New Louisiana Regulation Creates Safe Harbor For Certain Equity-Based Compensatory Plans of Privately-Held Companies

alan.berteau@keanmiller.com (Alan J. Berteau) — Fri, 21 Nov 2008 13:02:51 GMT

Offers and sales of “securities” must be registered unless there is an applicable exemption from the federal and state securities laws. The most commonly known exemption is the private placement exemption set forth in Regulation D promulgated by the Securities and Exchange Commission under the Securities Act of 1933 (and corresponding private placement exemptions under applicable state “blue sky” laws).

Regulation D was primarily designed to facilitate capital raising transactions, as opposed to employee stock option or stock purchase plans. Many people are unaware that when an employer (or controlling Shareholder) sells stock to an employee (even at a discount, or even if to an executive), such a sale is subject to the securities laws and applicable federal and state exemptions from registration must be found.

Federal Rule 701

In 1988, the SEC adopted Rule 701 which exempts from registration securities issued pursuant to a written compensatory employee benefit plan or written contract by a nonreporting (i.e., privately held) company. An employee benefit plan includes any purchase, savings, option, bonus, stock appreciation, profit sharing, thrift, incentive, pension, or similar plan. The participants in the plan (or party to the contract) must be employees, directors, general partners, trustees (if a business trust), officers, consultants, or advisers.

The plan or the contract setting forth the arrangement must be in writing and a copy must be given to the employees. The exemption is available only to the securities offered or sold by the issuer, which means the employee must find another exemption for their resale.

Rule 701 contains a limitation on aggregate sales price or amount sold in any consecutive 12-month period based upon the greatest of $1 million, 15 percent of the company’s assets, and 15 percent of the outstanding securities of the class.

Rule 701 also contains a disclosure requirement. The disclosure requirements apply only if the aggregate sales price or amount of securities sold during any consecutive 12-month period exceed $5 million. Subject to that qualification, an issuer relying upon Rule 701 is required to provide to investors, a reasonable period of time prior to sale, (1) a copy of the plan or contract; (3) a copy of the summary plan description required by ERISA or, if the plan is not subject to ERISA, a summary of the material terms of the plans; (3) information concerning risks associated with the securities sold; and (4) financial statements required by Part F/S of Form 1-A as of a date no more than 180 days prior to sale. Providing financial statements would be difficult for some issuers since, even though the statements do not have to be audited unless the issuer otherwise has audited statements available, they must be prepared in accordance with GAAP. It should err on the side of caution and make the required disclosures if there is a possibility that sales will exceed the $5 million limitation.

State Law

Until recently, Louisiana did not exempt sales of stock by employers to employees unless the sale was effected pursuant to a special type of stock option plan or pursuant to a stock purchase plan qualified under the Internal Revenue Code of 1986 (as amended), as Louisiana did not automatically exempt all types of transactions exempt under Federal Rule 701. Thus, unless one of the narrow Louisiana exemptions applied, privately held companies which desired to sell stock to Louisiana employees were forced to try to find another exemption, absent which they were forced to either (a) register the transactions with the Louisiana Commissioner of Securities, or (b) as was more likely the case, simply not proceed with the proposed sale to employees. However, the Louisiana Office of Financial Institutions recently promulgated a rule which provides that any transaction exempt under Federal Rule 701 is now exempt under Louisiana law. Louisiana Administrative Code, Title 10, Part XIII, § 801. A copy of the Rule can be found at www.ofi.louisiana.gov. The promulgation of this new rule has the effect of broadening the exemptions available to privately held companies which desire to sell stock to Louisiana employees.

For example, the sale of stock pursuant to a stock purchase plan (regardless of whether qualified under the Internal Revenue Code) or other written compensatory agreement which meets the requirement of Federal Rule 701 will now be exempt under Louisiana law. In addition, although Louisiana law has long exempted the issuance of stock options (and the exercise of such options) if issued pursuant to a plan which limited participation to employees only, Louisiana law did not exempt stock plans if the plan allowed for the issuance of options to non-employees (e.g., non-employee directors). Federal Rule 701 contains no such limitation with respect to option plans which authorize the issuance of options to non-employees and thus the new Rule seems to provide more flexibility for stock option plans as well.

Privately held companies which desire to sell stock or other equity ownership to one or more Louisiana employees should consider the securities laws implications of doing so before effecting any offers or sales.

Classmates are not looking for you

Tue, 18 Nov 2008 21:07:54 GMT

Wired notes that a California man filed a lawsuit against classmates.com for allegedly misrepresenting that former classmates were looking for him on line. According to the complaint, the plaintiff paid $15 for a subscription to the social networking site, which would allow him to contact those former school chums, only to learn that no former classmates had viewed his profile or had tried to contact him. The lawsuit seeks damages and equitable relief on behalf of a would be class of all similarly duped subscribers.

I suspect that whether the ads were puffery, whether plaintiff's reliance was reasonable, and whether classmates.com made intentional misrepresentations will be front and center in the lawsuit.

Department of Labor Issues New Family and Medical Leave Act Regulations

alan.berteau@keanmiller.com (Alan J. Berteau) — Tue, 18 Nov 2008 13:22:41 GMT

by A. Edward Hardin, Jr.

The U.S. Department of Labor has released the new Family and Medical Leave Act regulations. The new regulations will become effective January 16, 2009. The DOL issued its proposed new regulations in February 2008.

The DOL received over 20,000 comments regarding the proposed regulations, and the new regulations are over 700 pages long. But with an effective date in January 2009, employers do not have long to learn the in’s and out’s of the new regulations. Stay tuned as we review the new regulations too.

Trends and Issues in Online Behavioral and Other Technology-Driven Advertising - Seattle, WA

Tue, 11 Nov 2008 18:49:46 GMT

Andrew Lustigman will be presenting on online promotional marketing issues at the Law Seminars International's 17^th Annual Seattle Conference on New Developments in Technology Law. In his December 11, 2008 presentation, Andrew will discuss legal issues involving online sweepstakes and promotions, rules and business risk considerations, as well as provide an update on the SMS promotion litigation.

Andrew Lustigman named to 2008 New York Super Lawyers

Tue, 11 Nov 2008 18:42:31 GMT

Andrew Lustigman has been selected for inclusion in Super Lawyers - New York Metro 2008 in his practice area of Media and Advertising. Super Lawyers is a listing of outstanding professionals from more than 70 practice areas who have attained a high degree of peer recognition and professional achievement. More details can be found here.

