Protecting your reputation without using non-disparagement clauses

Businesses understandably care about their reputations, as negative publicity can drive away customer traffic. Many businesses have attempted to forestall negative feedback by putting non-disparagement clauses — also known as gag clauses — in their form contracts.

“However, a new federal law prohibits the use of non-disparagement clauses in certain form contracts entered into by consumers,” says Julia Richie Sammin, an attorney at Semanoff Ormsby Greenberg & Torchia, LLC.

Smart Business spoke with Sammin about non-disparagement clauses, the newly enacted Consumer Review Fairness Act of 2016 (CRFA), and the consequences of violations of the new law.

What is a non-disparagement clause?

Non-disparagement clauses prohibit customers from sharing their opinion of a seller’s goods or services, for instance by forbidding a customer from leaving reviews on websites such as Yelp, Angie’s List and TripAdvisor.

But this attempt to avoid negative publicity can backfire when a business sues a customer to enforce the contract provision, particularly where the review reflects the customer’s honest assessment of a business’s goods or services.

What is CRFA?

On Dec. 14, 2016, President Obama signed into law CRFA, a bill that received bipartisan support. Under CRFA, a provision in a ‘form contract,’ defined as a contract with standardized terms where the consumer does not have a meaningful opportunity to negotiate the terms and conditions, would be void from the inception of the contract if the provision:

  • Prohibits or restricts a consumer from making a statement assessing the seller’s goods or services,
  • Imposes a penalty or fee on a consumer for making such a statement, or
  • Claims ownership of the intellectual property in such a statement made by a consumer.

CRFA will not invalidate the entire contract, just the offending provision. It also does not preempt state law — if a state law regarding non-disparagement clauses is even more protective of the consumer than CRFA, that state law will remain in effect.

CRFA is very broad, even encompassing contractual provisions restricting false and defamatory comments. However, CRFA does not prohibit a business from bringing a civil action for breach of confidentiality, defamation, slander or libel, or from removing reviews from its own site that are defamatory, harassing, obscene, false or misleading, or unrelated to the goods or services offered by the business. A business just cannot attempt to restrict the consumer’s speech before such speech is made. Moreover, CRFA does not apply to employment or independent contractor agreements.

CRFA applies to non-disparagement clauses in effect on or after 90 days from the enactment of the new law, i.e. March 14, 2017, so businesses should act quickly to remove any non-disparagement clauses from their form contracts.

What are the consequences of violating CRFA?

A violation of CRFA is considered a violation of the Federal Trade Commission (FTC) Act’s prohibition against unfair or deceptive trade practices, which can result in a civil penalty of up to $40,000 per violation, among other outcomes. If the violation is ongoing, each day that the conduct continues is treated as a separate violation. The FTC Act, however, does not allow a private right of action, so a consumer could not sue a business directly for a violation of CRFA.

How can a business protect its reputation without using non-disparagement clauses?

CRFA instructs the FTC to begin providing non-binding best practices to assist businesses in compliance with CRFA within 60 days after the passage of the new law. In the meantime, businesses can proactively encourage happy customers to leave public reviews and unhappy customers to contact the business privately. Businesses can also ask review websites to remove reviews that are false or misleading, harassing, obscene, etc. Finally, businesses can still sue for defamation, breach of confidentiality, and other claims that are allowed under CRFA.

Insights Legal Affairs is brought to you by Semanoff Ormsby Greenberg & Torchia, LLC

Minimize project disputes through patient, thorough planning

The progress and success of a construction project is often defined by time well spent in the early planning and preparation process. Too often, however, developers, contractors and design professionals rush to start a project and do not spend the time needed in these critical phases.

“Thorough scope discussions and extensive contract negotiations will often yield a better understanding for the parties and their respective roles and responsibilities,” says Edward B. Gentilcore, Shareholder and Director of Sherrard, German & Kelly, P.C. and Chair of its Construction Services Group. “Patience in planning and preparation is the key to later success.”

Smart Business spoke with Gentilcore about the planning and contracting process, and what should be defined before starting actual project construction.

