New Delaware Statute Expands Duties to Prevent and Report Data Breaches and Applies to Anyone Who Conducts Business in Delaware

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Anyone who conducts business in Delaware – even if they are located outside that state – has until April 14, 2018 to comply with new requirements to protect “personal information” of Delaware residents from data breaches and to meet expanding duties to give notice of those breaches under an Act recently signed into law by Gov. John Carney.

Consistent with recent trends in cybersecurity law, the Act requires persons who maintain certain types of personal and confidential information to take proactive measures to prevent data breaches.  It requires persons who conduct business in Delaware to “implement and maintain reasonable procedures and practices to prevent the unauthorized acquisition, use, modification, disclosure, or destruction of personal information collected or maintained in the regular course of business.”  The Act does not specify the measures that would qualify as “reasonable procedures and practices,” presumably leaving it to be determined on a case-by-case basis if and as breaches occur. However, there are cybersecurity laws and regulations that impose more specific requirements in other contexts and jurisdictions, as well as evolving technical standards and practices, to which the courts and regulators may look for guidance to delineate the measures required to comply with this aspect of the Act.

The Act also expands the types of information that constitute “personal information” that is subject to protection under Delaware law.  Maintaining the current requirement that “personal information” be associated with an individual’s last name combined with their first name or first initial, the Act then provides a longer list than the current statutes of  the types of non-public data that qualifies as “personal information.”  In addition to social security numbers, account numbers (such as payment card numbers) in combination with passwords or codes that permit access to the accounts, and driver’s license numbers, the Act adds to the list passport numbers; state or federal ID cards; certain medical information and health insurance information; certain biometric and DNA data; tax ID numbers; and usernames or email addresses in combination with a password or security question and answer that would permit access to information that would give access to online accounts.

The Act encourages persons who maintain personal information to encrypt it.  But, it also provides that the unauthorized acquisition of encrypted personal information is a breach of security triggering certain notice obligations if the unauthorized acquisition includes, or is reasonably believed to include, the encryption key.

The Act also tweaks aspects of the requirements that a person who suffered a data breach give notice to Delaware residents whose personal information is involved.  Among other things, the new statute requires a person suffering the breach to provide notice within 60 days unless he investigates and reasonably determines that the breach is unlikely to result in harm.  It also requires a vendor to whom personal information is disclosed to immediately notify its customers (commonly other businesses who collect personal information about their customers or employees) of a breach regardless of whether the vendor determines that the disclosure of the information created a risk of harm.

Finally, the Act requires persons who suffer a data breach to offer one year of free credit monitoring services to Delaware residents if the breach includes Social Security numbers.

In light of these new requirements, businesses who do business in Delaware and who collect “personal information” of Delaware residents and who have questions concerning compliance with the Act should consider consulting legal counsel and/or data security technology professionals.

If you have any questions about the Act or cybersecurity issues in general, please contact Archer’s Privacy and Cybersecurity Group members Robert T. Egan at 856-354-3079 or regan@archerlaw.com or  Mark J. Sever, Jr. at 856-354-3079 or msever@archerlaw.com or any other member of the group in our Delaware office at (302) 777-4350.


DISCLAIMER: This client advisory is for general information purposes only. It does not constitute legal or tax advice, and may not be used and relied upon as a substitute for legal or tax advice regarding a specific issue or problem. Advice should be obtained from a qualified attorney or tax practitioner licensed to practice in the jurisdiction where that advice is sought.

Social Media Mavens Beware: Innocent Posts Can Violate Restrictive Covenants

It’s now official! According to the Superior Court of Pennsylvania–Facebook can be the basis for violation of a non-solicitation agreement.  Parties need to be aware that even seemingly innocuous posts about future undefined plans on a Facebook page may violate a non-competition/non-solicitation agreement.

On August 22, 2017, the Superior Court of Pennsylvania issued an Opinion in Joseph v. O’Laughlin, No. 1706 WDA 2015.  In that case, the parties entered into an asset purchase agreement (“Agreement”) related to a veterinary clinic (“Clinic”).  Pursuant to that Agreement, for five years after the sale of the Clinic, the defendant was prohibited from “engag[ing] or participat[ing] in any business or practice [within fifty miles of the Clinic] that is in competition in any manner whatsoever with [buyer].  Further, [seller] shall not contact, solicit, or engage in any activity to contact or solicit, indirectly or directly, any client, past, present, or future, during that five (5) year period.”

