LABOR & EMPLOYMENT:
Beyond Fraud and Abuse: Why Health Care Mistakes Can Be So Costly p.30
Facebook Has Changed the Game: dŚĞEĂƟŽŶĂů>ĂďŽƌZĞůĂƟŽŶƐĐƚĂŶĚ Your Social Media Policy p.34
Employee Stock Ownership Plans: When “Stock Drops” Head to Court
VOLUME ONE | 2012
BUSINESS Guide ^ŝŐŶ ŽŶ ƚŚĞ ŽƩĞĚ >ŝŶĞ͗ Renewing Your Commercial Lease in 2012 ŽŶƐŝĚĞƌŽŶŝŶŐtŚĞŶƵǇŝŶŐʹ Žƌ ǆƉĂŶĚŝŶŐ ʹ Ă ƵƐŝŶĞƐƐ >ŝĐĐĞŶƐƐŽƌƌƐĂŶĚ ŝƐƐƚƌŝŝďƵƚŽƌƐĂƐ ĐĐŝĚĞŶƚĂů&ƌĂŶĐŚŝƐŽƌƐ ϱ dŚŝŶŐƐ ƚŽ <ŶŽǁ ZĞ ĞŐĂƌĚ ĚŝŶŐ ƚŚ ŚĞ ͞&ŝƌƐƚͲdŽͲ&ŝůĞ͟WĂƚĞŶƚ^ǇƐƚĞŵ
Smith Moore Leatherwood LLP is proud to have served as legal counsel to Force Protection in its $360 million merger with General Dynamics. CONGRATULATIONS
We are honored to have played a part in the continued effort to protect our troops and our allies in conflict zones around the world.
Attorneys at Law
Robert W. (“Bobby”) Pearce Jr.
Michael J. Hickerson
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From the Chairman
ZŽďDĂƌĐƵƐŝƐ^ŵŝƚŚDŽŽƌĞ>ĞĂƚŚĞƌǁŽŽĚ͛ƐŚĂŝƌŵĂŶ͘dŚĞĨŽĐƵƐ ŽĨ ŚŝƐ ůĞŐĂů ƉƌĂĐƟĐĞ ŝƐ ŽŶ ĐŽŵƉůĞǆ ĐŽŵŵĞƌĐŝĂů ĂŶĚ ĂƉƉĞůůĂƚĞ ůŝƟŐĂƟŽŶ͘ ,Ğ ŚĂƐ ƌĞƉƌĞƐĞŶƚĞĚ ŶƵŵĞƌŽƵƐ ĐŽƌƉŽƌĂƟŽŶƐ ĂŶĚ ĮŶĂŶĐŝĂů ŝŶƐƟƚƵƟŽŶƐ ŝŶ ŚŝŐŚ ƉƌŽĮůĞ ĂŶĚ ĐŽŵƉůĞǆ ůŝƟŐĂƟŽŶ ŵĂƩĞƌƐƚŚƌŽƵŐŚŽƵƚƚŚĞƐƚĂƚĞĂŶĚĨĞĚĞƌĂůĐŽƵƌƚƐŝŶEŽƌƚŚĂƌŽůŝŶĂ ĂŶĚ ĞůƐĞǁŚĞƌĞ͘ ,Ğ ŝƐ ĂůƐŽ ǁĞůůͲǀĞƌƐĞĚ ŝŶ ĂůƚĞƌŶĂƟǀĞ ĚŝƐƉƵƚĞ ƌĞƐŽůƵƟŽŶ͕ŝŶĐůƵĚŝŶŐŵĞĚŝĂƟŽŶĂŶĚĂƌďŝƚƌĂƟŽŶ͘ ZŽďŚĂƐďĞĞŶƐĞůĞĐƚĞĚďǇ>ĂǁΘWŽůŝƟĐƐDĂŐĂǌŝŶĞĨŽƌŝŶĐůƵƐŝŽŶ ŝŶ EŽƌƚŚ ĂƌŽůŝŶĂ ^ƵƉĞƌ >ĂǁǇĞƌƐ ĨŽƌ ƵƐŝŶĞƐƐ >ŝƟŐĂƟŽŶ ĂŶĚ ŝƐ ůŝƐƚĞĚŝŶtŽŽĚǁĂƌĚͬtŚŝƚĞ͛ƐĞƐƚ>ĂǁǇĞƌƐŝŶŵĞƌŝĐĂ ĨŽƌƵƐŝŶĞƐƐ >ŝƟŐĂƟŽŶĂŶĚDĂƐƐdŽƌƚ>ŝƟŐĂƟŽŶ͘ ƌŽď͘ŵĂƌĐƵƐΛ ƐŵŝƚŚŵŽŽƌĞůĂǁ͘ĐŽŵ ϳϬϰ͘ϯϴϰ͘ϮϲϯϬ
In today’s ever-shifting economic climate, uncertainties make business planning and forecasting a challenge for even the most experienced analysts. Success is no longer defined by aggressive growth, or even by identifying the next best opportunity or niche market. In these times, it can simply be about keeping the doors open, and rethinking old habits to protect the bottom line. The business world has become more cautious by necessity. Lawyers are generally cautious by nature. As trusted legal advisors, we always strive to immerse ourselves in the businesses we represent to gain insight into where a client’s pitfalls may lie. As our clients try to do more with less, we offer a team approach to evaluating a business as a whole, relying on the experience of not just our corporate attorneys, but also those in the areas of tax, real estate, labor and employment, litigation, health care, and intellectual property. Our clients need economies of scale now more than ever before, and we are constantly working on ways to deliver. In this edition of SML Perspectives, we have compiled a series of articles intended to provide insights to executives and business owners navigating today’s uncertain business waters. While we can never mitigate all the risks, we hope to make some choices a little clearer and less daunting. As always, our attorneys are committed to more than just legal excellence; we are committed to listening.
The Legal Business Guide Issue P.10
Consider Zoning When Buying – or Expanding – a Business
But I Don’t Sell French Fries!
