Category Archives: Business Protection

Too Much Information on Credit/Debit Card Receipts Can Cause Big Problems for Businesses.

By Brendan Walsh, Esq.

The use of credit and debit cards has exploded in the past decade.  Indeed, recent data indicates that credit and debit card payments now account for a combined 60% of all sales volume, and that number is expected to rise by four percentage points in the next five years as new technologies make it easier for businesses and individuals to process such payments.  But all individuals and businesses, large or small, who accept credit and/or debit card payments should carefully review their point-of-sale practices to confirm that they are not unwittingly opening themselves up to substantial liability under federal law for including too much information on their customers’ electronically printed receipts.

In 2003, Congress enacted the Fair and Accurate Credit Transactions Act (FACTA) in an effort to combat identity theft.  Among many other things, FACTA provides that “no person that accepts credit cards or debit cards for the transaction of business shall print more than the last 5 digits of the card number or the expiration date upon any [electronically printed] receipt provided to the cardholder at the point of the sale or transaction.”  15 U.S.C. § 1681c(g)(1).  FACTA imposes civil liability for violations of this provision, but the amount depends on whether the violation was negligent or willful.  If the violation was negligent, liability is limited to “actual damages” suffered as a result of the violation, which in the vast majority of cases is zero.  However, if the violation was willful – meaning “objectively unreasonable” – FACTA allows the recovery of statutory damages ranging from $100-$1000 per violation, as well as the recovery of attorneys’ fees.  Punitive damages may also be awarded for willful violations.

The Third Circuit recently considered this provision of FACTA in Long v. Tommy Hilfiger U.S.A., Inc., 671 F.3d 371 (3d Cir. 2012), where a plaintiff sought to recover a substantial damages award on behalf of a class of consumers as a result of a Hilfiger store’s failure to fully redact the expiration date of the plaintiff’s credit card on the plaintiff’s electronically printed receipt.  Specifically, the receipt included the last four digits of the plaintiff’s credit card number (which is permissible under FACTA) and the month, but not the year of the card’s expiration date (i.e., 04/##).  Hilfiger argued that it had not violated FACTA because it had only included a portion of the expiration date on the receipt.  The Third Circuit disagreed and held that FACTA prohibits the inclusion of any portion of a card’s expiration date.  Nevertheless, the court concluded that the plaintiff was only entitled to recover actual damages (which the plaintiff conceded were zero) because it was not objectively unreasonable under the circumstances for Hilfiger to believe that FACTA only prevented the inclusion of complete expiration dates on customer receipts.  To this end, the court noted that “there was no guidance from the federal courts of appeal on this issue” and that the few district court opinions addressing similar FACTA violations “were not directly on-point because they involve[d] merchants who, unlike here, printed the entire expiration date.”

Now that the Third Circuit has resolved this issue, it is reasonable to believe that merchants who continue to include any portion of a credit card’s expiration date (or more than the last five digits of the card number) on electronically printed receipts may be opening themselves up to claims for willful violations FACTA.  If you accept credit and debit card payments and provide customers with electronically printed receipts, you should immediately review the information on your customers’ receipts in order to ensure that you are complying with FACTA.  Of course, attorneys at Pashman Stein would be happy to review your point-of-sale practices with you for compliance with FACTA.

Where You Incorporate Your LLC Matters

By Adam Schwartz, Esq.

Popular convention is to incorporate in Delaware, even if a company conducts no business there.  Due to its business-friendly regulatory environment and large body of case law regarding corporate management issues, over 900,000 business entities have incorporated in Delaware.  However, if you are minority owner of a closely-held company with its principal place of business in New Jersey, you may not want to follow popular convention.

New Jersey has enacted a Minority Oppression Statute, N.J.S.A. 14A:12-7(c), which provides a range of remedies for minority owners in closely held corporations when the majority has acted to defeat the “reasonable expectations” of the minority owner or has otherwise acted fraudulently, illegally or oppressively toward the minority.  The potential remedies include the appointment of a custodian or provisional director to manage the company, ordering the corporation to purchase the minority shareholder’s interest, or dissolving the corporation.

Delaware, however, does not have a corollary to the Oppressed Shareholder Statute, and its courts have not recognized any common law remedy for minority shareholder oppression.  Under Delaware law, a minority stockholder must protect him or herself by bargaining for any such protection.  If there is no contractual provision for a buyout or the appointment of a custodian or director, a Delaware court will not imply one.  In short, New Jersey law is for more favorable for a minority shareholder.

