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Inquire Before You Hire: Prospective Employees and Restrictive Covenant Agreements

Posted on by Suzanne Arpin

You have finally found a prospective employee who meets all of your search criteria and is a superstar (or prospective superstar) in the field.  You want to move forward with the hiring process on an expedited basis.  You extend a generous offer, which is promptly accepted.  And then you discover, one way or another, that this individual has a restrictive covenant agreement (a “Covenant Agreement”) with a prior employer.  What should you do?  What if you don’t find out about the Covenant Agreement until after you have hired the individual?

Covenant Agreements are becoming ever more common and they come in many forms.  This article will familiarize you with Covenant Agreements generally and will provide you with guidance regarding what you can do to protect yourself from legal liability and business disruption.

I.  LIABILITY AND DISRUPTION: RISKS TO YOUR BUSINESS

A.  What is a Covenant Agreement? Let’s be clear about what we are talking about.  For purposes of this article, a Covenant Agreement is a contract between your (prospective) employee and a current or prior employer that restricts the activities of the employee after the employment relationship terminates.  The restrictions can take many forms and the terms vary significantly from one Covenant Agreement to another.

Covenant Agreements are often referred to as “non-competes” or NDAs (short for “non-disclosure agreement”) and some are indeed just that.  Non-competes include terms that restrict an employee from engaging in activities that compete with the prior employer.  NDAs restrict the use of the former employer’s confidential information and trade secrets.  In most cases, however, Covenant Agreements include a number of different restrictive covenants so, if a prospective employee tells you he or she has an NDA with a prior employer, do not assume the document is indeed “just” a non-disclosure agreement.

Indeed, the majority of Covenant Agreements include at least two and often several different post-employment restrictions on conduct, such as provisions restricting the employee from:

  • contacting customers, suppliers, and/or employees of the prior employer;
  • saying or otherwise communicating damaging or negative information about the prior employer;
  • using materials that the employee developed with the prior employer;
  • keeping information or documents acquired in connection with the prior employment; and
  • using information acquired in connection with the prior employment.

Also, Covenant Agreements are not necessarily separate, stand-alone agreements.  They may be included in the terms of another, broader agreement, such as an employment agreement or a separation agreement.  Covenant Agreements may also be embedded in equity and bonus award agreements, transaction agreements, and deferred compensation agreements.  In short:  when assessing whether a prospective new hire is bound by a Covenant Agreement—and, if so, what restrictions apply to the new hire—do not depend on the “label”; review the document itself.

B.  Why Do I Need to be Concerned? I’m Not a Party to the Covenant Agreement.  It is basic contract law that a party to a contract can pursue its remedies against the other party to the contract in the event the other party breaches the agreement.  Clearly, a former employee who breaches a Covenant Agreement is liable for whatever damages are imposed by law or contract.  But how can a Covenant Agreement impact a subsequent employer who isn’t a party to the Covenant Agreement?  The answer is:  it depends on a number of factors, but the following is a brief summary of the possible ways a Covenant Agreement can disrupt the business of—or even create legal liability for—the subsequent employer.

Injunctions Against the Employee.  Practically without exception, Covenant Agreements permit the former employer to seek an injunction.  An injunction is a court order preventing the former employee from engaging—either temporarily or permanently—in the conduct that the former employer alleges is a breach of the Covenant Agreement at issue.  For example, if the employee has allegedly breached the Covenant Agreement by working for his or her current employer, the injunction can bar the employee from continuing such employment.  If an employer is relying on the skills and contribution of that employee, an injunction can be very disruptive.

Legal Claims Against the Current Employer.  A former employer that is a party to a Covenant Agreement has many causes of action that it might allege against the current or future employers even though there is no contract between the two employers.  These include: tortious interference with a contractual relationship; intentional interference with business relations; inducement to breach; civil conspiracy; misappropriation of trade secrets and proprietary information; conversion; and unfair competition.

It is important to note that, in some instances a candidate’s behavior may be actionable even in the absence of any Covenant Agreement. In most jurisdictions, employees have a common law duty of loyalty (and often a fiduciary duty) to act in the best interest of their current employer, even after tendering a notice of resignation. Violation of this duty of loyalty can result in substantial damages against the employee and, to the extent a subsequent employer is found to have assisted the employee in breaching his duty of loyalty, there is potential exposure to the new employer for aiding and abetting the employee’s breach.

C.  What Can an Employer Do? Whether the hiring employer will be directly liable to the former employer is largely predicated on the hiring employer’s intent and good faith, and whether it actually benefitted from the new hire’s unlawful conduct. Being able to show the following can provide a powerful defense for the hiring employer against this liability:

  • The hiring employer took diligent steps to determine at the pre-hire stage whether the employee was subject to post-employment restrictions.
  • The hiring employer was advised by legal counsel that, by hiring the employee, it would not interfere with an existing contractual restriction.
  • The hiring employer instructed the new hire that he or she was not expected or permitted to (1) use or disclose any trade secrets or confidential information belonging to his or her former employer, (2) improperly divert business opportunities belonging to the former employer, or (3) engage in any other conduct that would breach his or her Covenant Agreement.
  • The hiring employer instituted internal protocols to ensure against the inadvertent use or disclosure of the former employer’s trade secrets or confidential information.
  • The hiring employer continued to monitor the new hire’s conduct to ensure continued compliance with any post-employment restrictions that the former employer imposed.
  • The hiring employer used due diligence to ensure that it did not benefit from the new hire’s use or disclosure of the former employer’s trade secrets or confidential information.

II.  INVESTIGATE COVENANT AGREEMENT ISSUES DURING THE INTERVIEW PROCESS

Ask the Candidate If He or She Is Subject to Any Covenant Agreements.  The first thing an employer should do is ask a prospective employee whether he or she is subject to any Covenant Agreement.  This should be thoroughly vetted well before a decision is made regarding hiring the individual.  If the employer engages in adequate due diligence before it hires a candidate who is subject to a Covenant Agreement and makes a reasonable hiring decision based upon such due diligence, it would be very difficult for the former employer to assert any of the causes of action indicated above against the new employer.  (This, however, would not allay the possibility that the candidate would be enjoined from working for the new employer, in whole or in part, temporarily or permanently.)

Keep in mind that, as a general rule, restrictions imposed by Covenant Agreements may extend for a period of two years after employment terminates and in certain cases even longer.  Therefore, you should inquire not only about a candidate’s current or immediately prior employer, but also about earlier employers. The take away here is that when you endeavor to determine whether a candidate is a party to a Covenant Agreement, be sure to ask the right questions and review all agreements between the candidate and its prior employers.

If the Answer is “No” – “I Don’t Have A Covenant Agreement” and Other Tall Tales.

Going back to the facts described in the first paragraph of the introduction above, let’s assume that you asked the prospective superstar-employee whether he or she is subject to a Covenant Agreement and he or she says, “no.”  That should not be the end of your inquiry for a number of reasons.  First, strange as it may seem, employees often forget that they have signed Covenant Agreements.  Second, if the Covenant Agreement is embedded in another agreement, they might not realize that they are subject to one.  Third, the employee may unilaterally decide that although he or she has a Covenant Agreement, employment with you would not breach it and that therefore not disclosing it to you would do no harm.  Fourth, the prospective employee may want the job you are offering badly enough or believe the risk of enforcement is low enough that he or she decides to not disclose the fact that he or she is a party to a Covenant Agreement with a prior employer.

If the candidate affirms that he or she is not subject to any Covenant Agreement and you decide to hire him or her, then, as a pre-requisite to employment, require him or her to sign a notarized statement verifying that he or she is not subject to any Covenant Agreement with any current or former employer and stating that this verification is a pre-condition to the hiring decision, and that if the foregoing proves to be false for any reason, he or she would be subject to immediate termination of employment and be solely liable for any costs and expenses you incur if any action is brought against you because of it.

If the Answer is “Yes.”

Ask for a copy of the Covenant Agreement and have it reviewed by legal counsel who is knowledgeable about Covenant Agreements and the law implicated by them.  Your legal counsel should provide you with an assessment of whether the Covenant Agreement is enforceable, along with a plain English translation of what the Covenant Agreement prohibits, including the time limits, geographic scope, and the precise activities prohibited if the Covenant Agreement is enforceable and enforced.  Be sure to give your attorney enough specific information about what activities the prospective employee would perform for your company, if hired by you, so your attorney can advise you as to whether the prospective employee would violate the Covenant Agreement by working for you.

If you and your attorney determine that a candidate would be in breach of a Covenant Agreement by working for you and that the former employer is likely to sue, you can avoid that liability completely by not hiring the individual.  However, the issues are most often not so black-and-white.  In this case, you would need to consult with your attorney to weigh various factors to arrive at the decision as to whether to hire the candidate, including, for example: (i) the risk (and potential cost) of litigation and the potential disruption to your business (including the risk that your new hire will be enjoined from working for you, either temporarily or permanently); (ii) the likelihood that the former employer will be successful in enforcing the Covenant Agreement and your business’s potential liability for money damages; and (iii) any steps you can take to minimize or avoid a claim that the new hire is violating the Covenant Agreement.

