The U.S. Treasury’s Call for Transparency: What Small Businesses Need to Know

Posted: October 13th, 2022

By: Christine Malafi, Esq. email

As of January 1, 2024, most U.S. businesses with fewer than 20 employees will have to register with the Financial Crimes Enforcement Network (FinCEN) of the U.S. Treasury Department.[1] Read on for what your business needs to know about this new obligation.

The Corporate Transparency Act

In 2021, the Corporate Transparency Act[2] was enacted as part of the National Defense Authorization Act in an effort to better enforce anti-money laundering laws. The law seeks to make it more difficult for business owners to hide unlawfully obtained assets, hide identities, and launder money through the financial system of the United States. The law is also intended to make corporate ownership more transparent. The law became fully effective on September 29, 2022, when the final regulations were issued.[3]

This federal law requires certain business owners to provide the federal government with specific details on the owners of the business, as well as on other persons who benefit from the business operations. A business that must report is called a “Reporting Company,” which the Act defines as a “corporation, limited liability company, or other similar entity that is created by the filing of a document with a Secretary of State or a similar office under the law of a State or Indian Tribe” (so sole proprietorships or partnerships that are not separate entities do not need to report). However, an entity formed outside the United States which registers to do business in a State is subject to the law.

Who Reports What?

Reporting (at approximately $85 per business) is required of those U.S. corporations, LLCs, or similar entities with 20 or fewer employees. Why is 20 employees the threshold? It is believed that most shell companies being used to hide unlawful assets have few, if any, employees.

The largest exemption from filing is believed to be “large operating companies,” those with more than 20 employees, operating in the U.S. (from a physical business address, not a home office) with over $5 million in sales or gross receipts. Additionally, banks, credit unions, insurance companies, accounting firms, public utilities, governmental authorities, security brokers, and others who report ownership to the government under other laws are exempt from registration under the Act.

Existing, active businesses covered by the Act will have one year to report:

  • the company name, trade name(s), business address, state of formation, Employer Identification Number (EIN), and
  • the name, date of birth, residential or business street address, and one unique identification number (i.e., driver’s license, passport, government issued identification) with a copy of the document from which it came, of all “Beneficial Owners,” people who own, substantially control, or create the company (the “company applicant”).

Businesses must make the initial filing, then again every time there is a change in Beneficial Owner status.

Beneficial Owners

A Beneficial Owner is any person who, directly or indirectly, owns or controls 25% or more of the entity, or who exercises substantial control over the entity. Substantial control is defined to include any person who serves as a senior officer, has authority to appoint or remove senior officers or members of the board of directors, or who provides direction or makes decisions about a company’s “important matters.” The ownership or control that triggers reporting obligations may exist in not only corporate or business governance documents, but also through separate contracts, arrangements, relationships, or understandings.

However, Beneficial Owners are not minor children (assuming the child’s parents/guardians are reported), an individual acting solely on behalf of another person (an agent, nominee, custodian, etc.), a non-owner employee of the entity, creditors, or individuals with inheritance interests only.

Penalties

Any changes in Beneficial Owner statuses must be reported within 30 days of the change.

Penalties for willful non-reporting are both civil ($500 per day) and criminal (up to two years in prison and/or a $10,000 fine). The Reporting Companies are required to comply with this reporting law, not the Beneficial Owners themselves. These are most definitely safe harbors, which permit the sidestepping of liability for failure to report.

Safeguarding of Information

The U.S. Treasury Department is tasked to create a database to house the personal information of what is believed to be over thirty million businesses throughout the country.

The database will be accessed only by law enforcement, banks, and the government. FinCEN is responsible for safeguarding the financial system of the United States from illegal activity, including not only money laundering, but also fraud, corruption, and financing of terrorist activities. Ironically, a law intended to combat fraud may lead to potential concerns about safeguarding the sensitive information collected.

For further guidance, compliance information, and updates, please contact us.


[1] According to the New York State Department of Labor figures, in 2021 90% of all businesses on Long Island had between one and 19 employees.

[2] For full text of Act, see https://www.congress.gov/116/bills/hr2513/BILLS-116hr2513rfs.pdf.

[3] See https://bostontaxinstitute.com/wp-content/uploads/2022/09/boston-tax-institute-public-inspector-regs.pdf  and generally https://www.fincen.gov/beneficial-ownership-information-reporting-rule-fact-sheet.

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.

Transferring a Liquor License in New York State May Give Your Business a Hangover. Let Us Help! 