Between Cher And Joe Montana - When Is It Okay To Use A Person's Image To Advertise A Protected Use Of That Image?

updates@antitrustlawblog.com (Sheppard Mullin) — Mon, 10 Nov 2008 20:53:33 GMT

In deciding whether the unauthorized use of a third party’s name, voice, likeness or persona (collectively, “Image”) violates such third party’s publicity rights, the first level of inquiry is whether the use is properly categorized as a “commercial” or a “non-commercial” use. If an Image is used without permission in a non-commercial or “newsworthy” context, such use is generally protected so long as the Image used is reasonably related to the aspect of the use that makes it newsworthy, and so long as less than the Image owner’s “entire act” is used.

Distinguishing between commercial and non-commercial uses is a context-specific inquiry, and describing the precedent on that issue is beyond the scope of this article. But where the underlying use is concededly non-commercial, such that permission does not need to be obtained from the person whose Image is depicted, this Adbriefs blog post briefly addresses whether the Image can also be used to advertise or promote the underlying use without giving rise to a valid right of publicity claim by the person whose Image is depicted.

In the context of print publishing, it is well established that an Image originally published in one issue of a periodical as part of a newsworthy item (and therefore concededly protected) may be republished subsequently in another medium as an advertisement for the periodical itself (but not on or as an advertisement for a collateral commercial product), without the consent of the person whose Image is depicted so long as the advertising does not falsely claim that such person is affiliated with or endorses the periodical. Analogously, if a video documentary contains a protected use of a person’s Image, there is little question that an advertisement for the documentary, containing a clip of that use would be permissible.

One of the leading cases in this area is Montana v. San Jose Mercury News, Inc., 40 Cal. Rptr. 2d 639 (1995), which held that the reproduction in poster form of actual newspaper pages containing plaintiff Joe Montana’s photograph and artist rendition of Montana’s likeness, and the subsequent sale of such posters, were protected by the First Amendment against Montana’s common law and statutory commercial misappropriation claims. Each of the newspaper pages had been reproduced in poster form within two weeks of its original printing in the newspaper and had been made available for sale to the general public. The defendant San Jose Mercury News had submitted undisputed evidence that it had sold the posters to advertise the quality and content of its newspaper. The posters were exact reproductions of pages from the paper. They contained no additional information not included on the newspaper pages themselves, and they did not state or imply that Montana endorsed the newspaper. In holding such use to be protected, the court explained:

“It is well established ‘a person’s photograph originally published in one issue of a periodical as a newsworthy subject (and therefore concededly exempt from the statutory prohibitions) may be republished subsequently in another medium as an advertisement for the periodical itself, illustrating the quality and content of the periodical, without the person’s written consent.’”

40 Cal.Rptr.2d at 642 (quoting Booth v. Curtis Publishing Company, 223 N.Y.S. 2d 737 (1962)). Citing precedent, the court then explained:

“Constitutional protection extends to the truthful use of a public figure’s name and likeness in advertising which is merely an adjunct of the protected publication and promotes only the protected publication. Advertising to promote a news medium, accordingly, is not actionable under an appropriation of publicity theory so long as the advertising does not falsely claim that the public figure endorses that news medium.”

Id.

The protection given to using another’s Image to advertise or promote the concededly protected speech in which such Image appeared has been held not to extend to advertising that suggests or implies endorsement of the underlying use by the person whose Image is depicted. A case brought by Cher against a magazine publisher illustrates this principle. Cher v. Forum Intern. Ltd., 692 F.2d 634 (9^th Cir. 1982). In that case, Cher was interviewed for an article that was originally intended for US Magazine. The article was published instead in Forum magazine, which used the interview (and Cher's Image), along with copy that read "So take a tip from Cher and hundreds of thousands of other adventurous people and subscribe to Forum", to advertise subscriptions to Forum magazine. Holding that the magazine had exceeded permissible boundaries, the Ninth Circuit explained that "Forum would have been entitled to use Cher's picture and to refer to her truthfully in subscription advertising for the purpose of indicating the content of the publication", but "Forum falsely proclaimed to the readers of its advertising copy that Cher 'tells Forum' things that she 'would never tell US'", and such conduct was deemed not protected. Id. at 639.

As virtual worlds and photo-realistic animation continue to evolve, the law on these issues will continue to search for controlling principles. The bedrock of that evolution, however, has already been laid.

Authored by:

Benjamin R. Mulcahy

(212) 332-3841

bmulcahy@sheppardmullin.com

OIG Releases Work Plan for 2009

alan.berteau@keanmiller.com (Alan J. Berteau) — Mon, 03 Nov 2008 14:14:35 GMT

by Clay J. Countryman

On October 1, 2008, the Department of Health and Human Services, Office of Inspector General (OIG) released its 2009 Work Plan. The OIG’s Work Plan describes the initiatives and priorities of the OIG for the 2009 fiscal year. The OIG will address these initiatives through audits, investigations, inspections, and health care industry guidance documents, as well as enforcement action under federal, civil and criminal statutes. The following are some of the important 2009 OIG initiatives for hospitals, physicians, and other health care providers:

2009 Hospital Initiatives:

• Provider-Based Status for Inpatient and Outpatient Facilities: The OIG will determine the potential impact on both the Medicare program and its beneficiaries of hospitals improperly claiming provider-based status for inpatient and outpatient facilities.

• Hospital Ownership of Physician Practices: The OIG will determine whether hospitals have met the Federal requirements to obtain the provider-based designation and access the impact of the increased cost of Medicare as a result of reimbursement under the Hospital Outpatient Prospective Payment System for physician services and provider-based practices. The OIG will also determine the extent to which hospital-owned physician practices without provider-based designation were improperly received reimbursement under the Hospital Outpatient Prospective Payment System.

• Inpatient Rehabilitation Facility Payments: The OIG will determine the extent to which coding errors for claims that should have been paid as transfers have resulted in inpatient rehabilitation facilities submitted improper claims under the Medicare payment system for inpatient rehabilitation facilities.

• Critical Access Hospitals: The OIG will determine whether critical access hospitals have met the critical access hospital designation criteria in the Social Security Act and Medicare Conditions of Participation, and whether payments made to critical access hospitals were made in accordance with Medicare requirements.

• Medicare Secondary Payor: The OIG will access the effectiveness of current procedures in preventing inappropriate Medicare payments for beneficiaries with other insurance coverage. For example, the OIG will evaluate procedures for identifying and resolving credit balance situations, which occur when payments from Medicare and other insurers exceed the provider’s charges or the allowed amount.

• Reliability of Hospital-Reported Quality Measure Data: The OIG will determine whether hospitals have implemented sufficient controls to ensure that their quality measurement data are valid.

• Payments for Diagnostic X-rays in Hospital Emergency Departments: The OIG will determine the appropriateness of payments for diagnostic x-rays and interpretations paid by Medicare Part B for diagnostic x-rays performed in hospital emergency departments.