III.        MANAGING COVENANT AGREEMENT ISSUES

Because Covenant Agreements are so common these days, there is a high likelihood that any new hire will be subject to a Covenant Agreement.  Even if you have determined that the anticipated scope of duties the candidate will perform for your business isn’t likely to violate a Covenant Agreement, you should still implement policies—whether in your standard employee manuals, offer letters, and/or employment agreements—to demonstrate your expectation that your employees will comply with their obligations to prior employers, such as a prohibition on the unauthorized use or distribution of property, confidential information, or trade secrets of a third party.

However, if you and your legal counsel determine that a candidate is subject to an enforceable Covenant Agreement, and that the position for which the candidate is being considered might be construed as requiring the candidate to violate the terms of that Covenant Agreement, there are a number of things you can do to minimize the risk of litigation if you decide to proceed with hiring the individual.  Possibilities include: (i) if feasible, restructuring the position so that the duties and responsibilities do not run afoul of the Covenant Agreement (or at a minimum), placing the new hire in a temporary position that does not violate the Covenant Agreement for the duration of any contractual restriction period; (ii) asking the former employer to waive the restrictions or negotiate restrictions that both of you can live with; or (iii) structuring the new hire’s work to insulate him or her from departments or projects involving confidential information or clients for which the new hire might possess competitively valuable information belonging to his or her former employer.  Also, the hiring employer should consider whether it should leave itself an “out” by requiring the candidate to acknowledge and agree that if litigation is threatened or arises over any Covenant Agreement, it reserves the right to terminate the candidate or alter the candidate’s job requirements.

Lastly—and regardless of the steps you may have taken to avoid or minimize the risk that your new hire is violating a Covenant Agreement—there is always a risk that the prior employer will nonetheless suspect a violation or threaten legal action against you.  As such, there are actions you should take after hiring an employee who is subject to a Covenant Agreement if you receive a “cease and desist” letter or any other communication regarding the terms of the Covenant Agreement from the former employer.  Proper management of this situation can reduce, limit, or eliminate your potential liability in connection with an employee’s Covenant Agreement with a prior employer.  You should contact your attorney immediately, both to formulate a strategy for responding to the prior employer and to ensure that you are taking the proper internal steps to preserve evidence that may become important if the matter proceeds to litigation.

If you have any questions or would like additional guidance regarding restrictive covenant agreements or other employment law issues, please contact Suzanne Arpin at SArpin@fh2.com or (770) 399-9500.

THE SUPREME COURT’S EPIC DECISION: The Beginning of the End of Employee Class Actions?

Posted on by Patrick Jones

Many employers require employees to sign arbitration agreements as a condition of their employment.  Under those agreements the employee gives up his/her right to sue in court over job-related issues such as wrongful termination, breach of contract, and discrimination, and agrees to pursue such legal claims against the employer through arbitration.  These agreements often go further to provide for individualized arbitration proceedings, which means that claims pertaining to different employees will be heard in separate arbitration hearings – thereby precluding employees from bringing collective or class actions regarding workplace claims.  The use of mandatory, pre-dispute arbitration agreements has increased significantly over the past two decades.  A 2017 survey by the Economic Policy Institute showed that approximately 60 million private-sector, nonunion employees in the United States are subject to mandatory arbitration in their employment agreements, and almost 25 million of those agreements include a class action waiver.

The issue of whether these class action waivers are enforceable has been a contentious issue.  Although the Federal Arbitration Act (“FAA” or “Arbitration Act”) generally requires courts to enforce arbitration agreements as written, the FAA contains a so-called “saving clause” that permits courts to refuse to enforce arbitration agreements “upon such grounds as exist at law or in equity for the revocation of any contract.”  Employees have argued that the FAA’s “saving clause” nullifies the enforceability of an arbitration agreement if that agreement violates some other federal law.  Specifically, until the United States Supreme Court decision discussed below, federal courts disagreed whether arbitration agreements containing a class action waiver violate the National Labor Relations Act (“NLRA”), thus rendering them invalid and unenforceable.  On May 21, 2018, the Supreme Court resolved this issue, holding that agreements requiring employees to arbitrate claims on an individual basis are enforceable.  Here’s what you need to know.

Some Differences Between Arbitration and a Court Case

An arbitration differs from a court case in a number of ways, including:

  • An arbitration is not heard and decided by a judge or jury, but by a neutral and independent “arbitrator” agreed to by the parties, and who is paid by one or both sides to listen to the evidence and witnesses, and issue a decision, which is called an “award.”
  • The arbitration process generally limits the amount of information each side can get from the other, which oftentimes gives the employer an advantage because the employer is usually the one in possession of most of the documents and information relating to the employee’s case.
  • Arbitrations are less formal than court trials, which can make the process easier for all involved, especially employees who are not used to litigation.
  • Arbitration cases are generally heard and decided much more quickly than court cases, which can take several years from start to finish, and arbitration is usually less expensive.

How We Got Here

Until a few years ago, both courts and the National Labor Relations Board (the “NLRB”) seemed to be generally in agreement that arbitration agreements (including ones that required individualized proceedings) were to be enforced according to their terms.  However, in 2012 the NLRB ruled in D.R. Horton, Inc., 357 N.L.R.B. 2277 (2012), that arbitration agreements containing class action waivers violated Section 7 of the NLRA, which guarantees workers the rights to self-organize, to form labor organizations, to bargain collectively, and to “engage in other concerted activities for the purpose of collective bargaining or other mutual aid or protection.”  In its ruling, the NLRB found that agreements requiring employees to arbitrate their claims on an individual basis violated the NLRA, rendering these agreements invalid and unenforceable.

Since the NLRB’s decision, federal appellate courts have split on the issue.  Some circuit courts, including the Seventh and Ninth Circuits, agreed with the NLRB, while other circuit courts, including the Fifth Circuit, found such class action waivers to be enforceable and not in violation of the NLRA.

The Epic Systems Case

Against this background of conflicting decisions by various federal courts and the NLRB, on May 21, 2018, the United States Supreme Court held, in a 5-4 decision, that agreements requiring employees to arbitrate claims on an individual basis are enforceable.

The case, Epic Systems Corp. v. Lewis, 584 U.S. ____ (2018), consolidated three different cases on appeal from the Fifth, Seventh and Ninth Circuits.  In each of these cases, an employer and employee had entered into a contract providing for individualized arbitration proceedings to resolve employment disputes between the parties.  Nevertheless, the employee plaintiffs in each of these cases sought to litigate Fair Labor Standards Act and related state law claims through class or collective actions in federal court.  To avoid enforcement of the class action waivers under the FAA, the employees argued that, by requiring individualized proceedings, the arbitration agreements at issue violated Section 7 of the NLRA, which under the FAA’s saving clause rendered the arbitration agreements unenforceable.  The employer defendants, on the other hand, argued that the FAA protects agreements requiring arbitration from judicial interference, and that neither the FAA’s saving clause nor the NLRA demands a different conclusion.  A majority of the Supreme Court agreed with the employers.

The FAA’s Saving Clause Did Not Apply to the Employees’ Claims 

The FAA “requires courts ‘rigorously’ to ‘enforce arbitration agreements according to their terms, including terms that specify with whom the parties choose to arbitrate their disputes and the rules under which that arbitration will be conducted.’”  Nonetheless, the Court noted that the FAA’s saving clause, by its terms, “allows courts to refuse to enforce arbitration agreements ‘upon such grounds as exist at law or in equity for the revocation of any contract.’”

The employee plaintiffs in Epic Systems argued that the FAA’s saving clause creates an exception for cases like theirs, where the arbitration agreement (arguably) violates some other federal law.  In its Horton decision the NLRB found that requiring employees to arbitrate their claims on an individual basis was a violation of the NLRA.  The employees in Epic Systems argued that the saving clause applied because the NLRA renders their class and collective action waivers illegal, and in their view, “illegality under the NLRA is a ‘ground’ that ‘exists at law … for the revocation’ of their arbitration agreements, at least to the extent those agreements prohibit class or collective action proceedings.”  The Court rejected this argument, holding that in permitting courts to refuse to enforce arbitration agreements “upon such grounds as exist at law or in equity for the revocation of any contract . . . ”, the FAA’s use of “any contract” limits the saving clause only to generally applicable contract defenses, such as fraud, duress, or unconscionability, and not to defenses specific to arbitration contracts (such as the employees’ claims that arbitration agreements requiring individualized proceedings are unlawful under the NLRA).

 The NLRA Does Not Conflict with the FAA

But the employees were not done yet.  Following the NLRB’s decision in Horton, they argued that Congress nonetheless intended Section 7 of the NLRA to render employee class action waivers in arbitration agreements unlawful, even though such class action waivers would otherwise be enforceable under the FAA.  That is, in cases like theirs, the NLRA overrides the FAA.  The Court noted that when confronted with two Acts of Congress allegedly touching on the same topic, the Court must strive to give effect to both.  To prevail in this case, the employees must show a “clear and manifest” congressional intent to displace one Act with another.

