Is the confidential information on your network safe? That’s a question every organization should ask itself because network security breaches are common and becoming even more prevalent.

Kristen Werries Collier, a partner with Novack and Macey LLP, says organizations must acknowledge this risk and vigilantly monitor and evaluate their cyber-security safeguards and protocols to minimize it.

Smart Business spoke with Collier about network security breaches and the steps companies can take to mitigate or eliminate them.

How common are enterprise security breaches?

Most large and mid-sized companies have confronted a cyber attack at some point. Network security attacks are a reality you must confront head on. The threats to your network posed by unauthorized access — and the damage caused by a successful attack — will only continue to rise.

Can you prevent a security breach of your network?

While you may not be able to prevent a breach with absolute certainty, you can certainly deter one by proactively assessing and addressing your network’s vulnerabilities. If you don’t have the in-house expertise to do that, consult a security adviser. You want to invest your money in safeguards that deter — if not prevent — the attacks you are likely to face, and a security adviser can identify those for you.

Keep in mind that no system is ironclad because hackers adapt as security measures evolve. Accordingly, you must routinely monitor your layered security measures to make sure you are keeping up with determined hackers. Avoid being the easy target.

What should you do if, despite your precautions, a breach happens?

Undertake these best practices:

  • Act fast. Perform a post-attack forensic analysis to determine the ‘who, what, when, where and how’ of the breach. You’ll need to preserve this information to evaluate the damage, mitigate the fallout, structure appropriate remedial measures and build a case against the hacker.

  • Promptly notify anyone whose sensitive information may have been compromised.

  • Update your intrusion detection and prevention systems and other safeguards to deter future breaches.

  • Assess what your legal obligations are in the wake of the infiltration.

What is the potential fallout if your network is breached?  

Breaches expose your organization to legal claims and undermine its competitive advantage. As for the legal claims, the law mandates the protection of certain types of information like consumers’ personal and nonpublic financial information, Social Security numbers and medical records. Your organization could potentially face claims predicated on an array of legal theories, including negligence; breach of contract; the Fair Credit Reporting Act, which subjects certain organizations to liability if they fail to safeguard consumer credit information in their possession; and Section 5 of the Federal Trade Commission Act, which prohibits unfair and deceptive practices affecting commerce.

While you may defeat such legal claims on a motion to dismiss or ultimately at trial, it will cost you money to do so. From a business perspective, a security breach may have financial and competitive repercussions by publicly exposing your organization’s highly confidential or propriety information and by eroding consumer confidence in doing business with you.

What, if anything, is the government doing to crack down on hackers? 

The government is cracking down by charging hackers with crimes carrying potential years of imprisonment and hefty monetary fines. However, the deterrence effect of this crackdown is somewhat limited given that numerous hackers operate outside of the U. S., making prosecution difficult, if not impossible. This is yet another reason to deter, if not prevent, a breach of your organization’s network in the first place and quickly mitigate the fallout if one occurs despite your best practices.

Kristen Werries Collier is a partner at Novack and Macey LLP. Reach her at (312) 419-6900 or kwc@novackmacey.com.

Insights Legal Affairs is brought to you by Novack and Macey LLP

Published in Chicago

A dissatisfied client takes his complaints to the public forum by publishing statements calling your product junk and your operation a joke. A competitor slams your business on an online forum, accusing your firm of producing dangerous products.

How do you defend yourself, and do you have a case for a lawsuit?

“The Internet opens up a worldwide web of opportunity for people to publish their opinions about anything and everything, says Ian Simpson, a shareholder specializing in liability and defamation at Garan Lucow. And once alleged defamatory statements are published, the damage is already done.

“Deciding whether to move ahead with a lawsuit requires analyzing whether you have a legal basis for an action because you have to prove all of the elements of a claim and understand that it often takes a lot of resources to pursue the case.”

Smart Business spoke with Simpson about defamation, how free speech is protected and when to take action against a party that is making defamatory statements about your business or product.

What is defamation?

Generally, defamation is a false accusation of wrongful conduct, or a malicious misrepresentation of someone or some entity’s words or actions that is published to third parties, causing damage. Libel is the written form of defamation, and slander is the verbal form. Classic examples of defamation where damages are presumed include lack of chastity or criminal conduct. Defamation includes untrue statements with defamatory meaning that could harm a reputation, generally without charging criminality or lack of chastity. In most cases, damages have to be proven rather than presumed. The statements must be published and available to the public — not merely be stated in a confidential document — resulting in damage.

What defenses are used to protect those charged with defamation?

Truth is generally a defense under the First Amendment of the United States Constitution. Most matters of opinion are protected against claims of defamation, as such statements cannot be proven as true or false. For example, ‘In my opinion, Company X’s products are not high quality’ is a protected statement. Further, in the United States, public figures, celebrities, politicians and others who put themselves in the public spotlight are generally unable to sue for defamation unless they can prove the statements were made with actual malice.

Is a business owner considered a public figure?

Another area where statements are generally protected, unless actual malice is found, are matters of public interest. A private company may be involved in a public dispute of interest to consumers. This essentially places it in an arena similar to that of a ‘public figure’ because policy favors granting increased protections to statements made in controversies of interest to the public. Say a company is involved in coal mining and environmental safety. Because this issue is of public interest, alleged defamatory statements become a matter of public concern and are protected under the law unless malice is proven.

How has the Internet impacted companies’ vulnerability to defamatory statements?

The Internet essentially gives the public a speakerphone to air opinions online, and those statements are protected as long as they are expressly stated as opinion and not made with malicious intent. Further, federal law generally protects businesses that merely serve as online conduits for the statements of others (online review sites, for example) are generally protected against claims of defamation, although the maker of the comment may still be liable. Similarly, most blog sites, if not the posts themselves, are protected by law.

