Business Law Legal Research Blog

TRADEMARKS: Effect in Court of Decision by TTAB

Posted by Timothy J. Snider on Mon, Jul 27, 2015 @ 09:07 AM

The Lawletter Vol 40 No 6

Tim Snider—Senior Attorney, National Legal Research Group

     In opposed trademark registration proceedings, the administrative adjudicative body is the Trademark Trial and Appeal Board ("TTAB"). It hears the appeals of applicants for registration and of those who oppose registration who are aggrieved by the decision of the Patent and Trademark Office whether to grant or deny registration to an application for registration of a trademark. There is a further level of appeal to the Federal Circuit, and a plaintiff can always seek cancellation of a registered trademark in district court. An issue often involved in registration proceedings is whether there is a likelihood of confusion between the applicant's mark and the opposer's mark. Unlike court proceedings, there is no discovery and no live testimony. The TTAB makes its decision based on the written record that is submitted to it by the parties. If the TTAB makes a determination that there is a risk of confusion between the marks in suit, what weight should be assigned to that determination by a court that is hearing a dispute between two markholders, one of whom claims that the other's mark infringes on its mark?

      That was the issue before the U.S. Supreme Court in B&B Hardware, Inc. v. Hargis Industries, 135 S. Ct. 1293 (2015). The owner of the SEALTIGHT trademark used with respect to fasteners in the aerospace industry brought action against the owner of the SEALTITE mark used on self-drilling screws for the constructing of buildings, alleging trademark infringement, unfair competition, and false designation of origin. The defendant counterclaimed for copyright infringement, false advertising, false designation of origin, and unfair competition. Following a jury verdict in favor of the defendant on all claims, the district court denied the plaintiff's motion for a judgment as a matter of law and a new trial and awarded the defendant its attorney's fees. The judgment was affirmed in part and remanded in part. B&B Hardware, Inc. v. Hargis Indus., 716 F.3d 1020 (8th Cir. 2013).

     An application for registration of the SEALTITE mark by Hargis was refused by the TTAB because that body concluded that there was a likelihood of confusion between the two marks. That issue was presented in the litigation between the parties in court, but the district court and the court of appeals both found, based on a jury verdict after a trial, that there was no risk of confusion between the two marks. The issue before the Supreme Court was whether the earlier administrative determination by the TTAB should have been given preclusive effect in the later court proceeding. The Court disagreed with both lower courts and reversed. The majority found that likelihood of confusion for purposes of registration is the same standard as likelihood of confusion for purposes of trademark infringement. B&B Hardware, 135 S. Ct. at 1307. Thus, the majority, over a sharp dissent by Justice Thomas, concluded that at least in some circumstances, an administrative adjudication can have preclusive effect if the same issue is later presented in a court proceeding. Whether other administrative adjudicative proceedings will have similar preclusive effect in court proceedings remains an open question. Hargis could have sought cancellation of B&B's trademark, a remedy that is available under the Lanham Trademark Act, 15 U.S.C. § 1119, in addition to the remedies available for infringement, in which case the TTAB's finding would have had no more than persuasive effect. As a result, a case that is already two decades old continues to have a life of its own, since it was remanded for further proceedings, presumably for a new (third) trial.

Topics: trademarks, Timothy J. Snider, TTAB, registration proceedings, B&B Hardware, Inc. v. Hargis Industries

ARBITRATION: FAA Preempts New York Statute Prohibiting Mandatory Arbitration Clauses in Consumer Contracts

Posted by Charlene J. Hicks on Thu, Jul 9, 2015 @ 12:07 PM

The Lawletter Vol 40 No 5

Charlene Hicks, Senior Attorney, National Legal Research Group

      In a matter of first impression, the New York Supreme Court, Appellate Term, recently ruled that a state law prohibiting mandatory arbitration clauses in consumer contracts was preempted by the Federal Arbitration Act ("FAA"). In Schiffer v. Slomin’s, Inc., No. 2013-1867NC, 2015 WL 1566198 (N.Y. App. Term Mar. 30, 2015), consumers filed a lawsuit against a security systems provider that sold and installed home security systems. The complaint contained causes of action against the security systems provider for breach of contract, breach of warranty, and fraud. In response, the security systems provider filed a motion to compel arbitration pursuant to an unsigned contract provided to the buyers that contained a mandatory arbitration clause.

