Business Law Legal Research Blog

CONTRACTS: Harsh Arbitration Provisions May Be Found to Be Unconscionable Under State Law

Posted by Gale Burns on Tue, Jul 22, 2014 @ 13:07 PM

The Lawletter Vol 39 No 5

Charlene Hicks, Senior Attorney, National Legal Research Group

     In the last few years, the U.S. Supreme Court has issued controversial opinions that allow companies that use take-it-or-leave-it arbitration provisions in consumer contracts to require that unsatisfied consumers arbitrate all claims against the issuing companies on an individual,
rather than a class-wide, basis. See AT&T Mobility, LLC v. Concepcion, 131 S. Ct. 1740 (2011); Stolt Nielsen S.A. v. Animalfeeds Int'l Corp., 559 U.S. 662 (2010). Due to the high cost of arbitration, the practical effect of these decisions has been to discourage consumers from asserting any contractual dispute against the issuing companies and to thereby insulate large companies from liability for relatively minor small-dollar claims.

     Even so, some state courts have avoided the potentially far-reaching effects of Concepcion and Stolt Nielsen by analyzing the alleged unconscionability of an arbitration provision in a consumer contract under state law grounds. One particularly illuminating opinion is Gandee v. LDL Freedom Enterprises, Inc., 293 P.3d 1197 (Wash. 2013). In that case, the Washington Supreme Court ruled that a binding arbitration clause in a debt adjustment contract was unconscionable. The contract at issue required an indebted Washington consumer to travel to Orange County, California, to resolve her claim, shortened Washington's Consumer Protection Act statute of limitations from four years to 30 days, and required the consumer to pay the company's attorney's fees and costs if her claim was unsuccessful.

     In ruling that the arbitration clause in Freedom Enterprise Inc.'s ("Freedom") contract was substantively unconscionable, the Gandee court first found that the venue provision imposed prohibitive costs on the consumer. Next, the court determined that the "'loser pays' provision serves to benefit only Freedom and . . . effectively chills Gandee's ability to bring suit" under the state Consumer Protection Act. Id. at 1201. Third, the court concluded that the shortening of the state statute of limitations from four years to 30 days was substantively unconscionable.

     Finally, the court rejected Freedom's argument that the court's state law analysis was preempted by the U.S. Supreme Court's opinion in Concepcion. According to the Gandee court, Concepcion disallowed a California state court rule that invalidated an arbitration clause "that might be otherwise conscionable under California law." Id. at 1203. In contrast, the Gandee court's application of Washington's generally applicable unconscionability doctrine to the facts of the case before it was consistent with Concepcion and the Federal Arbitration Act. Thus, the Gandee court concluded: "Concepcion provides no basis for preempting our relevant case law nor does it require the enforcement of Freedom's arbitration clause." Id.

     Gandee limits the scope of Concepcion and the Federal Arbitration Act to arbitration provisions that are potentially conscionable under relevant state law. This suggests that where an arbitration agreement is so one-sided or overly harsh that it would be classified as unconscionable under state law grounds, a state court may feel free to invalidate the arbitration provision notwithstanding the Supreme Court's opinion in Concepcion. Although Concepcion may reflect the Supreme Court's recent trend of expanding the scope and general applicability of arbitration clauses, that opinion is not so far-reaching as to preempt traditional state law analysis of allegedly unconscionable contracts.

Topics: legal research, Charlene Hicks, contracts, Washington Supreme Court, The Lawletter Vol 39 No 5, arbitration provision, unconscionable, US Supreme Court controversial cases require indiv, Concepcion, 131 S. Ct. 1740, Stolt Nielsen, 559 U.S. 662, unconscionable claim analyzed under state law, Gandee v. LDL Freedom Enterprises, limits scope of Concepcion and Federal Arbitration

COPYRIGHTS: First-Sale Doctrine—Importation

Posted by Gale Burns on Mon, Jul 15, 2013 @ 16:07 PM

The Lawletter Vol 38 No 4

Tim Snider, Senior Attorney, National Legal Research Group

Under the "first sale doctrine," the owner of a copyrighted item, such as a book or a recording, is free to use it, sell it, lend it, or give it away under whatever conditions the owner chooses to impose.  This doctrine derives from a long line of jurisprudence, see Bobbs-Merrill Co. v. Straus, 210 U.S. 339 (1908), and is now embodied in the Copyright Act, 17 U.S.C. § 109(a) ("[T]he owner of a particular copy or phonorecord lawfully made under this title, or any person authorized by such owner, is entitled, without the authority of the copyright owner, to sell or otherwise dispose of the possession of that copy or phonorecord.").  Until now, the extent of the application of the first-sale doctrine to books sold overseas and then imported into the United States remained an open question.

Kirtsaeng v. John Wiley & Sons, 133 S. Ct. 1351 (2013), has now resolved that question.  John Wiley & Sons, Inc., an academic textbook publisher, often assigns to its wholly owned foreign subsidiary (Wiley Asia) rights to publish, print, and sell foreign editions of Wiley's English-language textbooks abroad.  Wiley Asia's books state that they are not to be taken (without permission) into the United States.  When Supap Kirtsaeng moved from Thailand to the United States to study mathematics, he asked friends and family to buy foreign edition English‑language textbooks in Thai book shops, where they sold at low prices, and to mail them to him in the United States.  He then sold the books, reimbursed his family and friends, and kept the profit.  Wiley sued Kirtsaeng, claiming copyright infringement. 

