• Airbnb and Rent Stabilized Apartments; the Two Don’t Mix

        

    Violation of rules has consequences. This lesson was learned the hard way by New York City artist, Eileen Hickey, age 72, whose artwork appeared in the popular movie Eat Pray Love. The film was adapted from the best selling book by the same name. Hickey is also a former curator at the venerable Guggenheim Museum in NYC.

    Hickey lived in a rent-stabilized loft in that city.  This means the rent is regulated by a government agency. In New York City that agency is the Division of Housing and Community Renewal (NYCDHCR), Rent stabilization applies to buildings with six or more units that were built before 1974. Some newer buildings are also rent-stabilized in exchange for tax abatements given to developers. To qualify for a NYC rent stabilized apartment, the renter’s household annual income must be less than $200,000. The NYCDHCR convenes every June to vote on how much stabilized rents can be increased, or if they should be frozen. Landlords cannot raise the rent beyond the amount specified by the NYCDHCR.

    Numerous other cities have similar rent stabilization laws.

    Hickey paid $1,500 per month for an apartment with a fair rental value of at least three times that amount. In violation of the NY Rent Stabilization Code, she rented out the apartment through Airbnb, earning up to $4,500 per month.

    Rent stabilization laws bar tenants from making a profit on their rent-stabilized units. Additionally, NY’s Multiple Dwelling Law bars tenants from renting out their apartments for less than 30 consecutive days.

    Hickey’s landlord brought an eviction action against her for violating the law. The tenant claimed she used Airbnb only briefly to assist in paying her former husband’s medical bills, a brief family emergency, and not to earn a living. She asserted she earned only a total of $14,000 from using the online site. The court ordered her to produce bank and credit-card statements.   She repeatedly failed to provide those documents. The court granted the eviction and authorized a city sheriff to “take all necessary steps . . . to effect the removal and ejection of Eileen Hickey . . from 460 Greenwich Street.” In addition, she was ordered to pay a fine of $185,000 for illegally renting out the rent stabilized apartment.

    Hickey owns a condominium also in Manhattan. The landlord argued this fact proves she is not living in the rent-stabilized apartment. Hickey however claimed she uses the condo as an office. Apparently the judge found Hickey’s claim to be not credible.

    The NYC Comptroller has reported, “Our city is facing an affordability crisis with rents constantly on the rise. A new study by my office shows one of the reasons why New Yorkers paid an additional $616 million in rent is because residential apartments are being used as tourist rentals b Airbnb.” Think supply and demand.

    In an effort to combat the limited number of available rental units, NYC has recently heightened its enforcement of the Multiple Dwelling Law prohibition against rentals of apartments for less than 30 days. One goal of fines as punishment for violation of laws is to deter both the defendant and others from engaging in the illegal activity. Hickey’s $185,000 fine will no doubt catch the attention of many who currently use Airbnb illegally, and others who may have been considering such endeavor.

    DISCUSSION STARTER:

    1) Recognizing that rent stabilized apartments result in significantly reduced income to landlords, what government policies prompted the development of rent stabilized apartments?

    2) Are those policies still relevant today? 

     

  • A Tarp-Covered MotorCycle in Your Driveway: A Warrant is Required to Lift That Cover

    Officer David Rhodes, of the Albemarle County Virginia Police Department was one of many officers in search of a driver on a distinctive black-and-orange motorcycle.  The driver has twice eluded police officers, and in one case there was a chase during which the rider exceeded 140 mph.  Using Facebook, Officer Rhodes found one Ryan Collins sitting atop what seemed to be the distinctive motorcycle.  Officer Rhodes was able to track Collins' location down to his girlfriend's address.  Officer Rhodes visited the property, warrantless, and invitationless.  He noted a tarp covering something in the driveway.  Officer Rhodes lifted the tarp and found the infamous black-and-orange cycle.Tracing the plates, Officer Rhodes learned that the infamous cycle was stolen. 

