• Spamhaus, Cyberbunker, DDos, and the Battle Over the Internet

    You may have noticed it over the past few days – your Internet service is slow. You are experiencing DDoS – distributed denial of service.  DDoS attacks send dummy traffic to certain web servers with the result being that those who are legitimately trying to access the site will struggle.  Experts compare it to being stuck in a traffic jam when no one can move or the movement is very slow – one car at a time as movement comes through inches, not feet.

    What you may not understand is why you are living through such a cyberspace traffic jam. Security experts have called this slow-down “the biggest cyber-attack in history.” And at the root of it is a fight over spam.  Spamhaus, a Dutch company that fights spam added Cyberbunker to its so-called blacklist.  Spamhaus’s blacklist consists of companies e-mail providers use as a screen to weed out spam. Cyberbunker is a web-hosting service that, by its own description, will host any site except “child pron and anything related to terrorism.” AS an aside, Cyberbunker got its name from its building – it occupies a former NATO bunker. Cyberbunker wants to spam and Spamhaus wants to protect e-mail servers from spam so there is a war in cyber space.

    The DDoS began on March 19th, and employ botnets that spray a site with activity.  In this round, a Silicon Valley security firm has found that the data stream being used for DDoS has grown to 300 billion bits per minute. Spamhaus has experienced the brunt of the attacks and those from Cyberbunker explain the reasons for their online sabotage, “Nobody ever deputized Spamhaus to determine what goes and does not go on the Internet.” John Markoff and Nicole Perlroth, “Dispute on Spam Stirs Big Assault on the Internet,” New York Times, March 27, 2013, p. A1.

    The attacks illustrate the vulnerability of the Internet’s basic structure of the Domain name System – DNS.  The domain name, such as Facebook.com, is similar to a listing in a telephone book.  The Internet translates the name into numbers and then sends the traffic to the domain.  However, with the release of the botnets, the Cyberbunker folks have been able to inundate the servers that direct the Internet traffic with data that overloads the system.  The problem cannot be fixed by any repair to the internet because the problem is the basic structure of the Internet.  There are some experts who disagree -- you can watch a discussion here. The only fix is to find who is doing the bombarding and arrest them.  The difficulty is tracking down who is doing it, where they are, and finding a legal basis for arresting them for this international activity.  Cyberbunker sources say Dutch authorizes have tried to storm the bunker but have been unsuccessful.

    That we are approaching two weeks for the length of the attacks indicates how difficult that task can be. This combination of cyberlaw with international law makes for a legal no-man’s land in an area of commerce that cannot afford a slow-down. The solution may be negotiations on hwo to handle spam.

    Discussion Starters

    1.     How is the slow-down accomplished and why?

    2.    What are the legal challenges in stopping this kind of a slow-down?

  • Hackers Face Stiff Penalties under Computer Fraud and Abuse Act

                                   

    The Deputy Social Media Editor at Reuters, an international news agency, has been charged with assisting computer hackers.  Specifically, Matthew Keys, 26 years old, is accused of violating the Computer Fraud and Abuse Act (CFAA) while employed at a previous job, a Sacramento-based television station.  Allegedly he gave a user name and password to hackers, enabling them to gain access to online data bases of the station’s parent company which owned a newspaper.  The intruders then changed a headline from “Pressure Builds in House to pass Tax-Cut Package” to “Pressure Builds in House to Elect CHIPPY 1337”.  The reference is to another hacking group.  Apparently that was the extent of the damage.

     The CFAA was adopted in 1984 with a goal of reducing  the incidents of hacking into computer systems and data.  It makes a felony of obtaining information by  “exceed[ing] authorized access” on a computer  owned by the United States Government, or a financial institution, or where the computer is  used in interstate or foreign commerce. 

     The charges against Mr. Keys could result in fines up to $250,000, and prison term of up to 10 years.  A  former prosecutor suggested that the actual sentence would be much less.  Still, in press releases issued by the Department of Justice about Keys’ case, the maximum punishments were noted.  The former prosecutor explained that this is a tactic intended to have a deterrent effect by discouraging others from committing  similar crimes.  He suggested the cited penalties were not a realistic possibility in Key’s case.

     Mr. Keys supporters argue that the law is Draconian and out-of-date.  Many lawyers and academics  concur.   They are urging Congress to reform  it.  However the House Judiciary Committee has proposed a number of amendments that expand CFAA’s coverage.  The amendments add conspiracy to violate the Act as a new crime,  adds computer crimes as a form of racketeering activity which enables additional charges against a defendant, and increases the maximum sentence for certain violations of the Act.

     Mr. Keys has a strong online presence.  His Twitter feeds have been described by Time Magazine as one of the 140 best.

