• The Estate of Whitney Houston Following Her Daughter's Death

    When singer Whitney Houston died in 2012, she left her entire estate to her daughter, Bobbi Kristina Brown. The estate was left in the form of a trust, with the trust terminating when Bobbi Kristina reached age 30, at which time she would receive all of the estate as her property.

    When Whitney Houston died, she appointed her mother, Cissy Houston as the executor of her will. However, Mrs. Houston did something known as “renounce the appointment.” Such a step is, in effect, saying, “I don’t want to be the executor.” In that situation, there is an alternative executor named in the will to take over. For Whitney Houston’s estate, the alternate executor, Ms. Houston’s sister-in-law and manager, Marion Pat Houston, was appointed. Pat and Cissy Houston have, however, together managed the $250 million Bobbi Kristina trust, a role to which they were appointed and would have held until Bobbi Kristina reached the age of 30.

    Bobbi Kristina was found unresponsive in her Atlanta home on January 31, 2015, and was in a medically induced coma until she died on July 27, 2015. Because of her untimely death, the Whitney estate as well as the Bobbi Kristina estate could become complicated.

    If Bobbi Kristina had a will, whatever property she has already received from her mother’s estate would be distributed according to the terms of her will. When children inherit from their parents in a trust arrangement, the distribution is usually structured to allow distribution in a way that minimizes taxes and also prevent children who are very young to develop personal and financial management skills over time so that the estate is not dissipated during the follies of youth. Bobbi Kristina was only 19 when her mother died. The estate was managed, but she clearly had resources and acquired property, probably funded by the estate. If Bobbi Kristina did not have a will, then whatever property she had or received from her mother’s estate (estimated to be 10% of the $250 million, which was slated to be distributed when she turned 21)  would go to her heirs. Since she had no spouse or children, intestate distribution laws take the estate back to the parents of an unmarried, childless person, which leaves Bobby Brown with Bobbi Kristina’s property.

    However, perhaps the bigger issue, in terms of both property and the potential for litigation, is what happens to Whitney Houston’s estate. Since the trust could not be fully executed and Ms. Houston’s daughter has died and there are no other children, the estate would go according to the terms of her will. The will of Ms. Houston provides that the estate goes to Cissy Houston and Ms. Houston’s two brother. Maria Fuente, “The Fate of Whitney Houston’s Fortune Now Up in the Air,” USA Today, July 28, 2015, p. 1A.

    If the will runs into any legal difficulties (a will contest or some issue with its validity), then we turn to intestate distribution and the spouse inherits. However, Ms. Houston and Mr. Brown were divorced. Again, the laws of intestate distribution generally provide that we go back up the ancestral chain, which would lead us to Cissy Houston and her brothers. Aunt Pat would inherit only if Cissy and her brothers had not survived Bobbi Kristina.

    The unusual circumstances of Bobbi Kristina’s death as well as the amount of the two estates and the fact that the former spouse and business manager/aunt do not appear poised to take under the wills are the stuff of estate battles. There is also a live-in boyfriend, and questions about joint property ownership. The boyfriend, Nick Gordon, has already hired a lawyer. There is a saying that we do not truly know our family until we have gone through a family member’s probate and there is property at stake or in dispute.

    With good advice and careful estate planning, even family circumstances will not topple the decedent’s wills. However, the tragic circumstances in this family serve as a reminder that we can never assume longevity and need to have our affairs in order even when we are very young.

    DISCUSSION STARTERS

    Explain the unusual problems with the Houston estates.

    Discuss how property is distributed without a will.

  • Airline Price-Gouging Following the Amtrak Crash??

     The U.S. Department of Transportation (DOT) sent a letter to five airlines (American, Delta, United, JetBlue, and Southwest) requesting information about their pricing of shuttle service tickets between Washington, DC and cities on the Eastern corridor, including New York City and Boston. A total of 28 routes are the subject of the investigation. The DOT has asked for average fares by market, day, and fare class for the period from April 28 through May 26, the period during which the service lines were down due to the May 10 crash of an Amtrak train just outside of Philadelphia.

    The DOT has statutory authority 49 U.S.C.§41712 to regulate unfair competition in the transportation industry. In addition to covering requirements for disclosure and e-tickets, the DOT has a general provision in that statute for investigation authority over unfair practices:

    the Secretary may investigate and decide whether an air carrier, foreign air carrier, or ticket agent has been or is engaged in an unfair or deceptive practice or an unfair method of competition in air transportation or the sale of air transportation. If the Secretary, after notice and an opportunity for a hearing, finds that an air carrier, foreign air carrier, or ticket agent is engaged in an unfair or deceptive practice or unfair method of competition, the Secretary shall order the air carrier, foreign air carrier, or ticket agent to stop the practice or method.

    The authority of DOT to regulate fairness in pricing in the context of disclosure of full fares has been upheld by the courts. Spirit Airlines, Inc. v. U.S. Dept. of Transp., C.A.D.C.2012, 687 F.3d 403, 402 U.S.App.D.C. 70 (2012), certiorari denied 133 S.Ct. 1723. In that case, the problems of additional fares, for luggage fees, etc. was at issue. However, the specific authority for price-gouging under the DOT statute has not been addressed by the courts.

    Price-gouging is not specifically called out in the statute, but as with many state investigations into issues such as the price of water following natural disasters, the authority comes from a general provisions against “unfair practices.” What constitutes price-gouging is not specified by the statute, but would be established by the patterns of pricing in certain time frames, which is why the DOT has asked for a month-long period that covers two weeks before the crash and two weeks afterwards. The spike immediately following the crash would be the proof of an unfair practice.

    Some of the airlines have already responded to the inquiry with press releases indicating that they lowered prices for a week, honored Amtrak tickets on their flights, or increased the number of available flights to accommodate those who usually travel by train. Susan Carey and Jack Nicas, “Five Airlines Face Price-Gouging Investigation,” Wall Street Journal, July 25-26, 2015, p. B3. However, Airlines Reporting Corporation’s figures indicate that the fares from New York City to Washington DC increased by 4.4% and from Washington to New York City by 12%. Airlines Reporting Corporation processes airfares for ticket agents and is owned by all the airlines (except Southwest).