    After losing his motion to suppress the search in the driveway, Collins was convicted of receiving stolen property.  He appealed the verdict to the Virginia Supreme Court, which held that the search was covered by the automobile exemption to the Fourth Amendment.  However, the U.S. Supreme court granted certiorari, and  in an 8-1 decisionheld that Officer Rhodes was required to have a warrant. You can listen to the oral argument here. Justice Sotomayor, writing for the majority, held that the "automobile exception" is jsut that -- an exception for automobiles.  Her opinion noted that the property was located inside the curtilage of the home.  "Curtliage" is an old English term for a house and its fenced or bounded area.  Justice Alito was the lone dissenting judge and quoted Mr. Bumble from CJarles Dickens' Oliver Twist, . Justice Alito noted that Mr. Bumble responded, when told of a legal rule that did not comport with reality, "If that is the law, the law is an ass -- an idiot."  Collins v. Virginia, 2018 WL 2402551 (2018)

    The majority opinion noted that the tarp was the equivalent of a garage.  Those with lesser means who could not afford a garage would not be entitled to the same protections as those with garages even though the tarp accomplished the same purpose as a garage in providing protection and privacy.  

    DISCUSSION STARTERS

    Do you believe it would have made a difference if Mr. Collins had been home at the time?

    Is the tarp the same as a garage?

  • Tying Arrangements: Did McDonald's Quarter Pounder With Cheese Violate Antitrust Laws

    Cynthia Kissner and Leonard Werner have filed a class action suit against McDonald's in federal court in Florida.  The two, seeking class action status, allege that they were forced to pay 30 to 90 cents extra for cheese on their Quarter Pounders, cheese that they did not want.  They allege that they had to place a special order for their Quarter Pounders or order a regular Quarter Pounder and remove the cheese.  The cheese-free option for Quarter Pounders has since been removed from the drive-through menu.  

    Lawyers bringing the suit claim that McDonald's actions violated the Sherman Act that prohibits tying arrangements, or sales that require customers to be one product in order to get the product that they really want.  Unless they take the cheese, they cannot have a Quarter Pounder.  Their argument is that they are thereby forced to pay extra for something that they do not want.  The lawyers have also argued that McDonald's is unjustly enriched because it receives payment for cheese it does not furnish to its customers.  The plaintiffs seek the remedy of McDonald's offering a Quarter  Pounder sans cheese as a menu option.  They also request damages of 30-90 cents per Quarter Pounded that they have purchased over the past few years.  Ziati Meyer, "Quarter Pounder Fans Sue Over Cheese Charges,"  USA Today, May 23, 2018, p. 4b.  Lawyers for the plaintiffs have claimed that the refunds will total about $25 million. 

    McDonald's practice is not unusual.  For example, at Subway, customers pay the same price whether they have their subs "fully loaded" or "plain." McDonald's offers both a Quarter Pounder and a Quarter Pounder with Cheese options in it ordering app. However, that option is not available for order in the physical stores, only for pick-up of app orders.  

    Tying is generally associated with activities between and among competitors. The law against tying was recently clarified in Suture Express, Inc. v. Owens & Minor Distribution, Inc., 851 F.3d  1027 (10th Cir. 2017). In that case, Suture Express was a new upstarts specializing in the medical supply network by selling on Suture.  Owens & Minor was a medical supply distributor that carried all types of medical supplies, including suture.  Owens & Minor began bundling provisions that required its customer to pay a premium for all medical products unless the customer agreed to purchase its sutures. Suture Express brought suit alleging a loss of its business to Owens  & Minor through anticompetitive practices.  To squelch tying the under the Sherman Act, the plaintiff must prove that the defendant had market power, The court held that there are many places to buy both medical supplies and sutures and the tying was not anticompetitive. In that case and in the McDonald's case, this element is critical.  There are many other places to purchase burgers and McDonald's will probably not be established as monopolistic.  

    McDonald's has been a defendant in a number of suits, including the one-napkin limitation suit, the hot-coffee suit, the no-more-toys in Happy Meals suit, and value meals costing 41 cents more than ordering the same items ala carte.  You can read a history of these suits here. The claims are splashy and make the news, but the substantive cases have only been at a ratio of ` out of six for McDonald's losing.

    DISCUSSION STARTERS

    Explain tying under the Robinson-Patman Act.

    Discuss the issues of damages in the suit. 