     Thomson Reuters has suspended Keys with pay. A company statement reads, “Any legal violations, or failures to comply with the company’s own strict set of principles and standards, can result in disciplinary action.” 

    The hackers to whom Keys allegedly gave information belong to a group called Anonymous,  a global association of loosely organized  hackers.   Two years ago some members  targeted Sony Corporation.  The cost incurred by the company to reverse the damage and enhance computer security was $171 million. 

    While CFAA  renders the prohibited conduct a crime, the law was amended in 1994 to also allow civil actions, enabling a victim to sue for monetary loss.

    For more information, click here.

    DISCUSSION QUESTIONS;

    1) How good a deterrent is a long jail sentence?

    2) What is your view of the proposed amendments to the Computer Fraud and Abuse Act?

     

     

  • Faux Fur is Real Fur, So Faux Ads Are False Ads

    Neiman Marcus, DrJays.com, and Eminent settled federal charges for false marketing.  The three retailers were accused of false marketing because they advertised shoes, coats, and other clothing items as having “faux fur.”  However, it turns out that the “faux fur” on the items was actually rabbit, raccoon, and, in some cases, mink.  Therefore, advertising real fur as faux fur was misleading. Whether something includes faux fur is important to consumers these days because of the animal rights movement.  Many consumers do not want to be seen wearing real fur, and if they thought they were buying faux fur because of these three retailers’ descriptions, then they were misled. In fact, it was the Humane Society that filed a complaint about the retailers' ads with the FTC.

    According to the FTC settlement announcement, Neiman Marcus’s website misrepresented the fur content and failed to disclose the animal name and fur country of origin for three products: a Burberry Outerwear Jacket, a Stuart Weitzman Ballerina Flat shoe, and an Alice + Olivia Kyah Coat. Neiman Marcus also misrepresented the fur content of the shoe in its catalog, at bergdorfgoodman.com, and in ads mailed to consumers.

    DrJays. com featured The Snorkel Jacket by Crown Holder on its website and described it as including a “faux fur-lined hood.” The NY Subway Bomber jacket featured on the site included the following, “Detachable hood with faux fur lining.” The Snorkel Jacket did include a label on the jacket itself that described the coat as containing, “real raccoon fur.” The site also included this description of a vest by Knoles:  “faux fur lining.”  You can read the complaint and see snapshots of the website items here.

    Eminent advertisied "faux fur trim" and "faux fur trimmed hood" on its Nordic Boot and Runway Coat, respectively.  You can see the web ads here.

    The three retailers have agreed to stop inaccurate labeling and for three years have agreed to also post to their websites full and complete information about their products’ composition, including details on any fur components in the products. The three-year requirement is really a form of corrective advertising, something that requires a seller to post accurate information related to products that may have already been sold or had ads that led folks to the product. You can read the full settlement for DrJay.com here. Links for the other company settlements are here. There was no fine agreed to as part of the settlement. However, Neiman Marcus paid a $25,000 judgment in 2012 to a consumer who had purchased an $1,895 St. John coat that was labeled as "faux fur" on Neiman's website when, in fact, it was raccoon dog fur. Julie Creswell, "3 Retailers Settle Claims They Sold Real Fur Masquerading as Faux," New York Times, March 20, 2013, p. B1. You can see the harvesting of raccoon dog fur here. (Note: this video is disturbing)

    Discussion Starters

    1.      Why is it important to consumers that they know whether a product has faux fur or real fur?

    2.     What is the penalty for the three retailers and why?

  • Seller Underestimates Bowl’s Value by $2.2million; Sales Contract Nonetheless Valid

                       

    Do your research before entering a contract.   Failure to do so can generate much regret. 

    A family went to a garage sale and found among the knickknacks  a small bowl (5.5 inches in diameter)  that caught their eye.  They plunked down the $3  price (or maybe even negotiated down from $5) and walked off with the bowl.  They made room for it on their mantle and there  it sat for several years.  On a whim they decided to have it appraised.  Lo and behold, it was identified as having major historical value worth between $200,000 and $300,000.  The bowl originated in the Northern Song dynasty of China and is known as an ornamental Ding bowl from the Hebei province.  Its origin dates back to the 10th or 11th century.  It is one of only two such bowls remaining in the world.  The other has been on display at the British Museum in London for 60 years. 

     Armed with this information, the owner placed the dish in an auction held at Soetheby’s, an auction house in New York City specializing in fine art and historical objects.  The bowl was purchased by a London art dealer for $2.2 million.  

