Think your company has no confidential information that needs to be protected? Think again.
“All companies have confidential information which, if compromised, could cause immeasurable damage,” says Kate B. Wexler, an attorney in the Business, Corporate & Securities practice group at Brouse McDowell. “Confidential information can be tangible or intangible and of a technical, business or other nature.”
Wexler says there are occasions where such information needs to be shared with employees, contractors, suppliers, customers, vendors, potential partners and others, and a confidentiality agreement should be put in place to protect the company’s interests.
Smart Business spoke with Wexler about confidential information and situations when you might want a confidentiality agreement.
What needs to be kept confidential?
Any information not generally known to the public should be treated as confidential, provided that you take steps to keep your information confidential as well. When you are sharing your company’s confidential information with any third party, you’ll want to press for a definition of confidential information that is as broad as possible to avoid any argument later on that any particular piece of information was not covered by the confidentiality agreement. It can be as general as all information, whether written or oral, delivered by your company in connection with a contemplated transaction. Of course, as the recipient of such information, you’ll want to limit this definition by requiring that all information disclosed be marked ‘confidential.’
Under what circumstances would you enter into a confidentiality agreement?
Contexts in which confidentiality agreements are used include agreements with individual employees to ensure they understand their obligations to the employer; agreements with potential partners in a joint venture; supplier agreements; and agreements between companies wishing to explore a potential acquisition or merger.
Although parties often rush through the step of entering into a confidentiality agreement when their new relationship begins, and sometimes omit it entirely, it’s critical in defining the relationship’s rules.
These rules not only include defining what’s mine and what’s yours, but they also address the level of care a receiving party must take with your confidential information; prohibitions against reverse engineering; disclosure to governmental entities; compliance with laws to which your company and your information is subject — e.g., HIPAA, GLBA, U.S. export laws; injunctive relief should a party breach the confidentiality agreement; and what happens to the information when discussions end.
Other issues often addressed in confidentiality agreements are confidentiality of the fact that the parties are even in discussion, and nonsolicitation, which prevents a potential partner from attempting to poach your employees that they may meet in the course of exploring this potential relationship.
Are there restrictions?
Yes, there are many situations where the disclosure of confidential information is required by law. For example, judicial or governmental order or by deposition, interrogatory, request for documents, subpoena and civil investigative demand. These situations can be addressed in the confidentiality agreement as permitted exceptions. It is also interesting to note that there are certain non-U.S. jurisdictions that will not recognize an agreement that prohibits reverse engineering.
Are there occasions when you might want to terminate a confidentiality agreement?
One such situation would be when the parties enter into a definitive agreement whereby confidentiality obligations between the parties would be addressed. Another might be when one or both parties no longer wish to pursue the objective of the relationship. In that case, a well-drafted confidentiality agreement would anticipate that situation and while the parties may no longer share information, their obligations to maintain confidentiality with respect to the previously disclosed information continues for a certain period of time.
Kate B. Wexler is an attorney with the Business, Corporate & Securities practice group at Brouse McDowell. Reach her at (330) 535-5711, ext 399 or firstname.lastname@example.org.
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Social media has pervaded the workplace. With more than 1 billion people on Facebook and 140 million Twitter users generating 340 million tweets a day, companies see the potential of social networking and often rush to get on board without formulating a comprehensive policy.
“Take a step back and consider the implications of posting — whether officially in your business, unofficially by employees, or about your business by disgruntled customers or competitors. Develop a plan for protecting your interests on all those fronts,” says Karen C. Lefton, a partner at Brouse McDowell. “That means drafting, implementing and, where appropriate, disseminating your policy before you are the target of a nasty post.”
Smart Business spoke with Lefton about what companies should consider now with social media.
What can companies do to protect themselves against disparaging statements made by customers or competitors?
Anyone who posts defamatory statements about your business may be subject to a defamation action. There must be a false statement of fact, published to at least one other person, with the requisite degree of fault — negligence or actual malice — resulting in damages. It is important to recognize that ‘opinion’ is protected. This is especially significant in the social media context, where reviews are pervasive and even encouraged on companies’ websites. When you do this, you invite potentially negative comments, but not ones that would be actionable in defamation.
Does that mean reviews are exempt from defamation lawsuits?
Reviews are usually excluded because opinions are protected speech. A false statement of fact is essential to a successful defamation claim. However, if someone says, ‘There was a cockroach in my oatmeal,’ that is demonstrably a statement of fact. If it is false, the restaurant where the oatmeal was served would have a potential defamation claim.
Whom would you sue?
The poster. Internet Service Providers generally have immunity for the posts on their sites, but the poster does not. Historically, defamed entities were reluctant to take action against an individual poster because the cost far exceeded the payoff. However, many homeowners’ insurance policies cover individuals for actions in defamation, which may provide some recompense for defamatory posts.
What if the harmful statements are made by your own employees? Can you fire them?
Be very cautious. Section 7 of the National Labor Relations Act protects employees who engage in concerted activity, so employees who post disparaging comments about wages and working conditions — including bad things about the boss or the business — are usually protected. This applies as much to employees in nonunion settings as to those in unionized workplaces.