After a lengthy and comprehensive analysis of Congress’ intent, the Court held that there is no conflict between the NLRA and the FAA.  The NLRA “secures to employees rights to organize unions and bargain collectively, but … says nothing about how judges and arbitrators must try legal disputes that leave the workplace and enter the courtroom or arbitral forum.”  Focusing specifically on the language of Section 7 of the NLRA, the Court found that “the term ‘other concerted activities’ should, like the terms that precede it, serve to protect things employees ‘just do’ for themselves in the course of exercising their right to free association in the workplace, rather than ‘the highly regulated, courtroom-bound ‘activities’ of class and joint litigation.’” (Emphasis added.)  Moreover, the Court noted that Congress has shown it knows exactly how to specify certain dispute resolution procedures, or to override the FAA; however, Congress has done nothing like that in the NLRA, which is further evidence that Section 7 does nothing to address the question of class and collective actions.

In short, the Court found that Congress intended Section 7 of the NLRA to grant employees certain rights to act together in the workplace – but did not intend to extend those rights to judicial or arbitral proceedings already governed by the FAA.  As such, the Court held that the NLRA does not “override” the FAA or render employee class action waivers in arbitration agreements illegal or unenforceable.  Justice Gorsuch concluded:

The policy may be debatable but the law is clear: Congress has instructed that arbitration agreements like those before us must be enforced as written.  While Congress is of course always free to amend this judgment, we see nothing suggesting it did so in the NLRA – much less that it manifested a clear intention to displace the Arbitration Act.  Because we can easily read [the FAA and the NLRA] to work in harmony, that is where our duty lies.

What Does This Mean for Employers? – The Pros and Cons of Class-Action Waivers

An employer that does not already utilize mandatory arbitration agreements with class and collective action waivers should consider whether implementing this type of agreement makes sense for its business.  While the Epic Systems decision made it clear that mandatory arbitration agreements with class and collective action waivers are enforceable (at least in the context of federal law), employers still must weigh various factors to decide if such agreements are right for them.

  • From a cost standpoint, for most employers the ability to prevent class and collective actions has a lot of appeal.
    • For wage and hour claims, the purported class can be extensive, the time and cost to defend against such claims can be substantial, and if the employees are successful the employer is required to pay the employees’ reasonable attorneys’ fees.
    • And even if the underlying claims are not strong, employees may use the class or collective action procedure as a vehicle to increase costs and try to force settlement with the employer.
  • However, the cost of defending dozens of individual arbitrations, each likely based on the same theory, can also be substantial.
    • The Supreme Court has held that employees may not be required to pay “prohibitive” costs in pursuing their federal employment rights, which often means that the employer will bear most of the burden of the arbitration costs, such as the filing fees, administrative fees, and the arbitrator’s fee. The employer would be required to pay these fees for each individual claim filed by an employee covered by a class or collective action waiver.
    • In addition, under the American Arbitration Association’s Employment Arbitration Rules and Mediation Procedures, with the exception of a $200 capped filing fee, the employer is responsible for all costs associated with an arbitration arising from an employer-promulgated arbitration plan.
  • Employers should also consider the impact on employee morale of requiring arbitration agreements with class and collective action waivers. Many employee-side commentators have decried the Epic Systems decision as undermining employee rights.
  • It should be noted that employers may face some uncertainty concerning state statutory and common law contract interpretations that may invalidate the terms of arbitration agreements, despite Epic Systems.
    • For example, several states have recently enacted limits on arbitration agreements that relate to sexual harassment claims, and some state courts have imposed exacting contractual wording requirements before enforcing arbitration clauses that waive the right to proceed with a court action.
    • Because of the uncertainty regarding whether a nonfederal law can override the FAA, employers should consider back-up contractual jury trial waivers in their arbitration agreements, if the governing state law permits pre-litigation jury trial waivers.
  • It should also be noted that the Epic Systems decision does not preclude lawsuits challenging arbitration agreements on general contract grounds, such as fraud, duress, or unconscionability, so employers should continue to be diligent about the general enforceability of their arbitration agreements.
    • In particular, employers should ensure that their arbitration agreements provide for due process and are not subject to claims that the terms are unconscionable and therefore unenforceable.

If you have further questions regarding the topic of this article or need help implementing the right dispute resolution mechanism for your business, please contact Patrick Jones at pjones@fh2.com or (770) 399-9500.

Data Breach Notifications: Your Obligations Will Vary from State to State

Posted on by Laura Arredondo-Santisteban

Today, unfortunately, it seems that data breaches are more of a “when it happens to your company,” and not a question of “if it happens to your company.”  And it’s a virtual certainty that your business possesses personally-identifiable information of individual residents of different states – whether customers, employees, or third parties – that could be compromised if your business suffers a data breach.  Consequently, if your company finds itself as the victim of a data breach, a swift response will likely be required – including a quick assessment of your obligations under the data breach laws of various jurisdictions.

For the first time since states began enacting their own data breach notification laws, all 50 states have now enacted some form of legislation requiring private or governmental entities to notify individuals in such states of security breaches involving their personally identifiable information.  Alabama and South Dakota, the last holdouts, enacted their own data breach notification laws to go into effect June 2018 and July 2018, respectively.

In light of this milestone, we thought it would be helpful to re-familiarize our clients and friends with a few of the common elements of state data breach notification statutes, their differences, and why companies should constantly remain vigilant as states consider measures that would amend their existing data breach laws.  Here is what you need to be aware of if you collect, process, or store personally-identifiable information about residents of various states.

State data breach laws generally affect businesses that collect personal information from consumers in a particular state; however, each state may have a slightly (or substantially) different definition of what “personal information” or “personally identifiable information” is covered by that state’s data breach laws. (Since the various state statutes employ differing terminology to describe this personal information, this article will use the term “PII” as shorthand for protected personal information that is covered by a given state’s data breach laws.)

The variations in the state data breach statutes extend not only to the definition of what constitutes PII, but can also vary in: (1) what circumstances trigger obligations to notify that a data breach has occurred; (2) parties to whom notification is required; (3) what information should be included in the notification; and (4) enforcement rights afforded to the state and to individuals affected by the data breach.  These distinctions can make multi-state notifications of a data breach difficult, especially since no “generally-applicable” data breach notification law has been enacted at the federal level.

Also, be aware that, depending on the industry in which you operate, and also the types, sources, and location of the data involved in a breach, a data breach may also trigger specific obligations under U.S. federal law and perhaps even under the laws of other countries. A discussion of these federal and international data breach obligations is outside the scope of this article – but you should nonetheless keep them in mind and consult with your attorneys to determine whether they are applicable to your business.

State Data Breach Notification Statutes – What To Look Out For

1.  Notification Trigger: Determining whether you are obligated by a given state’s law to give notification of a data breach – whether to the affected individuals, to governmental authorities, or perhaps even to other third parties – depends on a careful comparison of the facts of the breach to the precise wording of the applicable statute. In short, you will need to ascertain – likely, very quickly – first, whether the breach is covered by the laws of the given state and, if so, whether the breach itself rises to the level that triggers notification obligations under the applicable statute.

a. Is the information that was breached covered by the laws of a given state? Coverage of such state laws usually applies to the PII of a resident of the subject state. Thus, if you have a data breach, one of the first steps you must take to understand your possible obligations under state data breach laws is to inventory the data to determine (1) to whom the data relates (i.e., which state’s laws may apply to a given individual whose data was breached), and (2) the types of data affected.  These are generally the two critical components in determining whether a given state’s data breach laws are implicated in a breach incident.

Once you have identified that a breach affects an individual resident of a given state, you must then assess whether the data that was breached is “PII” within the meaning of the relevant state statute. This second step can be tricky due to the statutes’ varying – and often broad – definitions for what constitutes PII.  All of the states, for example, define PII to include the combination of an individual’s name with some type of financial account information such as credit and debit card numbers.  However, some states – including Georgia – go farther, extending the scope of their data breach laws to include information that could be used to perform identity theft, even if the individual’s name was not part of the information that was breached.  Colorado, for example, recently enacted legislation that expands the current statute’s definition of PII to include: (1) usernames or email addresses, in combination with a password or security questions that would grant access to an online account; and (2) account numbers, or credit or debit card numbers, in combination with any required security code, access code, or password that would permit access to the associated account.

b. Does the breach trigger notification obligations under the applicable statute? State statutes differ as to the criteria for determining whether a company must notify an individual of a data breach. Some states’ laws apply to all businesses equally, while others only apply to certain specified industries.  Furthermore, a given statute may specify that the breach must rise to a certain level of severity – based on, for example, number of individuals affected, or likelihood of harm to affected individuals – before there is an obligation to notify others of the breach.  Some laws, such as South Dakota’s data breach statute, require reasonable belief that an individual’s PII has been actually acquired in order to trigger the statutory disclosure requirements, while other states, like Connecticut, require notification if there is reasonable belief of unauthorized access to an individual’s PII, even if it is not yet known whether a third party actually acquired the information or gained control of it.  In still other states, notification of a breach may not be required unless there is a finding that the breach creates a risk of misuse or harm to the individual.

