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Navigating Your Commercial Lease Agreement During Inflation

Posted: June 22nd, 2022

By: Arthur Yermash, Esq. email

Tags: ,

Rising inflation is influencing virtually every aspect of life. For commercial landlords and tenants alike, it is more important than ever to focus on rent escalation provisions in your commercial lease agreement.

Instead of fixed and consistent increases in rent, some commercial leases provide for rent to increase in line with certain economic metrics: for example, the consumer price index. This is especially relevant as it relates to tenant renewal options. Where inflation is especially notable, as has been the case this year, rent increase formulas that rely on economic metrics to calculate an increase in rent may yield unexpectedly high rent for a commercial tenant, and may result in an unexpected windfall for a commercial landlord. Since the commercial real estate market relies on certain market equilibrium, unexpected or unanticipated increases in formulaic rent may have unintended disruptive market consequences. Focusing on these issues now will help minimize disputes and non-payment for commercial landlords and business risk for commercial tenants.

Negotiating Your Commercial Lease Agreement

For commercial landlords, protecting property interests and maintaining consistent profitability are two focal points when drafting and negotiating a commercial lease agreement. For commercial tenants, managing risk and expense (as well as future increases) is a vital part of negotiating a commercial lease agreement. Inflation and rent escalation clauses go hand in hand – when inflation rises, rents rise along with it. While inflation is not a new economic concept, rising inflation at unusual rates does create unanticipated results.

Clarity on rent and rent increase is an integral part of any lease. Most commonly, commercial leases provide for annual rent increases at a fixed rate. Sometimes, these increases are not annual, but every few years. Where things become more complex is when increases are tied to economic metrics. As we address the four common commercial lease rent structures, it is important to think about these in the context of periods of high inflation. 

Common Forms of Rent Escalation

  1. Fixed Increases (also known as Stepped or Percentage Increases) allow landlords to increase rent by a set amount at specific points in the duration of the lease agreement. This is one of the most popular options because it is a relatively straightforward method. However, a landlord may feel cheated out of profits if costs have gone up and a tenant may feel like they lost out on potential savings if costs have gone down.
  • Pass Through Escalation is a form of rent escalation that is initiated only when the landlord experiences an increase in costs that have been specified in the commercial lease agreement. This is most common in scenarios where a commercial tenant is responsible for compensating landlord for building operating expenses.
  • Direct Operating Cost Escalation is similar to the Pass Through option, except here the escalation is based on the increases of all the operating costs such as utilities, security, and maintenance.
  • Indexed/Variable Escalation (Consumer Price Index or another inflation index) – This option allows landlords to increase rent when an established index rises. Often, a cap will be included on how much the rent can go up in a year. This option is not favorable to tenants because index increases can be very unpredictable and dramatic.

Understanding the various rent escalation options is critical for commercial landlords and tenants negotiating new leases.

For existing leases that have rent escalations tied to inflation risk, it is critical to understand how the current economic environment will impact future rent. A common issue is whether a commercial tenant should exercise a right it may have in the lease to renew. Often, tenant renewal options provide for rent to be calculated using market metrics. Conceptually, this generally works well where the economic environment is stable and inflation is low. In such cases, the formulaic rent escalations adjust the rent to where the market suggests it should be and mostly everyone is satisfied. However, in situations where the economic market is unstable and inflation is especially high, the formulaic rent escalations could adjust the rent to extreme amounts not expected by landlords or tenants. For tenants, this could create an increase in rental expenses beyond what may been budgeted or sustainable by the business. For landlords, this could create scenarios where multiple tenants are unable to afford the drastically increased rent, leading to higher rate of default.

Ultimately, by highlighting and focusing on the impact of inflation on commercial rent increases, our goal is to shed light on this critical but often overlooked legal and business issue.

Here at CMM, we help clients – whether they are landlords or tenants – navigate how to structure the commercial lease agreement and the rent escalation provisions. We would be happy to help businesses navigate their existing leases to assist with making sound business decisions in light of existing rental escalation framework. 

Please contact us to discuss options.

Thank you to Ashley Cohen, Esq. for her contributions to this article.

The information contained in this article is provided for informational purposes only and is not and should not be construed as legal advice on any subject matter. The firm provides legal advice and other services only to persons or entities with which it has established an attorney-client relationship.

Sexual Harassment Prevention: What Municipalities Need to Know

Posted: May 19th, 2022

By: Christine Malafi, Esq. email

Tags: ,

Several laws were recently enacted in New York to expand protections for victims of sexual harassment in the workplace. Here, we (1) summarize these new laws, (2) discuss specific considerations for municipalities, (3) highlight new obligations imposed on municipal contractors, and (4) outline several key requirements that all employers must utilize in the workplace.

Expansion of Sexual Harassment Prevention Laws

Definition Expansion

One recent law expanded the scope of anti-discrimination protection under New York’s Human Rights Law by amending the definition of “covered employer,” which, in turn, created a new class of protected employees. Specifically, New York State and its cities, counties, towns, villages, and other political subdivisions, are now considered employers of any employee or official, including elected officials at both the state and local level, persons serving in any judicial capacity, and persons serving on the staff of any elected official.[1] 

The new law also prohibits any activity that subjects employees to inferior terms, conditions, or privileges of employment, regardless of whether the activity is severe or pervasive. Though there may be a defense if the alleged act was a “petty slight or trivial inconvenience,” neither a formal complaint nor a showing that a similarly situated employee was treated more favorably is required to sustain a harassment claim. Moreover, attorney’s fees may be awarded in all such cases.

