Nissenbaum Law Blog

May Corporate Actors Be Held Personally Liable Under the Consumer Fraud Act?

In Allen v. V&A Brothers, Inc, A-30 SEPT.TERM 2010, 2011 WL 2637270 (N.J. July 7, 2011), the Court considered whether an individual could have personal liability for a violation of the the Consumer Fraud Act (“CFA”) by his company. In that case, the Allens hired V&A Brothers to build a pool and later discovered the workmanship was defective.  Id. In response, the Allens filed several claims against the vendor. One alleged a violation of the CFA for failure to execute a written contract.

The reason that failure was significant was that the CFA requires “[a]ll home improvement contracts for a purchase price in excess of $500.00, and all changes in the terms and conditions thereof [to] be in writing.” N.J.S.A. 13:45A-16.2.  In Allen, there was no written contract at all.  Id.  Due to the failure to satisfy this requirement of the CFA, the New Jersey Supreme Court unanimously affirmed the lower court’s ruling and held that a corporation’s principal officers as well as their employees may be held personally liable under the CFA. Id. As a result, the corporate officers were liable for $390,000 in CFA damages, so long as the individual played a part in breaking the rules. Therefore, generally speaking, principals, who are the policy-setters for an organization, carry a greater exposure to personal liability than do employees.

In light of this decision, individuals associated with an entity that violates the CFA may be held liable even though the CFA claim is based only on a rule violation (such as a failure to provide a written contract) rather than actual fraud.

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When Is a Collection Letter a Misleading Demand For Payment?

In a recent decision, the United States District Court for the District of New Jersey held that an offer to settle a debt can include an optional payment date that falls within the time in which the consumer can dispute the debt. It may do so as long as the offer is not deceptive. D’Addario v. Enhanced Recovery Co., LLC, 2011 U.S. Dist. LEXIS 77682 (D.N.J. July 14, 2011).

The defendant in the case, Enhanced Recovery Co. (“Enhanced Recovery”), sent a letter dated October 15, 2010 to the plaintiff, Adam D’Addario (“D’Addario”). The letter offered D’Addario a repayment opportunity on an $8,744.70 debt that he owed to Chrysler Financial, LLC. The first of several options offered in the letter stated “Option 1: Settlement: $3,497.88, please remit by 10/30/10.” Id. at 2. The letter also notified the reader to “see reverse side for important notices and consumer rights.” Id. One of the rights granted to D’Addario was his right to dispute the debt within thirty days of receiving the letter.

D’Addario claimed that, because the deadline for payment fell within the time period in which he could have disputed the debt, Enhanced Recovery’s letter was a “misleading and inaccurate” “demand” for payment. Id. at 3. As such, he alleged the letter violated the Fair Debt Collections Practice (the “FDCPA”). 15 U.S.C. § 1692.  Enhanced Recovery moved to dismiss the case for failure to state a claim upon which relief could be granted.

The FDCPA states that “[a] debt collector may not use any false, deceptive or misleading representation or means in connection with the collection of any debt.” Id. at § 1692(e). A communication is determined to be deceptive for the purposes of the FDCPA if:

1)      It can be reasonably read to have two different meanings

2)      One of which is inaccurate.

Campuzano-Burgos v. Midland Credit Management, Inc., 550 F.3d 294, 298 (3d Cir. 2008).

When determining a communication is deceptive, the Court is required to adopt the perspective of “the least sophisticated debtor,” which is “less demanding than one that inquires whether a particular debt collection communication would mislead or deceive a reasonable debtor.” D’Addario at 5, 6.

Even when viewing the issue from this lower standard, the Court disagreed with D’Addario’s argument that the letter was misleading. It held that nothing in the statute prohibited settlement of the debt within the validation period. Additionally, “even the least sophisticated debtor could not believe that the letter presented him with an ‘either/or’ proposition – i.e., either dispute the debt’s validity or pay off the debt, but not both.” Id. at 7.  The letter did not emphasize one option over the other. Id. The Court also noted that the letter contained no threats or demands and did “not even suggest the possibility of legal action on the debt.” Id. at 8.

