Lululemon Product Defect

Lululemon Athletica Inc. LLC recently announced a product recall for its long black yoga pants, which turned see-through when wearers bent over. Lululemon CEO Christine Day claims the only way to detect the defect is to have the customer put the pants on and bend over.[1] Apparently, some stores were taking this advice from their CEO much too literally – stores throughout the country have reportedly been requiring customers to bend over so they can verify that the pants they’re trying to return are in fact defective.[2] However, New Yorkers can rest assured that a rep from Lululemon’s Union Square location insists that customers can bring in the pants for a full refund or exchange “no questions asked” and no bending over required.[3]

In addition to creating some embarrassing PR for the company, the see-through pants are also having an economic impact. The recall affected 17% of all the women's pants sold in Lululemon's stores.[4] The company’s shares have declined 15% this year as of last Thursday.[5] 

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[1] According to Bloomberg article available here: http://www.bloomberg.com/news/2013-03-21/lululemon-forecast-trails-estimates-on-pulled-transparent-pants.html.

[2] According to Shine from Yahoo article available here: http://shine.yahoo.com/fashion/-lulu-lemon-says--women-do-not-have-to-bend-over-203021965.html.

[3] According to Shine from Yahoo article.

[4] According to MSN Money article available here: http://money.msn.com/now/post.aspx?post=32011859-199b-4ee1-9a84-3f817a42cad0.

[5] According to MSN Money article. 

Tips for Startups and Small Businesses

Pantano & Gupta has a soft spot for startups and small businesses and has been serving the needs of these beloved clients since the firm’s inception. So, in honor of our startup and small business friends, we are outlining common issues you may encounter as a new venture. Most times, legal mishaps occur simply because no one consulted an attorney. We hope that none of you will face these legal problems. With the right legal assistance, you won’t.

If It Happened to Them, It Can Happen to You…

Cautionary Horror Story. This story told by Nevada-based Bongiovi Law Firm highlights the importance of creating agreements to manage cofounder disputes.[1] Jack and Bill formed a two-member LLC and decided to hire this Nevada firm to help them with preliminary legal work. Upon retaining Jack and Bill, the firm promptly asked them to see the operating agreement governing their LLC. Jack responded that they had obtained a generic operating agreement when they formed the LLC and that was their only governing document. This, understandably, troubled their new lawyers. Every few days for the next couple of months, the firm attempted to obtain the generic operating agreement to update it to fit the needs of Jack and Bill’s LLC – Jack and Bill were too concerned running the business to find the document they thought they’d never need. One day, the firm received a call from Jack in a panic – Bill was angry and leaving the company. The firm’s first piece of advice was to remove Bill as a signer on the business bank accounts. Jack went to the bank only to find that Bill was at another branch at the same time…withdrawing $21,000 from the company’s checking account. Because Bill was still a signer on the account, the bank could not refuse to give him the money and because the generic operating agreement did not restrict an LLC member’s ability to withdraw money from the company bank account, Bill didn’t breach any agreement by doing so. Jack’s only recourse at this point was to “file a lawsuit against Bill, hope he wins, and then hope he can collect the money.” You can avoid situations like this if you plan for the horrible.

Plan for The Horrible

Operating Agreements. I know, you’re excited to start your own company. In fact, you can’t wait and really don’t care to think about any of the logistics before you do. But, part of planning for the horrible is planning for the unpleasant possibility that your cofounder may not always be the friend or business partner you expected him or her to be.[2] It is an awkward situation to work with cofounders to plan for your potential “falling out” – but, it’s worth it. To protect yourself and your business, it is important that you create agreements during formation that clearly outline what will happen if you or your cofounder decide to leave. These agreements should include terms concerning who gets what when a cofounder leaves the company and importantly – when money can be withdrawn from any bank accounts. It’s a horrible situation to have a cofounder leave the business; it’s an even worse situation not to have a plan when that happens.