Although companies that operate as mere forums are generally protected, there is no similar protection for a company that is not considered a forum of opinion that adopts, republishes or retains defamatory statements.

The crux of many defamation cases is how opinions are stated. They must be couched as opinions to be protected. Where a person or company has stated opinions as ‘fact,’ the risk of liability is greatly increased.

What are the first steps to stop a party from making defamatory statements?

First, consult with an attorney. Typically, an attorney will create a cease-and-desist letter expressly demanding the person or company making the alleged defamatory statements stop immediately. If the person or company does not stop voluntarily, a written demand for a retraction of the statements will be made.

A written demand for a retraction will set the stage for future litigation. If no retraction, published in a similar manner to the original statement, is made, additional damages may be obtained if a lawsuit is pursued. Note that the statute of limitations for a claim of defamation is one year from the date of the publication of the alleged defamatory statements, so aggrieved parties must act promptly to protect their rights to bring an action under the law.

How can a business protect itself from being the victim of a defamation suit?

Always discuss with an attorney strong matters of opinion or statements about competitors or matters of public interest before those statements are published. Also, consider bringing in a legal adviser to train employees on Internet commentary and what is permissible and acceptable. It is generally ill-advised to be interviewed for any publication without consideration of the potential for defamation that may exist in the making of casual comments in such interviews, and the right to review the interview to reconsider any such comments before publication is essential.

Defending a defamation suit can be expensive and can effectively destroy a business. We highly recommend companies in the publishing and Internet business carry insurance covering claims of alleged defamation.

Ian Simpson is an attorney at Garan Lucow specializing in liability and defamation law. Reach him at isimpson@garanlucow.com or (248) 952-6456.

Insights Legal Affairs is brought to you by Garan Lucow Miller PC

Published in Detroit

The ubiquitous nature of technology allows businesses to acquire and share information nearly instantly across multiple platforms. And while this can be a great thing for networking, marketing and gathering information, it can be potentially devastating for a business if the technology is used inappropriately by an employee, says Todd Roberts, a partner at Ropers Majeski Kohn & Bentley PC.

Smart Business spoke with Roberts about the risks of electronic media and steps you can take to mitigate them.

Can an employer use social media to screen candidates during the interview process?

As time has gone on and as the labor market has become tighter, employers have been more aggressive in their efforts to screen prospective employees. One way they are doing that is to ask for not only the username of the applicant’s Facebook page but also for the password so that they can see what’s been posted and get to know that applicant in an unfiltered way.

Before employees were more sophisticated about the security settings of Facebook, it was not uncommon for the information that they had posted to be able to be viewed publicly, and for those who were hiring to access those web pages. Apart from the legal issues that are implicated, many prospective employees are completely put-off by what is perceived to be coercive and intrusive conduct.

There’s a clash between the privacy rights of prospective applicants who are looking for a job and business owners who are looking to hire them. There is legislation that is now pending both in California and at the federal level that would restrict, if not prohibit, employers from asking for Facebook account information that includes passwords.

Until the legislation is enacted, however, employers are free to ask for an applicant’s Facebook password, and if the prospective employee doesn’t want to give it, he or she can’t be forced to do so. However, declining may disqualify them for employment under the circumstances. There is definitely a move afoot to prevent that type of perceived invasion of privacy.

Is a business owner able to censor social media use by employees?

There is example after example of employees who have been terminated for acts of disparagement against the employer or other misconduct posted on their Facebook page. There is some movement at the federal level through the National Labor Relations Board, which has stepped in on behalf of workers who are members of a union. Those workers have contended that disciplining an employee for complaints about the employer on a Facebook or other social media page is unlawful conduct in violation of the National Labor Relations Act, because it’s protected concerted activity. These are laws enacted in the 1930s that the NLRB is trying to apply in the digital age.

How can business owners protect their company from improper use of social media by employees?

There are ways that employers can protect themselves to a certain degree, and the first is to adopt and implement both an electronic privacy policy and a social media policy as part of their employee handbook. The electronic privacy policy is fairly typical these days and basically states that any activity that employees engage in on their work computer is without any right of privacy. The policy inhibits the employee from frequenting certain websites, such as those that are inappropriate and unrelated to the employee’s job duties.

Some employers prohibit the use of Facebook at work and restrict access to other websites that are not reasonably related to the business. More recently, employers have been forced to adopt social media policies that restrict employees from making statements about the company, that appear to be on behalf of the company, or engaging in any use of social media that would cast the employer in a potentially negative light. There is no ‘First Amendment’ issue because private employers have the power to restrict the speech of their employees in the workplace.

The first step is to draft an electronic privacy and social policy, but the key really is in the implementation and the followup. You can have a 100-page manual consisting of all these regulations, but if an employer isn’t doing anything to enforce the policy, it becomes less likely that a court is going to enforce it, either.

The next step after the adoption and implementation of these policies is to widely disseminate it to employees by way of training sessions. Each person should also be asked to sign  off that they have read the policy, understand it and agree to comply with it. Where most employer’s trip up is in the enforcement phase. If an employer becomes aware of misuse or violations that are occurring but turns a blind eye, it becomes more difficult to justify discipline over time.

How can employers address email, cell phone usage and other forms of electronic media?

There’s some overlap, not only with social media, but also with the use of new technologies — email and text messaging are most prevalent — where employers and small business owners can get into trouble or be exposed to liability.

There are also multiple cases in which someone is using their cell phone for work-related activities even if it’s on their day off or otherwise on their personal time. In this instance, the employer could be sued for an accident in which the employee is involved, because the actions involved circumstances arguably benefitting the company at the time of the accident.