P.03 From the Chairman A letter from Smith Moore Leatherwood’s Chairman
Two unique takes on how Green Laws impact small businesses
NTENTS VOLUME ONE | 2012
Employee Stock Ownership Plans: When “Stock Drops” Head to Court If employer stock options decline in value, the plan’s fiduciaries can face legal claims that they violated their duty to act prudently in the management of the plan.
Estate Planning Myths Dispelling common misconceptions is an important step in getting your estate plan in order. It’s never too early, or too late, to start planning.
ĞǇŽŶĚ&ƌĂƵĚĂŶĚďƵƐĞͲ Why Health Care Mistakes Can Be So Costly The line between “fraud and abuse” and “mistake” has blurred dramatically, and many health care providers are concerned.
Facebook Has Changed the Game: dŚĞEĂƟŽŶĂů>ĂďŽƌZĞůĂƟŽŶƐĐƚĂŶĚ Your Social Media Policy Posting every micro-thought on Facebook is now so commonplace that it’s easy to forget that it’s largely uncharted territory from an employment law perspective.
All e-mail extensions @smithmoorelaw.com
Brian Byrd B P Partner G Greensboro, N.C. C Corporate b brian.byrd@ 3336.378.5429
WĞƚĞƌZƵƚůĞĚŐĞ Partner Greenville, S.C. Litigation peter.rutledge@ 864.240.2410
Andy Spence Partner Charlotte, N.C. Corporate andy.spence@ 704.384.2667
D DĂƩƵŶŶŝŶŐŚĂŵ dŽŵdĞƌƌĞůů Partner Greensboro, N.C. Land Use Team Leader tom.terrell@ 336.378.5412
tĞďĞǀĞůŽƉŵĞŶƚ 'ĞŽƌŐĞEĞůƐŽŶ ŐĞŽƌŐĞ͘ŶĞůƐŽŶΛƐŵŝƚŚŵŽŽƌĞůĂǁ͘ĐŽŵ
DŝĐŚĂĞů>ĞĞ D P Partner W Wilmington, N.C. Commercial Real Estate/ C L Land Use michael.lee@ m 9910.815.7121
Copy Editors <ĂƚŚǇĂŐǁĞůů ŬĂƚŚǇ͘ďĂŐǁĞůůΛƐŵŝƚŚŵŽŽƌĞůĂǁ͘ĐŽŵ
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6 P Partner R Raleigh, N.C. F Finance m matt.cunningham@ 9919.755.8703
Managing Editor: ŽƵŐtĂůŬĞƌ ĚŽƵŐ͘ǁĂůŬĞƌΛƐŵŝƚŚŵŽŽƌĞůĂǁ͘ĐŽŵ ƌĞĂƟǀĞŝƌĞĐƚŽƌ ĚƌŝĞŶŶĞĞŶŶĞƩ ĂĚƌŝĞŶŶĞ͘ďĞŶŶĞƩΛƐŵŝƚŚŵŽŽƌĞůĂǁ͘ĐŽŵ
SSanders Carter P Partner A Atlanta, Ga. L Litigation ssanders.carter@ 4404.962.1015
John Walker Partner Greenville, S.C. Corporate john.walker@ 864.240.2419
ŽƵŐtĂůŬĞƌ͕DĂŶĂŐŝŶŐĚŝƚŽƌ ĚŽƵŐ͘ǁĂůŬĞƌΛƐŵŝƚŚŵŽŽƌĞůĂǁ͘ĐŽŵ ^ŵŝƚŚDŽŽƌĞ>ĞĂƚŚĞƌǁŽŽĚ>>W ƩŽƌŶĞǇƐĂƚ>Ăǁ ϰϯϰ&ĂǇĞƩĞǀŝůůĞ^ƚƌĞĞƚ ZĂůĞŝŐŚ͕EϮϳϲϬϭ ϵϭϵ͘ϳϱϱ͘ϴϳϬϳ ǁǁǁ͘ƐŵŝƚŚŵŽŽƌĞůĂǁ͘ĐŽŵ ǁǁǁ͘ƐŵůƉĞƌƐƉĞĐƟǀĞƐ͘ĐŽŵ
::ŝůůZĂƐƉĞƚ P Partner W Wilmington, N.C. C Corporate jijill.raspet@ 9910.815.7128
Erin Zuiker Associate Raleigh, N.C. Health Care erin.zuiker@ 919.755.8809
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GEORGIA | NORTH CAROLINA | SOUTH CAROLINA H. Sanders Carter, ERISA Team Leader, Atlanta, GA | 404.962.1015 | firstname.lastname@example.org Smith Moore Leatherwood LLP | Attorneys at Law | www.smithmoorelaw.com
perspectives on Green Laws
How do Green Laws impact small businesses?
Dave Neill Associate Raleigh, N.C.
For a small business, it is often the perceived learning curve that has the greatest impact. Larger companies have often developed a certain level of comfort with sustainable development standards. For a small business, the first experience with the requirements and opportunities presented by such regulations can be very intimidating. In our experience, these fears are focused typically on worries regarding additional costs, additional regulatory oversight, and the possible need to identify new suppliers and contractors. Green business practices in the land development sector are growing. The identification of an experienced consultant early in the processâ€”whether that be an engineer, architect, or attorneyâ€”can be a great help in calming fears for a small business entering this arena for the first time. With the right assistance, the worries regarding green regulations can be minimized and opportunities to leverage sustainable development laws for business growth and profit maximized. Dave Neill has a multifaceted practice dedicated to assisting clients with the many challenges of commercial and residential real estate development. His work encompasses all phases of development including acTuisition title Âżnancing and regulatory approval. email@example.com 919.755.8766
Every business produces waste, and the Environmental Protection Agency (EPA) has guidelines for businesses in all industries. Some substances that are corrosive, flammable, toxic, or reactive require more careful disposal than others. These are regulated by such laws as the Toxic Substances Control Act, the Resource Conservation and Recovery Act, and the Pollution Prevention Act. While businesses must spend time and resources complying with these laws, there are also other opportunities presented by the EPA that encourage redevelopment of properties contaminated by hazardous waste known as Brownfields properties. By alleviating liability for prospective developers, and offering grants, loans, and funding, the EPA can offset the cost of assessments and clean-ups of a qualifying property. The impact of green laws on small business can be costly, but under certain circumstances, they can also be used to create advantages if you are willing to navigate the red tape. Ted Edwards focuses his practice on providing counsel to owners, engineers and contractors regarding construction project administration and construction litigation. firstname.lastname@example.org 919.755.8764
Ted Edwards Partner Raleigh, N.C.
