Articles Posted in Business Torts

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European Court of Justice (ECJ) in Luxembourg with flags 0017 (1674479483)Cybersecurity and data privacy are vital issues that business owners need to understand. Many Northern California businesses rely on the availability of customer data for their business operations. State and federal cybersecurity and privacy laws require businesses to take various steps to safeguard certain types of customer information. Businesses that have an international presence must also abide by certain international treaties and the laws of some foreign countries. Since 2015, the U.S. and the European Union (E.U.) have attempted to develop a framework that allows U.S. companies to transmit customer information from Europe, while protecting European consumers’ privacy. They agreed on a framework known as the “EU-US Privacy Shield” in 2016. A recent ruling from an Irish court, however, could significantly alter the flow of information from European consumers to U.S. businesses.

The Privacy Act of 1974, 5 U.S.C. § 552a, regulates the U.S. government’s use of information commonly known as “personally identifiable information” (PII). This includes names, addresses, Social Security and other identification numbers, and other information that can be used to identify a specific individual. The applicability of these protections to people outside the United States remains uncertain. Congress expanded the scope of the Privacy Act to include nationals of designated foreign countries in the Judicial Redress Act of 2015. Pub. L. 114-126, 130 Stat. 282 (Feb. 24, 2016). The White House, however, has directed federal agencies to “exclude persons who are not United States citizens or lawful permanent residents from the protections of the Privacy Act.” Exec. Order 13768, 82 Fed. Reg. 8799, 8802 (Jan. 30, 2017).

The U.S. and the E.U. developed a framework known as the International Safe Harbor Privacy Principles to address the handling of PII by private companies across national borders. The European Court of Justice (ECJ) ruled in 2000 that these principles were consistent with the E.U.’s Data Protection Directive, Directive 95/46/EC, which was in force at the time. The rise of social media, however, led to a complaint in 2014 from an Austrian citizen who was concerned about PII held by the social media company Facebook at its subsidiary facility in Ireland. Rather than concerns about identity theft, the complainant alleged that information submitted to Facebook would be subject to surveillance by the U.S. government.
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dating-love-app-tinder-phone-3373115Patent law gives inventors and designers to the right to exclusive use of their creations. These rights are similar to those granted by trademark registration, but the process of applying for a patent is usually much more complicated. In the event of infringement, patent and trademark owners have the right to sue for damages and to enjoin further unauthorized uses. A pair of lawsuits filed earlier this year by two competing tech companies demonstrate both the complexity of patent law and the types of business disputes that can arise in connection with alleged patent infringement. California businesses are undoubtedly familiar with many of the patent issues raised in Match Group, LLC v. Bumble Trading Inc. (“Match”), No. 6:18-cv-00080, complaint (W.D. Tex., Mar. 16, 2018), as well as the business torts alleged by Bumble Trading Inc. v. Match Group, LLC (“Bumble”), No. DC-18-04140, orig. pet. (Tex. Dist., Dallas Cty., Mar. 28, 2018).

Federal law allows patent protection for “new and useful” inventions, or “any new and useful improvement thereof.” 35 U.S.C. § 101. Patents that cover “useful” inventions are commonly known as “utility patents.” A “design patent” covers “new, original and ornamental design[s]” that are associated with a product without affecting its function. Id. at § 171(a). Both types of patents are protected from infringement, defined to include “mak[ing], us[ing], offer[ing] to sell, or sell[ing]” patented material without permission. Id. at § 271.

A trademark is a name, phrase, logo, or other design “by which the goods of the applicant may be distinguished from the goods of others.” 15 U.S.C. § 1052. More general designs and shapes that are associated with particular products are known as “trade dress.” Trademark law protects trade dress to the extent that it serves to identify a product. Federal law allows trademark owners to sue for various acts constituting infringement, including unauthorized use of copies or reproductions of a trademark in ways that are likely to cause confusion or dilution. Id. at §§ 1114(a), 1125(a).
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Silhouette of man standing by a lakeThe United States Constitution grants authority to the federal judiciary to hear “cases and controversies” arising under various circumstances. U.S. Const., Art. III, § 2, cl. 1. If a plaintiff does not present a justiciable controversy, federal courts lack subject matter jurisdiction to hear the case. One part of this analysis involves determining whether a plaintiff has standing to sue. The U.S. Supreme Court has defined a general test to determine standing, which requires evidence of an “injury in fact,” a “causal connection” between this injury and the defendant’s alleged conduct, and a likelihood that a “favorable decision” would redress the injury. Lujan v. Defenders of Wildlife, 504 U.S. 555, 560-61 (1992). The court further addressed the “injury in fact” requirement in Spokeo, Inc. v. Robins, 578 U.S. ___ (2016), finding that the Ninth Circuit needed to consider both the “concrete” and the “particularized” aspects of the alleged injury. The Ninth Circuit, whose jurisdiction includes many California business disputes, cited Spokeo in two recent decisions finding that plaintiffs lacked standing to sue for alleged violations of a federal consumer protection statute. Bassett v. ABM Parking Services, Inc., 883 F. 3d 776 (9th Cir. 2018); Noble v. Nevada Checker Cab Corporation, No. 16-16573, slip op. (9th Cir., Mar. 9, 2018).

