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2016 Mitigating Risk:Key Litigation Developments

Introduction

Staying abreast of key developments in the law is essential,

both to mitigate risk and to manage expenses. In the articles

in 2016 Mitigating Risk: Key Litigation Developments, our

litigation attorneys highlight procedural issues that are often

instrumental to achieving success. They also address important

substantive issues that arise in employment, financial services,

intellectual property, and real estate disputes. Our goal is to

help our clients make better strategic decisions and assess

(and reduce) litigation risk.

COMMERCIAL LITIGATION: PROCEDURAL ISSUES

2 No, Not All Arbitration Clauses Are Created Equal

3 Protecting the Attorney-Client Privilege While Using Third-Party Consultants

4 Best Practices for Legal Hold Notices

5 Jurisdiction Test for Foreign Defendants Continues to Narrow

CONSUMER CLASS ACTIONS

6 “Ascertainable” Class Members in Consumer False Advertising Actions

7 Our Best Offer: Rule 68 and TCPA Class Actions

EMPLOYMENT

8 Managing the Very Real Risks of FLSA Class Action Lawsuits

9 DOL Takes on Misclassification of Employees as Independent Contractors

10 Restrictive Covenant Keys: Choice of Law, Forum Selection Provisions

FINANCIAL SERVICES

11 Limitations on Motions to Dismiss in FINRA Arbitration

INTELLECTUAL PROPERTY

12 Expanding Reach of the Copyright Fair Use Defense

13 Strategies and Tactics to Battle Online Cyber-Defamation

14 Can the First Amendment Trump the Right of Publicity?

REAL ESTATE

15 How Best to Ensure Enforceability of Rent Acceleration Clauses

2016 Mitigating Risk:Key Litigation Developments

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2016 Mitigating Risk: Key Litigation Developments


No, Not All Arbitration Clauses Are Created EqualBruce M. Ginsberg, Partner, 212.468.4820, [email protected] Takeaways

■ Companies should not assume that all arbitration clauses are alike.

■ It is important to carefully review the language of arbitration clauses in contracts under consideration and to anticipate the kinds of statutory liability that could result from the contractual relationships.

■ Carefully considering the nature and wording of arbitration clauses can affect the claims that will be submitted to arbitration and those that will be reserved for the courts.

Faced with the delays and burdens that often go hand-in-hand with resolving disputes in court, companies increasingly have turned to arbitration as a method of alternative dispute resolution. Not all arbitration clauses, however, are created equal. Indeed, apparently minute semantic variances can spell the difference between a three-month arbitration and a three-year court battle.

Consider these two similar arbitration clauses commonly found in commercial agreements:

>>>> Any dispute, claim or controversy arising out of or relating to this Agreement shall be determined by arbitration in New York City before one arbitrator.

>>>> Any dispute, claim or controversy concerning the interpretation or enforcement of this Agreement shall be determined by arbitration in New York City before one arbitrator.

The two clauses seem virtually identical, and the differences may not be immediately apparent upon review of a lengthy contract. The seemingly small distinctions between the clauses, however, could affect the forum in which a potential dispute is heard and, by extension, the legal costs and even the ultimate liability to which a company may be exposed.

For instance, New York Labor Law imposes liquidated damages on employers that make unlawful deductions from their employees’ wages. As such, a breach of contract action for failure to pay compensation pursuant to employment agreements also could give rise to statutory claims and associated penalties under the Labor Law. In that way, the Labor Law claim might “arise out of” or “relate to” the agreement, and yet not involve its interpretation or enforcement. The statutory claim, therefore, might be arbitrable under the first clause but not the second clause.

Although the effect of this distinction commonly would be felt in the individual employment context, it could affect arbitrability in any area of law where contractual rights intersect with statutory ones, including consumer protection, copyright, and trademark, among others.

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Protecting the Attorney-Client Privilege While Using Third-Party ConsultantsMichael C. Lasky, Partner/Co-Chair, 212.468.4849, [email protected] B. Podolnick, Associate, 212.468.4983, [email protected] Takeaways

■ The complexity of modern legal issues often requires in-house and outside counsel to discuss legal issues with third-party consultants for the lawyers to be able to provide complete, accurate, and useful advice.

■ To help to ensure that communi-cations with third-party consul-tants are not discoverable, attorneys, clients, and consul-tants must take steps to show that the communications are necessary for the provision of legal advice.