2. Parties to Whom Notification is Required: If the facts of the data breach trigger notification obligations under a given state’s data breach laws, then you must pay close attention to the statute’s specific requirements regarding to whom notification must be given under the circumstances.  In addition to notifying affected individuals, some states require disclosure to the state attorney general and/or to the credit reporting agencies.  For example, Alabama’s statute requires providing written notice of the breach to the state Attorney General if the number of Alabama individuals affected by the breach exceeds 1,000.  Arizona recently amended its data breach statute to also require notification in writing to the “three largest nationwide consumer reporting agencies” and the attorney general if the breach requires notification to more than 1,000 individuals.  South Dakota, however, does not set a threshold for notification and requires that all national credit reporting agencies be notified “without unreasonable delay” if a company is obligated to notify any individuals (even just one) of a data breach.

3. Notification Requirements – Content and Timing: Some states require that certain specific information be provided to the affected individual. Alabama, for example, requires that each notice include, at a minimum: (a) the date, estimated date, or estimated date range of the breach; (b) a description of the PII that was acquired by an unauthorized person as part of the breach; (c) a general description of the actions taken by the company to restore the security and confidentiality of the PII involved in the breach; (d) information as to how a consumer can protect herself from identity theft; and (e) the company’s contact information so that an individual may contact the company to inquire about the breach.

State laws also vary in the timing required for disclosing the breach to affected individuals.  Arizona recently amended its data breach statute to require disclosure to affected individuals within 45 days after determination that there was a security system breach, while Colorado recently amended its statute to require notice within 30 days. However, many states do not provide a specific timeframe for notification, which means that determining whether your notification of a breach is “prompt enough” may be at your own peril. Texas, for example, requires disclosure to be made “as quickly as possible” after discovery, while numerous other states impose a uniform – but vague – requirement that notification be given “in the most expedient time possible and without unreasonable delay.”

4. Parties’ Enforcement Rights: In the majority of states, only a state official can enforce the data breach notification laws. However, a small number of states provide affected individuals with a private right of action.  In such states, private parties can sue for violations of the state data breach notification laws.  California, for example, allows any person injured due to a violation of its data breach notification law to institute a civil action to recover damages, and allows affected individuals to recover a civil penalty of up to $3,000 per violation for any willful, intentional, or reckless violation of the statute.

Despite the fact that only a minority of states currently provide affected individuals with a private right of action, companies should nonetheless work to comply with such state statutes in a timely manner to avoid the risk of an enforcement action by not only the state attorney general, but also by the Federal Trade Commission (“FTC”).   Failure to comply with applicable state law – and the publicity associated with an enforcement action by the state – increases the likelihood that the FTC will take notice of the data breach.  The FTC has brought numerous enforcement actions against companies concerning poor security practices, alleging that such companies failed to adequately protect the security of individuals’ PII.  Such enforcement actions can result in civil penalties and onerous reporting requirements.

In summary: if your company finds that it has suffered a data breach, you will need to move quickly to determine the scope of your legal obligations under various state data breach laws.  The first line of attack to determine which states’ breach notification laws apply should be to analyze to whom the affected data relates and what type(s) of data was involved – and then work with your attorneys to ascertain whether a given state’s data breach laws apply and, if so, what your company will need to do to comply with them.  The facts and circumstances of every data breach are different, and not every breach will necessitate a multi-state response, however, we hope this article heightens your awareness of the issues you will need to consider, and the inquiries you will need to quickly undertake, in the unfortunate event that your company experiences a data breach.

If you have questions regarding state breach notification laws that may apply to your company, please contact Laura Arredondo-Santisteban at LArredondo@fh2.com.

Should We Notify Our Insurance Company?

Posted on by Mike Reeves

On March 28, 2018, a federal judge in Atlanta excused Fulton County’s insurance company from paying more than $6.5 million. Valuable insurance coverage was lost because the County failed to provide timely notice to its liability insurance company.

Insurance policies are contracts between the insurance company and the insured. Those contracts require the insured to take various actions after an accident. Two of the most important are to give the insurance company notice of an accident and to send any potentially covered lawsuit to the insurance company. Coverage may be lost if the insurance company has included language in the policy stating that a failure to provide notice will result in a forfeiture of coverage or that the notice provision is a condition precedent to coverage. Put more simply, late notice may excuse the insurance company from paying, as it did Fulton County’s insurance company.

The notice clauses enable insurance companies to promptly learn of the accident so they may investigate the circumstances, determine whether it is prudent to participate in negotiations, or, if negotiations are not successful, to ensure the lawsuit is properly defended. Courts recognize the importance of prompt notice and will enforce clearly stated consequences of late notice.

The insured’s duties and the consequences of the insured’s failure to give prompt notice depend on the nature of the coverage, the language of the policy, and the law of the state whose statutes and cases are used to construe the policy. Insurance policies may be personal or commercial, they may be “first party” or “third party.” They may be “occurrence” or “claims made.” They may be “primary” or “excess.” These variations are critical but are beyond the scope of this brief article.

Here, we focus on a few of the principles common to almost all insurance contracts. For example, liability policies require that notice of an occurrence (an event that could give rise to a claim) be given to the insurance company “immediately” or “promptly” or “as soon as practicable.” In addition, most policies require the insured to notify the insurance company if a claim is made or, if suit is brought, to forward the suit papers to the insurance company. A typical notice provision follows:

Duties In The Event Of Occurrence, Offense, Claim Or Suit

a. You must see to it that we are notified as soon as practicable of an “occurrence” or an offense which may result in a claim. To the extent possible, notice should include:

(1) How, when and where the “occurrence” or offense took place;

(2) The names and addresses of any injured persons and witnesses; and

(3)  he nature and location of any injury or damage arising out of the “occurrence” or offense.

b. If a claim is made or “suit” is brought against any insured, you must:

(1)  Immediately record the specifics of the claim or “suit”’ and the date received; and

(2)  Notify us as soon as practicable.

You must see to it that we receive written notice of the claim or “suit” as soon as practicable.

As indicated by this language, policies generally impose two duties: (1) a duty to notify the insurance company of an incident, accident, occurrence, or claim; and (2) an independent duty to notify the insurance company of a lawsuit.

The duty to give notice of an incident, accident, occurrence, or claim arises when the insured has reason to know of the possibility of a claim, regardless of whether the insured believes that he or she is liable, or that the claim is valid. Under Georgia law, the duty to provide notice to an insurance company is triggered when an insured actually knew or should have known of a possibility that it might be held liable for the occurrence.

In determining if there is a possibility of a claim that should be reported to the insurance company, a prudent insured will consider, for example: whether the insured is aware a person is injured; whether the insured is aware the injuries require treatment; and whether the insured is aware of the extent of related damage to property such as a vehicle (suggesting the severity of the collision).

Even Short Delays Can Avoid Coverage
Under Georgia law, while the “as soon as practicable” language affords some leeway as to timing, courts applying Georgia law have held that short delays can nonetheless result in the loss of coverage. Where no valid excuse exists, the failure to give notice for a period as short as three months has been found to be unreasonable.

Late Notice May Result In Loss Of Coverage
If an insured unreasonably fails to give timely notice, the insurance company is not obligated to provide either a defense or coverage:

  • An insured’s own determination of its lack of liability is not an excuse. The insured may not justify failure to provide notice by claiming that it determined that it had no liability for the incident.
  • The insured’s duty to give notice arises upon actual knowledge of a claim; however, the insured’s duty may also arise in the absence of actual knowledge. The insurance company – and then a court – will look at all of the facts and circumstances to determine whether the insured had enough information that he or she “should have known” a claim was possible. For example, where insured heard that someone had fallen from a fire escape and that someone was observed taking photographs of the scene, it was unreasonable for insured to delay five months before giving notice.

Similarly, a failure to promptly forward suit papers may result in loss of coverage:

  • The failure of an insured to forward a complaint to an insurance company until 46 days after its receipt breached a provision of a policy requiring prompt forwarding of suit papers, and allowed the insurance company to avoid both of its obligations – to defend the suit and to pay for any resulting judgment.

The policy language is critical. Where notice to the insured is not a condition precedent to coverage, the insurance company may void coverage only if the insurance company is able to show that it was prejudiced by the late notice. On the other hand, where the policy language indicates timely notice is a condition precedent, Georgia cases hold that the insurance company  need not prove that it was prejudiced by the delay.

Some types of insurance have their own, specific rules. For motor vehicle insurance, an insurance company seeking to avoid coverage due to late notice bears the burden of showing both that the delay by the insured was unreasonable and that this unreasonable delay prejudiced the insurance company’s ability to defend the case.

Giving Notice to the Insurance Company
Insureds should carefully read the policy and strictly comply with the notice requirements of the policy, both as to whom notice should be sent and the manner in which it should be sent.

Who May Give Notice?
Usually, the insured gives notice of a claim or sends copies of a lawsuit directly to the insurance company, Georgia law does not require that notice come only from the insured. Anyone who follows the policy language may give notice, as long as reasonable and timely.

Indeed, with respect to motor vehicle insurance, Georgia statutes specifically provide that a copy of a complaint and summons may be sent by a third party to the insurance company or to the insurance company’s agent by certified mail or statutory overnight delivery within ten days of the filing of the complaint.

To Whom Should Notice Be Given?
It is always safest to notify the insurance company directly, at the place indicated in the policy.

