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Of Counsel William E. Wegner speaks on panel about persuasion in the courtroom

By | Arbitration, News, Speaking Engagements, Trial | No Comments

William E. Wegner, Of Counsel to the Firm, joined California Supreme Court Justice Ming W. Chin, Loyola Law School Professor Robert D. Brain, and Gibson Dunn partner Perlette M. Jura to present a three-hour program on persuasion techniques both in and outside the courtroom. The Rutter Group presentation, entitled Negotiating Rough Waters: What You Don’t Know…And Must! took place live in San Francisco on June 16, 2017, and again in Los Angeles on June 22, 2017.

A veteran presenter on Rutter Group panels, Bill Wegner is co-author of the Rutter Group’s California Practice Guide: Civil Trials and Evidence and Rutter Group Practice Guide: Federal Civil Trials and Evidence, both of which are established trial practice treatises.

Brown Wegner McNamara LLP weighs in on the Supreme Court’s landmark T.C. Heartland decision

By | News, Patent Law, Supreme Court | No Comments

The United States Supreme Court’s recent decision in T.C. Heartland, LLC v. Kraft Foods Group Brands, LLC (Case No. 16-341) addressed the venue rules in patent infringement cases. As counsel for the Orange County Intellectual Property Law Association, Brown Wegner McNamara LLP filed an amicus brief in the United States Supreme Court supporting the petitioner. The Firm argued that, properly construed, 28 U.S.C. section 1400(b) is the sole and exclusive provision governing venue in patent infringement actions, and that as a result, a corporate defendant may only be sued in the district in which it “resides—not any state in which it may be subject to personal jurisdiction. On May 22, 2017, the Supreme Court agreed with petitioner’s and the Firm’s position, holding in an 8-0 decision that a domestic corporation “resides” only in the state of incorporation for purposes of the patent venue statute, and that plaintiff in a patent infringement case therefore is not entitled to bring suit against a corporate defendant in any district in which the defendant happens to be subject to personal jurisdiction. The Supreme Court’s holding in TC Heartland signals the end of a decades-old filing practice that saw the majority of the country’s patent infringement lawsuits concentrated in a few districts (most famously, the Eastern District of Texas). Read the Firm’s amicus brief, and the Supreme Court’s opinion in TC Heartland.

Following the opinion, Bill Brown discussed TC Heartland on a telephonic panel. The podcast of Bill’s telephonic panel discussion is available here: http://www.fed-soc.org/multimedia/detail/courthouse-steps-decision-tc-heartland-llc-v-kraft-foods-group-brands-llc-podcast

Chatbot Contracts: Enforcing TOS Agreements in Computer-Generated Conversations

By | Arbitration Agreements, Internet Law, News | No Comments
[Originally published by Lily Li in the Spring 2017 Orange County ABTL Report]

 

Humanity has long imagined self-aware computers that can pilot our vehicles, purchase goods, and even sing songs for us, whether as the malevolent Hal in 2001: A Space Odyssey or the spunky Samantha in Her. Though fully sentient artificial intelligence is still science fiction (as far as we know), computer software has become “smart” enough to converse with us through text-based services like Facebook messenger, WhatsApp, or WeChat, or voice-operated services like Amazon’s Alexa or Apple’s Siri. As more e-commerce transactions are completed via these “chatbots” or “chatterbots” and away from browser-based websites, this begs the question: Will courts enforce the Terms of Service for chatbot contracts when the terms no longer appear on the same page – or even the same medium – as the transaction itself?

The Rise of Chatbots

Consumer appetite for on-demand goods and services continues to grow, but at the same time, consumers are consolidating their online attention on a limited number of platforms. For social media and messenger services, this means Facebook. In 2016, 79% of online users were on Facebook, with 76% checking in daily. (Pew Research Center, Social Media Update 2016) Facebook’s Messenger had approximately 1 billion users, with WhatsApp and WeChat following closely behind. (Economist.com, “Bots, the next frontier”, April 9, 2016.) On the e-commerce and voice front, Amazon reigns supreme. Amazon accounted for 53 percent of all online sales growth in the United States in 2016, capitalizing on sales of its popular Echo and Echo Dot devices. (Slice Intelligence 2016). In light of these trends, e-retailers are increasingly leaving their own websites and apps, and developing custom, conversational chatbots to sell through these platforms.

Internet Contracts 101: Mutual Assent and Notice

The majority of e-commerce sales are regulated by online Terms of Service (“TOS”), also known as Terms and Conditions or Terms of Use (“TOU”). These internet contracts usually contain arbitration, forum, and venue provisions that govern the conduct of litigation. As a threshold matter, courts will only enforce these TOS if they find mutual assent to their provisions. In other words, consumers must be put on reasonable notice of online TOS, then provide objective outward manifestations of their agreement to the contract. Long v. Provide Commerce, Inc., 245 Cal.App.4th 855, 862 (2016).

Courts have generally found mutual assent in “clickwrap” or “clickthrough” contracts, where the consumer clicks on an “I agree” or similar box or button, in tandem with a presentation of the TOS. In re Facebook Biometric Info. Privacy Litig., 185 F. Supp. 3d 1155, 1166 (N.D. Cal. 2016) (upholding California choice-of-law provision where plaintiffs clicked a box affirming they had read and agreed to the TOS, or where a separate plaintiff clicked a “Sign Up” button, with language immediately below stating that clicking the button constituted assent to the TOS). In contrast, courts are more hesitant to find mutual assent in situations where a link to the TOS appears on the online platform, but consumers do not affirmatively “click” to agree to those provisions. Compare Nguyen v. Barnes and Noble Inc., 763 F.3d 1171, 1178-1179 (9th Cir. 2014) (conspicuous hyperlink on every webpage not enough to demonstrate assent, where users were not prompted to take affirmative action) with Small Justice LLC v. Xcentric Ventures LLC, 99 F.Supp.3d 190, 197-98 (D. Mass 2015) (court distinguishes Nguyen and enforces TOS, where, in addition to hyperlink on each page, TOS were visible before the “continue” button on the final screen). For these “browsewrap” contracts, courts will analyze the conspicuousness of the TOS on the page, in context with the rest of the site or application, to determine whether “a reasonably prudent Internet consumer [is] on inquiry notice of the browsewrap agreement’s existence and contents.” Long, 245 Cal.App.4th at 123 (2016) (declining to impose TOS where hyperlink appeared in light green font on a page with light green background); see also Lee v. Intelius Inc., 737 F.3d 1254, 1257 (9th Cir. 2013) (TOS written in small, light grey print, next to a misleading “YES” button, caused customer confusion and was designed to deceive).