    The DOT letter not only asks for fares but also asks questions about added routes, types of planes used, and whether the airlines discussed the Amtrak crash internally as part of scheduling and pricing.

    DISCUSSION STARTERS

    Explain when price-gouging becomes an issue.

    Why the month-long examination of pricing?

  • Rapper 50 Cent Loses Lawsuits; Files for Bankruptcy

                  

     The rapper 50 Cent , whose real name is Curtis James Jackson III, claims to have hit hard times and has filed for bankruptcy.

    He has had several significant litigation losses of late which may have prompted the filing. He lost a case to Sleek Audio, a Florida headphone maker that sued the rapper for misappropriating trade secrets and breaching a fiduciary relationship. When a partnership deal between the singer and the company soured, 50 Cent established his own competing company and developed a line of headphones. Sleek Audio claimed he stole its design and won a judgment in October, 2014, of $18,428,257.

    Additionally, just last week the rapper lost a jury trial in an internet privacy case. A tape showing plaintiff engaged in sex acts was allegedly given to 50 Cent by the plaintiff’s then-boyfriend. 50 Cent edited and narrated it, then posted it on the web.

    The plaintiff won a verdict of $5 million in compensatory damages. The jury also voted to impose punitive damages in an amount not yet determined. In many states a trial involving punitive damages is bifurcated, meaning tried in two separate parts. The jury first hears testimony about the alleged wrongdoing and determines if the defendant is liable. If so, the jury also determines whether punitive damages should be imposed. In a second phase the jury addresses the amount of punitive damages. The punitive damage phase is now in process.

    Punitive damages are only awarded when the conduct of the defendant is particularly egregious. Punitive damages must be “relatively proportionate” to the actual damages award. In most circumstances, punitive damages cannot exceed 4 times the amount of compensatory damages. The purpose of punitive damages is  to deter similar conduct by defendant and others.                 . Most state statutes identify the defendant's net worth as a relevant factor when a jury is considering such damages. The jury in the sex tape case is currently hearing relative testimony about 50 Cent’s net worth Under questioning by defendant’s attorney, the singer admitted being paid as much as $100,000 for a nightclub appearance(!)..

    When a debtor files for bankruptcy, he must submit to the court an exhaustive list of his assets and debts. In the rapper’s filing, he identified 72 debts including money owed on his electric bill, his car lease, a loan from his grandfather. Other creditors include a lawn care company, his attorneys ($568,304), a landscaper, a carpet cleaner, and a hot tub company. He claims assets of $24.5 million. This figure significantly conflicts with Forbes Magazine’s estimate of his net worth published in May, 2015 as $155 million. That figure was attributable in part to a significant profit he supposedly made when Vitaminwater was sold to Coca-Cola in 2007. 50 Cent was an investor in Vitaminwater.

    Fifty Cent’s assets include the mansion where he lives. He attempted to sell it in 2012 for $10 million but did not find a buyer. The rapper is often seen with flashy jewelry and expensive cars. When questioned in court , he denied ownership of those items and said he rents, borrows and leases instead. Concerning a 65-karat ring he recently highlighted on an Instagram photo, Fifty Cent explained, “it’s a borrowed piece of jewelry from the jeweler.”

    Once a person files for bankruptcy, an automatic stay immediately occurs. This means all collection efforts by creditors must stop for the duration of the bankruptcy proceeding. However, creditors can ask the bankruptcy court for relief from the stay, called lifting the automatic stay, by filing a motion. The debtor is entitled to notice and a hearing. The burden of proof is on the creditor to convince the court that a very good reason to lift the stay exists.

    If the stay went into effect, the punitive damage phase of the singer’s trial would have ended prematurely. Plaintiff’s attorney moved for relief from the stay to allow the punitive damages phase to continue. The bankruptcy judge granted that motion despite 50 Cent’s attorneys’ objections, noting that “It is in everyone’s interest here, including Mr. Jackson’s, to reach finality” in the sex tape trial.” No doubt the timing of the bankruptcy application was troublesome to the judge and played a role in her decision.

    Stay tuned to the news for additional developments.

    For more information, click here.

    DISCUSSION QUESTION:

    In a bankruptcy proceeding, why does the law allow for an automatic stay?

    Do you agree with the bankruptcy judge’s ruling to life the automatic stay in Fifty Cent’s privacy trial? Why or why not?

     

  • The Seattle Battle Over Trash Searches for Errors in Recycling

    Seattle has adopted new trash rules in response to disobedience by Seattle residents.  The residents were not getting their trash into the appropriate cans for pick-up. There are cans for yard and food waste, cans for recycling, and tiny cans for trash that does not fit the other categories.  This multiple-choice quiz on trash has proven difficult for Seattle residents.  They are putting their trash in the wrong containers, thereby slowing down composting efforts and adding cost.  As a result, the new rules provide for random inspections of residents’ trash.  If, upon inspection, officials finds more than 10% of the refuse is in the wrong container, the resident’s container will be tagged with red tape, and, under pending rules, can be fined.

    While the residents support the city’s recycling efforts, they are concerned about their privacy.  A movement against the new rules has two slogans:  “Don’t Trash My Privacy,” and “Stop City Snooping.” 

    From the constitutional issues of the search to how the 10% is computed, the residents are out in full force.  The application of the rules has caused some consternation.  The  following computation methods are being debated regarding the computation of 10%:

    • The radius and twice the height of the can multiplied by Pi and then divided by 10.
    • The training manual for trash workers provides that they can gauge the 10% visually by dividing the can into 10 segments and using good judgment.

    On the privacy front, the rules provide that the workers cannot tear open sealed trash bags in conducting inspections.  But, if clear plastic bags are used, the trash workers are permitted to use that visual finding for a red tape tag or fine. Several lawyers involved in the  residents’ movement claim a right of privacy in their trash.  They also note that teens in the household or those walking along or residing in the neighborhood could place trash in the wrong cans, but the owner of the home would be penalized. 