The Court’s decision is significant for debt collectors who offer consumers various settlement offers and sheds light on the language that courts will generally permit in such documents.

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Be Careful Not to Undermine the Choice Of Law Provisions In Your Contracts.

One of the few ways to undermine the choice of law provision in your contract is to cite the wrong state’s law when you are trying to enforce it. That can be construed as a waiver of the choice of law.

A good example of this was a recent decision by the United States District Court for the Eastern District of California. The Court held that the parties, by their conduct, waived the New York law provision of the arbitration agreement by citing California law in their motion papers. This case involved an action for declaratory and injunctive relief by a California corporation against a Workers Compensation insurance provider.  Ellison Framing, Inc. v. Zurich American Insurance Company, 2011 WL 1322387 (E.D. Cal.). 

The plaintiff, Ellison Framing, Inc., (“Ellison”) was a California corporation with its operations located entirely within California. Id. at 1.  Ellison purchased and renewed its Workers Compensation Insurance from the defendant, Zurich American Insurance Company (“Zurich”). Id. On November 15, 2010, Ellison filed a complaint with the California Department of Insurance claiming that Zurich had overcharged it with improper fees. Id. Zurich responded by making a demand for arbitration with the American Arbitration Association based on the arbitration clause of the parties deductible agreements. Id.

Based on the arbitration agreement and the venue provision contained within the agreement, the American Arbitration Association (AAA) determined that the arbitration would be conducted in Schaumburg, Illinois. Id. Ellison responded by filing an action in the Superior Court of California, “seeking declaratory and injunctive relief on the grounds that the venue provision of the arbitration agreement is unconscionable.” Id. Zurich moved this action to the United States District Court for the Eastern District of California based on diversity jurisdiction. Id.

The Court granted Zurich’s motion to compel arbitration because Ellison’s claim, that Zurich fraudulently overcharged by using improper fees fell within the scope of arbitration agreement. Id. at 5. But, the Court held that in spite of a choice of law provision in the agreement providing New York law as the governing law for all disputes, the parties, by their conduct, had waived the New York law provision by citing only to California law in their motion papers. Id.

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Will Online Retail Companies Soon Be Required to Charge a Sales Tax?

Are the days of shopping online free of sales tax coming to an end? If certain senators get their way, they could be.

In a 1992 decision, the Supreme Court held that a business must have a physical presence – a “nexus” – within a state in order for that state to require the business to collect a sales tax. Quill Corp. v. North Dakota, 504 U.S. 298 (1992). This rule has enabled online retail companies such as Amazon.com to reap significant profits while not having to pass along a sales tax to their customers. In its decision in Quill Corp., the Court stated that “Congress is now free to decide whether, when, and to what extent the States may burden interstate mail order concerns with a duty to collect use taxes.” Id. at 318.

As states search for more money in a tough economic climate, Congress is beginning to exercise the power the Court gave them. It is considering proposed legislation that would allow states to tap into this previously untouched revenue. The Main Street Fairness Act, sponsored by Sen. Dick Durbin (D – Ill.), would allow states to require online and mail-order retailers to collect state and local sales taxes.

The amount of money states could collect through such a change in the law is substantial. The National Conference of State Legislatures estimates that nationwide, the estimated total is more than $11 billion.

A number of states have already enacted laws that address this issue. In 2008, the New York Legislature passed a bill that expanded the definition of nexus to include certain online retailers, including Amazon. Under the State’s law, an online retailer has nexus in New York and must collect sales tax if their sales affiliates in the state generate more than $10,000 in annual revenue for the retailer. Amazon brought suit and alleged the law violated both the commerce and due process clauses, but the state Appellate Division determined that the New York law was constitutional. See Amazon.com, LLC v. New York State Dept. of Taxation & Fin., 2010 NY Slip Op 7823 (N.Y. App. Div. 1st Dep’t 2010).  California, Illinois, Connecticut and several other states have passed similar legislation during the past few years.

From a legal perspective, it is significant to consider the implications such a law would have for companies and entrepreneurs who conduct business online. It is likely that at the very least, items such as the terms and conditions and sales total pages of such a company’s website would have to be modified to reflect such a revised law.  

