Law as a Widget (LaaW)

5 Differences Between Corporations and LLCs

Posted by | Startup | January 07, 2015

Disclaimer: Obviously, this blog does not provide legal advice. How do you know? This is free. Legal advice you have to pay for.

Two of the most common business entities around are the Limited Liability Company (LLC) and the corporation. Business owners should seriously consider entering into one of these entities as they provide significant liability protection. But what’s the difference between them? Below are five differences between an LLC and a corporation. Later, we’ll discuss ways to help select between them.

  1. Taxes. LLC’s and corporations are typically taxed differently. Corporations suffer double-taxation – the profits of the company are taxed, but so are the dividends to shareholders, and their capital gains. An LLC is a “pass-through” entity according to the IRS. This is their way of saying they don’t recognize the LLC, but instead tax it either as a sole proprietor, a partnership, or a corporation. Generally, the LLC can decide how it is to be taxed and can avoid double-taxation.
  2. Deductions. Because the LLC is a “pass-through” entity, the IRS allows members to deduct the company’s losses from their personal income (this is allowed for S-corps as well). However, all profits are taxed even if they were not distributed to the members. On the other hand, a corporation’s shareholders cannot claim deductions based on the company’s losses, but can reinvest profits into the company and avoid taxation on that amount.
  3. Organization. The organization of the business can be very different under the two structures. A corporation typically has laws specifying the general corporate structure. Certain meetings are outlined and required (like shareholder meetings) and a number of reports are required annually. The LLC, on the other hand, is very flexible in how it is organized. Members don’t need to be managers, managers could operate independent of members, any sort of boards or committees could make the decisions, or it could be the simple will of one person. LLC’s bring flexibility to run the company however you want.
  4. Owners. Membership and ownership are different. The LLC and C-Corp do not have ownership restrictions, but the S-Corp is limited to just 100 shareholders. Meanwhile, all corporations must give an equal vote to each share. The LLC can determine in the operating agreement how voting is divided among members, whether it be by contribution amount, time spent working with the company, or any other reasonable scenario the members decide. They could even decide that members don’t vote at all, except in certain matters.
  5. Ease. Often the most important difference (from the perspective of the new business owner) is that LLC’s are much easier and usually cheaper to establish. Because of the stricter reporting requirements of corporations, many find it maintain an LLC. The downside is that corporations are typically better respected and are more likely to receive investments.
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Who Owns the Monkey’s Selfie?

Posted by | Intellectual Property | September 25, 2014

What happens when a monkey takes a selfie? The field of intellectual property often has bizarre questions arise, but recently a picture went viral of a monkey who apparently took a photographer’s camera, and started taking pictures, including this awesome self portrait.

Apparently, British photographer David Slater had set up his camera in Indonesia to grab photos of crested black macaques. However, one of the monkeys found the camera when he stepped away, and took some photos, including the selfie above. When the photo went viral, Slater tried to take back control in a copyright dispute with Wikimedia Commons, who had posted the picture on Wikipedia.

Whether Slater owned the copyright seemed like nothing more than an interesting discussion among copyright lawyers, until the Copyright Office weighed in last month. In true fashion, it took them 1,200 pages to basically say that you can’t own a copyright to a monkey selfie.

“Materials produced solely by nature, by plants, or by animals are not copyrightable.” Humans need to create the work, or the Copyright Office will not register it. A less ridiculous example would be works created not by animals, but by machines. Music composed by an algorithm (www.computoser.com), or perhaps art based on fractal computations (http://www.deviantart.com/digitalart/fractals/) would not be copyrightable without additional human modifications.

It turns out the monkey was just the start of a much larger argument over the ownership of works produced by non-humans.

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Terms and Conditions Are Not Enough

Posted by | Privacy, Terms and Conditions | August 20, 2014

Disclaimer: Obviously, this blog does not provide legal advice. How do you know? This is free. Legal advice you have to pay for.