An employer may be found to have violated the act not only by disciplining a worker for what he posts but for merely having a policy that could be interpreted as chilling an employee’s Section 7 rights. Your policy governing employees’ use of social media must be very carefully drafted.
Are there pitfalls if employees post as part of their job, sanctioned by the company?
Absolutely. According to the Society of Human Resource Management, 68 percent of businesses require employees to use social media as part of their job. Of those, 73 percent give no training in how to use it appropriately.
Every company with a social media presence should have a policy governing its official website and social media accounts, including identifying those employees authorized to speak on behalf of the company and training them to ensure that private information — whether about employees, business plans or anything else — does not leak out. This is a growing problem because communication on social media is so quick and casual that it often does not get the same attention as a printed marketing piece. It should get more, as it will last virtually forever.
How can you avoid social media pitfalls?
Get expert help drafting your policies. Implement them. Follow them.
Karen C. Lefton is a partner at Brouse McDowell. Reach her at (330) 535-5711, ext. 341 or email@example.com.
For information on Brouse McDowell’s Labor and Employment Group, visit http://www.brouse.com/OurPracticeAreas/tabid/55/MainAreaId/5/Default.aspx.
For a complete bio of Karen C. Lefton, visit http://www.brouse.com/OurAttorneys/AttorneyProfile/tabid/90/aid/252/Default.aspx.
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Over the past year, the National Labor Relations Board (NLRB) has issued a number of directives with the potential to affect many employers across Ohio and the nation.
A common theme from the NLRB has been that employers need to clearly state that work rules do not restrict the legal rights of employees. Examples of NLRB actions include striking down a large retailer’s social media use policy and a car dealership’s rule about being courteous. In both cases, the NLRB ruled that employees could interpret the broad language of employer policies as prohibiting protected discussions about topics such as wages or working
“The board is emphasizing that an indirect violation can occur if, hypothetically, an employee who wants to exercise concerted rights with fellow employees might read a rule as preventing him or her from doing so. You’d have to be thinking of hypotheticals in order to be looking at that as a problem,” says Stephen P. Bond, partner with Brouse McDowell, LPA.
Smart Business spoke with Bond about the NLRB and what companies should do in response to recent rulings.
Are the recent NLRB actions just a concern for employers with unions in place?
No. Under federal law, the focus is on employees’ rights to engage in concerted activities for the purpose of mutual aid or protection. This may exist whether there is a union or not, and the board has the authority to enforce those rights. In fact, the board issued a directive ordering all employers involved in interstate commerce to post a notice to employees informing them of their rights under federal law. But, at this stage, enforcement of that order has been postponed while the courts decide whether the board has the authority to enforce such a requirement.
Why is this happening now?
It is easy to understand that if an employer enforces a work rule that directly prevents an employee from doing something he or she has a right to do, the government would have a problem with that. But, recently, the board has emphasized an interpretation that if an employer adopts a rule that could reasonably be construed as prohibiting legal labor activities, then that also will be prohibited by the board, even if the employer had a legitimate reason for the rule. And the board holds that the ambiguous employer rules — rules that reasonably could be read to have a coercive meaning — are construed against the employer. So, there have been cases cited by the board under this standard where seemingly innocent rules have come under attack.
Can you provide some examples?
In the case of Costco Wholesale Corp., 358 NLRB No. 106 (Sept. 7, 2012), the board had problems with a number of Costco’s employee rules. First, there were rules against unauthorized posting of any materials on company property; discussing private matters of employees, including issues about being off work for various reasons; disclosing sensitive information, including payroll, Social Security numbers and personal health information; and sharing confidential employee information such as addresses and email addresses. The board did not like these rules because they went too far and may have prevented employees from using information in connection with other employees for mutual benefit in ways that are protected.
The board further objected to a company rule prohibiting employees from electronically posting statements that damage the company or damage any person’s reputation. And the board did not like a rule that prevented employees from leaving company premises during the workday without permission. In both respects, the board envisioned possible scenarios in which the employee could interpret these rules as preventing them from proceeding with rights they have under federal law in dealing with their employers.
In Karl Knauz Motors, 358 NLRB 164 (Sept. 28, 2012), the employer had this work rule: Courtesy is the responsibility of every employee. Everyone is expected to be courteous, polite and friendly to our customers, vendors and suppliers, as well as to their fellow employees. No one should be disrespectful or use profanity or any other language that injures the image or reputation of the dealership.
But the board held that an employee could take this to mean he or she could not criticize his or her employer or object to working conditions, even if talking to co-workers, conduct which is allowed under federal law.
What should employers do about this?
First, employers need to be aware of the potential of an employee making a claim that a work rule may be violating employee rights under federal law, even if there is no union.
Second, they should look at existing policies and handbooks with this issue in mind. Particularly, look to see if there are any obvious ways they are running afoul of any of these rulings.
It’s not necessary to change all of your rules, but look at ways the rules can be interpreted and whether they can be clarified to make sure they’re not in violation. The board talks about putting in language that says the intention is not to prevent employees from engaging in their lawful rights. You can use the company’s existing language and put in a disclaimer that might save you from getting into one of these problems.
Stephen P. Bond is a partner with Brouse McDowell, LPA. Reach him at (440) 934-8080 or firstname.lastname@example.org.