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When Can a Plaintiff Pierce the Corporate Veil of a Limited Partnership?

New Jersey might be joining a group of states that have decided to allow plaintiffs to pierce the corporate veil of limited partnerships, but the state’s courts would only allow it in limited circumstances.

A limited partner is one who does not insinuate himself in the running of the partnership, and is therefore, not jointly and severally liable for the acts and omissions of the other partners. However, in a matter of first impression, the Appellate Division of the Superior Court of New Jersey recently held that a plaintiff would be able to pierce the corporate veil of a limited partner in certain situations, including when that partner dominated the partnership or used it to perpetuate a fraud or injustice. Canter v. Lakewood, 420 N.J.Super. 508, 22 A.3d 68.

The suit arose when the plaintiff, Sanford Canter, broke his leg during a slip-and-fall at Lakewood at Vorhees (“Lakewood”) nursing home, where he was a resident. The defendants named in the negligence suit included Seniors Healthcare, Inc. (“SHI”) and Ozal of Lakewood (“Ozal”), each a limited partner of Lakewood. Carter asserted that, in addition to Lakewood, the limited partners of the nursing home should also be liable.

While generally a limited partner is shielded from liability for the partnership’s obligations, the New Jersey Statutes set forth that the two exceptions to this rule:

a)      a limited partner is also a general partner, or

b)      a limited partner participates in the control of the business.

N.J.S.A. 42:2A-27a.

Nevertheless, N.J.S.A. 42:2A-27b’s “safe harbor” provision allows a limited partner to engage in certain activities of the partnership without being considered in control of the business. Those safe harbor activities include being a shareholder of a general partner; consulting or advising with a general partner; or being the partnership’s contractor, agent or employee.

However, the Canter Court held that a limited partner may also be found liable when the partner “dominates” the partnership or uses it to commit a fraud or injustice. Factors that are considered during this determination of “domination” include:

a)      the limited partner’s role in day-to-day operations of a business

b)      the limited partner’s decision-making authority compared to that of a general partner

c)      Capitalization of the entity relative to the nature of the company’s business

SHI argued that veil piercing did not apply to a limited partnership and, even if it did, that SHI did not dominate Lakewood or use it to perpetuate a fraud or injustice. The Court agreed with SHI’s second argument, stating that “corporate veil-piercing principles can apply to a limited partnership; however, the record does not support veil piercing in this case.”

The Court reversed the lower court’s decision and granted SHI’s motion for summary judgment, finding no evidence that it had dominated Lakewood or used its control in the company to perpetuate any fraud. The Court’s decision aligns New Jersey law with that of other states who have adopted the Revised Uniform Limited Partnership Act. It is significant  because it provides a framework for courts to use when determining whether to pierce the shield of a limited partner.

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Are you Pro Choice (of Law) in Your Contracts?

One of the most common mistakes business people make when reading a contract is to overlook the Choice of Law clause. While this may sound like a mere technicality, in fact, it is critical to the contract’s enforcement.

A Choice of Law contract clause states that the agreement will be enforced under the law of a particular state. That is especially important when the state in which the contract was entered into is not readily apparent. For example, what if someone in Pennsylvania signs an employment contract with a company based in California. And what if that person will work out of a satellite office in New York? It is not clear which state’s law would apply. That is a major problem if, for example, the restrictive covenant in that contract is enforced to bar the employee from working in the industry for a certain period of time. The law of California is radically different than the law of New York or Pennsylvania in this regard. California is notoriously hostile toward restrictive covenants.

Interestingly, the Choice of Law Clause is generally binding regardless of the state in which the Court hearing the dispute is sitting. So, in our example, the contract might say that New York law applies, yet the suit might be instituted in Pennsylvania since that is where the former employee resides and has assets subject to collection in the event a judgment is entered. In such a case, the Pennsylvania court would enforce New York law.

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When is it Appropriate to Use an Indemnification Provision in Selling a Business?

Most people selling their business are unaware (at lease at the outset) that the contract of sale normally includes some sort of indemnification language. There are many variations, but in the typical case, this means that the seller agrees to hold the buyer harmless from claims of third parties relating to what the seller did or did not do when they owned the business. Likewise, the buyer holds the seller harmless from claims of third parties for what the buyer does or does not do after the sale concludes. 