    No doubt the person who sold the bowl at the garage sale would like to get it back and resell it for millions of dollars.   His explanation for the gross undervaluation would predictably sound something like this: “Ooops, I made a mistake.  I never would have sold it for $3.00 if I had known its true value.: 

    This argument will not fly.  The buyers are entitled to the proceeds of the $2.2 million sale and need not return the bowl to the original owners.  A mistake of value, whether unilateral (made by one party only) or bilateral (both parties are mistaken) is not grounds to avoid a contract. In other words, the agreement  by which the bowl sold at the household sale for three bucks is binding and enforceable even though one or both parties was significantly mistaken about the item’s value. Thus is founded  the caveat: do your homework before you enter a the contract.  Know the value of items being exchanged.  Do not be in the position of the bowl owner who inadvertently took a loss in the amount of $2,199, 997.

    For additional information, click here.

    DISCUSSION QUESTION:

    What is the rationale behind the rule disallowing cancellation of a contract when a mistake of value is made? 

  • Lululemon Blames Its Supplier for Defective See-Through Pants: Contracts At Issue

    According to analysts, Lululemon has had its fourth quality control issue in a year, leading many to speculate that the company does not have its arms around its supply chain and the risks associated with reliance on single suppliers.

    The latest problem involves the company’s recent snafu of too-transparent $100 black yoga pants on its Taiwanese supplier. Eclat Textile.  However, Eclat officials fired back indicating the all of its shipments contained products that were produced according to Lululemon specifications and all went through Lululemon’s certification process before shipment. Aries Poon and Karen Talley, “Yoga-Pants Supplier Says Lululemon Stretches Truth,” Wall Street Journal, March 20, 2013, p. B1.

    Earlier problems with Lululemon products included a similar problem with transparent swimsuits and other colors of yoga pants and several issues with colors bleeding in several different products.  The “Paris Pink” bleeding problem was explained in an earnings call as well as in a Tweet apology from the company’s chief product officer.

    The resulting recall of the pants has been a product shortage as well as significant numbers of returns.  The company has reduced its earnings projections for the quarter because of the issue. Lululemon is a Canadian company that, like most brand-name companies, outsource production overseas. See more background information here.

    Litigation over the issue is inevitable with the contract issues being whether the pants were made to specifications or deviated from those specifications.  If the pants were made to fabric and construction specifications, then Lululemon absorbs the losses.  If the specifications were faulty, then Lululemon also absorbs the losses. If the pants fell short of the specifications, then Eclat Textile will be responsible for the losses. For example, if Eclat substituted a different fabric for the pants, Eclat would be responsible for any losses resulting from the product returns and sales losses. Damages for a breach of contract such as the failure to deliver products according to specifications would include lost sales, costs of returns, and any provable damages related to the company’s reputation. Currently. Lululemon’s vice president for sourcing, quality, and production is at the Eclat site checking into the questions and issues.

    Discussion Starters

    1.      How does the reason for the problem control the issues of fault and damages?

    2.     What lessons should companies learn about supply chain management from this experience?

  • Wall Street Journal Accused of Violating the Foreign Corrupt Practices Act

           

    The Justice Department of the United States government is investigating various branches of News Corporation, the company that produces the venerable Wall Street Journal and numerous other publications.   The investigations include possible bribes of Chinese officials for information for news articles,  alleged bribes for information by reporters at tabloids produced in the United Kingdom, and accusations of bribery paid to local officials by a billboard subsidiary in exchange for approval of sign locations in that country.  

    The Chinese claims allege that gifts were given that exceeded the typical meals or drinks shared by reporters and officials.  Instead, lavish entertainment and travel were supposedly provided.   If the bribery allegations are true, they would constitute a potential violation of the US Foreign Corrupt Practices Act (FCPA).  That Act makes it illegal for companies that sell securities to offer money or gifts to a foreign official for the purpose of obtaining or retaining business with any person, or directing business to a particular person. 

    The investigation was triggered by a whistleblower, a person who informs either management within a company or government law enforcers  of illegal or unethical conduct occurring within a business.   News Corp. claims the informant was an agent of the Chinese Government seeking to retaliate against the news company for the Wall Street Journal’s reporting on China’s leadership.  

    Unlike most laws which require for enforcement a government investigation, the FCPA requires the target of an investigation to hire outside counsel and if needed, CPAs to investigate the claims.  Investigations typically include audits and record searches.  When the investigation is completed by the independent counsel hired by the company, the results of the investigation and the findings are presented to the Justice Department.  News Corp. followed this procedure, and its counsel found no evidence of bribery.   

    Concerning the charges from England, a two year probe is rapping up.  Apparently the company is vulnerable on these matters and  settlement negotiations are anticipated.  A News Corp. spokesperson said that the charges have prompted “sweeping changes to our global internal controls, compliance programs, and ethics requirements.”   Criminal charges have been pressed against some individual employees of two publications of the company. 

