Trust the Leaders, Summer 2016

Trust the a publication of smith, gambrell & russell, llp

Summer 2016

SGRLAW.com

Protecting your business in the 21st century

Trust the Summer 2016

3 Editor’s Letter 4 Legal Briefs

News and views from the offices of Smith, Gambrell & Russell.

8 Data Breaches

With cyberattacks on the rise, we look at the business, legal and financial implications of a data breach.

12 Hauling in the Middleman We reveal the increasing spectrum of intermediaries at risk for indirect liability for trademark infringement.

17 The FinTech Challenge

How the convergence of financial services and technology presents a regulatory and legal maze for companies to navigate.

20 Keeping Separate Lifeboats Afloat

Why creating a subsidiary doesn’t necessarily isolate affiliates from related-entity liability.

24 Client Profile: Innospec

We introduce you to a global specialty chemicals firm serving truly diverse markets.

26 “Finnish” Line

SGR attorney John Saunders is awarded Finnish knighthood.

Smith,Gambrell

&Russell, llp Attorneys at Law

1230 Peachtree Street, N.E. Promenade, Suite 3100 Atlanta, GA 30309-3592 editor@sgrlaw.com editor-in-chief

Dana Richens editorial advisory board

Peter Goodman Joyce Klemmer Brett Lockwood Jim Monacell Jim Porter

sgr marketing team

Lee Watts Ashley Berry Sabina Farman Kathleen Rast Mollie Werner

Trust the Leaders is published on behalf of Smith, Gambrell & Russell, LLP by Fourth Element Creative.

The information contained herein has been obtained from sources believed to be reliable.

The content and information in this publication do not constitute legal advice, do not in all cases reflect the opinions of SGR or its attorneys and are not in all cases complete or current as of the publication date. This publication is not intended to and does not create an attorneyclient relationship or provide legal advice or legal opinion. Legal advice should be obtained from one’s legal counsel.

Permission is granted to use and reproduce this publication in whole or in part for internal and personal reference, provided that proper attribution of authorship is given. Except for material in the public domain, this publication may not be further copied, modified, used or distributed, in whole or in part, in any form or by any means without the written permission of Smith, Gambrell & Russell, LLP. All other rights expressly reserved. © 2016 Smith, Gambrell & Russell, LLP. Leaders

used with permission of Leaders Magazine, Inc.

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TRUST THE LEADERS | Summer 2016 | SGRLAW.com

Editor’s Letter

Editor’s Letter

IN THIS ISSUE

Welcome to the Summer 2016 issue of Trust the Leaders, the magazine of Smith, Gambrell & Russell, LLP. The articles in this issue cover a range of substantive topics, united by a common, underlying theme: protecting your business in the 21st century. As our cover imagery suggests, a sound command of legal issues can help a company protect its assets even when the next threat is not yet visible on the horizon.

Marcie Ernst’s article on cybersecurity addresses not only protecting a company’s data, but how a company can protect itself from litigation, penalties and other consequences of a data breach.

Jim Bikoff’s article, entitled “Hauling in the Middleman,” explains how global marketing powerhouses like Tiffany and Louis Vuitton protect their trademarks from infringement and counterfeiting by ecommerce websites, flea market landlords and other middlemen.

Greg Kirsch and Brett Lockwood discuss “FinTech” – the space in which financial services and technology intersect. Players in that burgeoning industry must navigate a wide range of federal and state regulations, and assess the pros and cons of both offensive and defensive patent prosecution, to protect their businesses.

And finally, Bill Maycock describes how a company can protect itself from an adversary’s attempt to use the “piercing the corporate veil” theory of liability to hold that company liable for the obligations of a related entity.

We hope you’ll also check out the Client Profile on the global specialty-chemical company Innospec, and our “Finnish” Line piece on our own John Saunders, recently knighted by the government of Finland for his decades of work on behalf of Finnish business interests in the United States.

Marcia Ernst p.8

Marcia highlights the legal and business costs that can follow a cyberattack or a breach of a company’s sensitive data.

Jim Bikoff p.12

Jim explains the legal ramifications of contributory trademark infringement in the United States.

Greg Kirsch and Brett Lockwood p.17 Greg and Brett explain why the convergence of financial services and technology presents legal challenges.

Bill Maycock p.20

Bill explains how to protect owners and affiliates from related-entity liability.

Dana Richens Editor-In-Chief editor@sgrlaw.com

P.S. We’ve just learned that SGR has been named an Am Law 200 firm for the second consecutive year. We’re honored by this recognition of SGR’s strategic growth initiatives.

FOLLOW

ONLINE

John Saunders p.26

John is awarded a Finnish knighthood for his services to the country in Georgia.

BLOGS: sgrlaw.com/blog TWITTER: twitter.com/sgrlaw LINKEDIN: linkedin.com/companies/27889

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LEGAL BRIEFS NEWS AND UPDATES FROM THE SGR OFFICES

ATTORNEYS IN THE NEWS Dana Mark, a partner in SGR’s NYC Private Client Services Group, recently spoke on a panel entitled “Women: Jumpstart Your Financial Future.” Dana discussed the role of estate planning, including tax considerations, as part of overall financial planning. The panel was sponsored by the Altfest Women’s Educational Fund at Temple Shaaray Tefila in Manhattan.

Dana was also a guest speaker for two undergraduate courses and a graduate course on family business management at Baruch College. Dana presented a workshop on trust and estate planning for family businesses.

Greg Kirsch, head of the

Jim Black, a corporate

David Moore, a partner

Firm’s Intellectual Property

partner in SGR’s

in SGR’s Litigation/

(IP) Department, was part

Washington, DC office,

Environmental Practice,

of a delegation of U.S.

recently gave a series

served as a faculty

IP attorneys who visited Israel. The

of training seminars to six German

member for the 15th Annual

delegation was organized by the “IP

and Austrian law firms on liability

Georgia Water Law & Regulation

Practice in Israel” Committee of the

risks for executives in connection

seminar held in March in Atlanta.

American Intellectual Property Law

with U.S. mergers and acquisitions.

The program covered “Water Wars”

Association (AIPLA), an international

The revised policy of the U.S.

updates, including Florida vs. Georgia

organization that seeks to improve

Department of Justice places a

litigation at the U.S. Supreme Court,

global IP protection. The participants

higher priority on the prosecution

and lawsuits against the U.S. Corps

met with Israeli companies,

of individuals responsible for

of Engineers.

universities and organizations, as

corporate crimes. The policy has

well as representatives of the Israel

raised concerns among European

Patent Office and IP Division of the

executives about their exposure to

Israel Ministry of Justice. Greg made a

prosecution in the United States

presentation on U.S. patent eligibility

for violations of U.S. law, including

for computer-implemented inventions

antitrust laws and the Foreign

during one of the sessions.

Corrupt Practices Act.

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TRUST THE LEADERS | Summer 2016 | SGRLAW.com

NEWS IN BRIEF Joe Mandarino, a partner in SGR’s Tax Practice, has given numerous presentations recently on tax topics, including April 2016’s “Structuring 1031 Like-Kind Exchanges for Real Property” for Strafford.

Peter Goodman, a partner in SGR’s Labor and Employment Practice in the New York office, presented on a panel entitled “Prosecuting & Defending Wage & Hour Cases” for the New York City Bar Association’s Employment Law Institute.

Andy Patterson, a partner in SGR’s Corporate Practice, was selected as one of the Men of the Year for the 2016 Law and Justice Awards sponsored by Women Works Media Group.

RECENT REPRESENTATIONS

LITIGATION SUCCESSES

demand for $9.4 million from the estate.

By attacking the IRS’s valuation models, John

Breach of contract victory

and A.J. successfully negotiated a reduced

New York litigators Peter Goodman and Victor Metsch persuaded a federal judge in the Southern District of New York to dismiss most of a breachof-contract case on summary judgment. The motion was granted before substantial discovery had taken place, thereby saving the client significant discovery costs. The court held that the client, a designer and marketer of branded footwear, jeanswear and accessories, did not breach its agreement with its distributor or its covenant of good faith and fair dealing when it asked its distributor to prepare a business plan and then terminated the distributor two months after the client received the plan.

settlement with the IRS of approximately $300,000 in taxes and interest due.

SGR recently represented Aaron’s, Inc., the national rent-to-own retailer, in the sale of its corporate headquarters building in the Buckhead district of Atlanta.

The 12-story building was built by Aaron’s, Inc. and has been home to the company since the 1960’s. A partnership SGR represented SASCO Chemical Group, Inc.

led by Knox Properties and Redan Group

in the company’s acquisition by Arsenal Capital

bought the building from Aaron’s, Inc. for

Partners. The transaction joins SASCO

$14.2 million. The transaction involved

Chemical with Arsenal’s specialty polymers

negotiation of parking easements with

and additives platform, Polymer Solutions

Buckhead Atlanta owner OliverMcMillan, and

Group. Jay Schwartz, Julie Sebastian and

negotiation of a master lease with the purchaser

Emily Cook in SGR’s Atlanta Corporate and

of the building for Aaron’s continued occupation

Mergers & Acquisitions practices and Andy

of the building while the company builds out

Fawbush and Brandon Sherlinski in SGR’s

new space in Cobb County.

Jacksonville Employee Benefits Practice acted

The SGR deal team included attorneys

on behalf of SASCO Chemical. David Santi

Alex Clay, Tom Spillman and Andrew Bauer,

and Steven Richman in the Atlanta Tax

and paralegal Crystal Francis.