  • Student Loan Default Rate: Educational Institutions Gaming the Metrics and Graduates End Up Paying More

    Educational institutions can lose their federal funding if they have an excessive number of loan defaults among their graduates. An excessive rate is measured using the figure of how many of an institution's graduates default within 3 years of graduation (called the cohort default rate). The intent is to measure whether the institutions are producing graduates who can earn a living and repay their loans.

    However, educational institutions have found a way to game the metric. They are contacting their graduates and asking them to put their loans in forbearance (i.e., on ice), which means that the students can avoid default. They are not paying their loans when they are on ice, but loans on ice do not count against the institutions' cohort rate. The forbearance rate has doubled since 2009. Erica L. Green, "Loophole Lets Colleges Mask Loan Default Rates Among Their Graduates," New York Times, May 12, 2018, p. A19. However,, graduates who are talked into going on ice face consequences for this forbearance option. Their loans accumulate interest, their credit ratings are affected, and they cannot obtain loans for buying homes. In some cases, their low credit scores can affect their eligibility for certain jobs. The educational institutions benefit by talking graduates into forbearance, but the graduates suffer. Taxpayers foot the bill for forbearance too. The likelihood of a loan being repaid after forbearance is reduced substantially because the amount of the loans continues to grow. Graduates find themselves in a hole and the interest keeps digging them in deeper.

    Legislation has been proposed to close the forbearance loophole and provide graduates with new options, including a longer 25-year repayment plan with lower monthly payments as well as government service loan forgiveness programs. The graduates buy time on repayment, but at great expense.

    DISCUSSION STARTERS

    Explain the metric used for educational institutions on student loans.

    Discuss the consequences for graduates. 

  • MoviePass: The Too-Good-To-Be-True "All You Can See Movies" Company and Dishonesty in Customers

    MoviePass offered what the public wanted. Originally, for just $99 (beginning last August), you could go to one movie per day. Then in August 2017, the company went to $9.95 per month and its subscriptions soared. Ben Fritz, "Plot Thickens for MoviePass,"  Wall Street Journal, May 17, 2018, p. B1.   That's right!  Download the app and use that app to pay for your ticket.  MoveiPass then paid the theaters the full price of the ticket. In short time, MoviePass went to 20,000 subscribers, then to 2,000,000, and then to uh-oh!  Figure out the cash drain when the average movie ticket cost in the United States is $9.16.  The business model had a slight flaw:  No one anticipated how many movies folks would see.  It turns out that there are quite a few people with lots of movie time on their hands.  Or, was it dishonesty?

    MoviePass has changed its terms of its original subscribers, back and forth.  Now you cannot see a movie more than once.  MoviePass said this is a good change because now the "little movies" can gain some traction at the box office. That new restriction came in tandem with issues of fraud.  Subscribers may have been sharing the app with friends.  Hence, the seeming habit of subscribers seeing movies more than once. In fact, MoviePass suspects that there are scalpers out there selling movie access for less than in the theaters using multiple MoveiPass subscriptions. Now, subscribers must take a picture of their ticket stub and send it through the app along with a photo, after every movie admission.  Failure to provide the photo results in subscription termination. Patrick Ryan, "MoveiPass Changes in Search of the Right Balance," USA Today, May 9, 2018, p. 4B. Can a company make such changes?  If the "subject to change" provision is built into the original agreement, yes.  However, in this case, the customer backlash is controlling, not the legal issues.  Backlash means the subscriber base cannot continue to grow.  

    But MoviePass is now offering different terms to new subscribers.  In April MoviePass sold the service with a 4-movies per-month limitation and streaming music from iHeartRadio for $29.95 per month.  Sufficient backlash resulted in MoviePass reversing that subscription decision just two weeks later. Again, new subscribers can be legally bound to new terms, but it is the backlash the drives what start-ups dependent on new customers must respond to.  The company is clearly struggling. Helios (the company that offers MoviePass) external auditor stated that it had "substantial doubts" about its ability to continue operating. Helios lost $98.6 million on $48.6 million in revenue for the first quarter of 2018. The price of its shares have dropped 93% since January, with the stock plummeting from going from a high $33.00 per share in October 2017 to a May 16, 2018 price of $1.68. Helios and Matheson Analytics (a company run by a former Netflix vice president) purchased MoveiPass. 

