“The FTC’s Supreme Court Victory: A Rare Win for Both Libertarians and Regulators” Guest Post by Theodore A. Gebhard

April 1, 2015

The Federal Trade Commission’s (FTC) recent Supreme Court victory in the North Carolina State Board of Dental Examiners (NCSB or Board) case brought together in common cause both economic libertarians and federal antitrust regulators — groups often at odds with each other respecting important philosophical and policy principles. The FTC’s win, however, gave both groups much reason to celebrate.

The question before the Court was whether unilateral anticompetitive actions of the NCSB, a state-created body, were immune from antitrust law under the “state action” doctrine. The state action doctrine arises from Parker v. Brown, a 1943 Supreme Court decision that sought to reconcile the Sherman Antitrust Act with the constitutional principle of federalism. Federalism is the idea that the U.S. Constitution recognizes both national and state government sovereignty by giving certain limited powers to the national government but reserving other powers to the individual states.

Because the Constitution is the highest law and therefore always trumps statutes, the Court carved out immunity from the Sherman Act for anticompetitive actions of states acting in their sovereign capacity, which includes regulating private actors in a way that restricts competition. In 1980 the Court extended this carve out to include the anticompetitive actions of non-sovereign bodies upon a showing that the actions were the result of clearly articulated state policy and were actively supervised by the state. (See, Cal. Liquor Dealers v. Midcal Aluminum, Inc.) The active supervision requirement ensures that the anticompetitive consequences are only those that the state has deliberately chosen to tolerate in exchange for other public policy goals.

The NCSB was established by the North Carolina Dental Act to be “the agency of the State for the regulation of the practice of dentistry.” In that capacity, the NCSB has authority to administer the licensing of dentists and to file suit to enjoin the unlawful practice of dentistry. Starting in 2006, the NCSB began to send strongly worded cease and desist letters to non-dentist providers of teeth whitening services. People in this occupation grew in numbers in North Carolina – as well as other states — as the popularity of these services increased over a period of years. Often the non-dentist providers are simply individual entrepreneurs operating out of kiosks in shopping malls and similar venues. Licensed dentists also provide teeth whitening services, but typically at substantially higher fees.

Significantly, the N.C. Dental Act is silent with respect to whether teeth whitening constitutes the practice of dentistry. Nonetheless, the NCSB determined that it was, though without hearing or comment and without any independent confirmation by any other state official. In so doing, the Board found that the non-dentists were unlawfully practicing dentistry. Instead of obtaining a judicial order to enjoin the non-dentists as prescribed by statute, however, the NCSB sent out cease and desist letters, which contained strong language including a warning that the non-dentist teeth whiteners were engaging in a criminal act. The letters effectively stopped the provision of teeth whitening services by non-dentists.

In 2010 the FTC sued the Board on antitrust grounds. In response, the NCSB asserted that it was entitled to immunity under the state action doctrine. The FTC rejected that claim and in an administrative hearing ruled that the cease and desist letters constituted unlawful concerted action to exclude non-dentist teeth whiteners from the North Carolina market for such services. The FTC further found that that this exclusion resulted in actual anticompetitive effects in the form of less consumer choice and higher prices. The Commission then ordered the NCSB to stop issuing cease and desist letters to non-dentist providers of teeth whitening services without first obtaining a judicial order.

Key to the FTC’s antitrust finding was that, under the N.C. Dental Act, the majority of NCSB members must be practicing dentists elected to the Board by the community of N.C. licensed dentists. Moreover, throughout the relevant period, most, if not all, of the dentist members of the NCSB performed teeth whitening in their respective practices. In addition, the Board’s actions came after it received several complaints from licensed dentists about the competition from non-dentists teeth whiteners and the lower fees that these providers charged. Only a few dentists suggested that teeth whitening by non-dentists might be harmful to customers. The FTC found the validity of such public health claims tenuous.

The NCSB appealed the FTC’s rejection of its state action defense. The appeal reached the Supreme Court in 2014, and in an opinion handed down last February, the Court held that, under the record facts, the NCSB does not have antitrust immunity. In reaching this conclusion, the Court found that, although the NCSB is a creature of the state and could properly be labeled a state agency, it is nonetheless a non-sovereign body and thus subject to the active supervision requirement for antitrust immunity to obtain. This requirement was not satisfied. (Not at issue was whether the state had a clearly articulated policy to regulate the practice of dentistry. All parties stipulated to this factor.)

The Court’s finding that the NCSB is a non-sovereign body is the key to the decision, and rightly focuses on substance over form. In particular, the Court focused on the fact that the NCSB is majority-controlled by active market participants and that its decisions in this case were unsupervised by any state government officials. Given these circumstances, the Court found there to be a high risk that Board decisions were and are influenced by self-interest instead of public welfare. When this risk is present, it trumps any formal label given by a state to a regulatory body. The Court specifically held that a “state board on which a controlling number of decision makers are active market participants in the occupation the board regulates must satisfy [the] active supervision requirement in order to invoke state action antitrust immunity.”