What needs to be determined during the planning and contracting process?

First and foremost, the project requirements and scope of the project need to be defined. Specifying Contractor and Owner Performance Expectations (aka SCOPE) are fundamental to establishing what is to be accomplished.

It should also be determined who will take the lead on developing the execution plan for project aspects such as design, construction and engineering. The parties involved should identify and create contractual silos of responsibility to help avoid disagreements and disputes.

What aspects of construction contracts are most susceptible to legal challenges?

Many legal challenges are often based on scope and site disputes. Scope disputes arise where the parties have not adequately allocated responsibilities. Site disputes emerge where site conditions are unexpected, the desired site is not available or access to the site is delayed. There can also be material and supply delays that impact the progress of project, and lack of coordination of performance responsibilities that causes delays and claims.

Untimely payments are another source of disputes. Sometimes these can be attributed to financial insolvency issues, but other times they have to do with one party believing performance expectations have not been met, so payment is withheld.
In the event of any disputes, regardless of their origin, parties need to be mindful of notice provisions with regard to changes, claims and payments. This is why the contract does not belong in the drawer. It should serve as a reference point that defines responsibilities and expectations.

How should companies respond to disputes?

If disputes occur, look at the contract first and determine what relief there is to claim, the obligations of providing notice, and whether those notice provisions have been fulfilled. If proper and timely notice isn’t provided, a party must then justify why it didn’t give notice. In these situations, the needed focus is not on the impact, but rather contention over why contractual obligations to provide notice were not met.

What can construction project participants do to mitigate claims?

Hopefully, when a party realizes it needs to make a claim, information about the claim has been accumulated in the form of notes, emails, photos, etc.

Counsel should be alerted and engaged early with an issue because they can help ensure contractual nuances are followed, notices are met and a sound information collection process is undertaken. To the extent that there could be a formal claim, communications over information collection can be made privileged if counsel is involved.

When transitioning into a dispute phase, there is the belief that parties can mitigate costs by not contacting counsel. That is counterintuitive. If the dispute escalates to an arbitration or court proceeding, costs are going to be much more significant and not likely accounted for in initial budget projections. That is why engaging counsel’s assistance sooner may reap benefits of earlier resolution of project conflict.

The best dispute resolution occurs at the earliest stages of a project. Defining more precisely the roles and responsibilities of each party in the process reduces the likelihood of uncertainty and of conflict. So patient and proper planning should always precede actual project performance.

Insights Legal Affairs is brought to you by Sherrard, German & Kelly, P.C.

Navigating divorce by using a business mindset

Divorce, like a business dissolution, is a process to terminate a relationship and divide assets, liabilities and wealth, says Kaitlyn D. Arthurs, an Attorney at McCarthy, Lebit, Crystal & Liffman. Unfortunately, this process can be complicated by emotion.

“Divorce is a high-conflict situation that involves sadness, anger and grief,” Arthurs says. “However, when a person approaches it with a business mindset, he or she can lessen the emotion in order to reach an end and minimize cost, both financially and emotionally.”

While there has been a shift away from litigation to numerous alternative dispute resolution processes, every case is unique. Clients should know their options and work with a practitioner who has a firm grasp on how those alternatives will coincide with different personalities and situations, and can then help determine the right approach.

Smart Business spoke with Arthurs about these processes and how bringing a business-minded approach to divorce can reduce some of the stress involved in reaching an end.

What are some important things to keep in mind when going through a divorce?
It’s important to recognize that a divorce is like a business breakup. The end goal is to ‘cut a deal’ to reach a resolution where both parties are satisfied and will, therefore, adhere to the terms. It is advantageous to both parties to be solution-driven to avoid getting lost in the weeds on the problems, which may or may not matter.

More importantly, a process provides the parties significant control over both the process and the outcome. The more involved the parties are in taking steps towards resolution, the better off the parties will be in the end.