There can be no question that business and legal transactions have become increasingly multi-disciplinary and complex. Business executives and their legal counsel frequently seek guidance from a variety of external consultants, including outside accountants, financial advisors, executive benefits consultants, human resources specialists, insurance brokers, executive recruiters, and public relations advisors (especially in crisis communication situa-tions). Can a company rely on the attorney-client privilege to protect the confidential nature of communications with these external consultants, or will the use of an external consultant constitute a waiver of privilege?

The attorney-client privilege protects communications between a client and counsel that were intended to be confidential and were kept confidential, where the communications were made to obtain or provide legal advice. In some circumstances, the attorney-client privilege may extend to non-lawyers consulted by internal corporate counsel and external counsel at law firms if the communications were made in confidence for the purpose of facilitating the attorney providing legal advice.

There are several steps a company can take to maximize the possible extension of the attorney-client privilege to consultants who assist counsel in providing legal advice. First, companies should have their attorneys, rather than a businessperson, seek the assistance of the consultants. Second, the attorney should indicate that the assistance of the consultants is being sought to help provide legal advice and be the one hiring the consultants if the consultants are being retained for a particular project.

Third, a consultant’s engagement agreement should indicate that the consultant is working at the direction of legal counsel and also should describe the manner in which the engage-ment relates to a legal issue. Fourth, a consultant should render a separate invoice for the work being provided to the client at the direction of legal counsel, separate and apart from its invoicing for other services the consultant may be providing to the client.

It is also advisable for attorneys to be copied on written communications with the consul-tants, and all written communications with the consultant should be marked “confidential and privileged.” The same degree of care should be followed in verbal communications. Preferably, the client’s attorney would be present during discussions between the client and the consultant. In at least one instance, however, a federal district court in New York ruled that communications between a client and consultant were privileged without the presence of an attorney because the communications were directed at giving or obtaining legal advice.

Finally, attorney-client privileged communications should not be shared with anyone, including spouses, family members, and friends; doing so risks waiving or destroying the privileged nature of the communications.

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Best Practices for Legal Hold NoticesJennifer Tafet Klausner, Partner, 212.468.4827, [email protected] Takeaways

■ A company that becomes aware of a potential or existing audit, investigation, claim, or lawsuit should promptly prepare a written legal hold notice and distribute it to anyone who may have relevant documents and information, as well as to its IT department.

■ Companies should confirm that individuals are complying with the obligation in hold notices to preserve documents and other records.

■ Attorneys should follow up with amendments to the notice and periodic reminders about the notice.

With a change in the Federal Rules of Civil Procedure concerning sanctions for destruction of electronically stored information (ESI), it is a good idea for companies to ensure that their form legal hold notices and protocols for distribution are in line with best practices.

A company should circulate a legal hold notice when an audit, investigation, claim, or litigation is reasonably foreseeable. It must be in writing and should be labeled PRIVILEGED AND CONFIDENTIAL ATTORNEY WORK PRODUCT AND/OR ATTORNEY-CLIENT COMMUNICATION. It must state the reason for the legal hold and specify the types of documents, including ESI, that are relevant to the facts and circumstances that prompted the legal hold.

Because the notice may go to employees who usually are not involved in legal matters, the description of the action should be as general as it can be, while still ensuring that the proper documents are preserved. The notice should indicate that these documents must not be destroyed and must be preserved. In addition, the notice should advise a company’s information technology department to suspend automatic deletion procedures and to preserve back-up tapes.

Companies that issue legal hold notices should keep records showing when and to whom they were sent. Counsel should check in at least quarterly to ensure compliance with legal holds. This is particularly important if the nature of the action changes — for example, a claim becomes a litigation or a complaint is amended —or if it becomes obvious that additional people should receive the notice.

The consequences of not preserving documents could be serious as courts can impose sanctions when evidence is destroyed. Indeed, pursuant to new Federal Rule of Civil Procedure 37(e), if a party failed to take reasonable steps to preserve ESI that should have been preserved in the anticipation or conduct of litigation and the information cannot be restored or replaced, then, upon a finding of prejudice to another party from the loss of the information, the court “may order measures no greater than necessary to cure the prejudice.” If, however, a court finds that a party intentionally deprived another of use of ESI, it may presume, or it may instruct the jury that the jury may or must presume, that the lost information was unfavorable to the party that lost it. The court also can dismiss the action or enter a default judgment.

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Jurisdiction Test for Foreign Defendants Continues to NarrowJoshua H. Epstein, Partner, 212.468.4869, [email protected] Takeaways

■ The “essentially at home” test narrows the exposure foreign corporations face in maintaining satellite offices or employees or otherwise generally doing business in a state, and corporations not headquartered or incorporated in the state where they are defending a lawsuit should examine whether they have a viable argument that they are not subject to personal jurisdiction there.