Where do you see your company LQÀYH\HDUV" by Michael Lee
here do you see your company in five years? It’s a simple question that inevitably prompts a more complicated one: how do you get there from here? If you don’t routinely spend time considering the answers, you could be doing your business a disservice. It’s too easy to get absorbed in daily matters, mini-crises, or operational planning. Overarching goals can become cloudy, start to feel lofty, or become irrelevant if your business environment changes. Reviewing your plan once a quarter requires you to look at where you are in relation to where you want to be. Making subtle adjustments every three to six months allows you to correct course smoothly, rather than making sharp turns after long intervals on a specific track. Brutally honest evaluation is the key to meaningful planning, and it’s important to take a hard look at key factors that will impact the success of your plan:
t8IBUTIBQQFOJOHJOZPVSJOEVTUSZ t8IBUIBWFZPVSDPNQFUJUPSTEPOFPWFSUIFMBTURVBSUFS t8IBUTZPVSQPTJUJPOJOUIFNBSLFU t"OZDIBOHFTTJODFZPVSMBTU4805(strengths, weaknesses, opportunities, threats) analysis? t)BWFZPVSUPQHPBMTDIBOHFETJODFZPVMBTUTUBUFEUIFN t8IFSFTUIFOFYUCFODINBSL The start of a new quarter always prompts us to begin anew, and it’s a great time to tweak your strategic plan. Scheduling time during the year to step back, look at the big picture, and take the long view is a simple but vital step in making your vision a reality. It’s the best way to know exactly how to get to where you want to be from where you are.
Michael Lee is a partner in 6mith Moore Leatherwood¶s :ilmington of¿ce. He focuses his practice on real estate development and land use/zoning. email@example.com | 910.815.7121
Sign on the Dotted Line:
Renewing Your Commercial Lease
in 2012 By Brian Byrd
eases sometimes get short shrift in the operations of a company, especially a company without personnel dedicated to facilities and property management who are accustomed to dealing with these sometime lengthy and arcane documents. Failing to give these documents appropriate attention prior to execution can create real headaches down the road when unanticipated situations arise. Although a comprehensive review of leasing issues is beyond the scope of this article, this article will touch on some of the “big picture” issues that need to be addressed regardless of whether a tenant is renewing an existing lease or entering into a new lease.
The business terms of the lease document should be compared with the letter of intent or term sheet, if there is one, to confirm that the lease accurately reflects the deal that was struck. Is the rental amount correct? If rent is calculated on a per square foot basis, do the math to check the stated rental amounts in the lease. Are rental escalations properly calculated? If the landlord has agreed to grant renewal options, does the lease clearly define how the renewal options must be exercised? How far in advance of the lease expiration date must the tenant exercise its renewal option? Landlords generally want as much notice as possible, but a long notice period limits the tenant’s operational flexibility. Depending on the type of property, notice periods between 90 and 150 days are customary. For the benefit of both parties, a floor plan showing the boundaries of the leased premises should be attached to the lease. Maintenance and repair provisions are often viewed as “boilerplate” but they merit careful review. Because a lease conveys exclusive possession of the premises and North Carolina law generally implies no obligation for a landlord to maintain commercial leased premises, what is not said in these provisions is often as important as what is said. Tenants should compare the portions of the premises to be maintained by the landlord and the portions to be maintained by the tenant in order to confirm that there are no gaps in the maintenance responsibilities allocated to the landlord and tenant. Typical maintenance and repair provisions vary depending on the type of space. While office leases in multitenant buildings generally require the landlord to maintain all areas outside the leased premises and the mechanical systems serving the leased premises, an industrial lease for an entire building may place all maintenance responsibility on the tenant. Tenants should try to avoid an obligation to bear the entire cost of making a capital repair the useful life
of which will significantly exceed the remaining lease term. For example, if the tenant is responsible for the maintenance and repair of the HVAC, is it reasonable for the tenant to bear the entire cost of replacing the HVAC with only a year or two remaining on the lease term? We sometimes see compromises reached to provide for the allocation of cost between the landlord and tenant based on the relationship between the expected useful life of the capital item and the remaining term of the lease. Assignment and subletting provisions also require careful attention. These provisions can limit a tenant’s flexibility to reduce operating costs if leased space becomes superfluous or if the tenant engages in some type of corporate sale or reorganization. In the absence of an express prohibition of assignment and subletting, a tenant may assign the lease or sublease the premises without the landlord’s consent. However, most landlords’ form leases will require the landlord’s consent to any assignment or subletting. At a minimum, a tenant should have its landlord agree that it will not unreasonably withhold, delay or condition its consent to an assignment or subletting. Setting objective criteria (e.g., minimum net worth, experience, and compliance with use requirements) for an automatic consent by the landlord can be helpful. In order to avoid losing a prospective assignment or sublease as a result of the landlord’s “filibuster,” the lease should require the landlord’s response to a request for consent within a specified period of time, failing which the landlord will be deemed to have consented to the assignment or subletting. Especially for tenants with numerous locations, obtaining consents to assignments in connection with a sale of assets or other corporate reorganization can be, in the best case, a logistical burden. Accordingly, a tenant should negotiate carve-outs in the assignment and subletting provisions for assignments to affiliates, assignments made in connection with the sale of substantially all of the tenant’s assets or stock transfers. If the assignee defaults under the lease, the original tenant may find itself liable for damages caused by the assignee’s default. In order to mitigate this risk, the tenant should attempt to include provisions releasing the original tenant from liability under the lease following an assignment of the lease, although landlords generally resist a complete release of the assignor. If the landlord will not agree to a complete release, then the lease should require the landlord to provide notice to the assignor of any default under the lease by the assignee and an opportunity pp y to cure the default.