What are some of the processes available?
Dissolution and divorce. In a divorce, a lawsuit is filed and, absent a settlement, the court will decide all issues. Litigation provides the ability to issue subpoenas to obtain information, to secure restraining orders, and/or to obtain a “divorce” if the other party refuses to engage.

However, litigation makes sensitive family matters public record, which can be problematic.

A dissolution allows the parties to reach a resolution prior to submitting the final agreement to the court. The parties may use one of many alternative dispute resolution processes, which include the following:

■  Cooperative Divorce: Through counsel, the parties utilize principled and facilitated negotiations to come to a settlement, which can involve meetings, phone discussions, sending proposals or shuttled diplomacy.

■  Collaborative Divorce: The parties and counsel agree in writing to work together in a series of ‘four-way’ planned meetings (which can involve joint evaluators/experts) to resolve the case. If there is an impasse, the parties must hire new counsel to pursue other processes, including litigation. This rule keeps the parties engaged to the collaborative process, while promoting an environment of confidentiality.

■  Mediation: The parties jointly hire a mediator to facilitate discussions to lead them to an agreeable solution. A mediator cannot provide legal advice, but will place the parties in the driver’s seat to problem-solve solutions, which can minimize cost.  Either party may retain counsel to consult on legal issues as they arise.

How does being proactive help minimize costs and preserve wealth?
Organized information is power. It’s important to establish a team (attorney, accountant, financial planner, etc.) that will be available to answer questions during the process.

Moreover, compiling documents to substantiate all assets, liabilities and income is a proactive way to prepare. Such information would include documents to demonstrate premarital, inherited, gifted or personal injury monies, which would remain a party’s separate property not subject to division.

Wealth can only be preserved when a party asserts and proves a claim with documents. Knowing how to transfer wealth during the marriage is also good preparation. Staying one step ahead of the other side will create an advantage. Time is money. The more information that can be provided in an organized fashion, the better an attorney can prepare and keep costs reasonable.

Insights Legal Affairs is brought to you by McCarthy, Lebit, Crystal & Liffman

How to avoid common intellectual property missteps

The American legal system provides certain rights and protections for owners of intellectual property (IP). It is crucial that businesses avoid infringement of intellectual property rights.

“Businesses often inadvertently infringe the intellectual property rights of others because of inattention to internal operations, a lapse that comes with a significant price tag,” says Alexis Dillett Isztwan, member, Semanoff Ormsby Greenberg & Torchia, LLC.

Smart Business spoke with Isztwan about the risks and consequences of infringing on intellectual property as well as how to avoid missteps.

What businesses are at risk?

In any business, a multitude of infringement risks exist in daily operations. Since infringement does not require that the infringer knew its activities were infringing, businesses must bear the burden of policing their own operations.

Where are the risks?

The most common risk is the unauthorized use of images, content or music. Businesses often look to the internet or social media as a flexible marketing platform for advertising and promotional campaigns that can be launched quickly and inexpensively. The downside is that employees often equate easy access on the internet to images and music with an unfettered right to use third-party works in advertisements or on company websites.

In reality, use of third-party images, music or content requires a license from the owner and typically a fee, regardless of the significance of the use. While employees may believe the IP owner will never discover the use, many technologies exist that enable IP owners to cast a broad search over the internet to identify unauthorized uses of their works.

Another risk arises with the use of software in excess of permitted use under the business’s license. Unless a license allows for enterprise-wide use, the business must limit its use to the numbers specifically permitted, whether those limitations are per user, per laptop or desktop, per server, or per location.

Employees often believe that a software license is carte blanche for use in the business and will copy a program to additional devices, laptops or desktops without the knowledge of the business owners. This misunderstanding of software rights puts a business at significant risk of infringement claims based on the unauthorized uses. While discovery may seem unlikely, all it takes is one disgruntled former employee to disclose the infringing uses to the software owner.

What are the consequences?

The stakes are high. Typically, once unauthorized use is detected, the IP owner will send a letter demanding payment of damages and immediate removal of the unauthorized use — the clear implication being that failure to comply will invite a lawsuit. Six-figure settlement demands are the norm with IP owners often arguing the infringer must pay three to five times the actual damages so that the settlement amount acts as a deterrent.