Both Bassett and Noble alleged violations of the Fair and Accurate Credit Transactions Act (FACTA) of 2003. This law amended the Fair Credit Reporting Act (FCRA), 15 U.S.C. § 1681 et seq., with various provisions granting consumers access to their own credit information and protecting against identity theft. Thanks to FACTA, consumers can receive a copy of their credit report from each of the major credit reporting agencies once a year, free of charge.

The two Ninth Circuit cases alleged violations of FACTA provisions requiring the truncation of credit and debit card numbers, printing no “more than the last 5 digits of the card number or the expiration date,” on receipts provided to consumers at the point of sale. Id. at § 1681c(g). Willful noncompliance with these requirements can result in liability to an aggrieved consumer for damages of $100 to $1,000, as well as actual damages and attorney’s fees. Id. at § 1681n(a).
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ticketA wide range of regulatory agencies monitor business activities, investigate alleged violations, and bring civil actions against companies they believe have committed unlawful acts. Many businesses designate executives or managers as compliance officers, in the hopes of identifying and preventing regulatory violations before they become actionable. Companies in some industries create separate organizations to serve as watchdogs over their members. Self-regulatory organizations offer the benefit of keeping official regulators at something of a distance, but their reliability depends on vigorously fulfilling their purpose. One example is the Advertising Self-Regulatory Council (ASRC), which has several divisions monitoring different aspects of the advertising business. One of these, the National Advertising Division (NAD), monitors national advertising campaigns to look for false or misleading claims and other deceptive practices. If it is unable to resolve a claim, it may refer the matter to a government agency. This recently happened with a company based in Northern California, which was accused of failing to disclose fees to consumers. The NAD referred the claims to the Federal Trade Commission (FTC).

The ASRC was founded in 1971 as an alliance between two advertising trade organizations and the Council of Better Business Bureaus (CBBB). Originally known as the National Advertising Review Council (NARC), the organization changed its name to the ASRC in 2012. The NAD conducts investigations based on its own monitoring of truth and accuracy in advertising, and it also receives claims of false advertising from competitors and consumers. In addition to the NAD, the ASRC has divisions monitoring advertising directed at children and various forms of online advertising. The National Advertising Review Board hears appeals of decisions made by the other divisions.

The FTC is a federal agency charged with enforcing multiple statutes dealing with consumer protection. The agency was created by the FTC Act of 1914, 15 U.S.C. § 41 et seq., which contains many of the provisions the FTC enforces. The statute prohibits numerous anti-competitive, deceptive, fraudulent, and otherwise unfair business practices. This includes the dissemination of “any false advertisement…for the purpose of inducing…the purchase in or having an effect upon commerce, of food, drugs, devices, services, or cosmetics.” Id. at § 52(a). The FTC is authorized to seek injunctive relief preventing the further dissemination of allegedly false advertising, and to bring suit for damages. Liability under these provisions is limited to a “manufacturer, packer, distributor, or seller” of a good or service, instead of an advertising agency or broadcaster. Id. at § 54(b).

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batteriesCalifornia businesses that sell goods or services to the public have a duty to deal fairly with consumers and other businesses. Statutes like the California Consumers Legal Remedies Act (CLRA) and the Unfair Competition Law (UCL) prohibit a variety of deceptive or unfair practices and allow civil claims for damages by aggrieved businesses or consumers. A lawsuit filed late last year in a Northern California federal court alleges violations of the CLRA and the UCL by a major technology company. Harvey v. Apple, Inc., et al., No. 3:17-cv-07274, complaint (N.D. Cal., Dec. 21, 2017). The complaint, which includes class action allegations, claims that the defendant allowed one of its signature products to go to market with a known defect, failed to disclose this defect to consumers, and made misleading statements about the nature of the defect and possible solutions for problems caused by the defect. Lawsuits filed in other California federal courts and other states make similar allegations, and the court is reportedly considering consolidation of some or all of the complaints.

The CLRA prohibits a wide range of deceptive practices involving the sale of goods or services to consumers. The deceptive practices alleged in Harvey include “representing that goods…have…characteristics,…uses, benefits, or quantities that they do not have”; “representing that [they]…are of a particular standard, quality, or grade,…if they are of another”; and “advertising [them] with intent not to sell them as advertised.” Cal. Civ. Code §§ 1770(a)(5), (7), (9). Damages under the CLRA may include injunctive relief, actual damages, punitive damages, and restitution. Id. at § 1780.