Having an electronic and social media policy in place outlining the responsibility of the employee in regard to use of these programs and devices, and then policing and enforcing the policy, is vital to protect the company from unwanted lawsuits or damages.

Todd Roberts is a partner with Ropers Majeski Kohn & Bentley PC. Reach him at (650) 780-1601 or TRoberts@rmkb.com.

Insights Legal Affairs is brought to you by Ropers Majeski Kohn & Bentley PC

Published in Northern California

Whether a company is a 10-person operation or a corporation with thousands of employees, its employer has a need to protect itself in case of employee-related claims. To keep the potential for legal landmines, confusion, and false expectations to a minimum, all employers should ensure they have an updated and relevant employee handbook — and that employees read and understand it. From HR policies such as vacation days to legal issues surrounding discrimination and employment contracts, employers need to stay up to date on what to include in their handbooks.

While every company is different in its structure and culture, each business’s handbook should at least address the basics.

“When creating a handbook there are a few essential items that are important to include,” says Jennifer Leeper, major accounts manager at Ashton Staffing.

Smart Business spoke to Leeper about how to help protect the business through proper use of an employee handbook.

Why should a company have an employee handbook?

A handbook is an important communication tool that is vital to any company with employees. A key aspect to a successful business is trust between the employer and the employee. One of the best ways to establish this trust is to develop an employee handbook. Handbooks are designed to help create structured environments and build loyalty within the company. Having said this, there are some employee handbooks that are so poorly written that they can actually damage the relationship between an employer and an employee. A poorly written handbook can cause a hostile work environment and can bind the company to promises that it didn’t even know it made. With the right advice, each company can develop a handbook that will establish a concrete relationship between the company and the employee.

What should be included in an employee handbook?

? Disclaimer. The disclaimer is used to show that the handbook is not a binding contract of employment. This helps protect the employer if a fired employee decides to try to sue the company based on a breach of contract. The disclaimer should also include that the employment with the company is ‘at will’ and can be terminated by the employer or the employee at any time for any reason.

? Equal opportunity statement. This should simply state that the employee’s religion, race, age, or sex will have nothing to do with hiring decisions, promotions, pay, or benefits.

? Mission statement. A mission statement defines the question ‘Why do we exist?’ It should give the company a purpose and help boost morale. The statement should provide a better understanding of the values that the company has and its goals.

? Defined work week. This should include lunch and time allotted for breaks.

? General policies and procedures. All the basics should be included in this section. Policies such as dress code, vacation days, holidays, and telephone and Internet policies need to be clearly stated.

? Sexual harassment and discrimination policies. It must be known that the company has a no-tolerance policy for harassment or discrimination of any kind. The company must also include different ways an employee may voice a complaint and who employees need to go to with concerns.

? Leave policies. Include policies on all types of leave that the company is willing to allow. For example, jury duty, maternity leave, sick leaves as well as bereavement. It should also discuss who is eligible for leave and what would happen if excessive time is taken off.

? Benefits. This is an important topic and should include who is eligible for benefits, the period of time that the employee must wait for coverage as well as how much the company will contribute towards the policy.

? Disciplinary polices. Define what is included and considered to be employee misconduct as well as what the  consequences are of such actions.

? Acknowledgment form. Every company needs a form for all employees to sign stating that they understand all of the rules and policies set forth in the handbook.

What are the most common mistakes employers make when putting together handbooks?

All companies can benefit from having a well prepared and thought out employee handbook. When creating a handbook it is important to make sure the following common mistakes are avoided.

Not having the handbook reviewed by a lawyer is one of the most commons mistakes employers can make. There are a lot of ways to state policies and sometimes being too vague may lead to potential legal issues. Having a lawyer who is versed in employment law review the handbook prior to distributing it to staff will help prevent any potential legal issues from arising.

Another common mistake employers make is not using straightforward language. If the handbook is too vague or too technical that the employees don’t understand it, then it won’t serve its purpose.

Failing to make sure that all employees read, sign, and have a copy of the handbook is another item that is often overlooked. A company must ensure that everyone signs a form agreeing that they have received a copy of the handbook. Employers need to keep that form in the employees’ files.

How often should employee handbooks be updated?

The world is constantly changing. From technology to society in general, it is important to make sure that handbooks are constantly updated to address new laws. What applied and was appropriate when the handbook was written may not apply or be appropriate now. Once a year, companies should review the handbook for any significant changes in company policies or laws.

Jennifer Leeper is major accounts manager at Ashton Staffing. Reach her at (770) 419-1776 or jleeper@ashtonstaffing.com.

Published in Atlanta

While the light of economic recovery may be appearing on the horizon, many sectors of the economy continue to suffer slow growth and persistent or periodic struggles with liquidity as a result of low demand for goods and services. Until consumers determinatively shake off the historically low levels of confidence and reverse the current trends of debt reduction and increased savings rates, some businesses will fall on hard times.

A struggling business and its leaders (e.g., directors and officers of corporations, or managers of limited liability companies) seeking to avoid the entity’s failure as it experiences liquidity challenges or insolvency need to heed some legal rules that may not be readily apparent.

Smart Business spoke to Steve Dettmann and Douglas Landrum of Jackson DeMarco Tidus Peckenpaugh about a few common legal matters for those businesses, and their principals (and guarantors), to consider when the business experiences difficult times.

