timely notice to excess insurers, and to allow the insured to make an informed decision as to whether to select its own counsel or to continue with the defense provided by the insurer.
Looking Beyond Wegman
The fact pattern discussed in Wegman, however, is not the only situation in which there may be a conflict of interest between an insurer and an insured concerning the control of the defense. Under the supplemental duty to defend in a CGL policy, an insured is entitled to be defended until settlements or judgments have been paid out in an amount that equals or exceeds the limits of liability. The cost of defense does not erode the limits of liability, which means that the supplemental duty to defend is of significant economic value to an insured.
The following hypothetical situations (involving an insured covered by a CGL policy with $1 million in per-occurrence and aggregate limits of liability and a supplemental duty to defend) illustrate the economic value of the duty to defend:
- The insured is sued 25 times in one policy year. In each instance, the insurer acknowledges coverage and undertakes to defend the lawsuits. Each lawsuit is dismissed without the insured becoming liable for any settlements or judgments. The total cost of defending these 25 lawsuits is $1.5 million. The limits of liability are completely unimpaired with $1 million in limits of coverage remaining available.
- The insured is a defendant in dozens of lawsuits alleging that one of the products it sells has a defect that has caused bodily injury. The insurer agrees to defend. The lawsuits are consolidated, and the costs of defense accumulate to more than $2.5 million. Eventually, there is a global settlement of the lawsuits for $1 million. Thus, a total of $3.5 million has been paid out on an insurance policy with a $1 million limit of liability.
- The insured is involved in a catastrophic accident for which he was solely responsible and in which four other people were permanently disabled. Each of the victims files a lawsuit and the realistic projected liability exposure to each victim is $1.5 million—or $6 million collectively. Shortly after the complaints are filed (and before there has been any significant discovery or investigation), three of the plaintiffs make a joint offer to settle their claims for a collective $1 million. The insurer and the insured both believe that this is an outstanding settlement opportunity, but the fourth plaintiff wants her day in court. If the insured agrees to this promising settlement opportunity, the limits of liability will be exhausted, the duty to defend will be extinguished, and the insured will be forced to pay for his own defense or rely on his excess insurance to reimburse him for defense costs.
Any insured who has been in the position of defending against either a serious claim or a multitude of smaller claims will understand that the supplemental duty to defend under a CGL policy may have much greater economic value than the limit of liability alone.
In these kinds of situations—when either the potential liability exceeds policy limits or there are multiple claims against the insured such that the economic value of the defense is worth more than the limit of liability—who should be allowed to control the defense of claims against the insured? In prior cases (Conway v. County Casualty Insurance Company  and American Service Insurance Company v. China Ocean Shipping Co. ), Illinois courts concluded that an insurer cannot be excused of any further duty to defend by paying out its remaining limits to the plaintiffs or by depositing its policy limits into court. But this rule does not address the conflict of interest when (1) it is in the insurer’s financial interest to avoid the potentially unlimited expense of defending its insured but (2) it is in the insured’s interest to continue receiving a defense that may have greater financial value than the limits of liability of a primary CGL policy.
Thanks to the Wegman decision, there is now some authority acknowledging that the insured’s right to select independent counsel may exist even if the insurer defends without a reservation of rights. The court recognized that the insurer-insured relationship and the right to control the defense is fraught with potential conflicts. Therefore, it is more important than ever for insureds to protect their interests.
The Ninth Circuit recently affirmed the dismissal of a consumer class action challenging the television programming industry’s practice of exclusively offering multi-channel cable packages. Brantley v. NBC Universal, Inc. No. 09-56785 (9th Cir. June 3, 2011). In so holding, the Court affirmed that allegations regarding widespread harm to consumers (either through increased prices, reduced choice, or both) — without some separate, cognizable injury to competition — fail to state a Section 1, Sherman Act claim.
Brantley involved a putative nationwide class of consumers suing two groups of industry participants: (1) programmers in the upstream market who sell television channels and programs to distributors; and (2) distributors in the downstream retail market who sell the programming to consumers. Plaintiffs alleged that programmers exploit market power derived from “must-have,” high-demand channels by bundling or tying them with less desirable, low-demand channels for sale to distributors, forcing distributors in turn to sell only higher-priced, multi-channel packages to consumers. Plaintiffs alleged that in the absence of such bundling, distributors would offer “a la carte programming” to meet consumer demand, thereby allowing consumers to purchase only those channels they wish to watch. Defendants’ vertical restraints thereby reduce consumer choice, raise prices, and limit competition between distributors. Indeed, plaintiffs cited to third party findings (including from the FCC) that the average cable subscriber is forced to pay for 85 channels that he does not watch to obtain the 16 he does, and that defendants’ bundling results in a net consumer welfare loss of $100 million.