This difference is important because, when a lawsuit involves the internal affairs of a corporation, New Jersey courts will apply the law of the state of incorporation.  Therefore, even if a company’s business is conducted solely within New Jersey, if it is incorporated in Delaware, Delaware law ordinarily governs shareholder and management disputes.  This results in a distinct disadvantage for the minority shareholder.

In 2008, the New Jersey Appellate Division found an exception to this general rule. Kraszteck v. Global Resource Industrial & Power, Inc., 2008 N.J. Super. Unpub Lexis 1360 (App. Div. 2008).  In that case, the Court recognized that “the location of incorporation is not always dispositive” and that New Jersey courts may apply the law of the state with the greatest interest in resolving the dispute.  Specifically, the Kraszteck Court noted that, for claims of minority oppression, when the company is headquartered in New Jersey and has no other connection to the state of incorporation, New Jersey the greater interest and its law applies.

However, in 2012, another Appellate Division matter, Hopkins v. Duckett, 2012 N.J. Unpub Lexis 93 (App. Div. 2012), arguably reached a different conclusion than the Kraszteck court.  In Hopkins, Appellate Division held that, even though the company had no connection with Delaware other than the fact that it was incorporated there, Delaware law applied the plaintiff’s minority oppression claims because “the [shareholders] freely entered into an operating agreement that they explicitly provided was to be governed by Delaware law” and the disputes at issue arose out of that agreement.  Consequently, the minority shareholder was not entitled to the protection of New Jersey’s Oppressed Shareholder Act.

In light of these seemingly divergent decisions, the question still remains — will New Jersey’s Oppressed Shareholder Act apply to business entities incorporated in Delaware with their principal offices in New Jersey?  Although subsequent cases may eventually follow Kraszteck, until there is a decision from New Jersey Supreme Court reconciling Kraszteck and Hopkins, the safer course of action for a minority shareholder concerned about majority management of a closely-held company would be to incorporate in New Jersey, instead of Delaware.

The iPad Boom: Good for Business?

By Michael Zoller, Esq.

According to a new national survey of owners and CEOs of small businesses conducted by the Business Journals, the use of the Apple iPad by businesses and their employees has nearly quadrupled in the past year.[1]  The results of the survey indicate that the usage rate of the iPad has risen from 9 percent in 2010 to 34 percent in 2011.  And to think, all of this increase occurred before Apple unveiled its “New iPad” on March 7th.  After only its first weekend of sales, Apple announced that the new iPad produced the strongest opening numbers of any iPad version, moving over 3 million units.[2]  Based on these initial sales of the new iPad and a discounted price for the older model iPad 2, it is only likely that this usage rate is going to increase going forward.

The survey cites owners’ and CEO’s desire for accessibility as the biggest reason for the iPad’s popularity.  Unfortunately, for any small business owner, this greater accessibility comes with greater responsibility.  While the iPad has many features and applications that can benefit a small business, it also raises many issues that any small business owner must be aware of in order to protect his or her business.

The first issue a small business owner faces when it comes to employees’ use of an iPad is ownership of the tablet.  If the business supplies the device for its employees, the business owner will have increased costs, but will also retain greater control over its use.  The alternative is for the business to allow its employees to supply their own iPad.  This approach will save the business the upfront acquisition costs, but might cost the business more in the long run if problems should arise.

With less control over an employee owned iPad, it will be harder for the business to protect any records or confidential information saved on the tablet.  If an employee was to leave the business, any information of this type could potentially leave with him or her instead of remaining with the business when the employee was forced to turn in a business owned iPad.

Of course not all issues a small business faces are related to who owns the iPad.  Regardless of ownership, the business could potentially face liability for its employees’ actions while using an iPad.  If the employee is using a business owned iPad or a personal iPad connected to the business’ wireless network, the business may be vicariously liable for any crime committed by the employee.[3]  The need to protect a business from liability then gives rise to other potential issues such as employee privacy concerns and what a business can have access to on an iPad that is potentially used for both business and personal purposes.  Additionally, if an iPad containing business records or confidential information is stolen, what will matter is not who owns the iPad, but what was done to protect the information.