Chatbots via Messenger: More of the Same

Existing precedent on internet contracts is well equipped to handle text-based chatbots, and courts should be favorable to TOS presented conspicuously through such services. These chatbots have the ability to fashion contracts analogous to “clickwrap” or “clickthrough” agreements, by featuring conspicuous hyperlinks to online terms in a messenger window, and requiring consumers to affirmatively click to agree, type “YES” or “I Agree”, or words to that effect.

The guided nature of text-based chatbots should in fact promote the enforceability of their TOS in court. Unlike a normal browser window, which may hide terms amidst other content, a messenger window limits consumer attention to a single step-by-step process. If done properly, consumers cannot proceed directly to an online shopping cart and bypass the terms completely. Instead, consumers can be required to outwardly manifest their assent to the TOS by typing or clicking for each transaction – a process favored by the courts. See Nguyen, 763 F.3d at 1177.

Of course, by relying on third-party messenger platforms, chatbot services need to remain vigilant and ensure that TOS remain visible to consumers. In-messenger advertisements, large swathes of text, or strange fonts or colors imposed by a third-party platform may hide terms and render them unenforceable. For instance, in Specht v. Netscape Communications Corp., 306 F.3d 17, 23-30 (2d Cir. 2002), the court refused to enforce a software download TOS where consumers had the ability to click a “Download” button for free software, and consumers had to scroll down the page below the “Download” button to access a link to the TOS. Since the link was essentially subsumed under a “Download” splash screen, consumers had no inquiry notice of the TOS. Id. Similarly, consumers have all faced scenarios where third-party applications create splash screens above the content on websites, such as survey notices, advertisements, and videos, which may obscure small chatbot windows.

Furthermore, chatbot services need to be aware of the TOS of third-party messenger platforms, which often require incorporation of specific licensing, privacy, and usage agreements within the chatbot terms. Here, clear access and delineation between these two competing sets of TOS is key, as the courts may refuse to enforce TOS where there is confusion as to which TOS apply, or refuse to enforce TOS that are only accessible through a series of pages and links. See Specht, 30 F.3d at 23-30; see also Cvent, Inc. v. Eventbrite, Inc. 739 F.Supp.2d 927 (E.D Va. 2010) (refusing to enforce TOS, where it was one of a series of links, and TOS page consisted of more links to other TOS).

Voice Recognition – Hello World!

For now, voice-based chatbots still rely on written TOS provided during online account sign up, which are subject to the same notice and assent requirements discussed above. Thus, when the TOS change for an underlying voice-activated device – or the third-party chatbot using such a device – consumers need to review, and generally provide affirmative assent, on a separate platform or application from the voice-activated service. Courts have often refused to enforce updated TOS, absent such express notice and affirmative assent from consumers, prior to ongoing use of an online service. See Douglas v. United States District Court, 495 F.3d 1062, 1066 (9th Cir. 2007) (court refuses to enforce arbitration agreement in revised TOS, holding that “[p]arties to a contract have no obligation to check the terms on a periodic basis to learn whether they have been changed by the other side”); Diverse Elements, Inc. v. Ecommerce, Inc., 5 F.Supp.3d 1378, 1381 (“[p]arties can…provide for modification in the contract and subsequently modify the contract with no new and independent consideration [Cite]…[t]his principle does not, however, allow parties to reserve the unfettered right to amend contracts without notice and at any unspecified time”); but see Klein v. Verizon Communications, Inc., 920 F.Supp.2d 670, 680-684 (E.D. Va. 2013) (upholding Verizon’s TOS where they provided that notice of revisions could be given by email, and new arbitration provisions were in fact provided by email).

The ongoing requirement for consumers to access a separate device or application and “accept” new and revised TOS may become more onerous over time, however, as consumers move towards pure voice services through dozens (if not hundreds) of providers. Indeed, the whole impetus behind voice-based chatbots, as opposed to text-based solutions, is consumer desire for 24/7 on-demand services without the need to login or access physical devices.

Consequently, courts will increasingly face scenarios where notices of new TOS or amended TOS are provided solely by voice. The chatbot will ask users to verbally agree to updated TOS, and then provide the terms separately by email or other text-based application. In these situations, it is not practicable to expect consumers to sit through an audio recitation of the TOS prior to purchase. Nor can TOS be provided concurrently with the verbal agreement, like “clickthrough” contracts, as there is no hyperlink, scroll-through, or pop-up window to view (absent VR/AR applications). Thus, in a pure voice paradigm, consumers will give – and will generally want to give – assent before they have an opportunity to review terms, if they review them at all.

At first blush, this situation may appear to completely defeat the notice and mutual assent requirements for contract formation. Early case law surrounding “shrinkwrap” agreements, however, suggests that at least in certain jurisdictions, courts may still enforce these contracts. In ProCD, Inc. v. Zeidenberg, 86 F.3d 1447, 1451 (7th Cir. 1996), for example, Judge Easterbrook of the Seventh Circuit enforced the terms of a software license that was visible to plaintiff only after he had purchased a consumer package and downloaded the software. In enforcing this “shrinkwrap” agreement (named after the plastic cellophane around software boxes), the court noted that “[t]ransactions in which the exchange of money precedes the communication of detailed terms are common,” and quoted examples such as airline tickets, concert tickets, and standard warranties with consumer products. Id. at 1451. The court also recognized situations where “[a] customer may place an order by phone in response to a line item in a catalog or a review in a magazine…[t]here is no box; there is only a stream of electrons, a collection of information that includes data, an application program, instructions, many limitations…, and the terms of sale.” Id. at 1451-52. Judge Easterbrook reaffirmed this position in Hill v. Gateway 2000, Inc., 105 F.3d 1147, 1149 (7th Cir. 1997), by enforcing an arbitration agreement shipped in a computer box, where the consumer ordered the computer by phone and had the opportunity to return the computer in 30 days. The court noted, “[i]f the staff at the other end of the phone for direct-sales operations such as Gateway’s had to read the four-page statement of terms before taking the buyer’s credit card number, the droning voice would anesthetize rather than enlighten many potential buyers. Others would hang up in a rage over the waste of their time.” Id. The Seventh Circuit’s adoption of “order by phone now, see terms later” in ProCD and Hill seem like apt analogies for voice-based chatbots, where consumers verbally assent to an order, then view written terms at a later time. These cases, and their progeny, thus provide potential bases for enforcing TOS agreements for voice chatbots, so long as consumers have a reasonable opportunity to rescind the terms or refund the transaction later. See O’Quin v. Verizon Wireless,256 F.Supp.2d 512, 516 (M.D. La. 2003) (“[s]everal other federal and state courts have come to similar conclusions under similar factual scenarios [to Hill and ProCD], which were all premised on the consumer having the opportunity to return the product in order to avoid any term or condition that he found to be unacceptable”).