     A New York state law, General Business Law section 399-c, generally prohibits mandatory arbitration clauses in consumer contracts. The Schiffer plaintiffs were homeowners-consumers; therefore, the arbitration clause the security systems provider sought to enforce was void under New York state law.

     The court found that section 399-c "is a categorical rule prohibiting mandatory arbitration clauses in consumer contracts." Id. at *3. Under preemption principles, this state law is displaced by conflicting federal law, i.e., the FAA, at least where the transaction at issue has a nexus with interstate commerce. Id. Because the evidence showed that the security systems provider did business in several states, a sufficient nexus with interstate commerce existed "to require preemption of the FAA over contradictory New York law." Id.

      Schiffer follows a national trend among courts to defer to the FAA and its presumption in favor of arbitration whenever any doubt exists as to whether a given dispute is subject to mandatory arbitration. As Schiffer also demonstrates, state legislation that categorically prohibits mandatory arbitration of a certain class of claims conflicts with, and is preempted by, the FAA. It is only in those rare cases wherein no nexus to interstate commerce is shown that the state law prohibiting arbitration may be enforced.

Topics: arbitration clause, Charlene J. Hicks, The Lawletter Vol 40 No 5, consumer contract

BANKING LAW: Finality—Appealability

Posted by Timothy J. Snider on Thu, Jun 11, 2015 @ 16:06 PM

Tim Snider, Senior Attorney, National Legal Research Group

      Very few principles of federal appellate practice are more fundamental than that only final judgments may be appealed. Mohawk Indus. v. Carpenter, 558 U.S. 100 (2009). That said, bankruptcy presents a unique situation, in that often adversary proceedings finally conclude the dispute between and among the parties to those proceedings and thus are appealable, even though the entire bankruptcy case may not yet be concluded. Howard Delivery Serv. v. Zurich Am. Ins. Co., 547 U.S. 651, 657 n.3 (2006) ("Congress has long provided that orders in bankruptcy cases may be immediately appealed if they finally dispose of discrete disputes within the larger case.").

     What rule should apply with respect to an order confirming or denying confirmation of a Chapter 13 plan? Chapter 13 of the Bankruptcy Code permits individual debtors to devise arrangements for the payment of the claims of creditors pursuant to a plan that is subject to the approval of the bankruptcy court. The court may confirm or decline to confirm the proposed plan or dismiss the case. If the court confirms the plan, then the confirmation order acts as a final judgment, resolving all the outstanding claims of all the parties to the proceeding. There is little doubt that the confirmation order, like an order of dismissal, has all the earmarks of finality that renders it subject to immediate appeal. Only plan confirmation—or case dismissal—alters the status quo and fixes the rights and obligations of the parties. When the bankruptcy court confirms a plan, its terms become binding on debtor and creditor alike. 11 U.S.C. § 1327(a). Confirmation has preclusive effect, foreclosing relitigation of "any issue actually litigated by the parties and any issue necessarily determined by the confirmation order." 8 Collier on Bankruptcy ¶ 1327.02[1][c], at 1327-6 (16th ed. 2014). But what about an order declining to confirm a plan?

     That was the issue before the Court in Bullard v. Blue Hills Bank, 135 S. Ct. 1686 (2015). There, the bankruptcy court entered an order refusing to confirm the debtor's proposed Chapter 13 plan. On appeal, the district court affirmed, and on subsequent appeal, the court of appeals dismissed for lack of jurisdiction. The Supreme Court, in an opinion authored by the Chief Justice, affirmed. He contrasted an order of confirmation with an order denying confirmation, reasoning:

     Denial of confirmation with leave to amend . . . changes little. The automatic stay persists. The parties' rights and obligations remain unsettled. The trustee continues to collect funds from the debtor in anticipation of a different plan's eventual confirmation. The possibility of discharge lives on. "Final" does not describe this state of affairs. An order denying confirmation does rule out the specific arrangement of relief embodied in a particular plan. But that alone does not make the denial final any more than, say, a car buyer's declining to pay the sticker price is viewed as a "final" purchasing decision by either the buyer or seller. "It ain't over till it's over."