Without opening a competing business, the seller purchased a property, applied for a zoning variance to permit a veterinary clinic, and used a Facebook page to advertise a new veterinary clinic within the restricted area to open at an undisclosed future date.  The Appellate Court upheld the injunction issued against seller, despite the fact that no actual competing business had commenced.

The Facebook page specifically was found to have violated the non-solicitation provision of the Agreement.  Facebook offers unique problems in this context.  There was no evidence that the seller himself actually initiated any contact with any past, present or future clients.  Rather, the seller established a new Facebook page indicating that the business would open at some undefined future date and gave the location of that future business.  The Court noted that former clients sought out and posted on the Facebook page.  The Court stated that “the resounding purpose of the Facebook page, and the attendant communication therein, was to inform the followers of the page, including former clients, that [the seller] intended to open a new clinic and to keep them apprised of his progress.”

This Opinion is surprising given the fact that there was not yet a competing veterinary clinic for those former clients to which they could take their business.

If you are the beneficiary of a restrictive covenant, you need to monitor the social media accounts of your counterpart.  If you are restricted by such a covenant, you need to be incredibly careful how you use social media.  For more information, or if you have any questions regarding restrictive covenants in Pennsylvania, please contact Archer at (215) 963-3300 and ask to speak to Patrick J. Doran, Esquire, Jonathan P. Rardin, Esquire or one of our other Trade Secret Protection and Non-Compete Practice Group members in Haddonfield, N.J., at (856) 795-2121, in Princeton, N.J., at (609) 580-3700, in Hackensack, N.J., at (201) 342-6000, or in Wilmington, Del., at (302) 777-4350.
DISCLAIMER: This client advisory is for general information purposes only. It does not constitute legal or tax advice, and may not be used and relied upon as a substitute for legal or tax advice regarding a specific issue or problem. Advice should be obtained from a qualified attorney or tax practitioner licensed to practice in the jurisdiction where that advice is sought.

Continued Employment May Not Be Enough for Your Arbitration Policy to Be Enforceable With Employees

On August 11, 2017, the New Jersey Superior Court, Appellate Division held, in Kevin Dugan and Roman Zielonka v. Best Buy Co. Inc., and Garrett Hetrick, Docket No. A-1897-16T4, that when it comes to employers implementing new arbitration policies for any disputes with its employees, continued employment alone may not be explicit affirmative assent to arbitrate claims.

Like all contracts, arbitration policies require mutual agreement and consideration between employer and employee.  While New Jersey courts have held continued employment is sufficient consideration for some employment-related agreements, the Appellate Division was clear that consideration is a concept and element of contract formation which is different from mutual assent, which was the concept at issue in Dugan v. Best Buy. Consideration requires each party give something up to the other to bind them to the agreement while mutual assent requires each party agree.

Arbitration agreements have been held to higher legal scrutiny recently, especially with the advent of Atalese v. U.S. Legal Servs., Grp., 219 N.J. 430 (2014), certif. denied, 135 S. Ct. 2804 (2015).  The Appellate Division, relying on New Jersey Supreme Court precedent, explained that an employee’s waiver of his or her right to sue in a court of law requires that he or she has a complete understanding of the agreement terms and rights being waived as well as must indicate an explicit, affirmative, and unmistakable assent.

Clearly, a signature is the best evidence of explicit, affirmative, and unmistakable assent.  Without one though, the question is what is sufficient as another explicit indication of assent.

In Dugan v. Best Buy, Best Buy introduced  its new arbitration policy with current employees through electronic prompts, which at the end of the pages of explanation of the policy, contained a box indicating “I acknowledge.”  The plaintiff, a current employee at the time of the policy being implemented, and manager at Best Buy, went through the electronic pages, but did not read the policy.  Thereafter, he clicked the “I acknowledge” box and was in charge of making sure employees subordinate to him also reviewed the electronic arbitration policy.  He remained employed for three (3) weeks after the arbitration policy went into effect.

New Jersey Supreme Court precedent has been clear that mere acknowledgement pages are insufficient for assent.  The Appellate Division indicated that revised language next to the box, perhaps including “and agree to the terms of the policy” would have “firmly established” the plaintiff’s assent.