The practical result of this holding is that the FTC’s finding of illegal anticompetitive conduct stands. This outcome will no doubt yield important benefits to North Carolina citizens. Teeth whitening entrepreneurs can seek to re-enter the market, and consumers of those services will enjoy lower fees resulting from the increased competition. These will be tangible, observable benefits.

Critically, however, the Court’s holding also has important legal and policy implications beyond North Carolina. States will have to re-evaluate their regulatory boards and account for the fact that giving unsupervised control over who is qualified to compete to boards comprised of members whose incomes depend on those decisions may not produce good outcomes. Going forward, states must give greater care not only to establishing such boards, but also to overseeing their decisions. Decisions made behind merely the facade of a state-created agency will be insufficient for a board to obtain state action immunity.

Additionally, the Court’s holding recognizes that license requirements that do not rest on firm evidence of a risk to public health absent licensure serve not only to protect incumbents from healthy competition, but unnecessarily infringe on basic economic liberty and the right to earn a living. As such, the holding implicitly elevates economic liberty to a position as prominent as the antitrust concern. In so doing, the holding is an important victory for economic libertarians, just as it is for antitrust enforcers. It is a rare example of an instance when groups with economic philosophies that often diverge can come together in common celebration. A great win for both.

Theodore A. Gebhard is a law & economics consultant. He advises attorneys on the effective use and rebuttal of economic and econometric evidence in advocacy proceedings. Mr. Gebhard holds a Ph.D. in economics as well as a J.D. During his career, he spent seven years as an antitrust economist with the Justice Department and ten years as a senior antitrust attorney with the Federal Trade Commission. Nothing in this article is purported to be legal advice. You can contact the author at theodore.gebhard@aol.com.

 

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“Amazon: Bully or Not?” Guest Post by Theodore A. Gebhard, J.D., Ph.D.

August 26, 2014

Several articles in the business press during recent months have reported on a dispute between book publisher, Hachette, and book distributor, Amazon.  The dispute centers on the pricing of e-books.  Amazon wants a larger slice of the profits on e-book sales, and to obtain that larger slice, it wants Hachette to lower its wholesale prices.  Hachette, which publishes James Patterson among other best-selling authors, is resisting.  In turn, Amazon has removed Hachette titles from its pre-order list.  That list is important to publishers because pre-order sales go into the initial sales figures for a new title, better enabling the title to achieve best seller status and the marketing boost that this status brings about.

In the reporting on this dispute, Amazon’s tactics have been described, among other pejoratives, as “bullying” and “strong-arming.”  Hachette after all is a relatively small publisher, and Amazon is the world’s largest book seller.  The European press has gone even further.  The Financial Times, for example, asks whether Amazon might be “using its dominance in one market – ereaders – to boost its dominance in another – ebooks.”

Before jumping on the band wagon condemning Amazon, however, some understanding of relevant facts and relevant law is in order.  To begin with, we might ask why Hachette and Amazon are negotiating an agreement at this time?  The answer is because Hachette, along with Apple and four other publishers (Simon & Schuster, Macmillan, Penguin, and HarperCollins) were accused by the Justice Department in 2012 of conspiring with each other to raise e-book prices in violation of Section 1 of the Sherman Antitrust Act, which outlaws anticompetitive agreements.  According to Justice Department documents, the alleged unlawful conspiracy consisted of creating a collective plan to force Amazon to increase its $9.99 price point for trade e-books.

As set out in Justice Department documents, Apple, in conjunction with its launch of the I-Pad in January 2010, desired simultaneously to enter the e-book retailing business, but was concerned about its ability to compete with Amazon on price.  In a plan largely designed by Apple but implemented by the five publishers, pressure was put on Amazon to agree to new distribution agreements by which the publishers would set the retail prices of trade e-books instead of Amazon.  Rather than buy the books at wholesale from the publishers, Amazon would act as a selling agent and simply receive a fixed commission on each sale.  Later, a sixth publisher, Random House, adopted this business model as well for many of its e-books, resulting in nearly 50% of all trade e-books distributed and sold under this agency system.  The almost immediate consequence was a significant increase in the price of trade e-books.

Hachette and each of the other four publishers subsequently reached a settlement with the Justice Department.  Apple went to trial and lost in an opinion filed in July 2013 finding Apple’s conduct illegal.  Although not admitting guilt, the settling defendants, including Hachette, agreed to abandon any control of retail pricing of e-books with any retailer, and to arrive independently at new distribution agreements with Amazon.  This then is the basis for the current negotiations between Hachette and Amazon. As is apparent, Hachette put itself into this position by dint of its prior concerted actions with its competitors.

If anything, to date Amazon’s presence in the retail e-book market, by resisting efforts on the part of publishers to raise prices, has been a boon to consumers. Implicit in the Justice Department’s litigation is a recognition of this fact. Further, as Apple, Google, and others, such as the publishers themselves, enter and expand into retail e-book sales, price competition will only increase.  The key is the ability to compete on price and not have price uniformly set by upstream anticompetitive agreements.

As for Amazon’s alleged dominance in e-book readers (the Kindle) and the alleged potential to leverage that dominance anticompetitively into e-book sales, few, if any, real world facts suggest that this presents a serious antitrust concern at this time, at least under U.S. law.  Section 2 of the Sherman Act goes after conduct that is both something other than “competition on the merits” and results in actual monopolization or a dangerous probability of that result. Simply having a large market share — even a very large one — is not a violation of Section 2.  Section 2 is concerned only with obtaining or maintaining a monopoly by anticompetitive means, i.e., a means that harms consumer welfare.