• Serious Medical Errors (“Never Events”): The OIG will review the incidences of and payments for serious medical errors, known as “Never Events,” in the Medicare population. The Tax Relief and Health Care Act of 2006 requires the OIG to conduct a study of Never Events, examining types of events and payments by any party; the extent that which the Medicare Program paid, denied payment, or recouped payment for services furnished in connection with such events; and the extent to which beneficiaries paid for such services.

• Financial Status of Hospitals in the New Orleans Area: The OIG will review the financial status of hospitals in the New Orleans area in the aftermath of Hurricane Katrina to access the needs of hospitals and options for policymakers as the area rebuilds its health care infrastructure.

The following are some significant areas for physicians:

• Place of Service Errors: The OIG will determine whether physicians properly coded the places of service on claims for services provided in ambulatory surgical centers and hospital outpatient departments, as compared to services provided in a physician’s office.

• Evaluation in Management Services During Global Surgery Periods: The OIG will determine whether industry practices related to the number of evaluation and management services provided during the global surgery period have changed since the global surgery fee concept was developed in 1992. Under the global surgery fee concept, physicians bill a single fee for all of their services usually associated with a surgical procedure and related E&M services provided during the global surgery period.

• Outpatient Physical Therapy Services Provided by Independent Therapists: The OIG will review outpatient physical therapy services provided by independent therapists to determine if they are in compliance with Medicare reimbursement regulations.

• Medicare Payments for Colonoscopy Services: The OIG will determine whether Medicare payments to physicians for colonoscopy services were properly supported, billed, and paid in accordance with Medicare requirements.

• Physicians Medicare Services Performed by Non-Physicians: The OIG will examine the qualifications of non-physician staff in physician offices that perform “incident to” services and access whether these qualifications are consistent with professionally recognized standards of care.

• Appropriateness of Medicare Payments for Polysomnography: The OIG will examine the appropriateness of Medicare payments for sleep studies. The OIG will also examine the factors contributing to the rise in Medicare payments for sleep studies and access provider compliance with Federal program requirements.

• Geographic Areas with a High Density of Independent Diagnostic Testing Facilities: The OIG will review services and billing patterns in geographic areas with high concentrations of independent diagnostic testing facilities. The IDTF is a facility that performs diagnostic procedures and is independent of a physician’s office or hospital.

• Patterns Related to High Utilization of Ultrasound Services: The OIG will review services and billing patterns in geographic areas with high utilization of ultrasound services paid by Medicare.
• Medicare Billings with Modifier GUI: The OIG will review the appropriateness of provider’s use of Modifier GUI on claims for services that are not covered by Medicare.

The following are some of the OIG investigative initiatives involving other types of providers:

• Medicare Payments for Continuous Positive Airway Pressure Devices: The OIG will review the appropriateness of Medicare Part B payments for continuous positive airway pressure (CPAP) devices.

• Medicare Payments for Chemotherapy Drug Administration Services: The OIG will review Medicare payments for chemotherapy drug administration services pursuant to the Social Security Act, § 1832, that occur without corresponding chemotherapy administration drug claims.

• Ambulatory Surgical Center Payment System: The OIG will examine changes to the revised ambulatory surgical center payment system and the rate-setting methodology used to calculate ASC payment rates.

• Physician Referrals for Home Health Agency Services: The OIG will review Medicare payments for home health claims to identify potential aberrant billing by referring physicians.

• Skilled Nursing Facility Consolidated Billing: The OIG will review Medicare Part B claims submitted by suppliers for items, supplies, or services provided to beneficiaries during Part A Medicare-Covered skilled nursing facility stays.

A copy of the OIG Work Plan can be downloaded here.

New Louisiana Laws Related to Bidding on Public Works Contracts

steve.boutwell@keanmiller.com (Steven Boutwell) — Fri, 31 Oct 2008 00:41:41 GMT

By Brian W. Hightower

Following the 2008 Regular Session, Louisiana Governor Bobby Jindal signed House Bill No. 558 ("HB 558") into law. Prior to HB 558(Act No. 726), it was not infrequent that publicly bid contracts were not awarded because all bids exceeded the budgeted funds. Following the change in the law, La. R.S. 38:2212 now requires the designer to provide a cost estimate to the bidding entity prior to advertisement of the project, and states that in the event the designer's estimate for the project exceeds the funds budgeted by the public entity, the project shall not be advertised for bid.

Additionally, HB 558 also requires public entities which advertise bids for construction of public works projects to include an estimate of the allocated budget in the advertisement.

In related legislation, also signed into law by Gov. Jindal, House Bill No. 563 ("HB 563") the Division of Administration, Office of Facility Planning and Control, shall develop a bid form to be used by bidders on such public projects (Act No. 727). In a move that should help streamline the bid process and reduce continuing problems arising out of bid irregularities, the bid form shall only require the bidders to provide the information necessary to determine the lowest bidder. The form shall also request other enumerated information including but not limited to bond information, acknowledgment of addenda, base bids, and unit prices utilized (where applicable). Note that the new bid form legislation represented in HB 563 is not applicable to bid forms of the Department of Transportation and Development pursuant to Title 48 of the Louisiana Revised Statutes of 1950.

Both pieces of legislation appear to be attempts to not only streamline the bid process but also, to re-instill confidence in the contractors and general public in the bidding process as it relates to taxpayers' money invested into public works projects. Contractors, please be aware of these changes in the bidding process, and in the event that you plan to submit a bid for a contract, make sure the bid is being submitted on the correct form provided by the state.

User Generated Content Promotions: Balancing The Sponsor's Rights Against Risks

updates@antitrustlawblog.com (Sheppard Mullin) — Wed, 29 Oct 2008 17:28:47 GMT

INTRODUCTION

User generated content (“UGC”) has quickly come to dominate the current landscape of online promotions and marketing initiatives. As UGC is generally made available for public viewing without prior screening, its growing prevalence raises liability concerns when the UGC contains third party references or materials. Web site operators/promotion sponsors have broad protections under the Communications Decency Act (“CDA”) and the Digital Millennium Copyright Act (“DMCA”) against liability for infringing UGC, but that protection is not without limits.

Promotion sponsors often want the right to exploit certain UGC beyond posting it online in connection with the promotion. For example, a sponsor may want to incorporate artwork created by entrants in an online contest in a print or television advertisement for a new product or service. Similarly, video submissions entered into a contest tied to a motion picture’s theatrical release may make a great “extras” feature to include in the DVD release of the motion picture. To secure such rights, the official rules for UGC promotions generally accord the promotion sponsor a broad grant of rights to further exploit UGC submissions or require a transfer of ownership in the UGC to the promotion sponsor upon posting. These mechanisms enable the promotion sponsor to utilize the UGC more fully, if it so chooses, but these options also raise the question of whether a transfer of ownership in UGC affects the scope of protection offered to the promotion sponsor under the CDA and DMCA.