It takes time and money to create a document retention plan, but it’s even more costly to wait until litigation is pending to determine how to get needed information.
“The work done on the front-end will help protect the company. It’s not something every company has, but it’s something every company should have,” says Kerri L. Keller, a partner with Brouse McDowell, LPA.
“Companies may shy away from creating a document retention plan because they don’t want to spend the money up front. It can take a lot of time and effort.”
But when one email server could have 30,000 or 40,000 emails, it can be quite expensive to pay someone to sift through everything to find relevant documents.
Smart Business spoke with Keller about the importance of a document retention plan.
What is a document retention plan and why does a business need one?
A document retention plan is a policy that provides for the systematic review, retention and destruction of documents. A business needs one for numerous reasons, but primarily to reduce the cost associated with document production during litigation, assist in complying with laws requiring the preservation of certain documents and to facilitate access to records.
How does a business draft a document retention plan?
First, identify which documents are important. These are usually employment records, accounting and corporate tax records, and legal records, but can also be business-specific documents, such as invoices and order forms. Key documents are often stored on computer hard drives, or consist of things like emails and Web pages.
The next objective is efficiency. It’s not feasible for a company to retain every electronic document and email created, so the key is to have a plan. The policy should also be developed with an eye toward minimizing costs should the company be involved in litigation.
How does the lack of a document retention plan impact a company during litigation?
Electronically stored information is a major contributor to the cost of discovery in litigation. When documents are produced in litigation, they must be reviewed by counsel prior to being presented to the other side. Companies with inefficient policies may have inflated legal costs attributed to this. For example, if there is a lack of a central corporate repository, information can be spread across servers and backup tapes. Duplication increases the time and expense of reviewing documents. If there is a lack of a corporate policy, irrelevant information can be saved, which again, leads to expense in reviewing documents. Likewise, if critical documents are mingled in with less critical documents, or personal documents mixed with business documents, costs in reviewing them can increase. A policy serves the function of mitigating risks, reducing costs and improving access to records.
How does a business implement a document retention plan?
A business must first identify and categorize the universe of documents. It must then consider what categories of documents are essential and relevant. Certain state and federal laws set forth the time that some documents are required to be retained. The policy must enable a business to locate records quickly and effectively, ensure that records can be protected when needed for examination or litigation, and allow for nonselective destruction of documents once retention needs are met. The plan should be reduced to a detailed document and followed.
When a business is sued, or considering a lawsuit, it must implement what is called a ‘litigation hold.’ A litigation hold stops the routine destruction of documents that might contain relevant information. It’s OK for documents to be destroyed in the routine course of business. It is actually preferable, as each unnecessary and obsolete record can be used by an adversary. Records are generally assets only as long as they are needed. Once litigation is threatened, or contemplated, the routine destruction of documents must be stopped. A litigation hold is the process used to advise employees of their obligation to preserve records and suspend the company’s document destruction process.
When and how should a litigation hold be issued?
The duty to preserve arises when a party knows, or reasonably should know, that a suit is about to be filed, when a suit is filed, when a discovery request has been made or when a court issues a discovery order. It can arise before a complaint is filed, such as when a demand letter is sent by an adversary.
The litigation hold notice should be disseminated by either senior management or the company’s legal department. It should be someone who commands the recipient’s attention — not an assistant. It should be sent to all individuals who will be directly involved, such as those who are likely to have relevant documents and knowledge of the facts, as well as any document custodians. The relevant persons must be directly contacted. Both the notice to the recipient as well as the recipient’s acknowledgement of receipt must be documented. The notice must be broad enough to catch all documents, but specific enough to provide guidance.
What are the consequences if the litigation hold is not followed?
The consequences can be severe. Spoliation occurs when documents are destroyed or not preserved in a pending or reasonably foreseeable action. The penalties can include the cost of recreating the information, an instruction at trial that the missing information would have been beneficial to the adverse party, the exclusion of favorable expert testimony, a judgment against the party that spoliated the evidence, monetary sanctions and even criminal sanctions. While it takes work to create a document retention plan, the work is worth the effort.
Kerri L. Keller is a partner with Brouse McDowell, LPA Reach her at (330) 535-5711 or email@example.com.
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Smaller businesses often don’t have the wherewithal to enforce their patent rights because pursuing this type of litigation is very expensive, and they lack the expertise. However, the rise of nonpracticing entities (“NPE”) — organizations that enforce patents against alleged infringers with no intent to manufacture or market the invention — have made this an area that businesses need to take seriously.
“When you are a company that has one or two patents in an area and you’re fighting against an entity with hundreds in that area, it’s difficult to win,” says Michael G. Craig, a patent attorney with Brouse McDowell.
If you don’t have a standalone IP protection program, you’re losing revenue now, have lost it in the past and will continue to do so in the future.
“In the past, people assumed patents were a trophy for smart people to hang on their walls,” he says. “Now companies are monetizing their IP. Studies have shown that some 50 to 60 percent of a company’s worth comes from trademarks alone. These are commodities that need to be monetized. If you don’t have a strategy to do that, you are losing revenue.”
Smart Business spoke with Craig about NPEs and the importance of IP protection strategies.
What is a nonpracticing entity?