Even short of litigation, damages can quickly grow. When coupled with legal fees related to negotiating a settlement, damages may have a substantial financial impact on a business even before considering the resulting operational cost of purchasing the appropriate number of software licenses or replacing the promotional piece.

How can a business avoid missteps?

First, never respond to a demand letter without consulting counsel. If the IP owner took the time to send a letter, the matter will not be resolved with a brief call. More often than not, attempts by business owners to resolve an IP matter without counsel result in increased settlement amounts or a severely compromised negotiating position.

Second, businesses should implement internal processes that minimize the risk of unauthorized use of IP. The policies should state clearly what activities are permitted and by whom, and identify the point person to be contacted for inquiries and approvals.

Third, educate and train employees on avoiding potential infringements and knowing when to ask questions and seek approvals.

Finally, appoint an internal coordinator to oversee use of third-party IP and software in the business’s daily activities.

Insights Legal Affairs is brought to you by Semanoff Ormsby Greenberg & Torchia, LLC

Building a better partnership by discussing the details day one

Optimism abounds in the early stages of a business partnership as the new company’s key players dream about success and all that comes with it, says Mark E. Krohn, Partner at Brouse McDowell. It’s during this time of great expectation and excitement that business partners should pause and talk about important issues such as capital needs, founder roles, other outside business interests and how disputes and stalemates will be handled.

“One of the things I see that early-stage partnerships don’t do very well is thoughtfully discuss expectations, define roles and responsibilities and have a clearly stated path to follow when the company hits a speed bump, needs cash or is faced with a key decision upon which the main decision- makers disagree,” Krohn says. “The worst time to discuss important or sensitive issues is when an event like that happens and battle lines are already drawn.”

Taking the time to create a detailed and understandable business plan and well thought out operating agreement can avoid a lot of these costly challenges and disputes between partners.

Smart Business spoke with Krohn about the steps business partners can take to be better prepared to operate their company and deal with conflict.

What are some important points that business partners need to address?

Business partners are often focused on the many opportunities that are out there for the new venture to go after. This is important, but it can distract them from the less exciting but no less important step of discussing the essential elements of the business. You need a detailed discussion of how things will work, the time and commitment that will be required to operate the business and what each partner will do and/or not do. It’s critical for each partner to talk about their role in the business so that everyone knows what is expected. More than a job description, it’s an opportunity to get clarity on which aspects of the business operation each partner will oversee, drive and forge to completion.

Another thing that companies tend to gloss over is the type of roles, amount of time and deliverables each of the key partners will be called upon to execute. I’m talking about what does success look like and over what period of time? Three months, six months, nine months, a year, two years, etc. Companies rarely sit down and say, ‘This is what the company is going to achieve, this is who is going to be in charge of leading it and these are the objective indicators we’re going to use to measure it at various intervals.’

You also want to have a good dispute resolution mechanism in place and have an independent third party who can quickly build consensus or make decisions when partners disagree. One option is to draft into your operating agreement a third-party neutral that all the partners like, know and trust in a personal, professional and business sense. When a dispute arises, I typically mandate that it be discussed with the third party in five to seven days. This person will act as a mediator and try to bring the partners to consensus. If consensus cannot be achieved, that person can make binding decisions after hearing all of the facts. This process avoids costly litigation, incredible delay and the other ancillary damage that a long, protracted partner battle can cause to the relationship of the partners, company morale and the business.

What’s the key to managing conflicts over money?

One of the most common things people fight about is money. Whether it’s distribution of profits, who is making what salary for what tasks or simply needing money to pay bills and determining where that money will come from, it’s a good idea to have provisions that specifically detail all of these things. If the company needs money, it has to come from somewhere. Whether that’s a bank, or if the company is not able to be financed, a partner, there needs to be a thorough agreement of what will happen in each instance, especially when one partner can contribute financially, but the other partner cannot. That way, no one feels as if they are being taken advantage of in a critical, time-sensitive decision, while still allowing the company to move on without an interruption of its business. This is probably the partner dispute I see the most and people often only think about it after the situation arises, which rarely leads to good decision-making.