■ With respect to New York, there is some uncertainty as to wheth-er a corporation is “essentially at home” if it has “consented” to general jurisdiction in New York by, for example, registering to do business in the state. In addition, courts still are considering what constitutes an “exceptional case” warranting departure from the rule set forth in Daimler. Thus, foreign corporations should still consider whether a court might deem them subject to jurisdic-tion in New York even if they are not incorporated or headquar-tered in New York.

In recent years, the century-old standard allowing courts to exercise personal jurisdiction over foreign defendants by showing that they were “doing business” in a forum state has been substantially limited.

Prior to the U.S. Supreme Court’s 2014 ruling in Daimler AG v. Bauman, courts required foreign defendants to maintain “minimum contacts” with a forum state, such that bringing the lawsuit in that state did not “offend traditional notions of fair play and substantial justice.” Accordingly, it had been established law in the Second Circuit, which includes federal courts in New York, that courts had general jurisdiction over a foreign corporation engaged in a “continuous and systematic course of doing business in New York” — by, for example, maintaining an office or employees in New York — regardless of whether the cause of action was related in some way to those activities.

In Daimler, however, the Supreme Court held that a court could not exercise jurisdiction over a foreign corporation unless the corporation’s interactions with the forum state were so “constant and pervasive” as to render it “essentially at home” in the forum state.

Daimler was followed and applied by the Second Circuit in a case in which it held that a foreign corporation was “essentially at home” in the forum state when it was incorporated or headquartered there.

In light of these significant decisions, foreign defendants may have a strong basis to challenge a federal district court’s exercise of general jurisdiction. In response, plaintiffs likely will shift their energy toward the second prong of the test establishing personal jurisdiction — specific jurisdiction — and focus on whether defendant corporations had purposefully engaged in activities in the forum state that gave rise to the claims asserted against them in the lawsuit.

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Consumer class action lawsuits often unfold into protracted and expensive cases, regardless of merit. In 2015, companies spent approximately $2.1 billion defending class actions, with consumer class actions being the largest category of those cases.

Courts have shown increasing receptivity to the argument that a consumer class action should not proceed where the plaintiff cannot demonstrate a reliable and efficient method for identifying or “ascertaining” the members of the potential class. This “ascertainability” requirement protects absent class members by ensuring that they get notice of the action and protects defendants by enabling them to challenge the class and obtain finality on the matter when the case is resolved. Defendants have been increasingly successful in arguing that a court should not permit a class action to proceed when it is based on the purchase of an inexpensive product or an allegedly false advertisement and the plaintiff is unable to satisfy the ascertainability requirement.

For example, the federal appeals court in Atlanta recently affirmed a Florida trial judge’s ruling that plaintiffs alleging that a pharmaceutical company falsely advertised its weight loss supplement could not proceed with a class action because the potential class members — consumers who primarily purchased the supplement through third-party retailers at relatively low prices — were not ascertainable. The court found it unlikely that consumers kept receipts proving their purchases of the supplement and also held that proving class members by affidavit posed too great a risk of fraudulent claims and would deny the defendant the ability to challenge the truthfulness of each class member’s statements without a multitude of mini-trials.

Similarly, a federal judge in California recently refused to certify a class of plaintiffs asserting that a video game producer had used “bait-and-switch” advertising to trick consumers into purchasing a game that looked nothing like the game’s commercials and demos. The judge held that no reliable method existed by which the plaintiff could identify those consumers who actually saw the ads and demos before buying the game.

The ascertainability requirement could be an insurmountable hurdle in many consumer class actions involving the purchase of an inexpensive product through a third-party retailer rather than directly from the defendant. Not all courts have adopted a strict approach to this requirement yet, and the U.S. Supreme Court recently declined to hear an appeal that might have resolved the courts’ different views on this issue.


“Ascertainable” Class Members in Consumer False Advertising ActionsNeal H. Klausner, Partner, 212.468.4992, [email protected] S. Greenberg, Senior Attorney, 212.468.4895, [email protected] Takeaways

■ Companies confronted with consumer class action claims immediately should examine the nature of the products at issue and the circumstances under which those products were sold.

■ Small items sold largely via retailers present the biggest ascertainability challenges for class action plaintiffs. Consumers of these products are unlikely to retain receipts for such small purchases, and neither the company nor its retail partners are likely to possess records sufficient to identify the potential class members, which could present a threshold problem for plaintiffs’ counsel.