In addition to employees, these protections also cover contractors, subcontractors, vendors, consultants, and other non-employees working or providing services in the workplace. 

Confidential Hotline

Another new law,[2] effective as of July 14, 2022, launches a statewide, confidential hotline to report sexual harassment in both the public and private sectors. The hotline will be operated by the New York State Division of Human Rights, which will work with attorney organizations to recruit experienced attorneys to provide pro bono assistance to those utilizing the hotline. 

Release of Personnel Records Constitutes Retaliation

An additional new law prohibits employers from releasing or “leaking” personnel records as retaliation against employees who file claims of harassment. The law also allows the attorney general, upon information and belief, to commence a proceeding in state court against employers who have violated or may violate the prohibition against retaliation.[3]

Confidentiality and Arbitration Prohibited in Some Cases

Recent legislation also establishes prohibitions against confidentiality and arbitration in certain cases.  As to confidentiality, all employers are prohibited from utilizing confidentiality agreements in the settlement or resolution of any claim involving sexual harassment, unless confidentiality is the complainant’s preference.  Further, the confidentiality provision must be provided to all parties, and the complainant will have 21 days to consider the provision. If the complainant agrees to the confidentiality provision, it must be stated in a separately executed written agreement, which agreement is subject to revocation by the complainant within seven days after signing.[4]

Mandatory arbitration provisions are likewise barred in contracts relating to claims of sexual harassment, except where permitted by federal law.[5] In fact, employers are only permitted to incorporate a non-prohibited clause or other mandatory arbitration provision within a contract if the parties all agree.[6] 

Likewise, at the federal level, “Ending Forced Arbitration of Sexual Assault and Sexual Harassment Act of 2021,”[7] signed by President Biden on March 3, 2022, prohibits employers from forcing workplace sexual harassment or assault claims to be resolved by arbitration, even if such an agreement was already signed. Disputes as to whether the Act applies in any given situation are to be decided by a court, not an arbitrator. Further, the Act applies to any dispute or claim that arises or accrues on or after the signing date.

Additionally, in the event of  any conflict between a collective bargaining agreement and the new law, the law specifies that the collective bargaining agreement shall control.[8]

Some Municipality-Only Considerations

The expansion of sexual harassment prevention laws also imposes several municipality-specific obligations.

Municipalities, for example, are barred from defending and indemnifying employees for (1) acts committed outside of the scope of their employment; (2) intentional wrongdoing and recklessness on the part of the employee; and (3) punitive damages.

Further, pursuant to a new section of the New York Public Officers Law, both paid and unpaid employees who are adjudicated to have committed harassment must reimburse the public entity responsible for paying out the harassment claim. If the employee fails to reimburse the public entity within 90 days of the public entity’s payment of the award, the public entity can garnish the employee’s wages.[9] 

Similarly, an additional amendment to New York Public Officers Law adds analogous legislation applicable to employees of New York State and its agencies.[10] Even if a municipality’s investigation reveals that the employee acted appropriately, there is always a chance that a final judgment could find that the employee was individually liable if the litigation proceeds to a hearing before an administrative agency or trial.

The question may be whether the fact that the employee may ultimately have to pay a judgment personally creates a conflict of interest in both the strategy of proceeding to trial on a case or deciding to settle, as well as in the defense of a claim.

Municipal Contractors

New legislation also imposes requirements on contractors that contract with the state, or any state department or agency, where competitive bidding is required. As of January 1, 2019, all such contractors are required to submit a certification with all bids, under penalty of perjury, that the bidder (1) has implemented a written policy addressing sexual harassment prevention in the workplace and (2) provides annual sexual harassment training to all its employees. Further, the written policy and annual training must meet the newly imposed requirements under section 201-g of the New York State Labor Law.[11] It is in the discretion of the state department or agency to require the certification of contracts for services that are not subject to competitive bidding.[12] 

If the contractor fails to meet the certification requirements, it must provide a signed statement detailing the reason for its failure to do so.[13] Otherwise, the contractor’s bid will not be considered.

Takeaways

Considering the recent expansion of legislation addressing sexual harassment in the workplace, all employers, including public entities, must expend resources and educate employees on preventing sexual harassment in the workplace to avoid liability. To that end, below is a list of several key requirements that all employers should adopt in the workplace:

  1. Adopt a model sexual harassment policy
  2. Include a standard complaint form
  3. Have a written procedure for the timely and confidential investigation of complaints and ensure due process for all parties
  4. Post required notices in the workplace
  5. Give the annual interactive training on sexual harassment to all employees (and possibly independent contractors)
  6. Make sure supervisory employees know their responsibilities for the prevention of sexual harassment

Thank you Josh Valentino, Esq. for his contributions to this article.


[1] N.Y. Exec. Law § 292.

[2] N.Y. Exec. Law § 295(18).

[3] N.Y. Exec. Law § 296.

[4] N.Y. Gen. Obligations Law § 5-336.

[5] N.Y. Civ. Prac. L&R § 5003-b.

[6] N.Y. Civ. Prac. L&R § 7515(4)(b)(ii).

[7] 9 U.S.C. Chap. 4 §§ 401-402.

[8] N.Y. Civ. Prac. L&R § 7515(4)(c).

[9] N.Y. Public Officers Law § 18-a.