Insights Legal Affairs is brought to you by Brouse McDowell

New uncertainties for Pittsburgh’s rebounding energy companies

“There is a gradual phased recovery in the energy industry surrounding Pittsburgh,” says Matt A. Jarrell, Chair of the Energy and Natural Resources Services Group at Sherrard, German & Kelly P.C. He is seeing a healthy demand response to the low prices and a bleeding away of the excess supply of natural gas that created a glut.

“That many energy companies in the region are in a position to capitalize on that recovery is largely attributable to the efforts and resourcefulness of those companies who have managed themselves creatively and with discipline through the recent downturn,” says LuAnn Datesh, a Director at Sherrard, German & Kelly P.C. “Those companies that have been smart and strategic in navigating the downturn give us ample reason for optimism.”

However, as the industry rebounds, businesses will encounter a wide range of complicated legal issues surrounding increased oil and gas production, midstream construction, new safety regulations, financing constraints and environmental compliance considerations.

Smart Business spoke with Jarrell and Datesh about Pittsburgh’s energy market and the legal obstacles that could impede growth if ignored.

What are the legal challenges companies might face through the anticipated rebound?

Uncertainty is the biggest concern. Companies and their investors are looking closely at the political bodies imposing environmental regulations and recent court decisions, and they are not quite sure how it will shake out. Uncertainty has made it difficult for operators and ancillary businesses to prepare and make capital and operational plans for the coming years.

Municipal and other land use regulations, as well as new pipeline safety and drilling regulations have fostered a level of unpredictability that did not previously exist. Many in the industry are also waiting to see how recent decisions of bankruptcy courts will affect the legal landscape.

How might new pipeline safety issues and the Sabine bankruptcy ruling factor in?

Production, gathering and midstream operators need to understand the new Pipeline and Hazardous Materials Safety Administration regulations, which, among other things, broaden the range of facilities that fall under the administration’s jurisdiction. Companies need to get ahead of these regulatory changes and consider how they will be interpreted and applied by regulators and, eventually, the courts.

The Sabine bankruptcy ruling is a classic example of how one court decision can undermine what everyone in the industry understood to be fact — that certain types of pipeline agreements and dedications of midstream capacities ran with and were part of the land. The Sabine court’s holding that some commitments by producers of gas reserves to pipeline operators do not run with the land, and are therefore obligations subject to discharge in bankruptcy, carries significant implications. If the Sabine decision is followed more generally by other courts, it will affect how investors evaluate midstream opportunities, what collateral is acceptable to lenders, how operators finance and manage their assets, and how their creditors manage their own risks. Fundamentally, Sabine will change the dynamic between producers and midstream companies and will affect the structure and content of their agreements going forward.

What can companies in this industry do that could help them manage uncertainty?

Companies know their businesses better than anyone. But when they need legal help, they benefit most from a relationship with counsel who understand this industry — not just regulatory, land or pipeline issues, but how all the business facets in this industry landscape fit together.

A sense of partnership with the people who are providing a professional service can be valuable because counsel becomes invested in the whole of the relationship, not merely discrete problems. Companies appreciate dealing with counsel who understand the industry and its relationship to their goals.

As the energy industry recovers, there are new opportunities and challenges that companies will encounter. The best path to success is to work with counsel who are knowledgeable partners and who help to navigate uncertainties and anticipate new obstacles in practical and effective ways.

Insights Legal Affairs is brought to you by Sherrard, German & Kelly, P.C.

Succession planning helps companies survive dramatic change events

Succession planning is the process of preparing a company for a change in control. Unfortunately, most business owners do not have a succession plan in place and delay thinking about one until something happens that disrupts business continuity, a catastrophe or a sale opportunity arises.