Id. at 1693.

     The Court's decision in Bullard lacks the virtue of symmetry, in that orders confirming the plan and denying confirmation are treated differently, but the logic of the Chief Justice's reasoning is compelling. As a practical matter, it may make no difference other than in an exceptional or unusual case.

Topics: bankruptcy, Chapter 13, legal reseasrch, Timothy J. Snider, order declining to confirm Chapter 13 plan

CORPORATIONS: Minority Shareholders Appraisal Rights

Posted by Timothy J. Snider on Thu, Mar 19, 2015 @ 09:03 AM

Tim Snider, Senior Attorney, National Legal Research Group

     Typically, the circumstances under which a minority shareholder in a corporation may compel appraisal and purchase of his shares by the corporation is made explicit by statute. Occasionally, however, a case tests the outer boundaries of a shareholder's appraisal rights. In Fisher v. Tails, Inc., Record No. 140444, 2015 WL 103679 (Va. Jan. 8, 2015), Tails was organized as a Virginia corporation to operate as a regional franchisee of RE/MAX LLC, a Delaware limited liability company ("LLC"). On August 9, 2013, Buena Suerte Holdings, Inc., another affiliate of RE/MAX, and Tails signed a "Plan of Reorganization and Purchase Agreement" in which Tails would be sold to Buena Suerte in four steps. First, Tails would become a Delaware corporation, changing its state of incorporation from Virginia to Delaware pursuant to Virginia Code § 13.1-722.2 and Delaware Code title 8, § 265. Second, Tails would merge with and into a newly formed Delaware LLC, Tails, LLC. Tails, LLC, would be a subsidiary of a newly formed holding company, Tails Holdco, Inc. (Holdco), and Holdco would hold all of Tails, LLC's membership interests. Third, Holdco would cause Tails, LLC, to amend and restate its LLC agreement to remove certain LLC provisions. Finally, Holdco would sell Buena Suerte all of its membership interests in Tails, LLC.

     Tails solicited proxies from its shareholders, and the majority approved the proposal. Certain minority shareholders dissented and asserted their right to appraisal of their shares pursuant to Virginia's appraisal statute, Code § 13.1-730. They claimed that the domestication of a Virginia corporation under the law of a foreign state, in this case Delaware, was one of those events entitling the minority to exercise appraisal rights. Virginia has enacted a version of the Model Business Corporation Act ("MBCA"), but unlike the MBCA, Code § 13.1-730 does not include appraisal rights upon "consummation of a domestication." Compare Va. Code Ann. § 13.1-730, with MBCA § 13.02(a)(6). Once a corporation's state of incorporation is transferred to Delaware, it is subject to Delaware corporate law. Del. Code Ann. tit. 8, § 265(d); Va. Code Ann. § 13.1-722.2. Delaware law, unlike Virginia law (and the law of most other states), does not provide appraisal rights for a sale of corporate assets. Del. Code Ann. tit. 8, § 262(b).

     The disappointed shareholders in Fisher urged the court to adopt Delaware's step transaction doctrine, which treats the "steps" in a series of formally separate but related transactions involving the transfer of property as a single transaction, if all the steps are substantially linked. In essence, the minority shareholders argued that Tails' change in corporate domicile should be ignored because it was just the first "step" in a series of technically distinct but related transactions that should be viewed together as components of a larger transaction and judged under Virginia, not Delaware, law. The court declined to adopt and incorporate into Virginia law a nonstatutory Delaware doctrine, since the transaction about which the shareholders complained was governed wholly by Virginia statutes. Virginia by statute provides that once a corporation is domesticated elsewhere, it is governed by the foreign state's law. The court declined to reach a result that it considered wholly at odds with the governing law that the Virginia General Assembly had adopted.

Topics: corporations, minority shareholders, appraisal rights

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. Natl Mortg. Assn, 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

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