Obviously, there are many legitimate variations to this approach. For example, if the seller is going to continue as a consultant or even employee to the business, the indemnification may need to take into account that he should continue to have some sort of indemnification obligation. Likewise, one might decide to define the indemnification obligation as applying to no more than a fixed upper amount or limit it to a certain period of time.

In the extreme case, a buyer or seller might want to take the position that there should be no indemnification provision at all. This includes situations in which the business is being sold for a relatively small sum that is less than the business is actually worth. In such a case, the seller may insist that it is being sold “as is” and “with all flaws” the same way as distressed real estate. In other words, the price figures in the risk inherent in having no indemnification clause.  

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Three Questions to Ask When Buying a Business’ Intellectual Property

One of the most frequently overlooked aspects of the sale of a business is the transfer of intellectual property. This includes, among other things, copyrights, trademarks, patents and non-disclosure rights. There are some basic questions that a purchaser of a business should ask in this regard. Set forth below is a list of three such questions and some interesting answers that may not be obvious:

1. If the business has a logo, can it be transferred?

Answer: Maybe not. If the logo infringes on the intellectual property rights of a third party, even if it can be transferred, it should not. Essentially, the purchaser is buying a lawsuit. Likewise, the logo might not be available to be sold, such as if the seller uses it under a license agreement which does not allow for assignment to a new purchaser. There are many other examples, but the point is that just because the seller is using the logo does not mean it can or should be sold.

    2.  If the buyer purchases the business, does that mean he automatically owns the business’ website?

Answer:  One might think so. After all, of what use is the business’ website to the seller after he sells the business? However, the answer is no. The reason resides on two levels. First, the sale agreement and ultimate bill of sale must have sufficient language in it to transfer the intellectual property rights to the website. Second, even it does, the seller must have the right to sell that intellectual property. For example, what if a website developer later claims that it did not give the seller the right to the website’s underlying source code? In such event, how does the buyer hire someone else to make renovations to the website that would involve using that source code? So, does the buyer really own it?

    3.  If the Seller entered into a non-disclosure agreement with a third party concerning the seller’s trade secrets, is that agreement enforceable by someone that buys the business?

Answer:  This is another maybe. The legal analysis is on two levels. First, did the sale agreement and ultimate bill of sale assign contract rights in the non-disclosure agreement? Second, did the non-disclosure agreement allow for that assignment of the business’ rights?

In sum, when purchasing a business the buyer must be acutely aware that the intellectual property it thinks it is purchasing, may not actually be transferred. It is critical that the underlying legal documents be scrutinized to ensure that this does not become a problem later on.

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May a law firm advertise with a picture that includes a potential defendant’s trademarked logo?

The Southeastern Pennsylvania Transportation Authority (“SEPTA”) of Philadelphia, recently sued the Philadelphia law firm of Mednick, Mezyk & Kredo (the “firm”) for trademark infringement over the firm’s use of a SEPTA bus on its website and for its telephone number, which contained the word “SEPTA.”

The reason the law firm wanted to use the SEPTA logo was that the law firm’s practice focused on lawsuits against SEPTA. In fact, the law firm’s phone number was 888-SEPTA-LAW. Their website was myseptalawyer.com.

According to SEPTA, the firm’s use of both the “SEPTA” logo and the red and blue stylized “S” mark in its advertising was infringing upon SEPTA’s registered trademark.  The lawsuit also alleged that the firm advertised in Philadelphia newspapers using SEPTA’s colors in addition to its trademarks.  The firm’s website displayed an image of a bus displaying the SEPTA trademarks that SEPTA argued was virtually identical to an image of a SEPTA bus.  Thus, SEPTA argued that the firm’s use of the trademarks was identical to SEPTA’s use of the trademarks in violation of the law.  Prior to filing suit, SEPTA sent the firm a cease and desist letter. 