    As one resident, who supports composting, put is, “An admirable goal does not justify bad policy.” Kirk Johnson, “Residents Sue Seattle, Saying New Trash Rules Violate Privacy,” New York Times, July 18, 2015, p. A10.

    DISCUSSION STARTERS

    Is there a right to privacy in your trash?

    Does it make a difference if you trash is sealed in bags?

  • The Nuns v. Katy Perry and the Archdiocese

    The Sisters of the Most Holy and Immaculate Heart of the Blessed Virgin Mary have a bone to pick with their archbishop as well as property law. Their eight-acre property has been for sale, a property valued at $15 million. There are two parties vying for the property, singer Katy Perry and developer Dana Holister.

    There are five surviving nuns in the convent, which the nuns acquired in 1971, including Sisters Rita Callahan (77) and Catherine Rose Holzman (86), who filed court documents opposing the sale. In e-mails attached to their filings, the sisters wrote, “In selling to Katy Perry, we feel we are being forced to violate our canonical vows to the Catholic Church.” The three remaining sisters, Sister Kean-Marie, Sister Marie Victoriano(88), and Sister Marie Christine Munoz Lopez (82) support the archbishop in his decision to sell to Ms. Perry. Michael Cieply, “Citing Vows, Nuns Remain Resistant to Sale of Convent to Pop Singer,” New York Times, July 20, 2015, p. A12. They have signed statements and expressed their support for the sale.

    However, in their filings, Sisters Rita and Catherine noted that Sister Marie Christine was “woozy” when she signed her statement, being under the influence of morphine. Sister Marie Christine has no longer responded to questions from her care facility. none of the nuns actually reside in the convent, but they have ownership rights in the property and would be entitled to the proceeds. Sister Rita said in an interview, "Well, I found Katy Perry, and I found her videos and ... if it's all right to say, I wasn't happy with any of it."

    Ms. Perry has met with the nuns, sung “Oh Happy Day” for them, and showed them her tattoo of Jesus on her wrist. The nuns were still concerned about the duet video with Missy Elliot.

    In a hearing scheduled for July 30, the court will need to decide several issues, one of which is the right of the archdiocese to take over the property rights of the nuns. There are other related questions such as the archdiocese’s use of funds bequeathed to the order along with the property in 1971. And the court will have to deal with the problem that the nuns have already given Ms. Holister a deed in exchange for $100,000 in cash (although some court documents indicate the amount in cash so far is only $44,000) and a promissory note for $9.9 million. That agreement is oral and payments of $300,000 per year begin in 2018. Ms. Holister has vowed to honor her oral agreement.

    Ms. Perry has offered to pay a total of $15 million for the property, consisting of $10,000,000 for the property (with very little in cash) and up to $5,000,000 in order to find a place for the nuns to have their retreat location, which will probably be an existing priests’ retreat. Ms. Perry’s offer allows control of the funds and property to remain with the nuns. Ms. Perry plans to move into the property with her mother and grandmother. Ms. Perry used her legal name of “Katherine Hudsen” for her offer in September 2014 and the sisters were not aware that she was actually Katy Perry until a few months ago.

    The 1971 bequest was to the nuns, but the archdiocese has had its hand in the management and upkeep of the property but has not accounted for the funds in the bequest.

    The court has a tangled web to unravel, including the offer and acceptance of the Holister terms, as well as the ultimate determination of whether there is deference given to canon law over civil law in terms of property rights.

    DISCUSSION STARTERS

    Explain who claims to own what.

    Discuss the list of issues the court must address.

    Explain how the capacity of the sisters might enter into the court’s decisions.

  • Hackers and Your Internet-Connected Car

    For the past five years, automakers have been rushing into providing Internet connectivity in their cars. Access to the Internet for directions, information, and other useful tools has resulted in increasing technological advancements in auto resources. However, the rush by manufacturers to include the latest and greatest technology was not accompanied by sufficient attention to cybersecurity. As a result, a former NSA analyst and another experienced hacker (Charlie Miller and Chris Valasek) were able to take control of a moving Jeep Cherokee that was being driven by a tech writing doing a story on whether cars could be hacked. The two cyber experts were able to get into the car’s wireless communications system. Once in the system, they were able to manipulate the air conditioning, blast the driver with Skee-lo at full volume, control its speed, turn on the windshield wipers, and eventually run the vehicle off the road. Danny Yadron and Mike Spector, “Hackers Show How Flaw Lets Them Control a Car,” Wall Street Journal, July 22, 2015, p. B1.

    Hearings in the U.S. Senate confirm that auto makers are aware of the potential for hacking, but are behind in terms of providing their cars with adequate protections. The Senate Commerce Committee has announced legislation that would require the Federal Trade Commission and the National Highway Traffic Administration to work together to establish federal standards to protect drivers’ (and cars’) privacy, i.e., sufficient security to prevent hacking. Marco della Cava, “Hack of Connected Car Raises Alarm Over Driver Safety,” USA Today, July 22, 2015, p. 6B.

    The problem with vehicles is more serious than with hacked credit card accounts because in the case of hacked bank and credit accounts, the accounts can be closed and the holder given a new card and account. However, as with the Jeep hacking experiment, the successful hack cannot be stopped, even by the driver. Once a car is hacked, the driver is trapped in a vehicle going 70 mph. In the Jeep experiment, the hackers were able to apply the brakes suddenly, and all the writer/drive could do was press on the gas and watch the RPMs climb. For more details on the ride by hackers, go here.

    One obvious response has been to provide updates to the cars’ software in order to fix any glitches or vulnerabilities as the companies become aware of them. However, the auto makers need to move quickly. The hackers noted that Chrysler products were easier to hack than others cars. The issue of “hackability” presents an interesting product liability issue because now the automakers are aware of the problem and will need to take steps to cure this design defect in their vehicles. From this point forward, any accidents that involve cars with security weaknesses in the Internet function of the cars will result in liability for the cars’ manufacturer. The cars have a design defect. The question now is whether it can be fixed. How quickly it can be fixed controls how much risk and resulting liability the companies have.