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Our Best Offer: Rule 68 and TCPA Class ActionsPaul F. Corcoran, Partner, 212.468.4825, [email protected] Marc J. Rachman, Partner, 212.468.4890, [email protected] David S. Greenberg, Senior Attorney, 212.468.4895, [email protected] Takeaways

■ With statutory penalties of up to $1,500 per call, the cost of a single campaign that violates the TCPA — even inadvertently — can be staggering.

■ Firms that use telemarketing, text messaging, or other similar methods of communication should continue to be vigilant in regularly reviewing their practices to ensure that they comply with the TCPA and the FCC’s rules.

■ Companies that receive TCPA class action claims still can consider making an early settlement offer to the named plaintiff, and even depositing a payment to that plaintiff with the court. If the plaintiff’s counsel lacks a suitable replacement for the named plaintiff, depositing payment with the clerk that extends full potential relief to that named plaintiff may moot the case and undermine the class action.

The Telephone Consumer Protection Act (TCPA) imposes significant restrictions on automatically dialed calls, including prohibitions against virtually all automated calls and text messages to cell phones. The TCPA also offers recoveries of $500 per violation, and $1,500 for a willful violation. It is not surprising, therefore, that plaintiffs have been filing more and more class actions under the TCPA in recent years.

Recent Federal Communications Commission (FCC) rulings that “automatic telephone dialing systems” (ATDS) include devices that merely have the future (as opposed to the current) capacity to dial random or preselected lists of phone numbers, and that human intervention in an ATDS’s calling process will not protect the caller if the device qualifies as an ATDS, likely will encourage even more TCPA litigation.

One procedural tactic for defending TCPA class actions that had gained momentum in recent years was the “offer of judgment” under Federal Rule of Civil Procedure 68, where a defendant offers the plaintiff judgment on specified terms and, if the plaintiff rejects the offer and obtains a less favorable judgment, the plaintiff will be liable for costs incurred by the defendant after the offer was made. Some courts had ruled that an unaccepted Rule 68 offer of all relief available to the individual plaintiff moots a class action if made prior to certification of a class.

In January 2016, the U.S. Supreme Court limited the utility of the Rule 68 offer as a settlement tactic in TCPA class actions. In the case before the Court, an ad agency engaged in a mobile marketing campaign for the U.S. Navy. One individual who received an unauthorized text message sued the agency. The agency offered the plaintiff a judgment of $1,503 for each call he had received, all reasonable costs he would have recovered if he had prevailed, and an injunction prohibiting the agency from repeating the alleged wrongdoing. The plaintiff did not accept the offer and the agency moved to dismiss the case as moot. The Supreme Court held that an unaccepted offer of judgment did not moot the plaintiff’s case.

The Court declined to address whether a defendant might be able to moot a case by actually depositing the full amount of the plaintiff’s claim with the court and by having the court enter judgment in that plaintiff’s favor. And in March 2016, a federal court in New York ruled that this approach indeed mooted a TCPA class action. In that case, the defendant deposited $1,503, plus $400 in court costs, with the clerk of court and then moved for judgment in the plaintiff’s favor. The court granted the motion and held that the class action had become moot.

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Class action lawsuits by employees and independent contractors asserting claims under the Fair Labor Standards Act (FLSA) continue to plague employers — and show no sign of leveling off, let alone decreasing. Moreover, some strategies that employers have relied upon for protection have become increasingly ineffective, making compliance even more important.

For example, arbitration policies requiring employees to waive their class action rights had been an effective tool in curbing employee class actions. However, the National Labor Relations Board (NLRB) has recently issued rulings that mandatory arbitration policies may violate the National Labor Relations Act (NLRA) — even if they have “opt-out” provisions allowing employees to preserve their class action rights outside of arbitration and to file administrative charges. When striking down mandatory arbitration policies, the NLRB has also ordered employers to notify current and former employees that the mandatory policy had been rescinded or revised and to provide a copy of any revised policy.

In addition, the U.S. Department of Labor’s Wage and Hour Division (WHD) has published “Administrator’s Interpretations” broadly interpreting federal employment laws, further encouraging plaintiffs’ attorneys to bring class actions. For example, the WHD has taken an expansive view on which workers should be classified as “employees,” as opposed to independent contractors, under the FLSA and has made clear that a written agreement designating an individual as an independent contractor was “not relevant to the analysis of the worker’s status.” Thus, employers cannot merely point to a writing to defend against claims filed by individuals seeking protection as “employees” under federal employment laws. The WHD has also taken an expansive view of the meaning of “employer” under the FLSA. Consequently, employers who outsource segments of their labor force to be recruited and employed by temporary or staffing agencies continue to have exposure to class actions under a “joint employer” theory.