Wiley prevailed in the district court and in the Second Circuit.  The Supreme Court reversed.  The majority in a 6-3 decision concluded that nothing in the language of the statute would require that copyrighted works imported from overseas should be treated any differently than goods that are initially sold domestically.  Furthermore, as a practical matter, an application of the Copyright Act that would require buyers of copyrighted works to ascertain their provenance is simply unworkable.  The volume of foreign trade in which the United States engages is simply too large for enforcement to be feasible.  The burden of requiring those importing copyrighted goods into this country for a variety of purposes, such as exhibitions of works of art or acquisitions by museums, to seek out the copyright owners to obtain a license would be onerous.  Thus, an interpretation of the Copyright Act that would treat goods initially acquired outside the United States differently from those that are acquired domestically, for purposes of the first-sale doctrine, would be unenforceable.

Justice Ginsburg, writing for the dissenters, disagreed with the majority's reading of the statute.  She would not draw a legal distinction between goods lawfully made in the United States and then reimported into the United States, and goods, such as Wiley's, that were not "lawfully made" in the United States but, instead, were made exclusively for sale overseas and thus were beyond the reach of U.S. law.  In neither case would the first-sale doctrine immunize the importer from liability for infringement.  Dicta in Quality King Distributors, Inc. v. L'anza Research Int'l, Inc., 523 U.S. 135 (1998), had suggested that if the issue were squarely presented, the Court would not find the distinction persuasive either.  If the two situations were treated similarly, the first-sale doctrine would not have applied to insulate Kirtsaeng's sale of the books from liability for copyright infringement.  The majority, however, declined to follow that dicta.  Justice Ginsburg disagreed with their reasoning and did not accept that the factual distinction had legal significance for purposes of copyright infringement.  Moreover, she was not persuaded by the rationale of impracticable enforcement but, instead, would defer to what she considered the literal language chosen by Congress in enacting the Copyright Act.

In the most general terms, this case represents a further erosion in the scope of protection that is claimed by copyright owners under the Copyright Act.  Publishers and others have tended to take the Court to task for narrowing that protection and putting this country's intellectual property further at risk from infringement.  Only time will tell if those concerns are well founded.

Topics: legal research, Tim Snider, copyrights, first-sale doctrine, importation, Copyright Act, 17 U.S.C. § 109, owner imposes restrictions, Kirtsaeng v. John Wiley & Sons, imported copyrighted works treated as goods, application of provenance unworkable, importer not immunized from liability for infringe, owner protection narrowed, The Lawletter Vol 38 No 4, U.S. Supreme court

CONSUMER PROTECTION: A Merchant Could Be Liable for Requiring a Customer Using a Credit Card to Give His or Her ZIP Code

Posted by Gale Burns on Wed, May 1, 2013 @ 11:05 AM

The Lawletter Vol 38 No 2

Alistair Edwards, Senior Attorney, National Legal Research Group

Some states have statutes prohibiting a merchant from requiring its credit card customers to give or write certain "personal identification information" in a credit card transaction or on a credit card form.  For example, pursuant to section 105 of chapter 93 of Massachusetts General Laws, the Massachusetts General Court has declared:

(a)        No person, firm, partnership, corporation or other business entity that accepts a credit card for a business transaction shall write, cause to be written or require that a credit card holder write personal identification information, not required by the credit card issuer, on the credit card transaction form. Personal identification information shall include, but shall not be limited to, a credit card holder's address or telephone number.  The provisions of this section shall apply to all credit card transactions; provided, however, that the provisions of this section shall not be construed to prevent a person, firm, partnership, corporation or other business entity from requesting information [that] is necessary for shipping, delivery or installation of purchased merchandise or services or for a warranty when such information is provided voluntarily by a credit card holder.

Mass. Gen. Laws Ann. ch. 93, § 105(a).  Similarly, California's Song‑Beverly Credit Card Act ("Credit Card Act") provides:

(a)        Except as provided in subdivision (c), no person, firm, partnership, association, or corporation that accepts credit cards for the transaction of business shall do any of the following:

(1)        Request, or require as a condition to accepting the credit card as payment in full or in part for goods or services, the cardholder to write any personal identification information upon the credit card transaction form or otherwise.

(2)        Request, or require as a condition to accepting the credit card as payment in full or in part for goods or services, the cardholder to provide personal identification information, which the person, firm, partnership, association, or corporation accepting the credit card writes, causes to be written, or otherwise records upon the credit card transaction form or otherwise.

Cal. Civ. Code § 1747.08(a)(1)-(2).