“Most owners tend to put off succession planning,” says W. Chad Pociernicki, an attorney at Sherrard, German & Kelly, P.C. “However, it is a process that should always be on the agenda. Ownership and key personnel should regularly think about and devote time to planning what would happen during a change of control to maximize value and minimize the chance that owners end up dissatisfied, or leave an unplanned or undesirable legacy.”

Smart Business spoke with Pociernicki about succession planning, what is involved and how to get it done.

Why is it that so many companies do not have a succession plan?

Succession planning requires longer-term thinking, which is difficult in a world where there are always fires to put out and pressing shorter-term goals and challenges.

It is important to understand that succession planning is a process. Plans should be assembled over time and revisited annually or quarterly just the same as other routine business issues.

What are the core elements of a succession plan?

Fundamentally, succession planning is making sure there is a plan for business continuity so that transitions to new owners or management occur in a way that does not harm the business. This requires a plan to cultivate and keep key people and assets during a transition, maximize value and minimize risk.

Valuation is also important. Owners should understand the true market value of their business today, and on an ongoing basis, and have a good understanding of the potential market for their business.

What scenarios call for a change of leadership and how does succession planning differ for each?

There are three major events for which to plan. The one many do not like to think about is death or debilitating injury to an owner or key member of the business. In a situation in which an owner or key manager is actively involved in operations, it can be difficult and disruptive if that owner is suddenly absent. Remaining owners and managers, surviving spouses and family members, or whoever is trying to run the business may be unable to maintain operations in the absence of a plan. They are left trying to cobble together a succession plan, and that can cause the business to lose value.

Companies need good contingency plans that diversify responsibilities and address maintaining continuity. Sometimes insurance can also assist in the event of a catastrophe, adding cash to the business and easing the burden on other owners and partners suddenly faced with an unexpected change in control.

Anticipating even more orderly management succession is important, as well. Those who could run the business by stepping in to fill important roles in the event those currently in key positions are absent must be identified and incentivized to remain after a business transition to ensure continued effective management of the business.

Lastly, business owners that plan to sell their businesses need a plan that minimizes the tax effects and maximizes the value while maintaining business continuity until a sale is finalized.

Why should legal counsel be a part of a company’s succession planning process?

Legal counsel has experience handling all aspects of succession planning. They are an essential part of the succession planning team, which should also include key business advisers such as accountants and bankers. A lawyer can help coordinate efforts between team members while developing and implementing a process to create the succession plan, keeping the process moving along while offering expertise and documentation when needed. Having experienced legal counsel on the team will help owners stay on track so they can create the plan they need to secure their future.

Insights Legal Affairs is brought to you by Sherrard, German & Kelly, P.C.

Leave nothing to chance as you plan your next construction project

Construction projects are complex endeavors that require a great deal of planning and organization in order to proceed on schedule. But often it’s the work you do to prepare for unexpected developments that proves to be the most valuable, says Wesley Lambert, a partner in the Litigation Practice Group at Brouse McDowell.

“Construction projects, and by extension, construction disputes can be high-stakes endeavors,” Lambert says. “At every step of the way, you have an opportunity to protect yourself, advance your case, or gain leverage over the other side. This is the case not only in litigation, but if you are in a dispute situation outside of court, or even if you are trying to negotiate a resolution to something in a situation that is not otherwise contentious. If a few basic concepts and rules are not attended to at the appropriate time along the way, your ability to win your dispute or negotiation can be compromised.”

Smart Business connected with Lambert about what project owners and contractors can do to increase their odds of winning a dispute or negotiation.

What are some key documents that should be part of any construction project?

A well-written and comprehensive agreement is essential, and should address things like scope of work, how changes to the project will be accomplished, notification provisions, and payment terms.

Identifying these things the right way on the front end can give you an advantage if a dispute arises, because the first place the parties or the court will look to resolve the issue is the written contract. If the written contract is drafted in your favor, or you are simply seeking to enforce terms you have complied with, you have a head start.