In addition to trends at the government agency level, some federal judges charged with reviewing class action settlements are rejecting settlement agreements that include any confidentiality or non-disparagement provisions, thereby impinging on employers’ efforts to protect against future wage and hour class suits.

On the other hand, several federal appellate courts have overruled the NLRB and upheld mandatory arbitration policies requiring employees to waive their class action rights, and in December 2015 the U.S. Supreme Court upheld a mandatory arbitration policy, albeit in the consumer context. However, in the employment context, the U. S. Supreme Court recently decided that employers cannot defeat class certification in a wage and hour case by offering the named plaintiffs the relief they are seeking.

EMPLOYMENT

Managing the Very Real Risks of FLSA Class Action LawsuitsMaureen McLoughlin, Partner, 212.468.4910, [email protected] Takeaways

■ Federal government agencies, including the NLRB and the WHD, are increasingly interpreting employment laws more broadly, which means employer strategies historically relied on to avert wage and hour class actions are less effective.

■ Compliance is a much more efficient and reliable way to avoid a wage and hour class action, so be certain that job descriptions, responsibilities, and classifications are consistent.

■ Investment in technologies to track employee hours and breaks and enforcing existing overtime policies are critical to defending against sweeping allegations that employee claims should proceed as a class action.

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The U.S. Department of Labor’s Wage and Hour Division (WHD) has significantly stepped up its efforts to reduce the misclassification of workers as independent contractors under the Fair Labor Standards Act (FLSA). In 2015 alone, WHD investigations resulted in more than $74 million in back wages for more than 102,000 workers in a variety of industries.

An employer’s failure to properly classify its workers could result in liability for years of unpaid wages, benefits, and employment taxes, in addition to penalty fees. In addition, a misclassification also could result in employers having to defend costly class action litigation, as well as manage investigations by the WHD (or equivalent state agencies).

In July 2015, the WHD issued an administrative interpretation on the misclassification of employees as independent contractors. In the interpretation, the WHD emphasized the broad definition of “employee” under the FLSA. Citing to established case law, the WHD stated that a worker was an “employee” if, “as a matter of economic reality,” the individual was “dependent on the entity.” In other words, if the worker was economically dependent on the employer, the worker was an employee, but if the worker truly was in business for himself or herself, the worker was an independent contractor.

The WHD rejected the “common law control test,” which focused only on whether the employee was “controlled” by the employer. Instead, the WHD endorsed the “economic realities” test, which had been developed by the U.S. Supreme Court and the circuit courts of appeals to serve as a roadmap for determining whether a worker was an employee or an independent contractor. All six factors of the test must be considered:

>>>> The extent to which the work performed was an integral part of the employer’s business;

>>>> The worker’s opportunity for profit or loss depending on his or her managerial skill;>>>> The extent of the relative investments of the employer and the worker;>>>> Whether the work performed requires special skills and initiative;>>>> The permanence of the relationship; and>>>> The degree of control exercised or retained by the employer.

The WHD further emphasized that the contractual “label” the employer gave to the relationship was far less important than “whether the work done, in its essence,” followed the “usual path of an employee.” Thus, merely entering into an independent contractor agreement with a worker, or issuing a Form 1099-MISC to a worker, was not enough to establish an independent contractor relationship.

EMPLOYMENT

DOL Takes on Misclassification of Employees as Independent ContractorsHoward J. Rubin, Partner/Co-Chair, 212.468.4822, [email protected] Takeaways

■ Although the WHD’s recent interpretation was not a formal rule and was not binding, it represented the latest effort to deal with what WHD Administrator David Weil has called the “growing problem” of misclassification.

■ The WHD has entered into partnerships with over 25 state labor agencies to share information and coordinate enforcement efforts to reduce employee misclassification. Given the increased scrutiny, employers should take the interpretation into consideration when making decisions about the classification of their workers.

■ Decisions about classification will be impacted by factors including the nature of the company’s business, the type of work being performed, and the extent to which the worker provides services to other companies.