Several courts have recently considered whether a Zone Improvement Plan code ("ZIP code") constitutes personal identification information.  For example, in Pineda v. Williams‑Sonoma Stores, 246 P.3d 612 (Cal. 2011), the California Supreme Court held that a business's act of requesting and recording a cardholder's ZIP code could violate the Credit Card Act and that the customer's ZIP code constituted personal identification information.  There, the court explained:

Section 1747.08, subdivision (a) provides, in pertinent part, "[N]o person, firm, partnership, association, or corporation that accepts credit cards for the transaction of business shall . . . : [¶] . . . [¶] (2) Request, or require as a condition to accepting the credit card as payment in full or in part for goods or services, the cardholder to provide personal identification information, which the person, firm, partnership, association, or corporation accepting the credit card writes, causes to be written, or otherwise records upon the credit card transaction form or otherwise." (§ 1747.08, subd. (a)(2), italics added.) Subdivision (b) defines personal identification information as "information concerning the cardholder, other than information set forth on the credit card, and including, but not limited to, the cardholder's address and telephone number."  (§ 1747.08, subd. (b).)  Because we must accept as true plaintiff's allegation that defendant requested and then recorded her ZIP code, the outcome of this case hinges on whether a cardholder's ZIP code, without more, constitutes personal identification information within the meaning of section 1747.08.  We hold that it does.

Id. at 616 (footnote omitted).[1]

Likewise, in Tyler v. Michaels Stores, 840 F. Supp. 2d 438 (D. Mass. 2012), the U.S. District Court for the District of Massachusetts, applying the Massachusetts statute, recently held that the collection of ZIP codes by a retail chain violated the Massachusetts law prohibiting the writing of personal identification information on a credit card transaction form.  In reaching this conclusion, the court held that a ZIP code constitutes "personal identification information."  There, the court explained:

Therefore, this Court holds that ZIP code numbers are "personal identification information" under Section 105(a), because a ZIP code number may be necessary to the credit card issuer to identify the card holder in order to complete the transaction.  This construction is more consistent with the Massachusetts legislative intent to prevent fraud than a statutory construction that simply views the ZIP code as a component of an address that later can be used to obtain a full address for marketing purposes.

Id. at 446; see also see also Tyler v. Michaels Stores, Civ. Act. No. 11‑10920‑WGY, 2012 WL 397916, at *4 (D. Mass. Feb. 6, 2012) (certifying to the Massachusetts Supreme Judicial Court the questions under Mass. Gen. Laws. Ann. ch. 93, § 105(a):  "1. . . . [M]ay a ZIP code number be 'personal identification information' because a ZIP code number could be necessary to the credit card issuer to identify the card holder in order to complete the transaction? 2. . . . [M]ay a plaintiff bring an action for this privacy right violation absent identity fraud? [and] 3. . . . [M]ay the words 'credit card transaction form' refer equally to an electronic or a paper transaction form?").

Of course, the above discussion is relevant only to those states, like California and Massachusetts, that have statutes prohibiting a merchant from writing, collecting, causing to be written, or otherwise recording a credit card customer's personal identification information.  Therefore, the first step for any attorney faced with this issue would be to research the statutory law of his or her state.

[1]Interestingly, the California Supreme Court recently held that the Credit Card Act provision prohibiting merchants from requesting and recording personal identification information concerning the cardholder does not apply to online purchases in which the product is downloaded electronically, since the safeguards against fraud that are provided in the Credit Card Act, such as visually inspecting the credit card, are not available to online merchants selling downloadable products.  Apple Inc. v. Superior Court, 292 P.3d 883 (Cal. 2013).

Topics: legal research, Alistair Edwards, consumer protection, credit card, personal information, ZIP code, online versus in person request, The Lawletter Vol 38 No 2

BUSINESS LAW UPDATE: New or Proposed State Legislation Impacting Businesses

Posted by Gale Burns on Tue, Mar 19, 2013 @ 11:03 AM

March 21, 2013

Charlene Hicks, Senior Attorney, National Legal Research Group

The advent of a new year marks the introduction of new state legislation that impacts business and commercial transactions, sometimes in significant ways.   A few newly enacted statutes that change existing laws and ways of doing business within the state are highlighted below.


On January 1, 2013, Senate Bill 474 came into effect.  Under this new law, a construction contract is void if it requires a subcontractor to insure, indemnify, or defend a general contractor, construction manager, or other subcontractor from its own active negligence or willful misconduct, design defects, or claims that do not arise out of the subcontractor's own work.  This law effectively eliminates "Type I," or active negligence, indemnity clauses in construction contracts.  The law does not affect "Type II," or passive negligence, indemnity clauses, nor does it apply to design professionals.

Also effective on January 1, 2013, Assembly Bill 1396 requires all employee commission agreements to be set forth in writing and to explain the method by which commissions will be computed and paid.  For purposes of this law, "commissions" are defined as compensation paid to any person in connection with the sale of the employer's property or services and based proportionately on the amount or value thereof.  However, commissions do not include short-term productivity bonuses or bonus and profit-sharing plans unless such payments are based on the employer's promise to pay a fixed percentage of sales or profits as compensation for work.

North Carolina

Effective April 1, 2013, a new Mechanic's Lien Statute, codified at N.C. Gen. Stat. §§ 44A-7 to -24.14, will come into effect.  The new statutory scheme is largely patterned after Virginia's Mechanic's Lien Statute and will apply to all construction projects except those having a value of less than $30,000 or involving improvements to existing residential dwellings.  Among other things, the new statute requires potential lien claimants to notify an owner identified as a "lien agent" prior to filing a mechanic's lien on real property.  In a change from North Carolina's former law, notice to the lien agent will be required to preserve the lien claimant's priority over a bona fide purchaser or mortgage lender. 