You should also establish a document retention policy. The preservation of electronically stored information, or ESI, is more important than ever. Litigants are expected to have the ability to preserve, collect and produce ESI. Some of the rules governing litigants are starting to reflect this, such as Cuyahoga Local Rule 21.3 and Federal Civil Rule 37, which recently implemented a “good faith” element to preservation. If you retain documents in good faith, you may save yourself from harsher sanctions if a document goes missing and cannot be produced.

Why do employees need to be trained in how they interact with others?

Keep in mind that your employees, particularly those in a managerial role, are generally considered your agents, and what they say can bind you in certain circumstances. You want to make sure that they are well prepared to represent you in a manner that is not going to harm you in the future, such as committing to changes or deadlines that you cannot meet.

Just as importantly, train your employees on who has authority to speak for the other side. Someone without authority to do so may agree to a change or an alteration of the contract in the field that will not be enforceable if there ends up being a dispute.

How do you manage changes that occur during the project?

Failing to correctly document changes to the project is one of the most basic mistakes frequently made in the field, and it becomes impossible to unwind these mistakes in litigation. These include changes to the project scope, changes to the project timeline, or changes in price or payment terms. In almost all instances, the contract will require these changes to be in writing, and to be approved by the appropriate person — such as the project architect or construction manager.

If they are not, and unless an exception applies, you are performing extra work for free, or operating under a mistaken assumption as to what your contractual rights are. Also, on this point, you want to make sure that when you execute a change to your contract, the change covers everything.

Insights Legal Affairs is brought to you by Brouse McDowell

The basics of Hart-Scott-Rodino and how to avoid potential pitfalls

Hart-Scott-Rodino Antitrust Improvements Act (HSR) compliance is typically associated with transactions involving mergers, stock or asset acquisitions, joint ventures and acquisitions of a controlling interest in a non-corporate entity. Pitfalls can arise, however, for individuals and companies who are unfamiliar with the coverage of the HSR Act.

HSR also applies to the acquisition of voting securities by individuals, including officers and directors, if the acquisition exceeds the HSR’s threshold amounts, regardless of whether the voting securities were acquired through a stock market purchase, as equity compensation or through the exercise of options or warrants.

“Individuals may not be cognizant of these rules and could unknowingly violate the HSR filing obligations,” says Jill Bellak, a member of Semanoff Ormsby Greenberg & Torchia, LLC. “Under the aggregation rules, each new acquisition of voting securities is aggregated with existing holdings. Once the value of the existing holdings plus the newly acquired voting securities exceeds the HSR thresholds, a filing is required prior to acquisition of the new securities. If the voting securities merely appreciate in value, but no new acquisition is made, a filing is not triggered.”

Smart Business spoke with Bellak about the thresholds under HSR, the applicable filing fees, the filing parties and the penalties for failure to comply with the filing requirements.

What are the current thresholds under HSR?

A filing may be triggered through the act’s size of transaction test if acquisitions of voting securities or assets have a value in excess of $78.2 million. If this threshold is reached, the size of person test must be analyzed.

The size of person test is satisfied if one party to the transaction, including the party’s parent and subsidiaries, has annual net sales or total assets of at least $156.3 million and the other party to the transaction has $15.6 million or more in annual net sales or total assets.

A filing under HSR is required if both the size of transaction and size of person tests are met and no exemptions are available. If the acquisition of voting securities or assets has a value in excess of $312.6 million, HSR applies and a filing is required, regardless of the size of person test.

These thresholds are adjusted annually. The relevant date for determining value is the closing date of the transaction, not the date the acquisition agreement is signed.

What are the filing requirements and review period?

Under HSR, a notification and report form, together with the acquisition agreement and other relevant documents, is required to be filed with the Federal Trade Commission and the Department of Justice.

Once a filing is made, the regulators have a 30 calendar day period in which to review the transaction and request additional information or documentation. Early termination of this 30-day waiting period is usually requested by the filing party and often granted by the regulators.

What are the filing fees under HSR?

The filing fees payable under HSR are quite steep, ranging from $45,000 for acquisitions with a value exceeding $78.2 million to $280,000 for acquisitions with a value of $781.5 million or more. Typically, the buyer pays the fee, but it may be the subject of negotiation between the buyer and seller.