Practice and Phillip Hoover in the Atlanta Environmental Law Practice were also on the SGR team.

John Tyler and A.J. Rollins, partners in SGR’s Tax Practice, settled a major Tax Court case with an extraordinary result. (In the Estate of David Lovins, Sr., Deceased, Dawn Elaine Lovins Causey, Executrix v. Commissioner of Internal Revenue.)

Mr. Lovins and his wife both died in a smallplane crash in North Carolina, leaving dozens of apartment complexes and single-family residences to his sister. When the estate initially filed the estate tax return, the estate claimed there was no tax due. The IRS made adjustments in the valuation that resulted in a

Favorable “Derby” result

After summary judgment was entered against her clients, Elizabeth Borland (who was retained late in the case) persuaded the court to reconsider its prior ruling, to enter an injunction much narrower than the defendants had offered during stalled settlement negotiations, to award damages much lower than plaintiff sought, and to deny plaintiff’s motion for attorney fees. (Churchill Downs, Inc. v.

Commemorative Derby, LLC, Civil Action No. 1:12-CV-517-WBH (N.D. Ga.)) The corporate defendant was the exclusive marketer of racing legend Secretariat and had been using terms that referred to the Kentucky Derby on its products, but did not use any of the plaintiff’s actual KENTUCKY DERBY trademarks.

The plaintiff contended that such conduct was trademark infringement and unfair competition and sought an injunction that would have precluded the defendants from even using the term “Derby.” The court found that some of the defendant’s conduct was wrongful, but much less than the plaintiff had sought.

TRUST THE LEADERS | Summer 2016 | SGRLAW.com

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LEGAL BRIEFS NEWS AND UPDATES FROM THE SGR OFFICES

REAL ESTATE SPOTLIGHT

SGR’s Litigation and Real Estate departments continue to lead the way on cutting-edge legal issues in the New York real estate industry.

Sean Altschul and Victor Metsch defeated an application for temporary restraining order and motion for preliminary injunction with respect to an apartment building being developed by SGR’s client. (Dormitory Authority of the State of New York v. Roman Catholic Church of Saint Ignatius.)

The project is adjacent to a college of the City University of New York (“CUNY”), on land owned by the Dormitory Authority of the State of New York (“DASNY”). The Court denied DASNY/CUNY’s application and motion, finding they failed to demonstrate a likelihood of success on the merits that a door located on the west wall of the school building was, in fact, a fire exit for a child care center in the adjacent college building that would be obstructed by the apartments.

The court also rejected the plaintiffs’ arguments that the development would demolish the cornice of the school building, impair the plaintiffs’ enjoyment of light and air, and obstruct the right of way enjoyed by the plaintiffs over a portion of the public property.

Victor Metsch and Michael Regan, commercial litigators in SGR’s New York office, successfully represented a condominium board of managers in a lawsuit contesting the validity and enforceability of a $2.2 million promissory note made by the condominium’s sponsor. The case presented a novel issue regarding the requirements that govern a condominium sponsor’s ability to incur a debt on behalf of the condominium. On a motion for summary judgment, SGR successfully convinced the New York Supreme Court, Commercial Division, that the promissory note was illegal and unenforceable. The decision was affirmed by the Appellate Division.

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TRUST THE LEADERS | Summer 2016 | SGRLAW.com

SUPPORTING INNOVATION AND BUSINESS SGR is proud to be a Founding Benefactor of Georgia PATENTS (Pro bono Assistance & Training for Entrepreneurs and New, Talented, Solo inventors), which seeks to help solo inventors, non-profits and small businesses find patent agents and attorneys to help file patents on a pro bono basis. In April, SGR partner

Joyce Klemmer and associate Gibson Lanier were among those honored at a reception for their significant contributions to the program. Both have served as members of the Advisory Committee of Georgia PATENTS since the program’s inception.

Gibson and SGR partner Dale Lischer were also recognized as volunteers who have assisted inventors through the program.

ATTORNEY INTERVIEW

LITIGATION SUCCESSES

10 minutes with…

Double success in Texas

Rodgers Lunsford Partner in SGR’s Intellectual Property Practice, and Atlanta Trademark Lawyer of the Year as recognized by Best Lawyers

Tell us a little about yourself.

I was born in Norfolk, Virginia. When my dad returned from Pearl Harbor, our family moved back to Atlanta where Mom and Dad had lived before the war began. I attended high school in Atlanta. I earned my undergraduate degree in mechanical engineering at Vanderbilt, where I was an infielder on the baseball team. After college, I worked for General Electric for about 14 months and the First National Bank of Atlanta, now Wells Fargo, for a little over two years. I then graduated from the law school at the University of Georgia. My wife Carolyn and I have been married for 48 years. We have two boys, ages 43 and 41.

Why did you become an attorney?

I wanted to be engaged in a profession with a significant cerebral component. I felt I was missing that in what I did before law school. I also wanted to help people. I thought that by practicing law I could meet both of those goals.

Most of my clients are family-run businesses.

Some are very large businesses, some are international businesses; but in each case I have developed personal relationships with the individuals who run those businesses.

Why did you choose trademark law?

When I graduated from law school, I joined a large Atlanta firm that had an established and significant trademark practice. I was basically a general civil litigator, but I did some trademark work. My father was trademark counsel for The Coca-Cola Company and was with the company for 40 years. In 1975, he took early retirement from the company and then opened the Atlanta office of Browne, Beveridge, DeGrandi & Kline, a boutique IP firm. About three years later, I received a telephone call from one of Dad’s partners who told me that Dad had more than

he could do and needed some help. I joined what was then the Atlanta office of Beveridge, DeGrandi, Kline & Lunsford.

What advice would you give to your 30-year-old self?

Understand the necessity to look at the longer road. For example, promoting business and acquiring clients can be as long as a 10-year investment. It’s not immediate. You don’t participate in an organization for two or three years and then say, “Gee, I didn’t get any clients,” then move on. That is something I did when I was in my 30s. We hear a lot about “You’ve got to live in the moment.” To a certain extent, that’s true. But if you only live in the moment, then you don’t consider the longer terms.

Which living persons do you most admire?

First is Mark Richt, the former head football coach at the University of Georgia, now the head coach at the University of Miami. I admire a statement he made about coaching: “Life is about people, not [championship] rings. Rings collect dust.” I think that’s a great philosophy. The other person would be Tim Corbin, who is the head baseball coach at Vanderbilt. He is keenly interested in the individuals who are the players that play for him. He’s interested in their athletic development, but he is equally, if not more, interested in their personal development. I think he is a truly remarkable person.

What do you do when you’re not working?

I have received the most satisfaction from coaching youth sports. That’s great as long as your children are playing, or you’re young enough to coach your grandchildren’s teams.

What is your greatest achievement?

Helping raise my two boys.

Pat Hill and Yash Dave succeeded on a Petition for Writ of Mandamus to the Ninth District Court of Appeals in Beaumont, Texas. The court of appeals agreed that a Jefferson County trial judge abused his discretion in denying SGR’s client’s motion to strike intervention.

Plaintiff-intervenors had named the client as a defendant in an unrelated case to avoid filing a separate action.

The court of appeals found there was no adequate remedy by appeal and ordered the judge to vacate its order and grant the motion to strike.

Pat and Yash also obtained a partial summary judgment in a federal wage and hour case. The Eastern District of Texas in Beaumont agreed that SGR’s client did not violate the Fair Labor Standards Act by failing to pay workers for time spent donning and doffing generic personal protective equipment and commuting by bus from a remote parking lot to the work site.

National Grange injunction

Jim Bikoff, Bruce McDonald and Holly Lance of SGR’s Washington, DC office obtained an injunction in federal court on behalf of the National Grange of the Order of Patrons of Husbandry (the “National Grange”), a non-profit fraternal organization.

The United States District Court for the Eastern District of California held that an unauthorized former National Grange state affiliate known as the “California State Grange” (CSG) “willfully and deliberately continued to deceive the public by infringing” the National Grange’s name, and “defied previous court orders in a willful manner.”

The court held that CSG’s conduct rendered this an “exceptional case” under U.S. trademark law and awarded the National Grange attorney’s fees.

TRUST THE LEADERS | Summer 2016 | SGRLAW.com

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DATA BREACHES They’re not just problems for the IT department – they can be legal headaches, too

BY MARCIA ERNST

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TRUST THE LEADERS | Summer 2016 | SGRLAW.com

Data Breaches

I

n just a relatively short period of time, cybersecurity

“breach,” what type of data constitutes “personal

has become a top concern. Cyberattacks are

information,” the types of events triggering notice

becoming more frequent. A 2016 survey indicated

obligations, the timing and content of notices, and

a 38% increase in cyberattacks from 2014.1

whether notice must be sent for an event when there is a very low likelihood of harm resulting from the breach.

Cybersecurity incidents are also costly. A 2015 study

Upon a data security breach, a company’s first task

found the average global cost of a data breach was $3.79 million, with U.S. companies experiencing an

is to identify which jurisdictions’ requirements apply.

average cost of $6.53 million.2 This study found the

Often, even the most “local” business finds that it has collected data from residents of multiple jurisdictions

mean time to identify a data breach was 206 days, and the mean time to contain a breach was 69 days.

and that it therefore must comply with the laws of

Another 2015 study found the mean cost of cybercrime

each of those jurisdictions with different, sometimes

was $7.1 million, with U.S. companies reporting the

conflicting, requirements. The company must carefully

highest average cost at $15 million. This study found

review the requirements of each applicable jurisdiction

the mean time to resolve a cyberattack was 46 days,

to determine its obligations.