    The federal legislation, if passed, will establish minimum security standards, but certainly not foolproof ones. The question is whether the cars need some anti-hacker means to halting a hack once it is in progress.

    DISCUSSION STARTERS                                                                 

    What makes the finding that a car could be hacked a game-changer for auto manufacturers?

    What will happen once a driver (other than those involved in experiements) experiences a hacking while driving? What are the legal issues then?

  • Top Restaurant Violates Service Charge/Tip Rules; Agrees to Pay Workers $500,000

                

     

    One of the world’s most expensive restaurants, Per Se in New York City, has agreed to reimburse staff $500,000 representing tip money that should have been paid to workers but was not. The payment settles charges brought by the New York State Attorney General (a state’s chief legal officer and, among other roles, enforcer of rights of wage-earners) accusing the upscale eatery of improperly withholding tips from employees over a 21 month period between January, 2011 and September, 2012.

    How costly is a meal at Per Se? The prix fixe at the eatery starts at $310 per person The establishment bills itself as the “haute couture of fine dining.”. It’s where you go for culinary delicacies such as caviar, truffles and Nova Scotia lobster.

    There has been much confusion in the restaurant industry over the term “service charge”. A 20% service charge is added by Per Se and many other restaurants to the bill of guests hosting parties at the facility. Hosts typically believe the service charge represents a tip to the servers and so do not pay an additional tip. However, the practice of many restaurants, including Per Se, was to retain the service charge, allocating it to the cost of rent, marketing, utility maintenance, wages and benefits, inventory, etc. Wait staff thus received no part of this fee.

    In 2011, New York State addressed this problem. The state Department of Labor issued an order requiring restaurants that impose a “service fee” to apply that money as a gratuity and give it all to servers.

    Fees that restaurants keep and do not distribute to staff should be called something different, such as an “administrative fee” or “operational charge”. Per Se corrected itself in 2012 and since then has been in full compliance.

    To distribute the half a million in restitution, the restaurant must identify current and former wait personnel who were employed during the time when Per Se was keeping the money, allocate the money among them, and send each a check.

    The attorney general was prompted to bring the case against Per Se because the eatery’s staff has a right to full payment of money earned, and customers have a right not to be misled about who receives money they intend as tips.

    The expensive restaurant’s servers make between $16.60 and $28 per hour, which are industry-leading wages. When tips and overtime are added, servers can earn up to $116,000 annually.

    The restaurant called the situation “an unintentional oversight.” And noted, “Per Se, unaware of a new state regulation, did not update the description of the operational charge in its private dining event agreement during a 21-month period in 2011 and 2012. . . .Our employees are among the best compensated in the restaurant industry because they are the best in the business.”

    The settlement covers the period from January, 2011 through September, 2012.

    Per Se is owned by Thomas Keller, a famed restaurateur who won Best Chef in America in 1997, and Best California Chef in 1996. He has authored numerous cookbooks. His restaurant in Napa Valley, California, called The French Laundry, regularly makes Restaurant Magazine’s list of top eateries in the world.

    Once an investigation of a business is begun, numerous law violations are often identified in addition to those that triggered the inquiry. Such resulted with the case against Per Se. Thus, the settlement also requires the restaurant to facilitate how employees make complaints about labor violations, train staff members responsible for private dining events on the mandates of the labor laws, and identify a compliance officer to monitor labor practices.

    Numerous states have laws regulating service charge. For example, some states do not require that service charges be paid to employees, but mandate that restaurants disclose on menus or receipts what percentage of a service charge is paid to workers.

    Effective January, 2014, the Internal Revenue Service treats automatic gratuities (fees automatically added on to a restaurant bill) as restaurant income. If they are distributed to employees, the money is considered wages and not tips. Restaurants will thus have to pay payroll taxes on such money, and cannot take tip credits (credit toward an employer’s minimum wage obligation for tipped employees).

    For more information, click here.

    DISCUSSION QUESTION:

    How might new restaurants avoid running afoul of rules relating to service charges and automatic gratuities?

  • Who Gets the Film Rights to Harper Lee's 'Watchman'? The Rights of a Film Studio in a Book

    Harper Lee’s “To Kill a Mockingbird” has been studied by most high school students and its film version viewed by more. HarperCollins recently released Ms. Lee’s only other manuscript, “Go Set a Watchman,” a book that deals with the characters pre-Mockingbird. The curiosity of readers having the opportunity, after over 50 years, to partake of an author’s only effort other than Mockingbird has produced a bestseller. Where there is a bestseller, the film rights cannot be far behind. You can watch a documentary about the film and its cultural role here.

    However, the film rights in this situation are complicated. First, there are Ms. Lee’s constraints. She will not permit the sale of film rights until the international publication of her book is complete. Michael Cieply and Brooks Barnes, “Film Version of ‘Watchman’? First, Untangling the Rights,” New York Times, July 17, 2015, p. A1. Then, there are the right of Universal, the company that produced the film version of “To Kill a Mockingbird.” Producers, directors, actors, and the heirs of all three have indicated that it remains unclear what rights Universal would have in any sequel. For example, Universal has preserved the set from “To Kill a Mockingbird.” The company does not allow its tours to view the set, which is referred to as scared property.

    Presently, no one from the studio is speaking publicly. Ms. Lee’s agent has said that the author will want some degree of control over the film because “Watchman” discloses that Atticus Finch (patterned after Ms. Lee’s father) attended a Ku Klux Klan meeting before he became a defender of civil rights for a wrongfully accused black defendant.

    Precedent for such prequel or sequel battles exists in Hollywood. For example, the film “Hannibal,” a sequel to “Silence of the Lambs,” was produced only after considerable negotiations regarding character rights of the first film studio.

    The books and the film are both protected by copyright. The question is whether the author and/or the studio must also give consent for the use of the original works for derivative works. And there are issues as to whether the sale of rights to a book to a film studio cause the owner of that copyright to waive any rights related to the characters, information, or stories in the book and movie.