There are different types of nonpracticing entities. Generally, NPEs own and enforce patents but don’t intend to manufacture the products or provide the services associated with them. They instead enforce the patent rights in other ways. Some NPEs purchase patents from companies that don’t have the wherewithal to enforce those rights, doing so through licenses or lawsuits against infringers. These are groups created solely to buy up the intellectual property of others and enforce those rights without any other business plan or means of revenue.
Some entities hold defensive patents. Companies can partner with them for protection against lawsuits, and collectively, they become a harder target because they’re part of a group. There is also the purchase of patents for offensive purposes, such as buying patents to take over a segment of the market and force others to leave or enforce their rights.
Patent trolls are another aspect of NPEs. They hold patent rights, wait for someone to monetize the idea and then pounce. EBay’s one-click purchase — which allows buyers to bypass the bidding process and buy the item instantly — was a victim of a patent troll, as was BlackBerry, which had a patent troll sue it for its technology, worth hundreds of millions of dollars.
Why are NPEs significant?
They can drive the way a company’s patent strategy is developed. NPEs don’t have anything to lose when enforcing their rights. When you are sued, you have to allocate resources to defend your rights, which takes money away from your core processes. NPEs’ resources and business models are designed to enforce patents. You need to understand what NPEs are doing because they change the landscape of IP, and you need to develop an R&D strategy to navigate it and determine where you fit in.
You can join an aggregator, which is an NPE that aggregates IP property for the benefit of having safety in numbers. Those that join them can use the IP of others, as well as the aggregator’s resources for protection, offensively or defensively. And because the cost of a lawsuit is so deleterious, most will give up their IP rather than pursue a lawsuit. Also, when you practice in an area, particularly one that utilizes an industry standard, such as wireless networking, there is likely to be an NPE from whom you, or your parts supplier, may need to license the technology.
What can companies do to protect themselves from NPEs?
There is an overarching concern in the industry that there is no protection against an NPE. The reality is, under the current legal system, NPEs are not doing anything wrong. They would say they are just protecting the rights of inventors. IP is actually property that can be bought and sold and infringements against that need to be protected.
Err on the side of overprotection. Managing IP may seem expensive at first, but as far as costs associated with patenting or licensing, in the long run, the payback is tremendous. Further, you need a strategy to deal with NPEs in areas in which you do business, such as licensing agreements and hold harmless agreements.
IP programs should have the use of legal professionals to help them determine what is worthwhile to patent and how to go about it. A lot of companies have brainstorming sessions to come up with a list of ideas of what to patent, then flesh them out and go to their legal professionals with a list of ideas to determine which are worth protecting and the costs to do so.
Also, every company needs to have a strategy on how to protect their IP when certain situations arise, such as a potential infringer or infringement.
What should companies do when they are in a potential infringement situation?
That can be an anxious time, particularly if it is a product that drives your business. Your first call should be to an attorney who specializes in that area to analyze the claim to see if it has merit. They could contact the other party and negotiate because you don’t want to reach litigation. The worst thing you can do is put your head in the sand, because after you have been notified, it becomes willful and the penalties can add up.
You don’t need to reach that point. If a company is unsure of what the next step should be, contact a professional to manage the process. All you need is a little help to point you in the right direction and periodic management from an attorney to help along the way.
Patents are assets that need to be exploited and monetized. The IP landscape is changing, and those who don’t recognize this and look at the other way are going to be left behind.
Michael G. Craig is a patent attorney with the Intellectual Property Group at Brouse McDowell. Reach him at (330) 535-5711 or firstname.lastname@example.org.
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There are many ways that small and medium-sized businesses can find themselves facing financial difficulties that lead to trouble in their commercial lending relationship. When this happens, many times business owners become paralyzed, shutting down and failing to communicate with their lender. While that is understandable, it is the wrong thing to do, says David M. Hunter, chair of the Real Estate Practice Group for Brouse McDowell.
“When a business anticipates that it is entering a period of financial challenge, one of the first things it should do is get competent legal counsel,” says Hunter.
Often, business owners only do this as a last resort. However, retaining knowledgeable counsel early on allows you to obtain practical pointers when there is often greater flexibility to negotiate an agreeable outcome, he says.
“Once a lawsuit is pending, things become much more difficult to negotiate, even with a lawyer involved,” he says.
Smart Business spoke with Hunter about how to work with your bank to preserve good relations during difficult financial times.
When a company realizes it may be headed for financial difficulties, what should it do first?
Small and medium-sized businesses typically have a large file that contains the underlying governing documentation when the business took out the credit facility. In the event that your business is slipping into financial turbulence, locate that file and review the terms and conditions of your loan.
However, most businesspeople are overwhelmed by the paperwork. This is a good reason to get counsel involved early. Your counsel will determine the secured or unsecured position of your lender. If your loan is secured, what are the assets that secure it and what are the current valuations of those assets? Is the loan in default? If not, what is the time period you project you could make the required payments and otherwise adhere to the terms of the loan agreement?
How can an attorney help?
A good attorney either has knowledge to assist a borrower facing a potential loan default or is with a firm with others who have knowledge of the federal bankruptcy law protections or other approaches that would aid a borrower facing an approaching problem.
Once you have secured counsel and discussed the issues, the next step is to contact your lender. Bankers appreciate knowing that a borrower is alert to the problem and wants to collaborate with the bank to address it or explore what remedial options are available.