3

4

with an average cost of $21,155 per day, or $973,130 over that period.5 Most people think of data breaches as information

Time is of the essence with regard to notifications.

For example, Vermont requires notice to its state attorney general within 14 business days following

technology problems. However, cybersecurity

discovery of a breach. Some notification statutes do

breaches must be viewed as legal events because they

not specify a fixed number of days, but instead require

trigger legal obligations. When a business suffers a

notice as soon as practicable and without unreasonable

cybersecurity incident, it must comply with federal and

delay. Government entities may impose fines for

state laws and regulations dictating not only that the

delays, and certain states outline specific penalties up

victim of a cybersecurity incident must give notice of the

to $500,000 where notice is not provided to affected

breach, but also how, when and to whom notice must

individuals within 180 days.

be provided. A 2015 survey of cyber insurance claims found the average cost for covered crisis services, such

Federal notification requirements

as forensics, notification, credit/ID monitoring and legal

Currently, there is no single federal data breach

advice, was $499,710.6 Additionally, companies must

notification law of general application to business

defend against lawsuits and enforcement actions. The

outside certain regulated areas. However, Congress is

cyber insurance survey found that the average costs

considering the “Data Security and Breach Notification

for a covered legal defense was $434,354 and for a

Act of 2015.” The U.S. House of Representatives,

covered legal settlement was $880,893.7 This article

Energy and Commerce Subcommittee on Commerce,

highlights several of the legal issues a company must

Manufacturing, and Trade approved the proposed Act,

address and some of the legal actions it may have to

which must now be formally introduced in the House

defend against in the wake of a data breach.

before further action can be taken.

This Act would require businesses to implement and

State notification requirements

maintain reasonable security measures and practices

Fifty-one U.S. jurisdictions, including 47 states, the

to protect and secure personal information they

District of Columbia, Guam, Puerto Rico and the U.S.

collect and electronically maintain. The definition of

Virgin Islands, have enacted data breach notification

personal information under this Act is more expansive

laws, which mandate notice of a covered breach to

than most state notification laws, including home

affected individuals. These laws specify the steps that a

address, telephone number, mother’s maiden name

company must take in response to a breach that affects

and date of birth. The Act would require companies

residents of that state and, in some instances, other

to notify individuals whose personal information has

states. Although the notification laws of each of the

been accessed and acquired as a result of the breach

51 jurisdictions are similar, they are not identical, and

within 30 days of discovery of the breach. Companies

they contain significant variations as to how they define

would not be required to provide notice if there is no

DATA BREACHES

BY THE NUMBERS

38

PERCENTAGE INCREASE IN CYBERATTACKS SINCE 2014

3.79

MILLION

AVERAGE U.S. DOLLAR COST OF A DATA BREACH

6.53 MILLION

AVERAGE GLOBAL U.S. DOLLAR COST OF A DATA BREACH FOR U.S. COMPANIES

21,155 AVERAGE U.S. DOLLAR COST PER DAY OF A DATA BREACH TO A U.S. FIRM

69

MEAN TIME IN DAYS TO CONTAIN A DATA BREACH

TRUST THE LEADERS | Summer 2016 | SGRLAW.com

09

Data Breaches

reasonable risk of identity theft, economic loss or financial harm. The Act would preempt existing inconsistent state data breach notification laws with a uniform national standard. The Federal Trade Commission (FTC) would enforce the rules and collect civil penalties if those rules are violated. No private right of action would be permitted.

Federal enforcement actions Increased scrutiny by government agencies is also affecting companies that handle sensitive personal information. A company may have to defend itself against a federal enforcement

the Payment Card Industry’s (PCI) Data Security

action concerning privacy and the protection of

Standards8 and conduct annual independent

personal information.

audits to confirm compliance.

For example, the FTC asserts broad authority

As another example, in 2016, the Consumer

Ranging in size from large class actions to those filed by a single person, data breach lawsuits are filed by consumers, financial institutions, credit card companies and other businesses affected by a data breach.

to regulate unfair or deceptive acts or practices

Financial Protection Bureau (CFPB) entered

relating to privacy and data protection under

the cybersecurity arena with an enforcement

Section 5 of the Federal Trade Commission Act.

action against Dwolla, Inc., an online payment

It has brought numerous enforcement actions

processing company. Although no cybersecurity

against companies, characterizing failure to

incident, data breach or other specific consumer

provide appropriate data security to reasonably

harm occurred, the CFPB’s action highlighted

protect customer information as an unfair act

several allegedly false and misleading statements

or practice, and/or noncompliance with the

Dwolla made about its data security practices,

companies’ privacy policies or representations

including that 100% of information was securely

regarding security as deceptive acts or practices.

encrypted and stored, and that its data-security

Data breach lawsuits

practices exceeded or surpassed industry

Data breach lawsuits range from large class

approach, in 2012, the FTC filed suit against

standards. Pursuant to its authority under the

actions to those filed by a single person. They are

Wyndham Worldwide Corporation claiming it

Consumer Financial Protection Act of 2010,

filed not only by consumers, but also by financial

failed to maintain reasonable and appropriate

CFPB fined Dwolla $100,000 and secured a

institutions, credit card companies and other

data security for consumers’ sensitive personal

strict five-year consent order. The order requires

businesses affected by a data breach. Most data

information related to three security breaches

Dwolla to implement a written cybersecurity

breach lawsuits are filed by breach victims and

by hackers between 2008 and 2010. Although

program to protect sensitive consumer

involve causes of action for negligence, breach of

Wyndham argued that the FTC’s authority

information, designate a qualified person to

contract, breach of warranty, breach of fiduciary

does not extend to data security matters, the

manage cybersecurity, conduct cybersecurity risk

duty, false advertising, and unfair or deceptive

U.S. Court of Appeals for the Third Circuit held

assessments, conduct employee data security

trade practices. Plaintiffs typically seek damages

that the FTC’s authority to regulate commerce

training, audit data security practices annually

for unauthorized charges, damage to credit, cost

extends to cybersecurity matters. In 2015, the

for five years, and expand the board’s role in

of credit monitoring, cost of replacement credit

parties agreed to an injunction order settling

cybersecurity oversight and management.

cards, time and expenses incurred to investigate,

Reflecting its aggressive enforcement

the action. Under the order, Wyndham is

and emotional distress. Whether breach victims

directed to establish, implement and maintain a

have suffered actual injury and cognizable

comprehensive information security program that

damages to have standing to sue is the critical

is reasonably designed to protect the security,

issue in many cases. The case law for this fact-

confidentiality and integrity of customer personal

intensive issue continues to develop. To defend

information. The order establishes administrative,

and resolve these claims, a company must incur

technical and physical safeguards for the

significant legal expense and costs of settlement.

program. Wyndham must also comply with

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TRUST THE LEADERS | Summer 2016 | SGRLAW.com

As an example, retailer Target Corporation

systematically failed to comply with industry standards and protect payment card and customer data,” noting that, as a consequence, financial institutions have borne the brunt of the data breach. Suits such as this one should prompt companies to do more to address information security issues on their networks.

Conclusion Companies should carefully review and evaluate the accuracy of statements made in privacy policies regarding cybersecurity, as well as conduct bi-annual cybersecurity risk assessments experienced a malware data breach in 2013 that

Eighth Circuit. The consumer settlement does

under the direction of legal counsel to preserve

allowed hackers to steal payment-card data when

not cover the complaint of the card issuer class,

attorney-client privilege, and annual audits of

customers swiped their credit or debit cards.

which sought recovery of amounts paid out for

policies and procedures. Given the increased

The breach gave rise to claims by consumers

the fraudulent charges against credit and debit

scrutiny placed on directors, it is also prudent to

and issuer banks. In the consolidated consumer

cards compromised in the breach. Target and

enhance communication between management

complaint, 100+ named plaintiffs alleged that

the financial institutions agreed to settle those

and the board on cybersecurity matters. In the

Target failed to prevent or timely disclose the

claims for $39 million. The court granted final

event of a breach, it is recommended that legal

data theft and that Target failed to disclose the

approval of the financial institutions’ class action

counsel coordinate investigations, notifications

insufficiency of its data security practices. The

settlement on May 12, 2016.

and remediation efforts so that the company can

complaint also asserted similar claims on behalf

As another example, First Choice Federal

claim attorney-client privilege and work-product

of a putative plaintiff class consisting of every

Credit Union recently filed a class action against

Target customer whose credit or debit card

the fast-food chain Wendy’s based on a five-

information was stolen in the data breach.

month data breach. The suit claims that Wendy’s

Target challenged the consumer complaint

“refused to take steps to adequately protect its

for lack of standing and lack of damages,

computer systems from intrusion.” From the fall

but a federal district court judge rejected the

of 2015 through the spring of 2016, hackers

arguments and denied Target’s motion to

accessed Wendy’s computer systems and stole

dismiss. This ruling came shortly after a decision

information concerning millions of consumer

partially denying Target’s motion to dismiss the

credit cards used at multiple Wendy’s locations.

consolidated complaint of the banks that issued

protection in the event of litigation. n Marcia Ernst is a partner in SGR’s Litigation Practice. She has extensive experience in complex business and multi-party litigation, including fraud, business torts, contract disputes and bankrelated litigation. mernst@sgrlaw.com.