In addition, a separate piece of legislation, HB 1052, effective January 1, 2013, amends the Mechanic's Lien Statute by expressly stating that a lien on funds "arises, attaches, and is effective immediately upon the first furnishing of labor, materials, or rental equipment at the site of the improvement."  This amendment was passed to effectively overrule bankruptcy court determinations that a lien on funds was not effective at such an early period and serves to protect a subcontractor in the event of a general contractor's declaration of bankruptcy.


Within the employment setting, an increasing number of states are taking action to protect employee privacy rights in social media.  In 2012, six states—California, Delaware, Illinois, Maryland, Michigan, and New Jersey—enacted legislation that prohibits employers from requesting or requiring an applicant or employee to disclose a username or password for a social media account such as Facebook or Twitter.  As of January 28, 2013, several other states have introduced legislation to protect an individual's right to social media privacy in the educational or employment setting.  These states include Colorado, Hawaii, Kansas, Massachusetts, Mississippi, Missouri, Montana, Nebraska, New Hampshire, New York, North Dakota, Oregon, Texas, Vermont, and Washington.

It should also be noted that other bills currently under consideration by state legislatures could potentially change the law in certain business settings.  Some of the more noteworthy bills are listed below.


AB 5:  California employers would be prohibited from discriminating against an applicant or employee due to his or her condition of being homeless, lack of a permanent mailing address, or current income level.


SB 51:  A noncompetition agreement between an individual and a former employer would be rendered unenforceable if the individual is unemployed and has applied for, and is found eligible to receive, unemployment benefits.  If passed, the law would take effect on October 1, 2013 and would apply only to noncompete agreements executed on or after that date.


HB 1913:  If a license is required for a contractor to perform work and the contractor does not have a valid license or certificate issued by the board of contractors, the contractor cannot record a valid mechanic's lien.

Topics: legal research, Charlene Hicks, business law, NC mechanic's lien statute, multistate legislation re employee privacy rights, new state legislation, California construction contracts

COMMERCIAL LAW: Mortgagee Not Liable for Its Servicer's Truth-in-Lending Violation

Posted by Gale Burns on Mon, Jan 28, 2013 @ 13:01 PM

The Lawletter Vol 37 No 11

Alistair Edwards, Senior Attorney, National Legal Research Group

The Truth in Lending Act ("TILA"), 15 U.S.C. §§ 1601 et seq., imposes certain obligations upon the holder/owner of a mortgage (the mortgagee) as well as upon the servicer of the mortgage loan.  Recently, in Kievman v. Federal National Mortgage Ass'n, No. 1:12-cv-22315-UU, 2012 WL 5378036 (S.D. Fla. Sept. 14, 2012), the court considered whether a mortgagee could be liable for the servicer's TILA violation.

In that case, the plaintiff-mortgagors alleged a violation of 15 U.S.C. § 1641(f)(2) and attempted to hold the mortgagee and the servicer liable for this violation.  That statutory section, referring only to the servicer, provides:

Upon written request by the obligor, the servicer shall provide the obligor, to the best knowledge of the servicer, with the name, address, and telephone number of the owner of the obligation or the master servicer of the obligation.

15 U.S.C. § 1641(f)(2).  Moreover, § 1640 imposes liability for noncompliance with § 1641(f)(2):

[A]ny creditor who fails to comply with any requirement imposed under this part, including . . . subsection (f) or (g) of section 1641 of this title . . . with respect to any person is liable to such person[.]

Id. § 1640(a).  Confusingly, although § 1641(f)(2) refers only to a servicer, § 1640(a) refers only to a creditor (the mortgagee).  The plaintiffs emphasized this fact to argue that a creditor-mortgagee should be held liable for its servicer's violation of § 1641(f)(2).  Rejecting this argument, the court stated:

This Court . . . declines to extend liability to obligation owners—be they creditors or assignees—for their servicers' failures to comply with § 1641(f)(2).  The reference to "subsection (f)" in § 1640(a) is best explained by the fact that the owner of an obligation may sometimes act as the servicer of that obligation.  The statute contemplates this scenario in the first paragraph of subsection (f), which reads:  "A servicer of a consumer obligation . . . shall not be treated as an assignee of such obligation for the purposes of this section unless the servicer is or was the owner of the obligation."  15 U.S.C. § 1641(f)(1).  In the case of an owner‑servicer, then, failure to comply with subsection (f) does subject it to liability.  See Khan, 849 F.Supp.2d at 1382 n. 2 ("The Court notes that an entity that is both the servicer and lender on a loan would clearly be liable for damages."); Davis v. Greenpoint Mortg. Funding, Inc., No. 1:09-cv-2719, 2011 WL 707221 at *3 (N.D.Ga. Mar. 1, 2011) (noting that subsection (f)(1) "limits a servicer's liability to situations in which the servicer was once an assignee or owner of the loan").  But there is no question of vicarious liability for the servicer's violation if the servicer could not itself be held liable.  See Holcomb, 2011 WL 5080324, at *7 ("[I]t remains unclear what liability would transfer given that [the servicer] itself bears no liability under the facts alleged.").