With the iPad gaining more traction in the small business world, a business must be fully aware of all the potential issues the device presents and protect itself accordingly.  At a minimum, businesses should have an iPad user policy.  The policy can be similar to the Email and Internet policy the business already has and lay out in detail exactly what is and is not acceptable use of a business owned iPad or an employee owned iPad on the business’ network.  Additionally, there are special applications and software that can be installed to protect and/or wipe business or confidential information from the iPad in the case of theft or an employee leaving.

Based on current trends, the 34% usage rate is going to look like a low figure by 2012-13 alone, so it is best for any small business owner to get out in front of these issues now.  As long as the small business owner is aware of the potential risks and takes the appropriate steps to protect him/herself and their business, the iPad should be an effective tool for any small business.

[3] See Doe v. XYC Corp., 382 N.J. Super. 122 (App. Div. 2005)(court found employer can be liable for its employee’s involvement in child pornography via his work computer).

Don’t Forget the Basics

By Joseph Goldman, Esq.

It’s April 2012 and the clock is ticking.  The federal estate and gift tax exemption is $5,120,000, the highest amount ever, but only until December 31.  Add an environment of low interest rates and relatively low market valuations and the time is ripe for estate tax planning.  But while you’re watching the estate tax bottom line, don’t forget the basics.

You need a Will, a Power of Attorney and a Health Care Proxy and Directive.  If you don’t have these documents – get them as soon as possible.

What’s more – communication is the key!

Does your family know that you executed estate plan documents and where to find them?

Does your family know your assets?  You should keep a list of bank accounts, credit cards, stocks and bonds, investments, real estate and mortgages, IRAs, pensions and other retirement plans.

Do they know your key advisers – attorney, accountant, investment and insurance – and how to contact them?

You should provide your family information about safe deposit boxes, combinations and keys.

Especially important in the digital age, you should provide them with your user name and password(s).

If you own a business, have you made plans for business succession?  This can be especially important if some of your children are involved in the business but others aren’t.

I often recommend that clients write a letter to family explaining their wishes, financial and otherwise, to supplement their estate plan documents.  This letter can provide useful guidance and a degree of comfort.

Estate planning should not be a secret.  Let your family in on the process and they will thank you for it.

Oppression in the LLC: Will New Jersey affirmatively adopt it as a cause of action?

By Janie Byalik, Esq.

Oppression of minority owners occurs when majority owners in a company take actions that unfairly prejudice the rights of the minority, such as harming their economic interests through failing to declare dividends, squeezing out the minority members, mishandling corporate assets to the detriment of the minority, awarding the majority members excessive compensation or making other management decisions that frustrate the reasonable expectation of the minority.  Oppression commonly occurs in close corporations, since lack of a public market leaves the minority shareholders susceptible to the maltreatment of the majority and does not afford minority shareholders an exit strategy of selling their stock and leaving the corporation.

Unfortunately, oppression can occur in any business organization, not just a close corporation.  It frequently occurs in Limited Liability Companies (“LLC”), which by their nature and character, are similar to close corporations, particularly with respect to the lack of a public market for most LLC interests.  This leaves minority members of LLCs vulnerable to oppression like the minority shareholders in a closely held corporation.  While the New Jersey Business Corporations Act expressly provides a remedy for shareholder oppression, the LLC Act does not.  But the lack of express statutory remedies for LLC members in various contexts has not stopped the New Jersey courts from crafting remedies to address the problem.

New Jersey courts routinely look to corporate principles in the context of an LLC in defining a Chancery Court’s ability to create appropriate remedies. Given the law and reasoning supporting the application of principles under the Business Corporations Act to LLCs, an equity Court may, by analogy, import remedies for corporate oppression to comparable situations in LLCs.

But what may be an equitable power of a Chancery Court to grant an appropriate remedy for oppression, may soon become a statutory protection for all LLCs like it exists for corporations.  A revised version of the LLC Act was introduced in the New Jersey Senate, including sections designed to assure that remedies for oppression available to shareholders will be applicable to members in LLCs. One of the notable changes in the LLC Act is the specific inclusion of remedies for oppression modeled on those in the Business Corporations Act.  While the legislation did not pass this term, it was reintroduced as Senate Bill No. 742 for the 2012 session last month.  It is quite possible that within the coming months minority members of LLCs will have concrete remedies for oppression.  Until then, oppressed minority LLC members will have to continue to try to persuade courts of equity to use the Business Corporations Act as a guide to fill in gaps in the LLC Act.