END NOTES

The lawsuit claims that “[a]s a result of

the credit and debit cards that were subject to

Wendy’s data breach, plaintiff and class members

the breach. Thereafter, in early 2015, Target

have been forced to cancel and reissue payment

and the consumer plaintiffs reached a proposed

cards, change or close accounts, notify customers

settlement, which creates a $10 million cash

that their cards were compromised, investigate

fund to be paid to resolve the claims of an

claims of fraudulent activity, refund fraudulent

estimated 110 million class members. Under the

charges, increase fraudulent monitoring on

settlement, Target must take steps to minimize

potentially impacted accounts, and take

the risk of a future breach, designate a chief

other steps to protect themselves and their

information security officer, develop a written

customers.” The plaintiffs claim that Wendy’s

security policy and conduct periodic review of

used outdated and easily hackable computer

the controls it has in place to protect customer

and credit card systems and that it failed to

data. The court granted final approval of the

meet the October 2015 deadline for embedded

consumer class action settlement in November

microprocessor chip cards and terminals. The

2015, but several individuals appealed the final

lawsuit further states that “[d]espite the growing

approval to the U.S. Court of Appeals for the

threat of computer system intrusion, Wendy’s

1. The Global State of Information Security Survey 2016, PricewaterhouseCoopers, available at http://www.pwc.com/ gx/en/issues/cyber-security/information-security-survey. html.

2, 3. 2015 Cost of Data Breach Study: Global Analysis, Ponemon Institute, LLC, available at http://www-03.ibm. com/security/data-breach/.

4, 5. 2015 Cost of Cyber Crime Study: Global, Ponemon Institute, LLC, available at http://img.delivery.net/ cm50content/hp/hosted-files/2015_GLOBAL_CCC_FINAL_3. pdf.

6, 7. NetDiligence 2015 Cyber Claims Study, available at http://netdiligence.com/downloads/NetDiligence_2015_ Cyber_Claims_Study_093015.pdf.

8. The PCI Security Standards Council is a self-regulated body formed to enhance payment-card security. The Council’s Data Security Standards are security guidelines to which PCI-compliant members must adhere.

TRUST THE LEADERS | Summer 2016 | SGRLAW.com

11

HAULING IN THE

BY JIM BIKOFF

MIDDLEMAN The impact of contributory trademark infringement in the United States

12

TRUST THE LEADERS | Summer 2016 | SGRLAW.com

Trademark Infringement

I

ndirect liability for trademark infringement

a direct infringer “have an apparent or actual

has expanded from its roots in tort

partnership, have authority to bind one another

law to include a growing spectrum of

in transactions with third parties or exercise

intermediaries and middlemen, particularly

joint ownership or control over [an] infringing

on the Internet. Celebrities and brand owners

product.” Hard Rock Cafe Licensing Corp. v.

must enforce their rights against social-

Concession Servs., Inc., 955 F.2d 1143, 1150

networking websites such as Twitter and

(7th Cir. 1992).

Facebook to reach the infringing conduct of In Inwood Labs, Inc. v. Ives Labs, Inc., 456 U.S.

end users. Famous brand owners like Tiffany and Louis Vuitton have pressed for greater

844 (1982), the U.S. Supreme Court affirmed

accountability on the part of online auction

both the “inducement” and the “knowledge

houses like eBay to reach end users hawking

and control” prongs of contributory trademark

counterfeited wares.

liability. Inwood Labs sold look-alike drugs to pharmacists who mislabeled the generic drugs,

What remedies are available under U.S. law against middlemen, whose services contribute

using Ives Labs’ trademark. Noting that “liability

to the direct infringement by a distributor

for trademark infringement can extend beyond

of counterfeit products? Examples of such

those who actually mislabel goods with the

middlemen are landlords, shipping companies,

mark of another,” the Court concluded that

parties providing payment-processing

“if a manufacturer or distributor intentionally

services and ecommerce websites. This article

induces another to infringe a trademark ... the

outlines the circumstances under which such

manufacturer or distributor is contributorially

intermediaries can be held liable for trademark

responsible for any harm done as a result of

infringement and counterfeiting.

the deceit,” and that “if [a manufacturer or distributor] continues to supply its product to

The two key theories of indirect trademark liability

one whom it knows or has reason to know

The federal trademark statute, the Lanham

manufacturer or distributor is contributorially

Act, is generally silent on liability for indirect

responsible for any harm done as a result of the

infringers, and few state laws contain explicit

deceit.”

is engaging in trademark infringement ... the

provisions on intermediary liability. In an effort to applied common-law theories of indirect tort

Landlords, fleamarket operators and shipping services

liability to trademark infringement. Over time,

Until the early 1990s, theories of contributory

two doctrines of indirect liability – contributory

and vicarious liability had not been widely

and vicarious liability – have evolved.

asserted outside the manufacturer/distributor

hold those middlemen accountable, courts have

context. However, in Hard Rock Cafe, the 1. Contributory trademark infringement

Seventh Circuit applied the Inwood holding to

This includes both (1) inducement of direct

a flea market operator. In Hard Rock Cafe, the

infringers and (2) knowing and material

owner of HARD ROCK trademarks for restaurant

contribution to, or control over, the means of

services and related merchandise sued the

direct infringement. The “inducement” prong

operator of “Swap-O-Rama” flea markets in

imposes liability where a middleman provides

Chicago for contributory and vicarious trademark

active encouragement to a direct infringer.

infringement when its vendors began selling counterfeit HARD ROCK T-shirts. The court

2. Vicarious trademark infringement

observed “it is not clear how the doctrine applies

In direct contrast, tracing back to the doctrine

to people who do not actually manufacture or

of respondeat superior, this infringement

distribute the good that is ultimately palmed off

imposes liability solely where a middleman and

as made by someone else.”

TRUST THE LEADERS | Summer 2016 | SGRLAW.com

13

seizure of counterfeit products. Despite that knowledge, Cherry Auction continued to provide key instrumentalities to its vendors, including “space, utilities, parking, advertising, plumbing and customers.” Cherry Auction was held liable for the direct infringement of its vendors

The shipping company was facilitating the marketing of counterfeit goods by arranging for shipment.

because it “actively strive[d] to provide the environment and market for counterfeit record

sentence of a Missouri flea market owner for

sales to thrive.”

intentionally aiding and abetting the trafficking

A recent brick-and-mortar case provides a

of counterfeit and piratical products in his

good example of the extensive measures parties

flea market. An appeal based on the civil and

could be forced to take in order to prevent

criminal statutes being unconstitutionally

infringement. In Louis Vuitton Malletier v.

vague was rejected by the court. This decision

Restatement of Torts for the rule that “[a

Eisenhauer Road Flea Market, SA-11-CA-124

follows prior landlord and flea market cases

landlord] is responsible for the torts of those

(W.D. Tex. 2012), an owner of a flea market was

finding contributory liability for tenant sales of

it permits on its premises ‘knowing or having

ordered to periodically inspect the areas leased

counterfeit and pirated goods and, by imposing

reason to know that the other is acting or will

by its tenants to determine if any counterfeit

a substantial prison sentence, may help to

act tortiously.’” The court held that “willful

goods bearing the plaintiff’s trademark were

reduce the sale of such products by these

blindness” may be the basis for a finding

being sold. If counterfeit goods were found, the

intermediaries.

of infringement under the “knowledge and

lease was to be terminated immediately.

The court in Hard Rock Cafe looked to the

The court also ordered that all future lease

control” prong, stating that “[t]o be willfully

The theory of contributory trademark liability found in landlord-liability cases has also been

blind, a person must suspect wrongdoing and

agreements between the flea market and its

applied to packaging and shipping services.

deliberately fail to investigate.”

tenants expressly prohibit the sale of counterfeit

In Cartier International B.V. v. Liu, 02-cv-7926

The court cited Louis Vuitton S.A. v. Lee, 875

goods bearing the plaintiff’s trademark, that

(S.D.N.Y. April 17, 2003), a shipping company

F.2d 584 (7th Cir. 1989) (holding merchants who

a sign be placed at the flea market entrance

that “arrange[d] for persons to ship items via

resold poorly crafted counterfeit luggage, which

warning the public and tenants that vendors are

United Postal Service” – and was located next

they had obtained at fire-sale prices, knowingly

not allowed to sell goods bearing the plaintiff’s

door to a major counterfeiting operation – was

engaged in the sale of counterfeit luggage), but

mark, and that the plaintiff’s personnel are

held contributorially liable for having “knowingly

cautioned that willful blindness does not imply

allowed to conduct random inspections at the

handled the shipment of [the direct infringer’s]

a duty for landlords to “seek out and prevent

flea market.

counterfeit merchandise to customers.” The

The defendant’s response to the ongoing

violations.” The case was remanded to the lower

court reasoned that the shipping company

court to determine contributory liability under

counterfeiting played an important role in

“was facilitating the marketing [of counterfeit

the standard announced by the appellate court.

Omega SA v. 375 Canal, LLC, No.1:2012cv06979

goods] by arranging for shipment to customers.”

In Fonovisa, Inc. v. Cherry Auction, Inc., 76

(S.D.N.Y. 2013). In that case, a landlord was held

And in Hetronic International Inc. v. Hetronic

F.3d 259 (9th Cir. 1996), the Ninth Circuit

liable for contributory trademark infringement

Germany GmbH, No. 14-650-C, 2015 WL

adopted the rule of the Seventh Circuit in Hard

even though it had no specific knowledge about

6835428 (W.D. Okla. Nov. 6, 2015), the court

Rock Cafe that “a swap meet can not disregard

which of his tenants were selling counterfeit

its vendors’ blatant trademark infringement with

merchandise. The landlord had only a few

impunity.” Fonovisa, a California corporation

tenants, and no genuine products containing

owning trademarks for Latin music recordings,

the trademark in question were being sold

brought an action against Cherry Auction

at the location. Therefore, it would not have

for contributory infringement based on its

been difficult for the landlord to stop sales of

operation of a flea market where vendors sold

counterfeit products without also harming sales

counterfeit records. Applying the “knowledge

of genuine products.