Business owners often believe that banks want to seize a borrower’s property or shut down a borrower’s business. No bank really wants to do that. If it is reasonably achievable, banks want to rehabilitate nonperforming loans and transform them back into performing loans that pay as agreed. They want to lend money to borrowers that use loan proceeds effectively and to create an improved economic performance for the borrower, which will allow the borrower to repay the loan.
Are there risks in alerting a bank of a potential missed payment?
Some businesses, regardless of efforts taken to head off financial difficulties, can face a situation in which the next loan payment might be missed. No bank will think unkindly of a call from a borrower saying an upcoming payment might not be paid timely. Some borrowers might worry that if a bank finds out about a potential missed payment, an awful consequence will be triggered. But if that is the impulsive reaction you receive from the bank, you are likely dealing with the wrong bank.
However, after 90 days of delinquency, the loan will likely go into a nonaccrual status — a consequence which immediately and negatively impacts the bank’s earnings. This is a more serious situation. If you alert your bank early enough, it will likely work with you to find a solution. But it gets more difficult to take these steps the longer a borrower waits.
At what point does this become a legal issue?
There are legal issues every step of the way. But these become more acute when the evolving facts empower a lender to take steps that can disrupt a borrower’s business. Many loans contain a cognovit provision, a tool a bank can use if a loan is in default. This authorizes a bank to obtain an expedited judgment against a borrower. This expedited judgment can quickly empower the bank to attach the bank accounts or levy upon the assets of its debtor.
It’s important to communicate with your bank before such a provision is implemented in an effort to find a way to augment the terms and conditions of the loan to give the borrower a window of opportunity to make payments. This often leads to the creation of a forbearance agreement — a mutually agreeable written understanding between the bank and its borrower as to how the parties will treat this troubled loan. Forbearance agreements customarily provide that as long as the borrower adheres to the agreement, the bank will refrain from pursuing certain remedies, such as obtaining or enforcing a cognovit judgment.
Preservation of value should be paramount for both the borrower and the bank. Under potential default circumstances, borrowers and banks can do things that can negatively impact a business’s value, and banks know that. If a bank acts aggressively to prompt a forced sale of assets, often the value realized when the assets are sold will be reduced.
Before a borrower gets to that point, the borrower would be well advised to work with a lawyer and devise a strategy to deal with the situation. Often, the owner and lawyer can come up with a plan of payment and present it to the lender. If the plan is reasonable, many times the lender will be receptive.
What are some other potential resolutions?
There is often relief available in bankruptcy. But its practical effectiveness hinges on the size of the company, as the pursuit of such a remedy can often be cost prohibitive. Chapter 11 cases, for example, can come at a high cost and be labor intensive. But a Chapter 11 filing can make sense in certain circumstances.
David M. Hunter is chair of the Real Estate Practice Group for Brouse McDowell. Reach him at (330) 535-5711, ext. 262, or email@example.com.
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The constitutionality of the Affordable Care Act was upheld recently by the U.S. Supreme Court, defining and solidifying many legal obligations employers have when it comes to health care coverage for employees.
“The crux of the Affordable Care Act is to make ‘minimal essential coverage’ more available,” says Christopher J. Carney, chair of the Labor and Employment Practice Group at Brouse McDowell. To achieve this, the Act contains provisions referred to as the ‘employer mandate’ or ‘play or pay.’
However, he says the Act does not require employers to provide minimal essential coverage.
“It is more accurate to state that the Act requires employers that meet a certain minimum employee threshold to make available minimal essential coverage or pay a penalty for failing to do so,” says Carney.
Smart Business spoke with Carney about some of the law’s caveats and what employers need to know in order to become compliant.
How does the law impact employers of various sizes?
The employer mandate provides that ‘large’ employers, or those with 50 or more full-time employees, are required to offer full-time employees health coverage effective Jan. 1, 2014. Businesses with fewer than 100 employees will also be eligible to shop for plans in health benefit exchanges that each state is required to establish as part of the Act.
What are the consequences of noncompliance?
Starting in 2014, large employers will be assessed an annual fee of $2,000 per full-time employee — in excess of 30 employees — if any full-time employee is not offered coverage and enrolls in and receives an income-based tax credit to participate in an insurance exchange. For example, assuming at least one employee satisfies the tax credit requirement, a business with 51 full-time employees that does not offer coverage must pay a monthly penalty of 21 (51 total employees minus 30) times the per-employee penalty amount, i.e., one-twelfth of the annual $2,000 per full-time employee. For purposes of the Act, a full-time employee is one employed at least 30 hours per week on average.
Furthermore, if an employee opts out of an employer’s health plan — either because the employee’s share of the premium would exceed 9.5 percent of his or her income, or because the employer’s or insurer’s share of the total cost of benefits is less than 60 percent and the employee obtains a tax credit for coverage in a health insurance exchange — the employer is also subject to a penalty.
Under these circumstances, the employer must pay a monthly penalty of one-twelfth of $3,000 multiplied by the total number of full time employees who obtain the income-based tax credit for that month. This penalty is capped at one-twelfth of $2,000, multiplied by the total number of full-time employees.