Not all jurisdictions recognize the reasoning in Hill and ProCD, however. See Specht, 150 F.Supp.2d at 592; Klocek v. Gateway, Inc., 104 F.Supp.2d 1332, 1337 (D. Kan. 2000); Arizona Retail Sys., Inc. v. Software Link, Inc., 831 F.Supp. 759 (D.Ariz. 1993) (license agreement shipped with computer software not part of agreement). The Tenth Circuit, for instance, has stated outright that Kansas law rejects the reasoning of ProCD, holding that “a seller’s later-arriving written contract constitutes at most only a proposal to modify a preexisting oral contract, and […] a buyer’s assent to the proposed modification won’t be inferred simply from the buyer’s continuing the preexisting oral contract.” Howard v. Ferrellgas Partners, L.P., 748 F.3d 975, 982 (10th Cir. 2014). Consequently, chatbot providers must tread carefully before offering pure voice-based TOS agreements.

Chatbots and Policy: Keeping it Simple

Smart chatbots have immense potential to make consumers’ lives easier. Instead of navigating through endless webpages, dense text, and the inevitable clickbait ads, chatbots can provide an intuitive, conversational platform for e-commerce. Given the many consumer benefits of chatbot technology, everyone will benefit from clear case law governing the enforceability of chatbot contracts, and prior “clickthrough” and “shrinkwrap” doctrines provide useful guidance for the courts.

– Lily Li is a commercial and IP litigator at Brown Wegner McNamara LLP. She can be reached at lli@bwmllp.com. 

*Disclaimer* This article is not legal advice or legal opinion, and the contents are intended for general informational purposes only. Circumstances may differ from situation to situation. All legal and other issues must be independently researched.

FLSA Wage Claims Are on the Rise! — How to Prevent and Defend Against Unpaid Wage Claims

By | Employment Law, News | No Comments

On September 17, 2016 Valerie McNamara and Lily Li of Brown Wegner McNamara LLP presented at the 30th Annual Education Conference for the Orange County Paralegal Association.

The presentation, entitled “FLSA Wage Claims Are on the Rise! How to Prevent and Defend Against Unpaid Wage Claims”, discussed the differences between the California Labor Code and the federal Fair Labor Standards Act, and analyzed recent California case developments under both statutory schemes. At the end of the presentation, Valerie McNamara and Lily Li shared best practices for avoiding and defending against FLSA claims, from internal record-keeping and management processes to external indemnification and arbitration agreements.

For a copy of the presentation, please contact us.

Help! What Are My (Immediate) Defenses to a Federal Trade Secret Claim?

By | Bonding, Defend Trade Secrets Act of 2016, News, Trade Secrets | No Comments

[Originally published as Help! What Are My (Immediate) Defenses to a Federal Trade Secret Claim?, by Lily Li and Andrea Paris, in Orange County Lawyer Magazine, September 2016, Vol. 58 No.9 on page 52.]

The Defend Trade Secrets Act of 2016 (DTSA), signed into law by President Obama on May 11, 2016 creates a new federal cause of action for trade secret theft. Not only does the DTSA open the doors of the U.S. district courts to trade secret plaintiffs, it weaponizes complaints. Now, upon a showing of immediate and irreparable injury, plaintiffs in trade secret cases can request extraordinary relief: court-ordered seizure of the misappropriated trade secrets without notice to the defendant. This relief is above and beyond what is provided for by the Uniform Trade Secrets Act (UTSA), the trade secret law adopted by most states, including California, and copies many of the civil seizure remedies previously available to copyright, trademark, and patent plaintiffs for infringing and counterfeit goods.

This extraordinary relief comes with several safeguards. Defendants, faced with the prospect of a U.S. Marshal knocking on (or down) their doors, have several options at their disposal to combat, modify, or remedy improper seizure requests—many of which should be implemented immediately to prevent any disruption to business. Prospective plaintiffs should also keep these procedural and substantive hurdles in mind, prior to proceeding with an application for civil seizure.

What the DTSA Protects

Congress enacted the DTSA with strong bipartisan support. The law allows companies to address growing levels of interstate trade secret theft, develop a coherent federal litigation strategy across all forms of intellectual property, and take advantage of the broad subpoena powers of the federal rules of civil procedure. The DTSA’s definitions of “trade secret” and “trade secret misappropriation” are modeled after the UTSA, with a few notable differences.

The UTSA’s definition of a trade secret is a “formula, pattern, compilation, program, device, method, technique, or process.” Under the DTSA, the definition of a “trade secret” is broadened to include “all forms and types of financial, business, scientific, technical, economic, or engineering information . . . whether tangible or intangible . . . .” These broad categories of information are protected regardless of how, where, or even whether they are stored at all. 18 U.S.C. § 1839.

To maintain trade secret protection under the DTSA, owners of the trade secret must make reasonable efforts to maintain its secrecy, and the information must derive independent economic value by not being known to other persons who can obtain economic value from its disclosure or use (i.e., competitors). This is a different, and arguably broader, standard from the UTSA, which limits trade secrets to those secrets not known by “the public.”

Requirements for Civil Seizure

The most distinguishing feature of the DTSA, when compared to the UTSA, is the civil seizure remedy. This remedy is intended for very limited circumstances, where trade secret “pirates” pilfer information for immediate dissemination, or intend to whisk it away to foreign jurisdictions beyond the subpoena power of the states. The seizure order is not intended as a means to prevent the normal movement of employees amongst competitors, nor as a means to disrupt the legitimate operations of competitors. Consequently, this remedy has stringent requirements.