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Because the law concerning the enforceability of post-employment restrictive covenants varies from state to state, a company’s ability to prevent a former employee from working for a competitor or soliciting the company’s customers or employees often turns on the law governing the agreement. In some states, such as California, non-compete agreements essentially are unenforceable outside the sale-of-business context because of the state’s strong public policy against such agreements. Other states, such as New York, are more willing to enforce post-employment restrictions to the extent they are necessary to protect an employer’s legitimate interests (for example, customer relationships), do not impose undue hardship on the employee, and are not injurious to the public.

Consequently, choice of law is often critical to the enforcement of a restrictive covenant. In 2015, however, New York’s highest court, the Court of Appeals, refused to enforce a choice of law provision in a restrictive covenant agreement because the chosen law offended New York public policy. The court held that Florida law, which the parties had selected in their restrictive covenant agreement, made it too easy to enforce restrictive covenants and found that it was sufficiently “obnoxious” to New York’s public policy to justify disregarding the choice of law provision and, instead, apply New York law.

Although California courts also have refused to honor the parties’ choice of law in non-compete agreements because of California’s public policy against these kinds of agreements, recent decisions suggest that California courts are more willing to enforce forum selection clauses because those clauses are not contrary to California public policy, even if it means sending a case to a jurisdiction that enforces non-compete agreements.

So, for example, although a California court likely would not honor a New York or Florida choice of law provision in a non-competition agreement, it more likely would enforce a New York or Florida forum selection clause, leaving it to the New York or Florida court to determine which state’s law should apply when analyzing the enforceability of the covenant.

EMPLOYMENT

Restrictive Covenant Keys: Choice of Law, Forum Selection Provisions Neal H. Klausner, Partner, 212.468.4992, [email protected] Takeaways

■ Because the governing law may be critical to the enforceability of a restrictive covenant agreement, employers should include a choice of law provision in these agreements, selecting a law that has a reasonable relationship to the agreement and that is favorable to enforcement of the covenant.

■ Because courts may not enforce a choice of law provision in a restrictive covenant agreement if the chosen law offends the public policy of the state where that court is located, employers also should include a forum selection provision in the agreement, selecting as the exclusive venue for any dispute the courts in a state that has a reasonable relationship to the agreement and that is willing to enforce restrictive covenants.

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FINANCIAL SERVICES

Limitations on Motions to Dismiss in FINRA ArbitrationJames R. Levine, Partner, 212.468.4985, [email protected] Takeaways

■ Arbitrating under FINRA’s rules generally deprives defendants of the right to move to dismiss claims that are legally deficient on their face.

■ Financial institutions should carefully consider the merits of including FINRA arbitration clauses in contracts with certain customers, particularly those holding large accounts.

There are advantages to financial institutions in resolving disputes with investors through arbitration under the auspices of the Financial Industry Regulatory Authority (FINRA) rather than in court. These include streamlined procedures, reduced discovery costs, faster decisions, and finality. There are, however, important procedural issues to consider when approaching FINRA arbitrations, one of which is the near-total absence of a defendant’s ability to move for dismissal of claims before trial.

FINRA’s arbitration rules state that motions to dismiss prior to trial are discouraged. Although this mindset exists at many arbitration bodies, FINRA has codified this policy and, indeed, has taken it a step further. The pertinent rule expressly limits motions to dismiss prior to trial to two narrow and rare circumstances:

>>>> Where the non-moving party previously released the claims in dispute — i.e., the case already was settled; and

>>>> Where the moving party was not associated with the accounts, securities, or conduct at issue — essentially a “mistaken identity” situation.

In addition, FINRA’s rules separately provide for a motion to dismiss under FINRA’s six-year “eligibility” rule, which is similar to a statute of limitations. These rules preclude many traditional grounds for motions to dismiss, including state and federal statutes of limitations and arguments that the claimant has failed to state a claim by not alleging facts supporting one or more elements of the cause of action. Thus, some claims that would be dismissed at the pleading stage in court may proceed all the way to trial. In fact, FINRA’s rules are written broadly enough to prohibit all dispositive motions prior to trial — including summary judgment motions which typically play a central role in court proceedings.

Financial institutions should carefully consider this issue, along with the advantages of FINRA arbitration, when determining whether to include FINRA arbitration provisions in their contracts. Although a customer of a broker-dealer may demand FINRA arbitration even in the absence of such a provision, under certain circumstances the absence of an arbitration clause may reduce the likelihood that a dispute will be resolved in that forum. These considerations are particularly significant with regard to clients holding large or complex accounts, where the opportunity to bring a dispositive motion prior to trial may be particularly valuable.