THE COMMUNICATIONS DECENCY ACT

Section 230 of the CDA (47 U.S.C. § 230(c)) sets out the general rule protecting web site operators from liability for UGC that violates a third party’s rights. It provides that “[n]o provider of an interactive computer service shall be treated as the publisher or speaker of any information provided by another information content provider.” Effectively, Section 230 establishes that interactive computer services are immune from publisher liability for content provided by third parties.

Notably, in determining whether a party is protected under the CDA, the literal language of Section 203 is simply concerned with who “provided” the information; that is, whether the information has been generated by the interactive computer service (e.g., the promotion sponsor) or whether it is UGC. The language of the CDA does not ask, or seem to care about, whether the promotion sponsor has acquired ownership of the UGC or merely a license to use it. As such, whether the UGC is ultimately licensed by a promotion sponsor or owned by a promotion sponsor does not appear to affect the scope of protection available under the CDA.

In a possible twist, that conclusion could be undermined if the promotional sponsor were to edit, modify or adapt the UGC to such an extent that the promotion sponsor becomes the information content provider. See, e.g., Fair Housing Council of San Fernando Valley v. Roommates.com, LLC, 521 F.3d 1157 (9th Cir. 2008). Another twist could arise if the persons who submit the UGC are deemed to be the mere agents of the promotion sponsor. In a relatively recent matter, the company that owns the Subway trademark filed a false advertising suit against the company that owns the Quiznos trademark for UGC that was submitted to an online contest that Quiznos sponsored. In the contest, entrants were reportedly instructed to submit videos depicting Quiznos sandwiches as superior to Subway sandwiches. Quiznos maintains that it is protected from liability under the CDA; Subway alleges that its false advertising claims are a type of intellectual property claim not covered by the CDA and that Quiznos should be held responsible for the allegedly false statements made about Subway in the various UGC submissions. The case, Doctor’s Associates Inc. v. QIP Holder LLC, is scheduled to go to trial in 2009.

THE DIGITAL MILLENNIUM COPYRIGHT ACT

The DMCA (17 U.S.C. § 512) provides a statutory safe-harbor against copyright infringement claims arising out of UGC residing on a web site at the direction of a user. Similar to the CDA, protection under the DMCA extends only to UGC, not to content that the promotion sponsor is responsible for creating or developing. In addition, if the promotion sponsor has the right and ability to control the UGC that appears on the web site, it risks losing DMCA protection if it receives a financial benefit directly attributable to the infringing activity.

The law is still unsettled as to what constitutes the right and ability to control infringing UGC as well as to what constitutes a direct financial benefit from UGC that is posted online in connection with promotions. But see Io Group, Inc. v. Veoh Networks, Inc., No. C06-03926 HRL, 2008, WL 4065872, at *16 (N.D. Cal. Aug. 27, 2008) (stating “the pertinent inquiry is not whether Veoh has the right and ability to control it [sic] system, but, rather, whether it has the right and ability to control the infringing activity.”). It is unlikely that UGC would be deemed to give a direct financial benefit to the web site operator/promotion sponsor, even though the content is posted on a page that also incorporates advertising that generates income for the web site operator/promotion sponsor. But see, e.g., Perfect 10, Inc. v. Cybernet Ventures, Inc., 213 F.Supp.2d 1146 (C.D. Cal. 2002) (subscription fees generated by visitors to a web site featuring infringing content constitute a direct financial benefit). Similarly, it is unlikely that simply using UGC in connection with an online promotion that is intended as a marketing tool for a product or service would be deemed to be a direct financial benefit for the web site operator/promotion sponsor, even though the promotion is designed to lead to increased sales. But it could be more difficult to disclaim a direct financial benefit from infringing UGC in those scenarios if ownership of that UGC was transferred to the web site operator/promotion sponsor when it was submitted to or posted on the web site.

CONCLUSION

In the interest of maintaining the ability to seek protection under the CDA and DMCA for claims arising from UGC, it may be advantageous for the promotion sponsor to obtain a license from the party who creates and submits the UGC to exploit that UGC, rather than obtaining outright ownership of the UGC. Outright ownership of infringing UGC that has been posted in connection with an online promotion could arguably undermine a sponsor’s ability to successfully argue under the DMCA that it has no right or ability to control the UGC that is posted or that it has derived no direct financial benefit from that UGC. Conversely, acquiring outright ownership of UGC would not seem to affect whether, in the first instance, the UGC was “provided by another information content provider” under the CDA.

Authored by:

Benjamin R. Mulcahy

(212) 332-3841

bmulcahy@sheppardmullin.com

and

Jessica Nickelsberg

(212) 332-3604

jnickelsberg@sheppardmullin.com

IRS Requires Employer Identification Numbers for Disregarded Entities Beginning in 2009

steve.boutwell@keanmiller.com (Steven Boutwell) — Mon, 27 Oct 2008 20:01:55 GMT

By Kevin C. Curry

Historically, the IRS has said that a disregarded entity could (and maybe should) use the owner's taxpayer identification number for income and other tax purposes. For employment tax reporting, the IRS issued Notice 99-6, 1999-1 CB 321 , which said that employment taxes for employees of a disregarded entity could be reported by a disregarded entity in one of two ways:

(1) Calculation, reporting, and payment of all employment tax obligations with respect to employees of a disregarded entity by its owner (as though the employees of the disregarded entity are employed directly by the owner) and under the owner's name and taxpayer identification number; or

(2) Separate calculation, reporting, and payment of all employment tax obligations by each state law entity with respect to its employees under its own name and taxpayer identification number.

Beginning next year, disregarded entities with employees must have their own employer identification numbers (EIN's) for employment tax purposes. The IRS has issued final regulations providing that for wages paid on or after Jan. 1, 2009, a disregarded entity is treated as a separate entity for purposes of employment taxes and related reporting requirements. Under the final regulations, the separate entity is treated as a corporation for purposes of employment taxes and related reporting requirements. (The regs also treat disregarded entities as separate entities for certain excise taxes, effective for liabilities imposed and actions first required or permitted in periods beginning on or after Jan. 1, 2008). ( Reg. § 1.1361-4(a)(7) , Reg. § 301.7701-2(c)(2) ) . Under the final regulations, an owner of a disregarded entity treated as a sole proprietorship is subject to self-employment taxes. ( Reg. § 301.7701-2(c)(2) ) .