To obtain a seizure order, a DTSA plaintiff must file an affidavit or complaint showing the following:

  • The trade secret misappropriation will cause immediate and irreparable injury, which cannot be addressed by injunctive or other relief;
  • The harm to the applicant outweighs the harm to the DTSA defendant, and substantially outweighs the harm to any third parties;
  • The applicant is likely to succeed in showing that trade secret misappropriation occurred;
  • The DTSA defendant has actual possession of the trade secret, and the application describes “with reasonable particularity” where it is located;
  • The DTSA defendant will destroy or hide the trade secret, if given notice; and
  • The applicant has not publicized the seizure.

See 18 U.S.C. § 1836(b)(2)(A)(ii).

It remains to be seen how often courts will order this “extraordinary” relief. There are comparable seizure remedies present in federal copyright law (17 U.S.C. § 503), trademark law (15 U.S.C. § 1116(d)(1)(A)), and ITC actions for copyright, trademark, and patent infringers (19 U.S.C. § 1337(i)), and courts will likely look to these precedents in order to interpret the DTSA requirements listed above. Unlike these other intellectual property rights, however, trade secrets lose their value as soon as they are disseminated. Thus, the potential immediate “harm” of such dissemination will likely outweigh the harm caused by other forms of intellectual property theft, weighing in favor of this seizure remedy for trade secrets.

Procedural Defenses

A. Seizure Hearings & Ex Parte Motions

Once a court issues an order for civil seizure under the DTSA, that same court must schedule a hearing within seven days. Defendants should not wait to act, however, if the seizure (or potential seizure) will disrupt legitimate business operations in the interim. Under the DTSA, defendants have the opportunity to move the court for an order dissolving or modifying a seizure order “at any time,” upon notice to the plaintiff. If defendants move quickly, and request ex parte relief as soon as they become aware of a DTSA complaint or subsequent seizure order (through a litigation alert service or other source), defendants may obtain relief prior to a civil seizure. Here, time is of the essence.

B. Confidentiality vs. Publicity

The DTSA requires the court to protect the confidentiality of all seized materials and to protect the target of the seizure order from publicity “by or at the behest of the person obtaining the order.” These protections are designed to prevent DTSA plaintiffs from using the seizure order purely as a means to obtain defendants’ trade secrets, or as a means to tarnish the reputations of these defendants through a court-ordered raid. These protections, however, are limited. The DTSA does not protect a defendant from publicity by the press or other third parties, and First Amendment protections may insulate anonymous tip-offs to the press—even if they originate from DTSA plaintiffs. The legislative history of the DTSA shows considerable attention paid to freedom of the press, so courts will probably be wary of any attempts to curtail such freedoms. See H.R. Rep. No. 114-529, at 10, fn. 2. (Committee on the Judiciary) (“The Act’s protections against the misappropriation of trade secrets—and the remedies it provides against such misappropriation—are not intended to displace or restrict protections for members of the press recognized under the First Amendment.”).

Given the probability of exposure, it is imperative for defendants to address confidentiality and publicity concerns at the seizure hearing, or better yet, at an early ex parte hearing described above. If defendants agree to an immediate turnover of the disputed trade secrets, or show that the requested seizure is harmful and excessive, then the court may limit the scope of the seizure order or dispense with it entirely. This seizure hearing or ex parte hearing is also a good time for defendants to move for encryption of any seized assets, under 18 U.S.C § 1836 (b)(2)(H), to further protect their privacy.

C. Cross-Complaint for Damage Caused by Wrongful Seizure

Should a “wrongful or excessive seizure” occur, despite the protections above, defendants have the option to countersue for damages as a result of the seizure. The DTSA provides the same remedies for a wrongful seizure as those available under the Trademark Act of 1964 (15 U.S.C. § 1116(d)(11)), which include lost profits, cost of materials, loss of goodwill, punitive damages in instances where the seizure was sought in bad faith, and, in most circumstances, reasonable attorney’s fees. Since the DTSA cites directly to these Trademark Act remedies, cases in the trademark arena are illustrative of what courts consider to be “wrongful seizure.” These include situations where “the items seized are predominantly legitimate” or where plaintiff “sought the seizure knowing it was baseless.” Martin’s Herend Imports, Inc. v. Diamond & Gem Trading United States of Am. Co., 195 F.3d 765, 773 (5th Cir. 1999). Given these considerations, defendants should consider doing the following immediately after a DTSA seizure: (1) inventory all missing and damaged property, (2) record all disruptions in business, and (3) develop a record of the DTSA plaintiff’s motivations and any misstatements at the seizure hearing.

D. Bonding Requirements

One of the most important procedural defenses for defendants is the bonding requirement of the statute. If a court authorizes a DTSA seizure order, it must require the person obtaining the order to post a security “determined adequate by the court for the payment of the damages that any person may be entitled to recover as a result of a wrongful or excessive seizure or wrongful or excessive attempted seizure.” 18 U.S.C. § 1836(b)(2)(B)(vi). Thus, in order to execute quickly on a seizure order, DTSA plaintiffs will need to negotiate with a bonding company for the estimated amounts of a required security, and figure out a way to timely deliver it to the court. These procedural hurdles may delay the actual seizure raid, providing time for defendants to move quickly with an ex parte hearing in the interim.

Employment-Based Defenses

Misappropriation of trade secrets claims often arise in the employment context, such as when a key employee with access to trade secrets leaves and starts a competing business or joins a competitor. In an effort to address concerns that injunctive relief under the DTSA would hinder employee mobility, the legislature included certain limitations on the court’s power to grant injunctive relief.

A. Restrictions on Injunctive Relief

A defendant opposing plaintiff’s request for injunctive relief may successfully challenge the request on various anti-competition grounds. In addition to meeting the federal standards for granting an injunction, the DTSA allows a court to grant an injunction “to prevent any actual or threatened misappropriation” only if the injunction would not: (1) prohibit defendant from entering into an employment relationship, (2) place conditions on defendant’s employment based merely on defendant’s knowledge of trade secret information without evidence of threatened misappropriation, and/or (3) violate applicable state anti-competition laws (e.g., Cal. Bus. & Prof. Code § 16600 et al.—voiding contracts that restrain a person from engaging in a lawful profession, trade, or business). 18 U.S.C. § 1836(b)(3)(A)(i).