     USA Today remains sold on MoviePass calling it a better deal than the Cinemark Movie Club and Sinemia.  Still, those two companies are not struggling to stay alive. A contract ends in bankruptcy even if you still had movies left on your subscription. 

    DISCUSSION STARTERS

    Explain why the terms for MovePass keep changing.

    What are the legal rights of subscribers?  What do those right mean in light of the company's financial condition?

  • The SEC Wants to Question JayZ: He Says That He Is Busy with His Global Concert Tour

    Grammy-award-winning singer JayZ is also a businessman with significant investments.  Shawn Carter (his birth name) was a founder of  Rocawaer, an apparel company.  In 2007, Iconix Brand Group, Inc. paid $200 million to purchase assets from  Rocawaer. Iconix then wrote down the value of the Rocawaer.  by $169 million in 2016 and by another $34 million in 2018.  In \November 2017, the Securities Exchange Commission (SEC) issued a subpoena to Mr. Carter as part of its investigation into the accounting practices of Iconix. Iconix is now a failed clothing company. Mr. Carter did not respond to the original subpoena, and the SEC issued another subpoena in March 2018.  Mr. Carter also did not respond to that subpoena.  Mr. Carter's lawyer has said that Mr. Carter has agreed to one day of testimony for the SEC, but that the subpoena is "burdensome," because of Mr. carter's schedule and his upcoming 45-date global concert tour.  "Rapper JayZ Pushes Back Against SEC Demands," USA Today, May 8, 2017, p. 1D.

    Mr. Carter is not accused of any wrongdoing.  However, he has been ordered to appear and explain why he should not be required to respond to the subpoena.  JayZ's lawyer has argued that his client has no knowledge about Iconix's accounting practices,“Mr. Carter had no role in that reporting or Iconix’ s other actions as a public company. Mr. Carter is a private citizen who should not be involved in this matter.”

    Rocawaer was launched in 1999 and expanded from a rapper clothing company to an international brand. Iconix paid $200 million for Rocawear's baseball cap design.  Mr. Carter maintains that he has no knowledge.  However, even private citizens are subject to judicial subpoenas, even rap rap stars are subject to subpoenas, and even Grammy winners have to show up offer, under oath, that they have no knowledge of a purchaser's accounting practices.  In relity, the SEC is probably seeking information from Mr. Carter about the value of the baseball cap acquisition as part of its investigation into the write-down of its value. Absent limited causes, such as health and working around work schedules, even super stars are subject to federal subpoenas. 

    DISCUSSION STARTERS

    Explain the relationship between Iconix and JayZ.

    Discuss the rights of those who are subpoenaed. 

  • Ability to Work Rotating Shifts held an Essential Function of Burger King Assistant Managers

                

     The Americans with Disabilities Act continues to generate many lawsuits. A recent decision held that the ability of management personnel to work rotating shifts was an essential function of a job.

    A Puerto Rican Burger King franchisee owns several restaurants, some of which are open 24/7 (at all times).   The assistant managers rotate the time and location of their shifts so that the desirable work periods as well as the undesirable ones are evenly distributed among them. The franchisee delineates three work shifts in the course of a day – 1) 6:00 a.m. to 4:00 p.m.; 2) 10:00 a.m. to 8:00 p.m.; and 3) 8:00 p.m. to 6:00 a.m.

    The plaintiff assistant manager was making a bank deposit in 2011 when he was robbed at gunpoint and hit on the head. Since that attack he has suffered from post-traumatic stress disorder and major depression.

    To better manage his medical conditions, plaintiff requested a fixed work schedule rather than a rotating one, and a permanent assignment to a location away from a high-crime area. The franchisee agreed to this request on a temporary basis but after awhile insisted plaintiff again work rotating shifts. Plaintiff resigned In 2013, and sued claiming defendant’s failure to allow him a fixed schedule violated the duty to reasonably accommodate his medical conditions.