Posted: August 8th, 2022

By: Christine Malafi, Esq. email

When buying or selling a business with a liquor license, many owners assume that they can simply transfer the license from one owner to another. In New York, the transfer of liquor licenses is not so simple. The New York State Liquor Authority (NYSLA) does not allow the direct transfer of a liquor license from one business to another. With the backlog of state and federal agencies, it is important to get started on this process as soon as possible.

To transfer the liquor license, the new owner of the business must go through the same process of applying for a license as the previous liquor license owner did. There are four main groups of liquors licenses, and each license type has its own set of application requirements. Generally, an application for a liquor license includes the application form, proof of citizenship and photo identification for each principal, the lease or deed and photos of the premises, and financial documents. When the application is necessitated by a transfer of the business assets related to the use of the liquor license, the contract of sale of the business must be included as well.

The transfer laws are different for New York City businesses than the rest of the state. Any establishment located in one of the five boroughs must send the prior notice of their application to their corresponding NYC Community Boards. Each borough has its own respective Community Board. Outside of New York City, local municipalities must be notified 30 days prior to the submission of a liquor license application that a person or entity intends to operate a business that needs a liquor license.

The NYSLA must approve the changes in advance if your business corporation or limited liability corporation is changing its corporate structure (i.e., adding or removing an officer or director, adding or removing a managing member, a change in the stockholders or the members, or any change in the stock or membership units held by an existing stockholder or member). However, no approval is needed if there are ten or more stockholders or members, the change involves less than 10% of the stock or ownership interest, and none of the existing stockholders or members with less than a 10% interest have their interest increased to 10% or more.

Be aware that the process for the transfer of license approval may take a long time to process. To help speed along the application process, the NYSLA has an attorney Self-Certification Program, where attorneys filing retail applications for a client can certify that statements and documents provided in the application are true and accurate and that the application meets all the statutory requirements.

The NYSLA’s Community Board FAQ provides detailed information on most requirements for applying for and transferring a liquor license. The experienced attorneys here at CMM are ready to help you through this process as your business evolves, along with any other business transaction needs.

Contact us today for more information.

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.

Effects of Inflation on M&A Deals

Posted: July 19th, 2022

Tags:

Long-lasting inflation is always a top concern because it decreases the value of currency and weakens the purchasing power of the American dollar. Since 2021, inflationary rates in the United States have increased at a much faster rate than predicted and central banks across the globe are reacting by raising interest rates.[1] Simultaneously, supply chain risks and production prices are increasing.[2] It may be obvious, but these consequences of influence M&A deals and the valuations of target companies. If you are debating on whether to initiate a sale, merger, acquisition, or other similar transaction, or if you have already decided to move forward and are currently in the midst of negotiating a deal, it’s important to understand the various effects that inflation has on M&A deals.

Common Effects on M&A Deals

As inflation continues to rise, buyers and sellers should expect to see more heavily negotiated purchase prices, alternative payment methods, and longer exclusivity periods.[3]

  • Lower Purchase Prices:  The cost of operating a business will increase with inflation and, if buyers cannot mitigate the impact of these costs, then they may begin to offer lower purchase prices.[4] This was evident in February 2022, when the M&A deal value declined by 74.4%.[5] Buyers may be aware of this trend and use it as a negotiation tactic. Sellers should work closely with their attorneys to discuss these tactics and factor in a purchase price buffer to account for such negotiations.  
  • Alternative Payment Methods: Inflation also increases the costs of interest rates, causing buyers to propose alternative payment structures.  In times of inflation, a buyer is less willing to pay cash at the time of closing.   In these situations, sellers should work closely with their attorneys to negotiate alternative payment methods such as installment payments, promissory notes, earnout/revenue milestone payouts, rollover equity and/or payment via other equitable assets.[6] In many cases, sellers’ attorneys will condition the deal on buyer’s ability to obtain satisfactory financing.[7]
  • Exclusivity Periods: Buyers always want to understand the company’s pricing arrangements with its suppliers and the contracting parties’ ability to amend the terms of the agreement; however, this becomes even more critical during times of inflation. Therefore, sellers may start to notice buyers requesting longer exclusivity periods to give the buyers time to perform a more detailed due diligence review.[8]  

How to Avoid the Negative Side Effects of Inflation

Inflation may deter buyers from offering higher purchase prices because they may worry that the ultimate payout won’t be as good as it would be in a non-inflationary scenario. However, in many cases, sellers can work with their accounting and legal advisors to demonstrate that their rate of profit growth will outpace the rate of inflation.[9] Sellers may choose to provide that data in terms of units sold and/or the dollar value. [10]

Ultimately, inflation matters in deals, especially when inflation rates are high and the duration of the inflationary period is long term. Inflation may be a concern when it comes to deal discussions; however, it should not derail the sale process. Buyers and sellers should work closely with attorneys to understand the potential implications of inflation on their M&A deals and to make sure they are negotiating the proper purchase price.  