In affirming dismissal, the Ninth Circuit held that given plaintiffs’ conscious decision not to allege any foreclosure of competitors, plaintiffs could not plead the requisite injury to competition. Courts have identified horizontal collusion and foreclosure of rivals as the two types of injury to competition sufficient to state a Section 1 claim. While vertical restraints may result in foreclosure of rivals, they do not necessarily do so. The two types of vertical restraints implicated here — tying and bundling — may result in such injury to competition if: (1) for tying, the seller leverages its market power in the tying product to exclude other sellers of the tied product; or (2) for bundling, the bundler is able to use discounting, for example, to exclude rivals who do not sell as great a number of product lines. Applied to the facts of this case, the Court found neither allegations that programmers’ practice of tying “must-have” with low-demand channels excluded other sellers of low-demand channels from the market, nor allegations that defendants’ bundling excluded competitors from either the upstream or downstream markets.
Plaintiffs urged the Court to adopt an alternative theory of injury to competition. That is, defendants’ conduct harms consumers by: (1) limiting the manner in which distributors compete with one another; (2) reducing consumer choice; and (3) increasing prices. The Court, however, rejected each argument in turn. Relying on Leegin Creative Leather Products, Inc. v. PSKS, Inc., 551 US 877 (2007), it explained that limitations on distributors’ ability to compete, without proof of competitive harm, fails to state an antitrust claim. With respect to harm to consumers, it explained that price increases and reduced choice are perfectly consistent with a free, competitive market, and, without more, fail to state an antitrust claim. While the alleged harm to consumers may establish antitrust injury, it does not establish any cognizable injury to competition. Even if consumers are forced to purchase multi-channel packages that include unwanted channels for a higher price, the antitrust laws do not interfere with the ability of businesses to choose the manner in which they do business, absent an injury to competition.
Most law firm clients would assume that an affidavit, once signed, would remain unchanged when it is filed in court. Recently, however, certain affiants in Cook County would have been perfectly justified in asking, “Did I really sign that?”
This issue was brought to light by General Administrative Order No. 2011-01 (GAO 2011-01), entered in March 2011 by Judge Moshe Jacobius in the Chancery Division of the Circuit Court of Cook County. GAO 2011-01 illustrates the importance of a close working relationship between law firms and their clients. In particular, clients must know and understand the content of any affidavit they sign. Similarly, if an affidavit that was previously executed is changed, a law firm must make its client aware of the alteration, have the client approve it and execute the affidavit after the alteration is made. As can be seen from the synopsis that follows, failure to follow this protocol can have dire results for both the client and the attorney.
The entry of GAO 2011-01 came about because a well-known Chicago law firm that specializes in mortgage foreclosures informed Judge Jacobius that in certain instances it had filed affidavits that varied from what the affiant actually signed. According to GAO 2011-01, employees of the law firm would remove the signature page from the affidavit as executed by the affiant. They would then make changes to the document—by adding attorneys’ fees, insurance costs and preservation costs, among other things—and reaffix the original signature page to the altered affidavit. Upon receiving this information, Judge Jacobius felt he had to take steps to protect the integrity of the court, the Illinois Mortgage Foreclosure Law, the Illinois Code of Civil Procedure and the Illinois Supreme Court Rules. Because there were approximately 1,700 cases with questionable affidavits, he ordered specific procedures designed to ensure that the affidavits were true and correct when signed.
First, the court mandated a stay of all the cases in which the offending law firm was involved. After that, the court required the firm to file the following motions, at a minimum, in each of the cases:
- A motion to vacate judgment of foreclosure and sale;
- A motion for leave to file an amended affidavit;
- A motion to vacate judicial sale (if the sale had occurred);
- A motion to lift the stay, which at a minimum must verify that the most recent affidavit filed with the court was true and correct and based on the personal knowledge of the affiant;
- A motion to vacate confirmation of sale, if applicable.
Needless to say, the procedures mandated by GAO 2011-01 were time consuming and created a significant hardship for the law firm and its clients. GAO 2011-01 also sent a clear message to other law firms in Cook County: in addition to damaging a law firm’s reputation with its peers and the court, failure to properly prepare and execute affidavits can negatively affect an affiant’s credibility and give the court a basis to void or vacate a judgment. While it may seem like a needless and ministerial task, a client/affiant and its law firm should always review and re-sign an affidavit that has been modified since it was originally executed.
Despite winning in court to protect valuable copyrights, Wall Street firms are unable to protect their valuable trading recommendations as federal and state laws collide in Barclays Capital Inc. v. Theflyonthewall.com, Inc.1 (pending any potential review on appeal). The electronic news media continues to lead the charge, and now the walls of exclusivity are beginning to crumble for these respected recommendations.
Wall Street firms have for long provided detailed research reports and trading recommendations—exclusively to firm customers—to drive order flow with the recommending firm, thereby generating commission revenue. Storming the walls, however, are those in the electronic news media blasting the once-exclusive information to all corners of the Internet, immediately upon its release by Wall Street. But for Wall Street, this widespread, uncontrolled dissemination has cut into profitability and has wreaked havoc on traditional business models for market research.