Don’t Mix Business and Personal Money. One thing that every small business or startup wants to avoid is called “piercing of the corporate veil.”[3] Small companies often choose to form as a corporation or limited liability company (LLC) to shield shareholders, officers, and directors of the company from personal liability for business debts and obligations. However, in situations where it seems that the corporation is simply an alter ego for the persons running it, that shield or “veil” can be pierced making those persons liable for the debts and obligations of the business. The fastest way to lose the corporate shield is by mixing business and personal funds.[4] DO NOT put business funds into your personal accounts or use them to cover personal expenses and vice versa. Open business bank accounts and credit cards and never use them for personal activities! EVER!

Put It In Writing. When a third party is important to your business model, make sure to enter into a signed, written contract with that party.[5] As Jeff Yelton noted in his article on small business pitfalls, verbal contracts “sealed with a handshake” are no longer sufficient to create a binding obligation.[6]  Although verbal contracts may be legally sound, they are hard to prove and too easily altered. If you find a supplier, client, or other business partner who offers to create a valuable relationship – have that relationship recorded in a signed written contract. Include the most important terms of that third party’s obligations. That way, if the third party later decides they no longer want to perform their end of the deal, you have a solid claim for breach of contract evidenced by a signed, written agreement.

Protect Your Intellectual Property Rights and Don’t Violate Others’

Protect First, Use Later. Intellectual property protection is not something you should think about after you design a valuable creative project, brand logo, or useful invention.[7]  Rather, there are preemptive types of protection in almost every area of intellectual property that allow you to protect first and use later. For example, to protect a logo you can file an “intent-to-use” trademark application based on a bona fide intention to use that logo in the future.[8] In order to quickly protect an invention or procedure used by your business, you can file a “provisional” patent application that requires much less information and a much lower fee than a full patent application. Then, you can take the time to determine your invention’s commercial potential before filing the full application and investing the full fee amount, which you must usually do within one year of filing of the provisional application.[9] Remember also that copyright protection attaches to your creative image, song, or video upon creation, so that you can register your copyright as soon as the creative project is completed as long as it is in a fixed, tangible medium of expression.[10]

Affordable Protection Does Exist. Startups and small business often believe it is too costly and time-consuming to protect their intellectual property. While that may be true for certain types of intellectual property, such as patents, there are other forms of protection that are much more affordable. If you want to protect your brand, product design, or product packaging, you can file trademark applications for protection of all three. Trademark and copyright protection are much cheaper[11] than patent protection and may be sufficient depending on the type of business and the subject matter you’re seeking to protect.  

License Others’ Intellectual Property. The internet provides a plethora of images, sounds, and videos that you may want to use in promoting your business. However, just because something can be downloaded online does not mean your company has the right to use it. In fact, often times you don’t. Make sure that you have the license to use any photographs, clipart, songs, sound clips or movies that you use on your company brochure, business card, or website. Otherwise, you may find yourself being sued for a hefty sum after several years of seemingly minor, but lengthy infringement. 

Avoid Employment Lawsuits.

Have an Employee Termination Procedure and Follow It. There will likely be a time in the life of your company that you have to terminate an employee. It is important to have a termination procedure in place before you need to fire someone.[12] It is also important to follow that termination procedure. If you do, you will have strong evidence in your favor against an argument that the employee was terminated for the wrong reasons. Point to the wrongdoings of the employee, as documented according to your disciplinary and termination procedure, and you have a defense. This relates to another important tip for employment issues – keep a paper trail – meaning document EVERYTHING so that an employee attempting to fudge the real facts of his or her termination cannot get away with it.[13]

Maintain an Internet and Security Policy. There are several reasons why you need an internet policy and a security policy for your new business.[14] An internet policy that specifically outlines acceptable online activities on company computers can help keep employees productive and minimize the potential for sexual harassment or other liability-creating behavior facilitated by company technology. A security policy that delineates which employees can access confidential information and trade secrets, how company files can be transferred to third parties, and who has the authority to access client lists will prevent leakage of valuable company information. These policies can be included in an employee handbook or drafted as separate agreements.

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[1] http://bongiovilaw.com/2011/06/small-business-horror-story-1-shady-partner-generic-operating-agreement-disaster/.

[2] Mark Britton, Ten Legal Pitfalls Startups Should Avoid, Fox News (July 12, 2011), http://smallbusiness.foxbusiness.com/legal-hr/2011/07/12/ten-legal-pitfalls-startups-should-avoid/ (last visited on March 7, 2013).