Kievman, 2012 WL 5378036, at *3.  As the court logically pointed out, a mortgagee that services its own loan could be liable for a violation of § 1641(f)(2).  "[T]his Court's interpretation recognizes that § 1640(a)'s reference to subsection (f) creates a private right of action against those obligees who might employ unfair practices in servicing their loans[.]" Id. at *4 (court's emphasis).

Thus, a mortgagee may very well not be liable under TILA for its servicer's violation of the Act.  However, it should be noted that there is likely a division of authority on this issue.  In fact, the same district responsible for the Kievman decision had previously held that a creditor-mortgagee could be held vicariously liable for damages under TILA for a loan servicer's failure to properly respond to a borrower's request for information about the loan owner under § 1641(f)(2).  Khan v. Bank of N.Y. Mellon, 849 F. Supp. 2d 1377 (S.D. Fla. 2012).

Topics: legal research, Alistair Edwards, The Lawletter Vol 37 BNo 11, commercial law, mortgagee liability for servicer violation of TILA, Kievman v. Fed. Nat’l Mortg. Ass’n, SD Florida, mortgagee not liable if not servicer

CREDITORS' RIGHTS: Ability of Judgment Creditor to Garnish Protected Assets After Deposit into Debtor's Account

Posted by Gale Burns on Wed, Dec 19, 2012 @ 16:12 PM

The Lawletter Vol 37 No 9

Charlene Hicks, Senior Attorney, National Legal Research Group

As judgment creditors throughout the nation have experienced firsthand, it is often more difficult to enforce a judgment against a financially strapped debtor than it is to obtain the judgment in the first place.  To further complicate matters, state and federal laws protect certain assets, such as retirement pensions, from garnishment.  In an effort to circumvent such measures, creditors may attempt to garnish the debtor's bank account into which protected monies have been deposited.  On a nationwide basis, these efforts have met with mixed success.  Some courts have held that protected funds cannot be garnished even after they have been deposited in the debtor's account, whereas other courts have ruled that the monies lose their protected status once they have been deposited.

This split of authority was highlighted in the recent case of Anthis v. Copland, 270 P.3d 574 (Wash. 2012).  There, Bonnie Anthis won a wrongful death lawsuit against Walter Copland, a retired police officer.  To enforce the judgment, Anthis attempted to garnish Copland's only known asset, his retirement pension, which had been deposited in Copland's personal bank account.  Copland, in turn, claimed that the funds were exempt from garnishment or attachment.  The relevant Washington state statute states that a person's right to a retirement allowance "shall not be subject to execution, garnishment, attachment, . . . or any other process of law whatsoever."  Wash. Rev. Code § 41.26.053(1).

In analyzing the merits of Copland's claim, the Washington Supreme Court conducted a detailed exploration of how other state and federal courts have dealt with benefits-exemption statutes.  As a general rule, these courts have held that "some unambiguous reference to money actually paid to or in the possession of the pensioner is necessary in order to find that pension funds retain their exempt status postdistribution."  Anthis, 270 P.3d at 578 (¶ 14).  Federal courts, for example, have ruled that the language of the Social Security Act prohibiting garnishment of "the moneys paid or payable" to a beneficiary mandates the continued protection of such funds "even after deposit" in the beneficiary's personal bank account.  Id. (citing Philpott v. Essex County Welfare Bd., 409 U.S. 413, 415-17 (1973)).

In contrast, the language of the ERISA statutes simply requires that employee benefits plans prohibit the assignment or alienation of benefits.  The First, Second, Third, Ninth, and Tenth Circuits have held that this language is not an antialienation provision and, therefore, does not prohibit garnishment after funds are deposited into pensioners' personal bank accounts.  Id. at 578-79 (¶ 15).  The Fourth Circuit, however, has ruled that a pensioner cannot be required to turn over ERISA benefits that have been paid to him.  Id.; see United States v. Smith, 47 F.3d 681, 684 (4th Cir. 1995).

Cases decided under state law "have tended to follow the federal holdings requiring explicit language to exempt benefit payments deposited into a personal bank account or otherwise placed into the personal possession of the debtor."  Anthis, 270 P.3d at 579 (¶ 16).  A Michigan court of appeals, for example, had held that its state exemption statute protected only a retiree's right to a benefit and, therefore, did not prohibit garnishment of monies paid as a retirement benefit.  Id. (discussing Whitwood, Inc. v. S. Blvd. Prop. Mgmt. Co., 701 N.W.2d 747 (Mich. Ct. App. 2005)).

A minority of state courts, however, have held that "even where the statutory language is somewhat ambiguous, . . . 'statutorily exempt funds do not lose their exempt status by voluntary deposit into a checking account, as long as the source of the exempt funds is known or is reasonably traceable.'"  Id. at 579 n.11 (¶ 17) (quoting Haggarty v. George, No. 00-C.A.-86, 2001-Ohio-3481, 2001 WL 1647216, at *2 (Ct. App. Dec. 13, 2001) (unpublished)).  According to this minority view, the "placement of [protected] funds in a bank does not strip them of their protected character."  Id.