In United States v. Frison (2016 WL 3184476),

and control” prong, the court held that Cherry Auction clearly knew of direct infringement

decided by the U.S. Court of Appeals for the

by vendors due to raids and warnings by the

Eighth Circuit on June 8, 2016, the court

sheriff’s department, which had resulted in the

affirmed the conviction and two-year prison

14

TRUST THE LEADERS | Summer 2016 | SGRLAW.com

Trademark Infringement

intentionally or recklessly supplie[d] registration

the distributor under its ONEOK trademark.

services to fictitious entities, knowing that these

Ultimately, both cases were settled when Twitter

entities engage in trademark and service mark

removed the allegedly infringing content from

counterfeiting.” Moniker, an Internet registrar,

its system.

To date, the leading cases on contributory

moved to dismiss the complaint, arguing that the plaintiff failed to plead either “inducement”

liability on the Internet are Tiffany (NJ) Inc. v.

or “knowledge and control.” Denying the

eBay, Inc., 576 F. Supp. 2d 463 (S.D.N.Y. 2008)

motion, the court pointed to the registrar’s

and Louis Vuitton Malletier S.A. v. Akanoc

continued provision of registration services

Solutions, Inc., 591 F. Supp. 2d 1098 (N.D. Cal.

to fictitious serial cybersquatters, “long after

2008), aff’d, 658 F.3d 936 (9th Cir. 2011).

In eBay, the court held that an online auction

it would have been apparent to any registrar in Moniker’s position that its customer was

house was not contributorially liable for sales of

held that the plaintiff’s contributory trademark

using Moniker’s service to engage in trademark

counterfeit Tiffany jewelry on its website by end

infringement claim could stand because

and service mark counterfeiting, and long

users. The court determined that eBay exercised

the court in Inwood “laid down no limiting

after Moniker knew or should have known

sufficient control over its website to come

principle that would require defendant to be a

that its customer was a fictitious entity and/or

within the “knowledge and control” threshold

manufacturer or distributor” (quoting Fonovisa,

anonymous individual.”

articulated in Fonovisa and Hard Rock Cafe, as it

Theories of indirect trademark infringement

provided the software to set up auction listings,

have been applied unevenly to online payment

supplied the necessary marketplace for the sale

processors and social-networking websites.

of counterfeit goods, actively promoted the sale

Internet service providers

In Perfect 10, Inc. v. Visa International Service

of Tiffany jewelry items, profited from the listing

Internet and domain-name registration services

Ass’n, 494 F.3d 788 (9th Cir. 2007), an online

of items and successful completion of sales, and

were seemingly immune to indirect trademark

publisher brought an action against credit card

maintained significant control over the listings

liability after the decision in Lockheed Martin

companies for processing payments to websites

on its website by barring entire categories of

Corp. v. Network Solutions, Inc., 194 F.3d 980

that sold unauthorized digital photographs

products and implementing fraud-screening

(9th Cir. 1999). There, the court analogized

bearing the publisher’s trademark. The U.S.

engines. The court concluded, however, that

Network Solutions (NSI) – then the only

Court of Appeals for the Ninth Circuit held that

“general knowledge ... does not require eBay

accredited domain name registrar – to

the credit card payment networks were not

to take action to discontinue supplying its

the United States Postal Service, stating,

instrumentalities of trademark infringement.

service to those who might be engaging in

76 F.3d at 265). The defendants in Hetronic were a distributor and an assembler.

“NSI does not supply [a] domain-name

counterfeiting.”

Similarly, in Anthony La Russa v. Twitter,

combination any more than the Postal Service

Inc., 3:09-cv-02503-EMC (N.D. Cal. 2009), an

The evidence demonstrated that eBay had

supplies a street address by performing the

American celebrity sued the social-networking

general notice that some portion of the Tiffany

routine service of routing mail.” For liability

website Twitter for contributory infringement

goods sold on its website were counterfeit due

to attach, the court held, there must be “[d]irect

when an anonymous user began making

to thousands of infringement notice forms

control and monitoring of the instrumentality

inflammatory and insulting comments under

and numerous demand letters sent to eBay by

used by a third party to infringe the plaintiff’s

the celebrity’s trademark-protected personal

Tiffany. Tiffany argued that eBay’s “generalized”

mark.” See also Scholz v. Goudreau,

name. And in Oneok, Inc. v. Twitter, Inc.,

No. 13-cv-10951, 2015 WL 5554012

4:09-cv-00597-JTK (N.D. Okla. 2009), a natural

(D. Mass. Sept. 21, 2015) (applying “control and

gas distributor sued Twitter for contributory

monitoring” test).

trademark infringement when an anonymous

However, in recent years, federal courts have

user released misleading information about

shifted gears, recognizing that domain-name registration authorities provide much more than mere “rote translation services.” In Transamerica Corp. v. Moniker Online Services, LLC, 672 F. Supp. 2d 1353 (S.D. Fla. 2009), the owner of the TRANSAMERICA trademark for financial services and insurance alleged that “Moniker

Theories of indirect trademark infringement have been applied unevenly to online payment processors.

TRUST THE LEADERS | Summer 2016 | SGRLAW.com

15

Trademark Infringement

Federal courts now grapple with the duty owed by Internet service providers to trademark owners. upon notice from trademark owners; in Akanoc Solutions, all of the Louis Vuitton products purchased from Akanoc’s customers were counterfeit.

The future of indirect liability Indirect trademark liability has expanded to include middlemen and intermediaries such as landlords, shipping services and Internet service providers.

The principal extension of the law has been In Akanoc Solutions, the other leading case

from the contribution of an infringing product

remedy the problem at the very moment it knew

on contributory infringement liability for Internet

to the contribution of a service as the means of

or had reason to know the infringing conduct

activity, a California jury awarded $32.4 million to

infringement.

was occurring. The court, however, declined

Louis Vuitton arising from a web host’s continued

to extend contributory liability “where there

provision of services to websites peddling

by Internet service providers to trademark owners.

is some uncertainty as to the extent or nature

counterfeit goods. Akanoc provided servers that

Clearly, an Internet service provider may not

of infringement.” The court also noted that a

stored Internet content and allowed content to be

continue to provide its services to counterfeiters

substantial number of authentic Tiffany goods

accessed through the Internet to counterfeiters.

while remaining willfully blind to infringement.

were sold on eBay. “Were Tiffany to prevail

Denying a motion to dismiss Louis Vuitton’s suit,

However, trademark owners will continue to try to

on its argument,” the court stated, its “rights

the court focused on Akanoc’s knowledge of

have providers such as eBay and Twitter step up

in its mark would dramatically expand, potentially

the direct infringement as evidenced by Louis

their preventive measures. In general, trademark

stifling legitimate sales of Tiffany goods on eBay.”

Vuitton’s demand letters and internal Akanoc

infringement on the Internet is pervasive, but

emails recognizing sales of counterfeit goods by

overly restrictive standards for indirect liability chill

significant efforts to protect its website from

end users. Citing Hard Rock Cafe and Fonovisa,

competition and innovation. For now, it seems

counterfeiters, promptly removed challenged

the court found that Akanoc’s services were

federal courts will continue to apply and expand

listings from its website and invested millions of

“the Internet equivalent of leasing real estate”

doctrines of indirect trademark infringement to

dollars in anti-counterfeiting initiatives. The court

and, when combined with Akanoc’s ability to

maintain a precarious balance between fostering

concluded, “the law does not impose a duty ... to

remove infringing websites, entailed a level of

innovation and protecting trademark rights. n

take steps in response to generalized knowledge

involvement and control that prohibited Akanoc

of infringement.”

from remaining willfully blind to trademark

Note: This is an updated version of an article

infringement taking place on its servers.

originally published in the Journal of Intellectual

knowledge required eBay to preemptively

The court also found that eBay made

The significance of measures taken by

Both eBay and Akanoc Solutions turned on

the intermediary to prevent infringement

Federal courts now grapple with the duty owed

Property Law & Practice (Oxford University Press):

was also emphasized by the court in

the issues of knowledge and willful blindness.

“Hauling in the Middleman: Contributory Trade Mark

Chloe SAS v. Sawabeh Information Services

Neither court hesitated to find that the provision

Infringement in North America,” by James L. Bikoff,

Co., 2:11-cv-04147 (C.D. Cal. 2013), holding

of Internet services qualified as an instrumentality

Keri A.F. Johnston, David K. Heasley, Phillip V. Marano,

an ecommerce platform liable for contributory

of direct infringement. However, as in Omega SA,

and Andrea Long (JIPLP (2010) 5 (5): 332-343).

trademark infringement, without mentioning

the focal point in both cases was the defendant’s

the specific knowledge requirement as set out

response to notice of direct infringement

in eBay. However, the defendant in Chloe was

and the precautions taken to prevent such

willfully facilitating trademark infringement,

infringement. In eBay, the online auction house

whereas eBay was taking significant measures

made significant efforts to combat counterfeiting

to combat it.

activity and promptly removed infringing content

16

TRUST THE LEADERS | Summer 2016 | SGRLAW.com

Jim Bikoff is a partner in SGR’s Intellectual Property Practice. He specializes in worldwide trademark, copyright and anticounterfeiting protection and enforcement. jbikoff@sgrlaw.com.