     News Corp. has not commented on the Russian allegations.  The billboard subsidiary has denied any wrongdoing.

    In recent years the Justice Department has aggressively been investigating US  companies  suspected of bribing foreign officials.

    For more information, click here.

    DISCUSSION QUESTION:

    1) What benefits inure to the government by the requirement of the FCPA that companies under investigation hire their own independent attorneys and accountants to conduct an investigation?

    What concerns might that provision of the FCPA generate concerning the reliability of the resulting report?

  • Buying Air When Land Is Not Available; Selling Air to Keep Your Building

     When you own real property, you own the ground below (subsurface or mineral rights) and the skies above (air rights).  In fact, with the surface ownership you hold, you have three divisions of your land and these three divisions of your real property can be conveyed, together or separately.  With restrictions on building and/or tight financing, landowners are dividing their three land interests and selling air rights as they continue to own the surface rights.  For example, the Pacific Branch of the Brooklyn Public Library (pictured above) has decided to sell the land and building to developers who will then use the land for developing housing and other projects because Brooklyn is in a mini real estate boom. Joseph Berger and Al Baker, "Saving Schools and Libraries by Giving Up the Land They Sit On,"  New York Times, March 18, 2013, p. A1. Brooklyn’s Pacific Branch will remain in its same location, except that it will use the proceeds from the sale of the air rights above the property to upgrade.  The developer has agreed to tear down the old library building, that is not in good condition or working order, and build a new library as part of the project.  Brooklyn has a new library and no public funds or additional taxes are needed or used in the project.  In addition, there will be enough money from the sale of the air rights to make improvements in other library branches.

    These types of projects are not new.  The Trump Tower is built in the air rights above Tiffany’s. Christ’s Church (pictured above) recently sold the air rights above its building for $40 million, or $600 per square foot.  As one real estate broker noted, “Height is where the profit is.” In fact, there is a boom in air rights with the resulting projects being in demand because of the views afforded by apartments and condos built in air rights.  Alchemy Properties built its 18-story Isis Condominium (pictured below)  in air rights acquired from two adjacent tenements.  The projects is built 8 feet above the roofs of both of the tenements -- each six stories high.  In this case, the owner has the air rights through the sixth floor, and Alchemy owns the remainder of the air rights. Robin Finn, "The Great Air Race," New York Times, February 22, 2013.

    Before making a decision on an air rights purchase, developers should be familiar with local zoning and building codes so that they are aware of building height limitations as well as safety requirements for construction above an existing building.  The legal requirements can affect the profitability of the project.

     

    Discussion Starters

    1.     What are the benefits of air rights sales and development?

    2.     What types of laws should developers know about before undertaking a purchase of air rights?

     

  • Whistleblower Discloses Tax Fraud by Tailor to the Stars

                

    A tailor who stitched suits for basketball greats and political bigwigs  pled guilty to tax fraud.  His customers included hoops stars Patrick Ewing, Wilt Chamberlain, and Darryl Strawberry, plus Rudolph Giuliani and Edward Koch, both former NYC mayors. The tailor, Mohanbhai Ramchandani, owns  Mohan’s Custom Tailors which  failed to pay sales taxes, both state and local, for numerous years.  A sales tax is a tax paid to the government by a seller for the sales of certain goods and services.  The seller typically collects money for the tax from the consumer at the time of the purchase.  The tailor collected $1.7 million in sales taxes from customers but failed to give that money to the government and apparently pocketed it instead.  

    Additionally the business understated its income.  Allegedly the business made $28 million over a 10 year period but declared only $5.6 million. Because the amount of income tax a business pays is based on the amount of income it makes, Ramchandani’s business paid much less income tax than what was owed.  Likewise, the amount of income he reported on his personal tax returns was in synch with the business’ reported income and so those personal returns significantly understated income as well.  Both Ramchandarni’s business and he faced charges of tax evasion.

    The tailor, age 66, decided to resolve the case and admitted wrongdoing relating to both sales and income taxes.  He will pay $5.5 million in back taxes and penalties within two years, and serve a prison sentence of one to three years.

    Due to his famous customers, Ramchandami was featured in a 1993 profile in the New York Times.  It reported that he came to the US from India in 1972 and worked hard to develop his business.  His big break came in 1984 when Mr. Ewing’s mom called wanting a custom suit for her son, then a star at Georgetown University.  When Ewing joined the New York Knicks, the tailor asked him to appear in advertisements for his shop. Many other basketball stars then began calling.