[3] Glencap, How to Avoid Piercing the Corporate Veil and Maintain Personal Asset Protection for Your LLC, http://glencap.hubpages.com/hub/avoidpiercingthecorpveil (last visited on March 7, 2013).

[4] Suzanne Kearns, 5 Small Business Legal Nightmares – and How to Avoid Them (Jan. 24, 2012), http://blog.intuit.com/money/5-small-business-legal-nightmares-—-and-how-to-avoid-them/ (last visited March 7, 2013); See also Mark Britton, Ten Legal Pitfalls Startups Should Avoid.

[5] Mark Britton, Ten Legal Pitfalls Startups Should Avoid; See also Suzanne Kearns, 5 Small Business Legal Nightmares – and How to Avoid Them; See also Eight Common Legal Mistakes That Startup Businesses Make, http://www.thesmallbusinessplaybook.com/common-legal-mistakes-startup-businesses-make/ (last visited on March 7, 2013).

[6] Jeff Yelton, 5 Common Legal Pitfalls and How to Avoid Them (Sept. 5, 2011),  http://www.varsguide.com/5-common-legal-pitfalls-and-how-to-avoid-them/ (last visited March 7, 2013). 

[7] Register it, use it, and defend it – in that order. Barbara Findlay Schenck, Register, Protect and Defend (Jan. 3, 2011), http://www.entrepreneur.com/article/217800 (last visited on March 7, 2013).

[8] See 15 USC 1051(b).

[9] See 35 USC 111(b); Provisional Application for Patent, http://www.uspto.gov/patents/resources/types/provapp.jsp; Provisionsal Application Brochure, http://www.uspto.gov/patents/resources/types/provisional_app.pdf.

[10] See 17 USC 102(a).

[11] While the basic fees for both somewhere between $300 and $400, there is much more preparation work required for filing a patent that will result in greater attorneys’ fees. See USPTO Website, http://www.uspto.gov/web/offices/ac/qs/ope/fee031913.htm (for patent and trademark filing fees).

[12] Dana Schultz, Top Ten Legal Mistakes of Startup and Early Stage Companies, LawPivot Blawg (Oct. 11, 2011), http://blog.lawpivot.com/2011/10/top-ten-legal-mistakes-of-startup-and-early%C2%ADstage-companies/ (last visited on March 4, 2013).

[13] Even when you win an employment case, it can be a long and drawn-out process. Emails documenting each step of the termination process will make this process easier. See Adriana Gardella, Settling Is Not the Only Way to Resolve an Employee Lawsuit, NY Times (Feb. 20, 2013), http://www.nytimes.com/2013/02/21/business/smallbusiness/tips-for-s…iness-owners-to-avoid-employee-lawsuits.html?ref=smallbusiness&_r=0 (last visited on March 7, 2013).

[14] Minara El-Rahman, Current Legal Issues for Small Business Owners (Jan. 25, 2010), http://blogs.findlaw.com/free_enterprise/2010/01/current-legal-issues-for-small-business-owners.html (last visited on March 7, 2013); See also Karen E Klein, Four Legal Pitfalls Loom in 2010, Businessweek (Jan. 12, 2010), http://www.businessweek.com/smallbiz/content/jan2010/sb20100111_618606.htm (last visted on Mar. 7, 2013).

Volcker Rule Conformance Period Clarified

On April 19, 2012, the Federal Reserve Board announced its approval of a statement clarifying that an entity covered by section 619 of the Dodd-Frank Wall Street Reform and Consumer Protection Act, or the so-called “Volcker Rule,” has the entire two-year period provided by the statute to fully conform its activities and investments, unless the Board extends the conformance period. In general, the Volcker Rule requires banking entities to conform their activities and investments to the prohibitions and restrictions included in the statute on proprietary trading activities and on hedge fund and private equity fund activities and investments.

Section 619 required the Board to adopt rules governing the conformance periods for activities and investments restricted by that section, which the Board did on February 9, 2011. However, the Board has since then received a number of requests for clarification of the manner in which this conformance period would apply and how the prohibitions will be enforced. The Board is issuing this statement to address this question.