Management may be liable to creditors

Normally, the duties of the directors of a corporation and the managers of a limited liability company are owed to the equity holders of the business. However, if a business has insufficient equity or is insolvent, management personnel may become personally liable for approving distributions to shareholders or other equity owners. For a Delaware business entity, the Delaware Supreme Court has held that when a corporation is actually insolvent, fiduciary duties arise for the benefit of creditors in the place of shareholders — under the theory that the creditors of an insolvent corporation become the beneficiaries of any increase in value and suffer the detriment of further decreases in value of the corporation’s remaining assets. Thus directors and managers should ascertain an accurate financial understanding of proposed actions of struggling businesses.

Not all guaranties are the same

Another area where principals become exposed to personal liability for obligations of the business is by executing guaranties. In many lending circumstances involving small and medium-sized business entities, lenders will require guaranties of varying types from principal equity owners. These guaranties come in many forms — some absolute, some limited and some contingent. Some guaranties are unconditional and others may limit the lender’s recourse to a specific set of assets or circumstances. Most guaranties contain a set of waivers pursuant to which the guarantor waives statutory suretyship defenses — some ironclad and others suffering notable deficiencies. Understanding the difference is key.

In commercial real estate lending, the borrower’s principals are frequently induced to give the lender a “springing” guaranty (sometimes referred to as a “recourse carve-out” guaranty) under which the lender’s right to seek recovery beyond the borrower or the specific secured collateral arises only upon the occurrence of specified events. These events typically include “bad boy” acts of the borrower (notwithstanding that only certain of the acts are inherently “bad”) including, among others, fraud, misrepresentation, commission of waste, prohibited transfers, failure to pay real estate taxes or failure to properly apply security deposits, reserves or insurance proceeds. The spring on some guaranties is sprung (i.e., the recourse obligation arises) when the borrower, during times of financial difficulties, seeks legal protection from its creditors through the filing of a petition in bankruptcy — even though the bankruptcy petition may be later dismissed (i.e., like bells that cannot be unrung, certain springs cannot be unsprung). Therefore, if a commercial real estate enterprise is failing, guarantors having influence over the actions of the borrower should consult with counsel to ascertain the potential consequences of a borrowing entity’s proposed actions before those actions are taken, and to carefully navigate through potential foreclosure of real property security so as to avoid, where possible, the triggering of liability under a guaranty.

Completion guaranties are commonly used as credit enhancements for construction financing, but the remedies available to a lender are uncertain. Generally, recovery under a completion guaranty is limited to the increase in value of the collateral that completion would offer; and where a lender on an underwater project cannot demonstrate that the value upon completion would exceed the as-is value, then the completion guaranty may be worthless.

Knowing which type of guaranty binds the principal, and whether there may exist a partial or complete defense to recovery, is essential to determining what actions should be taken or decisions should be made on behalf of the business.

Filing bankruptcy may not be a good idea

While a debtor-in-possession (DIP) usually acts as the trustee upon the filing of a bankruptcy petition under Chapter 11 of the United States Bankruptcy Code, if the business cannot present or implement a viable plan to reorganize in a Chapter 11 bankruptcy, under certain circumstances, the bankruptcy case can be converted to a Chapter 7 liquidation upon request of the creditors. Independent U.S. Trustees appointed by the court in Chapter 7 bankruptcy liquidations are compensated based upon what they are able to collect on behalf of the estate for payment to the creditors of the bankrupt entity. With this motivation, the trustees frequently look into the pre-petition acts of management and equity holders to determine whether the bankruptcy estate may have causes of action that could bring a recovery. A Trustee may therefore act in a manner opposed to management and equity holders, as they look for evidence of insider transactions, misuse of corporate assets for personal benefit, distributions to equity holders at or near the time of insolvency or breaches of duties that could provide access to policies of directors and officers liability insurance.

Accordingly, if a struggling business is unlikely to be able to reorganize in bankruptcy, then it may be a better course for management to wind-up the business and distribute assets to creditors (similar to a bankruptcy liquidation) without filing a case with the United States Bankruptcy Court. Negotiating with creditors for a liquidation of the company’s assets without a bankruptcy case may avoid the appointment of a trustee who turns out to be the worst enemy of former management or owners.

Remember tax obligations

One of the knee-jerk reactions of management in a difficult business setting is to use funds withheld from employee wages (income tax, social security tax or Medicare withholdings) for liquidity purposes instead of paying over the funds to the IRS and other tax authorities. This is one of the worst methods that management could employ to prop up the business as it begins to fail, as any “responsible person” of the business (meaning the individual or group of individuals within an organization who, individually or collectively, has sufficient authority to pay over withholding taxes) may be held personally liable by the IRS for a Trust Fund Recovery Penalty — a 100 percent tax penalty — for failing to pay over taxes withheld from the employee.

Conclusion

If a business is struggling, management and equity holders must be mindful of the many traps that exist from which could arise personal liability, and a small investment in consultation with legal counsel before actions are taken may be essential to avoiding unnecessary loss.

Steve Dettmann is Senior Counsel, Real Estate Practice Group and Douglas Landrum is a Shareholder and a Member of the Corporate Practice Group at Jackson DeMarco Tidus Peckenpaugh. Reach them at SDettmann@jdtplaw.com and DLandrum@jdtplaw.com, respectively.

Published in Orange County

Establishing a foreign subsidiary may have lucrative business advantages, but if you’ve decided to pursue this strategy, it’s important to stay informed, plan ahead and follow proper compliance with both U.S. and international requirements. Failing to do so can result in undesired consequences and potential IRS penalties.

To ensure proper compliance domestically and abroad, engage a solid group of advisers in the initial planning stages, says Sonia Agee, partner at Ropers Majeski Kohn & Bentley PC.

“It is critical to have the right team in place,” says Agee. “Generally speaking, that team consists of a U.S. legal counsel, accountancy professionals on both sides of the operations who understand the coordination of the various tax and reporting requirements between the U.S. and foreign jurisdictions, and a foreign counsel who also has the same knowledge and understanding.”