    The tax issues came to light when a former employee reported irregularities in Ramchandani’s tax returns.  This rendered the employee a whitleblower , a person who reports to someone in authority alleged dishonest or illegal activities occurring in a government office or private company or organization.  The law protects whistleblowers in two ways.  First, it outlaws retaliatory termination of the informer.  The employer is thus prohibited from firing the employee for disclosing the illegal conduct.  Additionally, the law entitles the tleblower to a percentage of any money recovered against the wrongdoer, typically 20% to 30%..

    The information provided by the tailor’s former worker led to an investigation and the criminal charges which were asserted by the New York State Attorney General. a state's key consumer advocate.  The latter commented, “There are no excuses for tax cheats,  . .Honest citizens are harmed by people who break the law to avoid paying their fair share, making it harder for New York State to provide essential services.”  Of the $5.5 million Ramchandani will pay in back taxes and penalties, the whistleblower will receive $1.1 million.

    For more information click here.

    DISCUSSION QUESTION:

    What is the justification for awarding the whistleblower a percentage of the money collected from the wrongdoer?

     

  • Lamar Odom Must Have Read Jay-Z’s Book and Kim Kardashian Must Wear Old Navy Jeans Before Tweeting: FTC Rules

    When celebrities Tweet, the public responds.  Advertisers know that and are willing to pay – sometimes $10,000 per Tweet when celebrities endorse a product.  For example, Kim Kardashian boosted Old Navy jeans sales with her Tweet that the jeans “make your butt look scary good.” Lamar Odom was paid to Tweet an endorsement of Jay-Z’s book, “Decoded.”  That Tweet went out to Odom’s two million followers. Terrell Owens Tweeted to his one million followers that Comfort Inn was offering a great deal that included free sports tickets and the chain enjoyed a nice boost in its reservations. For more examples, read here.

    There are companies, such as Izea, Ad.ly and twtMob that pair products with celebrities in order to get those Tweets out there.  The success of this form of advertising and its increasing presence brought a new ruling from the Federal Trade Commission (FTC).  The new ruling relates to a longstanding rule that resulted when former Jets quarterback, Joe Namath, endorsed panty hose for women. The purpose of the FTC rule is very simple – to prevent consumers from being deceived about the nature of the endorsement and the product.  The rule consists of four parts, as summarized by the FTC:

    ·        To thine own self be true. The bedrock principle for celebrity endorsements – and any testimonial – is that they must reflect the honest opinion or experience of the endorser. If the ad suggests that the celebrity is a satisfied customer, he or she actually must use the product.

    ·        Time will tell. You may use a celebrity’s endorsement only as long as you have good reason to believe the opinions in the ad continue to be the views of the celebrity. One way to satisfy your obligation is to check periodically that the celebrity’s opinions remain the same.

    ·        Don’t bury your head in the sand. A marketing campaign isn’t the time for ostrich-like behavior. Even if a celebrity is given a script to read, he can’t ignore signs that claims made about the product are false or misleading. For example, suppose an advertiser says its roasting bag can cook chicken in 30 minutes. During the shoot, the celebrity hired to appear in the ad watches five unsuccessful attempts to get the product to work. Each time the chicken was raw after 30 minutes and needed a full hour to cook. However, in the commercial, the celebrity is shown placing a chicken in the bag, taking out a perfectly roasted chicken, and saying that if you want great chicken every time in only 30 minutes, this is the product you need. The celebrity could be liable for the deceptive statement about the product and the advertiser could be liable for misrepresentations made through the endorsement.

    ·        Disclosures about connections. Financial ties between advertisers and celebrities must sometimes be disclosed. If a financial connection is obvious, disclosure is unnecessary. For example, a tennis star who appears in ads for a line of polo shirts is the type of arrangement most people expect involves payment. However, now suppose she’s a guest on a morning talk show. When asked about her recent victories, she credits them to a laser vision correction procedure at a clinic she names. She doesn’t disclose her contractual deal with the clinic that requires her to speak publicly about her surgery – that’s a problem.

    So, the new guidance from the FTC relates to celebrity Tweets and requires the celebrity endorsement Tweet to begin with either “Ad.” or “Sponsored.”

    Before this new interpretation, most Twitter ads look as follows:

     

    Note: the disclosure of the nature of the post (Ad.ly Network) does not appear until the end of the ad -- something the FTC ruling concludes is deceptive.