An insured may be accustomed to working with an independent insurance agent for most of their “day-to-day” insurance-related dealings. However, an insured should be aware that giving notice to an independent agent likely does not constitute valid notice to the insurance company. Under Georgia law, independent insurance agents or brokers are generally considered the agent of the insured, not of the insurance company.

However, under limited circumstances, an independent insurance agent may be considered an agent of the insurance company, such that notice to the agent is considered notice to the insurance company itself. For example, an independent insurance agent may be considered an agent of the insurance company if the insured can prove that the insurance company granted the agent or broker authority to bind coverage on the insurance company’s behalf. Alternatively, if an insurance company holds out an independent agent as its agent and an insured justifiably relies on such representation, the independent agent will be considered the agent of the insurance company. The insured will bear the burden of proving that the independent insurance agent is an agent of the insurance company. Gathering and presenting this evidence is expensive and time-consuming but may help to save coverage.

Late Notice May Be Excused
Not every late notice results in a loss of coverage. There are some circumstances in which courts have come to the rescue of insureds when the insurance company has denied the claim because of “late notice.” The insured has the burden of showing justification for a delay in providing notice. Some examples from Georgia cases include:

  • Even though 19 months elapsed before the insured gave notice, the court properly let a jury determine whether the insured acted reasonably where the insured had no actual knowledge of an accident, there were no facts to show the insured should have known, and the insured notified the insurance company immediately when evidence of a claim came to its attention.
  • Even though the insured was aware of an accident, its late notice may be excused because no one appeared to be injured in the accident and there was no significant property damage.

Gathering and presenting evidence that the insured’s delay was excusable under the circumstances is expensive and time-consuming but presenting and proving the grounds for an excuse may prevent the insurance company from denying coverage.

Call Your Lawyer, Provide Notice To The Insurance Company, And Forward Suit Papers
Whenever the insured is aware of an occurrence or a potential claim, the insured must promptly review the language of the applicable policy. The insured should not speculate there is no liability. Neither should the insured speculate there is no coverage. The insured should give notice even if the insured is unsure if the policy provides coverage.

Similarly, the insured must not assume that things can be “worked out” with the other party without involving the insurance company. An insured must not fail to give notice just because it believes the it has no liability or that the claimant or some other party was at fault. The other party or the other party’s insurance company may not agree.

The rules are complex, and the inquiry is very fact-specific. As the Georgia Court of Appeals recently stated:

We recognize that our jurisprudence on the question of what constitutes sufficiently prompt notice under an insurance contract … is not easily harmonized. Indeed, some of our prior decisions are difficult to reconcile with each other, as is not uncommon in an area that calls for a fact-specific inquiry.

In other words, call an experienced lawyer.

Because the consequences of failing to comply with the terms of an insurance policy could be fatal to coverage, a person or a business who becomes aware of an occurrence, or who receives a claim, demand letter, or lawsuit, should seek legal counsel as soon as possible. Ask about the specific rules applicable to the kind of policy at issue, about the details of when, by whom, and to whom notice must be given, and about the law of the state whose law will be used to construe the policy. And if the insured has failed to give prompt notice of an occurrence or claim, or to forward suit papers, the insured must consult a lawyer immediately to see if the delay may be  excused so that the insured is not left facing liability without insurance coverage.

If we may be of assistance, contact Mike Reeves at mreeves@fh2.com or (770) 399-9500.

Susan J. Berlin Joins FH2

Posted on by Friend, Hudak & Harris

We are pleased to announce that Susan J. Berlin has joined our Firm as Senior Counsel.

Susan joins the FH2 telecommunications team and has an extensive background in federal and state public policy strategy and advocacy, government relations, administrative law and litigation, privacy, regulatory compliance and general telecommunications legal issues. Susan’s experience includes practicing law in-house, at a law firm, at a state agency, and as a member of industry associations.

Susan may be reached at SBerlin@fh2.com or at 770-399-9500. For more information on Susan, please click here

DAVID V. GOLIATH – Using Indemnification Clauses to Level the Contractual Playing Field

Posted on by Scott Harris

Not all parties to contracts are created equal. In fact, more often than not one party to a contract may have considerably greater bargaining power and financial resources than the other party. This can give the stronger party an incentive to misbehave.  So how can you protect yourself when you are the “David” in a David v. Goliath scenario? Consider using an indemnification[1] clause to help level the playing field.

Indemnification clauses can be among the most important provisions to include in contracts for several reasons.  First, the mere existence of an indemnification clause can help ensure that a party gets what it bargained for under a contract, by giving the other party a reason to “think twice” before breaching the agreement.  Second, in the event the other party does breach the agreement, a well-crafted indemnification clause can give the non-breaching party more leverage to resolve matters favorably, before trial.  Third, an indemnification clause can help the non-breaching party recover its legal expenses incurred in enforcing the contract, thus removing the most costly obstacle to a “David” standing up to a “Goliath”.

Illustration – The David v. Goliath Scenario. Assume David and Goliath enter into a contract where David will pay $50,000 upon Goliath’s delivery of widgets. But, when it comes time for Goliath to deliver the widgets, he refuses.  Goliath may have accepted a higher offer from someone else for the widgets because he knows that David has fewer resources than Goliath and is unlikely to sue.

Let’s look at David’s options. David would almost certainly be entitled to recover “contract damages” for Goliath’s breach – such as the difference in price David must pay to acquire substitute widgets from an alternate source. But actually winning and collecting those contract damages comes with its own significant costs.  If David were to sue Goliath for breach (assuming he could afford to) David must hire an attorney.  However, under American contract law principles, David will not be entitled to reimbursement for the attorneys’ fees that he incurs fighting Goliath.  This results in a very real likelihood that David’s costs to pursue a lawsuit against Goliath will be greater than the amount he may actually recover in damages. This means that David may end up “winning” the lawsuit, but lose money overall after factoring in legal costs.

In short, because the American contract law on damages does not generally reimburse plaintiffs for their attorneys’ fees in contract breach actions, plaintiffs like David face an economic disincentive to stand up for their rights. Conversely, breaching parties like Goliath can have a perverse incentive to breach, particularly if the other party is financially weaker. This is where an indemnification clause can help level the playing field.

I.  Anatomy of an Indemnification Clause.

Indemnification clauses can help address the shortcomings of American contract law on damages by shifting liability or expense from one party to the other.

Here is a simple indemnification clause from a two-party contract:

Indemnitor shall indemnify, hold harmless, and defend indemnitee, to the fullest extent, from and against all claims, demands, actions, suits, costs and expenses (including, without limitation, attorneys’ fees and costs), losses, damages, settlements, and judgments (each, a “Claim”), whether or not involving a third party claim, arising out of or relating to: (i) any breach of any representation or warranty of indemnitor in this Agreement; or (ii) any breach or violation of any covenant of indemnitor in this Agreement, in each case whether or not the Claim has merit.

The three basic components of an indemnification clause are (1) the Parties, (2) the Claims, and (3) the Trigger Events. Each is explained below.

  1. Parties. The effect of an indemnification clause is to shift certain expenses and legal responsibilities from one party, the “indemnitee” or benefitting party, to the contract’s other party, the “indemnitor” or obligated party.
  2. Claims. “Claims” are the things the indemnitee is protected from or against. Claims can be:
  • an allegation (such as a claim or demand asserted by the indemnitor or a third party);
  • a formal legal proceeding (such as an arbitration, lawsuit, settlement, or judgment); or
  • a monetary amount (such as a loss, liability, cost, or expense incurred by the indemnitee).

(While this article focuses on “Direct Claims”, meaning a Claim by one party to the contract directly against the other party, indemnification clauses can also be used to shift liability and expense associated with a Claim asserted against the indemnitee by a third party, known as a “Third-Party Claim”.)

  1. Trigger Events. Usually, an indemnification clause is limited only to those Claims that arise out of, or result from, certain enumerated occurrences or circumstances (the “Trigger Events”). For our simple indemnification clause above the Trigger Events are limited to breaches of the indemnitor’s representations, warranties, and covenants (i.e., the indemnitor’s promise to do something) in the contract. But there can be many other types of Trigger Events; for example, the indemnitor’s violation of laws, its products or services infringing the rights of others, its acts causing personal injury or property damage, etc.

II.  Indemnification for Direct Claims.

With an understanding of the components of an indemnification clause, now let’s reconsider how our illustration might play out if the contract between David and Goliath had contained our simple indemnification clause.

In this instance, David could still sue Goliath for his contract damages.  But now, David has a bigger, more powerful “stone in his sling”.  Specifically, because his lawsuit is a Claim of a specified Trigger Event (Goliath’s breach of his covenant/promise to deliver widgets as required by the contract), David can also make a claim for reimbursement of David’s attorneys’ fees in bringing the lawsuit. The fact that Goliath may now be saddled with having to pay David’s legal fees will likely influence David’s decision to enforce his contractual rights against Goliath.

III.       Effects of Indemnity on Indemnitor Breaching Party.

As we can see, having an indemnification clause for Direct Claims substantially changes the economic calculus in favor of the plaintiff. It has considerable effects on the defendant breaching party, as well.