How do the state exchanges come into play?
The Act provides for government-run health benefit exchanges from which individuals and employers with fewer than 100 employees can purchase insurance. Plans in the exchanges will be required to offer four levels of coverage that vary based upon factors such as premiums and out-of-pocket costs. Premium and cost-sharing subsidies will be available for low-income families.
Each state is required to have its own health benefit exchange. If a state chooses not to create its own health benefit exchange, then one will be set up by the federal government. Ohio Gov. John Kasich says the state will not create its own and will rely upon the federal government’s health benefit exchange.
Considering the efforts to derail the Act, what would you advise an employer to do?
Employers should continue with their efforts to comply with the Act’s requirements and some provisions need immediate attention. For example, employers and insurers must provide a Summary of Benefits and Coverage for the open enrollment period beginning on or after Sept. 23, 2012. The SBC is similar to, but does not supplant, the Employee Retirement Income Security Act’s Summary Plan Description. If an employer’s SBC fails to satisfy the requirements of the Act, then the employer is subject to a penalty of $1,000 per failure, per participant. Another example is that the aggregate cost of employer-sponsored health coverage must be reported on Form W-2 for 2012 and going forward.
I would not expect a repeal of this law any time soon. Therefore, employers should determine the extent to which the new rules apply. Because the Act does not apply uniformly, an employer should review the law to identify which requirements apply and the compliance deadlines corresponding to each requirement.
When must employers come into compliance with the law?
The Act was passed on March 30, 2010, and not all changes set forth were imposed immediately. Generally, the provisions that were not controversial went into effect first. The provision prohibiting health plans from denying coverage or limiting benefits for children under the age of 19 because the child has a pre-existing condition went into effect immediately. But the ‘play or pay’ provisions for employers go into effect after Dec. 31, 2013.
What can legal counsel offer as employers look to come into compliance with the law?
Particularly when an employer is close to the 50-employee threshold limit, legal counsel can be helpful in identifying and analyzing employer options and obligations. The ‘play or pay’ regulations have not even been promulgated yet, but expect them to be complicated. Issues that will likely require the assistance of counsel include how to account for independent contractors to whom employee functions have been outsourced and whether common ownership of business would require the aggregation of employees.
Christopher J. Carney is Chair of the Labor and Employment Practice Group at Brouse McDowell. Reach him at (216) 830-6825 or firstname.lastname@example.org.
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Corporate policyholders often spend significant sums on insurance coverage to protect themselves against loss or injury. These policies are important assets and policyholders should be mindful of ways to protect and maximize them, particularly when an insurer has denied a claim or reserved its rights to deny a claim, says Amanda M. Leffler, partner with Brouse McDowell.
“There are fundamental principles of Ohio law that favor policyholders,” says Leffler. “Policyholders have the ability to use these principles to negotiate favorable outcomes with their insurance companies and often have more leverage than they think they do.”
Smart Business spoke with Leffler about the leverage you have as a policyholder and how to use it to your advantage.
What are the defense rights of policyholders?
Policyholders have some fundamental rights with respect to any defense provided by their insurance company, the first of which is the ability to choose and control their counsel when the insurer has reserved its rights. Many third-party insurance policies say they will pay for defense costs for policyholders if they are the subject of a suit. The right to defense costs is significant and can operate as leverage in a dispute with an insurer.
Many insurance companies attempt to impose upon their policyholders counsel of the company’s choosing, and policyholders frequently don’t want to use that counsel because they don’t feel those attorneys have their best interests at heart. When there is a reservation of rights, the insurer cannot control the litigation and can’t mandate the counsel that will act on behalf of the policyholder.
What are policyholders’ defense rights regarding multiple claims?
In Ohio, the insurer must defend all claims pled in the suit, even if they are unrelated to coverage. If a complaint sets forth multiple claims, but only one of those triggers coverage, the insurer must pay all defense costs and cannot require the policyholder to contribute unless the policy states otherwise.
Also, insurers in Ohio are not permitted to recover defense costs paid, even if the claim is ultimately not to be covered. For example, if a policyholder were sued for both negligence and intentional conduct, the claim for negligence would likely be covered, but the claim for the intentional tort would likely not be covered. Nonetheless, the insurer must defend the entire case. If the policyholder were ultimately held liable for only the intentional tort claim, the insurer would not have to indemnify the policyholder for the damages for which it was liable. The insurer, however, could not recover its defense costs, even though the claim was not covered by the indemnity provisions of the policy.
What is important to understand about the interpretation of insurance policies?
Insurance policies are contracts, and most disputes between insurers and policyholders present claims for breach-of-contract. Actions for breach of insurance contracts differ from other breach-of-contract actions in certain respects. Significantly, courts in these actions apply rules of contract interpretation that strongly favor policyholders, which provides leverage to policyholders in disputes with their insurers.
Where provisions of an insurance contract could have more than one interpretation, courts will adopt the interpretation that favors the insured. The test applied in determining whether there is ambiguity is not what the insurer intended its words to mean, but what a reasonably prudent person applying for insurance would have understood. Under such circumstances, any reasonable construction that results in coverage of the insured must be adopted by the trial court.
The burden is always on the insurer to prove the language of an exclusion bars a particular claim. Moreover, for a court to apply an exclusion to bar coverage, it must be clear and explicitly stated.