[10] N.Y. Public Officers Law § 17-a.

[11] N.Y. Finance Law § 139-1(1)(a).

[12] N.Y. Finance Law § 139-1(1)(b).

[13] N.Y. Finance Law § 139-1(3).

The information contained in this article is provided for informational purposes only and is not and should not be construed as legal advice on any subject matter. The firm provides legal advice and other services only to persons or entities with which it has established an attorney-client relationship.

Maintaining Client Confidences: Ethical Considerations for Attorneys When Posting on Social Media

Posted: May 5th, 2022

By: Patrick McCormick, Esq. email

Published In: The Suffolk Lawyer

Tags:

So, you want to brag about your latest courtroom victory or closed deal on social media.

Congrats on your win! But be mindful: unless you have informed consent from your client, any social media bragging could reveal confidential client information and result in a violation of the Rules of Professional Conduct. (Yes, even if you share information or facts in the public record such as a trial verdict.)

Maintaining Client Confidences

The New York Rules of Professional Conduct 1.6 defines confidential information as “information gained during or relating to the representation of a client, whatever its source, that is (a) protected by the attorney-client privilege, (b) likely to be embarrassing or detrimental to the client if disclosed, or (c) information that the client has requested be kept confidential.”[i] (The ethical obligations concerning client confidentiality and confidential information are distinct from the rules of the evidentiary attorney-client privilege. The intersection of attorney-client privilege and social media is not addressed in this article.)[ii]

Maintaining client confidences and confidential information applies to any and all attorney social media activity. While each situation is fact-specific, attorneys should keep a few things in mind when deciding whether and what to post on social media (and beyond).

New York Rules of Professional Conduct

Rule 1.6(a)

The rules protecting client confidential information are outlined in the New York Rules of Professional Conduct (effective April 1, 2009, and amended through June 24, 2020). According to Rule 1.6(a), a lawyer shall not knowingly reveal confidential information or use such information to the disadvantage of the client or for the advantage of the lawyer or a third person.

Rule 1.6 confirms that confidential information (as defined above) does not include a lawyer’s legal knowledge and/or research. Confidential information does not include information that is generally known in the local community or in the trade, field, or profession to which the information relates. However, as noted in the commentary to Rule 1.6, the fact that information may be part of a publicly available file or a result is in the “public domain” does not make the information “generally known.”

Under Rule 1.6(a), client confidentiality must be maintained unless:

  1. The client gives informed consent
  2. The disclosure is impliedly authorized to advance the best interests of the client

So if you close a deal for a high-profile client and that client gives you permission to post about it, then you can go ahead with your brag post.

However, if an attorney does not receive informed consent from their client, Rule 1.6(a) cannot be skirted by using an anonymous post that’s anything but anonymous. For example, a Twitter rant talking about client xx, her new SNL boyfriend, and her divorce from a famous rapper who sent her threats online would raise some eyebrows. That’s because while the client technically remains anonymous, there are glaring identifiable descriptors of the client. Anonymous posts must truly be anonymous. Your legal blog can’t say your client is Jim Jardashian under the guise of anonymity. A lawyer’s ethical obligations do not just disappear because an interaction occurs online.

These principles apply to all social media activity including posting on platforms such as Instagram, LinkedIn, Facebook, Twitter, Snapchat, and TikTok. But the required analysis is not limited to posting on social media; the same analysis also applies when lawyers respond to online reviews or reply to online comments, or when posting blogs or on websites. Client confidences must be maintained throughout all these different interactions, and lawyers should understand how the platforms they are using work before using them and consider if any of their online activity places client information and confidences at risk.[iii]

Rule 1.6(b)

Sometimes, a lawyer might need to reveal or use confidential information. Such disclosure is allowed only in circumstances that a lawyer believes necessary under Rule 1.6(b), which says confidential information can be revealed:

  1. To prevent reasonably certain death or substantial bodily harm
  2. To prevent the client from committing a crime
  3. To withdraw a written or oral opinion or representation previously given by the lawyer and reasonably believed by the lawyer still to be relied upon by a third person, where the lawyer has discovered that the opinion or representation was based on materially inaccurate information or is being used to further a crime or fraud
  4. To secure legal advice about compliance with these Rules or other law by the lawyer, another lawyer associated with the lawyer’s firm or the law firm
  5. To defend the lawyer or the lawyer’s employees and associates against an accusation of wrongful conduct or to establish or collect a fee
  6. When permitted or required under these Rules or to comply with other law or court order

But while Rule 1.6(b) sets out certain situations in which a lawyer can disclose confidential information, attorneys must consider that Rule 1.6(c) requires the lawyer to make reasonable efforts to prevent the inadvertent or unauthorized disclosure or use of, or unauthorized access to, information protected by Rules 1.6, 1.9(c), or 1.18(b). (Rule 1.6 refers to confidentiality of information as referenced above in parts a, b, and c. Rule 1.9(c) refers to confidentiality rules and protections for former clients, and Rule 1.18(b) refers to confidentiality rules and protection for prospective clients.) Given the public nature of online communications, social media and other postings are almost certainly not the appropriate forum for disclosures that might otherwise be permissible.

Conclusion

Essentially, lawyers have the ethical responsibility to former, current, and prospective clients to keep information learned during or relating to the representation of a client confidential. Unless your client has given you permission to disclose the information you’re posting, or disclosure is otherwise authorized under Rule 1.6(b), you’re bound by the ethical rules of client confidentiality. Each scenario is fact-specific, so here’s your friendly reminder to be careful with what you post on social media. And congrats on landing Jim Jardashian as a client!