FinTech

THE FINTECH CHALLENGE The convergence of financial services and technology may have simplified our lives, but it presents a regulatory and legal maze for companies to navigate

F

inTech – the convergence of financial services and technology – touches consumers and businesses

in many ways. Mobile payments and funds transfers, online banking, virtual currencies, on-demand retail payments processing, online lending and investing platforms, remote insurance claims settlements, merchant loyalty rewards programs, and wealth management applications

BY GREG KIRSCH

BY BRETT LOCKWOOD

are among the many FinTech services burgeoning in the marketplace.

While financial services businesses

TRUST THE LEADERS | Summer 2016 | SGRLAW.com

17

have long relied on extensive computing infrastructures to make their services possible and economical, innovative technologies only recently provided the nexus through which users accessed those services. By contrast, FinTech product and service offerings encompass a wide array of financial products and services that

Intellectual property is both a valuable asset and, potentially, a significant risk to players within the FinTech industry.

are accessible to consumer and business users

2

Technology services regulation and practices

On the nonfinancial side of these businesses – the “tech” element of FinTech – there are many other legal considerations that require significant attention. Although the offering of technology services has not generally been the subject of government regulation (with some notable

through multiple personal computing devices

anti-money laundering, financial fraud and

exceptions, such as telecommunications), certain

and, in many cases, on an on-demand basis.

anti-terrorism concerns under the requirements

concerns that cut across many technology

of the Department of Treasury’s Financial

service offerings, particularly where consumers

readily available financial services is immensely

Crimes Enforcement Network (FinCEN) or

are involved, have received more scrutiny and

convenient. From a legal perspective, the

other agencies. One further regulatory concern

resulted in legal compliance obligations.

issues that must be dealt with by a FinTech

FinTech companies must contend with is the

business involve the overlap of financial services

growing and somewhat omnibus authority

and deceptive and unfair business practices

regulation with concerns that are peculiar to

of the Consumer Financial Protection Bureau

have spurred a patchwork of federal and

mobile and online technology businesses.

(CFPB) and the Federal Trade Commission, each

state regulation and compliance requirements

of which has far-reaching jurisdiction over the

that impact FinTech businesses. Data privacy

Key FinTech legal concerns

manner in which many financial services are

and security concerns among consumers,

Financial services of many types are the subject of

offered to consumers. This spring, the CFPB

businesses and regulatory agencies have

meticulous regulation at a federal and state level,

brought the first-of-its-kind (for the CFPB)

increased considerably within the United States

with many governmental agencies having broad

enforcement action against Dwolla, a FinTech

over the past five years. Although previously

(and often overlapping) jurisdiction over products

payments company, for inadequate data

regarded mostly as an afterthought when a

and services offered by regulated entities.

protection practices.

data breach occurred, compliance with data

From a user perspective, the range of

On top of the fact that the list of applicable

1

Concerns over data privacy, data security,

security requirements is now a fundamental

Financial services regulation

federal and state statutes and government

consideration at the front end as applications

Banking services are subject to the

agencies is lengthy in any given subsector of

are developed and deployed. While many factors

oversight of the Office of the Comptroller of

financial services, many FinTech services do

account for this – from newsworthy major data

the Currency, the Federal Reserve, the Federal

not neatly fit within well-defined regulatory

Deposit Insurance Corporation and state-specific

categories. A cautious approach to compliance

banking authorities, among other agencies.

is therefore required. This consideration has

Insurance providers must be licensed by state

prompted many FinTech companies to err on

insurance commissions, while services related to

the side of “opting in” to a regulatory scheme

the insurance ecosystem may have obligations

where there is meaningful concern about

under federal laws (such as for health care

the applicability of particular statutes. As an

reimbursements). Payment processors and credit

example, U.S. providers of one of the most

card and other payment-card companies must

widely used virtual currencies, bitcoin, generally

adhere to obligations under federal statutes that

have sought state-level licenses as a money

regulate permissible levels of fees for payment

service business or money transmitter, although

cards, as well as mandatory guidelines set by

it is not clear that this is even necessary.

While delivering financial services through

industry bodies such as the Payments Card Industry (PCI) Security Standards Council. Money

innovative technologies makes the services

services businesses providing funds transfers and

offered by FinTech companies more attractive

money order services are subject to state-by-state

to users, the panoply of regulation means that

money transmitter licensing.

legal compliance obligations must be

Virtually all financial services companies must also implement detailed programs to address

18

a central component of FinTech businesses.

TRUST THE LEADERS | Summer 2016 | SGRLAW.com

FinTech

breaches by retailers and health care companies to the increased incidence of financial fraud

FINTECH FACTORS

facilitated by the explosion of electronic data –

Moreover, as a result of recent changes in U.S. patent law, there are an increasing number of techniques available to challenge the validity of

Regulation

because of the type of data required to enable

granted patents. For example, new procedures

financial services transactions, FinTech companies

exist at the USPTO to challenge patents after

must pay special attention to data privacy and

issuance, based on, for example, prior art (i.e.,

data security obligations.

prior publications and prior patents). And a special procedure is now available to challenge

In addition, businesses within the online and mobile sectors of the technology industry, which dominate FinTech, have developed a series of

Finance

Technology

covered business methods, or “CBMs,” which include certain types of FinTech inventions.

customary legal-contracting practices that most

These new procedures resemble litigation in

FinTech business are well advised to follow. These

many ways, yet offer a less expensive alternative

include requiring user assent (and a specified

to federal district court litigation to challenge granted patents.

manner of doing so) to a set of protective service

Innovation

or application terms, the posting of data

Thus, while in some ways it has become more difficult to obtain and enforce patents

privacy practices, copyright notice and infringing-

for FinTech inventions, patent protection for

content takedown policies under the Digital Millennium Copyright Act, and specific consent

for various reasons: leverage to exclude others

financial technologies can still be obtained.

requirements under the Telephone Consumer

from a market segment, extraction of licensing

However, the strategies and tactics for obtaining

Protection Act for text messages and other

revenue from third parties, offsetting patent

such patent protection has changed markedly,

electronic communications.

portfolios of competitors, and increasing the

especially in light of the new procedures

value of their companies.

available at the USPTO to challenge patents.

3

Intellectual property concerns

But through a thoughtful approach to applying

Patent applications are filed with and granted by the U.S. Patent and Trademark Office

for and pursuing patent protection at the

asset and, potentially, a significant risk to players

(USPTO), an agency of the U.S. Department of

USPTO, with a similarly thoughtful approach to

within the FinTech industry. This is especially

Commerce, to encourage the development of

mitigating the risks posed by third-party patents,

true of patents. To protect their investment in

new inventions for the ultimate benefit of society

FinTech companies can pursue suitable strategies

innovation, many FinTech companies actively

by granting innovators exclusive rights with

for offensively and defensively protecting their

pursue patent protection for their inventions,

respect to their inventions for a limited period of

investments in innovation.

Intellectual property is both a valuable

time. In this way, patent owners can achieve a

SELECTED FINTECH COMPANIES

return and profit on their investment, providing

Summary

an incentive for them to innovate.

As with other technology sectors that have

SECTOR

COMPANIES

Payments

NCR, PayPal, FIS, Stripe, Idology, Dwolla

patent protection, but, on the other hand, often

FinTech companies and their service offerings

struggle with how best to mitigate the risk

present tremendous opportunities for

Lending

Kabbage, Sindeo, Funding Circle, Prosper, Lending Club

posed by third-party owners of other patents.

innovations and conveniences that benefit

This challenge is further compounded by recent

consumers and businesses alike. That growth

case law, from the U.S. Supreme Court and

also poses for FinTech businesses and their

Currencies

CoinBase, BitPay, Coinnections, Fenergi, Circle

lower appellate courts, that has severely limited

users many new regulatory, legal and intellectual

patent protection for automated methodologies

property challenges that will need to be sorted

(such as those driven by a computer), where the

out further as the FinTech sector continues to

invention merely performs by computer what

develop and grow. n

Personal Finance Credit Karma, Mint,

VantageScore, E*Trade,

Equifax Security

Pindrop, Okta, Good Technology, SunGard, Centrify

FinTech companies, on the one hand, embrace

experienced rapid growth in recent years,

previously was performed manually. Because many fall into this category, it has become more difficult to obtain and enforce patents for certain FinTech inventions for financial services methodologies.

Greg Kirsch is the head of SGR’s Intellectual Property Practice. gkirsch@sgrlaw.com.

Brett Lockwood is the head of SGR’s Technology Law Practice. blockwood@sgrlaw.com.

TRUST THE LEADERS | Summer 2016 | SGRLAW.com

19

BY BILL MAYCOCK

KEEPING SEPARATE LIFEBOATS AFLOAT How to protect owners and affiliates from related-entity liability

20

TRUST THE LEADERS | Summer 2016 | SGRLAW.com

Related-entity Liability

S

“

o, we’ll form a new subsidiary to isolate

company will continue in business. By analogy, if one

the risk of the new venture. If the new

lifeboat sinks, the others remain afloat. While it takes

venture fails, our core business will

time, money and effort to set up and maintain separate

remain unaffected.”

entities, doing so enables a business to undertake

Here’s what’s wrong with that common business

sentiment. When related-entity liability sucks in owners and affiliates, it’s a very bad day for everybody. Having

opportunities for which the company prefers not to place all of its assets at risk.