In response to the cease and desist letter, the firm denied that it was infringing on SEPTA’s trademarks and continued to use the website and telephone number.  After filing suit, SEPTA argued that the firm’s continued use of the trademarks constituted bad faith and continued and willful infringement.  SEPTA alleged in its complaint that the firm’s use of SEPTA’s trademarks had, or was likely to, cause confusion in the minds of consumers as to the origin of the firm’s services and/or its possible affiliation with SEPTA.  SEPTA claimed that the firm’s actions caused damage to its goodwill and reputation.

The firm took the position that its use of the trademarks constituted a fair use under the law and that there was little chance people would confuse personal injury lawyers representing victims hurt on SEPTA property with lawyers employed by SEPTA.  Despite taking that position, the firm ultimately settled the lawsuit with SEPTA, agreeing to remove its website and change its telephone number.  In exchange, SEPTA agreed to a transition period during which the firm may change over its website and telephone number.

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May the State of New Jersey require merchants to collect zip code information from purchasers of gift cards?

The United States District Court for the District of New Jersey was recently asked to determine whether to uphold a New Jersey law requiring merchants to collect zip code information from purchasers of gift cards – which are also known as “stored value cards” (“SVC”).  New Jersey Retail Merch. Assoc. v. Sidamon-Eristoff, No. 10-5059. The purpose of collecting this information was to establish that the card was purchased in New Jersey. Having established that, if the card were not redeemed within a certain period, it would become the property of the State of New Jersey by the legal principle known as, escheat.

A group of plaintiffs led by the New Jersey Retail Merchants Association sued Andrew Sidamon-Eristoff, the Treasurer of the State of New Jersey on the grounds that the law placed an unfair burden on merchants.  The plaintiffs sought a temporary restraining order preventing the State from enforcing the portion of the law requiring merchants to collect zip code information from purchaser of SVCs at the time of sale (the “data collection provision”).  A different portion of the law – which presumed that if no zip code information was available, the presumption would be that it was purchased in New Jersey (the “place-of-purchase presumption”) – was held unconstitutional by the same District Court in an earlier proceeding.  The plaintiffs argued that the data collection provision was similarly unconstitutional on the grounds that it was so interrelated to the place-of-purchase presumption that the two could not be severed.

The District Court held that the requirement to obtain zip code information was “entirely independent from what presumption is applied when no zip code is actually obtained, and the place-of-purchase presumption is applied.”  Id. at *11.  The court reasoned that removing the place-of-purchase presumption placed the focus on the residence of the purchaser/owner of the SVC rather than on the location where the SVC was purchased.  The court also reasoned that upholding the data collection provision furthered the objective of the law, which was to reunite purchasers/owners with their abandoned property.  The court determined that the collection of zip code information assisted in fulfilling that objective.

The District Court also examined decisions of the United States Supreme Court and determined that the Supreme Court consistently held that it is the purchaser’s last known address that determines which state has the right to “escheat” – acquire title to property for which there is no owner – and “the data collection provision focuses on that key location.”  Id. at *16.  The District Court noted that in the cases it analyzed, the Supreme Court refused to permit other states – such as Pennsylvania and Delaware – to presume that all property purchased in the state had been purchased by a state resident even when no address was on record.  The Supreme Court created a method to govern the escheat of intangible property by creating the Texas priority scheme, beginning with its decision in Texas v. New Jersey, 85 S.Ct. 626 (1965). 

The Texas priority scheme has two rules.  The “primary rule” states that, “the right and power to escheat the debt should be accorded to the State of the creditor’s last known address as shown by the debtor’s books and records.”  The “secondary rule” states that, “where the creditor’s last known address is unknown, or where the last known address is in a state that does not provide for the escheat of the abandoned property . . .  the right to escheat [goes] to the debtor’s State of corporate domicile.”  Per the court, the Texas line of cases clearly authorized states to require issuers of intangible property to collect the last known address of the purchaser and to rely on that address in reuniting the purchaser with her abandoned property.

In conclusion, the District Court held that the data collection provision was entirely severable from the place-of-purchase presumption and that there was no interdependence between the two provisions.  The District Court also held that “collection of the purchaser’s last known address has been sanctioned by the United States Supreme Court and is integral to the Texas priority scheme.”  Id. at *17.  As a result, the District Court denied the plaintiffs’ motion for a temporary restraining order.

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