New Jersey Becomes the 47th State to Adopt the Uniform Trade Secrets Act

By Sean Mack, Esq.

On January 9, 2012, Governor Christie signed into law the New Jersey Trade Secrets Act.  N.J.S.A. 56:15-1 to -9.  New York, Massachusetts and Texas are now the only three states that have not adopted a version of the Uniform Trade Secrets Act.

The Act (i) brings better clarity to the definition of a trade secret and the remedies available, (ii) provides a guide to litigants and judges regarding protecting trade secrets during court proceeding, and (iii) specifically sets a statute of limitations for misappropriation of trade secrets claims.

The Act builds off of prior judicial decisions and should not significantly change the meaning of what is a trade secret.  Under the Act, a trade secret is specifically defined as:

information, held by one or more people, without regard to form, including a formula, pattern, business data compilation, program, device, method, technique, design, diagram, drawing, invention, plan, procedure, prototype or process, that:

(1) Derives independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable by proper means by, other persons who can obtain economic value from its disclosure or use; and

(2) Is the subject of efforts that are reasonable under the circumstances to maintain its secrecy.

The Act also makes clear that injunctive relief, and damages or royalties may be available for prevailing parties.  The Act clarifies that damages may be calculated based on the actual losses caused by the misappropriation and based on the unjust enrichment obtained by the wrongdoer as a result of the misappropriation.  Royalties may be awarded instead of, but not in addition to, the award of damages.  The Act also provides for the awarding of punitive damages if the misconduct is willful and malicious.  Punitive damages are capped at twice the damage award.  In a departure from the common law precedent in New Jersey, the Act expressly authorizes the award of attorney’s fees to the prevailing party (plaintiff or defendant) in appropriate cases.

The Act should be a warning to companies hiring new employees that they can be held liable for misappropriation of trade secrets if they induce the employee to wrongly disclose trade secrets or if the company has reason to know of the employee’s breach.

In an effort to balance New Jersey’s long standing public policy in favor of public access to legal proceedings against a company’s legitimate need to maintain the secrecy of its trade secrets, the Act mandates that courts take reasonable means to protect the secrecy of the information.

Finally, under the common law parties usually relied on New Jersey’s six-year statute of limitations in connection with misappropriation claims.  The Act now specifies that misappropriation of trade secret claims must be brought within three years of the discovery of the misappropriation or three years of when the party should have had reason to know of the breach.

Unpaid Interns and Trainees Can Become a Big Expense

By Andrew Moskowitz, Esq.

On February 1, 2012, a former Hearst Corporation intern filed a lawsuit in the Southern District of New York.  The suit was filed as a class and collective action under the Fair Labor Standards Act, 29 U.S.C. §§ 201 et seq., and purportedly involves hundreds of former Hearst interns.  The case, Wang v. The Hearst Corp., Civ. No. 12-0793, highlights the  dangers that companies face when they employ unpaid individuals to perform routine work tasks.

Employers are required to pay most employees minimum wage (which is $7.25 per hour under New York and New Jersey law) and “time-and-a-half” for all hours worked in excess of 40 hours per week.  Under federal law, to classify someone as an unpaid “trainee,” employers must meet some or all of the following criteria:

  1. The trainees do not displace regular employees, but rather work under close observation;
  2. The training is for the trainees’ benefit and the employer derives no immediate advantage from the trainees’ activities and, on occasion, its operations may actually be impeded;
  3. The trainees are not necessarily entitled to a job at the completion of the training;
  4. The training, even if it includes the actual operation of the employer’s facilities, is similar to that which would be given in an educational environment such as a vocational school; and
  5. The employer and the trainees understand that the trainees are not entitled to wages for the time spent in training.In general, under federal law, all of the above criteria need not be met; rather, courts look at the totality of the circumstances.

In contrast, under the New Jersey Wage and Hour Law, N.J.S.A. 34:11-56a et seq., all of the above-listed criteria must be met.  In addition, New Jersey law imposes additional requirements.  Specifically, the training must occur outside regular work hours.  Moreover, the employee may not perform productive work while attending the training and the program cannot be directly related to the employee‘s present job.

An employer that fails to comply with the above does so at its peril.  Under federal law, an employee may recover not only back pay but also “liquidated” or double damages and reasonable attorney’s fees and costs.