Enforceability Requires Reasonable Notice

The Ninth Circuit Court of Appeals

Simply posting terms and conditions on your website is not enough, even if you provide a link on every page. That’s the take away from the Ninth Circuit’s opinion on Monday in the case of Nguyen v. Barnes & Noble. Essentially, the court said that “close enough” was not enough when it comes to agreeing to terms and conditions. The case arose when Nguyen filed suit over a purchase dispute. Barnes & Noble responded by claiming that Nguyen was bound by the site’s terms and conditions, which had a choice of law provision and an arbitration clause. Nguyen never read the terms, and claimed not to be bound.

Judge Noonan wrote the opinion, which stated, “the proximity or conspicuousness of the hyperlink alone is not enough to give rise to constructive notice.” She distinguished this case which included a “browsewrap” agreement with those upholding “click-wrap agreements.” It is also a distinction between what we call actual knowledge verses constructive knowledge. Constructive knowledge is where a person is legally assumed to know something, even if they don’t actually know it. It arises when the information is presented in such a way that the user should have known it. Actual knowledge is exactly what it sounds like.

Click-wrap agreements require the user to actually affirm that they have read the terms and conditions, even if they haven’t. This is usually done by presenting a link to the terms, or the terms themselves, along with a checkbox stating that the user has read them. If they click the box then the courts will generally uphold those terms as a binding contract. Essentially, the court will say that the user has constructive knowledge of the terms and has consented to be bound.

A click-wrap agreement.

Browsewrap agreements, on the other hand, claim that merely using the website is agreement to the terms, even if the user has not read them or even visited the terms and conditions page. The courts have been very reluctant to uphold these. However, they will be upheld if there is evidence that the user did have actual knowledge of the terms, by reading them or being presented with them.

Ultimately, the Ninth Circuit held that Nguyen was not bound by the terms and conditions of the Barnes & Noble website. The takeaway for online businesses is that terms and conditions need to be obvious and provide “reasonable notice.” Remember, your terms and conditions are your most important legal document, since they control most of your interactions with your customer. Bad terms lead to bad business.

Here are some best practices:

  • Make sure your terms and conditions are easy to read so that anyone (not just lawyers) can understand them.
  • Make sure that your terms and conditions actually reflect how you want to interact with your customers. Too often, companies don’t understand their own terms (especially when they are copied from the internet), and are surprised to learn of weird provisions after the fact.
  • Include a link to your terms and conditions and privacy policy at the footer of every page on your site.
  • Use click-wrap agreements any time the user is providing personally identifiable information or making a purchase. These are easy to make, and there are many pre-made widgets that can be plugged into your website.

 

Read the Case – Nguyen v. Barnes & Noble

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John Oliver Convinces FCC to Act

Posted by | Net Neutrality | July 29, 2014

FCC Investigates Internet Download Speeds – Thanks Largely to John Oliver?

This may be a bit late, but as I’ve been on a sort of hiatus for the last month or so as I geared up to take yet another bar exam (watch out Louisiana!). However, it’s a great story and maybe you missed it.

Earlier this month, FCC’s chairman, Tom Wheeler, announced that the FCC had opened an investigation into deals where companies like Netflix had to pay ISP’s like Comcast to ensure an internet fast lane for its services. The scope of the investigation is essentially whether customers are getting the speeds that they were promised by the ISPs.

What’s great about this story is that it seems Wheeler was convinced to act based on a John Oliver bit from his show, “Last Week Tonight.” In it, Oliver reviews the net neutrality debate and encourages his viewers to comment on FCC rules that could allow for fast and slow lanes. That led to 19,000 comments to the FCC requesting review, which clogged the systems.

Wheeler actually mentioned the Oliver clip, stating that he had reviewed it “a couple of times,” calling it “creative and funny.” Let’s see if anything comes of the investigation. In the meantime, you can watch the clip from Oliver’s show here:

NY Times – F.C.C. Begins Investigation Into Quality of Internet Download Speeds

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Role Reversal for Government Regulation?