Smart Business spoke with Agee about the steps to take when expanding overseas, and how to maintain compliance with both domestic and foreign regulations.

What initial talking points should business owners discuss with their counsel when they’ve made the decision to expand overseas?

When a business client first comes to us and expresses interest in looking at overseas opportunities, first and foremost we need to get a clear understanding of the goals and strategies for pursuing foreign operations. We assess the specifics of what the company plans to accomplish by expanding overseas, and how it may be different from or impact what they’re doing here in the U.S.

Once the company makes the determination to expand internationally, it is critical to ensure that the new business venture is properly structured overseas. The necessary steps will vary widely depending on the jurisdiction in which the company is looking to operate. In addition to U.S. counsel, it is important to have good counsel overseas who has worked with cross-border issues, because there is often a delicate balancing act to making it work overseas, as well as from a U.S. perspective. Not all forms of entity will work for all ventures, so making sure that the foreign venture is properly structured minimizes liability to the company.

What potential legal landmines exist with foreign subsidiaries?

Once the setup with regard to the actual structure is determined, you must look at the detailed aspects of the company’s operations. The company must coordinate a number of things, including the work force: will it be necessary to hire a foreign work force, or will the company be bringing key individuals from the U.S. or from other parts of the world into that new jurisdiction? In either case, there are both immigration and employment law issues to coordinate in the U.S. as well as from the foreign perspective. For example, if the company plans to replace a local work force by moving overseas, it is imperative to hire employment counsel because, depending on the size of the work force, there may be a number of formal requirements to avoid liabilities.

Additionally, many jurisdictions have varying laws surrounding intellectual property. Some jurisdictions simply don’t provide the same protection that we have in the U.S. in terms of intellectual property rights, so it is important to identify those issues and determine the best way to deal with them.

Finally, the company must be sure that appropriate reporting and compliance is in place. There is a myth that if you earn the money overseas and don’t bring it back to the U.S., you don’t have to report it. The general rule under U.S. tax law is that worldwide income is reportable and taxable in the U.S. If a company is formed as a subsidiary of a U.S. entity, the U.S. entity has a reporting requirement. Conversely, if a company goes overseas and is formed as a ‘sister company’ to the U.S. company (the ownership of the foreign entity mirrors the ownership of the U.S. company) there are still reporting requirements. Not only must the appropriate forms disclosing the existence of the foreign entity be filed each year, but, in addition, all income from the foreign entity likely needs to be reported here in the U.S., either through the U.S. entity or through the shareholders.

If a company has a foreign bank account for the foreign business, and a U.S. person has signature authority over the account, the U.S. person is required to file a reporting form disclosing the existence of that account as well as their authority over it. There is a significant penalty an individual can incur for failure to report; it can be up to a $10,000-per-year penalty for not reporting a foreign account, so it’s very important if you are looking to go overseas that those reporting requirements are dealt with each year. If they’re not, every year can carry its own penalty and fine.

What other issues should you consider to get the most benefit from a foreign subsidiary?

Another question to ask is ‘Can the entity here in the United States have a subsidiary overseas?’ In most instances, the answer is yes, but a U.S. company does not want to inadvertently forfeit U.S. tax benefits by having an entity formed overseas that may not work with the U.S. requirements — for example, S corporations may only have qualified S subsidiaries. A foreign entity may not comply with the requirements and the S status benefits would be lost.

Again, working with foreign counsel to ensure the form of the foreign entity chosen does not present any problems for the intended purposes is extremely important, as there may be other limitations overseas. For example, a company may not be able to have a direct foreign subsidiary due to specific limitations on ownership imposed by the foreign jurisdiction. Each jurisdiction has its own requirements that need to be understood in the context of the proposed foreign operations before making any decisions.

Sonia Agee is a partner with Ropers Majeski Kohn & Bentley PC. Reach her at (408) 947-4889 or sagee@rmkb.com.

Published in Northern California

Over the last couple of decades, violence in the workplace has actually dropped to an all-time low. A March 2011 Special Report by the Bureau of Justice Statistics, a division of the U.S. Department of Justice, shows that in almost every major crime category, including homicides, workplace violence has continued to decline since 1993. Over this time, homicides in the workplace have decreased by 51 percent. Thirty percent of these homicides were committed by co-workers or those related to an employee, such as a spouse or jilted lover. The decline in workplace violence coincides with a downward trend of violent crime across the nation over the same time frame.

But does that really mean our workplaces are safe?

Smart Business spoke to Louis C. Klein, Esquire, Of Counsel to Jackson DeMarco Tidus Peckenpaugh, about how employers can ensure they are not exposed to workplace violence issues.

Is workplace violence still something employers should worry about?

Each year, approximately 2 million U.S. workers are injured as a result of workplace violence, losing on average $16 million in wages. The cost to employers has been even more staggering – nearly $121 billion annually based on the National Institute of Occupational Safety and Health estimates. From 2005-2009, guns were used in 80 percent of homicides committed in the workplace and homicides are now the fourth leading cause of fatal occupational injury in the nation.

Although the statistics compiled by the DOJ have shown a consistent drop in workplace crime, news reports of violent acts in the workplace still abound. There is a disconnect between the actual decline in violence in the workplace and the perception that employee violence may be on the rise as a result of the current recession, with its schemes of mass layoffs and lost jobs. In a 2003 survey conducted by the Society of Human Resource Management, more than 50 percent of employees were concerned that workplace violence might occur at their organizations.

Can employers be held liable for workplace violence?