The regulations provide the following example:

(i) LLCA is an eligible entity owned by individual A and is generally disregarded as an entity separate from its owner for Federal tax purposes. However, LLCA is treated as an entity separate from its owner for purposes of subtitle C of the Internal Revenue Code. LLCA has employees and pays wages as defined in sections 3121(a), 3306(b), and 3401(a).

(ii) LLCA is subject to the provisions of subtitle C of the Internal Revenue Code and related provisions under 26 CFR subchapter C, Employment Taxes and Collection of Income Tax at Source, parts 31 through 39. Accordingly, LLCA is required to perform such acts as are required of an employer under those provisions of the Internal Revenue Code and regulations thereunder that apply. All provisions of law (including penalties) and the regulations prescribed in pursuance of law applicable to employers in respect of such acts are applicable to LLCA. Thus, for example, LLCA is liable for income tax withholding, Federal Insurance Contributions Act (FICA) taxes, and Federal Unemployment Tax Act (FUTA) taxes. See sections 3402 and 3403 (relating to income tax withholding); 3102(b) and 3111 (relating to FICA taxes), and 3301 (relating to FUTA taxes). In addition, LLCA must file under its name and EIN the applicable Forms in the 94X series, for example, Form 941, “Employer's Quarterly Employment Tax Return,” Form 940, “Employer's Annual Federal Unemployment Tax Return;” file with the Social Security Administration and furnish to LLCA's employees statements on Forms W-2, “Wage and Tax Statement;” and make timely employment tax deposits. See §§31.6011(a)-1, 31.6011(a)-3, 31.6051-1, 31.6051-2, and 31.6302-1 of this chapter.

(iii) A is self-employed for purposes of subtitle A, chapter 2, Tax on Self-Employment Income, of the Internal Revenue Code. Thus, A is subject to tax under section 1401 on A's net earnings from self-employment with respect to LLCA's activities. A is not an employee of LLCA for purposes of subtitle C of the Internal Revenue Code. Because LLCA is treated as a sole proprietorship of A for income tax purposes, A is entitled to deduct trade or business expenses paid or incurred with respect to activities carried on through LLCA, including the employer's share of employment taxes imposed under sections 3111 and 3301, on A's Form 1040, Schedule C, “Profit or Loss for Business (Sole Proprietorship).”

These regulations do not change the fact that a disregarded entity will continue to be disregarded for other Federal tax purposes.

FTC Delays Red Flags Enforcement until May 1, 2009

Mon, 27 Oct 2008 16:42:47 GMT

The Federal Trade Commission announced that it will suspend enforcement of the new "Red Flags Rule" until May 1, 2009, to give creditors and financial institutions additional time in which to develop and implement written identity theft prevention programs. Under the Red Flags Rules, covered companies, which includes utilities and telecommunications companies, are required to develop and implement written "identity theft prevention programs." The programs must provide for the identification, detection, and response to patterns, practices, or specific activities - known as "Red Flags" - that could indicate identity theft. Enforcement was slated to begin on November 1, 2009, but has been delayed because of industry confusion and uncertainty.

United States Fifth Circuit Holds that Willful Concealment of a Prior Medical Condition From a Jones Act Employer May Constitute Contributory Negligence

steve.boutwell@keanmiller.com (Steven Boutwell) — Wed, 22 Oct 2008 20:26:38 GMT

By Clay Cosse

While a Jones Act seaman’s willful concealment of a pre-existing medical condition has long been held to preclude a seaman’s recovery for maintenance and cure benefits, willful concealment has never acted as a bar to recovery under the Jones Act. The Fifth Circuit’s recent ruling in Leroy Johnson v. Cenac Towing, Inc. provides both comfort and caveat to the Jones Act employer. [See 2008 WL 4330553 (5th Cir. 2008)].

The comfort: the seaman who willfully conceals a pre-existing medical condition from his employer does so to his own peril—if his concealment causes the seaman to suffer a re-injury, the seaman will be precluded from recovering maintenance and cure, and will see his Jones Act claim reduced in proportion to the percentage of fault attributable to his concealment. The caveat: insurance benefits received by a Jones Act seaman under an employer financed health insurance plans that provide coverage only for non-work-related injuries are “collateral source” payments and will not reduce the seaman’s recovery from his employer for Jones Act negligence.

Still, the Fifth Circuit notes: "If Cenac had established a health insurance plan that covered both work-related and non-work-related injuries and contained specific language requiring that benefits received under the plan be set-off against a judgment adverse to the tortfeasor [Jones Act employer], then a court might find that the plan was intended to indemnify the tortfeasor from liability." [See Allen v. Exxon Shipping Co., 639 F.Supp. 1545, 1549 (D.Me. 1986).]

Leroy Johnson, a Jones Act Seaman employed as a tankerman by Cenac Towing, injured his back while carrying a 175-pound cross-over hose aboard a Cenac vessel. Johnson had applied for employment with Cenac on two occasions. Both times, Johnson indicated that he had never suffered any on-the-job injuries and that he did not have any physical conditions that might interfere with or hinder his job performance. In connection Cenac’s pre-employment physical examinations, Johnson completed medical history questionnaires. Both times, Johnson indicated that he had never hurt his back and had never received disability compensation. Yet Johnson had suffered work-related injuries on two occasions prior to his employment with Cenac. In 1994, Johnson sustained neck and back injures that left him disabled for 10 months; Johnson underwent neck surgery for these injuries. In 2001, Johnson re-injured his back and was disabled for 13 months; Johnson received steroid injections for the re-injury.

Johnson then injured his back in 2005 while working for Cenac. Johnson applied for and received insurance benefits for his back injury under an employer financed insurance plan, which provided coverage only for non-work-related injuries.

District Judge Sarah Vance denied plaintiff maintenance and cure benefits on the grounds that plaintiff had willfully concealed his pre-existing medical conditions. Judge Vance awarded plaintiff damages under the Jones Act. While Judge Vance found the plaintiff’s injuries to be aggravations of his pre-existing conditions, the Fifth Circuit found that Judge Vance’s ruling was unclear as to whether the plaintiff had been contributorily negligent by willfully concealing his prior injuries from Cenac. The Fifth Circuit remanded the case to the District Court to determine whether plaintiff had been contributorily negligent in “exposing himself to heavy labor with a weakened back.” The Fifth Circuit’s decision did not make a determination on Johnson’s contributory negligence.