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Expanding Reach of the Copyright Fair Use DefenseMarc J. Rachman, Partner, 212.468.4890, [email protected] Takeaways

■ Marketers, agencies, and others who create materials inspired by another’s copyrighted work should be aware of the distinc-tion between fair use and infring-ing use and should recognize that the determination of whether a use constitutes fair use is a fact-intensive and context-specific exercise.

■ Content owners need to assess the availability of the fair use defense before sending DMCA takedown notifications.

■ Before sending a DMCA takedown request, a written record of the assessment of fair use should be recorded and retained so that if a fair use challenge is later made, there is a clear record that fair use was considered prior to the sending of the notification.

Fair use allows for the unauthorized copying of a copyrighted work in limited circum-stances. Historically, examples of fair use have included copying for the purposes of criticism, comment, parody, news reporting, teaching, scholarship, or research. Now the application of the fair use defense applies far beyond this. Two court decisions in 2015 illustrate the expanding reach of the fair use defense.

One of the key factors in determining fair use is whether the use is transformative. A work is transformative if it adds something new, with a further purpose or different character than the original work, giving it new expression, meaning, or message.

The U.S. Court of Appeals for the Second Circuit, in a case referred to as the “Google Books” case, found that Google’s search and snippet features in its library were highly transformative and, thus, fair use. This was despite Google having scanned without permission over 20 million books for the library. The Second Circuit decided that the features were transformative because the search features allowed users to search for specific terms in the digitized books and to review snippets from those books, serving purposes different from reading the original books themselves.

In a case referred to as the “Dancing Baby” case, the U.S. Court of Appeals for the Ninth Circuit addressed the application of the fair use defense to the Digital Millennium Copyright Act (the DMCA). It found that a copyright holder must assess whether a potentially infringing use on a third party website was fair use before sending a request to “takedown” (or remove) the material. Universal had sent a DMCA takedown request for a mom’s posting on YouTube of her baby son dancing to Prince’s song, “Let’s Go Crazy.” The court held that Universal had to first make a good faith consideration as to whether the use of the song was fair use before sending the takedown notification. The Ninth Circuit declined to re-hear the appeal, but amended its opinion, taking out language that a content owner’s fair use analysis need not be “searching or intensive” and that it could use automated programs to conduct such an analysis. In the wake of the initial decision, YouTube announced that it will pay the legal fees of certain users faced with frivolous DMCA takedown notices where there clearly was fair use.

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Strategies and Tactics to Battle Online Cyber-DefamationIna B. Scher, Partner, 212.468.4937, [email protected] Daniel A. Dingerson, Associate, 212.237.1488, [email protected] Takeaways

■ A company subjected to online defamation first should determine if there has been a violation of the site’s terms of service; if so, the site often will remove that review without any legal process.

■ A court order that identifies the false statement typically will suffice to obtain removal from many reputable websites.

■ The best way to effectively neutralize defamatory postings from sites that refuse to remove the material is to request that search engines (Google, Yahoo!, and Bing) voluntarily “deindex” the pages with the defamatory material from their search index; although the information will continue to exist, searches will not reveal it.

With the ever-expanding role of social media and the Internet, negative reviews can spread virtually unchecked. Although some negative reviews are limited to statements of opinion that, generally, are legally protected, companies and individuals increasingly are subject to attacks that include false statements constituting online defamation.

The legal avenues for addressing defamatory comments and obtaining their removal from websites can be difficult to navigate. Generally speaking, the Communications Decency Act of 1996 protects Internet providers, including Google, Facebook, Twitter, and Yelp, from liability for content posted by their users, which creates little incentive — and, arguably, a disincentive — for these entities to self-police their sites. Accordingly, many sites require a court order or judgment before removing allegedly defamatory comments.

Moreover, some sites simply refuse to remove any posted material without a specific order finding the material is defamatory, and then they may remove only the limited portion of the online review deemed defamatory. Because reviews frequently are posted in multiple places, or reposted by numerous sites, it can be difficult and expensive to obtain orders relating to every unique occurrence of the information. Search engines can be asked to deindex defamatory material to remove the content from search results, though compliance is voluntary.

Further complicating matters, at least one state (California) recently prohibited contractual provisions that penalize customers and clients for posting negative comments.

Another issue is that online defamatory statements frequently are posted anonymously or via a pseudonym. That means a defendant must be identified before a judgment or order finding that an online statement is defamatory can be obtained.

In New York, two procedures aid efforts to identify anonymous online commentators:

>>>> Filing for pre-litigation disclosure, for the limited purpose of obtaining discovery; and>>>> Filing a “John Doe” complaint, which can be done prior to discovering the identity of

a defendant.