The DTSA’s rejection of the inevitable disclosure doctrine, which prevents an employee from working for a competitor merely because disclosure of trade secrets is a likely possibility, is notable. Although courts interpreting California’s UTSA have rejected the inevitable disclosure doctrine, choice of law provisions could otherwise subject a California employee to another state’s UTSA that recognizes the inevitable disclosure doctrine. Compare PepsiCo, Inc. v. Redmond, 54 F.3d 1262, 1269 (7th Cir. 1995) (recognizing the inevitable disclosure doctrine), with Whyte v. Schlage Lock Co., 101 Cal.App.4th 1443, 1447 (Cal. Ct. App. 2002) (rejecting explicitly the inevitable disclosure doctrine under California law).

B. Failure to Provide Notice of Immunities

Employee defendants who are bound by a nondisclosure or confidentiality agreement should review those agreements for plaintiff’s compliance with the DTSA’s notice of immunities requirement. Pursuant to the DTSA, employers must provide employees (defined to include contractors and consultants) with notice of certain available immunities or be precluded from an award of exemplary damages and/or attorney’s fees under Section 1836(b)(3). The notice of immunities must be present in any contract that governs an employee’s use of trade secret or other confidential information entered into, or updated, after May 11, 2016. Referencing a policy document setting forth the employer’s reporting policy for a suspected violation of law constitutes sufficient notice. 18 U.S.C. § 1833(b)(3).

C. Whistleblower Immunity

The DTSA broadened the civil and criminal immunity available to whistleblowers who disclose trade secret information if the disclosure is made: (1) in confidence to a federal, state, or local government official, directly or indirectly, or to an attorney; and (2) solely for the purpose of reporting or investigating a suspected violation of law. 18 U.S.C. § 1833(b)(1)(A). Defendants may broadly invoke this immunity even if the disclosure of trade secret information was made to a governmental entity that had no authority over the alleged violation of which defendants complain. Additionally, defendants will not be held liable for disclosing trade secret information in a complaint or other document filed in a lawsuit or other proceeding as long as such filing is made under seal. 18 U.S.C. § 1833(b)(1)(B). This provision of the DTSA preempts state laws. 18 U.S.C. § 1833(b).

D. Anti-Retaliation Lawsuits

Additionally, employees who suffer retaliation as a result of reporting an employer’s suspected violation of the law may disclose trade secret information to their attorneys and use the information in court. The DTSA immunizes such disclosure as long as the document containing the trade secret is filed under seal, and not disclosed except pursuant to court order. 18 U.S.C. § 1833(b)(2). Thus, the DTSA allows employees to prosecute retaliation and whistleblower claims where trade secret information is at issue, while protecting businesses’ legitimate interests in their intellectual property.

Conclusion

As we move ever closer towards a global, knowledge-based economy, the importance of trade secrets will only grow over time. Businesses and their employees must operate across state lines and work in the “cloud,” yet still protect their core intellectual assets in this milieu. For this to work, it is critical that all businesses and managers create an effective protection and defense strategy that works in tandem with federal and state intellectual property and employment laws.

– Lily Li is a commercial and IP litigator at Brown Wegner McNamara LLP. She can be reached at lli@bwmllp.com. Andrea Paris is an employment litigator and advisor at the Law Office of Andrea W. S. Paris. She can be reached at ap@andreaparislaw.com.

*Disclaimer* This article is not legal advice or legal opinion, and the contents are intended for general informational purposes only. Circumstances may differ from situation to situation. All legal and other issues must be independently researched.

Motion for Disentitlement Granted by California Appellate Court

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Following a confirmed arbitration award in favor of a Brown Wegner McNamara client, the opposing side appealed the judgment. The firm filed a successful motion to dismiss the appeal, citing the disentitlement doctrine. The California appellate court agreed to dismiss the appeal, and awarded Brown Wegner McNamara costs on appeal.

What is the Disentitlement Doctrine?

The disentitlement doctrine is an infrequently-used method to dismiss an appeal prior to the appellate court’s consideration of the merits of the case. The doctrine allows an appellate court to use its “inherent power” to dismiss an appeal, in situations where the appellant has refused to comply with a lower court order. Stoltenberg v. Ampton Investments, Inc. (2013) 215 Cal.App.4th 1225, 1229. This doctrine is founded in fundamental principles of equity. As noted by the California Supreme Court, a “party to an action cannot, with right or reason, ask the aid and assistance of a court in hearing his demands while he stands in an attitude of contempt to legal orders and processes of the courts of this state.” MacPherson v. MacPherson (1939) 13 Cal.2d 271, 277. Thus, if a party is found in contempt by a lower court, or has continuously engaged in willful disobedience or obstructive tactics, then the appellate court will not consider that party’s appeal.

RFAs: The Underutilized Strategy for Recovering Attorney’s Fees

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[Originally published as RFAs: The Underutilized Strategy for Recovering Attorney’s Fees, by Lily Li, in Orange County Lawyer Magazine, December 2015, Vol. 57 No.12 on page 40.]

A successful motion for attorney’s fees can be just as important as winning at trial, especially when it comes to your client’s satisfaction with the outcome of litigation. What are your options, however, when there are no obvious attorney fee-shifting provisions in your case? A recent decision out of the Fourth Appellate District bolstered the use of a “costs of proof” motion under Code of Civil Procedure § 2033.420, based on defendants’ unreasonable denials of various requests for admissions. Grace v. Mansourian, No. G0495 at 6-7 (9th Cir. filed Aug. 17, 2015) (certified for publication on Sep. 15, 2015), available at http://www.courts.ca.gov/opinions/nonpub/G049590.PDF.

In Grace, plaintiffs served requests for admission in the lower court concerning a traffic collision. These requests asked the defendant to admit he failed to stop at a red light, that this failure was negligent, and that it caused the traffic accident in question. The defendant denied all of these requests, despite eyewitness testimony and a police report to the contrary. The defendant’s sole reason for denying the request was his perception that the light was yellow. A jury found the defendant negligent, and awarded the plaintiff $410,000. The plaintiff then moved for nearly $200,000 in attorney fees and costs to recover expenses in proving the facts that the defendant had denied, but should have admitted. The trial court denied this motion.

The appellate court reversed, ruling that a trial court is required to award plaintiff’s costs and fees unless it finds a defendant “had reasonable ground to believe [he or she] would prevail on the matter” or “[t]here was other good reason for the failure to admit.” Id. at 6(citing Cal. Civ. Proc. § 2033.420(b)(3)-(4)). The Grace court determined that the defendant did not have a reasonable ground to believe he would prevail at trial given substantial evidence (police report and eyewitness testimony) that he was negligent. The court ruled that even if the defendant reasonably believed the light was yellow, not red, this does not constitute “reasonable grounds” to believe he would prevail at trial.