Posted by | Sharing Economy | July 07, 2014

Interesting argument here that industry disrupters, like Uber, are changing the role of government regulators. While they once made regulations to protect public safety, now they’re using those same regulations to protect old industries, like taxis. http://linkd.in/VzsXoI

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Hobby Lobby and the Future of Corporations

Posted by | Employment, Legal Analysis | July 01, 2014

Hobby Lobby Decision May Have Large Impacts on Corporations

Much has been said about the Supreme Court’s decision in Burwell v. Hobby Lobby, especially as it relates to women’s rights. However, this is a business law blog, and there are some especially important impacts on businesses from the decision. Unfortunately, the case raises far more questions that it hopes to answer, and the majority provided almost no instructions for lower courts. The end result will be increased litigation by corporations seeking to avoid regulation.

First, an overview: In Hobby Lobby, the Supreme Court majority, written by Justice Alito, essentially held that corporations are persons that can claim religious exemptions to federal laws. It’s important to note that this was not decided on First Amendment grounds. Rather, it was based on the Religious Freedom Restoration Act (RFRA), which was a law passed by Congress in 1993. The RFRA gives “persons” the right to demand a religious exemption to certain federal laws, and requires the government to show that the law serves a government interest and is using the least restrictive means in order to overcome the religious exemption. The law has been on the books for quite some time and has been upheld on Constitutional grounds.

In coming to the decision, the Court held that the RFRA applies to closely held corporations, so publically traded corporations are not included. However, Justice Ginsberg pointed out in her dissent that the majority’s reasoning applies just the same to large corporations, so the decision would logically extend to them as well.

There are two potential effects of the case on corporations. First, it may open the door to claiming exemptions to regulations, especially regarding healthcare, that go counter to their shareholders’ religious beliefs. The second is that the concept of corporate personhood has been altered once again, raising the question of whether a corporate person is distinct from the shareholder behind it.

Religious Exemptions from Healthcare Requirements

For obvious reasons, healthcare is probably the most immediate question. Justice Ginsberg’s dissent raised a number of hypothetical, yet very real, situations that could be effected by the Court’s decision:

“Would the exemption the Court holds RFRA demands for employers with religiously grounded objections to the use of certain contraceptives extend to employers with religiously grounded objections to blood transfusions (Jehovah’s Witnesses); antidepressants (Scientologists); medications derived from pigs, including anesthesia, intravenous fluids, and pills coated with gelatin (certain Muslims, Jews, and Hindus); and vaccinations (Christian Scientists, among others)?”

Taken to an extreme, some Christian Scientists and Pentecostals believe only in faith healing and reject modern medicine completely. Could such a corporation deny all health insurance to its employees? Justice Alito suggests that would be bad for business, but doesn’t claim it would be impermissible.

Despite Justice Alito’s assurances that such questions will not come up, it seems very clear that some corporations will suddenly have strong religious convictions where saving money is at stake.

Possible Permitted Discrimination Under Hobby Lobby

Justice Alito tried to limit the decision so that corporations could not opt out of any law they felt was incompatible with their religion. He was especially clear that religious exemptions would not be available for any question of racial discrimination. However, that leaves the very real possibility of other types of illegal discrimination that are common religious exemptions.

LGBT discrimination was at the very heart of a recent debate in Arizona over their version of the RFRA. After supporting it, but receiving significant backlash, Gov. Brewer vetoed a proposed law that would allow companies to choose who they work with based on religion. It was made clear that the point of the law was to specifically permit businesses to discriminate in hiring and serving customers based on sexual orientation. While it failed in Arizona, it was quickly passed in Mississippi. The parallels between these bills and the Hobby Lobby decision are clear, and the possibility for a similar result exists.

Religious non-profits and churches, which already enjoy a number of religious exemptions, may be helpful in determining what could potentially qualify as an exemption under Hobby Lobby. Religious non-profits have used various religious exemptions to discriminate against LGBT employees, unwed pregnant mothers, and women who used in vitro fertilization. The question Hobby Lobby raises is whether corporations can now do the same.

Sometimes an extreme example helps clarify the issues. Churches are currently exempt from certain provisions the Civil Rights Act of 1964, which allow them to require all their employees to be part of their church. This makes sense for churches, but can it now be applied to corporations? Can the corporation demand employees join their church or face termination? Or a less extreme hypothetical – can this be used as a defense in a religious discrimination case?

Is It Even a Corporation Any More?

Under the law, a corporation is considered a new person. This is a “legal fiction” that was created to allow large groups of people to form companies that would then protect the shareholders from liability. In other words, shareholders cannot be forced to pay the corporation’s debts.