Thank you to Kimberly Lee for her research and writing assistance on this article.


[1] Tom Manion, Principal, Valuation & Capital Market Analysis, BDO (May 2022), https://www.bdo.com/insights/industries/technology/how-interest-rates,-inflation,-and-geopolitical-un

[2] Id.

[3] Ana Calves, The Potential Impact of Inflation on M&A, Mergers & Acquisitions (June 7, 2022),  https://www.themiddlemarket.com/opinion/the-potential-impact-of-inflation-on-ma

[4] Calves, supra note 3.

[5] Brian Scheid, Peter Brennan, & Annie Sabater, Inflation Puts Dent in M&A After White-Hot 2021, SPA Global (Apr. 4, 2022) https://www.spglobal.com/marketintelligence/en/news-insights/latest-news-headlines/inflation-puts-dent-in-m-a-after-white-hot-2021-69551549.

[6] Calves, supra note 3.

[7] Id.

[8] Id.

[9] Michael Collins, How Does Inflation Affect an M&A Deal, ProSales (Apr. 5, 2021) https://www.prosalesmagazine.com/business/how-does-inflation-affect-an-m-a-deal_o

[10] Id.

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.

Navigating Your Commercial Lease Agreement During Inflation

Posted: June 22nd, 2022

By: Arthur Yermash, Esq. email

Tags: ,

Updated July 21, 2022, as published in Law360
https://www.law360.com/real-estate-authority/articles/1512083/negotiating-a-commercial-lease-agreement-during-inflation

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 minimizing future rent increases) is a vital part of negotiating a commercial lease agreement. Inflation and rent escalation clauses that are tied to economic metrics go hand in hand – when inflation rises, rents rise along with it. While inflation is not a new economic concept, rising inflation at exceedingly high percentages creates unanticipated results for all involved.

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. 

Most commercial leases use a combination of methods to provide for escalation various rental components.

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 commonly implemented for base rent and is a popular option 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.  This also does not account for the market environment that may be shifting throughout the lease term.
  2. 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 commonly implemented in scenarios where a commercial tenant is responsible for compensating landlord for building operating expenses.
  3. 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.
  4. Indexed/Variable Escalation (Consumer Price Index or another inflation index) – This option allows landlords to increase rent in proportion to increases in established economic indexes.  This method is commonly used when to establish rent after an initial term to adjust and align rent with the economic environment, for example, when tenant exercises a right to renew. This option may not be favorable to tenants because index increases can be very unpredictable and dramatic.  In addition, while it may align with national economic trends, it may not represent local real estate economic trends.

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.

Since the goal for most commercial tenants is to pay a fair market rent, while the goal for most commercial landlords is to ensure steady rent payments, the parties may be aligned in the interest of fairness.  To that end, before a commercial tenant exercises any option where its rent would be significantly above market considering current market indicators, the first step would be to communicate concerns to the landlord.  A reasonable commercial landlord would often welcome reasonable dialogue to find common ground to address the unintended and unexpected impact of present economic conditions.  Often, a negotiated extension, while delaying exercising a right to automatically renew may be an appropriate alternative to economic index impact.  Since a commercial lease has many components there are many intangibles that can be negotiated to equalize what each party may be giving up.  These could include improvements to the space, longer term, and other aspects of the lease agreement.  A commercial tenant may also, or as an alternative, explore other market opportunities to identify similar properties at more reasonable rent, considering buildout and moving costs.

For commercial leases being negotiated, instead of agreeing to standard provisions that directly use economic metrics to determine future rent, landlords and tenants may explore other options to mitigate against unintended results.  One option is to provide for limits, or caps, on increases affected by unstable indices.  Another option is to identify and use localized real estate market metrics as the basis for increasing future rent instead of using national economic metrics.  By focusing more on the regional real estate market trends, the resulting rent is more likely to be better aligned with the real estate market instead of national economic trends.  For multi-tenant commercial buildings, a close look at existing rents and escalations can also be a determinative metric for determining what a fair rent escalation could be.  Occasionally, real estate professionals with knowledge of the local real estate environment may be used to help the parties determine the best approach. Ultimately, evaluating all aspects of lease terms to find reasonable alternative methods for determining future rent increases.

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


[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.

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 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.