Although the electronic news media scored a fresh victory, Wall Street has not suffered a devastating loss. The copyrightable aspects of Wall Street research—the published models, insights, and facts, for example, are often more valuable to institutional customers than the basic recommendation itself (e.g., Buy, Sell, or Hold). These copyrightable aspects, of course, remain protected by federal copyright law.2 Outside the realm of finance, however, this case may signal much broader implications for any business with both feet in the Information Age.
The appeals court received this case after the District Court for the Southern District of New York granted injunctive relief to plaintiffs Barclays Capital Inc.; Merrill Lynch; Pierce, Fenner & Smith Inc.; and Morgan Stanley & Co. Inc. (“the Firms”), which prohibited Theflyonthewall.com, Inc. (“Fly”) from publishing information about the Firms’ recommendations, within certain parameters.3 The issue presented on appeal was whether Fly could be enjoined from publishing “news,” i.e., bare facts, that the Firms [had] made certain recommendations.4 The appeals court vacated the injunction, paving the way for the electronic news media to publish Wall Street recommendations far and wide, and of course, to direct profits to publishers and sponsors, away from the recommending firm. In the wake of this decision, Wall Street firms must now reconsider business models built upon the value of their proprietary information.
Without further recourse from federal copyright law, which does not protect bare “facts” alone, the Firms sought relief under New York tort law through the doctrine of “hot news” misappropriation of information. The appeals court was bound to consider, however, whether federal copyright law preempted the applicability of state law in these circumstances. To survive preemption, Firms were required to prove that Fly’s use of the information constitutes “free riding” on the Firms’ efforts.5 By concluding that there was no “free riding,” the appeals court significantly narrowed the circumstances in which similar state law misappropriation claims can survive preemption by federal copyright law. Accordingly, this case signals a broader victory for electronic publishers hoping to widely distribute, and to profit from, factual information created by others.
In determining whether Fly engaged in “free riding,” the court looked to precedent in National Basketball Association v. Motorola, Inc.6 (“the NBA Case”). In the NBA Case, the NBA collected and broadcast information, based on live sports games, over a communication network; and likewise, a competitor collected and broadcast its own information, based on live sports games, over a competing communication network. The appeals court noted that, in the NBA Case, there was no free riding, in part, because Motorola was bearing its own costs of collecting factual information.
In the present case, the appeals court’s ultimate inquiry was whether any of the Firms’ products enabled Fly “to produce a directly competitive product for less money because it has lower costs.”7 Extending the reasoning from the NBA Case to cover Fly’s actions, the appeals court concluded that that there was no “free riding” because approximately half of Fly’s twenty-eight employees were involved in the collection and distribution of Firms’ recommendations.8 According to the appeals court, Fly “is reporting financial news—factual information on Firm Recommendations—through a substantial organizational effort.”9
The appeals court, however, did not consider it important that the Firms had incurred substantial costs in research and analysis (i.e., acquiring and creating information) as the basis for their recommendations, whereas Fly’s only costs were in collecting and reporting the recommendations. The appeals court discarded the relevance of these basis costs—even though they provide an arguable distinction over the NBA Case—stating that although the Firms “may be ‘acquiring material’ in the course of preparing their reports . . . that is not the focus of this lawsuit. In pressing a ‘hot news’ claim against [Fly], [Firms] seek only to protect their Recommendations, something they create using their expertise and experience rather than acquire through efforts akin to reporting.”10 The appeals court concluded that there was no meaningful difference between “taking material that a Firm has created . . . as the result of organization and the expenditure of labor, skill, and money . . . and selling it by ascribing the material to its creator” and the “unexceptional and easily recognized behavior by members of the traditional news media [reporting on] winners of Tony Awards . . . with proper attribution of the material to its creator.”11 We expect that the contours of these differences to be a key issue if this case [is] heard on appeal, either at the Second Circuit en banc or at the United States Supreme Court.
Absent any legal recourse to ensure the exclusivity of their recommendations, Wall Street firms must now scramble to implement even greater security and counter-intelligence measures. After all, publishers such as Fly rely on information leaks and intelligence to timely obtain the recommendations in the first place. More likely, however, is that Wall Street firms will soon refine their business models to otherwise adequately monetize, or else reduce expenditures in, their intensive research and analysis efforts.
The broader implications of this case—that the “ability to make news . . . does not give rise to a right for it to control who breaks that news and how”12—will bear critically on the development, funding, and overall power of rapidly-advancing electronic information sources. In particular, businesses providing information aggregation services of all stripes—including, for example, those provided by Google, Inc. and Twitter, Inc.—will rejoice in the ability to gather and publish information from multiple sources across the entire nation with a lower risk of encountering divergent legal standards for misappropriation, on a state-by-state basis.