This is a very good system, and incredibly necessary in today’s economy. However, the legal fiction only exists so long as the corporation and the shareholders are distinct. The Hobby Lobby decision is part of a string of cases conferring individual rights on corporations, thus separating the distinction between the corporation and the shareholders.

The issue in Hobby Lobby was framed as a religious freedoms problem. If the law requires a corporation to do something the owners believe to be incompatible with their religion, then the owners’ freedoms are infringed. Justice Alito explained:

“[I]t is important to keep in mind that the purpose of this fiction is to provide protection for human beings. A corporation is simply a form of organization used by human beings to achieve desired ends. An established body of law specifies the rights and obligations of the people (including shareholders, officers, and employees) who are associated with a corporation in one way or another. When rights, whether constitutional or statutory, are extended to corporations, the purpose is to protect the rights of these people.” (emphasis added)

This was similar to the argument in Citizens United, allowing corporations to spend money on political campaigns based on the shareholders’ rights of speech. The problem is that such a simplistic definition leaves the question of liability wide open. If Constitutional rights of the shareholders can pierce the corporate veil up to the corporation, then it stands to reason the liabilities of the corporation could pierce the corporate veil down to the shareholders.

In Hobby Lobby, it was the corporation, not the owners, who was supplying healthcare. The Court brushed away that distinction, and treated the owners as the suppliers. If we read the law like Justice Alito, then are the owners similarly liable for healthcare? If Hobby Lobby impermissibly denies other healthcare rights, will the owners be held personally responsible?

This is a slippery slope that could eventually hurt the concept of the corporate person. That would be harmful to the economy and society in many ways.

What’s Next?

Undoubtedly, there will be a string of cases across the country of corporations trying to claim religious exemptions to any number of federal regulations. Healthcare and discrimination will just be the start. Basically, any regulation that could conceivably be a religious impediment (and would save the company money), will be under attack.

It’s important to recognize that this was not a Constitutional decision. Since the RFRA is just a statute, Congress could simply change it or redefine “person.” Senate Democrats have already declared their intention to do just that, though it’s unlikely to ever pass the House.

Nonetheless, Hobby Lobby shows that the distinction between a corporation and its shareholder is growing blurrier every day. If rights can flow one way, then liabilities may be able to flow the other way. Such a result would be a disaster and destroy a bedrock of the American economy.

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SCOTUS Finds Expectation of Privacy in Cell Phones

Posted by | Legal Analysis, Privacy | June 27, 2014

Warrant Required to Search Cell Phone Data

The Supreme Court has determined that police need a warrant in order to search a cell phone under the Fourth Amendment. The question in Riley v. California was whether the data within a cell phone is subject to a search incident to arrest. Basically, when police arrest someone, they are allowed to do a complete search of that person. Now, with the new court ruling, the police can no longer access the cell phone’s data during that search without a warrant.

Search Incident to Arrest

The search incident to arrest rule came about in a 1973 case called United States v. Robinson which held that police can do a warrantless search of a person when they are arrested. In coming to this rule, the Court balanced the police interest with the individual’s right to privacy. For the police, the Court decided that police concerns about risks to officers and destruction of evidence were present in all arrests, and were very important interests. On the other hand, individuals have very little expectation of privacy when they are arrested. So lots of government interest, very little privacy interest.

A Modern Rebalancing

Fast forward 40 years and now we have smart phones. These things carry insane amounts of very personal data, from bank accounts to geotracking. The Court in 1973 never could have imagined such a world. In fact, the world’s supercomputer at that time held only 200mb of data (http://www.futuretimeline.net/subject/computers-internet.htm). Compare that to a 32gb cell phone. So the Court in 2014 looked at the same balancing of interests that they did in 1973, but applied it just to cell phone data. When it comes to cell phone data, the risks of harm to the police or destruction of evidence are very little (are you going to Tweet them to death?). However, the individual’s expectation of privacy is huge. So the balance shifts to little government interest verses large privacy interests.

riley v california

Of course, police can still seize your cell phone when you’re arrested; they just can’t start poking around to check your email or anything without getting a warrant first. The Supreme Court basically distinguished between physical objects, and digital data. The balance of interests is very different between the two, so they need a different result under the Fourth Amendment.