Moreover, Best Buy’s arbitration policy stated even employees who did not click the “I acknowledge” box were bound by the policy, “by remaining employees.”  Therefore, the Appellate Division examined whether continued employment was sufficient in these circumstances to constitute explicit assent to the arbitration policy.  The Appellate Division found that the plaintiff’s knowledge of the policy’s existence and his status as a manger were factors related to his understanding of the waiver of his right to sue in court, but were not factors related to his assent.

In a similar context, the Appellate Division, in Jaworski v. Ernst & Young, U.S., 441 N.J. Super. 464 (App. Div.), certif. denied, 223 N.J. 406 (2015), held that continued employment for five years after the effective date of a similar employment arbitration policy was sufficient explicit assent to the arbitration policy.

However, the Appellate Division, here, held that three weeks of continued employment after the arbitration policy went into effect was insufficient explicit assent to the policy.  The Appellate Division expressly took issue with how brief the period of continued employment was in comparison to the high standard required to uphold arbitration provisions.  The Appellate Division found that there was not enough time permitted for an employee who disagreed with the arbitration policy to find other employment if he or she took issue with the policy.  The Court determined that since there was no negotiation of this arbitration provision, the take it or leave it approach was really no choice at all for this specific plaintiff who worked for the Company for almost sixteen years.

In summary, Dugan v. Best Buy means that for employers to have enforceable arbitration provisions for its current employees, there must be some other means of ascertaining assent from the employees.  Acknowledgment pages and in certain circumstances, continued employment are simply not enough.

If you have questions about whether your arbitration policy is enforceable or whether your employees have provided explicit assent to arbitrate any employment disputes with you, please contact any member of Archer’s Labor & Employment Group in Haddonfield, N.J., at (856) 795-2121, in Princeton, N.J., at (609) 580-3700, in Hackensack, N.J., at (201) 342-6000, in Philadelphia, Pa., at (215) 963-3300, or in Wilmington, Del., at (302) 777-4350.

DISCLAIMER: This client advisory is for general information purposes only. It does not constitute legal or tax advice, and may not be used and relied upon as a substitute for legal or tax advice regarding a specific issue or problem. Advice should be obtained from a qualified attorney or tax practitioner licensed to practice in the jurisdiction where that advice is sought.

NJ Statute Restricting Retailers’ Collection and Use of Personal Information Signed Into Law

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New Jersey retail establishments who collect electronic data by scanning personal identification cards must comply with the “Personal Information and Privacy Information Act” that Governor Chris Christie signed into law on July 21, 2017.

The Act, which goes into effect three months after enactment, places restrictions on the collection, storage and use of personal information that is obtained by scanning cards such as a person’s driver’s license or other government issued identification card.  The Act:

  • limits the information collected by scanning a person’s identification card  to “the person’s name, address, date of birth, the State issuing the identification card, and identification card number”;
  • allows retailers’ to scan identification cards for one or more of the following eight permitted purposes, and no others:
    • to verify the authenticity of the identification card or to verify the identity of the person if the person pays for goods or services with a method other than cash, returns an item, or requests a refund or an exchange;
    • to verify the person’s age when providing age-restricted goods or services to the person;
    • to prevent fraud or other criminal activity if the person returns an item or requests a refund or an exchange and the business uses a fraud prevention service company or system;
    • to prevent fraud or other criminal activity related to a credit transaction to open or manage a credit account;
    • to establish or maintain a contractual relationship;
    • to record, retain, or transmit information as required by State or federal law;
    • to transmit information to a consumer reporting agency, financial institution, or debt collector to be used as permitted by three federal statutes; or
    • to record, retain, or transmit information by a covered entity governed by the “Health Insurance Portability and Accountability Act of 1996” (HIPAA) and certain regulations;
  • prohibits retailers from retaining information obtained only to:
    • verify the authenticity of the identification card or to verify the identity of the person if the person pays for goods or services with a method other than cash, returns an item, or requests a refund or an exchange; or
    • to verify the person’s age when providing age-restricted goods or services to the person;
  • requires any information obtained by scanning identification cards to be “securely stored”, and requires any breach of the security of such information to be reported to the State Police and any affected person in accordance with NJ statutes on data breaches involving personal information;
  • prohibits retailers from selling or disseminating any information obtained by scanning identification cards, except in one very narrow circumstance; and
  • imposes penalties on retailers who violate the Act and allows aggrieved persons to bring a suit for damages caused by a violation of the Act.