The Board’s conformance rule grants entities covered by the Volcker Rule a period of two years after the statutory effective date, which would be until July 21, 2014, to fully conform their activities and investments to the requirements of section 619 of the Dodd-Frank Act and any implementing rules adopted in final under that section, unless that period is extended by the Board.

The Board, the Office of the Comptroller of the Currency, the Federal Deposit Insurance Corporation, the Securities and Exchange Commission, and the Commodity Futures Trading Commission (the “agencies”) plan to administer their oversight of banking entities under their respective jurisdictions in accordance with the Board’s conformance rule. The agencies have invited public comment on a proposal to implement the Volcker rule, but have not adopted a final rule.

 Source:  --> http://www.cftc.gov/PressRoom/PressReleases/pr6238-12

Study Shows Chapter 7 Debtors Represented by an Attorney Are “Almost Ten Times More Likely to Receive a Discharge” of their Debts

In my work as a bankruptcy attorney, I attend Chapter 7 “341 hearings” with my clients. That’s the typically routine and fairly short meeting with the bankruptcy trustee that everyone filing bankruptcy attends  a month or so after their petition is filed. Because these are public meetings, I can observe the people who file bankruptcy without an attorney, and there are many cases that prove how dangerous it is to file a Chapter 7 bankruptcy without an attorney. The question of whether hiring an attorney is really necessary or even helpful is discussed in a book that was recently published, Broke: How Debt Bankrupts the Middle Class. In the compilation of scholarly articles, one of the chapters focuses on “pro se” filers (those without attorneys). The author, Asst. Professor Angela K. Littwin of the University of Texas School of Law, analyzed data from the Consumer Bankruptcy Project, “the leading [ongoing] national study of consumer bankruptcy for nearly 30 years.” She concluded, “that pro se filers were significantly more likely to have their cases dismissed than their represented counterparts.”

In another closely related study from last year, Prof. Littwin concluded that “17.6 percent of unrepresented debtors had their cases dismissed or converted” to Chapter 13, [while] only 1.9 percent of debtors with lawyers met this fate.”  Even after controlling for other factors such as “education, race and ethnicity, income, age, homeownership, prior bankruptcy, whether the debtor had any nonminimal unencumbered assets at the time of the filing,” “represented debtors were almost ten times more likely to receive a discharge than their pro se counterparts.” In her carefully understated and scholarly appropriate way, Prof. Littwin concluded that “there may always be additional unobservable factors for which I cannot control… [b]ut this analysis suggests that filing pro se dramatically escalates the chance that a Chapter 7 bankruptcy will not provide a person with debt relief.”

Update on Cap-Subject H-1B Petitions

The USCIS has just informed the AILA that 22,323 cap-subject H-1B petitions have been received as of April 4, 2012. Approximately 25% of these cases are for U.S. advanced degrees.  Based on this announcement, approximately 17,000 of the 65,000 “regular” H-1B cap-subject petitions have been filed and 5,500 “Masters” H-1B cap-subject petitions. Last year, the USCIS reported that 17,400 Regular H-1B Cap-subject numbers had been used through June 29, 2011. It took about 4 and one-half months for the remaining 47,600 “regular” H-1B slots to be filled. If this year’s pace were to equal last year’s pace, that would mean that the H-1B numbers would be exhausted by mid-August. However, this year’s demand seems certain to be greater than that. Last year 15,000 “regular” H-1B cap-subject H-1Bs were filed in the final month (November 2011). If the November 2011 demand is a reasonable metric for usage projection, this year’s H-1B cap would be reached approximately June 1, 2012.

Healthcare Legislation In Supreme Court Today

Today, the Supreme Court convened for the second of three days to hear arguments on the healthcare legislation signed into law by President Obama two years ago. The court is set to determine the extent of congressional power. At the heart of the controversy is the individual mandate, which requires individuals to purchase health insurance by 2014.

No past Supreme Court decisions are completely on point, leaving many observers to speculate about how the ideologically divided justices will decide the limits of congressional power to address society's raising health insurance costs. Today’s legal arguments will focus on the extent of Congress’s power granted to it by the Constitution. The two specific powers at issue in the case, are set out in Article I, Section 8, concern the regulation of interstate commerce and the imposition of taxes.  