Who are the filing parties?

Both the buyer and the seller must file. Typically, the filings are made contemporaneously by their respective counsel. The filing person, referred to as the Ultimate Parent Entity (UPE), may be an individual or an entity, depending upon a detailed analysis of who controls the buyer and seller parties, respectively. For this purpose, the holdings of a spouse and minor children are aggregated with the holdings of an individual UPE.

What are the penalties for failure to file?

The penalty imposed for failure to comply with the filing obligations is $16,000 per day for each day that the filing is delinquent. If a violation has occurred, it is important to notify experienced counsel immediately and take steps promptly to rectify the failure to file.

Insights Legal Affairs is brought to you by Semanoff Ormsby Greenberg & Torchia, LLC

How to recognize wrongful workplace conduct

Employers have a responsibility to create an environment that errs on the side of caution in protecting their employees against workplace harassment, says Kerri L. Keller, Attorney at Brouse McDowell.

“An effective policy will describe the sort of conduct that is prohibited, state who is protected by the policy and who must abide by it, and warn all employees that they must follow the policy,” Keller says. “It must provide a procedure for dealing with complaints and ensure that all complaints will be addressed promptly and impartially.

“There should also be a prohibition against retaliation. Taking measures such as the creation and enforcement of an appropriate policy can help insulate against liability should an employee file a lawsuit and allege harassment.”

Smart Business spoke with Keller about what employers need to know about workplace harassment.

What constitutes illegal workplace harassment?

Workplace harassment is unlawful when an individual is harassed on the basis of his or her gender or other protected status, such as age, race or religion. Sexual harassment may be the most prevalent type of workplace harassment, but it is not the only type of workplace harassment. The Equal Employment Opportunity Commission (EEOC) defines sexual harassment as ‘unwelcome sexual advances, requests for sexual favors and other verbal or physical conduct of a sexual nature.’ It can be illegal to harass a woman by making offensive comments about women in general, states the EEOC, even if the comments are not sexual in nature. Importantly, the harassing party can be either a woman or a man, and the victim and harasser can both be the same sex. So, a woman can harass a man, or vice versa.

So even a joke can be illegal harassment?

The law does not prohibit teasing, or an offhand comment, or joke. Also, an isolated incident that is not serious will generally not qualify as harassment that is illegal in nature. As the EEOC notes, ‘harassment is illegal when it is so frequent or severe that it creates a hostile or offensive work environment or when it results in an adverse employment decision (such as the victim being fired or demoted).’

What does this mean for an employer?

Employers must understand the types of harassment. Quid pro quo harassment is harassment committed by a person who can take formal employment actions, such as hiring and firing. Quid pro quo essentially means ‘this for that.’

For instance, quid pro quo harassment would occur if a supervisor conditioned an employee’s career advancement on sexual favors. Hostile work environment is the other type of harassment. It differs because the harasser does not need to be in a position to take formal employment actions. The harasser can be a co-worker, or someone who is not an employee of the employer, such as a client or even a customer.

Is it only sexual conduct that employers need to worry about?

No. A hostile work environment does not always need to be sexual in nature, i.e. it can involve harassment based on gender. For instance, a woman can allege a hostile work environment if the men tell jokes of a sexual nature, even if they do not directly involve the woman who feels harassed by them. But, notably, a hostile work environment can also result from comments about a person’s race, age, disability, national origin or religion.

What is the difference between an environment that is not hostile and one that is?

In order for a work environment to be deemed hostile, it must be subjectively abusive and offensive to the person who is being harassed, and objectively offensive enough that a ‘reasonable person’ would find the environment to be hostile or abusive.

The second prong is of particular importance, as it generally serves to protect employers from those employees who may be overly sensitive. Employers usually do not have to worry about liability from isolated incidents or the telling of a perhaps inappropriate joke, unless those incidents or jokes would rise to the level of being objectively offensive to a reasonable person.

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