The Act does not specify the practices that are required to “securely store” the information, leaving that to be determined on a case-by-case basis if and as breaches occur.  However, retailers should be aware that there are cybersecurity laws and regulations that impose more specific requirements in other contexts and jurisdictions, as well as evolving technical standards and practices, to which the courts and regulators may look for guidance to delineate the measures required to comply with this aspect of the Act.

If you have any questions about the Act or cybersecurity issues in general, please contact Archer’s Privacy and Cybersecurity Group members Robert T. Egan at 856-354-3079 or regan@archerlaw.com or Daniel DeFiglio at 856-616-2611 or ddefiglio@archerlaw.com.

DISCLAIMER: This client advisory is for general information purposes only. It does not constitute legal or tax advice, and may not be used and relied upon as a substitute for legal or tax advice regarding a specific issue or problem. Advice should be obtained from a qualified attorney or tax practitioner licensed to practice in the jurisdiction where that advice is sought.

ESOPs are an Excellent Succession Tool

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An employee stock ownership plan (“ESOP”) is a qualified retirement plan that can serve as a tremendous business succession tool for business owners of privately held corporations.

Imagine the scenario in which a business owner spends 30+ years of his working life creating and growing a successful privately held business.  After a successful run, this owner whose children have little interest in taking over the business decides to cash out and sell his stock in the business to a private equity firm.  Before inking the deal, the business owner who wants to stay active in the business negotiates a two year employment agreement for himself and tries to protect the employees by including a provision in the purchase agreement that states the company must remain in the same facility for the next three years.  As you might imagine, two years after the business owner sold the business, the private equity firm (the now owners of the company) decided not to renew the business owner’s employment agreement – forcing him to retire at the age of 62.  A year after forcing the business owner out of the company, the private equity firm decided to consolidate business operations and move the company some 300 miles away – causing most of the employees to lose their jobs with the company.

Had this business owner sold his company stock to an ESOP, the above result would never have occurred.

A business owner can monetize his or her capital investment in their business by selling some or all of their company stock to an ESOP and still maintain an active role in the business that he or she created.  Moreover, the business owner can maintain and protect the job security of the employees and provide them with a supplemental retirement benefit.  In fact, empirical data proves that ESOP owned companies are more profitable and have lower turnover rates than non-ESOP companies.

The best way to demonstrate how a leveraged ESOP transaction occurs is by example.  Let us assume a business owner (“John”) is looking to sell 40% of his company (a subchapter C corporation) to an ESOP for $5 million.  Once the Company, John and the ESOP negotiate the terms of the deal, the Company will lend $5 million (the Company obtains this money from either a commercial bank, company cash, seller notes or a combination thereof) to an ESOP for a note.  The ESOP, in turn, uses the $5 million loan proceeds to purchase the 40% interest in company stock from John.  John (under certain circumstances) may be able to avoid having to pay capital gains tax on the $5 million in sale proceeds (the mechanics of this 1042 Code Section tax deferral election is beyond the scope of this article).  In addition to monetizing a portion of his capital investment in the Company, John still remains the majority owner of the business – something a private equity firm would never permit.

Each year the Company will make a tax deductible contribution to the ESOP so that the ESOP can pay its annual debt service requirement back to the Company (remember the ESOP borrowed the $5 million from the Company for a note).  The net cash flow from Company to ESOP and then from ESOP back to Company is cash neutral.  In other words, the Company is not out of pocket any dollars once the ESOP effectuates its debt service payment back to the Company.  However, this circular flow of funds generates a sizable tax deduction for the Company which means that the Company can pay back outside bank financing (the Company probably borrowed a portion of the $5 million from a bank) with pre-tax dollars.  This results in tax-advantaged financing for the Company.

As for the employees and as the $5 million note is paid off (let us assume it is a 10 year note), each employee / participant in the ESOP will receive an allocation of company stock in his or her account.  Here, 10% of the company stock that was purchased by the ESOP is allocated each year to the participants (in the aggregate).  After 10 years, all of the Company stock that was purchased by the ESOP will be allocated to the participant accounts.  Over the years, each participant’s account balance will grow in size and will prove to be a real supplemental retirement benefit for such participants.  This ESOP benefit is completely employer paid.  There is no cost to the participant.