    Discussion Starters

    1.      What are the critical components of celebrity endorsements that are not deceptive?

    2.     Why the upfront disclosure requirement under the FTC ruling?

  • Student-Exchange Programs, McDonald's, and Cheap Labor

    Some of them paid $3,000 to get here – students participating in a cultural exchange program who come to explore the United States with a guaranteed job at McDonald’s.  However, in Harrisburg, Pennsylvania, the exchange students have gone to the media because of troubling working conditions.  McDonald’s is their employer and their landlord.  Seven of the students live in a basement in a home where the male and female student spaces were separated only by a curtainThe students, who will be interviewed by State Department officials who will be reviewing the special J-1 visa program, explained the following issues:

    ·       Some have so few hours that they owe money to the McDonald’s owner in the area because they have their rent deducted from the wages they earn while working at McDonald’s.

    ·       Some have had to work 25-hour shifts.

    ·       Some have earned $250 per month, but after deductions for rent and food they also owe the McDonald’s owner more than they earn.

    ·       They earn $7.25 per hour and pay $75 per week in rent.

    One student from Argentina said, “Everyone just wants to return home and forget this terrible experience.” Miriam Jordan, Kris Mahr, and Julie Jargon, “Temp Troubles Visit McDonald’s,” Wall Street Journal, March 9-10, 2013, p. B1. The students said that when they complained to their landlord/manager about the financial issues and working conditions he responded that with one phone call he could have their visas revoked.  As a result, the students and their supporters staged a protest outside a Harrisburg McDonald's owned by Mr. Cheung and obtained national press coverage regarding their issues and concerns.

    There are currently 109,000 students participating in the work/study program created in 1961 in order to allow foreign students to obtain a visa and have a rich, cultural experience by studying in the United States while having opportunity for travel through a source of income.  However, many officials worry that the program has become a source of cheap labor for fast-food restaurants, ski resorts, and car washes.

    The rules for the program were changed in May 2012 to curb employer demands by requiring that the employer offer the students more than just work experience as part of the cultural exchange.  However, little has changed in the year since the rules reform. The J-1 program is not subject to the level of oversight and review that other worker programs have and the result has been increasing complaints from participants.  McDonald’s is looking into the allegations.  Andy Cheung, the owner of the Harrisburg, Pennsylvania McDonald’s and the landlord for the students, did not respond to reports’ calls.  McDonald’s responded that it was not aware of the issues until the reporters for the Wall Street Journal contacted them. You can view an interview with the students here.

    The Department of Labor and State Department have worked together to allow slightly different rules for worker visa programs and this cultural exchange program.  For example, workers who come on visas for agricultural purposes can work longer hours during the harvest season because of the temporary nature of the work.  However, housing conditions and their cost continue to be an issue that requires government investigation and supervision. The Department of Labor is now investigating the Harrisburg McDonald's issues.

     

    The student-exchange programs are generally run by private companies that charge fees for placing the students in jobs in the United States.  The bulletin-board posters that these companies post at colleges and universities around the world promise “rich cultural experiences” to the students.  If the students were misled by the representations, there is the possibility of a contract breach and remedies of a refund of their upfront fees and perhaps additional damages related to the rent monies they owe.  However, their access to the courts would be limited to their time here and recovery would be difficult.

    Discussion Starters

    1.      What role does the Department of Labor play in these exchange programs>

    2.      What contract rights do the students have?

  • FTC Sues to Stop Illegal Spam Text Messages

               

    The Federal Trade Commission, an agency whose mission includes consumer protection, has filed eight lawsuits trying to stop spam text messages.  The cases are filed in federal courts throughout the country against companies accused of sending hundreds of millions of those communications to mobile phone users.   The messages usually promise to provide prizes, primarily gift cards of up to  $1000,to major chain stores including Best Buy, Walmart and Target, and require as a prerequisite disclosure of much personal information.  Consumers are thus lured to disclose social security numbers, email addresses, credit card numbers and related data valuable to identity thieves.  Despite the promises, the gift cards are almost never provided. 

     Approximately 60% of mobile phone users have received one or more spam text messages, and of those approximately 15% clicked on the link in the message. The FTC has received more than 50,000 complaints about spam texts.  The number of complaints in 20012 was seven times the number from 2011! 

    The relevant law is the Telephone Consumer Protection Act (TCPA) and related rules adopted by the FTC. It bans text messages sent to mobile phones by an autodialer, which is an electronic device or computer that automatically dials telephone numbers.  Exceptions to the prohibited communications include situations where the cellphone owner previously gave consent to receive the message, or the message relays emergency information. 

    If you receive a spam text message, the FTC advises not to click on any link, and not to type back to the sender the word “STOP” or similar direction as the note frequently advises. Instead the FTC requests that recipients forward the text message to a central repository for spam messages sent by cell phone carriers - 7726. 

    A related law addressed at email spam sent to mobile phones is the Controlling the Assault of Non-Solicited Pornography and Marketing Act of 2003, for short called CAN-SPAM. It does not prohibit spam but instead requires compliance with certain rules, explained below.  CAN-SPAM bars states from enacting stronger anti-spam legislation, and prohibits recipients of spam from suing the senders.  The act is instead enforced by the FTC.  