Significantly, the Grace court clarifies the definition of what constitutes “reasonable grounds” to deny a request for admission. In an earlier case cited by the Grace court—Brooks v. Am. Broad. Co. 179 Cal. App. 3d 500 (1986)—the responding party denied a request for admission based on the anticipated testimony of the responding party’s father, where there was no expert report to the contrary. The Brooks court found this to be enough “reasonable grounds” to deny the request. The Grace court, in comparison, found defendant’s sole testimony insufficient “reasonable grounds” to prevail at trial, where there was eyewitness testimony and an expert report to the contrary. Thus, it appears that the appeals court will weigh the probative value of each party’s testimony in considering whether a denial of a request for admission is appropriate. If the propounding party has third-party or expert testimony supporting the facts contained within a request for admission, the responding party should be able to contest these facts with their own third-party or expert testimony, respectively, before denying the request for admission.

Aside from the responding party’s “reasonable ground to believe [he or she] would prevail on the matter,” a responding party can also deny a request if “[t]here was other good reason for the failure to admit.” Cal. Civ. Proc. § 2033.420(b)(3)-(4). Although this part of the test was not central to the decision by the Grace court, counsel should be aware of these other “good reasons” before allowing a client to deny a request for admission or proceeding with a “costs of proof” motion after prevailing at trial. Grace at 7.

The Brooks decision outlines several of these additional considerations. For instance, costs of proof are not appropriate for relatively trivial issues in a case, though sometimes such seemingly trivial issues can develop substantial importance later on in the case. Consequently, a court should “assess whether at the time the request was denied it was reasonably possible for the party making the denial to have appreciated that the requested admission involved a central issue . . .in the case.” Brooks,179 Cal. App. 3d at 510. In Grace, this consideration did not apply, as the determination of whether defendant ran a red light, or was negligent in doing so, was of obvious substantial importance to the case from the very beginning.

Another appropriate consideration is whether the responding party attempted, in good faith, to reach a resolution of the issue, such as agreeing to stipulate to the facts of the matter, with reasonable conditions. Finally, the Brooks court also considered circumstances where the responding party learned of additional facts after the original request, and later advised opposing counsel of this error. The Brooks court emphasized, however, that these circumstances do not define or limit the other “good reasons” for denying a request, and that the ultimate decision in what factors to consider lies within the discretion of the trial court.

The scope of “other good reasons” can also involve the application of federal court decisions because Brooks, along with later decisions, highlights Rule 37(c) of the Federal Rules of Civil Procedure as the progenitor of Civil Procedure Code section 2033.420. See City of Glendale v. Marcus Cable Assoc., LLC, 235 Cal. App. 4th 344, 353 n.6 (2015). Thus, when considering what other “good reasons” apply for denying a request for admission, it is appropriate to look to federal court decisions interpreting Rule 37(c). Be warned, though, that the post-1970 provisions of Rule 37(c) apply to all failures to admit requests for admission, including responses that state the respondent “cannot truthfully admit or deny.” Section 2033.420, in contrast, only applies to sworn denials, and does not encompass equivocal responses (though these may be subject to separate discovery sanctions). Smith v. Circle P Ranch Co.,87 Cal. App. 3d 267, 277-78 (1978).

In summary, requests for admission can be a powerful and underutilized strategy for recovering attorney’s fees and costs post-trial. Early requests, seeking admissions regarding the crux of liability in a case, can either limit the issues at trial, if admitted, or recover the majority of litigation costs, if denied without good reason. For those on the receiving end of requests for admission: be careful. Make sure you have competent evidence backing any denial or other “good reasons,” or your client may end up paying for everyone’s battle.

*Disclaimer* This article is not legal advice or legal opinion, and the contents are intended for general informational purposes only. Circumstances may differ from situation to situation. The views expressed herein are those of the Author. They do not necessarily represent the views of the Orange County Lawyer magazine, the Orange County Bar Association, The Orange County Bar Association Charitable Fund, or their staffs, contributors, or advertisers. All legal and other issues must be independently researched.

Spoliation of Evidence: Bill Brown, Hon. Nakamura, and Hon. Derek Hunt Speak at OCBA Event

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The rise of numerous and varied forms of Electronically-Stored Information [ESI] has significantly changed the landscape regarding destruction, suppression and oversight of evidence, particularly concerning non-traditional forms of ESI such as Facebook, text messages, and online video.

On December 4, 2015, in a presentation before the Orange County Bar Association Business Litigation section, speakers Hon. Nakamura, Hon. Derek Hunt, and Bill Brown discussed the growth of ESI, best practices in preserving ESI, and the latest case law and guidance concerning spoliation of evidence.

Hon. Nakamura began the discussion with an overview of spoliation causes of action in California state courts. Overall, he noted, the recent trend in California is clear. California appellate courts, through decisions in Strong v. State, 201 Cal.App.4th 1439 (2011) and Rosen v. St. Joseph Hosp. of Orange Cnty., 193 Cal. App. 4th 453 (2011) have narrowed the scope of spoliation causes of action. Under current case law, there is no cause of action for first-party spoliation of evidence. There does, however, still remain a narrow cause of action for third-party spoliation of evidence, if a case presents facts that mirror the situation of Cooper v. State Farm Mut. Auto. Ins. Co. , 177 Cal. App. 4th 876 (2009) (a third party intentionally destroys a piece of evidence important to the underlying case, despite specific promising a party that he will preserve that same evidence).

Bill Brown continued the discussion by highlighting recent changes to the Federal Rules of Civil Procedure concerning ESI. Recent amendment to Rule 37, which became effective on December 1, 2015, create a new standard by which district courts can impose sanctions on parties who fail to preserve ESI. The amendments acknowledge the growing difficulties and costs in preserving vast quantities of ESI, and differentiates between negligent and intentional losses of information. Of note, the new Rule 37 amendment requires a finding of intentional destruction of information relevant to the litigation, before a court can (i) presume the lost information was unfavorable to a party; (ii) issue an adverse inference instruction; or (iii) dismiss the action or enter a default judgment.