There are about 10,000 ESOPs in the United States, covering over 10 million employees which equate to about 10% of the private sector workplace.  There are certain macro factors that support ESOPs in today’s economy.  Several of these factors include:  (a) baby boomer business owners are approaching retirement age and need an exit strategy; (b) stock market multiples are at a near or multi-year highs; (c) borrowing rates on loans are low; and (d) bank’s lending parameters have generally loosened in the last few years.

The following link is to an article of a new ESOP owned company.  The team at Archer orchestrated this transaction and helped the company reach it goals of becoming employee owned.

http://www.capegazette.com/article/trinity-logistics-announces-employee-ownership-plan/137941 

If you have questions about ESOPs, please contact Mark R. KossowTerence J. FoxDeborah A. Hays, Brian M. McGovern or any member of Archer & Greiner’s Corporate or Tax Law Groups in Haddonfield, N.J., at (856) 795-2121, in Philadelphia, Pa., at (215) 963-3300, in Princeton, N.J., at (609) 580-3700, in Hackensack, N.J., at (201) 342-6000, or in Wilmington, Del., at (302) 777-4350.

DISCLAIMER: This client advisory is for general information purposes only. It does not constitute legal or tax advice, and may not be used and relied upon as a substitute for legal or tax advice regarding a specific issue or problem. Advice should be obtained from a qualified attorney or tax practitioner licensed to practice in the jurisdiction where that advice is sought.

 

Important Changes For Employers: New I-9 Form and Procedures

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Whether employers are hiring United States citizens or foreign nationals with visa needs, onboarding is governed in part by immigration Form I-9. As a general basis, every employee must fill out a Form I-9 to prove both identity and eligibility to work in the United States. Immigration, more specifically ICE, is authorized and active in enforcing employers’ compliance with I-9 protocols.  Restated, this innocuous form can create a lot of employer headaches if not completed and maintained correctly. Fortunately, Archer attorneys have a “deep bench” of experience in assisting clients with the nuances of I-9 compliance.

As an update, the United States Citizenship and Immigration Services (USCIS) recently released another revised version of Form I-9, with subtle changes to the form’s instructions and list of acceptable documents. The new edition is dated 7/17/17.

Employers can continue to use the November 2016 edition of Form I-9 until September 17, 2017. However, starting on September 18, 2017, only the 07/17/17 edition can be used.

A key change on the new Form I-9 that employers should be aware of is revised instructions in reference to how Section 1 of Form I-9 should be completed.

Prior Forms I-9 required that Section 1 had to be completed by “the end of the first day of employment.” By removing “the end of” from the phrase “the first day of employment,” USCIS emphasizes that the employee should “complete Section 1 at the time of hire (by the first day of their employment for pay).”

While we await specific guidance from USCIS concerning this change, employers should consider revisiting their onboarding practices to ensure that Section 1 of Form I-9 is completed no later than when the employee starts work for pay rather than by the end of the first day of employment.

If you have any questions about the Form I-9 or your onboarding procedures, please contact Robert C. Seiger at 856-816-0331 or rseiger@archerlaw.com or Deborah A. Hays at 856-354-3089 or dhays@archerlaw.com or any member of the Business Counseling Group.

DISCLAIMER: This client advisory is for general information purposes only. It does not constitute legal or tax advice, and may not be used and relied upon as a substitute for legal or tax advice regarding a specific issue or problem. Advice should be obtained from a qualified attorney or tax practitioner licensed to practice in the jurisdiction where that advice is sought.

Pennsylvania Supreme Court Rules Selective Reverse Appeals are Unconstitutional

The Pennsylvania Supreme Court has ruled in favor of taxpayers, finding a valid claim that Upper Merion Area School District real estate assessment appeal policy violates the Uniformity Clause of the Pennsylvania Constitution. Valley Forge Towers Apartments et al. v. Upper Merion Area School District, No. 49 MAP 2016.

The Valley Forge Towers appeal raises the question of whether the Uniformity Clause of the Pennsylvania Constitution permits taxing districts from selectively appealing the assessments of commercial properties, while choosing not to appeal the assessments of other types of property – most notably, single-family residential homes – many of which are under-assessed by a greater percentage. The Supreme Court ruled that such appeals violate the Uniformity Clause and are not permitted. It reversed lower court dismissals of the taxpayer’s complaint and remanded the matter for further proceedings.

The Pennsylvania Supreme Court’s Valley Forge Towers decision provides much needed guidance on enforcing constitutional boundaries where taxing districts employ discriminatory and unfair appeal policy.