Some Rights Reserved - Copyright Terminations Coming Into Clearer Focus

updates@antitrustlawblog.com (Sheppard Mullin) — Tue, 21 Oct 2008 20:36:14 GMT

"Seventy years after Eric Knight first penned his tale of the devoted Lassie who struggled to come home, at least some of the fruits of his labors will benefit his daughter." So said the U.S. Court of Appeals for the Ninth Circuit in Classic Media Inc. v. Mewborn on July 11, 2008, when it held that Eric Knight’s daughter had duly terminated the motion picture, television and other rights that had been granted in the "beloved children’s story ‘Lassie Come Home’", which her father first published in 1938. In so holding, the Ninth Circuit significantly narrowed its precedent-setting 2005 copyright termination opinion relating to "Winnie the Pooh," which held that copyright grantees could renegotiate their terminable grants and, thereby, avoid termination under Section 304 of the Copyright Act. Offering some hope for grantees seeking to renegotiate their terminable copyright grants, the Classic Media decision left the door slightly ajar to the possibility that a renegotiation did not have to occur during the actual five-year termination window but could instead occur at any time during the longer statutory notice period. But just one month later the Second Circuit kicked that door wide open in an opinion relating to various novels and other works written by John Steinbeck. Until there is a case resolving the issue in the Ninth Circuit or in the United States Supreme Court, copyright grantees seeking to renegotiate terminable grants should consider taking advantage of the precedent in the Second Circuit that now appears to be more tolerant of renegotiations on this issue by designating New York choice of law and venue in their renegotiated contracts. The following article by Ben Mulcahy was originally published in The New York Law Journal. Click here to continue reading, or visit The New York Law Journal.

Author's Note: A footnote was inadvertently left of the version of this article that went to press. That footnote was in reference to the termination notice period for Superman opening in 1970. The omitted footnote read "These dates were chosen to mirror the dates in the Siegel case that follows, and the 1970 date is when the notice window would have opened if there had been a termination right that year, but the Copyright Act was amended in 1976, effective 1978, and there was no termination right prior to that."

Authored by:

Benjamin R. Mulcahy

(212) 332-3841

bmulcahy@sheppardmullin.com

Some Rights Reserved - Copyright Terminations Coming Into Clearer Focus

updates@antitrustlawblog.com (Sheppard Mullin) — Tue, 21 Oct 2008 20:36:14 GMT

The following article by Ben Mulcahy was originally published in The New York Law Journal. To read the article please click here, or visit The New York Law Journal.

Authored by:

Benjamin R. Mulcahy

(212) 332-3841

bmulcahy@sheppardmullin.com

Federal Court of Appeals Absolves Louisiana Hospital of Liability in Failure to Report Physician Impairment While on the Medical Staff

alan.berteau@keanmiller.com (Alan J. Berteau) — Mon, 20 Oct 2008 14:25:38 GMT

by Linda G. Rodrigue

In May of this year, the United States Court of Appeals for the Fifth Circuit absolved Lakeview Regional Medical Center (“Lakeview”) of any liability, and reversed a damage award against it, in a lawsuit that had been brought against Lakeview and a physician group practice by Kadlec Medical Center, a hospital located in the state of Washington. Kadlec sued Lakeview and a physician practice for over $8 million in damages, on the grounds that Kadlec was forced to settle a malpractice lawsuit due to the negligence of an anesthesiologist who was impaired at the time of the malpractice. Kadlec’s claim was that Lakeview and the physician group practice knew of the physician’s impairment when he was on the medical staff of Lakeview, were asked about his performance before he was credentialed at Kadlec, and did not disclose the prior impairment and disciplinary action that had resulted.

The Fifth Circuit affirmed a lower court decision that the practice group, Lakeview Anesthesia Associates, APMC, and some of the individual physicians in the group practice, liable for their failure to provide full disclosure to Kadlec upon its request to receive a recommendation from the group regarding the physician’s placement on the Kadlec medical staff. Factually, the physician group, when asked to comment on the physician’s performance, not only responded in writing, but also gave positive remarks about the physician, despite being aware of his impairment and its impact on his ability to practice. Lakeview, on the other hand, responded to Kadlec’s request by simply stating that the number of requests for information, such as Kadlec’s request, was voluminous and, due to inability to have time to respond, Lakeview simply gave the starting and ending dates of the physician’s tenure on the medical staff of Lakeview. Kadlec did not ask for anything further from Lakeview.

Although a federal jury had found Lakeview 25% at fault for its failure to disclose the physician’s problems while on the medical staff due to his impairment, the Fifth Circuit reversed this finding, on the grounds that under Louisiana law, the hospital did not have a duty to disclose information about the physician. This was because the hospital had no special relationship or pecuniary interest in the transaction. The court made clear, however, that had the hospital decided to voluntarily disclose information even absent a legal duty, then its voluntary disclosure would have created a duty to disclose completely and honestly. Because the hospital did not incur the duty, it had no obligation to provide further information regarding the physician.

The import of this decision is that under Louisiana law there may be a duty to speak if one has a special relationship or a pecuniary interest in the transaction at issue. Even if there is no such special relationship or pecuniary interest, a party who voluntarily chooses to respond to an inquiry assumes a duty to respond accurately and completely.

The Kadlec decision should be read very carefully, as it does not appear to provide a “sword” to use against others under the theory that failure to voluntarily give negative information regarding a physician might result in liability. That is not the import of Kadlec. The import of Kadlec is that when asked, a party who has no duty to speak need not speak at all. If the party has a duty to speak, or if the party voluntarily incurs a duty to speak, then the party must do so in such a way as to not mislead, misrepresent, or give less than all pertinent information. This is all that the Kadlec decision stands for.

The Fifth Circuit decision is Kadlec v. Lakeview Anesthesia Associates, 527 F.3d 412 (5th Cir. 2008).

The National Flood Insurance Program's S.F.I.P. Proof of Loss Requirement: A Trap for the Unwary

steve.boutwell@keanmiller.com (Steven Boutwell) — Thu, 16 Oct 2008 18:01:06 GMT

By Clay Cosse

In the aftermath of Hurricanes Gustav and Ike, homeowners filing flood insurance claims under the National Flood Insurance Program’s (“NFIP’s”) Standard Flood Insurance Policy (“SFIP”) should exercise extreme caution to avoid running afoul of the SFIP’s Proof of Loss requirement.

SFIP policies require that insureds asserting a claim file a Proof of Loss within 60 days, subject to such extensions as FEMA may approve, listing “the actual cash value of each damaged item of insured property, the amount of damage sustained, and the amount claimed as due under the policy to cover the loss."

Courts have consistently enforced this requirement in an extremely strict and severe manner, holding that failure to timely file a Proof of Loss complying with the regulatory requirements is a valid basis for denying an insured's claim. If the policyholder does not strictly comply with the Proof of Loss requirement, the policyholder may not file suit to recover under its SFIP. That the insured's losses are covered under the policy is irrelevant. The conduct of the insurer/adjuster in adjusting the claim is irrelevant. Timely filing a proper proof of loss is essential to filing suit under the SFIP.