[i] NYRPC §1200 (Rule of Professional Conduct 1.6)

[ii] N.Y.C.P.L.R. §4503

[iii] NYSBA, of the Social Media Ethics Guidelines, June 20, 2019, at No. 5.E

The information contained in this article is provided for informational purposes only and is not and should not be construed as legal advice on any subject matter. The firm provides legal advice and other services only to persons or entities with which it has established an attorney-client relationship.

2021 Was a Record-Breaking Year for M&A – How Does 2022 Compare?

Posted: April 11th, 2022

By: Vincent Costa, Esq. email, Marc Saracino, Esq. email

2021 was a record-breaking year for M&A deals. Global deal value rose to an unprecedented $5 trillion, smashing the previous record of $4 trillion set in 2007. In the United States alone, deal value records rose to $2.6 trillion, doubling the deal value of 2020.

Given that new records were set in the United States and all over the world in 2021, demand for M&A deals is clearly on the rise and many business owners and private equity firms are racing to find undervalued targets in 2022.

You may have already heard about Microsoft’s recent plans to acquire Activision Blizzard, one of the largest video game companies in the United States, for $68.7 billion, and that’s not all that’s swirling in the M&A-sphere in the first half of 2022. Some potential M&A targets for 2022 include well-known companies such as the fitness giant, Peloton, Kohl’s, and a leader in clean technology, Petroteq Energy (with offers already presented to Kohl’s and Petroteq).

Let’s take a look at the some of the heavy hitters that are already making headlines in the following key sectors, as well some deals that are on deck:

Technology

Technology was a coveted industry for US and global M&A deals in 2021. According to the PwC Global M&A 2022 outlook, new market opportunities, tech convergence, and an abundance of capital are paving the way for deal-making opportunities across the technology sector in 2022.

Tech advancements led to significant industry growth in 2021, which means more M&A deals in 2022. PwC predicts hotspots in the areas of crypto and NFTs as emerging markets are established. Moreover, with the pandemic coming to an end, business owners will begin to seek opportunities for consolidation, which will lead to an insurgence of M&A deals in 2022.

CMM attorneys were at the forefront of the tech M&A wave in 2021, representing an artificial intelligence tech leader in a complex recapitalization and M&A transaction in which CMM helped negotiate the terms of a multimillion-dollar loan agreement.

As for how tech deals are already playing out, Microsoft’s acquisition of Activision Blizzard could be the biggest tech/entertainment M&A deal in 2022. Another hot M&A deal announced in Q1 is Sony’s plan to buy Bungie, a gaming company, for $3.6 billion. Citrix, the cloud computing and virtualization company, has reported that they are being acquired by private equity firms Vista Equity Partners and Evergreen Coast Capital for $16.5 billion.

Healthcare & Pharmaceuticals

Deals in this sector rose to $288.9 billion in the US with SPAC (Special Purpose Acquisition Company) mergers playing a strong role in driving activity. In their 2022 M&A outlook, PwC predicts healthcare services consolidation and re-sale to lead M&A deals within this sector. We will also likely see more cross-border expansion and consolidation of private clinic and specialist care providers.

Proving the trend predictions correct, CMM already successfully represented a New York vet practice in the multimillion-dollar sale of its business to a larger partnership focused on acquiring vet practices around the tri-state area.

According to Digital Health Business & Technology’s data, there have already been 65 M&A deals in the digital health sphere in the first quarter of 2022. Additionally, several healthcare companies have been named targets for 2022 such as Health Gorilla and Summus Global. 

Manufacturing & Aerospace

Within the manufacturing industry, PwC also predicts strong M&A activity in 2022 as companies target vertical integration and operational consolidations. Likewise, as air passenger numbers increase in 2022, M&A activity in the aerospace and defense industry will also increase.

CMM attorneys recently represented a leading manufacturer in the sale of its business, assets, and property, resulting in a multimillion-dollar transaction. The team also negotiated and closed a complex transaction in the aerospace field, selling a family-owned aerospace supplier’s business to a Connecticut-based private equity firm.

As for deals already happening in the first quarter of 2022, Frontier Airlines and Spirit Airlines, the two largest discount carriers in the United States, have announced a merger in a deal valued at $6.6 billion. Private flying is also growing more common, a trend already reflected in aerospace M&A with Vista Global Holding announcing their acquisition of the U.S. charter operator Jet Edge for an undisclosed amount.

CMM’s Most Recent M&A Deals

With the second quarter of 2022 underway, we already see 2022 M&A heating up. Curious to see what CMM has been up to recently in the M&A space?

View the firm’s recent M&A highlights here

The information contained in this article is provided for informational purposes only and is not and should not be construed as legal advice on any subject matter. The firm provides legal advice and other services only to persons or entities with which it has established an attorney-client relationship.

Supreme Court Tetris: How Social Media and First Amendment Rights Fit Together

Posted: February 22nd, 2022

By: Joe Campolo, Esq. email

Tags:

Social media meets freedom of speech: a complicated topic I predicted would be debated among lawmakers more than 25 years ago when I first encountered Section 230 of the Communications Decency Act. Essentially, Section 230 shields internet service providers (and now – although they did not exist when the law was first passed – social media platforms) from legal liability for the content of what a user on its platform may post. This legislation was passed in 1996, and now, more than two decades later, Section 230 continues to be entangled in the web of freedom of speech online, the layers continuing to build as technology develops.