    CAN-SPAM requires the following.

     1) No false or misleading information in the header .  This means the “from,” “to,” “reply to” and routing information must be truthful.  Additionally the originating domain name and email address must be correct and identify the person or business initiating the message. 

    2) No deceptive subject lines.  Instead, it must accurately reflect the content of the message.

     3) The message must disclose clearly and conspicuously that the message is an advertisement.

     4) A valid street or post office box address or a private mailbox registered with a commercial mail receiving agency.

     5) An opt-out option for future email, and a clear and conspicuous explanation of how to use it.  Additionally, all opt-out requests must be honored promptly.

     6) If an advertising company hires another business to handle email marketing, the former must monitor the latter.  If violations occur, both can be legally liable.   

     Some of the practices followed by spammers that generated these rules include:

    concealing the origin of spam; intentionally misspelling words that computer users commonly filter; using fraudulent headers, and more.

     In addition to CAN-SPAM, these unwanted messages violate the acceptable use policy of almost all internet service providers.  However they vary in the ability to enforce this rule. 

    For more information, click here.

     DISCUSSION QUESTION:

     Rather than allowing spam and imposing requirements, why do you think Congress did not outlaw it?

  • ATVs, Kids, Injuries, Liability, and Regulatory Compliance

    Since the time of the three-wheel all terrain cycles (ATCs), the issues of safety, liability, and regulation have been evolving, but not resolved.  Three-wheel ATVs were outlawed in the 1980s, with four-wheel ATVs becoming the standard.  Each year the federal government releases a report on ATV sales and injuries and its annual release continues to be a focus for consumer safety groups as well as parents whose children have been killed or injured in ATV accidents. Injuries from ATVs have steadily decreased since the 1980s, with 2011 (the latest figures available) showing a dramatic decrease to 327 deaths and 107,500 total injuries. You can read the full report here. However, there is concern as the 2012 figures are being compiled because of an uptick in accidents with the greatest increase being the number of accidents involving ATVs on public roads.  Those types of ATV accidents have increased nine fold since 1982.

    In addition, the percentage of ATV accidents that involved young people between the ages of 10 and 18 has also been increasing.  Children account for about one-third of the ATV deaths and inuries. The result of this injury-rate discovery was that the Consumer Product Safety Commission (CPSC) has prohibited ATV dealers from selling ATVs to adults who were buying them for their children between those ages.  Undercover buyers visit dealers to test compliance and the rate of compliance with the rule is at 69%, with 31% of the dealer violating the selling ban rule.  That figure varies from state to state with Alaska having a 70% violation rate on the selling ban.

    There are new calls for banning ATVs, calls for prohibitions on using the vehicles on public roads, and proposed legislation that would prohibit children under the age of 16 from riding ATVs. 

    The product liability suits, particularly those involving the Yamaha Rhino, are increasing and the recoveries substantial because of the emotional appeal of cases involving young children. There are several nonprofit groups that provide information and advice for parents on ATV use.

    The product liability issue is whether ATVs are unreasonably dangerous by design.  The weight of the vehicles, the strength required to handle them, the tipping factor on rougher terrains, and the issues of seat belts are all points of focus as the cases deal with proof of defective design. There are some who argue that ATVs cannot be made safe and are calling for a product ban because there is no safe design.  As noted in the video the American Academy of Pediatric Physicians has maintained its firm stance in favor of recalls since the time it was successful in banning the three-wheel design in the United States.  

    Discussion Starters

    1.     Would there be liability for a dealer who sold an ATV knowing that it would be used by a child?

    2.     What are the things that could make an ATV unreasonably dangerous for purposes of product liability?

     

  • Beware Expiration of Noncompete Clauses

     When a contract is over, it's over.  A contract generally binds the parties only until the contractual obligations are completed or the agreement expires by its terms.  PepsiCo learned this the hard way in its dealings in Thailand.  

    PepsiCo, which produces Pepsi products, had a contract with Serm Suk, a bottling  company in Thailand, for the packaging and distribution of Pepsi drinks.  The deal greatly benefited Pepsi for two reasons.  Thailand’s population of 67 million is the biggest carbonated soft drink consumers in Southeast Asia.  Additionally, Serm Suk has a vast distribution network, delivering drinks to approximately 200,000 stores, restaurants and vending machines in Thailand.  The two companies have been partners for 59 years.