These two procedures can be used to seek discovery from entities that possess information (such as IP addresses and customer details) needed to identify the poster.

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Can the First Amendment Trump the Right of Publicity? Guy R. Cohen, Partner, 212.468.4853, [email protected] Takeaways

■ An individual’s right of publicity is not absolute, but always must be balanced against a user’s First Amendment rights.

■ Although a creator of an expres-sive work may use an indi-vidual’s likeness without consent if the use is transformative, the dividing line between transfor-mative and non-transformative uses often requires a careful analysis and judgment.

Many states recognize a “right of publicity,” which prohibits the commercial use of an individual’s name, likeness, or identity without consent. When aspects of a well-known person’s identity are incorporated into an expressive work, however, what emerges is a tension between the individual’s right of publicity and the artist’s freedom of expression as protected by the First Amendment.

A recent New Jersey case involved Billy Mitchell, a former Donkey Kong world record holder with long black hair and a black beard, who sued Cartoon Network for allegedly misappropriating his likeness in episodes of the animated series The Regular Show. Cartoon Network did not dispute that its character — a disembodied floating head from outer space — was intended to evoke Mitchell. Instead, it argued that its use was “transformative” and, therefore, protected by the First Amendment.

The court determined that Cartoon Network’s use of Mitchell’s persona was transformative, emphasizing the significant corporeal differences between the human plaintiff and a giant floating head, as well as the obvious parody: Mitchell’s traits were exaggerated to create a cartoonishly evil character.

The Mitchell case contrasts sharply with the recent Electronic Arts cases in the U.S. Courts of Appeals for the Third and Ninth Circuits, which concerned the use of avatars of real college football players in a college football video game.

Like The Regular Show program in Mitchell, the video game in the Electronic Arts cases contained expressive elements that were protected by the First Amendment.

Unlike in Mitchell, however, these courts found the uses to be non-transformative copies or imitations because the avatars were literal representations of the football players designed to resemble them physically and accurately track their biographical details. Moreover, the digital football players did what the actual football players did while in college: they were shown playing football in college football stadiums, filled with the trappings of college football games. The game developers profited because video game users enjoyed the heightened realism associated with actual players, and the uses did not include any transformative elements that would support a First Amendment defense, the circuit courts ruled.

15


A New York commercial landlord’s ability to enforce lease provisions that provide for the acceleration of a tenant’s future rent obligation in the event of breach came under scrutiny recently in the decision by New York’s highest court, the Court of Appeals, in Van Duzer Realty v. Globe Alumni Student Assistance.

New York law imposes no duty on commercial landlords to mitigate damages. That is, landlords have no obligation to re-let premises previously leased by defaulting tenants. Landlords, however, cannot collect from tenants more than what was bargained for at the time a lease was signed. Thus, a commercial landlord must make sure that any damages measured by the accelerated rent are not disproportionate to its actual damages.

The Court of Appeals in Van Duzer found that a lease provision that gave the landlord both possession of the premises during the term of the lease and the right to immediately recover all rents due under the lease (without calculating for net present value) was akin to “double-dipping” because it gave the landlord the ability to collect rent from a defaulting tenant and a future tenant for the same period.

The court was persuaded by the argument that the damages measured by the accelerated rent could be disproportionate to the landlord’s actual damages because the landlord had possession and immediately collected all rent due for the balance of the lease in one lump sum. According to the court, the rent acceleration provision contained in the lease, which gave the landlord both possession and a lump sum payment, allowed for the landlord to receive more than the compensation it would have received had there been full performance of the lease. The court, therefore, ruled that the case had to be sent back to the trial court so that the tenant could submit evidence demonstrating that the damages sought by the landlord were disproportionate to what was bargained for under the lease.

REAL ESTATE

How Best to Ensure Enforceability of Rent Acceleration ClausesJesse B. Schneider, Counsel, 212.468.4854, [email protected] Takeaway

■ To help ensure enforceability and to prevent an acceleration clause from being deemed an unenforceable penalty, landlords should make sure that the clause provides for recovery of only the net present value of any future rent.

■ Landlords should consider discounting future rent against current fair market rental value for the premises.

■ In addition, landlords should consider crediting a tenant for any amount of rent collected by the landlord from a replacement tenant over and above the amount the defaulting tenant was paying during the period of the defaulting tenant’s lease term.

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Michael C. LaskyPartner/Co-Chair

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