When must an insurer provide a defense for a claim?
An insurer’s duty to defend is distinct from and broader than its duty to indemnify. A liability carrier has the duty to defend its policyholder whenever the allegations against the policyholder arguably or potentially state a claim within the coverage of the policy.
Where the insurer’s duty to defend is not apparent from the pleadings in the action against the insured, but the allegations do state a claim which is potentially or arguably within the policy coverage, or there is some doubt as to whether a theory of recovery within the policy has been pleaded, the insurer must accept the defense of the claim.
What types of damages can a policyholder recover from its insurer?
This is a significant leverage point in Ohio because damages go beyond what you would typically think of being able to recover as compensatory damages. In insurance coverage matters, if you win, you can be made completely whole.
If policyholders are required to litigate with their insurer, they can expect to obtain damages that include the amount the policyholder had to pay to settle the claim, the amount the policyholder had to pay to satisfy a judgment against it that should have been covered, and, if the insurer refused to defend the action, the reasonable and necessary cost incurred to investigate and defend the underlying claim.
Policyholders may not be aware they will also be awarded attorneys’ fees if they win a breach-of-contract case. The Ohio Supreme Court has made it clear that the state recognizes an exception to the American Rule to permit policyholders to recover attorneys’ fees when they must litigate with their insurers to enforce policy rights. The rationale is that the insured must be put in a position as good as that which it would have occupied if the insurer had performed its duty. This does not require the policyholder to demonstrate any impropriety on the insurer’s part, and these coverage case attorneys’ fees can be a significant component of a damages award.
Amanda M. Leffler is a partner with Brouse McDowell, L.P.A. Reach her at (330) 535-5711 or email@example.com.
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Your parts distributor has always been reliable, offering you prices that its competitors couldn’t beat. It was a great deal for you — until the distributor went bankrupt.
You find another supplier and move on. But months — or years — later, you are called on by a bankruptcy trustee that has been appointed to oversee the bankruptcy case. The trustee says that the commodity you were purchasing was priced much lower than market rate. And because the trustee’s job is to collect funds in this case, he’s delivering you with a lawsuit to charge you with paying the difference between your below-market prices and the market rate for those years you purchased the commodity.
“Increasingly, customers of bankrupt businesses are being caught by surprise with fraudulent transfer claims asserted by bankruptcy trustees, who claim that they received a deal that was too favorable,” says Alan Koschik, co-chair of the Commercial & Bankruptcy Practice Group at Brouse McDowell. “These claims seek to renegotiate sale transactions long after they took place and create a new layer of uncertainty for certain business transactions.”
Smart Business spoke with Koschik about how businesses can help protect themselves against fraudulent transfer claims.
What are fraudulent transfers and when do they most commonly occur?
Technically, a fraudulent transfer claim is a transfer of property that is made with the intent to hinder or delay a creditor, or put property beyond their reach. In typical cases, a debtor might transfer his home or savings accounts to another person, an insider such as family or a spouse.
Fraudulent transfer claims most often arise in these familiar situations: transfers to insiders, as described; so-called upstream guaranties of a corporate parent’s debt by a business that ultimately cannot pay its creditors; and leveraged buyout transactions that cause an insolvent debtor to take on too much debt while permitting former equity holders to cash out of the business.
What is surprising about the new class of fraudulent transfer claims?
The new class of claims is distinctly different from these typical cases. They do not involve insider transactions, or extraordinary transactions. The claims are being charged against customers that have engaged in day-to-day business transactions, such as simply buying a commodity a company sells.
The customer isn’t trying to defraud or hinder anyone; it simply wants to buy the product and the seller (debtor) is offering an attractive price. However, bankruptcy trustees are seeking to change the price term of regular sales transactions long after they were completed by arguing that the value paid was less than ‘reasonably equivalent.’ Litigation ensues and usually involves an expensive debate about the sufficiency of the price.
What typical business transactions could lead to fraudulent transfer claims?
Sales of commodities are the most typical sales that can trigger a fraudulent transfer claim because a bankruptcy trustee has access to pricing information. Commodities are traded in a variety of exchanges, so trustees can look up idealized prices and make comparisons to prices actually paid to the debtor, the business that went bankrupt. Then, the trustee can calculate the difference and come up with a figure that he contends the customer should have paid.
The trustee justifies this based on commodities prices, charging that the debtor would have collected X more dollars if it had charged the reported market price. Commodities are more likely to be subject to a pricing comparison and lead to a fraudulent transfer claim than, say, accounting or legal services that are typically considered unique and less likely to have a non-negotiable ‘market price.’
In case of a lawsuit, what defenses can a business raise?
These new fraudulent transfer claims can be challenged with the argument that non-insider customers that negotiate at arm’s length set their own market price and should not bear the burden of guarantying the debtor-seller’s debts to its creditors. The customer shouldn’t have to help pay the vendor’s debt just because it was offered a lower price on a commodity during a regular business transaction.
A non-insider customer’s negotiated price should be considered to be ‘reasonably equivalent value’ by definition and the trustee’s claim should fail. However, the problem is that litigation is a lengthy, costly process, and customers frequently end up paying more in a settlement.