Proofs of Loss must be submitted within sixty days after the loss, or within any extension authorized by FEMA. On September 19, 2008, FEMA granted an extension of the period for filing Proofs of Loss for SFIP claims arising out of flood damages sustained in Hurricanes Gustav and Ike. Due to the recent flooding associated with Hurricanes Gustav and Ike, an extension of the 60-day period within which a proof of loss must be submitted to the Insurer has been granted. FEMA has authorized the extension of this period by 120 days.

This extension applies to all claims for flood-insured buildings in the States of Alabama, Arkansas, Louisiana, and Mississippi damaged by flood resulting from Hurricane Gustav (dates of loss August 31, 2008, and continuing); and in the States of Alabama, Arkansas, Florida, Illinois, Indiana, Kansas, Kentucky, Louisiana, Michigan, Mississippi, Missouri, Ohio, Oklahoma, Tennessee, and Texas damaged by flood resulting from Hurricane Ike (dates of loss September 13, 2008, and continuing). The extension applies whether the SFIP was issued directly by the NFIP Servicing Agent or through one of the private insurance companies issuing flood insurance coverage under the Write Your Own ("WYO") Program.

An NFIP policyholder who incurred a Gustav-related flood loss on August 31, 2008, would normally have until October 30, 2008, to submit the proof of loss. With the extended deadline, the same policyholder now has until February 27, 2009, to submit the proof of loss. Similarly, an NFIP policyholder who incurred an Ike-related flood loss on September 13, 2008, would normally have until November 12, 2008, to submit the proof of loss. With the extended deadline, the same policyholder now has until March 12, 2009, to submit the proof of loss. In either case, eligible policyholders will be allowed a total of 180 days to submit the proof of loss.

The formal requirements for filing a Proof of Loss are set forth in Article VII(J)(4) of the SFIP. Within 60 days after the loss, insureds are directed to send a proof of loss, which is a statement of the amount claimed under the policy signed and sworn to, and which furnishes the following information:

The date and time of loss;
A brief explanation of how the loss happened;
Interest (for example, “owner”) and the interest, if any, of others in the damaged property;
Details of any other insurance that may cover the loss;
Changes in title or occupancy of the covered property during the term of the policy;
Specifications of damaged buildings and detailed repair estimates;
Names of mortgagees or anyone else having a lien, charge, or claim against the insured property;
Details about who occupied any insured building at the time of loss and for what purpose; and
The inventory of damaged personal property described

The insurance carrier-whether it be the federal government or the private WYO carrier-may hire an adjustor to investigate the SFIP claim. The adjustor may help the insured complete the Proof of Loss form. Be forewarned, however-neither the WYO carrier nor the adjustor is authorized to waive the proof of loss requirement. There are numerous SFIP cases in which WYO carriers notified SFIP policyholders verbally or in writing that the proof of loss requirement was waived, but in which coverage was nonetheless denied for failure to comply with the Proof of Loss requirement. For example, in Wright v. Allstate Ins. Co., coverage was denied for failure to comply with the proof of loss requirement despite a letter from the WYO carrier stating that “we are accepting this proof in compliance with the policy conditions concerning the filing of a Proof of Loss.”

Simply put, the policyholder will be held to the terms of the SFIP and its Proof of Loss requirement regardless of statements to the contrary by the WYO carrier or claims adjustor. Only FEMA may waive the proof of loss requirement. No matter what they say or do, neither the WYO carrier nor the adjustor may waive the proof of loss requirement. The SFIP policyholder may not rely on spoken or written waivers of the proof of loss requirement by any party other than FEMA.

Finally, if you are uncertain about whether the September 19, 2008 FEMA extension of the Proof of Loss deadline applies to your claim, or if you are uncertain as to how to comply with the Proof of Loss requirements, you should seek the advice of an attorney.

Three Things Every Contractor Should Know Before Signing That Construction Contract for Building Remediation

alan.berteau@keanmiller.com (Alan J. Berteau) — Mon, 13 Oct 2008 14:14:56 GMT

by G. Trippe Hawthorne and Mark D. Mese

In a perfect world, Contractors would only do business with owners, designers, subcontractors, and material suppliers that they know well and trust. No surprises, misunderstandings, or disasters.

In this world, doing business is risky. The trick is to identify and analyze as many of the risks as you can, so that when you take a risk, you know what the risk is, and have some ideas about how to deal with it, should things go badly.

Here are three risks that you always want to identify and analyze:

1. Who is paying for the work and what is the payment mechanism? In other words, if you are doing remediation, are you going to be paid by the property owner, the building tenant, their insurer, their bank? If the person you have contracted with can’t or won’t pay you, do you have a mechanism of getting funded from the funding source?

2. What is the history of the building where you are working? Are those asbestos tiles? Is that mold in the corner? The last thing you need is to get into a project and be shut down because you are not licensed to do critical path work.

3. What is the building user’s business? What happens in the building? If you are contracting with the building owner, does the prime tenant’s business keep you from working 9:00-5:00 Monday to Friday? Are there medical records or other confidential documents for which special accommodations must be made? Is there sensitive equipment that your demolition crew needs to know about?

It is hard enough just doing the work that you think you are agreeing to do. Make sure that you are not taking on other problems too.

Fri, 10 Oct 2008 21:12:36 GMT

Wells Fargo/Wachovia Combination Receives Premerger Clearance

This posting was written by Jeffrey May, Editor of CCH Trade Regulation Reporter.

Wells Fargo & Company’s acquisition of Wachovia Corporation will not be challenged by the federal antitrust agencies.

On October 9, the parties received early termination of the report-and-wait period under the Hart-Scott-Rodino Act. Wells Fargo announced the same day that it was proceeding with the combination, after Citigroup, Inc. ended negotiations with Wachovia.

Wells Fargo is seeking expedited approval of the transaction from the Federal Reserve Board. The Federal Reserve said in an October 9 statement that it would “immediately begin consideration of the filings.”

Wells Fargo and Wachovia announced on October 3 that they had entered into a definitive merger agreement for the companies, including all of Wachovia’s banking operations in a whole company transaction. The parties said that the transaction required no financial assistance from the Federal Deposit Insurance Corporation (FDIC) or any other government agency.

Citigroup Offer

The Wells Fargo/Wachovia deal came while a Citigroup offer for the ailing Charlotte, North Carolina-based bank was pending.

In an October 3 news release, Citigroup called Wachovia's agreement with Wells Fargo a clear breach of their exclusivity agreement, which prohibited Wachovia from entering into a transaction with another party.