     The contract between them included a noncompete clause, which is a contract term prohibiting one party from competing with another.  The Pepsi/Serm Suk contract prohibited Serm Suk from developing a soft drink that would compete with Pepsi products while the contract was in effect. Like a good contract partner, Serm Suk complied.  But when the contract ended, so too did that company’s compliance.  The contract expired on November 1st, 2012.  Wasting no time, Serm Suk launched a new cola soda on November 2nd.  Adding insult to injury, Serm Suk thereafter declined to utilize its coveted distribution networks to benefit Pepsi, using them instead for its own product.  As a result, Pepsi was very limited in its means to deliver its soda to the market, and Pepsi's fans were left high and dry. 

     Serm Suk’s conduct in developing a competing soda and discontinuing distribution of Pepsi products is not illegal.  When a contract’s language limits the parties’ commitments to a designated period of time, the obligations typically expire when that time time period is over.

     Serm Suk’s  new soda is named Est and is sold in the same shaped bottles as Pepsi with red, white and blue lettering suggestive of Pepsi’s logo.  Pepsi has refused comment on whether it intends to assert a trademark violation claim.  The name Est has no meaning in Thai but was intended to reference superlatives such as the tastiest, the best, and the biggest.

     Serm Suk is now using its significant distribution muscle for its own soda.  Additionally it spent about $10 million on a  marketing campaign to introduce Est to the Thai market.  The campaign included three Thai teen pop idols. 

     Pepsi is not conceding the market.  It has opened a new bottling plant in Thailand with a large enough capacity to satisfy the Thai demand. Additionally, Pepsi has a new distribution partner that will deliver the soda to retail outlets. Pepsi expects the People of Thailand to see the company’s soda back on the shelves soon. 

     Pepsi has similar noncompete clauses with bottlers in other countries including China.

    For more information, click here.

     DISCUSSION QUESTION:

    How might Pepsi tighten its contract language for noncompete clauses to prevent similar bottling and distribution partners in other countries from repeating Serm Suk’s actions?

  • Payday Loans and JPMorgan Chase's Role

    As the video discussion indicates, payday loans can create financial strain for borrowers and they are indeed expensive. Payday loans are high-interest-rate loans that are generally made for shorts terms, such as “until the next pay day.” The loan must be repaid within five to 14 days  or the lender is entitled to repayment plus interest, which can run at 30% before default and higher afterwards, as well as a service fee for the loan and additional costs for collection because of the lack of timely repayment.  Some loans carry a 500% interest rate. Some states have limitations on service fees for payday lenders.

    However, the borrower has an additional problem which involves their banks.  Most payday lenders require borrowers to give them access to their checking accounts for automatic deduction of the amounts due under the loans.  When the borrower fails to pay, the payday lenders exercise their right to withdraw funds from the borrowers’ checking accounts.  With penalties and interest, the withdrawals are so high that the borrowers have overdraft fees.  Without the cooperation of the banks, the payday lenders would have significant difficulties with collection. The New York Times ran a front-page story on the role of major banks in facilitating payday loan activities and significant profits. Jessica Silver-Greenberg, "Major Banks Aid in Payday Loans Banned by States," New York Times, February 23, 2013, p. A1.

    Following the appearance of the story, JPMorgan Chase CEO, Jamie Dimon, spoke about Chase’s payday withdrawal policies, called the practices of the payday loan industry “terrible,: and pledged that Chase would be examining its practices and making changes. Jessica Silver-Greenberg, “Dimon Pledges to Address JPMorgan’s Practices on Payday Loans,” New York Times, February 27, 2013, p. B2.   Chase has already been sued by two customers for withdrawals from their accounts by payday loan companies that caused customers to be charged late fees as their accounts continued to be drained by the payday lenders.

    While payday loans are illegal in New York, Chase was making withdrawals for online payday lenders. Several Chase customers who are payday borrowers and had funds withdrawn from their accounts, including overdraft fees, have filed suit against Chase for its involvement with loans that are illegal in New York.  You can read the complaint here. Payday lenders can be brick-and-mortar operations housed in offices and strip malls, or they can be online lenders who have a big presence among borrowers in states where payday loans are prohibited. Without access to customer accounts in states, such as New York, where payday loans are illegal, it would be almost impossible for the lenders to collect loan repayments and fees in those states.   

    The story has attracted attention and resulted in legislative proposals related to online payday lenders, brick-and-mortar payday lenders, and possible federal regulation of payday lenders. Existing law might help if borrowers claimed unconscionability in the terms of the payday loans or if the application of illegality of the online loans in certain states. You can find more information about the possible federal oversight of payday loans here.

    DISCUSSION STARTERS

    1.      What contract formation issues might arise that would give borrowers a defense against the payday lenders?

    2.     Is it illegal for banks to allow the online lenders access to customer accounts when those customers live in states where payday loans are prohibited?