    There are no definitive answers, but the publication of a major author’s only other book reminds us of the need to take care of issues related to derivative and use rights. And it is a certainty that the sale of film rights for ‘Watchman’ will net Ms. Lee a fortune, but only after substantial negotiation.

    DISCUSSION STARTERS

    1. Why do prequels and sequels present legal problems?

    2. How does copyright apply here?

  • Apple’s Loses Appeal on E-Book Antitrust Case: The Supply Chain Price-Fixing Case

    In 2012, the U.S. Justice Department, 33 states, and consumer plaintiffs filed suit against Apple for its role in price-fixing with book publishers. Apple had worked with the major book publishers (Simon & Schuster, Hachette Book Group, Harpercollins, and Penguin) to arrange for an agreement to hold firm on e-books pricing so that the companies would not be subject to Amazon’s aggressive price discounting. At the time of the agreement, Amazon controlled between 80 and 90% of e-book sales. Apple agreed to let the publishers set their prices, but if another retailer was selling an e-book at a lower price, the publisher would have to match that price at Apple. The result was that the publishers gained some bargaining power with Amazon. Apple had introduced what has become known as the agency model. Different from the wholesale market, in which the publisher sells the books to retailers and distributors at a lower price, and the retailers and wholesalers set the price, the agency model allowed the publishers to set the retail price with Apple simply acting as an agent for distribution of the books with the launch of its iPad. Apple explained to the publishers that, “There is no one outside of us that can do this for you. If we miss this opportunity, it will likely never come again.”

    The federal district court (U.S. v. Apple, 952 F. Supp. 2d 638 (S.D.N.Y. 2013)) found that Apple had committed a per se violation of the Sherman Act by setting up a situation in which all the publishers agreed to the same pricing. Their intent in trying to preclude Amazon’s monopolization or the fact that prices did not actually increase were deemed irrelevant to the district court.

    On appeal, the Second Circuit Court of Appeals, in a 2-1 decision (U.S. v. Apple, Inc., 2015 WL 3953243 (2nd Cir. 2015)) concluded that the district court got the decision right and concluded that Apple had indeed violated the Sherman Act. Apple has agreed to pay $450 million to e-book consumers in order to settle the state and private lawsuits that resulted from the antitrust case. The publishers had already agreed to pay $170 million to settle their roles in the case.

    However, there was a dissent in the case that raises an interesting question about price-fixing. Price-fixing is an agreement among competitors, those who operate at the same level of the supply chain. In this case, Apple was not a publisher competitor. rather, Apple was a supplier who established a new form of selling books that allowed the publishers to set their own prices, independently. The dissent noted, “On the only horizontal plane that matters to Apple’s e-book business, Apple was in competition and never in collusion. So, it does not do to deem Apple’s conduct anticompetitive just because the publishers’ horizontal conspiracy was found to be illegal.” The dissent indicated that the conspiracy was among the publishers and that Apple was ona different rung of the supply chain.

    Apple said that it simply pushed the publisher agreements unwittingly. Its real goal was to compete with Amazon. However, the majority of the court concluded that the facilitation was enough to find Apple guilty of conspiracy to fix prices. A U.S. Supreme Court appeal is a possibility, something that would result in an interesting clarification of the antitrust laws as well as a battle between the varying economic minds of the court.

    Apple has a federal monitor in place at its headquarters. The monitor is there to be sure that no further antitrust violations occur and that Apple has checks and balances in place to prevent any further antitrust issues.

    DISCUSSION STARTERS

    Explain the supply chain issues the dissent raised in relation to price fixing.

    Does the fact that prices came down mitigate the conspiracy to fix prices?

  • Airlines Facing Justice Department Investigation for Antitrust Collusion

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    It was not quite two years ago that the Justice Department approved the merger between US Airways and American Airlines, creating the largest airline in the world. However, the Justice Department is not investigating all of the major airlines to determine whether there was collusion among the big carriers to limit the number of seats available on flights.

    The big four airlines, American (combined with US Airways), Delta, Southwest, and United, carry 80% of the air traffic in the United States. There have been indications in airline executives’ discussions with analysts about “capacity discipline.” Some belief that “capacity discipline” is airline jargon for limiting the number of available flights as well as the size of fleets. Christopher Drew, “U.S. Investigates Biggest Airlines in Collusion Case,” New York Times, July 2, 2015, p. A1.

    Such collusion would not directly control prices, a per se violation under the Sherman Act, but it would limit the supply of airline seats on flights, thus driving up the price of those seats. If true, the control of the number of seats was indirectly an agreement on pricing – the basics of supply and demand.

    However, airline executive deny the collusion and point to added capacity as well as an overall decrease in fares. Some experts in the field believe that the airline executives were simply speaking to appease analysts who were prepared to downgrade their ratings if the airlines overbuilt routes, fleets, and seats. When Southwest announced expansion of its capacity in May 2015, there was a sell-off of airline stocks so large that there was a loss of $10 billion in the big four’s capital in a matter of hours. The capacity factor is heavy on the minds of the analysts and the markets. The slightest change in fleet size or added routes results in a sell-off of airline stocks. Jack Nicas, Brent Kendall, and Susan Carey, “Airlines Face Antitrust Probe,” Wall Street Journal, July 2, 2015, p. A1. The big four airlines have announced growth in routes and fleet of 5.4% overall. The following chart shows the growth over the past year among the carriers.

     Spirit                                                   35.2%

                Allegiant                                              24.3%

                Frontier                                                13.9%

                JetBlue                                                 10.5%

                Alaska                                                     9.5%

                 Southwest                                               7.0%

                 Hawaiian                                                 4.9%

                  Delta                                                       4.2%

                  American                                                 3.5%

                   Virgin America                                        2.2%

                   United                                                      0.7%

    The smaller airlines, such as Spirit and Allegiant, are offering lower fares, much lower than the big four. However, their fares do not include the add-ons, such as charges for even carry-on bags. The larger airlines have traditionally offered discounts in order to make it more difficult for the upstarts to compete. That form of competition has not been seen among the big four. The big four have increased their add-on fees, so while the airfares look lower for the first half of 2015, passengers may actually end up paying more with upgraded seats, Internet fees, and checked bag fees. As a result, their profits have increased, and combined with lower gas prices (down 40%), their profitability continues to grow.