A purchaser of commercial real estate would never complete the purchase without having the title searched. However, tenants often do not consider that the interest in real estate conveyed to them by the landlord by way of the lease is only as good as the landlord’s title to the real estate. Accordingly, tenants should ask for a representation and warranty by the landlord that it owns good title to the leased premises subject only to the exceptions listed on an exhibit to the lease. If the landlord will not agree to make this representation and warranty (and perhaps even if the landlord will make this representation and warranty), then the tenant should consider having a title search performed. Any restrictions affecting the property should be reviewed to confirm that the tenant’s proposed use will not violate the restrictions. Are there recorded leases that give other tenants exclusive right to conduct particular uses? Do restrictive covenants require approval of alterations to the leased premises by a third party, such as an owners’ association? If the leased premises are subject to a mortgage or deed of trust in favor of the landlord’s lender, foreclosure of the mortgage or deed of trust may extinguish the tenant’s lease. In order to protect itself against this risk, the tenant may need to obtain an SNDA (subordination, non-disturbance and attornment agreement) from the landlord’s lender pursuant to which the landlord’s lender will agree not to terminate the tenant’s lease in
connection with a foreclosure as long as the tenant is not in default under the lease. In addition to protecting itself against holders of prior interests in the real estate such as mortgagees, a tenant should also be careful to protect its leasehold interest against future purchasers and other parties who acquire an interest in the real estate. In North Carolina, a purchaser of leased premises is not bound by an unrecorded lease which has a maximum term (including renewal options) of greater than three years. Most landlords object to recording the entire lease because they do not want other parties to see the economic terms of the lease, but North Carolina law authorizes the recording of a memorandum of lease which discloses only the parties to the lease, the location of the leased premises, and the term of the lease. Accordingly, the lease should authorize the tenant to record a memorandum of lease and should require the landlord to execute and deliver the memorandum of lease.
Tenants often do not consider that the interest in real estate conveyed to them by the landlord by way of the lease is only as good as the landlord’s title to the real estate.
These are just a few of the basic issues that tenants should consider when reviewing leases. The lease is the “constitution” that will govern the tenant’s use and occupancy of the leased premises and the relationship between the landlord and tenant. Giving the lease appropriate attention on the front end can avoid disputes and unexpected obligations during the term of the lease.
Brian Byrd is a partner in 6mith Moore Leatherwood¶s *reensboro of¿ce. He practices primarily in the real estate development and ¿nance area, representing developers, lenders and operating companies in connection with real estate matters. firstname.lastname@example.org | 336.378.5429
Consider Zoning When Buying – or Expanding – a Business by Tom Terrell
When buying or expanding a business, beware of the sand traps and pitfalls related to zoning. “Zoning” concerns far more than the surface inquiry of whether a certain use (e.g. your business) is allowed in the current district.
Is the Zoning Correct? The zoning might be correct, but there could have been “conditions” added in a previous rezoning that limit the uses allowed or that control architectural or dimensional aspects of your building. For apartments, density caps to appease neighbors are common. Office and retail zoning districts may have building height limitations, lighting controls or extra landscaping requirements in areas bordering residential districts. You should also check for zoning “overlays.” Overlays are zoning districts that are superimposed on top of already existing districts. For example, all of Main Street might be zoned retail but the town has adopted an extra set of zoning requirements for retail on the Main Street corridor. Checking the requirements for the retail district only doesn’t tell you all of the restrictions affecting your business.
What are the Sign Regulations? Every year more and more cities adopt sign regulations that require smaller, more muted and less visible street and building signage. Just because your predecessor was allowed a pylon sign or an internally lit wall sign doesn’t mean you will be. If you purchase an existing business, your signs are likely to be “grandfathered.” But if new regulations have been adopted and you need to change the signs to accommodate your company’s name, you lose the grandfather status and must comply with the new regulations.
Is Expansion Possible? If you think your building may need to be expanded, do your “setbacks” allow it? Setbacks are the distances a building must sit from front, side and rear property lines. Setbacks will vary from one district to the next. If setback requirements do not allow you to expand, you might meet the requirements for a “variance.” Variances are granted by the local Board of Adjustment if you meet certain statutorily imposed standards. If the statutes are strictly followed, very few variances are allowed. Many counties and towns, however, are not so strict.
Is Your Use Allowed but “Nonconforming”? If you purchase an ongoing business, always check to see if the business conforms to current zoning regulations. If it does not, the status is called “legal nonconforming.” In simple and more colloquial terms it is called grandfathered, but legal nonconforming uses in most jurisdictions are not allowed to expand the building footprint or the intensity of use.
Access Access is handled differently depending upon your locale. If your business enters the state’s road system, you must obtain a driveway permit from the state Department of Transportation. The DOT can impose conditions upon the permit, such as the construction of a deceleration lane or entrance taper. But driveway regulations often are not in the zoning ordinance, and especially when you acquire a building that must be redeveloped you should not assume that you will have the same number of access points that the previous owner had.
Tom Terrell is a partner in 6mith Moore Leatherwood¶s *reensboro of¿ce. He regularly offers legal updates and commentary on his wordpress blog, N& Legal Landscapes, North &arolina¶s ¿rst blog on zoning and land use. Tom was also selected by his peers for inclusion in The Best Lawyers in America® (Copyright 2010 by Woodward/White, Inc., of Aiken, S.C.), Land Use & Zoning Law, 2007-2011. email@example.com | 336.378.5412
by Matt Cunningham and John Walker
Many people share the common misconception that a “franchise” is a narrowly defined form of business arrangement, whereby a “franchisor” creates strict policies and procedures to ensure that every french fry served by every “franchisee” tastes and looks the same, from Florida to Alaska. That misconception can lead to the birth of an accidental franchise.
As a starting point, please note that franchising and business opportunity laws exist at both the federal and state levels, and companies must be aware of the differing scope of application and requirements in their operational territories.