As the internet and social media grow in power, a recent case from Australia’s Supreme Court examines the role of free speech when it comes to social media platforms. And while not in the United States, in the end, a new precedent was set for media outlets being held liable for comments on their Facebook page. Let’s take a closer look.

Fairfax Media Publications Ltd v Dylan Voller; Nationwide News Pty Limited v Dylan Voller; Australian News Channel Pty Ltd v Dylan Voller

Across the globe in the land down under, Australian courts recently faced a case related to freedom of speech and social media. In this case, the Australian Broadcasting Corporation (ABC) had aired an investigative report about the mistreatment of a young man named Dylan Voller while he was in a youth detention center. Voller was a troubled youth in and out of juvenile detention since he was 11 years old for car theft, robbery, and assault. During his time at one of these correctional centers, footage of Voller in a restraining chair and wearing a spit hood was aired on an ABC TV program Four Corners. The footage led to an investigation into youth detention facilities. Media companies published additional stories about Voller’s life after this initial coverage and published links to their stories on their public Facebook pages.

In the comment sections of the media companies’ Facebook pages, many Facebook users who read the stories countered that Voller had indeed committed violent crimes and said that he beat a Salvation Army officer, causing him serious injury. Voller disputed the allegations and sued the three media companies involved for defamation, alleging that they were publishers of third-party Facebook comments. The media companies included Nationwide News, Fairfax Media Publications, and Australian News Channel.

The Supreme Court of New South Wales found in 2020 that the media companies could be considered publishers of comments left by third-party users on their public Facebook pages. The Court reasoned that the media companies had the capability to moderate and hide vulgar comments but chose not to do so. The High Court of Australia (the highest court in Australia) upheld this ruling in 2021, staring that the outlets that post links to their articles on social media are liable for comments that they invite by posting on social media platforms.

This decision is significant for media companies with public social media pages where there are often thousands of comments posted by others. This ruling has already inspired change all over the world with Facebook recently allowing publishers to switch off comments and encouraging teams to monitor their comments section more rigorously.

Indeed, the Australian government is now proposing a new bill directly in response to this decision that would hold media companies liable for defamatory comments. The only way to avoid liability would be to make sure trolls can be identified and disclosed to victims as well as any defamatory comments removed.

Bringing It Back Home

So what does this mean for the United States? It all comes back to Section 230 of the Communications Decency Act. While Facebook itself cannot currently be held liable for the content that users post on their platforms due to Section 230, perhaps the future will see media outlets held liable in the United States as well. Indeed, the COVID-19 pandemic has thrust this issue into the limelight as misinformation has spread rampantly through social media platforms. 

Several bills have already been introduced with the goal of addressing COVID-19 misinformation and stripping away social media platforms’ Section 230 liability shield. One such bill is the Health Misinformation Act. Introduced by Senator Klobuchar in late 2021, the bill seeks to amend Section 230 to hold social media outlets such as Facebook and Twitter liable for the promotion of health misinformation related to any existing public health emergency, such as the COVID-19 pandemic.

It remains to be seen if and when Section 230 will be amended, but the legislation is starting to garner more and more attention as social media and free speech issues clash. In the meantime, the United States should look at the Australian decision and the outrage at public health misinformation for what it is: a warning of what’s to come as the web of social media and First Amendment rights continues to tangle.

The information contained in this article is provided for informational purposes only and is not and should not be construed as legal advice on any subject matter. The firm provides legal advice and other services only to persons or entities with which it has established an attorney-client relationship.

The First Amendment, Social Media, and Off-Campus Speech: SCOTUS Weighs In

Posted: February 9th, 2022

By: Joe Campolo, Esq. email

Tags:

What is going on in Pennsylvania? In November 2021, the Supreme Court of Pennsylvania affirmed the Commonwealth Court’s conclusion that a school district had improperly expelled a student, J.S., after J.S. had accused another student on social media of being a school shooter – outside of the school day and off school property. While the school district claimed that J.S.’s posts substantially disrupted the school environment, both the Commonwealth and Supreme Courts of Pennsylvania concluded that J.S.’s speech was protected under the First Amendment.

A few weeks later, in January 2022, the Commonwealth Court concluded that a Pennsylvania school district’s decision to expel a student, G.S., violated his constitutionally protected right to free speech. This expulsion resulted from the school district’s determination that G.S. posted a harassing and terroristic threat on the social media platform Snapchat in the form of violent song lyrics (“Everyone, I despise everyone! F*** you, eat sh*t, blackout, the world is a graveyard! All of you, I will f***ing kill off all of you! This is me, this is my, snap!”) that disrupted the school environment.

These cases came on the heels of another Pennsylvania case in which a school district suspended a student based on off-campus speech on social media. In this case, a cheerleader, B.L., essentially cursed out her high school on social media when she didn’t make the varsity team and was suspended from the junior varsity team as a direct result. Sound familiar? This case broke headlines last summer due to the perceived oddity of the Supreme Court weighing in on a cheerleader’s suspension. And while the case may seem utterly ridiculous at first blush, its impact on off-campus student speech remains important, especially as 2022 gets underway.