Employers have a duty to prevent workplace violence. Employers who fail to take this obligation seriously not only face actions from governmental agencies, but also from injured employees. Claims of negligence, negligent hiring and negligent retention are a few of the real liabilities, as well as increased workers’ compensation costs and lost work time for injured employees.

Section 5(a)(1) of the Occupational Safety and Health Act of 1970 (OSHA) states that employers have a ‘general duty’ to provide employees with work and a workplace free from ‘recognized hazards that are causing or are likely to cause death or serious physical harm’ to employees — 29 U.S.C. §654(a)(1). The prevention of workplace violence has generally been found to fall under this ‘general duty’ clause.

Under current law, employers have a duty under OSHA to prevent workplace violence when the hazards involved: (1) create a significant risk to employees in other than a freakish or utterly implausible concurrence of circumstances; (2) are known to the employer and are considered hazards in the employer’s business or industry; and (3) are hazards which the employer can reasonably be expected to prevent.

An employer who becomes aware of threats or intimidation, or who has experienced some type of workplace violence already would be on notice of the potential risk of violence in the workplace and would most likely be required to institute a workplace violence program aimed at prevention.

What can employers do to prevent incidents of violence?

The most effective weapon an employer can use against workplace violence is preparation. Employers should have, and strictly enforce, a strong written workplace violence policy and prevention plan. The policy should be written in clear and unambiguous language setting forth a zero tolerance standard.

Employers should ‘hire smart.’ Insist on fully completed applications and thoroughly review a potential job candidate’s information. An employer should always try to conduct face-to-face interviews and the interviewer should have some training in interview techniques. Background checks are paramount.

Educating the work force, and specifically supervisors and managers, on the prevention plan is critical to the success of any workplace violence prevention program. Educating employees on the indicators that could lead to workplace violence is also a wise consideration. Not only will training and education provide employees with a sense of a company’s serious commitment to preventing violent incidents, but it will alleviate employees’ anxiety and may help diffuse difficult situations that could have led to a violent incident. All employees should know how to recognize and report incidents of violent, and threatening or intimidating behavior, and should have immediate access to phone numbers for emergency personnel, such as local law enforcement and fire departments.

In addition to the education and training suggestions above, employers should also train supervisors in basic leadership principles and crisis management. Supervisors should work closely with human resources to understand company standards relating to employee performance, counseling, discipline and other management tools. These employee intervention tools can ultimately help diffuse very tense and difficult situations from becoming a potential disaster.

Finally, alternative dispute resolution programs can be an effective tool when a potential employee conflict has been identified. The dispute resolution program can take many different forms, such as the use of ombudspersons, mediations, or peer reviews. The idea is to diffuse the situation as soon as it comes to light.

Although the statistics point to a decline in workplace violence, it remains a very real problem confronting both employers and employees. Consequently, an employer must prepare for the unthinkable, become and remain vigilant, and adequately educate its workforce.

Louis C. Klein, Esquire, is Of Counsel to Jackson DeMarco Tidus Peckenpaugh. Mr. Klein partners with businesses to resolve difficult employee issues, including the development of workplace violence policies and prevention plans. He can be reached at (805) 418-1907 or lklein@jdtplaw.com.

Published in Orange County

A lawsuit has just been filed against your company and several of the company’s executives. Your first thought: “We have general liability insurance, and paid a lot of money for it. The insurance company will pay the lawyers to defend us and pay any settlement or judgment that might be entered. No need to worry.”

But then the insurer tells you that your general liability insurance policy only covers claims for bodily injury, property damage and something called “advertising injury.” None of the claims in your lawsuit fall into those categories. You are on your own. Now, your company has to pay for the defense and any settlement or judgment. Suddenly, the lawsuit that you thought was “no problem” because you have general liability insurance is now a financial nightmare for your company.

How can a company avoid this scenario?

Smart Business learned more from Edward Galloway, shareholder, and Joel Covelman, senior counsel, at Jackson DeMarco Tidus Peckenpaugh, who specialize in advising companies regarding insurance issues.

Why would a business need anything other than general liability insurance?

The scenario described above is a painful reality for some businesses because they wrongly assume that their general liability insurance covers far more than it does. In our experience, these situations can quickly get even more complicated, causing the potential litigation costs to spiral out of control.

To illustrate this point, consider these possibilities: Imagine if one of the executives in your company who was sued has been advised that he should have a different lawyer, separate from the others, because he believes that others are at fault, not him. He asserts that under the terms of his employment contract the company has to pay for his separate legal counsel. Your company is now faced with paying two law firms to defend the case. Both sets of lawyers send you a litigation budget well into the six-figure range. They also tell you that they need expert witnesses to testify at trial, and the experts’ hourly rates are almost as high as those the lawyers charge. Early in the lawsuit, the plaintiffs make settlement demands also in the six-figure range, but instead of the money coming from your general liability insurer, you would have to pay it out of existing assets or revenues.

If you do not settle quickly, the defense costs are not the only ‘costs’ you will have to worry about. The time that your employees and you spend dealing with the lawsuit, such as preparing for and attending depositions, answering interrogatories, and searching for documents that are requested by the other side, is an additional cost to your company that is hard to quantify, but can have a very real impact on your bottom line.

How does a company know if its liability insurer is justified in denying a claim?

Just because your general liability insurer’s adjuster tells you that its liability policy does not cover your claim does not mean that is, in fact, correct. When a potentially big and expensive claim is on the line, it is worthwhile to seek the advice of a knowledgeable insurance lawyer to be certain you are presenting all the necessary information that will maximize the odds of triggering coverage under the policy, and to be sure the insurer is not wrongfully denying your claim under the law governing insurance coverage.

How can a company avoid having no insurance to pay defense costs or any possible judgment?