Taxing district “spot” appeals can significantly impact your property taxes. Taxpayers in Pennsylvania should take the necessary steps to protect their rights to uniformity in assessment, and equality and fairness in taxation.

David Schneider is a partner in Archer’s Real Estate Tax Appeal Group. His primary practice is Pennsylvania property tax appeals where he has significant experience defending against taxing district reverse appeals state-wide. Please feel free to contact David at 215.246.3172 or dschneider@archerlaw.com to discuss how spot appeals can impact your real estate taxes. He can help you review your assessment and evaluate your case. There is no fee for a preliminary analysis of your property tax assessment.

DISCLAIMER: This client advisory is for general information purposes only. It does not constitute legal or tax advice, and may not be used and relied upon as a substitute for legal or tax advice regarding a specific issue or problem. Advice should be obtained from a qualified attorney or tax practitioner licensed to practice in the jurisdiction where that advice is sought.

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Exhausting Update: Patents are NOT Different from Copyrights! A Sea Change Ahead for Licensing?

This is a promised update to the Client Advisory of February 2016 on the issue of  patent exhaustion in the case of  Lexmark v. Impression, as then decided by the United States Circuit Court of Appeals for the Federal Circuit when we speculated:

“Whether or not either barrel of this decision will shoot its way to the Supreme Court is hard to say; however, it goes without saying that this complicated commercial topic of dealing with exhaustion of intellectual property rights is a critical one for many patentees, licensees, and resellers. Its changeable nature and complexity argue for early and continuing analysis of contracts and licensing agreements by your trusted, and never exhausted, intellectual property law advisor.”

The value of  that type of inexhaustible advice has now doubled, because  the  recent, unanimous, double-barreled reversals of the Federal Circuit by the Supreme Court are of major commercial implication to the above mentioned patentees, licensees, and resellers, casting into troubled waters the question of  whether a sale of a  patented product is  still a good idea,  at least in the case in which that product can be licensed, rather than sold.

In its reversal of the Federal Circuit,  the Supreme Court in  Impression Products v. Lexmark International upheld its prior rules on when patent rights have been “exhausted” and by doing so weakened the arsenals of patent holders.  The appeals court had held: (i) that the sale in the United States of an article covered by a US patent that is subject to certain reuse and resale restrictions does not exhaust the patent  rights of the patent holder; and (ii) that the sale outside of the United States of an article covered by a US patent does not exhaust the rights of the patent holder as against the purchaser of that article on the purchaser’s importation of that article into the United States, notwithstanding the 2013 Supreme Court copyright decision in Kirtsaeng.1

Both holdings of the appellate court were reversed in a whale of a decision  by the Supreme Court at the end of this term.

Again, the facts:

Lexmark sold  patented ink cartridges domestically under a “Return Program Cartridge” program at a contractual discounted price subject to a single-use, no-resale restriction.  In the trial court, Lexmark accused Impression of reselling the discounted Return Program Cartridges domestically and of importing into the USA cartridges  that Impression had purchased directly from Lexmark abroad. The trial  court: (a) found no patent infringement on  Impression’s domestic sales of Return Program Cartridges, but (b) found infringement on the importation into the United States of either type of cartridge by Impression  since foreign markets  are not equivalent to domestic markets, and refused to apply the Supreme Court’s logic in the Kirtsaeng copyright case to patent law.

The Federal Circuit reversed the first holding,  but upheld the second, in a decision highly  favorable to patent holders, saying:

“We hold that, when a patentee sells a patented article under otherwise-proper restrictions on resale and reuse communicated to the buyer at the time of sale, the patentee does not confer authority on the buyer to engage in the prohibited resale or reuse. The patentee does not exhaust its § 271 rights to charge the buyer who engages in those acts-or downstream buyers having knowledge of the restrictions-with infringement. We also hold that a foreign sale of a U.S.-patented article, when made by or with the approval of the U.S. patentee, does not exhaust the patentee’s U.S. patent rights in the article sold, even when no reservation of rights accompanies the sale.”

The Supreme Court did not agree with that school of thought; it’s now the law that:

    A. The sale, anywhere in the world,  of an article covered by a US patent exhausts the patent holder’s right to sue the purchaser of that article for patent
infringement.