The UCL also establishes broad prohibitions on unfair or deceptive business practices under various provisions of state law, but its coverage is not limited to consumers. California law states that a person is liable for damages that result from “willfully deceiv[ing] another with intent to induce him to alter his position to his injury or risk.” Id. at § 1709. “Deceit” includes acts like “the suppression of a fact, by one who is bound to disclose it.” Id. at § 1710(3). An act of deceit that is intended “to defraud the public” can potentially result in liability to every person “who is actually misled by the deceit.” Id. at § 1711. An individual can file suit for violations of the UCL if the alleged unfair act has caused them to “suffer[] injury in fact and…los[e] money or property.” Cal. Bus. & Prof. Code §§ 17203, 17204.

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churchA plaintiff must establish that the court in which they are filing suit has jurisdiction over their claims. Questions of jurisdiction can quickly become complicated, especially when a lawsuit cites multiple sources of law. The Alien Tort Statute (ATS) gives foreign citizens the right to file suit in U.S. district courts for certain tort claims. U.S. courts have allowed claims against individuals. The U.S. Supreme Court is now considering whether the ATS allows claims against foreign corporations in Jesner v. Arab Bank, PLC. While the case is not likely to have much effect on California business litigation, it offers a useful look at how U.S. courts can exercise jurisdiction over international business disputes.

The Judiciary Act of 1789, one of Congress’ very first laws, created the ATS. The statute gives federal district courts jurisdiction over “causes where an alien sues for a tort only in violation of the law of nations or a treaty of the United States.” 1 Stat. 77 (1789), 28 U.S.C. § 1350. It does not define “alien.” Federal law defines that term elsewhere as “any person not a citizen or national of the United States.” 8 U.S.C. § 1101(a)(3). The term “law of nations” refers to international law, which mostly consists of treaties, conventions, and other agreements.

The ATS was largely forgotten until 1980, when the Second Circuit ruled on a claim by the parents of a teenager who had been “kidnapped and tortured to death” in 1976 by the defendant, who was the “Inspector General of Police in Asuncion, Paraguay” at the time. Filártiga v. Peña-Irala, 630 F.2d 876, 878 (2d Cir. 1980). After the defendant moved to New York in 1978, the plaintiffs filed suit against him under the ATS for violations of the United Nations Charter, the Universal Declaration on Human Rights, and other sources of international law. The Second Circuit affirmed the verdict in favor of the plaintiff, which included a damages award of $10.4 million.

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Computer technology and the internet have created countless opportunities for both businesses and consumers. As more and more commercial activity moves online, however, the risks to the integrity of a company’s digital records grow greater. Cybersecurity breaches threaten not only the company’s assets but also stored customer information. Consumer information is often the target of hackers because it may enable further fraudulent activities like identity theft. Companies that collect and store personal information have a duty under California law to protect that information and to notify consumers in the event of a breach. Penalties for noncompliance may include civil liability to consumers and state or federal regulatory actions. Northern California business owners that deal with digital consumer information should make cybersecurity a critical part of their business operations.

hackingCalifornia’s Breach Notification Law (BNL) defines “personal information” as any information that “is capable of being associated with a particular individual,” such as a name, address, date of birth, and social security number or other identification number. Cal. Civ. Code § 1798.80(e). Businesses must “implement and maintain reasonable security procedures and practices” to safeguard customers’ personal information from cybersecurity breaches. Id. at § 1798.81.5(b).

If a breach occurs, the BNL requires businesses to notify individuals who were affected by the breach “in the most expedient time possible and without unreasonable delay.” Id. at § 1798.82(a). If a business intentionally shares customer information, such as for marketing purposes, California’s “Shine the Light” (STL) law requires it to make certain disclosures to customers in advance and to disclose, upon a customer’s request, which information was shared and with whom. Id. at § 1798.83.

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carSelf-driving cars have been a subject of great interest in Silicon Valley recently. The technology that would make autonomous vehicles viable on a wide scale is not here yet, but numerous companies are working to make it a reality. As with any new technology, competition can easily lead to conflict. In this case, a company affiliated with the tech company Google has filed suit against the ridesharing company Uber and others, alleging infringement of trade secrets and patent rights, as well as unfair business practices. Waymo LLC v. Uber Technologies, Inc. et al., No. 3:17-cv-00939, am. complaint (N.D. Cal., Mar. 10, 2017).