Hon. Derek Hunt advised attendees on best practices for implementing a litigation hold and preserving evidence. He also commented on the growing use of strategic preservation letters in litigation. A carefully worded preservation letter, inclusive of ESI, can be a useful way to notify opposing counsel of their preservation obligations ahead of trial. This is not only a good way to preserve evidence, but also provides a valuable record for future spoliation battles.

Overall, all the panelists agreed that ESI was here to stay. There is an every-growing necessity to understand a client’s information technology systems – or hire a third-party specialist who can help. Now that ESI is part of our everyday lives, ignorance of its uses in litigation is no longer an option.

 

Robot Price Wars: Minimum Advertised Pricing (“MAP”) Policies and the Colgate Doctrine in the Era of Smart Web Crawlers

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[Originally published in the Fall 2015 issue of the Federal Bar Association/Orange County Chapter Newsletter. See the original article here.]

A growing number of manufacturers and wholesalers are using minimum advertised pricing (“MAP”) policies to control how retailers showcase the price of their goods. Whether the products are smartphones, luxury handbags, or golf clubs, manufacturers use MAP policies to protect brand integrity, to encourage retail investment in product display, customer service, and sales, and to avoid the ever-present “free-rider” problem that results when retailers who do not expend resources on brand promotion take advantage of those who do by out-pricing them. In contrast with a resale price maintenance (“RPM”) policy, which controls downstream pricing, a MAP policy places restrictions on the price at which downstream retailers display prices in fliers, store windows – and with increasing importance, on their websites. A thoughtfully drafted—and consistently enforced—MAP policy may avoid some of the antitrust pitfalls in state and federal law that would otherwise apply to agreements on price.

In today’s e-commerce, smart web crawlers can complicate the successful implementation of a MAP policy. Using automated bots, competitors can now access information within an online retailer’s shopping cart, and advertise these in-cart prices directly on the Internet. These tactics, when successful, essentially defeat the benefits of a MAP policy. Now more than ever, manufacturers need to develop robust MAP policies to combat smart web crawlers, yet avoid the antitrust implications of direct price controls.

Advertised Price v. Sales Price Online

The difference between advertised price and sales price can be tough to tell with an online retailer. After all, both the advertised price and the sales price are available on the retailer’s website, and are often one and the same.  Though the Ninth Circuit has yet to address this issue head on, a pair of district court decisions in New York have determined that MAP policies do not constitute RPM or vertical price-fixing policies when they (a) specifically state that retailers can set their own sales price; (b) apply to internet and non-internet retailers alike; and (c) provide retailers with “with more than one way to communicate lower prices to clients” either by allowing customers to call or email for a price quote, or by allowing retailers to offer coupons at a website’s checkout page. WorldHomeCenter.com v. Franke Consumer Products, Inc., 2011 WL 2565284 *5 (S.D.N.Y. 2011); WorldHomeCenter.com v. KWC Products, Inc., 2011 WL 4352390 *5 (S.D.N.Y. 2011).[i] Thus, at least for now, the distinction between advertised price and sales price lies at the point of sale on the website – the ubiquitous shopping cart.

Smart Web Crawlers – Combatting “AI” Free Riders

In the past, simple “Captcha” codes (those weird twisted words that determine if you are human) blocked web crawlers from accessing the shopping cart. If an online retailer implemented a MAP policy, automated web crawlers would only “report” the higher, advertised prices to search engines or competitor websites, not the lower in-cart price. Lately, as we can see from the growing difficulty of CAPTCHA codes, web crawlers have grown smart enough to get through these barriers.

To address this growing problem, manufacturers have the option of drafting their resale contracts (usually “authorized reseller” agreements) to require additional security measures on checkout. These have the double benefit of blocking web crawlers and improving safeguards on consumer credit card data:

  1. Two-Step Authentication Prior to Checkout: Instead of a simple one-stage login process, more and more retailers – including Apple, Google, and Amazon use two-stage verification processes. These verification processes require consumers to enter passcodes or data received via e-mail or text (or some other format), in addition to the normal login. The PCI Security Standards Council, an organization originally formed from the largest credit card vendors, provides baseline security standards and certifications for credit card data security, required by law in certain states. [ii]
  2. Click-Through Terms of Use Agreement : Over the past decade, there have been a number of civil actions that allege trespass, copyrights violations, and violations of the Computer Fraud and Abuse Act against web crawlers that extract commercial data from websites. The success of these cases have, in large part, turned upon the Terms of Use Agreements on the websites in question. See eBay v. Bidder’s Edge, 100 F.Supp.2d 1058, 1060 (N.D. Cal. 2000) (Terms of Use agreement, which required users to click ‘I Accept’ and prohibited robots and web crawlers, constituted a limited license that controlled access to the site). Though these Terms of Use Agreements will not deter the most avid hackers, the threat of potential liability may dissuade competing retailers from data scraping efforts. (**Manufacturers beware – make sure to carve out a provision in your MAP policy that allows you to monitor a retailer’s compliance with MAP, so that you do not run afoul of your own retailer’s Terms of Use!)

Alternatively, manufacturers can implement more restrictive MAP policies to combat web crawlers, which fall within the scope of Franke and KWC[iii].  The MAP policy can require the retailer to implement a “call in for a lower price” strategy, or only allow the use of limited-time or one-time only coupon codes.

Of course, the advantage of all of these approaches for manufacturers – increased barriers to web crawlers – also creates a potential deterrent to consumers, as consumers face additional barriers to purchasing products. Prior to implementing these barriers, retailers should carefully measure the loss of customers through these additional verification processes, either through online A/B market testing or other methods. The loss of customers may or may not outweigh any potential gains in profit from a robust MAP policy.

Why Can’t I Control Price Directly? The Aftermath of Leegin.

Prior to the Supreme Court’s decision in Leegin Creative Leather Products Inc. v. PSKS Inc., 551 U.S. 877 (2007), federal antitrust law subjected horizontal price-fixing and vertical price-fixing to the same standard of review. Whether it was a deal between competitors to maintain prices (“horizontal price-fixing”) or a deal between a manufacturer and its retailer to maintain prices (“vertical price-fixing” or RPM), the courts considered the activity to be per se illegal. The Leegin decision, however, noted the many pro-competitive effects of RPM.  Higher margins could encourage retailers to invest in customer service and attractive displays.  By enforcing RPM policies, manufacturers can protect retailers that spend money on these pro-consumer services, and prevent them from being undercut by discount competitors that “free ride” off of these advertising and services for which they themselves have not paid. Id. at 890-91. Consequently, the Supreme Court adopted the more forgiving “rule of reason” standard to analyze whether the activity was an “unreasonable restraint of trade.”