On September 29, Citigroup had announced that it reached an agreement–in-principle to acquire all of the banking subsidiaries of Wachovia. Citigroup said that it intended to acquire more than $700 billion of assets of Wachovia's banking subsidiaries, and related liabilities and that the FDIC would provide loss protection in connection with approximately $312 billion of mortgage-related and other Wachovia assets. The deal was “supported by all of the federal banking agencies and the Secretary of the Treasury, after consultation with the President,” according to Citigroup.

Citigroup has said that it will not ask that the Wells Fargo-Wachovia merger be enjoined. However, it plans to pursue claims of breach of contract and for tortious interference with contract against Wachovia and Wells Fargo and their officers, directors, advisors.

Thu, 09 Oct 2008 22:26:00 GMT

Data Brokers Settle Charges of Selling Private Phone Records

This posting was written by Thomas A. Long, Editor of CCH Privacy Law in Marketing.

Web-based “data broker” businesses and their principals have settled charges by the Texas Attorney General that they violated the Texas Deceptive Trade Practices Act by fraudulently marketing consumers’ private telephone records, it was announced on September 25.

Under an agreed final judgment, the companies—USA Skiptrace, AMS Research Services, Inc., and Worldwide Investigations, Inc.—and their principals are permanently prohibited from obtaining and selling consumers’ private telephone records.

According to Texas Attorney General Greg Abbott, USA Skiptrace, for a fee of $125, would obtain a person’s phone record history, including the number of calls made and received, the duration of calls, dates and times, and other private information.

The purchaser of such information was required to fill out a form on USA Skiptrace’s website and to pay for the service with a credit card. The purchaser provided the cell phone number, name, and address of the person whose phone records were being sought. AMS Research Services Inc. then notified the purchaser via e-mail that the order would be fulfilled between one and six business days.

“The sale of the personal cell phone information is an outrageous invasion of personal privacy that will not be tolerated in Texas,” Abbott said. “Today’s judgment permanently bans these defendants from peddling customer phone records without prior consent.”

USA Skiptrace was enjoined from representing that it can obtain private phone records without first obtaining a lawfully-issued subpoena or receiving prior consent from the individual or company.

The defendants were also barred from employing “pretexting” practices to obtain personal phone information, such as posing as the person whose records are being requested or claiming to speak for that person as his or her representative. The corporate defendants were ordered to pay $150,000 in civil penalties, with their principals also responsible for a separate fine of $2,500.

A news release on the case appears here on the Texas Attorney General’s website. The agreed final judgment and permanent injunction in State of Texas v. Strange appears at CCH Privacy Law in Marketing ¶60,251.

Wed, 08 Oct 2008 23:15:59 GMT

iPhone Purchasers’ Monopoly Claims Withstand Apple’s Motion to Dismiss

This posting was written by Jeffrey May, Editor of CCH Trade Regulation Reporter.

Last week, the federal district court in San Jose, California, denied Apple, Inc.’s motion to dismiss antitrust claims brought by nine consumers from California, Washington, and New York who purchased the iPhone. The court ruled that the consumers sufficiently alleged Sherman Act, Sec. 2 claims against Apple and AT&T Mobility, LLC (ATTM)—the exclusive cellular phone service provider to iPhone customers. The plaintiffs seek to represent a nationwide class.

Each plaintiff purchased one or more iPhones and each executed a two-year contract with ATTM. Unbeknownst to the purchasers, Apple and ATTM had entered into a five-year agreement, under which ATTM would serve as the only authorized provider of wireless voice and data services for iPhones in the United States. As a result, customers allegedly would be forced to renew with ATTM, despite initially being required to agree to only a two-year contract.

The complaining consumers also alleged that Apple issued an “upgraded” version of the iPhone operating software to retaliate against purchasers who installed unapproved third-party applications or used the SIM cards of wireless providers other than ATTM.

Apple attempted to disclaim warranty liability for any damage to consumers’ iPhones as a result of installing the new software. The iPhones of some consumers who installed the software were purportedly damaged. Based on this conduct, the consumers alleged violations of the Magnuson-Moss Warranty Act (MMWA).

Relevant Market, Market Power

The court ruled that the iPhone purchasers sufficiently alleged two relevant markets: (1) an aftermarket in iPhone voice and data services and (2) an aftermarket in applications for the iPhone. A legally cognizable aftermarket in a single brand’s products can exist, even if that market is created by a contractual relationship, as long as the aftermarket was “wholly dependent” on the primary market, according to the court. The consumers alleged aftermarkets that would not have existed without the primary market for iPhones. Thus, they were “wholly derivative from and dependant on the primary market.”

The consumers alleged that they were locked into using the provider after the expiration of their initial two-year service contracts by the undisclosed agreement between ATTM and Apple. Apple unsuccessfully argued that there was no aftermarket for iPhone applications because (1) Apple did not sell or make any add-on applications and (2) the array of differing applications for the iPhone could not possibly make up a single relevant market.

The iPhone purchasers also sufficiently alleged market power and monopolization in these aftermarkets. A claim of market power could not arise solely from contractual rights that consumers knowingly and voluntarily gave to the defendant. However, there was a dispute as to whether the consumers knowingly placed Apple in a monopoly position. Such a dispute was better suited for resolution at a later stage of the litigation, in the court’s view.

Arbitration Agreements

An arbitration agreement did not require the iPhone consumers to arbitrate their antitrust, Magnuson-Moss Warranty Act, and consumer protection claims, the court ruled. The nine named plaintiffs were residents of California, Washington, and New York, and they successfully argued that the arbitration agreement was procedurally and substantively unconscionable and therefore unenforceable under California, Washington, and New York law.

The customers did not see the arbitration agreement until they purchased their new iPhone, connected to the Internet, and then were presented with the terms of service.

Moreover, the Federal Arbitration Act did not preempt application of state unconscionability law to the Arbitration Agreement. Application of general state unconscionability laws to the arbitration agreement neither conflicted with an express federal law, nor stood as an obstacle to the accomplishment of a federal objective to encourage arbitration, according to the court.

Magnuson-Moss Warranty Act Claim

The iPhone purchasers could proceed with claims under the MMWA against Apple for unlawful conditioning of the iPhone warranty on consumers’ use, in connection with the iPhone, of products and services “approved” by Apple. Apple allegedly refused to honor the warranties of customers who used iPhone applications and cellular service not approved by Apple.

The fact that Apple issued a press release in advance of releasing the “upgraded” version of the iPhone operating software that disclaimed warranty liability for damage resulting from installation of the new version was “of no moment to the permissibility of Plaintiffs’ claims” because such a later disclaimer ran afoul of the MMWA's single document rule. The MMWA requires warrantors to disclose warranty terms in a single document, the court explained.

The October 1, 2008, decision, In re Apple & AT&TM Antitrust Litigation, No. C 07-05152 JW, will appear in CCH Trade Regulation Reporter.

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