Unlike other forms of intellectual property, the value of a company’s trade secrets depends on their confidentiality. State and federal trade secret laws therefore focus on preventing or dissuading the misappropriation of trade secrets. A business must show that information meets several criteria in order to invoke trade secret protection. The information must have economic value based on the fact that it is not known to others and not easily discoverable by others who are in a position to benefit from it, and the business must have made reasonable efforts to safeguard the information’s secrecy. 18 U.S.C. § 1839(3), Cal. Civ. Code § 3426.1(d).

California law allows the owner of trade secrets to obtain injunctive relief preventing “actual or threatened misappropriation.” Cal. Civ. Code § 3426.2. If a court finds that an injunction would be “unreasonable,” it can order a person to pay “a reasonable royalty” for use of the information. Id. A court can award damages for “actual loss” or “unjust enrichment caused by misappropriation,” along with punitive damages in an amount up to twice the total amount of damages in cases of “willful and malicious misappropriation.” Id. at § 3426.3. Federal law contains similar provisions for damages and specifically allows courts to order “seizure of property necessary to prevent the propagation or dissemination of the trade secret that is the subject of the action.” 18 U.S.C. § 1836(b)(2).

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Banana RepublicThree plaintiffs filed a putative class action against a retail clothing company, alleging that it induced them to enter store locations with misleading advertisements of a storewide sale. The defendant sought summary judgment, partly on the ground that the plaintiffs lacked standing to sue because they had not established actionable economic injuries. The trial court ruled in the defendant’s favor. The appellate court reversed this ruling, finding that the plaintiffs had demonstrated a triable issue of fact as to whether they suffered injuries-in-fact. SV v. Banana Republic, LLC, No. B270796, slip op. (Cal. App. 2nd, Dec. 15, 2016).

The lawsuit asserts causes of action under three California statutes. The Unfair Competition Law (UCL) prohibits “unfair, deceptive, untrue or misleading advertising.” Cal. Bus. & Prof. Code § 17200. The False Advertising Law (FAL) broadly prohibits the advertising of goods or services using “any statement…which is untrue or misleading, and which is known, or which…should be known, to be untrue or misleading.” Cal. Bus. & Prof. Code § 17500. The Consumers Legal Remedies Act (CLRA) prohibits “unfair or deceptive acts or practices” connected with the sale of goods or services. Cal. Civ. Code § 1770(a). The plaintiffs in SV alleged three CLRA violations involving false advertising of goods, false or misleading statements regarding “price reductions,” and misrepresenting the nature of a transaction. Id. at §§ 1770(a)(9), (13), (14).

In order to establish standing under any of these statutes, a plaintiff must demonstrate that they have “suffered injury in fact and…lost money or property” because of the defendant’s unlawful act. SV, slip op. at 10, quoting Kwikset Corp. v. Superior Court, 51 Cal.4th 310, 321 (2011), Cal. Bus. & Prof. Code § 17204. With regard to the amount of damages a plaintiff must show, the court notes that an “injury in fact is not a substantial or insurmountable hurdle.” SV at 10, Kwikset at 324. All three statutes allow restitution and injunctive relief. The UCL and the FAL limit any other kind of damages, but the CLRA expressly includes compensatory and punitive damages as available remedies.

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thumbs upMost businesses must maintain an online presence these days in order to succeed. Even if a business does not provide any kind of online service, consumers are still likely to look for a website or social media profile. Many consumers will look at websites like Yelp, which allow consumers to rate businesses and write reviews describing their experience. A negative review can damage a business’ reputation, so businesses must be vigilant about their online profile. Some businesses, rather than responding to bad reviews, have tried to prevent bad reviews from ever occurring by placing “non-disparagement” or “gag” clauses in form contracts. These clauses prohibit customers from writing negative online reviews and penalize any who do so. Congress passed the Consumer Review Fairness Act (CRFA) of 2016 in December. This new law prohibits these types of clauses and allows enforcement by federal and state consumer protection agencies.

The CRFA only addresses contractual provisions that penalize consumers for writing negative reviews without regard to whether the negative review is accurate. A customer who writes a false review of a business could be liable to the business for defamation. This requires the business to prove that one or more statements made by the customer were false, that the customer knew they were false, and that the publication of the statement caused actual, measurable harm to the business. A clear-cut example might be a person who completely fabricates a set of facts in order to disparage a business in an online review, leading to a damaged reputation and loss of revenue.

The type of gag clause covered by the CRFA is not uncommon in certain situations, but it is a relatively new phenomenon for consumers and online review sites. These clauses often appear in settlement agreements resolving a lawsuit, in which a plaintiff accepts a settlement payment in exchange for dismissing the case and agreeing not to disparage the defendant with regard to the subject matter of the lawsuit. Both parties have an opportunity to negotiate terms and to review the final agreement before signing.

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