Though Leegin loosened the federal regulations against RPM policies, the state responses to Leegin were more mixed.  Manufacturers that implement RPM policies may yet face the risks of civil litigation and state-level prosecution. For example, in both Franke and KWC, the courts noted that RPM policies are unenforceable under section 369-a of New York’s General Business law.[iv]  In New York, the Attorney General sued Tempur-Pedic for terminating contracts with retailers that did not follow a RPM policy.[v]  Closer to home, in California, the Attorney General sued beauty product manufacturers Bioelements and Dermaquest for implementing RPM agreements.[vi]

In contrast to RPM, MAP policies have always been subject to the “rule of reason” standard of review, and do not have the same degree of litigation and prosecution risks that RPM policies face. See Blind Doctor Inc. v. Hunter Douglas, Inc., 2004 WL 1976562 (N.D. Cal 2004); Campbell v. Austin Air Systems, 423 F.Supp.2d 61 (W.D.N.Y. 2005).

Enforcing MAP – The Importance of Unilateral Action under Colgate

The federal Sherman Act prohibits all contracts, combinations, and conspiracies in restraint of trade. The Supreme Court held in United States v. Colgate & Co., 250 U.S. 300 (1919), however, that manufacturers do not violate the Sherman Act when they unilaterally announce resale prices in advance and refuse to sell to those that do not comply.  California courts have expressly adopted the Colgate doctrine when applying California’s own antitrust statute, the Cartwright Act. Chavez v. Whirlpool Corp., 93 Cal.App.4th 363, 370 (2001).

Thus, the Colgate doctrine provides a safe haven for manufacturers under federal and California antitrust law. So long as a manufacturer unilaterally announces a MAP policy in advance, and then, without negotiation, refuses to deal with anyone who fails to comply with the MAP policy, the manufacturer will be on safer ground under the Sherman Act and Cartwright Act.

As soon as a manufacturer fails to enforce its MAP policy (or negotiates different terms) with one retailer, but enforces it with another, there is a risk that the unequal treatment will be viewed as (i) an illegal conspiracy with the first retailer to harm the second retailer in violation of the Sherman/Cartwright Act; or (ii) unfair competition in violation of California Business and Professions Code §17200 et seq. Similarly, if manufacturers agree amongst each other to implement similar MAP policies for their retailers, this would no longer constitute a unilateral policy, and would fall under the prescriptions of the Sherman and Cartwright Act. See In the Matter of National Association of Music Merchants, Inc. (FTC File No. 001 0203) (FTC filed charges against a music trade organization for facilitating agreements among music manufacturer dealers on MAP policies, and a consent order followed).

In advance, implementation of a unilateral MAP policy sounds easy enough – that is, until a large and/or very important retailer decides to disregard the MAP policy. At that point, dropping the retailer may seem like an intolerable business decision.  Prior to implementing any MAP policy, manufacturers must consider whether they are willing to enforce MAP equally for all retailers, regardless of size or market power. If not, the risk of liability for antitrust and unfair competition could outweigh the potential benefits of the MAP policy.

Best Practices for Implementation of MAP Policies

Given developments in case law and advances in web technology, manufacturers should consider the following best practices when deciding if and how to implement a MAP Policy:

  • Expressly allow the retailer to control end prices in the text of any MAP Policy. Whether it is through coupon codes, loyalty points, or calling in for prices, retailers must have opportunities to set sales prices at checkout.
  • Follow the Colgate Doctrine and strictly enforce MAP policies. Negotiations with retailers or other manufacturers can lead to antitrust liability.
  • Combat Smart Web Crawlers. Consider including data security and Terms of Use provisions to any “authorized reseller” agreements with retailers to avoid the MAP-defeating effects of web crawlers.
  • Determine whether the risks of enforcing strict MAP policies on consumer retention outweigh the benefits of higher advertised prices.
  • Determine whether the risks of enforcing a MAP policy, and losing a major distributor, outweigh the benefits of higher advertised prices.

What’s Next?

Online retail is continuously evolving. While web crawlers, flash sales, social media events, and discount coupons may be popular today, innovative marketers – and hackers – are always looking for the next technological edge (­live-action coupons and rick rolling on virtual reality headsets?). Since antitrust case law and legislation will always be one step behind the next technological ‘surprise’, manufacturers and lawyers alike must consider MAP policies and distribution practices in anticipation of industry disruption, and be able to adapt accordingly.

 

[i] Cf. Worldhomecenter.com, Inc. v. L.D. Kichler Co., 2007 WL 963206(E.D.N.Y. March 28, 2007). In this pre-Leegin decision, the court denied defendant’s motion to dismiss a Sherman Act claim, when plaintiff argued that a MAP policy constituted vertical price fixing. In this case, the MAP policy at issue did not give retailers the opportunity to provide different online prices at checkout.  The KWC court expressly declined to follow the reasoning of Kichler. Despite the failure of court’s to follow the reasoning of Kichler, this case serves as a cautionary tale to any manufacturers that wish to impose strict MAP policies across a retailer’s website.

[ii] https://www.pcisecuritystandards.org/

[iii] In Blind Doctor Inc. v. Hunter Douglas, Inc., 2004 WL 1976562 (N.D. Cal 2004) the court upheld a MAP policy that restricted all online sales of certain “proprietary products” in the window covering industry (blinds, shades etc.). This is another extreme strategy for avoiding online price wars – obviously not applicable for most products.

[iv] Franke, 2011 WL 2565284 *5; KWC, 2011 WL 4352390 *5.

[v] People v. Tempur-Pedic Int’l, Inc.,No. 400837/10 (N.Y. Sup. Ct. 2011); People v. Bioelements, Inc., No. 10011659 (Cal. Super. Ct. 2010); People v. Dermaquest,Inc, No. RG10497526 (Cal. Super. Ct. 2010). For more details on the risks of RPM policiessee “Minimum Advertised Pricing Programs: Practical Pointers in the Wake of Leegin”, available at http://www.edwardswildman.com/insights/PublicationDetail.aspx?publication=1834

 

*Disclaimer* This article is not legal advice or legal opinion, and the contents are intended for general informational purposes only. Circumstances may differ from situation to situation.