  1. Chief Justice Roberts, writing for a unanimous Court on the domestic issue, found:   “Congress enacted and has repeatedly revised the Patent Laws against the back drop of hostility toward restraints on alienation,” and went on to cite a 1917 decision for the proposition that those restraints have been “‘hateful to the law from Lord Coke’s2 day to ours.”
  2. And the place of the sale simply does not matter because Justice Roberts, in applying Kirtsaeng to patent law, noted the “‘historic kinship between patent law and copyright law’…and the bond between the two leaves no room for a rift on the question of international exhaustion.”

But….

B. The license, anywhere in the world, of an article covered by a US patent does NOT exhaust the patent holder’s right to sue the licensee of that article for patent infringement. Justice Roberts wrote: “Patent exhaustion reflects the principle that, when an item passes into commerce, it should not be shaded by a legal cloud on title as it moves through the marketplace. But a license is not about passing title to a product, it is about changing the contours of the patentee’s monopoly: The patentee agrees not to exclude a licensee from making or selling the patented invention, expanding the club of authorized producers and sellers….Because the patentee is exchanging rights, not goods, it is free to relinquish only a portion of its bundle of patent protections.”

Will we see a sea change in the commercial waters  now as patent holders attempt to camouflage  their transactions as  licenses,  thereby  morphing  into  licensors, rather than sellers? Since  patent rights can no longer “stick remora-like to [a sold] item as it flows through the market,3” the bigger fish may be doing a lot more licensing.

One thing to keep in mind: Just because the right to sue for patent infringement may be lost, a seller might still have the bargaining power to impose contractual restrictions on its purchasers, and those contractual restrictions may well float  along with the product and be enforceable…it’s not a known certainty, but it’s also not all that exhausting.

If you have questions about copyrights or other related intellectual property issues, please contact Gregory J. Winsky or a member of Archer & Greiner’s Intellectual Property Group in Haddonfield, N.J., at (856) 795-2121, in Philadelphia, Pa., at (215) 963-3300, in Princeton, N.J., at (609) 580-3700, in Hackensack, N.J., at (201) 342-6000, or in Wilmington, Del., at (302) 777-4350.

DISCLAIMER: This client advisory is for general information purposes only. It does not constitute legal or tax advice, and may not be used and relied upon as a substitute for legal or tax advice regarding a specific issue or problem. Advice should be obtained from a qualified attorney or tax practitioner licensed to practice in the jurisdiction where that advice is sought.

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[1] In Kirtsaeng, a foreign student attending Cornell, on learning that Wiley’s copyrighted textbooks were much more expensive to buy in the United States than at home, began importing textbooks from home to be sold domestically at huge profits. While Wiley’s copyright infringement action against the wily importing book reseller was successful at both the district and appeals courts levels, the Supreme Court reversed, extending the rule of first sale exhaustion of copyright rights, theretofore applied only to domestic sales, to foreign sales as well.

[2] Sir Edward Coke (b.1552-d.1634)  having been, during his long and illustrious legal career, Chief Justice of The Common Pleas in England, may be best known for an aphorism engraved to encircle the entrance to the law library of a great American law school (and, as a result,  engraved forever in the hearts of many a  bleary eyed student trudging thereunder): “The Knowne Certaintie of the Law is the Saftie of All.”

[3] See  the last page of the opinion of the Court. See also https://en.wikipedia.org/wiki/Remora

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State Tax Equalization Board Releases 2016 Common Level Ratios

The State Tax Equalization Board (STEB) has released its Common Level Ratio (CLR) of assessed value to market value for each county in Pennsylvania for calendar year 2016 (applicable to tax year 2018). The CLR is used to convert aggregate taxable assessed values into equalized market values for use in a formula that determines the allocation of state subsidies to school districts. The CLR can also be used to convert fair market values into assessed values in conjunction with property tax appeals, subject to a taxpayer’s Constitutional and common law right to application of a different ratio reflecting a lower level of assessed value to fair market value in the county or for similarly situated property. The 2016 CLRs can be viewed at http://www.pabulletin.com/secure/data/vol47/47-22/953.html. Notice, Dept. of Rev., 2016 Common Level Ratios, Pa. Bull. Doc. No. 17-953, Pa. Bull., Vol. 47, No. 22, 07/03/2017.

The CLR can significantly impact property tax appeal proceedings. Taxpayers in Pennsylvania should annually evaluate their assessed values and equalized assessed values, after application of the CLR, and take the necessary steps to protect their rights to uniformity in assessment, and equity and fairness in taxation. 