Tinker v. Des Moines Independent Community School District

To understand the First Amendment cheerleader case, Mahanoy Area School District v. B.L., it’s necessary to first address the 1969 landmark decision Tinker v. Des Moines.[1]

Tinker stemmed from a group of Des Moines public school students who wore black armbands to school to show their support for ending the Vietnam War. After the students were sent home for wearing the armbands, they sued the school district for violating their First Amendment rights. The District Court dismissed the case, holding that the school district’s actions were reasonable to uphold school discipline. The U.S. Court of Appeals for the Eighth Circuit affirmed.

When the case reached the Supreme Court, the Court decided that public schools could regulate student speech that “materially disrupts classwork or involves substantial disorder or invasion of the rights of others.” However, in their decision, the Supreme Court pointed out that students do not lose their First Amendment right to freedom of speech when they step onto school property. A school cannot take action to limit a student’s freedom of speech out of fear of possible disruption rather than any actual interference.

Since then, in Hazelwood v. Kuhlmeier[2] in 1988 and Morse v. Frederick[3] in 2007,the Supreme Court has held that student speech can be regulated when indecent speech is uttered on school grounds, promotes illegal drug use, or that others may reasonably perceive as “bearing the imprimatur of the school” such as in a school-sponsored newspaper. These instances of regulation combined with the ruling that schools can regulate speech that rises to disorder, such as in Tinker, create a set of characteristics that gives schools additional license to regulate speech that takes place off-campus.

Mahanoy Area School District v. B.L.[4]

The Supreme Court ultimately revisited the issue in the April 2021 “cheerleader case.” Pennsylvania high school student B.L. tried out for her high school’s varsity cheerleading team as a freshman. After learning that she made only the J.V. team, B.L. posted a Snapchat story while she was at a local store (not at school) with the caption: “F*** school f*** softball f*** cheer f*** everything.” After B.L.’s friends on Snapchat and members of the cheerleading team saw the post, the message spread to the coaches and school administration, and the school ultimately decided to suspend B.L. from cheerleading for the upcoming year.

B.L. and her parents subsequently filed suit against the school district in the Middle District of Pennsylvania. The District Court found in B.L.’s favor, finding that her speech was made outside of school and did not cause substantial disruption as outlined in Tinker. The Court ordered the school to reinstate B.L. to the J.V. team. On appeal, the Third Circuit[5] affirmed the District Court’s conclusion that the school district’s punishment violated B.L.’s First Amendment rights; however, the Third Circuit added that Tinker did not apply because schools cannot regulate student speech occurring off campus. The school district then filed a petition for certiorari with the Supreme Court, asking the Court to decide “[w]hether [Tinker]…applies to student speech that occurs off campus.”

When news of this case first broke, many people scratched their heads and wondered how a high school cheerleader’s case about being kicked off the team made it all the way to the Supreme Court. Well, the Supreme Court decided in 1969 in Tinker that schools can regulate on-campus speech if it involves substantial disorder. Now, with this case, the Supreme Court could have made history by addressing a public school’s involvement in regulating off-campus speech. (Not so frivolous, after all.)

In the Court’s June 2021 opinion written by Justice Breyer, the Court noted that three features of off-campus speech often block a school’s efforts to regulate it. These features include that (1) a school rarely stands in loco parentis (in place of a parent); (2) off-campus speech combined with on-campus speech means all the speech a student utters during the full 24-hour day; and (3) since America’s public schools are “the nurseries of democracy,” schools should have an interest in protecting a student’s unpopular expression.

So, what did the Supreme Court decide? The Court found that the school district violated B.L.’s First Amendment rights in suspending her from the team. However, while this decision affirmed the Third Circuit decision, the Supreme Court clarified that schools can regulate some off-campus speech including serious or severe bullying, threats, and breaches of school security devices including material maintained within school computers. Even with this clarification, the Supreme Court declined to set forth a list of what constitutes as off-campus speech or a test to identify it.

Justice Breyer wrote, “We hesitate to determine precisely which of many school-related off-campus activities belong on such a list. Neither do we now know how such a list might vary, depending upon a student’s age, the nature of the school’s off-campus activity, or the impact upon the school itself. Thus, we do not now set forth a broad, highly general First Amendment rule stating just what counts as ‘off campus’ speech and whether or how ordinary First Amendment standards must give way off campus to a school’s special interest to prevent substantial disruption of learning-related activities.” The Court clearly believes that context matters when determining what qualifies as off-campus speech.

Sure, context matters. For instance, consider G.S. from the opening of this article. Was he just posting song lyrics, or was he posting violent threats that he would later carry out? And was J.S. bullying a fellow classmate by suggesting the classmate looked like a school shooter, or was he pointing out legitimate harm that the fellow student posed? It’s a thorny subject, one the Supreme Court nimbly dodged by suggesting that each individual case should be considered “in context.”

One of my previous SCOTUS blogs examined how individual Supreme Court justices use their published opinions and dissents to ask for a case that would challenge a precedent set by a prior case. The Supreme Court used Mahanoy to do something similar by inviting other litigants to come forward with cases in which the Court would be able to set forth a First Amendment rule clarifying what counts as off-campus speech. The Court’s decision highlights how they really used this case as an example, leaving it to future cases “to decide where, when, and how” off-campus speech can be regulated by school districts in connection with the First Amendment.

As Justice Alito put it in his concurring opinion (and as cited in the Supreme Court of Pennsylvania Middle District in the J.S. case), “If today’s decision teaches any lesson, it must be that the regulation of many types of off-premises student speech raises serious First Amendment concerns, and school officials should proceed cautiously before venturing into this territory.”