Decision Will Have a Wider Impact on Digital Data Privacy

This was the correct decision, and one that should have been made decades ago when computers became standard. In fact, while this case is limited to cell phone data, it may expand very soon. Chief Justice Roberts, who wrote the Court’s opinion, called cell phones “mini-computers.” If privacy interests exist in cell phones, why not exist in other computers and data storage devices? The lower courts have been struggling with this question, and the Court may have answered it for them.

From a practical perspective, police will probably get warrants for cell phone data very easily if it’s relevant to the case. It’s just a bit more paperwork.

NY Times – Major Ruling Shields Privacy of Cellphones

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KlearGear Fined $300k

Posted by | News | June 27, 2014

After KlearGear Tried to Fine Couple for Posting Bad Review, Court Awards Couple $300k.

We’ve talked about this case before ==> Here. Sometimes an update is satisfying, as it is this time. For those who don’t know, or remember, John and Jen Palmer posted a bad review about KlearGear.com for poor customer service. In retaliation, KlearGear fined them $3,500 for an obscure clause in their terms of service requiring users to not say anything bad about KlearGear. Never mind that the Palmer’s ordeal happened before those terms were implemented.

Obviously, the Palmer’s refused to pay the $3,500 fine for the review of the $20 item, so KlearGear then went about ruining the Palmer’s credit, to such an extent that they were unable to get a loan even to fix their water heater. So they sued KlearGear, who never responded and ended up with a default judgment voiding the $3,500 fine and setting a date for damages.

Now the damages are here and they’ve clocked in at over $300,000 for the Palmers. It’s satisfying to see behavior like this get its just deserts. We’ll see how likely they pay though. They may have a service of process issue to clear up first.

Public Citizen – Judge Awards Utah Couple $306,750 in Case Against Retailer That Tried to Impose Fine for Critical Online Review

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No Mo’ Aereo – What Now?

Posted by | Legal Analysis, News | June 26, 2014

SCOTUS Holds Against Aereo TV

The Supreme Court yesterday held that Aereo TV, the online television service that streams broadcast TV to your phone, violated copyright laws by not paying broadcast fees to the broadcast television companies. We discussed the case on LaaW earlier ==> here.

A Tale of Two TV’s

The case came down to two analogies of Aereo’s business model. On the one hand, the broadcast companies compared Aereo to a cable company, which must pay retransmission fees to the broadcast companies for rebroadcasting their shows. On the other hand, Aereo argued that it was no different that somebody sticking “rabbit ears” on their TV and sending the show through DVR, but with Aereo doing that hard work for them. You can pick up broadcast signals with an antenna without having to pay retransmission fees.

Ultimately, the majority went with the broadcasters’ analogy, and the dissent went with the rabbit ear analogy. This is a major blow for Aereo and its users. Aereo has stated that its business model cannot work if it has to pay retransmission fees, and has also stated it has no “Plan B” if it loses in Court. Aereo’s CEO Chet Kanojia stated that they “will continue to fight for our consumers and fight to create innovative technologies that have a meaningful and positive impact on our world.” Note that he doesn’t mention TV as part of that impact.

Wider Impact Lessened

The case was closely watched because of heavy emphasis during oral arguments on the potential effects on cloud computing. Under either analogy, the Court had to make decisions on settled copyright law and the worry was how far they would go. The question was how much would be tossed around to come to a decision. However, it seems Justice Breyer took note of the worries in his opinion by strictly limiting the holding to broadcast TV – not cloud computing, streaming, or anything else.

So probably no more Aereo TV. Another innovative company caught up in the law, but that’s the nature of the game sometimes.

CNN – What will Aereo’s TV watchers do now?

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The Law for Affiliate Marketing: Privacy Policies

Posted by | Affiliate Marketing, Privacy | June 24, 2014

Disclaimer: Obviously, this blog does not provide legal advice. How do you know? This is free. Legal advice you have to pay for.