However, neither intent nor awareness is required to form a franchise relationship. A business arrangement is not a franchise because the parties call it a franchise. Many licensing and distribution-oriented companies create franchise relationships without ever being aware that franchise laws might apply to them.
hile it is true that the restaurant and hospitality industries have relied on the franchise growth model more heavily than other industries, the franchise relationship is not exclusive to any particular industry and can be an attractive option for businesses that use third party licensing and distribution models. A franchisor can protect more than the mere use of its trademark; a franchisor can use operational controls, policies and procedures in an attempt to protect the integrity of its brand and the way its products, goods or services are perceived in the public sphere. In addition, the franchisor-franchisee relationship offers great mutual benefit, providing the franchisor the opportunity to grow its sales and distribution platform more quickly and effectively, and offering franchisees the ability to own and operate a local business with an existing and broadreaching brand, reputation and marketing model.
No one wants to be an accidental franchise. The negative repercussions of operating an unwitting franchise are too significant to ignore. A prudent business person should be able to recognize the basic elements of our franchising and business opportunity laws, as those laws may apply to his or her own licensing and distribution models. This article provides a brief overview of franchising and business opportunity laws, issues and concerns that impact many types of common business relationships.
At the federal level, the Federal Trade Commission (the “FTC”) oversees
Many licensing and distributionoriented companies create franchise relationships without ever being aware that franchise laws might apply to them.
rules and regulations for franchising registration and disclosure (the “FTC Franchise Rule”), and business opportunity registration and disclosure (the “FTC Business Opportunity Rule”). Franchise laws are a relatively new development, with the first significant federal franchising regulations being developed in the 1970s. However, despite the recent development of the predecessor regulations to the FTC’s franchise and business opportunity regimes, those original regulations have seen significant, recent overhauls. The FTC Franchise Rule was substantially updated in 2007, and the FTC Business Opportunity Rule, which was
initially included within the original franchising rules and regulations, is now codified in its own separate regulations effective as of March 1, 2012. At the state level, Georgia, North Carolina and South Carolina have each adopted their own business opportunity laws. A number of other states have implemented business opportunity laws, as well, and several states have adopted their own franchise regulations. (A handful of states have enacted both.) Certain other common industry-specific relationships which are substantially similar to franchise relationships—automobile manufacturerdealer relationships, for example— are governed by separate regulations at the state and federal level. While a state-by-state comparison of franchising and business opportunity laws is beyond the scope of this article, we should note that the only uniformity among the various state and federal regulations is that they are all uniformly different.
What is a franchise? The FTC Franchise Rule, when boiled down to its simplest form, states that a franchise relationship exists where (A) one party, the franchisor, grants another party, the franchisee, the right to use the franchisor’s trademark or brand, (B) for the purposes of selling, offering or distributing goods or services associated with the franchisor’s trademark, (C) where the franchisor has significant control over the operations of the franchisee or offers the franchisee significant operational and marketing assistance, and (D) the franchisee pays the franchisor $500 or more in fees, in order to begin or continue operations. Under the FTC Franchise Rule all of the elements described above must be present to create a franchise relationship. The absence of any one element removes the relationship from
coverage under the FTC Franchise Rule (although state-level franchising relationship laws, or federal- and statelevel business opportunity rules may still apply). Of course, the federal franchise elements are broadly defined. For example, the term “trademark” includes any one or more of a franchisor’s trademarks, service marks, trade names or symbols associated with the franchisor’s brand. As a further example, the definition of “fees” includes more than just initial franchising fees and ongoing royalties or licensing fees. Other examples of “fees” include payments to franchisors for required marketing fund contributions, training costs and back-office assistance, franchisorprovided (or franchisor-required, if a third party seller pays a referral fee to the franchisor) equipment sales and rentals, and supplies. Frequently, in an “accidental franchise” dispute, in the absence of an easily identifiable common marketing plan, the dispositive question revolves around whether the alleged franchisor has exerted a “significant amount of control” over the operations of the alleging franchisee. Most licensing and distributorship agreements impose some degree of health, safety and quality control, so the question of whether those controls amount to a “significant degree of control” is often situational and fact-intensive. The FTC and case law in many state jurisdictions provide some guidance as to what constitutes “significant control”. Basic inspection rights and similar passive or limited controls are generally not indicative of “significant control”. However, examples of “significant control” may include training and oversight programs, facility site location and design controls, common websites, detailed operations manuals, personnel policies, uniforms, and other
controls intended to create a uniform appearance or manner of operations among franchisees. t
Requirements of the FTC Franchise Rule If the FTC Franchise Rule applies to a business relationship, the prospective franchisor must undertake extensive registration and disclosure obligations, which at the federal level, are addressed by filing a uniform Franchise Disclosure Document (“FDD”) with the FTC. The FTC Franchise Rule also contains detailed restrictions and controls concerning the manner, timing and consummation of a new franchise offering, and imposes certain provisions that define the terms of the franchisorfranchisee relationship (such as termination and renewal).
Exceptions to the FTC Franchise Rule The disclosures and controls contained in the FTC Franchise Rule are intended to protect inexperienced, potentially vulnerable persons from predatory franchising practices. Due to this general protection, the FTC provides certain exemptions from registration where the probability of abuse is minimized, such as when a franchisee has significant business experience or resources. Exemptions and exclusions from the FTC Franchise Rule include (as a nonexclusive list): t
Payments made solely to acquire inventory at wholesale prices for third party resale purposes are exempted from the definition of “fees” (this exemption protects many traditional distributor relationships).
No use of trademark? No franchise! Expressly forbidding a distributor
to use a manufacturer’s mark destroys a key element in meeting the definition of a franchise. Offers to high net worth prospective franchisees. Offers that require a large upfront investment of capital by the franchisee. Offers to sophisticated prospective franchisees that have significant, direct experience in the contemplated franchise business. Offers to certain franchisor insiders. So-called “fractional franchise” arrangements, where (i) key franchisee personnel have direct experience in a business, and (ii) the parties expect that the arrangement will generate less than 20 percent of the franchisee’s revenues in the first year. A structure under which no fees are payable by the franchisee during the first six months of operations. Licensors with only one licensee are exempted from registration, as well.