Following the majority line of cases, the Anthis court ruled that because the Washington Legislature did not unambiguously extend exemption protection to pension monies deposited in a bank account, such funds were not protected from garnishment.  Thus, Copland's pension payments lost their protected status at the moment they were deposited into his personal bank account.  Hence, Anthis could legitimately garnish those monies.

As Anthis demonstrates, judgment creditors may successfully garnish or attach a debtor's previously protected assets, such as retirement funds, once the asset is converted into monies and deposited in the debtor's bank account.  A creditor's ability to satisfy its judgment through this means is largely dependent on the exact language of the state or federal benefits-exemption statute in question.  A judgment creditor interested in pursuing this avenue of relief should carefully review the status of the law in the governing jurisdiction prior to taking any enforcement action.

Topics: legal research, Charlene Hicks, The Lawletter Vol 37 No 9, benefits-exception statutes, Social Security Act prohibits garnishment after fu, creditor's rights, enforcement of judgment, protection of funds once deposited in bank, unambiguous statute language generally governs sta

BUSINESS LAW UPDATE: MARS Rule—Federal Government Launches Concerted Action Involving Fraud andCorruption in the Bank Mortgage Industry, Including Activities by Loan Modification Companies and Attorne

Posted by Gale Burns on Fri, Oct 26, 2012 @ 15:10 PM

October 30, 2012

Charlene Hicks, Senior Attorney, National Legal Research Group

In recent days, federal officials have launched an all-out effort to halt the fraud and corruption plaguing the nation's bank mortgage industry.  On October 9, 2012, the Federal Trade Commission ("FTC") filed three separate federal court lawsuits against allegedly phony mortgage-relief companies.  These suits accuse the companies of having engaged in deceptive business practices by falsely assuring struggling homeowners that they could save their homes from foreclosure, charging thousands of dollars in up-front fees, and then providing little or no actual assistance.  On the same day, the U.S. Attorney General, the Federal Bureau of Investigation ("FBI"), and the Department of Housing and Urban Development ("HUD") announced the results of the Distressed Homeowner Initiative, a year-long, coordinated, multilevel investigation targeting predatory foreclosure-rescue and mortgage-modification schemes.  Meanwhile, on another front, the U.S. attorney's office in Manhattan filed a mortgage fraud lawsuit against Wells Fargo, accusing the major bank of having engaged in improper underwriting of home loans for over a decade.  The following day, October 10, the FTC announced that it had reached a settlement with Equifax on allegations concerning the improper sale of information on late borrowers.  The FTC alleged that Equifax had sold more than 17,000 lists of consumers who met specific criteria, such as being late on their mortgage payments, to Direct Lending Source, which, in turn, had sold the lists to various third parties.

A major source of ammunition in these federal efforts against mortgage fraud is the newest provision of the FTC's Mortgage Assistance Relief Services ("MARS") Rule, which was issued in November 2010.  See 12 C.F.R. § 1015.5.  This Rule prohibits mortgage-relief companies from collecting any fees until the homeowner has a written offer from his or her lender or servicer that the individual deems acceptable.  Mortgage-relief services that charge advance fees to consumers may be held civilly or criminally liable for violation of the MARS Rule.  See id. § 1015.10.

Notably, attorneys are generally exempt from MARS Rule prohibitions.  Id. § 1015.7.  To qualify for exemption from all MARS disclosure rules except the advance-fee ban, an attorney must satisfy three conditions:  (1) The attorney must be engaged in the practice of law; (2) the attorney must be licensed in the state where the consumer or dwelling is located; and (3) the attorney must comply with state laws and regulations governing attorney conduct relating to the MARS Rule.  Id. § 1015.7(a).  To qualify for an exemption from the ban against advance fees, the attorney must also meet a fourth requirement: Any up-front fees collected must be placed in a client trust account, and the attorney must abide by state laws and regulations governing such accounts.  Id. § 1015.7(b).

Broadly speaking, the sweeping actions just taken by various federal agencies may signal a general change in attitude from one that is "procreditor" to a more lenient "prodebtor" perspective.  Such a shift in the law could potentially benefit debtors seeking relief from seemingly harsh creditor-imposed penalties of all types.

It should also be noted that the FBI's announcement of October 9, 2012 emphasized the role that unscrupulous attorneys have played in perpetrating mortgage fraud upon desperate consumers.  In that announcement, the agency specifically stated it has "noticed a disturbing trend among these [distressed homeowner fraud] cases—an increasing number of lawyers playing primary or secondary roles in the fraud."  Distressed Homeowner Initiative:  Don't Let Mortgage Fraud Happen to You,'t-let-mortgage-fraud-happen-to-you.  According to the FBI, phony mortgage modification services have attempted to circumvent the MARS Rule advance-fee ban by "using attorneys—which by itself adds an air of legitimacy to their fraudulent schemes—and calling their upfront fees 'legal retainers.'"  Id.

The FBI's singling out of the attorney exemption to the MARS Rule may be taken as a sign that the federal government intends to take steps to close this "loophole" by imposing more stringent requirements on attorneys engaged in the practice of assisting financially troubled homeowners.  Attorneys for consumer-debtors should take care to stay abreast of any new developments in this regard.  At a minimum, the imposition of more stringent federal regulations that limit, or even outright prohibit, the collection of advance or retainer fees from clients who may wish to obtain a modification of their underlying home mortgages would significantly impact the risks associated with the pursuit of such cases and the maintenance of client trust accounts.