  1. The Threat of Having to Pay for Two Sets of Lawyers. In a lawsuit to enforce a contract with an indemnification clause, the breaching indemnitor is faced with the possibility of ending up paying for two sets of attorneys—its own and the plaintiff/indemnitee’s. Adding an indemnification clause to the mix has a substantial economic and psychological effect on the indemnitor. While protracting and delaying litigation is a time-honored tradition for some defendants, the benefits of being stubborn is much less compelling when weighted against the potential of having to pay both sides attorney’s fees. This fact weighs more and more heavily on indemnitors as legal fees mount and litigation progresses.
  2. Encouraging Settlement and Dispute Resolution. The example above assumes that a lawsuit was filed and proceeds all the way to trial and judgment. However, the vast majority of lawsuits are concluded before judgment, either by settlement or dismissal. Having an indemnification clause can be beneficial to resolving a lawsuit early on and even before a lawsuit is filed because as the indemnitee’s attorneys’ fees rise, the typical benefit of delay and protraction to the indemnitor diminishes. This increases the likelihood of earlier and more reasonable settlement.
  3. The Indemnitor May “Think Twice” Before Breaching the Contract At All. Of course, David would probably be happiest if Goliath simply performed the contract and avoided a dispute entirely. The mere presence of a clause that could make Goliath responsible for David’s costs of enforcing the contract may give him ample economic incentive to play by the rules of the contract from the outset.

III.  Conclusion.

While the particular facts and circumstances of the parties should always be considered, in many circumstances including a properly-drafted indemnification clause can enhance the parties’ likelihood that they will receive what they bargained for under the contract.

________________________

If you have questions regarding indemnification clauses or need further guidance on how to structure your business relationships, contact Scott Harris at SHarris@fh2.com or (770-399-9500).

[1] As used in this article, the terms “indemnity” and “indemnification” include three slightly different legal obligations: indemnity (to reimburse for an incurred expense or cost), hold harmless (a release from liability), and defend (the agreement to defend against a legal claim).  The three are slightly different concepts, but their effect is the same. They shift liability or expense from one party to the other.

It’s the New Year: Have You Checked Your Marks Lately?

Posted on by Michael Stewart

The start of a new year provides a time to reflect on past successes and lessons learned. It’s also a time to chart the course ahead to achieve your goals. One important goal for any business is to protect the uniqueness and “brand identity” that distinguishes it from others. And, there is no more valuable asset of brand identity than a company’s trademarks and service marks.

Like any business asset, trademarks and service marks must be used properly in order to maintain and enhance their value. Failure to do so can result in your trademarks and service marks losing their value and, eventually, allowing copycats to “steal” value from your business.

So, here are a few New Year’s tips to 1. ensure that you know how to properly use (and, thereby, legally strengthen) your trademarks and service marks, and 2. keep from weakening (or even losing) your trademarks and service marks.

I.  First, Some Basics:

What Is a Mark? What Is Its Purpose?

In short, a “trademark” is a word or symbol (or a combination of both) used to identify a business’s products to distinguish them from similar products offered by others.  Conversely, a “service mark” is used to identify services (rather than products) offered by a business to distinguish those services from similar services offered by others.  (Unless stated otherwise, the rest of this article uses the term “Mark” to include both trademarks and service marks.)

Marks help customers differentiate between products or services offered by one business and products or services offered by another.  Customers rely extensively on Marks when making purchasing decisions between different brands of the same product. They purchase one product instead of another, more often than not, based on perceptions of the respective quality and reputation associated with a specific brand (the Mark)—often without ever sampling the actual product or service. (Who opens a Coca-Cola beverage to taste it before buying it over a generic labeled store brand?) The ability of Marks to distinguish competing products or services and drive buying decisions is what makes them so valuable.  Such value is worthy of protection. And protection starts with proper usage.

What Do We Mean by “Proper Usage” of Marks?

Proper usage of Marks is all about clearly and consistently presenting the Mark in a way that the consumer easily recognizes that the Mark indicates a specific source (or brand) of products or services. The antithesis of this is when a Mark is used in such a way that it is perceived as merely a generic name for a product or service. Proper Mark usage indicates a specific source or brand. (Think: “Buy a BMW automobile”.)  Improper usage allows the Mark itself to be mistaken for the generic name of a category of products or services. (Bad: “Hand me a Kleenex”; “Make me a Xerox”.)  As customers come to associate your Mark with the specific quality and reputation unique to your brand, properly presenting a Mark preserves—and, over time, strengthens—the Mark’s ability to distinguish your business’s products and services from those of another company in the minds of customers.

II.  Do a “Proper Usage” Check-Up: Some Things to Look For.

A.  Present Your Mark as an Adjective – Not as a Noun or a Verb. You should always use your Mark as an adjective followed by a noun (the generic name of your products or services). Never use your Mark as a standalone noun or verb, even as a “shorthand” description of the products or services.  Failure to consistently present your Mark as a modifier to differentiate your company as the source of products or services leads consumers to think that your Mark is merely a generic name (whether as a noun or verb) for the type of products or services you provide. If that happens, your Mark may no longer be “distinctive”—meaning that customers no longer view it as a basis for distinguishing between your products and services and similar products and services of others. Once your Mark is no longer distinctive, it can lose the legal protections accorded to a trademark or service mark. This includes the right to exclude others from using your Mark.

Here are some examples of correct and incorrect uses of a Mark in a sentence.

Correct:   “Use BUZZ cloud data services to manage your data.” (“BUZZ” modifies cloud data services—good!)

Incorrect: “Use BUZZ to manage your data.” (“BUZZ” used as a shorthand noun—bad.)

Incorrect: “BUZZ your data management!” (“BUZZ” used as a verb—bad.)

TIP – One way to determine whether you are using your Mark properly as an adjective is to delete the Mark from the sentence in which it appears.  If the sentence still makes sense after deletion, that’s a good sign that the Mark was being used properly in the sentence.

EXCEPTION:  Sometimes a business uses the same term as both a Mark (a brand name for its products and services – an adjective) and as a name for the business itself (a noun).  (Think “BMW”, which is used both as the name of the company and as a brand name for the automobiles offered by that company.) When the business is merely using the term to refer to itself as a company or corporate entity, it is permissible to use the term as a standalone noun—but the business should nonetheless remain vigilant to follow the rules of proper Mark usage when it is using that term as a brand name for the business’s products and services (an adjective).

B.  Present Your Mark Consistently in Form and Format. Your Mark should always be presented consistently.  Consistent repetition of your Mark in the exact same form helps consumers recognize and remember it. This, in turn, strengthens consumers’ association of your Mark with the specific quality and reputation unique to your business. So:

  • Don’t vary the spelling or punctuation of your Mark; and
  • Avoid presenting your Mark in plural or possessive forms. (However, this does not apply if your Mark is actually plural (like “BUNCHES”) or a possessive (like “BOB’S”).)

C.  Make Your Mark Stand Out. Consider taking additional steps to make your Mark stand out as a unique identifier for your brand of products and services. For example, if your Mark is a word or a phrase (rather than a logo), differentiate the Mark visually from surrounding text.  Present your Mark in ALL CAPS or in a different color font.  Making your Mark stand out,  reinforces the word or phrase as a Mark instead of a generic reference.

D.  Use the Correct ®, TM, or SM Symbol and Use It Correctly.  Proper use of the correct ®, TM, or SM symbol is crucial to preserving rights in your Marks for several reasons.  It publicly reinforces that the word(s) or logo to which the symbol is affixed are being used as a Mark and not a generic name for goods or services, and it puts potential infringers on notice of your claim to rights in your Mark.  Furthermore, in some cases, it may eliminate certain defenses available to those infringing your Mark and affect the types of infringement damages you might recover for an infringement of your Mark.

Here are tips on how to determine which is the correct symbol to use with your Mark and how to use that symbol properly.

  • Use the ® symbol if your mark is registered with the USPTO in connection with the products and/or services on which the mark is being used in that particular instance.
  • Conversely, don’t use ®—and do use either the TM or SM symbol, as applicable—if you have not obtained a USPTO registration for your Mark or if you are not using the Mark, in that particular instance, with the particular products or services listed in your Mark’s USPTO registration.
    • Use the TM symbol when the Mark is being used in connection with products.
    • Use the SM symbol when the Mark is being used in connection with services.
  • Place the correct ®, TM, or SM symbol immediately following the Mark, not after the generic name of the product or service with which your Mark is associated. For example, for the Mark “BUZZ” registered with the USPTO for cloud data services, an example of appropriate usage would be “Use BUZZ®  cloud data services”—not “Use BUZZ cloud data services®”. (If there was no USPTO registration for “BUZZ” or if “BUZZ”, is not registered with respect to “cloud data services,” you would change the ® to a SM symbol.)

EXCEPTION: As noted, sometimes a business uses the same term as both a Mark and as a name for the business itself.  Trademark symbols should never be used where the business is merely referring to itself as a company or corporate entity (a noun), as opposed to a “brand name” for specific products or services (adjective).

Conclusion:  Start the new year off right by making sure your business is using and presenting its Marks properly. Appropriate presentation and use of your Marks will: strengthen customers’ association of your Mark with the particular products or services with which it is associated; help you protect your Mark against infringement; and increase the value of your business’s unique “brand identity.”