Don’t forget the state level Although a clear exemption from registration may exist at the federal level, we cannot stress strongly enough the need to look at each applicable state’s franchise registration, disclosure and business opportunity laws. Definitions, coverage and requirements vary from state to state. Thus, an entity that is exempted from registration and disclosure at the federal level, or that falls outside of the definition of a “franchise” as promulgated by the FTC, might be deemed a “franchise” under certain state laws.
What is a “business opportunity”? Generally, a business opportunity is not considered a franchise at the federal level. If a business relationship falls under the FTC Franchise Rule, the FTC Business Opportunity Rule generally does not apply. Typical examples of abusive “business opportunity” practices include scams involving vending machines, internet kiosk and ATM machine sales, work at home “envelope stuffing” offers and certain types of multi-level marketing (i.e., pyramid) schemes.
Under the FTC Business Opportunity Rule a “business opportunity” exists if: (A) one party, a “seller” solicits another party, as a “prospective purchaser,” to enter into a new business or new product line, (B) the prospective purchaser is required to make a payment of any amount to accept the opportunity, and (C) The seller promises to (i) provide a use or sales location to the purchaser, (ii) provide accounts, customers or sales outlets to the purchaser, or (iii) buy back some or all of the goods or services that the buyer makes. Just as with the FTC Franchise Rule requirements, all of these elements must be present to constitute a “business opportunity” under the FTC Business Opportunity Rule.
Requirements of the FTC Business Opportunity Rule Just as with the FTC Franchise Rule, the FTC Business Opportunity Rule is intended to protect the inexperienced and unsophisticated buyer from predatory practices. The new FTC Business Opportunity Rule significantly simplifies the registration and disclosure form and the overall process for entities offering a business opportunity.
However, the FTC Business Opportunity Rule requires certain types of disclosures and promises that are typically made by “business opportunity” sellers, primarily with respect to earnings claims, repurchase promises and preferential placement of product claims.
Exemptions from Registration and Disclosure The exclusions available to business opportunity sellers under the FTC Business Opportunity Rule are somewhat similar to the exemptions available under the FTC Franchise Rule. Offers to sophisticated and high net worth individuals are excluded from coverage, as are arrangements that provide solely for acquisition of inventory at wholesale prices for general resale purposes. However, there are variations in treatment and applicability from state to state. In addition, the trademark is the key to a franchise relationship, and is a frequent distinguishing element between a franchise arrangement and a business opportunity offer. If a business relationship in Georgia or South Carolina involves the licensing of any registered trademark, or if a business relationship in North Carolina involves the licensing of a federally registered trademark, then that relationship is excluded from coverage by the applicable state’s business opportunity laws.
What Should You Do? Due to the broad application of the FTC’s franchising and business opportunity requirements as well as various state law requirements, business owners should take a hard look at their own licensing and distribution arrangements to avoid any violations.
If you are uncertain as to whether franchising or business opportunity laws might apply to your licensing and distribution arrangements, please consider consulting with qualified counsel. Since business relationships can be structured to maintain exemption or compliance with state and federal registration and disclosure laws, it is preferable to address potential areas of concern in your contractual and other business arrangements in a proactive manner rather than a reactive manner. In the event you are considering developing and growing your business under a franchise model or similar system, please consult with your franchise counsel and develop a plan to work within or remain safely exempt from FTC and state franchising and business opportunity laws.
Matt Cunningham is a partner in Smith Moore Leatherwood’s Raleigh of¿ce. He has a varied corporate practice, representing companies across each stage of their corporate lifespan. Mr. Cunningham’s practice includes providing counselling and compliance advice to privately held companies engaged in an array of licensing, distribution, and franchise relationships in a number of industries, in situations that range from day-to-day operating issues to industry-speci¿c acquisition and disposition concerns. firstname.lastname@example.org 919.755.8703 John Walker is a partner in Smith Moore Leatherwood’s *reenville of¿ce. Mr. Walker’s practice covers a broad range of corporate transactions, with a focus on mergers and acquisitions, commercial real estate development and corporate ¿nance. email@example.com 864.240.2419
5 THINGS TO KNOW REGARDING FIRST-TO-FILE UNDER THE AMERICA INVENTS ACT by Andrew T. Spence
n September 16, 2011, President Obama signed into law the Leahy-Smith America Invents Act (AIA), considered by many the most significant patent reform legislation since the U.S. Patent Act of 1952. The AIA includes many sweeping changes, perhaps none more so than switching the U.S. patent system from a “first-to-invent” system to a “first-to-file” system. The patent systems of most other countries in the world are already based on first-to-file, and our switch has been seen by many as a further step in patent harmonization. Take a look at the following five things to help you understand first-to-file under the AIA.
FIRST-TO-FILE VS. FIRST-TO-INVENT: Under our current first-to-invent system, a patent is grantable to the first person(s) to conceive of and reduce to practice a patentable invention—i.e., the first person(s) to invent. But under the impending first-to-file system, a patent is instead grantable to the first person(s) who not only conceive of and reduce to practice a patentable invention, but also file their corresponding patent application in the U.S. Patent and Trademark Office. For example, presume an inventor A invents a widget and later files a corresponding patent application; and presume that between A’s invention and application, another inventor B independently invents the same widget and files a separate application. Under firstto-file, priority may be given to B as the first to file, even though A was the first to invent. This system therefore promotes an inventor filing their patent application as soon as possible and considering, as appropriate, whether an even earlier priority date should be obtained by a provisional application filing.
INVENTORSHIP STILL REQUIRED: Under the first-to-file system, priority between two independent patent applicants is given to the first to file their application, but only insofar as both applicants are considered inventors of the claimed subject matter. In fact, in the AIA, first-to-file is more particularly referred to as “first-inventor-tofile.” Thus, an applicant generally will not be awarded a patent to the invention of another applicant simply by filing their patent application first.