Although the Kindle device links to Amazon’s Kindle Store, it is possible to download many e-books obtained elsewhere. Some may first have to be converted to the Kindle format (Mobi), however. Calibre is a free download conversion program that will do this in a few minutes or less. Thus, there generally are no significant obstacles to using the Kindle to read e-books obtained elsewhere. Furthermore, tablets such as the I-Pad are e-readers as well. In fact, some might argue that they are superior to the Kindle insofar as they can display content in color such as illustrations or exhibits in art books. Hence, if anything, we are likely to see considerable erosion of Amazon’s share of e-reader sales in the future, eliminating any potential to use those sales as leverage in the retail e-book market.

Notwithstanding the above, given the global marketplace, it is useful to note that there are differences between U.S. antitrust law and competition law in other jurisdictions.  Firms operating globally must be cognizant of these differences.  As noted, the Sherman Act does not outlaw conduct by dominant firms unless that conduct is detrimental to competition itself, i.e., it results in harm to consumer welfare. Indeed, the U.S. Supreme Court has often stated that it is axiomatic that the U.S. antitrust laws are intended for the “protection of competition, not competitors.” By contrast, competition law within the European Union is more suspect of firms with dominant market shares, and may be more protective of competitors and suppliers. Conduct and practices that may not be unlawful under U.S. law may be unlawful under EU law.  Not only Amazon, but any global enterprise, should take care to be informed about and in compliance with all relevant law.

Theodore A. Gebhard advises attorneys on the effective use and rebuttal of economic and econometric evidence in advocacy proceedings.  During his career, he spent seven years as an antitrust economist with the Justice Department, ten years as a senior antitrust attorney with the Federal Trade Commission, and six years in private law practice.  Nothing in this article is purported to be legal advice.  Facts or circumstances described in the article may have changed by the time of posting. You can contact the author via email at theodore.gebhard@aol.com.


 

 

Arts Advocacy – Not Just in the “Big City”

August 5, 2014

This is a story about how two DC-based arts organizations – Artomatic and Washington Area Lawyers for the Arts (WALA) – and their respective leadership and volunteers came together to make a difference in the predominantly rural community of Jefferson County, West Virginia.

According to Artomatic’s website,

“Artomatic began in 1999 in the historic Manhattan Laundry building in Washington, D.C. A dozen or so artists originally toured the empty building and within a month, 350 artists had cleaned, lit, painted and presented artwork in its 100,000 square feet. Over 20,000 visitors attended the first Artomatic over six weeks. … [It] creates community, builds audience and expands economic development by transforming available space into a playground for artistic expression.”

WALA began in 1983 as a collaborative effort to meet the needs of artists and fulfill a mission to serve artists’ legal needs. To accomplish this, WALA

“[P]rovides access to education, advocacy and legal services through workshops and seminars, legal clinics and pro-bono referral services for creatives and cultural organizations”

and counts amongst its attorney base more than 350 of Washington, DC’s top lawyers and law firms who participate in their legal services programs as volunteers, according to its website.

In 2012, Cynthia Gayton, a volunteer attorney for WALA and a speaker at two Artomatic events, received a call from Ginny Fite, formerly the president of the Arts and Humanities Alliance (Aha!) of Jefferson County, about an Art Walk Gayton organized for the neighboring communities of Bolivar and Harpers Ferry, West Virginia. Fortunately, Fite caught Gayton at just the right time – minutes after exiting the Dupont Circle Metro station after having seen the 2012 Artomatic event in Crystal City, Virginia. They spent some time discussing Artomatic’s history as well as its jury-free and “anyone can play” format and considered whether it was something that would work in Jefferson County, WV. Gayton agreed to contact George Koch, and Artomatic Founder and Chair Emeritus, about what would need to happen to bring Artomatic to a county 60 miles away from the District of Columbia. Gayton spoke with Koch soon after, and he agreed to participate in a preliminary discussion. A meeting with Koch, Gayton and the Alliance’s leadership, including Ginny Fite and Debbie Piscitelli, Executive Director of the Harpers Ferry Historical Association and former president of Aha!, was held, leading to several more discussions. Encouraged, Fite took the reins and proceeded to organize, along with many supportive members and sponsors of the arts community in Jefferson County, a month-long Artomatic (called Artomatic@Jefferson) event on U.S. 340 between Charles Town and Harpers Ferry in October 2013.

Gayton, who was on the Artomatic@Jefferson Steering Committee and responsible for the event’s adult education programming, contacted Maggie Gladson, WALA’s Legal Services Director, to see if WALA would be interested in supporting the event by sponsoring two programs from its Creative Entrepreneurs education series. Vance Levy, WALA’s Arts Ambassador and Education Director, was instrumental and a key asset in bringing the request to WALA volunteers to participate in the event as well as subsequently promote it. John Mason, WALA Board President and Chair of the Education Committee agreed to conduct a class entitled “Copyright/ Trademark Protection and Use” and Gayton conducted another class called “Tax Strategies for Creative Entrepreneurs” during the first two Saturdays of Artomatic@Jefferson.