Lessons Learned

Turns out that a case about a cheerleader being kicked off her team due to a vulgar social media outburst opened the door to much more. Mahanoy had the power to force the Supreme Court to decide on the constitutionality of a public school’s right to regulate off-campus student speech. And while the Court determined that the school had violated B.L.’s First Amendment rights, the Court did not use the case to set a precedent on student speech made off-campus…and via social media.

This isn’t the last time a case will force courts to consider and reconsider Tinker as it applies to off-campus student speech. And as technology develops, it’s only a matter of time before the Supreme Court confronts the intersection between off-campus school speech and social media again. As Pennsylvania’s courts have already seen, more school districts will be facing the crossroad between taking action against students and their off-campus speech while at the same time not violating their First Amendment rights.

And while some of the school districts discussed here seemed perhaps a bit too eager to suspend or expel their students, the fact remains that school districts are often stuck in a difficult spot when balancing their students’ First Amendment rights with legitimate concerns about protecting students from bullying and potential violence.


[1] Tinker v. Des Moines Sch. Dist., 393 US 503 (1969).

[2] Hazelwood Sch. Dist. v. Kuhlmeier, 484 U.S. 260 (1988).

[3] Morse v. Frederick, 551 U.S. 393 (2007).

[4] Mahanoy Area School District v. B. L., 594 U.S. ___ (2021).

[5] B.L. v. Mahanoy Area Sch. Dist., 964 F.3d 170 (3d Cir. 2020).

The information contained in this article is provided for informational purposes only and is not and should not be construed as legal advice on any subject matter. The firm provides legal advice and other services only to persons or entities with which it has established an attorney-client relationship.

Mergers and Acquisitions Primer: Capital Gains vs. Ordinary Income Tax

Posted: February 1st, 2022

By: Christine Malafi, Esq. email

This article is for informational purposes only. For tax advice or guidance, please consult your accountant directly.

The most common forms of businesses include sole proprietorships, partnerships, C-corporations, and S-corporations. When a business entity is sold, there is a tax impact based on the capital gain and ordinary income realized from the sale. When a business owner sells their business, the capital gain is generally the difference between the adjusted basis and sale price, and the ratio of capital gain v. ordinary income tax depends on the type of business and assets being sold. Let’s take a look at some considerations for different entity types – enough to make conversations with your (or your client’s) accountant slightly less taxing.

Sole Proprietorships

In a sole proprietorship, a sale is treated as if each asset is sold separately. Most assets trigger capital gains taxes, but the sale of some assets, such as inventory and unrealized receivables, are taxed at ordinary income tax rates. It’s important to check with a tax advisor regarding the types of assets that incur ordinary income tax compared to capital gains tax.

Partnerships

For a partnership, the sale of a partnership interest generally results in capital gain or loss treatment to the selling partner. However, any part of the gain or loss from unrealized receivables or inventory items is subject to ordinary income tax rates.

C-corporations

When selling a C-corporation, the choice between structuring the sale as a stock or asset sale impacts the taxes levied. Since C-corporations are not pass-through entities, the company pays taxes on its income, and all income from C-corporations is treated as ordinary income. This means that C-corporations are taxed at ordinary corporate income tax rates as compared to capital gains tax rates.

Stock sale proceeds are taxed at the capital gains rate (single taxation) while asset sale proceeds are taxed at ordinary corporate income rates and then again at the individual level upon distribution to the shareholders (double taxation).

Sellers should be aware that shareholders will be taxed at different rates depending upon the type of distributions that the shareholders receive. For instance, ordinary, non-qualified dividends mean ordinary income rates while qualified dividends that meet certain requirements could mean capital gains rate. This could also be taxed as a liquidating distribution which is taxed at capital gains rates (it may seem like the same thing as a qualified dividend, however, if the individual has capital losses, they could be used to offset such gains).

S-corporations

When selling an S-corporation, both a stock and asset sale generally result in single taxation at the shareholder level. The U.S. Tax Code allows buyers and sellers of the stock of an S-corporation to make a section 338(h)(10) election so that a qualified stock purchase will be treated as an asset purchase for federal income tax purposes.

This election is made jointly by the target shareholders and the purchasing corporation and treats the transaction as if it were an asset sale rather than a stock sale. Although the shareholders sell stock to the buyer, they pay taxes as if they sold the company’s assets.

Since the company itself does not pay taxes on the sale of its assets, the income from the sale of its assets passes through to the shareholders, who are responsible for paying taxes.

Asset sales are calculated individually for each asset. If the company that sells the assets is an S-corporation that was a C-corporation within the last five years, then the S-corporation’s asset sale could trigger corporate-level taxes.

Goodwill

The goodwill of a business, the value of the reputation of the business, is taxed as capital gain income.

Non-Compete Agreements

Most of the time, the owner of a business being sold will agree not to compete with the business being sold for a period of time (and perhaps within a certain geographic area), and a value/portion of the repurchase price will be allocated to this agreement, the value of which will be taxed as ordinary income.

When working with clients on tax issues stemming from the sale of their business, always work with a tax advisor to avoid IRS-related issues regarding capital gains vs. ordinary income taxes.

Thank you Alan R. Sasserath, CPA, MS for his contributions to this article.

The information contained in this article is provided for informational purposes only and is not and should not be construed as legal advice on any subject matter. The firm provides legal advice and other services only to persons or entities with which it has established an attorney-client relationship.