PRE-FILING PUBLIC DISCLOSURE: Although the first-to-file provisions of the AIA generally favor an earlier-filed application to a laterfiled application, the AIA includes an exception in the context of a public disclosure made by an inventor or another who obtained the subject matter from an inventor, provided the inventor’s corresponding patent application is filed within 12 months of the disclosure. For example, presume that inventor A publicly discloses their inventive widget and within twelve months thereafter files their corresponding application; and presume that between A’s disclosure and application, inventor B files their application to the same widget. Under the AIA, A’s earlier disclosure may be prior art to B’s application but not A’s; and by virtue of A’s earlier disclosure, B’s earlierfiled application may not be prior art to A’s later-filed application. An inventor may somewhat benefit in this context by the pre-filing public disclosure, but
care must still be taken as this type of disclosure may jeopardize foreign patent rights in any of the many countries that have an absolute novelty requirement.
PUBLIC-AVAILABILITY ANYWHERE IN THE WORLD: The AIA expands what qualifies as prior art. A patent, published patent application, printed publication, or public use or on-sale activity may all constitute prior art against a claimed invention, but currently for public use or on-sale activity, only if it occurs in the U.S. Under the AIA, however, public use and on-sale activity—and even further any activity that makes the invention “otherwise available to the public”— may constitute prior art even if it occurs outside the U.S. Similarly, currently, an issued U.S. patent or pending U.S. application with a claim of foreign priority may only constitute prior art as of its earliest U.S. filing date. But under the AIA, an issued patent or pending application with foreign priority may constitute prior art as of its earliest priority date— foreign or U.S.
FILE BEFORE MARCH 16, 2013: Although the AIA was enacted on September 16, 2011, its first-to-file provisions do not become effective until March 16, 2013 (18 months from the date of enactment). The first-to-file provisions will then be generally applied prospectively to any original or continuing application with an effective filing date on or after the effective date, with other applications generally under the former first-toinvent system. Notably, however, all of the claims of a continuing application must be entitled to priority to an earlier, pre-effective-date application to avoid first-to-file. Thus, a continuation or divisional of an earlier, pre-effective-date application will be under first-to-invent, but a continuation-in-part will be under first-to-file. And because the AIA expands what qualifies as prior art, those with inventions before March 16, 2013 may want to consider filing their patent applications (utility or provisional) before that date to avail themselves of the former first-to-invent. Andy Spence is a partner in Smith Moore Leatherwood’s Charlotte of¿ce. He concentrates his practice in the area of intellectual property focusing on patent procurement in the electrical, computer software and business method arts. firstname.lastname@example.org 704.384.2667
Employee Stock Ownership Plans:
When“Stock Drops” Head to Court By Sanders Carter
mployer stock options can represent a significant portion of an individual’s retirement portfolio—but the employee almost never decides when it’s a good time to buy or sell company stock. When a corporation makes its own stock available as an investment option in a retirement plan, the plan is overseen by a fiduciary (an individual or entity assigned to control the stock assets). If the company stock declines in value, the plan’s fiduciaries can face legal claims that they violated their duty to act prudently in the management of the plan. These matters arise often enough to have been given their own name: “stock drop” cases.
Fiduciary responsibility is governed by the Employee Retirement Income Security Act (ERISA). All pension plans in private industry must comply with these laws that seek to protect pension plan participants and their investments. Stock drop cases illustrate the tension between two of ERISA’s primary goals: t
The protection of employee retirement funds by imposing fiduciary duties on plan managers; and The encouragement of employee ownership through special status provided to eligible individual account plans (EIAPs), including employee stock ownership plans (ESOPs).
ESOPs are intended, by definition, to encourage investment in qualifying employer securities. Courts recognize that, as a result, they “place employee retirement assets at much greater risk than does the typical diversified ERISA plan.” 1 Congress has granted special status to retirement plans that offer investment in employer stock by creating a qualified exemption from the prudence requirement imposed on plan fiduciaries. “In the case of an [EIAP],
entitled to a presumption that it acted consistently with ERISA by virtue of that decision. However, the plaintiff may overcome that presumption by establishing that the fiduciary abused its discretion by investing in employer securities.
the diversification requirement … and the prudence requirement (only to the extent that it requires diversification) … is not violated by acquisition or holding of … qualifying employer securities ….”2 Even so, fiduciaries of ESOPs may face allegations that they acted imprudently by not divesting plans of employer stock when the stock value declines, or when the employer faces significant financial problems.
That presumption was adopted by the Sixth, Fifth, and Ninth Circuits in these cases: t
ERISA requires fiduciaries to act “in accordance with the documents … governing the plan insofar as such documents … are consistent with the provisions [of ERISA].”3 But when a plan requires investment in employer stock, ERISA does not say when such a requirement might become inconsistent with the Act’s fiduciary requirements. When, for example, might a fiduciary be required to disobey the requirements of the plan and halt the purchase of employer stock? Or be required to sell employer stock?
Presumption of Compliance with ERISA Several federal circuit courts of appeal have addressed the standard by which ESOP fiduciaries are to be judged in such circumstances. Beginning with the Third Circuit in Moench v. Robertson, 62 F.3d 553 (3d Cir. 1995), these courts have adopted a presumption of compliance with ERISA when a fiduciary invests retirement assets in the employer’s stock. In Moench, the ESOP fiduciary continued to invest in company stock after the share price dropped from $18.25 to $0.25 over a two-year period. Applying what has become known as the Moench presumption, the Third Circuit held: [A]n ESOP fiduciary who invests the assets in employer stock is
Kuper v. Iovenko, 66 F.3d 1447, 1459 (6th Cir. 1995) (“[T]he purpose of ERISA and the nature of ESOPs requires that we review an ESOP fiduciary’s decision to invest in employer securities for an abuse of discretion.”); Kirschbaum v. Reliant Energy, Inc., 526 F.3d 243, 254 (5th Cir. 2008) (“The Moench presumption ... applies to any allegations of fiduciary duty breach for failure to divest an ... ESOP of company stock.”); Quan v. Computer Scis Corp., 623 F.3d 870, 881 (9th Cir. 2010) (The presumption “is consistent with the statutory language of ERISA and the trust principles by which ERISA is interpreted.”).