The Artomatic@Jefferson event, according to news reports, attracted upwards of 4,000 visitors, and was a success by all accounts. Jefferson County itself has a population of only 53,498, so attendance was the equivalent of about 7% of the county’s population.

Due the event’s success, Charles Town Mayor, Patty Smith, was moved to investigate an “Our Town” grant from the National Endowment for the Arts starting in November 2013. Mayor Smith applied for the grant which resulted in a $50,000 award to Charles Town in July 2014. According to the July 16, 2014 edition of The Spirit of Jefferson and Farmer’s Advocate, Mayor Smith said of the award, “It’s exciting – a giant step forward. … The goal is to have more art functions in town, to draw more local citizens and to bring in more tourism, too. Art is a big tourism attraction.” The grant will be used in part to create a “Washington Heritage District” which, in turn, is intended to make the town a destination for the arts, in addition to culture and history. Also, according to The Spirit, which published Mayor’s 4-point plan for the grant money, Smith said “Artomatic[@Jefferson] has such a heavy demand, by both artists petitioning to participate and the public, that it must be [in a larger space].” At least two downtown Charles Town locations are being considered for a future Artomatic@Jefferson event.

Stephen Skinner, an attorney born and raised in Charles Town, West Virginia and a member of the West Virginia House of Delegates said:

“The NEA grant signals that the arts are a critical component of development and culture in the Eastern Panhandle of West Virginia.”

This success dovetails nicely with the goals of a District of Columbia July 16, 2014 publication entitled “Creative Economy Strategy for the District of Columbia”. In the accompanying press release, four economic growth sectors were included in the economic vision for the District: “1) Arts and Heritage, 2) Information and Technology, 3) Culinary Arts and 4) Professional Services.” Mayor Vincent Gray, in his letter to DC citizens, said that once the strategy is implemented, it “will contribute to the District’s commitment to create 100,000 jobs and generate $1 billion in new tax revenue.” The letter continues on to say:

“No city or enterprise can survive for long heralding the victories of the past or sustaining old economic archetypes that no longer apply in a technology-driven society. Instead, we must look toward the future with a vision for how best to transform for the 21st century. The Creative Economy Strategy articulates such a vision for the District, ensuring our economy remains competitive today and in the future.”

This vision and accompanying strategy extends not only to the artists and arts advocates in the District of Columbia, but through the efforts of Artomatic and WALA, goes further into neighboring regions whose fortunes are influenced by DC’s success.

It is not often that pro bono attorneys, or any volunteers for that matter, get to hear “the rest of the story” after they organize, speak, teach, or provide advice. Volunteers make a difference, and due to their efforts, a new arts-focused community is becoming a reality. Thank you.

New Kindle Release! Guide to Creating and Protecting Fictional Characters

June 18, 2014

The second edition of a Kindle edition publication by Cynthia Gayton entitled, “Guide to Creating and Protecting Fictional Characters“, was just released last month. 

This legal guide is intended to be used by those people interested in protecting fictional literary and illustrated characters, generally, in the comic book and graphic novel fields, specifically.

What’s in a name? Blackhorse v. Pro-Football, Inc.

June 18, 2014

The United States Patent and Trademark Office (USPTO) canceled six trademark registrations for the Washington Redskins. The plaintiffs in the case are five Native Americans who wanted to cancel registrations filed by, and issued to, the organization from 1967 and 1990. The 2-1 decision in Blackhorse, et al. v. Pro-Football, Inc. was announced today (June 18, 2014). The majority stated:

“[W]e decide, based on the evidence properly before us, that these registrations must be cancelled because they were disparaging to Native Americans at the respective times they were registered, in violation of Section 2(a) of the Trademark Act of 1946, 15 U.S.C. § 1052(a). This decision concerns only the statutory right to registration under Section 2(a). We lack statutory authority to issue rulings concerning the right to use trademarks.”

The team has two months to appeal it before the team loses its right to use the federally registered mark – an “R” in a circle or  ® on its goods or for services. The dissent, by Bergsman, Administrative Trademark Judge, stated that:

“I find that petitioners failed to show by a preponderance of the evidence that a substantial composite of Native Americans found the term REDSKINS to be disparaging in connection with respondent’s services during the relevant time frame of 1967-1990. Accordingly, the six registrations should not be cancelled under Sections 2(a) and 14(3)of the Trademark Act.”

The decision does not mean that anyone can use the mark – yet – and maybe not ever. Federal registration affords the trademark owner several benefits – including statutory damages and attorneys’ fees if a party is found to be infringing upon a federally registered mark. But there are other ways to protect a word or symbol which distinguishes a good or service under common law trademark.

A trademark is any word, name, symbol, or device or any combination of those things used by a manufacturer or merchant to identify goods and distinguish them from the goods manufactured or sold by others. The owner of the trademark has the exclusive right to use the mark to identify such goods and services and that right can continue indefinitely as long as the trademark is in use. Because a trademark can be established simply by using the mark in commerce, there is no requirement that the mark be registered with the USPTO and the mark is protected by common law trademark rights.