If you have questions regarding trademarks and service marks, including selection, proper usage, and protection of these valuable business assets, contact Mike Stewart at mstewart@fh2.com or (770) 399-9500 for more guidance.

FIVE THINGS EVERY EMPLOYER SHOULD KNOW ABOUT (If You Are an Employer, You Need to Read This)

Posted on by Suzanne Arpin

This article focuses on several areas that every employer should know to avoid unintentional non-compliance and potentially-significant liability and expense.  If you need more information or details regarding any of these topics, please contact us.

1.  WAGE AND HOUR LAW

The Plaintiffs’ Attorneys Favorite. Recently, there have been a large number of claims and settlements involving alleged violations of the federal wage and hour law, known as the Fair Labor Standards Act (“FLSA”).  Most of these claims involve either:

  • worker misclassification—classifying a worker as an independent contractor instead of an employee); or
  • failure to pay for time worked and overtime.

Considerations.  Plaintiffs’ attorneys actively seek out current and former employees willing to assert FLSA claims against employers.  This is because the employer is required to pay their attorneys’ fees as part of a settlement or judgment—if it comes to that. Naturally, this makes FLSA claims a plaintiff attorney’s favorite.  Here are a few things to keep in mind.

  • Bias Toward Finding “Employee” Status. Both the FLSA and tax law are biased toward finding a worker to be an employee and not an independent contractor.  Be very careful if you elect to categorize a person as an independent contractor.  When in doubt, unless you consult legal counsel, it is often legally advisable to categorize a worker as an “employee”.
  • 100% Burden of Proof. You, the employer, have 100% of the burden to prove you comply with the wage and hour law.  If an employee merely alleges that he worked more time than he was paid, or worked unpaid overtime, and you don’t have the records to prove him wrong, YOU LOSE.  If your records are not well organized, you may have to engage an attorney to go through them to pull your rebuttal together.
  • Very Costly. If you don’t comply or are unable to prove you have complied, then, in addition to paying the plaintiff’s attorneys’ fees, the plaintiff can go back up to three years to get back-pay damages.  Finally, those damages are generally doubled to calculate “liquidated damages”.

2. EMPLOYMENT DISCRIMINATION

Equal Employment Opportunity Commission (“EEOC”) Activity.  Recently, the EEOC sued and/or settled with numerous employers of all sizes after finding illegal discrimination in the workforce, mostly based on race, sex, or disability.

Preventative Measures.  Employers can inadvertently commit costly violations by employing supervisors, managers, and officers who behave inappropriately or simply don’t know enough to recognize the legal risk involved.  Here are a few observations based on experience.

  • Make Your Policy Clear and Follow It. Be sure you have a comprehensive anti-discrimination policy and abide by it.  It should name the people within the company to whom an employee can report any perceived instance of discrimination, either involving themselves or something they observed happen to another employee. These people need to be instructed to immediately notify the appropriate officer in the event of any complaint.
  • Consult Your Attorney. Contact your legal counsel for advice as soon as you sense any trouble.  The earlier the better.   Don’t “bury” or wait for things to resolve themselves.

3. EMPLOYEE HANDBOOKS

 A Trap for the Unwary.  An employee handbook has two basic legal purposes: to protect the employer from liability and to impose certain requirements on employees.  Employee handbooks can also serve a third purpose: to educate employees regarding the employer’s practices and policies.  Employee handbooks should NEVER include language that could create liability for the employer.

Common Mistakes.  Below are a few common, and potentially very costly, mistakes.

  • The employee handbook states that the employer will not pay overtime. This is prima facie evidence of an FLSA violation.
  • The employee handbook includes policies that the employer does not actually follow.
  • The employee handbook contains language that can be interpreted to change the “at-will” status of the employment relationship.

Considerations.

  • Provisions to Consider. The employee handbook can be used to impose a number of obligations on employees including, for example, restrictive covenants (confidentiality, non-solicitation, etc.), alternative dispute resolution terms, and cyber security obligations.  Note the employee’s agreement to some of the foregoing must be specifically indicated by his/her signature.
  • Get the Employee to Acknowledge Receipt. All the good defensive measures in an employee handbook become worthless if the plaintiff employee alleges he never received a copy of it and the employer cannot prove otherwise. Employees must be required to acknowledge in writing their receipt of the employee handbook.  As noted above, if the employee handbook contains terms for which the employee’s agreement must be specifically indicated by his/her signature, the signed acknowledgement should also specifically indicate the employees agreement to those terms.
  • Attorney Review. Your attorney should review your employee handbook periodically.

4. TERMINATION OF EMPLOYMENT

Waiver and Release of Claims.  Every employer needs to be prepared to handle terminations in a way that minimizes its potential liability.  There are certain things that an employer can do to minimize the risk that a terminated employee will end up as a plaintiff in a lawsuit against the employer.

In most cases, if terminated employee signs a properly-worded, enforceable waiver and release of claims, the employer should be largely protected from future claims by the terminated employee.  However, keep in mind the following.

  • Enforceability. Have legal counsel review your form of waiver and release or provide you with an appropriate form.  If you are terminating more than one employee during a 60-day period, special rules may apply to ensure full enforceability.  Also, some states impose additional requirements.
  • Consideration. You must provide some benefit to the employee in exchange for agreeing to the waiver and release of claims.  That can be in the form of severance or any other benefit or perquisite that the employee would not otherwise be entitled to receive.
  • Prerequisite for Severance. An employer should NEVER give or pay a former employee anything he is not otherwise entitled to receive without getting a properly-worded and properly-executed waiver and release of claims (including complying with any potential waiting periods for the former employee to review and consider signing the document).  Always, check with your attorney first.

5. CERTAIN LAWS APPLY BASED ON THE TOTAL NUMBER OF YOUR EMPLOYEES—KNOW THEM

This is a brief summary of the thresholds for the most-commonly-violated federal employment laws.  (State laws are not included.)

Number of Employees Covered Employer Law Protection
1 Any employer with any employee involved in commerce Employee Retirement Income and Security Act employee benefit rights
1 Any employer with any employee involved in commerce Fair Labor Standards Act minimum wage/overtime
1 Any employer with any employee involved in commerce Occupational Safety and Health Act occupational safety and health
4 Any Immigration Reform and Control Act national origin/U.S. citizenship
15 Any Title VII of the Civil Rights Act, ADA, GINA race, color, gender, religion, national origin, disability, genetic information
20 Any ADEA age discrimination
20 Any, except for church and governmental health plans COBRA health benefit continuation
50 Any FMLA family and medical leave
100 Any WARN advance notice of plant closings and mass layoffs

CONCLUSION

Because U.S. laws applicable to employers and employees are very complex and not always clear and because they cover a broad range of diverse areas (including: compensation, contract, tax, worker’s compensation, restrictive covenants, ERISA, HIPAA, privacy, etc.), every employer should have a competent and responsive attorney who can provide practical advice on the wide range of employment-related laws affecting employers.  It is far easier and cheaper to avoid problems than to endure them.

If you need help or have any questions regarding the topics discussed in this article or other employment law matters, please contact Suzanne Arpin at sarpin@fh2.com or (770) 399-9500.

Terms and Conditions May Not Apply – How to Make Sure Your Terms and Conditions Work for You

Posted on by Ben Byrd

“Additional terms and conditions apply” is a phrase we have all heard from a voice-over on a late-night infomercial hawking vegetable juicers or subscriptions to a knife-of-the-month club. But just what are “terms and conditions” and how are they different from a normal contract? And what concern are they to businesses that occupy, shall we say, more reputable corners of the marketplace?

What are “terms and conditions”?

As an initial matter, every contract has “terms”. These are simply the various promises that the parties to a contract make to each other: WidgetCo shall provide Customer with 600 widgets. In return, Customer shall pay WidgetCo $1,000 per widget. These are both terms.

Terms can be conditional—if Customer pays within 30 days of delivery, WidgetCo will give Customer a 5% reduction off the quoted purchase price. But conditional terms are still terms and, legally, there is no meaningful distinction between terms and conditions. Like “cease and desist” or “will and testament”, “terms and conditions” is simply a stock phrase that has become a fossilized part of legal language.

As a practical matter, though, when we hear the phase “terms and conditions”, what is usually meant are contract terms that have two characteristics. First, they are boilerplate terms—that is, standardized terms that are ancillary to the “real” terms of the deal that have been hammered out between the two parties with respect to the transaction at hand (for example, quantity purchased, delivery dates and locations). Second, they are often contained in a document (often titled “Terms and Conditions”) that is separate from the primary “deal-specific” document (such as a purchase order or statement of work) that gives rise to a particular deal. Terms and conditions are often, but not always, dictated by the seller of the goods or services without negotiation. It is in this sense that we will use the phrase “terms and conditions” in this article.

Considerations in using separate “terms and conditions”:

It can be useful to structure a transaction so that there are separate terms and conditions, and it is a practice that is especially common in internet-based commerce. Nevertheless, if you choose to employ terms and conditions, there are several considerations you must account for. Otherwise, you may end up with a contract different from the one you thought you agreed to.