    There is also congressional interest in the question of fares remaining the same or higher despite the fuel cost savings, and there is the possibility of a congressional investigation. The airlines deny any collusion, but there was still a sell-off of airline stocks.

    DISCUSSION STARTERS

    What would the Justice Department need to prove to show collusion?

    Why is capacity control a form of price controls?

  • Court Cancels Redskins Trademark

                 

     

    A federal court has ruled that the trademark registration for the Washington Redskins football team should be canceled. The decision upheld a 2014 ruling by the Trademark Trial and Appeal Board (an administrative tribunal that determines a party’s right to register or maintain a trademark) (hereinafter “the Board”) of the US Patent and Trademark Office (PTO). The basis for both decisions was the country’s primary trademark statute, the Lanham Act, that prohibits, among other actions, the registration of marks that “may disparage” individuals or groups.   Many people view the name Redskins as a racial slur against Native Americans. Those encouraging the team to change the name include many Native Americans, some lawmakers, former players and fans.

    Disparagement is a statutory cause of action that permits any person to petition the Patent and Trademark Office to cancel a trademark registration where the mark, in the words of the Act, “may disparage . . . persons, living or dead, institutions, beliefs, or national symbols, or bring them into contempt or disrepute.” Examples of disparagement cases that led to cancellation include use for a cigarette of the name of a Muslim group that forbids smoking, and use of the name “Slant” for a band whose members are five Asian-Americans.

    Soon after the 2014 decision by the Board, the football team filed an appeal. From the PTO, an appeal goes to a federal district court. The District Court of Eastern Virginia was the court that ruled to uphold the Board’s decision.

    The cancellation order does not prevent fans from collecting, wearing or displaying the Redskins trademark, nor does it stop the team from using the name. Indeed, a trademark holder is not required to register its mark. Cancellation does, however, significantly reduce the team’s legal protection for the name. Cancellation blocks the team’s ability to stop counterfeiters from selling merchandise with the team’s name and logo.

    Registration provides some benefits when suing for trademark infringement (unauthorized use of another’s trademark in a way that creates confusion about the source of a product or service) in federal court. Those benefits are lost when the registration is cancelled. Registration facilitates a trademark owner’s burden of proof (the legal obligation to establish an allegation as fact using evidence) concerning the existence of the mark and its geographical scope. Additionally, registration serves as constructive notice (notice that is attributed to someone by law even if the person lacks actual notice) to those who might wish to use a name similar to the protected term.

    Registration also qualifies the product to have Customs and Border Protection (US law enforcement agency charged with regulating international trade) that helps prevent knockoffs from being imported.

    The owner of the Washington football team, Daniel Snyder, is appealing the case to a federal court of appeals. He claims the name and logo honor Native Americans. The court rejected this assertion finding that the evidence supported a finding of disparagement. Snyder has argued that “the team has been unfairly deprived of its valuable and long-held intellectual property in violation of the Takings Clause of the Fifth Amendment (“Private property [shall not] be taken [by the government] for public use without just compensation.”). The court rejected this argument on the grounds that a trademark registration is not considered property under the Fifth Amendment.

    The team also claimed cancellation would infringe its right of free speech, and also that the statute is void for vagueness (unenforceable due to the inability of the average citizen to understand). The court rejected these arguments as well, noting that the team can continue to use the mark after cancellation, and so any speech rights connected with the trademark are unimpeded Further, the statute gives fair warning of prohibited conduct and so is not void for vagueness. .

    The trademark registration will continue in effect pending the appeal process. The decision to cancel the mark does not become effective until all appeals are completed. If the losing party in the Court of Appeals decides to appeal further, the case will go to the United States Supreme Court.

    The National Congress of American Indians and the Oneida Indian Nation said in a joint statement : The National Football League claims it has a no-tolerance policy when it comes to racism, but by continuing to fight a court battle defending its promotion of a dictionary-defined racial slur, the league makes clear it is a proud purveyor of bigotry against Native Americans . . . The real question this latest appeals raises is simple: Why are the NFL and the Washington team so pathologically committed to continuing to slur Native Americans?”

    For more information, click here or see Pro-Football, Inc. v. Blackhorse, _F.Supp.3d_, 2015 WL 4096277 (E.D.Va., 7/8/15).

     

    DISCUSSION QUESTION:

    How should the court rule on appeal – cancel the registration or continue it in effect? Why?

  • Court Decision Clarifies Interns’ Status; Fewer Will Qualify as Employees

       

    An appeals court has expanded the category of students who qualify as interns and not employees. [1]  The decision overturns a lower court decision that had entitled many interns to payment as employees.

    Plaintiffs were hired as unpaid interns by Fox Entertainment Group to work on the set of Black Swan, a movie that won the Academy Award for Best Picture in 2011. They claimed defendant movie company violated the Fair Labor Standards Act (FLSA), the federal law that includes the requirement that employers pay all employees at least minimum wage.

    One plaintiff had graduated college with a bachelor degree in multimedia instruction design and was enrolled in a non-degree graduate program at NYU’s School of Education. His graduate program did not offer credit for the internship. He worked from 9:00 a.m. to 7:00 p.m. five days a week. His duties included copying, scanning, filing, tracking purchase orders, transporting paperwork, maintaining employee personnel files, and answering questions, drafting cover letters, organizing filing cabinets, and running errands.

    A second plaintiff graduated college with a degree in film studies. He was not enrolled in a degree program at the time of his internship. At first he worked five days a week but that was shortened to three days. His responsibilities included arranging office furniture, making hotel reservations for cast and crew, emptying the trash, taking lunch orders, answering phone calls, drafting daily call sheets, photocopying, making coffee, making deliveries, and compiling lists of local vendors.

    The Second Circuit Court of Appeals identified the issue as follows: When is an unpaid intern entitled to compensation as an employee under the FLSA?