A trademark owner of a common law trademark can register the mark with their state including the District of Columbia, but those rights are usually limited to the geographic area in which the mark is used.

If you are considering adopting the still federally protected trademarks, do not be surprised if you receive a cease and desist letter from the football organization. Despite this legal blow, there are unfair competition and common law trademark causes of action which can be used to protect the common law trademark owner.

The George Washington University and the Corcoran

March 13, 2014

Last month, George Washington University, the Corcoran Gallery of Art and Corcoran College of Art + Design, and the National Gallery of Art proposed a collaboration amongst them. The history between GWU and the Corcoran is worth noting. The founder of the Corcoran Gallery, William Wilson Corcoran, was president of GW’s Board of Trustees from 1869 until 1872, and he founded the school, called the Corcoran Scientific School in 1884.

William Wilson Corcoran

William Wilson Corcoran

The Corcoran Scientific School is now the School of Engineering and Applied Sciences.

Seminar on October 12, 2013

October 9, 2013

Cynthia Gayton, who has been a volunteer attorney for the Washington Area Lawyers for the Arts since 1996, will hold a seminar tax strategies workshop for creatives at Artomatic@Jefferson this coming Saturday, October 12, 2013. The event is free for attendees, but registration is recommended.

What’s Happening Now – Technology, Small Business, Contracts – June 2013

June 9, 2013

Technology News

Health Care, Privacy and Mobile Apps. New smartphone apps make it easier to collect more and more personal information from consumers, including health care related data. The National Telecommunications and Information Agency (“NTIA”), which is part of the Department of Commerce, has started a process to develop a “code of conduct” related to mobile application transparency to protect personal data privacy. According to a recent Mobile Privacy Report, the FTC recommends that app developers have a privacy policy which is easily accessible through app stores. In addition, a bill was introduced by The Honorable Hank Johnson of Georgia on May 9, 2013, entitled the “Application Privacy, Protection & Security Act of 2013” or “APPS Act of 2013” which is intended “[t]o Provide for greater transparency in and user control over the treatment of data collected by mobile applications and to enhance the security of such data” and is now being considered in Congress. The bill’s discussion draft recommends that if an app collects personal data, the user must agree to the product’s terms and conditions. Specifically, “[b]efore a mobile application collects personal data about a user of the application, the developer of the application shall – (A) provide the user with notice of the terms and conditions governing the collection, use, storage, and sharing of the personal data; and (B) obtain the consent of the user to such terms and conditions.” Rep. Johnson has demonstrated a keen interest in privacy. Please see his press release regarding the National Security Agency’s telephone surveillance program.

Gayton Law can help you develop a privacy policy, whether you are an app developer or otherwise collect personal information from customers through your website.

Small Business News

Employee Benefits and the Affordable Care Act. Employers have until October 1, 2013 to notify employees about health care coverage options available through the “Health Insurance Marketplace” established under the Patient Protection and Affordable Care Act commonly called the “Affordable Care Act.” The new Fair Labor Standards Act (“FLSA”) Section 18B requires such notice. The requirements are detailed, but in general, the notice to employees must at minimum inform the employee of 1) the existence of the Marketplace; 2) whether the employer plan’s share of the total allowed benefit costs provided under the plan is less than 60% of such costs which may make the employee eligible for a premium tax credit if the employee purchases a qualified health plan through the Marketplace; and 3) the possibility that the employee may lose the employer contribution to any health benefits plan offered by the employer if the employee purchases a qualified health plan through the Marketplace.

Please note that the law requires that the notice “must be provided in writing in a manner calculated to be understood by the average employee.” Gayton Law can help you draft an appropriate notice in compliance with the law.

Contracting News

Employment Applications. The Americans with Disabilities Act says that employers are not permitted to ask an applicant medical questions until the employer has offered a conditional offer of employment. In a recent case, decided on March 29, 2013, a 3rd Circuit Court said that because an employee made false statements on an employment application regarding drug use, an employer had legitimate and non-discriminatory grounds to fire the employee. Reilly v. Lehigh Valley Hospital, No. 12-2078, (3rd Cir. March 29, 2013). In this case, the former employee, Robert Reilly, brought a lawsuit against his former employer, Lehigh Valley Hospital (“LVH”) asserting that it violated the ADA by disclosing his medical records to the human resources (“HR”) department. Reilly was employed by LVH as a part-time Security Officer. When he was offered the job, he completed and signed an employee health information form as part of the hiring process. The form included two alcoholism and drug addiction questions. In addition to answering “no” to these questions, there was a note on the form indicating that Reilly denied drug/alcohol addiction. The form also said that falsifying information “could result in withdrawal of the employment offer or if subsequently discovered termination of [his] employment.” When Reilly was admitted to the hospital to receive treatment for a work-related injury, he disclosed to the treating doctor that he had a history of drug use and that he was a recovering drug addict. This information was included in a clinical report which was submitted to LVH’s HR department. He was fired for falsifying his employment form. Reilly brought a lawsuit against LVH for violating the ADA and a corresponding Pennsylvania law. The District Court granted summary judgment in favor of LVH regarding Reilly’s claims that LVH’s firing was discriminatory. The District Court determined that LVH’s decision to terminate Reilly was founded on a non-discriminatory reason – falsifying information on the employment form – and, and therefore, permissible. Reilly appealed the District Court’s decision to the United States Court of Appeals for the Third Circuit claiming that the District Court erred in its decision. The Third Circuit determined that the District Court did not err and affirmed its decision.