While there is not insurance for every conceivable kind of claim, every year, businesses of all sizes should conduct a thorough review of the internal and external risks they face. Competent insurance brokers and lawyers knowledgeable about insurance coverage and litigation can give advice about the types of insurance available, what risks they cover, and the cost of such insurance.

When shopping for insurance you should know that not all policies are the same. Although there is a great deal of standardization in insurance contracts, some insurers modify the industry standard coverage forms or exclusions. You should ask your insurance broker to obtain ‘specimens’ of the actual policies of insurance you are considering buying, so that your insurance coverage lawyer can evaluate whether there are meaningful differences in coverage, and so you can minimize gaps in coverage that are sometimes buried in the details of the policies being offered.

With a coverage analysis of the specimen policies, your company can then perform a cost-benefit analysis by weighing your business risks against the cost of insuring against them. If there is no insurance coverage available for some of the identified risks, or the cost of the coverage offered is too high, then the company at least knows what uninsured risks it is facing, and can contemplate steps to minimize those risks or create reserves to deal with them.

What are some of the other kinds of coverage available besides general liability insurance?

The typical general liability insurance policy issued to a business does not cover claims for breach of contract, negligent misrepresentation, fraud, sexual harassment of a company employee, wrongful termination of an employee, pollution liability, breach of fiduciary duty by a company officer or director, professional malpractice, employee theft, or workplace injuries to employees. Depending upon the insurer and the endorsements you select, your liability insurance policy may or may not cover auto accidents in company vehicles or in the private vehicles of your employees who are on company business, and it may or may not cover defamation of individuals, or disparagement of businesses or products.

Specialized types of liability insurance may be available to provide at least some degree of coverage for these types of claims, such as employment practices liability, pollution liability, directors and officers liability, and errors and omissions liability, among others.

To understand whether your business needs any of these or other coverages, an annual risk and insurance coverage audit is the starting point, along with a discussion with your insurance broker and insurance lawyer.

Edward Galloway is a shareholder and Joel Covelman is senior counsel at Jackson DeMarco Tidus Peckenpaugh. Reach them at EGalloway@jdtplaw.com and JCovelman@jdtplaw.com, respectively.

Published in Orange County

Who have you hired lately? What do you know about their backgrounds? Is the information they provided on their resume or application accurate? The National Credit Verification Service says that 25 percent of the MBA degrees it verifies on resumes are false. College and university registrars report that at least 60 percent of the degrees they are asked to verify are falsified. The Wall Street Journal reports that 34 percent of all job applications contain lies regarding experience, education and the ability to perform essential functions of the job.

Smart Business spoke to Ron Williams at Talon Companies about how business owners can avoid the liability of making a bad — or dangerous — hire through the proper use of background checks.

Why should employers be concerned with accurate background checks?

Consider these statistics:

  • 30 percent of small business failure is caused by employee theft
  • Internal employee-related thefts occur 15 times more often than external theft
  • Embezzlement losses exceed $4 billion every year
  • ‘Other’ employee crimes cost businesses an estimated $50 billion annually

What do business leaders need to know when hiring employees?

Even more deadly than fiscal loss due to employee dishonesty is workplace violence. Not to mention the harm it causes employees and the company’s reputation, statistics show that the average award in a workplace violence lawsuit exceeds $1 million per case and, overall, on-the-job violence costs employers $36 billion per year.

One of the easiest and most effective ways a company can protect itself and its assets against loss of any type is to hire the right people. Although obvious, this advice is seldom heeded by employers, who rely on intuition in making hiring decisions more often than established facts learned through background checks.

Most businesses have neither the expertise nor the time to wade through the mountains of information from an almost infinite number of sources, all available to verify and check the background of an applicant. By failing to perform even the most rudimentary background check on a potential employee, employers are exposing themselves to liability for negligent hiring and, after the fact, for negligent retention.

What is negligent hiring?

Today, it is fairly common knowledge that employers have an obligation to provide a safe work environment for their employees. But not everyone is aware of the consequences that can stem from negligent hiring and/or negligent retention of employees.

Negligent hiring occurs when an employer does not exercise ‘reasonable care’ in hiring a new employee. More and more, legal actions are resulting in judgements that find employers liable for negligent hiring situations when an employee was hired into a position without the proper checks in place to verify that individual’s history. An employer who hires someone with a history of criminal behavior, when that emp;loyee harms another employee, client, or vendor, is likely to be held accountable. Additionally, employers run the risk of being held liable for negligent retention if they do not respond appropriately to signals from current employees that they may pose a threat to those with whom they associate through work.

What can happen to an employer who does not conduct appropriate background checks?

As an example, an armored truck company in Los Angeles paid a $12 million settlement in a negligent hiring and training lawsuit. The suit alleged that the company did not adequately investigate an employee’s past work record or provide adequate driver training.

In a federal court in Tennessee, a store customer was inured when restrained by a security guard who had identified the customer as a shoplifter. The customer was awarded $10 million in damages, claiming negligent hiring and failure to properly train the guard.

In Dallas, Texas, a suit against the owners and management of an apartment complex was settled for $5 million. The suite filed by family members of a deceased tenant, alleged that the tenant was killed by the assistant manager’s brother. The suit claimed that management was negligent in hiring as assistant manager without conducting a criminal background check. In this example, it was not even an employee who was identified as the murderer, yet the employer was cited for not conducting simple criminal background checks.

What should employers do to prevent these kinds of suits?

Because employers are held accountable if they knew, should have known, or had any reason to believe that an employee or prospective employee posed a risk of threat to others, it is essential that thorough background checks be conducted and documented.