    The court stated two facts relating to internships that impact the decision. First, “(W)hen properly designed, unpaid internship programs can greatly benefit interns.” Indeed, the court acknowledged that the purpose of a bona-fide internship is to integrate classroom learning with practical skill development in a real-world setting. Second, the possibility exists that employers can exploit unpaid interns by using their free labor without providing the intern with an educational experience.

    Plaintiffs proposed, and the lower court adopted, a test whereby interns would be deemed employees whenever the employer receives an immediate advantage from an intern’s work. Defendants advocated for a more “nuanced primary beneficiary test.” Under this standard, an employer could benefit yet the worker remain an intern. With this test, “The proper question is whether the intern or the employer is the primary beneficiary of the relationship.” An employer need not pay interns provided the job benefits the intern as a learning experience more than it benefits the employer financially. A court, when determining whether an intern is really an employee, must consider the totality of the circumstances, that is, the benefits to both the employer and the intern.

    The court ruled that the primary beneficiary test should be adopted. It identified a “non-exhaustive list of six factors acourt should review. They include: whether the parties’ understand that compensation is not expected; how much educational training is provided; whether the internship is related to the student’s course of study; whether the internship corresponds to the academic calendar; whether the duration exceeds the period of beneficial learning; whether the intern’s work displaces a paid employee; and whether the employee and employer understand that the intern is not entitled to a paid job following completion of the internship. A court should also assess other relevant factors, applicable in a given situation.

    The appeals court remanded (returned to a lower court) the case for further proceedings by the district court consistent with the higher court’s decision. The district court will now apply the primary beneficiary test and determine if the plaintiffs were interns or employees.

    The new decision by the Second Circuit Court of Appeals will likely curb a halt a waive of lawsuits brought by interns seeking payment for their services.

    For more information, click here.

    DISCUSSION QUESTION:

    If you were the judge in the district court applying the primary beneficiary test, how would you rule in each plaintiff’s case – intern or employee?

     

     



    [1] Glatt and Footman v. Fox Searchlight Pictures, Inc., _F.3d_, 2015 WL 4033018 (2nd Cir., 7/2/2015).

  • The Fox Interns and Wages: Are They Employees or Educational Interns?

    The labor law issues have been percolating during the summer months. The first is the issue of unpaid interns, an issue that has made its way to a federal appeals court decision just a few days ago. In Glatt v. Fox Searchlight Pictures, Inc.--- F.3d ----, 2015 WL 4033018 (2nd Cir. ), the court held that employers have considerable leeway in how they treat interns when the work of the interns serves as educational purpose.  The class-action suit resulted from the need for interpretation of the Department of Labor’s Intern Fact Sheet that and used the following factors to determine whether there was an internship or an employer/employee relationship:

     1. The internship, even though it includes actual operation of the facilities of the employer, is similar to training which would be given in an educational environment;

     2. The internship experience is for the benefit of the intern;

     3. The intern does not displace regular employees, but works under close supervision of existing staff;

     4. The employer that provides the training derives no immediate advantage from the activities of the intern; and on occasion its operations may actually be impeded;

     5. The intern is not necessarily entitled to a job at the conclusion of the internship; and

     6. The employer and the intern understand that the intern is not entitled to wages for the time spent in the internship.

     The federal district court held that the DOL did not state explicitly that all six factors be present to establish that the intern is not an employee and instead balanced the factors. The district court found that the first four factors weighed in favor of finding the interns at Fox Searchlight were interns and that the last two factors favored finding them to be trainees. The district court found that the plaintiffs had been improperly classified as unpaid interns and granted their motion for partial summary judgment against Fox.

     On appeal, the court, making a decision that was the first on the intern issue, held that the six-point test was too rigid and that the proper test was the primary beneficiary test, or, phrased differently, who benefits more from the relationship?  The intern or the employer? The primary beneficiary test, under the court’s decision, consists of an examination of the following factors:

     1. The extent to which the intern and the employer clearly understand that there is no expectation of compensation. Any promise of compensation, express or implied, suggests that the intern is an employee—and vice versa.

     2. The extent to which the internship provides training that would be similar to that which would be given in an educational environment, including the clinical and other hands-on training provided by educational institutions.

     3. The extent to which the internship is tied to the intern's formal education program by integrated coursework or the receipt of academic credit.

     4. The extent to which the internship accommodates the intern's academic commitments by corresponding to the academic calendar.

    5. The extent to which the internship's duration is limited to the period in which the internship provides the intern with beneficial learning.

    6. The extent to which the intern's work complements, rather than displaces, the work of paid employees while providing significant educational benefits to the intern.

    7. The extent to which the intern and the employer understand that the internship is conducted without entitlement to a paid job at the conclusion of the internship.

    As a result, the case was remanded to the district court for a trial that would apply the primary beneficiary test. The court will reexamine the facts related to the lead interns.  For example, Eric Glatt worked on Black Swan at Fox.

    From December 2, 2009, through the end of February 2010, Glatt interned in Black Swan's accounting department. He worked from approximately 9:00 a.m. to 7:00 p.m. five days a week. As an accounting intern, performed copying, scanning, and filing documents; tracking purchase orders; transporting paperwork and items to and from the Black Swan set; maintaining employee personnel files; and answering questions about the accounting department. The other interns worked on Black Swan as well in different functions, some for credit and some for the work experience. Most performed clerical functions.  They were not paid.  The court will examine the work in relation to the benefits the students gained from their experience.

    DISCUSSION STARTERS

    What should businesses consider when taking on interns?

    What paperwork would you recommend for both employer and interns?

  • The Former Toyota Executive in Prison in Japan for Oxycodone

    Julie Hamp was named as Toyota’s chief communications officer, a position she would fulfill from Japan. Her appointment was in March 2015, and she resigned on June 30, 2015. Ms. Hamp had to issue a statement about her resignation through her lawyer in Japan because she is in jail there. Ms. Hamp was arrested on June 18, 2015 for allegedly illegally importing oxycodone into Japan from the United States.