This case was decided in the Third Circuit and would not be applicable in any other jurisdiction. However, this case is instructive for purposes of advising employers that they should ensure that their employment-related forms are not discriminatory or in violation of the ADA. Please contact Gayton Law with any questions about employment application forms and employee-related documents.

Recent Publications

The “Guide to Creating and Protecting Fictional Characters” by Cynthia Gayton was released in May 2013 and is now available on Kindle. Here is an excerpt:

“This is an exciting time to be a creative in any enterprise. You can develop stories, illustrate and publish your work with great speed and minimal expense. Doing things on your own is both liberating and inhibiting. Yes, you can do it all – from start to finish, the product, distribution, display, advertising and promotion are all controlled by you. On the other hand, it could be a problem that all these things are controlled by you. Do you have the skills necessary to bring your product to market, including the knowledge to protect your creations?”

In March 2012, Kendall-Hunt publishers released the 9th edition of Legal Aspects of Engineering by Cynthia Gayton. This book is used in several engineering courses and is a useful reference for anyone interested in contracting, intellectual property, engineering practice, and other general legal issues.

Thank you for reading!

The information contained in this post is for general guidance on matters of general interest only. The application and impact of laws can vary widely based on specific facts. The information contained in this newsletter should not be construed as a substitute for consultation with professional advisors. Certain links in this post connect to other websites maintained by third parties over whom Gayton Law has no control. Gayton Law makes no representations as to the accuracy or any other aspect of information contained in other websites.

© 2013 Gayton Law

What’s Happening Now in Technology, Small Business & Contracts

March 21, 2013

Technology News

Patents

Are you a small business that considered applying for a patent, but didn’t because of costs? The America Invents Act, which went into effect in September 2011, provides some financial relief in the form of a fee reduction. However, how a small business can take advantage of the fee reduction was unclear until this month. A filing fee reduction of 75% may apply if your business qualifies as a “micro entity.” A micro entity is defined as an applicant who certifies that “that the applicant: (1) Qualifies as a small entity as defined in 37 CFR 1.27 (2) has not been named as an inventor on more than four previously filed patent applications …; (3) did not, in the calendar year preceding the calendar year in which the applicable fee is being paid, have a gross income, as defined in section 61(a) of the Internal Revenue Code of 1986 (26 U.S.C. 61(a)), exceeding three times the median household income for that preceding calendar year, as most recently reported by the Bureau of the Census; and (4) has not assigned, granted, or conveyed, and is not under an obligation by contract or law to assign, grant, or convey, a license or other ownership interest in the application concerned to an entity that, in the calendar year preceding the calendar year in which the applicable fee is being paid, had a gross income, as defined in section 61(a) of the Internal Revenue Code of 1986, exceeding three times the median household income for that preceding calendar year, as most recently reported by the Bureau of the Census.” For further information, please contact the USPTO and James Engel, Senior Legal Advisor ((571) 272–7725), Office of Patent Legal Administration, Office of the Deputy, Commissioner for Patent Examination Policy.

Social Media

Ever wonder what is and is not allowed with social media advertising? Being in compliance with the specific social media company’s rules does not guarantee that you are in compliance with the Federal Trade Commission (FTC). Among other goals, the FTC promulgates rules, monitors and enforces laws related to unfair and deceptive trade practices. As computer, smart phone and mobile device screens become smaller, some businesses are removing lengthy disclosure/disclaimer language that clutter the screens. This month, the FTC prepared some guidance for both businesses and consumers regarding advertising for online media distribution. Here is a summary of the new guidelines:

  1. The same consumer protection laws apply online as they do in print or other media. The FTC’s rules and guides are not medium specific and may apply to many online behaviors.
  2. Claim qualification should be incorporated in the advertiser’s message (when practical).
  3. Required disclosures must be clear and conspicuous.
  4. As a “sub requirement” to guideline 3, advertisers should place the disclosure as close as possible to a claim which may otherwise be deceptive.
  5. If a disclosure is necessary to prevent deceptive advertising, don’t publish the ad on that particular media platform.

Summarized from “.com Disclosures – How to Make Effective Disclosures in Digital Advertising,” Federal Trade Commission, March 2013.

Gayton Law can review your online advertising to ensure compliance with these guidelines.

Small Business News

Employee Benefits

Employee benefits and federal and state leave requirements are expensive for businesses, especially small businesses. The relationship between and employer and employee should be based on trust, and when an employee negotiates leave under the Family and Medical Leave Act (“FMLA” or “Act”), trust is paramount. Unfortunately, that trust may be abused as outlined in a recently decided case, Lineberry v. Detroit Medical Center et al., No. 11-13752 (E.D. Mich. Feb. 5, 2013), where an employee who took leave under the Act, was fired for failure to comply with company policy.