Topics: legal research, Charlene Hicks, business law, predatory mortgage-relief schemes, Mortgage Assistance Relief Services (MARS) Rule, attorneys generally exempt, noticeable increase in attorney fraud, government to enforce more stringent regulations a

CONTRACTS: "Plain Language" Versus "Legalese"

Posted by Gale Burns on Tue, Oct 16, 2012 @ 15:10 PM

The Lawletter Vol 37 No 7

Charlene Hicks, Senior Attorney, National Legal Research Group

Precision is essential in drafting effective legal contracts of any type.  If the contract language is not sufficiently expansive to include a particular party or situation, contractual obligations that were intended to be binding may be set aside as inapplicable.  At the same time, however, there has been a great movement toward "plain language" contracts as opposed to agreements comprised of "legalese."  The interplay between these potentially conflicting themes was recently highlighted by the First Circuit's opinion in Gove v. Career Systems Development Corp., 689 F.3d 1 (1st Cir. 2012), a case involving the applicability of an employer's mandatory arbitration clause to an unsuccessful job applicant.

In that case, Ann Gove applied for a job with Career Systems Development Corporation ("CSD").  The final section of the electronic job application contained the following arbitration clause:

CSD also believes that if there is any dispute between you and CSD with respect to any issue prior to your employment, which arises out of the employment process, that it should be resolved in accord with the Dispute Resolution Policy and Arbitration Agreement ("Arbitration Agreement") adopted by CSD for its employees.  Therefore, your submission of this Employment Application constitutes your agreement that the procedure set forth in the Arbitration Agreement will also be used to resolve all pre-employment disputes.

Id. at 3.  Gove duly checked the "accept" box next to the statement, indicating that she accepted the terms of the agreement, including the arbitration clause.

Gove was pregnant throughout the period in which her job application was processed.  After she was not hired by CSD, Gove filed an employment discrimination lawsuit in federal district court against CSD.  CSD moved to compel arbitration on the basis of the arbitration clause contained in the electronic job application.  The district court denied CSD's motion on the grounds that the arbitration clause was ambiguous as to whether it applied to Gove, a job applicant who was never hired, and the ambiguity had to be construed against CSD as the drafter of the clause.

On appeal, the First Circuit affirmed.  In reaching this decision, the court began by emphasizing that the dispute concerned "the scope of the arbitration clause, not its validity."  Id. at 5.  In other words, the arbitration clause was clearly valid and effective in at least some circumstances.

In analyzing the scope of CSD's arbitration provision, the court noted that the arbitration clause was devoid of any reference to job "applicants."  Id. at 6.  "Instead, every reference is to 'your employment,' 'the employment process,' or 'pre-employment disputes.'"  Id.  Based on this language, the court determined that a reasonable basis existed for Gove's conclusion that she would be bound by the arbitration clause only in the event that she was ultimately hired.

Because the contract language was susceptible to different interpretations and, therefore, was ambiguous, the court concluded that the contract had to be construed against the drafter, CSD.  Although Maine has a broad presumption favoring arbitration as a method of dispute resolution, this broad presumption does not take precedence over the equitable rule favoring the construction of contracts against the drafter, particularly where such contracts are presented to the nondrafting party on a take-it-or-leave-it basis.  As a result, Gove was not required to arbitrate her claims against CSD.

As Gove indicates, any ambiguities in the scope of "plain language" contracts will likely be construed against the drafting party.  As a result, it is critical that counsel retained to draft a contract take steps to ensure that foreseeable contingencies are clearly and unreservedly accounted for in the express terms of the contract.  The desire for plain contract terms does not negate the need to expressly document the expansive reach of a party's contractual obligations.

Topics: legal research, Charlene Hicks, contracts, Gove v. Career Systems Development Corp., 1st Circuit, ambiguity of arbitration clause re scope, ambiguity construed against drafting party, The Lawletter Vol 37 No 7

TRADEMARKS: Law of Competition—Unfair Competition

Posted by Gale Burns on Thu, Sep 6, 2012 @ 12:09 PM

The Lawletter Vol 37 No 5

Tim Snider, Senior Attorney, National Legal Research Group

There are occasions when it pays to plead a state law cause of action, even though the main claim arises predominantly under federal law.  In Belk, Inc. v. Meyer Corp., U.S., 679 F.3d 146 (4th Cir. 2012), Meyer claimed that Belk had infringed certain of its copyrights, trademarks, and trade dress in selling at retail a certain line of high-end cookware.  After a nine-day trial, the court found, based on the jury's factual findings, that Belk had engaged in unfair and deceptive trade practices as a matter of law. The jury found that Belk had distributed, marketed, and sold a private‑label cookware line that was "deceptively similar" to Meyer's trademarked product line.  Belk did so after receiving product, sales, and market information, as well as images and samples of Meyer's line.  Finally, Belk purchased a cookware design from a third party that was "deceptively similar" to Meyer's product line, even after learning that proposed designs sold by the third party were being sold by Meyer.