    A plaintiff suing for failing to accommodate under the ADA must prove the following three elements: 1) he is disabled within the meaning of the ADA; 2) he is nonetheless qualified to perform the essential functions of the job, with or without reasonable accommodation; and 3) the employer knew of the disability but refused to make an accommodation when requested to do so by the employee.

    An essential function of a job is one that is fundamental to the job, as opposed to marginal. Whether or not a task is an essential function is determined on a case-by-case basis. The contents of a written job description by an employer is one form of evidence of essential functions. A few other factors a court considers when determining whether a task is an essential function are the consequences to the employer of not requiring the incumbent to perform the task, the work experience of past incumbents in the job, and the current work experience of employees in similar jobs.

    Here, accommodating plaintiff permanently would have disproportionately burdened the other assistant managers who would have to work an increased number of undesirable shifts. Further, the job application for the position, which plaintiff signed when hired, informed assistant managers they they had to be able to work a variety of shifts at different sites.

    The court concluded that working rotating shifts was an essential function of the job of assistant manager in defendant’s Burger King franchises.

    The ADA protects qualified individuals, which is defined as a person “who, with or without reasonable accommodation, can perform the essential functions of the job.” Since no accommodation would enable plaintiff to work rotating shifts, and since rotating shifts are an essential function of the job, plaintiff was not a qualified individual per the ADA. Therefore, the store did not violate the Act by declining to adjust plaintiff’s work schedule as he requested. Summary judgment for the employer; case dismissed.

    For more information see Sepulveda-Vargas v. Caribbean Restaurants, LLC, __F.3d__, 2018 WL 2000012 (1st Cir., 4/30/2018)

     DISCUSSION QUESTION:

    Do you concur that the ability to work rotating shifts was an essential function of defendant’s job? Why or why not?

  • Fidelity Fires 200 Employees Over Fitbits and Laptops

    Fidelity Investments had two programs for its employees.  One was an offer for the company to reimburse employees who purchased Fitbits.  The Fitbit program was one designed to have encourage healthy living among employees.  The second program was one that wold reimburse employees 20% of the purchase price of $10,000 worth of computer equipment.  Fidelity discovered that 200 employees made qualifying purchases and submitted their receipts for reimbursement, but then returned the items and kept the Fidelity reimbursements.  Most of the 200 employees were located in the brokerage department.  In releasing a statement about the terminations, Fidelity explained that Fidelity has a culture of "compliance and integrity."  Sarah Krause and Rob Barry, "Fidelity Employees Fired After Alleged Misuse of Reimbursement Programs," Wall Street Journal, May 7, 2018, p. B2.   In some cases, employees submitted altered receipts in order to up the amount of their reimbursement. 

    One employee had purchased a laptop and was given reimbursement.  Because he was getting married and had wedding expenses, he returned the laptop and forgot to pay back the reimbursement.  He said, “Was it poor judgment on my part? Absolutely. Do I think I should have been fired for it? No.”  Fidelity's position is that honesty and integrity are critical for customer trust and that misuse of company resources shows a lack of commitment to fairness, disclosure, and honest. The Fidelity code of ethics prohibits the use of company resources for personal gain.  The result was that the code of ethics provided for termination as a remedy for misuse of company property.  A broader inquiry is underway because of the concerns about other activities by the brokers

    When an employee violates a company's code of ethics, the offense is one that permits immediate termination.  In most other issues, such as performance, tardiness, and behavior, the employer must build a record in order to be sure that there is notice and grounds for termination.  However, breach of the code of ethics, because such a breach often involves compliance with statutes and company reputation, the termination can be immediate.  The employer need only have the proof of the breach of the code. For example, in the situation with Harvey Weinstein, the board was facing many accusations by actresses and some employees about Mr. Weinstein's behavior.  However, Mr. Weinstein would have been entitled to some form of internal due process on the allegations before he could be terminated.  Mr. Weinstein was ousted so quickly because the board was able to establish a pattern of expenditures by Mr. Weinstein in violation of the company's code of ethics on the use of company resources. Misuse of company funds is one of those automatic termination areas   In the case of Fidelity, internal audit had gone through all of the employees' reimbursements and found the irregularities in the 200.  The documentation was then used to question the employees.  Those employees without contradictory proof or an explanation were then terminated.  An investment firm, such as Fidelity, is dependent upon public trust and must take swift action against employees, particularly with employees such as brokers who have contact with customers. 