As background, Lineberry, a registered nurse, was placed on FMLA leave because she experienced excruciating back and leg pain after moving stretchers. During her FMLA leave, Lineberry posted photos on her Facebook page where she was seen drinking beer and riding a motor cycle while on vacation. Her co-workers, who saw her Facebook page, reported these activities to her boss, who initiated an investigation into possible termination. Lineberry’s employer, Detroit Medical Center (“DMC”), requires an investigation when an hourly employee is facing termination.

After the investigation, DMC’s human resources representative wrote a letter to Lineberry terminating her employment. The letter said that Lineberry was being terminated for failure to abide by DMC’s discipline policy which provided that an employee may be terminated for “[d]ishonesty, falsifying or omitting information, either verbally, in written format … on DMC records including, but not limited to payroll records, human resources records etc.”

Lineberry brought a lawsuit against DMC for “(1) interfering with and denying her right to be reinstated to her position as staff nurse with DMC upon return from her FMLA leave, and (2) retaliating against Plaintiff for taking FMLA leave” both of which are rights guaranteed by FMLA. DMC responded by filing a counter-complaint where DMC sought to recover $3,636.57 it paid Plaintiff in short-term disability benefits.

When the court reviewed the case, it noted that in Michigan, “interference with an employee’s FMLA rights does not constitute a violation if the employer has a legitimate reason unrelated to the exercise of FMLA rights for engaging in the challenged conduct.” Edgar v. JAC Products, Inc., 443 F.3d 501, 507 (6th Cir. 2006) (emphasis added). Because Lineberry was unsuccessful in proving that DMC violated the FMLA by terminating her employment, the court agreed with DMC and dismissed the case.

Please note that this case was tried in Michigan and may not apply in your jurisdiction. Gayton Law can help you draft employment policies which may help prevent similar abuses.

Sequestration and Small Businesses

Under the Balanced Budget and Emergency Deficit Control Act of 1985, some automatic cuts became effective on March 1, 2013, including a reduction to the “refundable portion of the Small Business Health Care Tax Credit for certain small tax-exempt employers under Internal Revenue Code section 45R.” The refundable portion for these employers will be reduced by 8.7 percent and will be applied until 9/30/13, or until Congress intervenes.

Please contact your tax professional to see if this applies to you.

Contracting News

Collusion

Times are tough and many business owners spend sleepless nights trying to figure out how to make ends meet (perhaps joining with competitors to keep prices high), but the law never rests. Price-fixing is one area of antitrust law about which even small businesses should be aware. The Department of Justice (DOJ) and the Federal Trade Commission (FTC) enforce laws related to price fixing which is “is an agreement among competitors to raise, fix, or otherwise maintain the price at which their goods or services are sold”. Price fixing violations come under the Sherman Act, which was enacted into law in 1890.[i] The reason why price fixing is under tough scrutiny is because “[w]hen consumers make choices about what products and services to buy, they expect that the price has been determined freely on the basis of supply and demand, not by an agreement among competitors. When competitors agree to restrict competition, the result is often higher prices. Accordingly, price fixing is a major concern of government antitrust enforcement.” FTC Guide to Antitrust Laws. Depending on the nature of the price fixing behavior, a case may be brought by either the Department of Justice or the Federal Trade Commission.

On February 8, 2013, the DOJ settled with Holtzbrinck Publishers LLC, which does business as Macmillan. DOJ said that Apple and five publishers, including Macmillan, had conspired to “eliminate retail price competition, resulting in consumers paying millions of dollars more for their e-books.” The DOJ complaint said that Apple and the five publishers were unhappy with e-book prices and related low profit margins. The settlement requires that Macmillan immediately allow retailers to “lower the prices consumers pay for Macmillan’s e-books.” The DOJ is continuing its litigation against Apple.

Before entering into a contract with a competitor, ask Gayton Law to review the document to make sure that the agreement is not anti-competitive.

Contractor Fraud

The Justice Department announced on March 18, 2013, that executives at two Arlington, Virginia based businesses pled guilty to “fraudulently obtaining more than $31 million in government contract payments that should have gone to disadvantaged small businesses.” The court records do not identify the company names (they are identified as Company A and Company B), but the named conspirators are Keith Hedman of Arlington, Virginia and Dawn Hamilton of Brownsville, Maryland. According to the DOJ press release, Hedman formed a company with “an African-American woman who was listed as its president and CEO to enable the company to participate in the Small Business Administration’s (SBA) Section 8(a) program, which enables certain small businesses to receive sole-source and competitive-bid contracts set aside for minority-owned and disadvantaged small businesses.” He then formed another company to operate as a shell company in order to secure contracts for which the first company could not qualify. Dawn Hamilton was a “figure-head” owner who could qualify for 8(a) contracts due to her “Portuguese heritage and history of social disadvantage, when in reality the new company would be managed by Hedman and senior leadership” from Hedman’s other company. In 2011, Hedman withdrew $1 million from the second company’s account and distributed the funds in cash to co-conspirators. Hedman and Hamilton together brought in $31 million in government contracts. Hedman and Hamilton pled guilty to “major government fraud and face a maximum penalty of 10 years in prison and a multimillion-dollar fine. Hedman also pleaded guilty to conspiracy to commit bribery, which carries a maximum penalty of five years in prison. Hedman agreed to forfeit more than $6.3 million, and Hamilton agreed to forfeit more than $1.2 million.” Sentencing is scheduled for June 2013.