Do you have a meeting of the minds? The first challenge that terms and conditions present is that they have a funny way of never making it into the contract at all. Any lawyer can tell you that a commercial contract is a “meeting of the minds” – that is, an agreement – between the buyer and the seller. In short, terms that both parties agree to become a part of the contract. Those that haven’t been agreed to do not.

The legal burden is on the party seeking to enforce a term to prove that the term was agreed to by both parties to be part of their “deal”. And, generally, this requires proof that the other party (i) had notice of the additional terms and an opportunity to review them, and (ii) agreed to be bound by them.

A problem with separate terms and conditions is that one party may not be aware that they exist at all. (In fact, a cynic might conclude that one reason terms and conditions are so popular is they seem to allow one party to insert terms into a deal without bringing them to the other party’s attention.) But if one party isn’t aware of certain terms, that raises the possibility that there was no meeting of the minds as to those terms, and so they do not become a part of the parties’ contract.

  • Imagine, for example, WidgetCo sells widgets through its website, widgetsforless.com. Within that website is a web page laying out the terms and conditions for purchases made through the website. However, a customer never has to visit that page to complete an order, nor is there a specific reference or link to the terms and conditions during the order process—so a customer can place an order without ever being exposed to the “other terms and conditions”. Instead, the website may contain just a general—and inconspicuous—statement that merely browsing or using the website binds the customer to the terms and conditions. This approach is often referred to as a “browse wrap” agreement. (The word “wrap” is an allusion to the earlier practice of selling software with terms and conditions included inside a box wrapped in shrink-wrap.)

In this situation, can we really say—or prove—the customer has knowingly agreed to those terms? Without something more, that is a very hard conclusion to reach, and courts usually agree. Browse wrap terms are often found to be unenforceable for the fundamental reason that they were never mutually agreed to—because the customer did not have adequate notice of the terms.

  • Now imagine WidgetCo uses a printed order form that contains the statement “WidgetCo’s standard Terms and Conditions apply”. This is better, because WidgetCo’s customer should at least be on notice that there are other terms out there that it needs to be aware of. But does WidgetCo’s customer really know the substance of the terms it’s agreeing to when it submits the order form? Can it find out what it’s agreeing to? If not, whose fault is that—WidgetCo’s or the customer’s? In this case, it would be WidgetCo’s fault—while WidgetCo has notified the customer that additional terms apply, it has not given the customer any opportunity to review those terms. As such, the customer cannot be said to have agreed to terms that it could not review.

To avoid these questions, the best practice would be for WidgetCo to include a copy of its separate terms and conditions with the primary contract document and to get some affirmative manifestation that the customer agrees to those terms, such as a signature on the terms and conditions document.

But that is not always possible. So, at a minimum, WidgetCo needs to include a provision in the main document that clearly and unambiguously

  • incorporates the additional terms into the parties’ agreement; and
  • provides clear direction on how the customer can find those terms to review them.

So long as the terms and condition of a contract have been made available for review by a party, the law will usually presume that the party read them and understood their contents—even if the party chose (for whatever reason) to not actually review the terms.

A useful provision could look something like this:

This transaction is subject to WidgetCo’s standard Terms and Conditions, last modified August 1, 2015. WidgetCo’s full Terms and Conditions are available to Customer on WidgetCo’s website at www.widgetsforless.com/terms_and_conditions. 

In an e-commerce context, the same thing can be accomplished by having the buyer/user click a box signaling that he or she agrees to the seller’s terms and conditions, with the actual terms and conditions being available for review via a conspicuous hyperlink. (This is commonly referred to as a “click wrap” agreement, as distinguished from browse wrap.)  Where the terms are available for review by clicking on a conspicuous hyperlink, courts again generally presume that the buyer/user has read them and understood their contents before checking the “I agree” box—even if the buyer/user later admits that they chose to not click on the hyperlink or to actually review the terms.

Can you prove what  terms and conditions the parties agreed to? At this point, we do know the customer has agreed to a set of terms and conditions. But, we still may not necessarily be able to prove what those terms and conditions are. That brings us to our next issue.

In this case, the terms and conditions are almost certainly for WidgetCo’s benefit, so it is likely WidgetCo that is going to want to assert the rights and protections they provide if the deal falls apart. That means the burden will be on WidgetCo to prove the content of the terms and conditions to a court. Experience has shown that that can be harder than it sounds.

Let’s assume WidgetCo’s customer has clearly and unambiguously signaled its consent to be bound by WidgetCo’s  terms and conditions that were in effect on the date their deal was struck. If the terms and conditions were reproduced in full on a document that the customer signed, it’s easy to prove what terms and conditions were agreed to.  But if he has signed a printed document containing a provision like the one in the section above, or he has checked a box on WidgetCo’s website showing his assent—i.e., in both cases, where the terms were made available to the customer through a hyperlink or web address—what now?  Especially if WidgetCo has since revised the terms and conditions found on its website?

Almost by their nature, terms and conditions change over time (a point we will discuss further below). More than once, a business has appeared in court ready to prove how their current terms and conditions appear on their website, only to be told that their current terms and conditions are irrelevant. What matters, of course, are the terms and conditions that were in place at the time this contract was formed with this customer. If the business has not maintained the entire history of its terms and conditions in a structured way—and many businesses do not—it may find itself unable to prove what earlier terms and conditions were in place on the date that this customer entered into the contract.

Therefore, if a business intends to rely on separate terms and conditions, it is essential that it maintain records of its various terms and conditions in such a way that it can prove the contents of the terms and conditions that every individual customer has actually agreed to. To do this will require the business to:

  1. Maintain all prior versions of its terms and conditions in a repository;
  2. Make sure that the repository uses a system that will show not only the version that was in effect on a given day, but also that the customer could have accessed them or did in fact access them (for example, the website containing the terms was not “down” or unavailable at the time; a record showing that the customer clicked the link or “checked the box” (if applicable)); and
  3. Make sure that the repository system is designed so that future employees will be able to testify with certainty about what terms and conditions were in effect on a given date. (Murphy’s Law dictates that all the employees from the time of the sale will be long gone, years later, when the terms actually become relevant to a dispute.)

Are the terms and condition “subject to change”? A common characteristic of standard terms-and-conditions forms is a provision that the terms and conditions themselves are subject to change, usually at the sole discretion of the party that drafted them and often without notice to the other party. The terms may then go on to say that any such change automatically becomes binding on the other party as soon as the change is made. These types of provisions would obviously be useful to the drafting party if they were enforceable. The problem is, they often aren’t.

Again, a contract is an agreement by two parties to a common set of promises. Imagine WidgetCo’s terms and conditions contain the following language:

All invoices shall be paid within 30 days. All invoices that remain unpaid after 30 days shall incur interest at the rate of 4 percent per annum.

If WidgetCo can retain the right to change any term at any time and in its sole discretion, what’s to stop WidgetCo from amending its terms and conditions to require payment within 14 days? Or 4 days for that matter? Why couldn’t it raise the interest rate to 12% and disavow any warranties at the same time? In fact, while it was at it, why couldn’t WidgetCo change its terms and conditions to say that a customer representative had to come to the home of WidgetCo’s president and mow her lawn every Sunday until the balance is paid?

These scenarios may seem absurd, but they illustrate the fundamental unfairness that a unilateral “subject-to-change at will” clause presents. The law recognizes this unfairness and so, generally, renders “subject-to-change at will” provisions unenforceable.  In some cases, courts have gone even further to find that the mere presence of a “subject-to-change at will” provision makes the entire contract unenforceable from the outset.

To make changes to your terms and conditions binding on the other party, you need to comply with the same fundamental requirements as were needed to form the initial contract. That generally means:

  1. Giving the customer actual notice of the new terms;
  2. Getting the customer’s consent to the new terms (which can be express or implied, depending on the circumstances); and
  3. Giving some new promise or performance—or giving up an existing right—in return for the customer’s agreement to make changes to the existing deal.

The last of these is probably the least intuitive for non-lawyers. That is because to be a legally enforceable contract, an agreement cannot be just a meeting of the minds. To be enforceable, an agreement also has to have “consideration” given by each party to the other.  Without new consideration, changes to terms and conditions will generally be found to be an unenforceable attempt to unilaterally modify the terms agreed to by the parties.

Consideration is a legal term of art that refers to the thing that each party agrees to, or gives up, as its part of the deal. For example, in a commercial transaction, the seller promises to give up goods or services, and the buyer gives up his money. These promises are consideration. When the terms of an agreement are changed, the customer’s agreement to proceed under the new, changed terms is usually the necessary consideration given on the part of the customer—but the seller must give something in return as well. It could be a promise to accept future orders from the customer (if the seller would otherwise have the right to refuse such orders), a relaxing of payment terms, or something else.   Depending on the facts and the type of business at hand, the possibilities are potentially limitless—so long as the seller gives something in exchange for the customer’s agreement to accept the changed terms.

In the end, terms and conditions are a fixture of modern commerce, especially online commerce, but they present issues that must be addressed before they can be effective. If you have any questions about your business’s terms and conditions, please contact Ben Byrd at bbyrd@fh2.com or (770) 399-9500 to discuss further.