How can businesses protect themselves against fraudulent transfer claims?
If your business purchases commodities, dig deeper when vendors offer a surprisingly low price. Why is the price so low? How long has the company been in business? Are you aware of the financial state of the vendor’s business? Is it in trouble? How much lower than market rate is this vendor charging?
While it’s prudent in business to seek out vendors with competitive prices, if a deal seems too good to be true, it just might be. That said, if you move forward with a vendor offering a price you can’t resist, engage in a futures contract or swap agreement. These transactions are common in the commodity trade, and there are safe harbor defenses built into the bankruptcy code regarding futures trading.
It’s a good idea to consult with your attorney if you engage in commodities purchases to discuss pricing and the potential risks associated with fraudulent transfer claims. Then protect your business by making decisions not based solely on cost.
Alan Koschik is co-chair of the Commercial & Bankruptcy Practice Group at Brouse McDowell. Reach him at firstname.lastname@example.org.
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Last fall, the National Labor Relations Board (“NLRB”) issued a rule mandating that employers begin to post at the workplace a new form that notifies employees in general of what rights they have under the National Labor Relations Act. It was initially scheduled to take effect on November 14 of last year; but its effective date was postponed to April 30, 2012.
“Contrary to what some employers might assume, this poster is required regardless of whether their own employees belong to a union,” says Stephen P. Bond, partner at Brouse McDowell.
Smart Business spoke to Bond to find out more about what this means for employers and how they can comply with the new rule.
What kinds of employers should be concerned with the new requirement?
As a general rule, this applies to all businesses that have annual gross revenues of $500,000 or more. There are some specially defined categories that vary from this. For example, the regulation would apply to a nursing home with annual revenues of as little as $100,000, or a daycare center with annual revenues of $250,000. Even a smaller business can come under coverage if it buys or sells more than $50,000 worth of goods or services in interstate commerce. There is an exemption for governmental entities.
What does the poster say?
In addition to telling them how to reach the NLRB with complaints, it advises employees they have the rights to, among other things:
* Organize a union
* Bargain collectively
* Discuss wages, benefits and other terms and conditions of employment with other employees
* Take action with one or more co-workers to improve their working conditions by raising work-related complaints with their employer
* Go on strike, depending on the purpose or means of the strike
It also informs them that it is illegal for an employer to, among other things:
* Prohibit them from talking about a union during non-work time
* Question them about union activities
* Discipline them for being involved in union organizing activities
* Threaten to close down if a union is chosen by workers
* Prohibit them from wearing union buttons at work in most cases
* Spy on them for engaging in union organizing activities
How is it to be posted?
The poster is to be placed in a prominent location and, at the least, at any location where personnel rules are usually posted by the employer. If 20 percent of the work force speaks another language, a foreign language version of the poster needs to be posted. If the employer usually uses an intranet or Internet sites to communicate with employees about personnel issues, the poster needs to be available there as well, either as an exact copy or as link to the NLRB’s site. Employers can download the poster from www.nlrb.gov/poster, or they can call the government at (202) 273-0064 to have it mailed to them.
What challenges does this rule pose for employers?
The poster is significant on three levels. First, if an employer fails to comply voluntarily, any employee can file an unfair labor practice charge with the NLRB against the employer; and, theoretically, the NLRB could ultimately order the employer to comply with a court order. That process can be costly, time-consuming and counterproductive to staff morale. Beyond that, if an employer fails to post, and an employee later files an unfair labor practice charge on some other issue, the NLRB may excuse any delay by the employee because the person hasn’t been forewarned of his or her rights through a poster. The NLRB may also interpret the refusal to post as evidence that the employer has an anti-union motive relative to the unfair labor practice charge.
Second, while the warnings in the poster are merely reciting rights that have long existed in the law, some employers are concerned that this listing, without explanation or context, will create confusion among employees and lead to disputes that would not otherwise have arisen.
Third, the poster does highlight a couple of issues, which, regardless of the new requirement, employers should be aware of. Even if an employer does not have a union in place or a collective bargaining agreement, employees generally do have certain rights under federal law, essentially, the right to act in concert to assert their rights as employees. One example that is surprising to many employers is that employees have a right to talk about their rates of pay and work benefits — and a rule that prohibits that would be deemed illegal by the NLRB. In turn, they also have the right to talk among themselves concerning work issues, and to approach management for solutions, even though no union represents them. If employees are e-mailing or using social media to share their concerns about their work experience, the NLRB may say that this too is engaging in concerted action about work and prevent employers from interfering with it.
What is the status of the rule?
Once this rule was announced last fall, lawsuits were immediately filed in federal courts. The National Association of Manufacturers, for one, alleged in its complaint that the rule is itself illegal because the National Labor Relations Act, which created the NLRB, did not authorize it to issue a substantive requirement of this nature. This litigation is part of the reason that the NLRB has twice postponed the final effective date for the rule. In a decision issued in March, the Federal District Court for Washington, D.C., held that it was satisfied that the scope of authority that Congress intended to give to the NLRB, back in 1935, was broad enough to include this type of a posting requirement. An appeal was immediately filed and is now pending.
Stephen P. Bond is a partner at Brouse McDowell. Reach him at (440) 934-8080 or email@example.com.
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