Have a government contract problem? Gayton Law can help!

Publications

In March 2012, Kendall-Hunt publishers released the 9th edition of Legal Aspects of Engineering by Cynthia Gayton. This book is used in several engineering courses and is a useful reference for anyone interested in contracting, intellectual property, engineering practice, and other general legal issues.

Thank you for reading!

The information contained in this post is for general guidance on matters of interest only. The application and impact of laws can vary widely based on specific facts. The information contained in this post should not be construed as a substitute for consultation with professional advisors. Certain links in this post connect to other websites maintained by third parties over whom Gayton Law has no control. Gayton Law makes no representations as to the accuracy or any other aspect of information contained in other websites.

© 2013 Gayton Law


[i] Interested in the events behind the Sherman Act? Consider watching “The Men Who Built America.”

Year End Tips for You and Your Business

November 20, 2012

Greetings!

It may seem to be a little early to think about 2013, but if you are anything like me, the weeks after Thanksgiving are full of hustle and bustle and finding time to organize paperwork and consider the coming year are not at the top of my preparation list. However, thinking about 2013 now will put you ahead of the curve, so here are five things to consider before you become overwhelmed with the holiday season.

1. Get your paperwork and documents in order early for taxes

At least twice a year, I conduct a seminar for creatives and small businesses on taxes. While I do not hold myself out as a tax expert, I can identify several tax issues that daunt creatives and other entrepreneurs. Paperwork is unavoidable, even in this digital age. Even more so as many, if not most, transactions are conducted online and physical receipts are becoming rare.

But an organized approach to your documents can save you money and time. Many creatives and other small businesses ask me about the likelihood of an audit. In my experience, it is hard to make an accurate prediction, but I can say with certainty that having the right documents to support your tax filing can save you a lot of grief even if you are audited.

Gayton law can help you decide which business entity is right for you. Please ask about our Business Entity Selection table.

2. Look for money on the table

You are busy. You have ordered supplies, hired contractors, made sales, etc., but have you gone back to check whether you have received all the services for which you paid? How about royalties? If you were offered a discount on a purchase, did you receive that discount? On the flip side, have you fulfilled all your obligations to a customer? In either circumstance, money may be left on the table waiting for you to pick up. If you were promised a discount or service, go back and review your agreements to see if you received these things. If you provide services or offer discounts, this is an opportunity to build better customer relationships by contacting them to see if your service met expectations and perhaps get more business.

If you are concerned about whether you have received the services requested at the price you paid, contact Gayton Law to conduct a contract audit for your business. If you have contracts that need to be revised to better reflect your business services, Gayton Law can help you update your contracts and make suggestions to improve your contractual relationships.

3. Update your media policies

Even a one person operation should have in place an information and document retention plan, especially when so much of this information is in virtual as well as physical form. Maintaining and keeping old and outdated documents not only clutters your hard drives, cloud drives and desk drawers, but unmanaged documentation may create legal vulnerabilities for your business. Creating policies about document retention which apply to both physical and virtual documentation, as well as email and social media communication is a crucial business practice.

Gayton Law can prepare document retention policies for your business.

4. Employees and Independent Contractor Agreements

Now may be the time to review your employee and independent contractor agreements, especially if existing contracts (even oral ones!) are several years old. Good agreements protect the business as well as your employees and independent contractors.

Gayton Law can review your current agreements and provide advice about whether an update will be advantageous to you and better protect your interests.

5. Annual Business Meetings and Corporate Governance

Even small businesses should take a moment to assess the previous year. Whether you are an LLC, corporation, partnership or a sole proprietor, there is value in setting aside a day or even a few days to look over your accomplishments and start outlining future goals. For those of you with LLCs, corporations and partnerships, your business documents typically require annual meetings. Although everything may be well, getting into the habit of holding annual meetings is a useful way to maintain good businessrecords, which will assist you in the future.

Gayton Law can prepare the documents you need for a small business enterprise, including bylaws and operating agreements as well as assist with corporate governance processes.

Knowledge Asset and Governance Management

For those of you investigating whether knowledge asset and governance management practices are in your future, any knowledge management (KM) plan should incorporate all of the above considerations. Please contact Gayton Law for information about how to include these practices into your KM plan.

Recent Publications

In March 2012, Kendall-Hunt publishers released the 9th edition of Legal Aspects of Engineering by Cynthia Gayton. This book is used in several engineering courses and is a useful reference for anyone interested in contracting, intellectual property, engineering practice, and other general legal issues.

Thank you for reading. Have a great holiday season!

The information contained in this website is for general guidance on matters of interest only. The application and impact of laws can vary widely based on specific facts. The information contained in this newsletter should not be construed as a substitute for consultation with professional advisors. Certain links in this newsletter connect to other websites maintained by third parties over whom Gayton Law has no control. Gayton Law makes no representations as to the accuracy or any other aspect of information contained in other websites.