Our overview of affiliate marketing rules now moves into privacy policy requirements. Online privacy is always in the news, and the balance between users’ privacy and your companies need for information is always going to be tricky. A site’s privacy policy explains to your users what information is being collected, and how it’s being used. This way, users can make an informed decision about working with you.

Do You Need a Privacy Policy?

Privacy policies are not legally required by the federal government. However, some states do require them. California requires privacy policies where the site collects information from any California resident. That’s right – resident. It doesn’t matter where you are. Unless your business in no way attracts users in California (or any of the other privacy policy states), you should put together a privacy policy.

Beyond the legal requirement, they’re a good idea anyway. At this point, users expect them. They’ll never read the damn thing, but it’s comforting to know it’s there. Sites without a privacy policy seem less legitimate. Some business will not even work with companies that don’t display privacy policies.

Finally, it’s just plain fair to your users. Remember, they’re the ones you’re trying to persuade. Ultimately, it’s their information and it shouldn’t seem like you’re sneaking it away from them. Let them make their own decisions. Respect your customers, and they will respect you.

Following Your Privacy Policy

I say this so often it seems like a mantra – Follow your privacy policy. While there is no federal law requiring a privacy policy, the FTC does require those with a policy to comply with it. And they love to enforce this one, even when the site didn’t put any thought into making it. They consider it a “deceptive” practice to post a privacy policy, but not follow it. If you remember the discussion about using disclosures to avoid deception, then you’ll know that you can’t tell customers one thing, and then do another.

Snapchat recently got caught up by the FTC for failing to comply with its privacy policy. The policy stated that users’ information would be deleted, which was the whole purpose of the app. However, there were so many ways to save the information and get around the deletions, that it was completely ineffective. Snapchat had to change their policy (notice they didn’t fix the app) to say that nothing would be deleted. Similarly, the FTC filed a complaint against Google because it was using information without permission to build the now defunct Google Buzz.

Once you put that policy out there, you need to know what it says and ensure that it matches your actual practice. Don’t just copy and paste something you found on another site, since lazy drafting is not a defense.

Don’t Forget the Little Children

The law is particularly strict when it comes to kids’ information. While a privacy policy isn’t required by federal law normally, it is if your site collects information on children. Under COPPA, sites cannot collect information from users under 13 without the guardian’s consent. This includes cookies.

This is a particularly tricky area, since it’s not always easy to know when users are under 13, and COPPA compliance brings in a whole array of requirements. The important thing to remember is that you are responsible for third parties. This means that even if you do not collect any information from kids, if one of your third party plug-ins or apps does, then you must comply with COPPA (they need to as well). It also means that you are responsible for your affiliates, so make sure they understand COPPA and won’t violate it.

What Goes Into a Privacy Policy

The general rule is to simply make clear what information you are collecting, and how it’s being used. Let them know if you’re selling it to third parties, or keeping it safe for them. Here are a few things to make sure you include:

  • What information is being collected;
  • What steps you are taking to make sure personal information (name, address, phone number, etc) is secure;
  • Whether you will share the information with anyone outside your, whether you sell it or not;
  • Let them know how they can opt out of communications, or modify/delete their information;
  • Unless you prohibit kids from visiting your site, include COPPA information like how a parent can delete their kids’ info;
  • Tell them how you will notify them when the policy changes (because you need to update your policy as you upgrade your business); and
  • The effective date of the policy (when it begins).

Depending on your practices, there may be specific clauses to add. For example, if you’re using Google Adwords remarketing, then they have specific language they want you to include in your privacy policy. You may also need language if you’re using analytics, Facebook integration, or other info sharing systems.

Do It Already!

A privacy policy is usually the last thing put on a site or app, and too often ignored. But it can have significant consequences. If you don’t want to mess with it, hand it off to an attorney. You’ve got enough to do already. If you do it yourself, make sure it matches your actual practices. Make notes of what your site or your affiliates are collecting, what kind of data security you have in place, and what you plan to do with all that information. Write it down. Now it’s 90% done. Put it through a privacy policy generator, like this or this. Then show that to your attorney to make sure it’s got everything you need. Finally, put a link on every page of your site or app so it’s easy to find. Common practice is to put it in the footer – you users will look for it there.

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