After the jury rendered its verdict, the district court observed that the jury had made its findings regarding Meyer's claim for unfair and deceptive trade practices, and the court invited argument from the parties as to whether those findings were sufficient as a matter of law to establish that Belk had engaged in unfair and deceptive trade practices under North Carolina law. After argument, the district court determined that, based on the jury's findings, Belk had engaged in unfair and deceptive trade practices as a matter of law and that Meyer was entitled to treble damages.  As a procedural matter, the Fourth Circuit concluded that Belk had forfeited its argument that the judgment was not supported by the evidence by failing to timely file a motion for a new trial under Federal Rule of Civil Procedure 50(b).  As the court put it, "[a] lawyer has a duty to preserve issues on the record for his client."  Id. at 160.

Under the Lanham Trademark Act, 15 U.S.C. § 1117(a), damages normally will not be trebled or attorney's fees awarded absent a finding that the case is exceptional or that the defendant's conduct warrants an enhanced award.  Upon a finding of a violation of North Carolina General Statutes section 75-1.1, however, treble damages are assessed automatically pursuant to section 75-16.  Once the jury found that Belk's conduct was unfair or deceptive, within the meaning of the statute, the award of treble damages was not discretionary.         

Prudent counsel should always look to state law for additional or augmented remedies, even when the claim predominantly sounds in federal law.  Particularly in the field of unfair competition, state remedies can enhance or augment the remedy awarded for conduct that violates both federal and state law.

Topics: legal research, Tim Snider, The Lawletter Vol 37 No 5, trademarks, enfringement, Belk, Inc. v. Meyer Corp., 4th Circuit, duty to preserve issues, 15 USC § 1117, no treble damages or attorney's fees award, state law may provide additional remedies for cond

BANKING LAW: Expanded Money-Laundering Laws Unavailing to Bank Customers Seeking Private Right of Action

Posted by Gale Burns on Thu, Sep 6, 2012 @ 11:09 AM

The Lawletter Vol 37 No 5

Anne Hemenway, Senior Attorney, National Legal Research Group

Stringent federal anti-money-laundering laws, many of which were originally passed to control mob and other underground financial transactions and activities, have existed for some time.  After September 11, 2001 and the passing of the USA PATRIOT Act, several of these laws were amended and expanded, although the connection with terrorism and the controls on domestic banking have long been questioned and scrutinized.  See Megan Roberts, Big Brother Isn't Just Watching You, He's Also Wasting Your Tax Payer Dollars:  An Analysis of the Anti-Money Laundering Provisions of the USA PATRIOT Act, 56 Rutgers L. Rev. 573 (Winter 2004).

Today, these federal laws are being reviewed by ordinary small bank customers and investors who are innocent victims of Ponzi schemes and other fraudulent investment scams. Some of the provisions are being looked at as a possible means of asserting claims against banks that may themselves be directly or indirectly involved in the scams, particularly when the fraudulent investment companies turn out to be insolvent and judgment-proof.

Title 31 U.S.C. § 5318 arises under the Department of the Treasury and sets forth the general powers of the Secretary of the Treasury to address and monitor monetary transactions. This statute, the Annunzio-Wylie Anti-Money Laundering Act, popularly known as the Bank Secrecy Act, requires banks to issue a Suspicious Activity Report ("SAR") to the Secretary of the Treasury to report suspicious financial transactional activity at their banks. It also provides immunity to financial institutions from civil liability for making the proper disclosures regarding both suspicious cash transactions and electronic transfers.  See Gregory v. Bank One Corp., 200 F. Supp. 2d 1000 (S.D. Ind. 2002).

Numerous regulations have been promulgated under 31 U.S.C. § 5318(g) to implement the Bank Secrecy Act within the financial market.  The regulation that pertains directly to banks is 12 C.F.R. § 21.11(k), which details regulations for national banks for filing a SAR. 

Unfortunately, for the small investors caught up in one of the many Ponzi schemes that have arisen in recent years under the banks' so-called watchful eye, the Bank Secrecy Act's requirement that banks monitor activity and prepare SARs for the Treasury Department does not create a private right of action and does not impose a special duty of care on the banks upon which they could be liable.  In re Agape Litig., 681 F. Supp. 2d 352 (E.D.N.Y. 2010); see also 2 Corporate Counsel Guidelines § 5:20 (Westlaw database updated Nov. 2011) (commentary on SARs required by federally insured financial institutions).  In Union Bank of California, N.A. v. Superior Court, 29 Cal. Rptr. 3d 894 (Ct. App. 2005), the court addresses a bank's privilege under the federal law from producing into evidence any SARs it prepares.

In addition, apart from the Bank Secrecy Act, there are numerous decisions that hold that a bank's failure to investigate a customer's suspicious activity does not give rise to liability to a third-party, nonbank customer who has been injured by the customer's fraud.  See Pub. Serv. Co. of Okla. v. A Plus, Inc., No. CIV-10-651-D, 2011 WL 3329181 (W.D. Okla. Aug. 2, 2011) (and citations therein).

Topics: legal research, The Lawletter Vol 37 No 5, banking law, money-laundering laws, 31 USC § 5318, Anne Hemenway, Bank Secrecy Act, SAR requirement, no private right of action for bank's failure

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