So, after spending time, money and effort to set

your assets seized for your own debts would be bad

up separate legal entities, we expect those separate

enough. Having your assets seized and sold for the

legal entities to be recognized by the courts as, well,

debts of a company that you own or with which

“separate.” Thus, we are shocked when the assets of

you are affiliated is doubly bad when you and your

owners and affiliates of a debtor are sometimes drawn

company were not at fault for the underlying liability.

into the liability vortex of a so-called “separate” related

For the claimant, being able to seize and sell the

entity that lacks assets sufficient to pay a judgment

assets of owners and affiliates of a judgment debtor

against it. “[T]he list of justifications for piercing

may constitute the difference between finding a pot

the corporate veil is long, imprecise to the point of

of gold rather than an empty tin cup at the end of the

vagueness and less than reassuring to investors and

litigation rainbow. So, instead of a judgment creditor

other participants in the corporate enterprise interested

being able to seize only the assets of its debtor, the

in knowing with certainty what the limitations are

judgment creditor may also be able to seize the assets

on the scope of shareholders’ personal liability for

of its debtor’s owners and affiliates. The legal term for

corporate acts.” (“The Three Justifications for Piercing

this legal asset-grab is “piercing the corporate veil.”

the Corporate Veil,” Harvard Law School Forum on

While the “piercing” concept originally applied to

Corporate Governance and Financial Regulation,

corporations, the concept today is applied to other

https://corpgov.law.harvard.edu/2014/03/27/the-three-

forms of business entities, including limited liability

justifications-for-piercing-the-corporate-veil). Rather

companies.

than attempt to explain the legal nuances of those

From the standpoint of a creditor of a defunct

justifications, this article provides straightforward

debtor, seizing related-entity assets is a bonanza. From

preventive business practices that will help rebut

the standpoint of the owner of those assets, such a

those justifications and preserve separateness.

seizure may spell catastrophic disaster.

Lenders and guarantors should take heed, too.

Loan documents often lack covenants requiring the

Understanding lifeboats

borrower to maintain corporate separateness, thus

Entities are often created to limit and separate assets

unnecessarily endangering the payback by subjecting

and liabilities of one project or line of business from

the borrower’s assets to collection for the liabilities of

those of another. If one company fails, the other

an owner or affiliate of the borrower.

TRUST THE LEADERS | Summer 2016 | SGRLAW.com

21

INCREASING INSULATION CREATING BOUNDARIES

wish to state something such as: The Really-Happy Group of Companies is

So, don’t automatically select a nominal amount for initial capital. Further, too often the specified

composed of companies based upon values and

amount is not actually paid. Sometimes, the

standards of happiness, excellence and quality.

amount is entered on the financial records as

Those companies include:

an account receivable from the owners or is not

●

Really-Happy Enterprises, Inc.

entered at all. So, check on it. It should show on

●

R-H Marketing, LLC

the balance sheet. In the event that initial capital

●

Glücklich, GmbH

has not yet been actually paid, pay it now. Even

Such a description identifies the group, not

if the company formed is used solely as a non-

Six straightforward steps to take – five by entities and one by lenders and guarantors – to increase liability insulation between related entities, and thereby decrease the possibility of spillover affiliate liability.

itself a legal entity, as a group of companies, and

operating or holding entity, the company should

identifies the companies comprising the group.

have a bank account with the initial capital

1

licensor is an operating company, the license

For multiple companies using the same

paid into the account. Failure to pay the initial

trademark, use a written trademark license

capital may result in the owner being personally

agreement. That is not essential from an

responsible for judgments against the entity for

intellectual property standpoint, but it provides

that reason alone.

added related-party insulation. Further, if the

4

Wear the right hat

Publicize who you really are

agreement should permit each licensee to

Be authentic. Use your own entity’s

continue to use the trademark even if the

full legal name where everybody can

licensor becomes insolvent.

entities, then be sure to wear the right hat at

2

the right time. If you are negotiating a deal for

see it: on contracts and legal documents to be sure, but also on your website, email signature block, business cards, invoices, purchase orders, forms, receipts and copyright notices. Currently

If you wear multiple hats, such as serving as an officer in multiple related

Don’t allow others to pass themselves off as you

Really-Happy Enterprises, Inc., then hand out

Make sure that related businesses –

of that company. When you sign a letter for

your business card identifying you as an officer

especially those using the same trademark or

those negotiations, sign as an officer of that

of using a trademark or trade name in lieu of

trade name as you are using – publicize who

company, and not of some other company or of

an entity name to build brand awareness and

they really are by using their full entity name.

no company at all. If you confuse the companies

to exude an image of collective largeness and

Not only do you want to hold yourself out as

for which you are an officer when you are

credibility. You may use the trademark and

a separate entity, you want to prevent anyone

negotiating a deal, you should expect

trade name for those purposes, but not to the

from confusing another company with your

that the opposing party

exclusion of your legal name. If you are actively

company. “Really-Happy Enterprises, Inc.”

identifying yourself as Really-Happy Enterprises,

and “R-H Marketing, LLC” are less likely to

Inc., with a Really-Happy trademark, you will be

be responsible for each other’s liabilities if

far less likely to be held liable for the judgments

both use their full names all the time. If you

against an affiliated company also using that

permit a related company to mooch off of your

trademark than if you were only to use the

company’s image, then you should expect that

trademark.

company’s creditors may later mooch off of

in vogue for marketing purposes is the practice

The terms “Inc.,” “Corp.,” “LLC” and similar designations are your friends. They clearly identify you as a legal entity responsible for your own liabilities and not the liabilities of others.

To promote brand awareness and exude

your company’s assets.

3

Pay the initial capital. Really At formation, a company

largeness without compromising entity liability

must be adequately capitalized

insulation, you may want to use something

for the anticipated needs of

similar to “Vice-President, Really-Happy

the business. (Sometimes, this

Enterprises, Inc., an entity of the Really-Happy

same rule also applies to an

Group of Companies.” On a website under a tab

expansion or material change

such as “Who We Are” or “About Us” you may

to the scope of the business.)

22

TRUST THE LEADERS | Summer 2016 | SGRLAW.com

Related-entity Liability

will later claim that it, too, was confused. So, if the deal fails and the opposing party sues, that party may attempt to seize the assets of all of the related companies. If you sign a document without specifying a particular company, you should expect the opposition to claim that you were signing on behalf of all of the related companies. Similarly, do not sign as “Vice President of the Really-Happy Group of Companies” because the title “Vice President” incorrectly implies a legal entity that may be sued. “Really-Happy Group of Companies”

Create separate financial statements

is not such a legal entity. Thus, for liability-

for each related entity. All commercial

containment purposes, you want to avoid

accounting software for businesses

implying that such a legal entity exists.

today permits maintenance of

5

separate accounting records for

Maintain separate finances

separate companies. Take advantage of

Don’t share bank accounts between

that software and engage a competent

evaluation of separateness, you may later find

entities. Each entity must have at

bookkeeper to maintain separateness.

that you have made a loan to a company (or

least one bank account and no entity should

Intercompany loans should be documented in

guaranteed a loan of a company) that has by

share an account with any other entity. If your

intercompany loan accounts and in promissory

its own sloppiness – and the consequential

accountant objects that a separate account

notes.

operation of law – tacitly assumed related-

for each entity makes things too complicated,

Undertake and keep for evidence for seven

entity liabilities beyond those shown on its

overrule the objection. Any shared services,

to 10 years allocation studies or analyses for

own financial records. Further, loan documents

such as accounting, human resources, etc., of

allocating in a fair way certain costs among

and guarantees should contain adequate

affiliated companies should be the subject of

related entities. For example, the costs of

covenants of separateness and practices to

accounting personnel might be allocated based

maintain separateness to help protect against

upon the number of accounting transactions of

the possibility of related-entity liability adversely

the various companies for which the personnel

affecting the borrower’s capability to repay.

a written services agreement that provides for allocations.

provide services. The allocation studies need not be complex or extensive, just reasonable and

Conclusion

fair. They are invaluable when refuting a claim of

By adopting the business practices

related-entity liability. If you indiscriminately mix

recommended above, you may facilitate

money among related companies, you should expect that liability will be indiscriminately imposed among the companies. Good fences not only make good neighbors, they keep the neighbor’s junk out of your yard.

6

For lenders and guarantors, evaluate separateness and require covenants Absent a pre-transaction

and fortify the legitimate purpose of setting up separate legal entities to limit financial risk. Those practices serve to help maintain separateness, send clear messages of separation to potential asset-grabbers and prevent the catastrophic failure of one business from sinking the owners and affiliates of that business. n Bill Maycock is a partner in SGR’s Litigtion Practice.

He has represented clients in litigation regarding antitrust, energy, telecommunications, intellectual property, property tax litigation and other business litigation. bmaycock@sgrlaw.com.