 David Schneider is a partner in Archer’s Real Estate Tax Appeal Group. His primary practice is Pennsylvania property tax appeals where he has significant experience representing taxpayers throughout the Commonwealth. Please feel free to contact David at 215.246.3172 or dschneider@archerlaw.com to discuss how the 2016 Common Level Ratios could impact you. He can help you evaluate and identify potential opportunities to reduce your real estate taxes. There is no fee for a preliminary analysis of your property tax assessment.

 DISCLAIMER: This client advisory is for general information purposes only. It does not constitute legal or tax advice, and may not be used and relied upon as a substitute for legal or tax advice regarding a specific issue or problem. Advice should be obtained from a qualified attorney or tax practitioner licensed to practice in the jurisdiction where that advice is sought.

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Recent Decision Demonstrates Need for Careful Crafting of Restrictive Covenants

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 A recent appellate decision by the Superior Court of Pennsylvania underscores the need for employers to carefully review the language of restrictive covenants and illustrates how a lack of precision can result in uncertainty and costly litigation.    

In Metalico Pittburgh, Inc. v. Newman, 2017 PA Super 109 (2017), the employer (“Metalico”) entered into identical employment agreements with two employees (“Newman and Medred”) which provided for three-year terms with Metalico having an option to extend for additional three-year terms subject to the employee’s agreement.  The agreements also included restrictive covenants prohibiting each employee from soliciting Metalico’s customers, suppliers and employees for a specified period beginning “on the last day of employment” and continuing for a defined time period varying based on the reason for the termination.  The agreements included a provision stating that if the employee’s “employment hereunder expires or is terminated this Agreement will continue in full force and effect as necessary or appropriate to enforce the covenants or agreements” of the employee, including the restrictive covenants. 

Shortly before the original three-year term expired September 18, 2014, Newman and Medred inquired as to their future status, and Metalico confirmed that Newman and Medred would become at will employees and, while their salaries would not change, certain other benefits provided by the agreements, such as raises, bonuses and stock grants ,would become discretionary.

On September 21, 2015, Newman’s and Medred’s employment with Metalico ended, and they went to work with a competitor and promptly began to solicit Melalico’s employees and customers.  Metalico sued Newman and Medred for breach of the restrictive covenant and (along with their new employer) for tortious interference with Metalico’s business. 

The trial court granted summary judgment for Newman, Medred and their new employer, finding that since the original employment agreements expired and Metalico was no longer bound to provide the same contractual benefits, the restrictive covenants failed for lack of consideration. 

The Superior Court reversed this decision, holding that the contractual consideration required by the agreements was provided and citing a prior decision, Boyce v. Smith-Edwards-Dunlap Co., 580 A.2d 1382 (Pa. Super. 1990), appeal denied, 593 A.2d 413 (Pa. 1991), in which the Court held that a restrictive covenant survived the expiration of the stated term of employment where the covenant referred to employment “whether pursuant to [the employment agreement] or otherwise.”  Despite the absence of such a provision in Newman’s and Medred’s agreements, the Superior Court found that the agreements clearly contemplated that the restrictive covenants would apply beyond the original term. 

While the Superior Court ultimately found that the restrictive covenant survived Newman and Medred becoming at will employees, this decision demonstrates the critical importance of careful drafting of restrictive covenants, particularly in instances where an employee may “convert” to at will employment after the original term expires.  Had more careful drafting occurred – including a provision similar to that found in the employment agreement in the Boyce decision, it may well be that Metalico could have avoided the consequences of breaches and the expense of litigation.

If you have any questions about restrictive covenants please contact Patrick J. DoranJonathan P. Rardin, or any member of the Trade Secret and Non Compete Practice Group in Haddonfield, N.J., at (856) 795-2121, in Princeton, N.J., at (609) 580-3700, in Hackensack, N.J., at (201) 342-6000, in Philadelphia, Pa., at (215) 963-3300, or in Wilmington, Del., at (302) 777-4350.

DISCLAIMER: This client advisory is for general information purposes only. It does not constitute legal or tax advice, and may not be used and relied upon as a substitute for legal or tax advice regarding a specific issue or problem. Advice should be obtained from a qualified attorney or tax practitioner licensed to practice in the jurisdiction where that advice is sought.