At a minimum, every employer should carefully inspect the information recorded by an applicant on his or her application. Are any patterns of short-term employment noted? Ask the applicant for his or her explanation, then verify their explanations through a reliable background check agency. Social Security number verification, criminal and civil record searches and credit reports should all be part of an employer’s pre-employment screening program.

Proper screening of employees makes it possible for an employer to make an informed decision about applicants before they are hired and brought into the workplace. Such basic practices give an employer the ability to create a safe and profitable work environment and protect against loss.

For more information on background checks of all types, please contact Talon at (714) 434-7476.

Ron Williams is the CEO at Talon Companies. Reach him at (800) 808-2566 or rwilliams@talonexec.com. Reach Talon Companies Headquarters at service@talonexec.com, (800) 808-2566, or www.TalonCompanies.com.

Talon Cyber Tec is a subsidiary of Talon Executive Services, an independent risk management firm providing full spectrum services to secure corporate assets and prevent loss due to malevolent acts.

Published in Los Angeles

 

Smart Business spoke to David E. Cranston of Greenberg Glusker Fields Claman & Machtinger LLP about how not to get saddled with the cleanup costs in environmental contamination cases.

A client of ours faced significant costs in cleaning up property contaminated by the operations of its tenants many years earlier. The client’s former counsel who opined the pursuing claims against the tenants, who were mostly out of business, was not worth the time or money. Our investigation indicated otherwise. We learned that a tenant with a small scrap operation in the 1950s had changed names, and its business, through a series of transactions, was acquired by a large publicly traded company. Another tenant who was no longer doing business had significant insurance assets. After prosecuting the claims that our client was about to abandon, we recovered several million dollars to pay for the cleanup.

All too often businesses fail to recognize the value of claims against their own insurers as well as the claims against those who are primarily responsible for the contamination. Make no mistake, recovering the costs of an environmental cleanup is no easy task but, given the potential exposure, every business facing these liabilities should understand the potential value — and costs — in making an informed decision on whether to prosecute the claims.

Here are the highlights of what a business in this position should know:

Recovering costs from your historical insurers

There are two types of insurance that potentially cover the costs of cleaning up your property. The most common is comprehensive general liability (CGL) insurance, now commonly known as commercial general liability. CGL policies are occurrence-based policies. This means that coverage under the policies in place when the contamination first occurred, and each subsequent policy, are potentially triggered. There also more recent specialized pollution liability policies. (This article will focus on CGL policies because, if your business bought pollution liability policies to address specific environmental risks, you are probably already well aware of their potential coverage benefits.)

CGL policies provide coverage for your company’s liability for “property damage,” which courts have construed to mean environmental contamination. But there are limitations.

The insurance industry began including the so-called “total” pollution in 1987, so you are searching primarily for pre-1987 CGL policies. CGL policies issued from 1972 to 1986 contained a limited pollution exclusion leaving coverage only for “sudden” pollution events. However, in our experience, most contamination was caused, at least in part, by events that were “sudden,” as courts have construed the term. Policies issued prior to 1972 typically have no pollution exclusion. Thus, older CGL policies can provide an important source of funding, provided that:

  • Prior to 1987, the contaminated property is one that was owned by your business (or by companies acquired by your business).
  • At least some of the contamination resulted from events occurring prior to 1987 — which is usually the case due to the relatively poor care in handling hazardous materials many years ago.

You may need help in finding older policies from your attorney or insurance archaeology services.

Importantly, coverage under CGL policies is generally not triggered in California, and some other states, unless there is a lawsuit against the insured. Government agencies prefer to use orders and other administrative mechanisms to enforce cleanup requirements. This is one time where a business may welcome the filing of a lawsuit.

There are a number of other potential limitations on coverage and you can expect insurers to try and take advantage of every one of them. In 25 years, I have yet to see an insurer pay for environmental cleanup costs without at least somewhat of a fight. It is important to have counsel on your side that knows how to win that fight quickly and cost-effectively.

Recovering costs from other responsible parties

The same laws that impose cleanup responsibility on owners of property simply because they are the owners also impose liability on others who owned or operated the property at the time the contamination occurred or who otherwise caused the contamination. Common law claims, such as trespass and nuisance, are also frequently available. In the case of tenants and former owners, look for contractual indemnities in the lease or purchase agreements that run in your favor.

A thorough investigation into the property’s history, and the history of its tenants can usually identify who is likely responsible.  Frequently, the businesses that caused pollution many years ago appear to be judgment proof: they may be defunct, dissolved or bankrupt and/or the individuals who ran them are deceased. And this is where even experienced environmental counsel often give up. That would be a mistake.

Most businesses operating after 1950 had CGL insurance and those insurers remain on the hook regardless of the status of their insured. A suit against those former businesses, even if they are dissolved our bankrupt, will trigger the obligations of the insurers. In addition, the environmental liabilities of former businesses may often reside with a person or entity with deeper pockets. Before you abandon your claims, make sure they have been carefully investigated and evaluated.

Choosing to pursue environmental cost recovery claims presents a difficult choice. Businesses are concerned about investing in the pursuit of claims where the outcome is usually far less than certain. Good environmental counsel is essential in evaluating the value of those claims and the likelihood of recovery. And counsel that has sufficient confidence in their evaluation may offer to share in the risk — and reward — by offering an alternative fee arrangement such as contingency fee. This may make your choice easier and help you avoid leaving valuable claims on the table.

David E. Cranston chairs Greenberg Glusker’s Environmental Group and the Climate Change and Sustainability Practice Group. His broad-based experience ranges from the litigation of complex environmental disputes under CERCLA, RCRA, CEQA and the Clean Air Act to representation and counseling on regulatory and policy matters. He can be reached at DCranston@greenbergglusker.com or (310) 785-6897.

Published in Los Angeles