TRUST THE LEADERS | Summer 2016 | SGRLAW.com

23

SGR CLIENT PROFILE

INNOSPEC The specialty chemicals firm delivers innovative technologies to a wide range of industries, from oilfields, fuels and refineries to power stations and personal care

W

hat do shampoo, fracking

Fuel Specialties. Their common denominator:

prevents foaming of diesel fuel. Frequently, a

fluid, and diesel fuel additives

chemistry. “Behind the tailored products that

very small amount of our chemicals can create a

have in common? They all

we supply to our different markets, there are

very dramatic impact in the final application – a

contain specialty chemicals

some basic chemistries that our markets have in

little goes a very long way!”

produced by Innospec, a global specialty

common,” explains Brian Watt, Innospec’s Vice

chemicals company bringing innovative new

President of Strategic Planning and Regulatory

than 1,300 employees in 20 countries. Because

technologies – aided by superior customer

Affairs. “For example, surfactants are the

it runs its business regionally, Innospec has

service – to market.

chemicals that allow us to combine oil and

major centers in Englewood, CO (serving the

water, and create products that clean, or prevent

Americas), Ellesmere Port, UK (serving Europe,

marketing of new ingredients that allow its

deposits. Variants of this chemistry are used in

Middle East and Africa), and Singapore (serving

customers to create new consumer products. The

shampoos and cleansers, in ‘frac’ fluids, and

Asia Pacific). The company has manufacturing

company’s business is comprised of three basic

in fuel detergents. Similarly, silicone chemistry

operations across the U.S., and in the U.K.,

industries: Personal Care, Oilfield Services and

delivers high shine in hair-care products, and also

France, Germany and the Philippines.

Innospec’s lifeblood is the development and

24

TRUST THE LEADERS | Summer 2016 | SGRLAW.com

Innospec is a truly global company, with more

Client Profile: Innospec

Innospec’s lifeblood is the development and marketing of new ingredients that allow its customers to create new consumer products.

A focus on sustainability

explains. “So, all of our customers expect new

Innospec looks at this issue on two fronts.

products regularly.”

The Fuel Specialties business will be aided

First, Innospec considers the resources used in making, using and disposing of its products.

by legislation – already well established in

Innospec implements plans, updated annually,

North America and Europe, but just now being

to reduce the energy it uses, the waste it creates

adopted in other areas of the world – requiring

and the carbon footprint of its products and

improved standards for air and fuel quality. To

its manufacturing operation. Innospec is a full

anticipate this demand, Innospec has recently

member of the Roundtable on Sustainable Palm

established bases of operation in Brazil and

Oil, and the Carbon Disclosure Project. Second,

Russia, and is in the process of enhancing its

standpoint, Innospec is old-fashioned when it

the company looks at how its products can help

presence in China.

comes to the importance of good customer

its customers reduce their environmental impact.

and employee relationships. “We back our

For example, Innospec has a wide range of

challenged by recent dramatic declines in both

products up with excellent customer service

products in its Fuel Specialties business that are

oil and gas prices, which have caused substantial

– we have one customer that needs on-time

designed to reduce fuel consumption, reduce

reductions in customers’ investment plans. But

delivery in no fewer than 20 countries around

pollution and emissions, and make engines safer

with its broad range of products for drilling,

the globe,” Watt explains. “We believe that a

and easier to maintain.

“frac/stim” and production applications, this

But while forward-looking from a technology

Innospec’s Oilfield Services business has been

segment of Innospec’s business is well positioned

business is no more or less than its people – our relationships with our customers, and with each

What’s in store at Innospec?

to expand rapidly when oil and gas prices

other, are paramount. We are not big users of

Constant innovation is the key to Innospec’s

recover.

videoconferencing – we would much rather talk

continued success in the future. “All of our

face to face.”

core markets rely on a constant stream of new

innovation by Innospec will mean shampoos or

products being developed, to continually renew

moisturizers that deliver better effects on the

and improve the downstream products,” Watt

skin, are derived from more natural ingredients,

A culture of compliance

In the Personal Care business, future

Innospec weathered a storm of difficult

or are devoid of many of the minor components

legal challenges in the early 2000s, eventually

that consumers view as undesirable. Historically,

emerging with an unwavering commitment

Innospec’s primary offerings to its Personal

to compliance. “The advent of the U.S.

Care business were additives providing foam,

Foreign Corrupt Practices Act and the U.K.

or lather, for cleaning. But the company is now

Bribery Act have underpinned the need for

expanding into other product components,

absolute compliance with laws and regulations,”

either organically or through acquisition, in an

notes Innospec’s CEO Patrick Williams.

effort to “take a greater share of the bottle,” as

Since Williams became CEO in 2009, the

the company describes it. One example: its 2014

company has invested heavily in the process

acquisition of Chemsil now allows Innospec to

and people necessary to deliver a first-class

offer “shine,” as well as a cleansing agent, to its

compliance culture. It has been a hard

customers.

road, and has taken some time to embed

So, the next time someone tells you how

compliance into the fabric of the company,

clean and shiny your hair looks, you may have

but it is a prerequisite to winning the

Innospec to thank for that. n

confidence of customers, employees and investors in today’s world. Explains Williams, “Innospec has been able to move on from its troubled

Smith, Gambrell & Russell has represented Innospec in major acquisitions, in litigation and in contract negotiations

past, and has created an

and other corporate matters, and also

environment in which

acts as primary outside legal adviser

compliance is non-negotiable,

to the company’s CEO. We look forward

and simply ‘the way we do

to continuing our relationship with

things ‘round here.’”

this innovative company.

TRUST THE LEADERS | Summer 2016 | SGRLAW.com

25

THE FACE OF FINLAND

IN GEORGIA

SGR’s John Saunders honored with Finnish knighthood

F

or the past 20 years, SGR partner John

and assisting Finnish companies with potential

Saunders has been “the Face of Finland

office locations and the sale of their products

in Georgia.” Since 1996, John has served

in the state. In addition, he delivers several

as Honorary Consul of Finland for the State of

presentations each year on topics related to

Georgia. Recently, the government of Finland

Finland.

bestowed upon John the title of Knight, First Class, of the Order of the Lion of Finland, for his

Finnish interests in the fields of commercial,

extensive work on behalf of the Nordic country.

scientific and cultural exchange, John’s

As Honorary Consul, John represents all

John proudly displaying his Order of the Lion of Finland cross.

26

Honoring his consular work in promoting

knighthood was presented by Ambassador

matters relative to Finland in Georgia including

Jukka Pietikainen, Consul General of Finland,

consularization of documents using the official

at the Finnish American Chamber of Commerce’s

seal, assisting Finnish citizens in distress,

98th Independence Day celebration in Atlanta

handling travel concerns between Georgia and

on December 5, 2015, the day prior to Finnish

Finland, organizing visits of Finnish politicians,

Independence Day.

businesspeople, academicians, artists, athletes

When presenting the honor, Ambassador

and government officials, verifying the identity

Pietikainen said, “This highly esteemed

of Finnish persons doing business in Georgia,

decoration has been bestowed upon you for

TRUST THE LEADERS | Summer 2016 | SGRLAW.com

“Finnish” Line

“Your efforts to serve Finland here in the State of Georgia are exemplary.

I must say I can’t imagine having a better person to represent our country here or anywhere else for that matter.”

Ambassador Jukka Pietikainen, Consul General of Finland

company, Oilon, a Finnish family-owned energy and environmental technology company, recently

your relentless work. Your efforts to serve Finland

opened its first North American corporate office

here in the State of Georgia are exemplary. I must

in Georgia due to the new location’s proximity

say I can’t imagine having a better person to

to a significant customer and the industry

represent our country here or anywhere else for

knowledge the area offers. John was honored to

that matter.”

attend the ribbon cutting for the 32,000-squarefoot headquarters in June in Thomasville (photo

John began representing Finnish companies in connection with their activities in the U.S. in

above) to show his support and dedication to

1978. One of John’s first clients was Finnish

his client and to Finland.

John has authored several articles related to

company and communications giant Nokia, with whom John worked to establish corporate

Finnish business in the United States. As one

offices in Atlanta. For John, the Nokia relationship

of the most active Honorary Consuls of Finland

led to regular trips to Finland, exposure to the

in the United States, John has shown deep

country’s business practices and additional clients

commitment to Finland and to the Nordic region

along the way. As John recalls, “In the early days,

in general through his other civic activities. He

ABOUT THE KNIGHTHOOD

when we would describe our Finnish practice to

has hosted four (three former and one sitting)

colleagues in the U.S., the response most often

prime ministers of Finland during their visits to

The Order of the Lion of Finland, one of three official orders, was introduced on September 11, 1942, to complement the Order of the White Rose of Finland and to facilitate the awarding of honors for military and civilian merit. The Order of the Lion is among the highest honors the government of Finland can bestow upon a nonFinnish citizen. The president of Finland wears the Star of the Order of the Lion of Finland and is Grand Master of the Order.

Knight, First Class, is one of seven classes of the Order of the Lion of Finland.

heard was, ‘Did you say Finland?’ Now that

Atlanta. He is a past president and currently

Finnish companies are at the forefront of leading

serves as secretary and a director of the Finnish

industries, no one asks that question anymore.”

American Chamber of Commerce of the Southeast.

SGR’s Finnish practice has expanded over the

In addition to his Finnish practice, John is the

years and, today, SGR represents approximately 20 Finland-based companies in connection

head of one of SGR’s Corporate practices, and a

with their U.S. activities. Georgia enjoys a high

member of the firm’s Investment Management

concentration of Finnish-related commerce.

and Investment Advisory Practice and the Air

Finnish technology and equipment are utilized

Transport Industry Group.

John is humbled by the high honor and

by many paper mills in Georgia, which leads the nation in the production of pulpwood used in the

recognition, stating, “I am honored and

paper industry. And Finnish companies continue

privileged by this decoration. I have enjoyed

to seek business opportunities in the Southeast

serving and look forward to continuing to serve

to expand their operations and take advantage

the Finnish community and promoting Finnish

of the healthy business climate. One such

culture and industry.” n

TRUST THE LEADERS | Summer 2016 | SGRLAW.com

27

Trust the Leaders is printed on recycled paper