What Employers Should Know About Employee Non-Compete Agreements in 2022

Posted: January 28th, 2022

By: Vincent Costa, Esq. email

Tags: , ,

Employers want to know: will 2022 mark the end of the employee non-compete agreement?

Federal Efforts

In July 2021, President Biden signed an executive order aimed at promoting competition in the U.S. economy. The executive order encourages the Federal Trade Commission (FTC) to ban or limit employee non-compete agreements. According to the Biden administration, this FTC-directed crackdown on non-competes is meant to “curtail the unfair use of non-compete clauses and other clauses or agreements that may unfairly limit worker mobility.” In his remarks last summer, President Biden noted that non-competes not only affect highly paid executives but also tend to unfairly target low-wage earners who should be free to take a better job if given the opportunity.

A non-compete agreement is essentially a contract wherein an employee agrees not to work for or otherwise engage with competing businesses, and/or not to use information learned during employment, when their current employment ends. The purpose of these types of agreements (also known as restrictive covenants) is to avoid competition for an agreed-upon period of time after an employee leaves.

Since the executive order in July 2021, the FTC has not initiated any action or rule regarding non-compete agreements. Part of this delay involves a vacancy on the FTC Committee, which is required to have five members. President Biden recently resubmitted a nomination for Georgetown University Law Professor Alvaro Bedoya, but until the vacancy is filled and a fifth Committee member confirmed, the FTC is unlikely to take concrete action on non-compete agreements.

Besides the Biden administration’s executive order, there have been other federal efforts to prohibit non-compete agreements. First introduced in January 2019, Congress’s Freedom to Compete Act amends the Fair Labor Standards Act of 1938 to prohibit an employer from enforcing or threatening to enforce any non-compete agreement in employment contracts with certain entry-level, lower wage workers. The Act is currently stalled in the Senate Health, Education, Labor and Pensions Committee. 

New York State Efforts

As the law currently stands in New York, non-compete agreements are generally permitted as long as they (1) are necessary to protect the employer’s legitimate business interests, (2) do not pose an undue hardship on the employee, (3) do not harm the public, and (4) are reasonable in time period and geographic scope.

Even if the federal rule change does not come to pass, the future of non-compete agreements in New York could soon change regardless. During her first State of the State address in January 2022, Governor Hochul pledged to ban non-compete agreements in New York State for workers making below the median wage in the state.

Several other states have already amended their own laws pertaining to non-compete agreements. Oregon and Illinois recently prohibited non-competes for certain employees earning less than a certain salary per year. The District of Columbia has completely banned employee non-compete agreements – a law that will go into effect on April 1, 2022.

While federal and state changes remain uncertain, it’s still important for employers to make sure that all agreements, including non-competes, are tailored to best meet their goals within the law’s limits. Please contact our labor and employment team for guidance.

The information contained in this article is provided for informational purposes only and is not and should not be construed as legal advice on any subject matter. The firm provides legal advice and other services only to persons or entities with which it has established an attorney-client relationship.

2022 Changes to Minimum Wage and Overtime Exempt Salary Threshold

Posted: December 21st, 2021

By: Vincent Costa, Esq. email

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As the end of the year is approaching, it is important to remind New York State employers and employees of the increased minimum wages that affect both hourly and salaried employees.

For hourly, non-exempt workers, please see the below chart for basic hourly minimum wage increases that go into effect as of December 31, 2021:

Minimum Wage Increase

Geographic Location / Increase from 2021 2022 Rate
NYC $15.00 per hour (no change)
Nassau, Suffolk, & Westchester / +$1.00 per hr$15.00 per hour
Remainder of New York State / +$0.70 per hr $13.20 per hour

To the extent you or your workforce are paying basic minimum wage, it is important to make sure that the increased wages are reflected as of December 31, 2021.

Tip Credit

New York State also allows employers in certain industries to satisfy the minimum wage by combining a cash wage paid by the employer plus a credit for tips the employee receives from customers. The minimum hourly rates New York employers must pay most tipped employees go into effect as of December 31, 2021:

Service Employees

Geographic Location2022 Rate / Tip Credit
NYC$12.50 / $2.50
Nassau, Suffolk, & Westchester$12.50 / $2.50
Remainder of New York State$11.00 / $2.20

Food Service Employees

Geographic Location2022 Rate / Tip Credit
NYC$10.00 / $5.00
Nassau, Suffolk, & Westchester$10.00 / $5.00
Remainder of New York State$8.80 / $4.40

The “tip credit” rules can be difficult to follow, so it is important to track this information to ensure that tipped employees are receiving at least basic minimum wage, inclusive of tips, when calculating wages.

Increased Salary Threshold for Overtime Exemption

Finally, there are increases in the minimum salary threshold that must be met for exempt employees. As of December 31, 2021, the following minimum salaries must be paid for exempt administrative and executive employees:

Geographic Location2022 Salary Threshold
NYC$1,125.00 p/w ($58,500.00 annually)
Nassau, Suffolk, & Westchester$1,125.00 p/w ($58,500.00 annually)

With the upcoming changes, it is important to update policies and pay practices to stay in compliance.  If you have questions about minimum wage, overtime, or wage and hour exemptions, please contact us here or call (631) 738-9100.

The information contained in this article is provided for informational purposes only and is not and should not be construed as legal advice on any subject matter. The firm provides legal advice and other services only to persons or entities with which it has established an attorney-client relationship.