    DISCUSSION STARTERS

    Explain the standards for termination of employees.

    How does termination for breach of the company code of ethics vary?

  • Why a Federal Judge Said "C'Mon, Man!" to Special Counsel Robert Mueller's Attorney

    Former Trump campaign adviser, Paul Manafort has been indicted by a grand jury empaneled by Special Prosecutor Robert Mueller.  Mr. Mueller was hired to look into alleged collusion between the Trump campaign and Russian agents to influence the outcome of the 2016 election.  Mr. Manafort's lawyers mad a motion to dismiss the tax and wire fraud charges against him on the grounds that the ability to charge Mr. Manafort exceeded the authority Mr. Mueller was granted in his appointment as a special prosecutor.  Under federal law, the U.S. Attorney General (or in the case the deputy U.S. Attorney General, Rod Rosenstein because U.S. Attorney General recused himself from handling the appointment because he was involved in the Trump presidential campaign) appoints a special prosecutor who is directed in scope and the type(s) of crimes to be investigated.  

    Mr. Manafort's lawyers argued in court before U.S. federal district judge T.S. Ellis III that the charges agaisnt Mr. Manafort dated back to activities in 2005 and were unrelated to the scope of the special prosecutor's work.  They argued that just as Mr. Mueller's team turned over the investigation into Michael Cohen, one of Mr. Trump's private lawyers, to the Southern District of New York prosecutors, that Mr. Manafort's case should be turned over to the Virginia federal prosecutors, where Mr. Manafort resides.  Mr. Manafort's lawyers also argued that because the crimes and dates are beyond the scope of the appointment that the charges should be dismissed. Judge Ellis asked the assistant solicitor general arguing the motion for Mr. Mueller, "The scope covers bank fraud from 2005?" Aruna Viswanatha, "Judge Questions Charges for Manafort," Wall Street Journal, May 5, 2018, p. A3. 

    Judge Ellis went on to say, "You don't really care about Mr. Manafort. You really care about what information Mr. Manafort can give you to lead you to Mr. Trump and an impeachment, or whatever."  He added, "The vernacular is 'to sing, or tighten the screws."  Sharon LaFraniere, "Federal Judge Questions Counsel's Pursuit of Manafort," New York Times, May 5, 2018, p. A13. The judge asked to see the memo of appointment so that he could assess the scope for himself and the Mueller team lawyers assured Judge Ellis that is was not necessary.  Judge Ellis then responded, "Your argument is 'We said this was what [the] investigation was about, but we are not bound by it and we were lying.'" The judge then referenced the common exclamation from NFL announcers, saying, "C'mon man!" 

    Judge Ellis concluded by saying that the Mueller team needed to produce the memo because, "I am sure you're sensitive to the fact that the American people feel pretty strongly about no one having unfettered power." 

    The issue and motion is unique in that it represents a challenge to the special counsel law, a statute that provides for appointment of a prosecutor independent of the Justice Department, but under the authority of the Justice Department.  There have been special counsels in the past, such as Kenneth Starr's investigation into then-President Bill Clinton's false testimony in a harassment suit by Paula Jones and Patrick Fitzgerald in the investigation of an alleged leak of CIA information by Bush administration officials.  The concerns about the power of such special prosecutors, the length and scope of their investigations, and accountability have been debated, but this challenge in court represents the first time a defendant has mounted an aggressive challenge to the procedures and perhaps constitutionality of the work of special prosecutors. 

    Judge Ellis will rule on the motion after receiving the Rosenstein memo of appointment.  The release of that memo has been a point of contention between congressional committees investigating possible Justice Department and FBI abuses of power.  So far, the memo has not been released except in heavily redacted form.  The case is one in which the various branches of government are pressing each other for information and raises questions about the issue of separate but equal and who supervises whom and to what extent.  The judicial branch will have its say through Judge Ellis (and any appeals that follow) and the congressional demands, including subpoenas, will continue.

    DISCUSSION STARTERS

    Explain the role of special counsel investigations.

    Why is Judge Ellis concerned about the Manafort case?