            

THE ARGUMENTS

U.S. Solicitor General Donald Verrilli, the Obama administration's top lawyer at the court, will argue that the individual mandate flows naturally from Congress' authority to regulate commerce. He notes congress’ long-standing authority to regulate the insurance field. In his brief to the justices, Verrilli said the law addressed an existing problem in the healthcare market brought on by the uninsured consuming healthcare they cannot afford. He said unaffordable health insurance annually leads to $43 billion in uncompensated healthcare, much of which is passed on to people with insurance. The administration estimates that such "cost-shifting" adds $1,000 a year to a family's insurance policy. The Obama administration frames the issue as such: may Congress decide, in fashioning a comprehensive response to a national crisis in the health care market, to regulate how people pay for the health care they will almost inevitably need?

            
The challengers, including 26 of the 50 states and a small-business trade group, contend Congress exceeded its authority to regulate commerce with that so-called individual mandate. At the heart of the legal controversy is the mandate that most people obtain health insurance by 2014 or pay a tax penalty. Representing the 26 states is Washington lawyer Paul Clement, formerly a solicitor general under George Bush. He relies upon a slippery slope argument. Clement deems the mandate "unprecedented" and said it could lead to limitless intervention by Congress in people's lives. He frames the legal issue as one of individual liberty. May the federal government, he asks, compel individuals not engaged in commerce to buy a product from private companies?

           

 SOURCES

1. Adam Liptak, Hard Questions From Justices Over Insurance Mandate, N.Y. Times, March 27, 2012, at http://www.nytimes.com/2012/03/28/us/hard-questions-from-conservative-justices-over-insurance-mandate.html?_r=1&hp.

2. Editorial, Getting to the Merits, N.Y. Times, March 27, 2012, at A26

3. Joan Biskupic and James Vicini, Supreme Court Divided Over Obama Healthcare Law, Reuters U.S. Edition (March 27, 2012), http://www.reuters.com/article/2012/03/27/us-usa-healthcare-court-idUSBRE82L1CJ20120327.

4. Robert Reich, Health Care Jujitsu, Huffington Post (March 27, 2012), http://www.huffingtonpost.com/robert-reich/single-payer-health-care_b_1381382.html.

5. Lee Ross, Swing Justice Poses Tough Questions on Obamacare at Supreme Court Hearing, Fox News (March 27, 2012), http://www.foxnews.com/politics/2012/03/27/swing-justice-poses-tough-questions-on-obamacare-at-supreme-court-hearing/.

Legislation to Eliminate New York and Delaware’s monopoly on Corporate Bankruptcy

Legislation to eliminate New York and Delaware’s monopoly on Corporate Bankruptcy was introduced in 2001 when Enron filed for bankruptcy in New York, the state of its incorporation instead of its hometown in Houston, Texas, where its principle place of business was located. Much like the 50% of corporate Chapter 11 cases filed in Delaware and New York combined, the two states reap economic benefits for the legal community.  Bloomberg reports that Delaware derives about $100 billion from its Bankruptcy docket alone.  70 percent of the largest 200 coroporations who filed for Bankruptcy since 2005 did so in New York and Delaware. 

Currently, federal law allows companies to file in either the state of their principle place of business or in the state of their incorporation.  For tax consequences, a majority of businesses are incorporated in New York and Delaware despite their lack of nexus to the states.  This encourages businesses to engage in forum shopping, selecting the state to file for Bankruptcy in the state which provides them with the most benefits including state exemptions.  Additionally, filing in New York and Delaware also creates an inefficient use of resources: flying company representatives out to appear in court, disparity in costs of litigation, and greater Court fees etc…

Legislation was at a standstill in 2001 and again in 2005 as a strong opponent of the law was Vice President Joe Biden who was at the time chaired the Senate Judiciary Committee.  Currently, the legislation has been re introduced by U.S. House Judiciary Chairman, Lamar Smith R-Texas in July 2011 in the Bankruptcy Venue Reform Act of 2011. 

See “Playing on the Home Court” Curriden, Mark. ABA Journal, March 2012.