    According to reports, Ms. Hamp had her father send 57 oxycodone tablets to her at her hotel where she was staying as she looked for a place to live in Japan. The reports also indicate that Ms. Hamp suffered from knee pain. Her lawyer has explained that she did not know it was illegal to bring prescriptions into the country. The pills were not declared on the customs forms and were shipped to her with some plastic children’s necklaces in the package as well. Japanese prosecutors have until July 8 to decide whether she will be indicted. Jonathan Soble, “American Toyota Executive Resigns While in Jail,” New York Times, June 2, 2015, p. B3

    The arrest touches on a number of concerns for companies with global operations. First, all employees should be clear on laws in the country where they will be working. Both the United States and Japan have strict restrictions on the importation of prescription drugs. However, it is also important to understand cultural distinctions. In Japan, it is much more difficult to obtain an oxycodone prescription than in the United States. In Japan such prescriptions are generally limited to those experiencing the most severe pain, such as cancer patients. In the United States the drug is widely prescribed. Per capita consumption of oxycodone in Japan is one-sixtieth that of the rate in the United States. Understanding the cultural distinctions helps in understanding the strict enforcement of the importation laws in Japan.

    A second concern is the need for global companies to understand the level of background checks that need to be undertaken before hiring for the highest executive positions. At that level of hiring, security background checks and personal profiles are detailed and often lengthy because so much is at stake with their roles, access, and behavior. Experts note that background checks would have uncovered the use of the prescription drug. With that knowledge, Ms. Hamp could have been provided information about customs, importation, prescriptions, and the cultural differences.

    A third concern is the criminal process. The prosecutors could decide to simply drop the charges. Or, under Japanese law, they could re-arrest her, thus allowing another 20 days for them to decide what to do. There could also be an indictment and a confession, which would probably lead to deportation. The prosecutors could also do something in Japan known as suspending prosecution, which is a way of saying that they have the evidence but they are letting you go. Under this scenario, she would also leave the country. The final option is suspension and prosecution. However, there is a 99% chance of conviction in this scenario because in Japan they do not indict unless they are sure of a conviction.

    A final concern is the possible impact of this setback on diversity efforts by Toyota and other global companies. Ms. Hamp was the highest ranking female executive at Toyota and the most senior non-Japanese executive. Ms. Hamp had a stellar career, first with GM and then heading communications for PepsiCo, Inc., before moving to head communications for Toyota North America just prior to her promotion to Japan headquarters. Toyota’s president, Akio Toyoda, knew Ms. Hamp personally, and offered her the promotion in an effort to diversify Toyota’s executive management ranks. He issued an apology for the events and asked forgiveness of the Japanese people for the company’s lack of experience in recruiting global talent. Yoko Kubota and Eric Pfanner, “Arrested Toyota Executive Resigns,” Wall Street Journal, July 2, 2015, p. B2.  

    DISCUSSION STARTERS

    Explain what Toyota should have done differently.

    What have you learned about having your parents ship things to you when you are in another country?

  • U.S. Supreme Court: The Hotel Guest List Is Private-- Police Need a Warrant to Examine It

    In City of Los Angeles v. Patel, 2015 WL 2473445 (2015), the U.S. Supreme Court struck down a Los Angeles Municipal Code ordinance that required “every operator of a hotel to keep a record” of every guest at the hotel and to have that record available for 90 days for the Los Angeles Police Department upon their demand. The failure to keep the guest register was a criminal misdemeanor charge. The record required had to include the following:

    the guest's name and address

    the number of people in each guest's party

    the make, model, and license plate number of any guest's vehicle parked on hotel property

    the guest's date and time of arrival and scheduled departure date

    the room number assigned to the guest

    the rate charged and amount collected for the room

    the method of payment

    Guests without reservations, those who pay for their rooms with cash, and any guests who rent a room for less than 12 hours were required under the ordinance to present photographic identification at the time of check-in, with a record of the number and expiration date of that document. For guests who checked in using an electronic kiosk, the hotels records had to include the guest's credit card information.

    Naranjibhai Patel, a hotel owner, several other hotel owners, and a lodging trade association brought suit challenging guest register ordinance on the grounds that it violated the Fourth Amendment.

    The federal district court found for the City of Los Angeles, holding that the hotel owners had no reasonable expectation of privacy in their records. The Ninth Circuit reversed that decision holding that such searches are unreasonable under the Fourth Amendment because hotel owners are subjected to punishment for failure to turn over their records without first being afforded the opportunity for precompliance review.

    The City appealed and the U.S. Supreme Court held in a 5-4 decision that the records are private and require a warrant for examination. While hotel owners are free to give consent, they are not required to do so and have the right to demand a warrant. Also, the same warrant exceptions, such as exigent circumstances, apply. The court noted that there was risk in officers possibly using the administrative searches as “a pretext to harass business owners.”

    In the dissenting opinion, Justice Scalia noted that guest records are required for hotels and motels around the country (with 100 jurisdictions offered as evidence in the case) with the purpose of deterring criminal conduct. The theory behind the laws is that if those seeking to engage in criminal conduct have to show identification, they will find another place for their illicit activities. Spot-checks authorized by the law are limited to the register itself and do not permit a general search of the hotel or motel. Justice Scalia noted, “Motels not only provide housing to vulnerable transient populations, they are also a particularly attractive site for criminal activity ranging from drug dealing and prostitution to human trafficking. Offering privacy and anonymity on the cheap, they have been employed as prisons for migrants smuggled across the border and held for ransom.” He refers to the role of hotel and motel owners as one of “unique duties,” and cites the commentary of Blackstone (from English common law, to reflect the longstanding tradition of regulation. You can gain a flavor for the issues through the oral argument video posted above.

    The case illustrates the intricate business rules certain industries face as well as the application of basic constitutional provisions to business records. The decision in this case will require police officers to have either a warrant or permission to view the hotel’s registration records.

    DISCUSSION STARTERS

    What is the purpose of the hotel registration requirements?

    Explain what could happen if warrants are required for verifying that the records are being kept.