Second Circuit Applies Deferential Review More recently in a case involving Citigroup,4 the Second Circuit came to the same conclusion, holding that an ESOP fiduciary’s decision to continue offering retirement plan participants the opportunity to invest in Citigroup stock should be reviewed for an abuse of discretion, and that no abuse of discretion was shown. 1. Martin v. Feilen, 965 F.2d 660, 664 (8th Cir. 1992). 2. 29 U.S.C. § 1104(a)(2). 3. 29 U.S.C. § 1104(a)(1)(D). 4. In re: Citigroup ERISA Litigation, 2011 U.S. App. LEXIS 21463 (2d Cir. Oct. 19, 2011)
The case involved two retirement plans which offered the Citigroup Common Stock Fund as an investment option, among 20 to 40 other options available to plan participants. After a sharp drop in the price of Citigroup stock, a class action lawsuit was filed. The plaintiffs alleged that Citigroup’s participation in the subprime mortgage market caused the stock drop, and that the plan fiduciaries breached their duties of prudence and loyalty by refusing to divest the plans of Citigroup stock, even though the company’s “perilous operations tied to the subprime securities market” made it an imprudent investment option. Plaintiffs argued that a prudent fiduciary would have foreseen the stock drop and either suspended the participants’ ability to invest in the stock fund or diversified the fund so that it held less company stock. The plan documents, however, mandated that the Citigroup Common Stock Fund be included as an investment option, along with at least three other investment funds. Therefore, the fiduciaries argued that they had no discretion to eliminate Citigroup stock as an investment option. The district court agreed and held that, even if the fiduciaries had been given the discretion to eliminate the company stock fund as an option, they were entitled to a presumption that investment in the fund, as required 5. 2009 U.S. Dist. LEXIS 78055 (S.D.N.Y. Aug. 31, 2009). 6. While the Citigroup case was decided on a motion to dismiss the complaint, the Sixth Circuit has held more recently that the Moench presumption is an evidentiary presumption, not a pleading presumption, and that it does not apply at the motion to dismiss stage of an action alleging breach of fiduciary duty by an ESOP fiduciary. Pfeil v. State Street Bank and Trust Co., 2012 U.S. App. LEXIS 3482 (6th Cir. Feb. 22, 2012).
by the plan’s terms, was prudent. The court granted the fiduciaries’ motion to dismiss the complaint, holding that the facts alleged by the plaintiffs were insufficient to overcome that presumption.5 The Second Circuit also agreed and held that the fiduciaries’ “decisions not to divest the Plans of Citigroup stock or impose restrictions on participants’ investment in that stock are entitled to a presumption of prudence and should be reviewed for an abuse of discretion, as opposed to a stricter standard.”
Moench Presumption Applied to EIAPs and ESOPs
“We now join our sister circuits in adopting the Moench presumption,” the court wrote, “and we do so with respect to both EIAPs and ESOPs – because, as those courts have recognized, it provides the best accommodation between the competing ERISA values of protecting retirement assets and encouraging investment in employer stock.” “This presumption may be rebutted if an EIAP or ESOP fiduciary abuses his discretion by continuing to offer plan participants the opportunity to invest in employer stock,” the court said. “We endorse the ‘guiding principle’ endorsed in Quan that judicial scrutiny should increase with the degree of discretion a plan gives its fiduciaries to invest.” Here, the Citigroup plan required that the company’s stock fund be included as an investment option. “Thus,” the court said, “a fiduciary’s failure to divest from company stock is less likely to constitute an abuse of discretion if the plan’s terms require—rather than merely permit— investment in company stock.” The Second Circuit cited Moench for the proposition that fiduciaries should override plan terms requiring
investment in company stock only when “owing to circumstances not known to the [plan] settlor and not anticipated by him,” maintaining the investment “would defeat or substantially impair the accomplishment of the purposes of the [Plan].” “[W]e believe that only circumstances placing the employer in a ‘dire situation’ that was objectively unforeseeable by the settlor could require fiduciaries to override plan terms,” the court said. “The test of prudence is, as the dissent points out, one of conduct rather than results, and the abuse of discretion standard ensures that a fiduciary’s conduct cannot be second-guessed so long as it is reasonable.” The court noted that during the class period, Citigroup stock dropped in price from $55.70 to $28.74 per share, a loss of just over 50 percent. “Other courts have found plaintiffs unable to overcome the Moench presumption in the face of similar declines,” the court said, citing Kirschbaum, 526 F.3d at 247 (40% drop), Kuper, 66 F.3d at 1451 (80% drop), and Edgar v. Avaya, Inc., 503 F.3d 347, 344 (3d Cir. 2007) (25% drop).6 Sanders Carter is a partner in Smith Moore Leatherwood’s Atlanta of¿ce. His practice is focused on the representation of life, health, and disability insurance companies and employers in ERISA and non-ERISA litigation. Mr. Carter is the editor of DRI ERISA Report, published by the Defense Research Institute’s Life, Health and Disability Committee. email@example.com 404.962.1015
BringingWisdom to theTable:
Ask BobWedge what he likes about practicing law, and his answer may surprise you.
ou would think after reading his bio that a seasoned commercial litigator with more than 50 reported cases in state and federal courts would talk about dogged court battles, protracted litigation and the thrill of jury verdicts. But Bob believes that a good trial lawyer must be a good problem-solver first, and he strives to uncover possible approaches to resolving a dispute before it enters the courtroom. What he likes most about practicing law is uncovering those possibilities and devising strategies to fit his clients’ needs. When possible, that involves litigation avoidance. “Much of my litigation practice involves commercial contract, lease and construction disputes,” explains Bob. “I often represent corporate clients who will continue their business relationships with opposing parties after the dispute has been resolved. In those circumstances, it’s about achieving a favorable resolution for the clients without destroying their business relationships. To get to the heart of a case, you have to be directly involved with clients and the issues they face. You have to be hands-on, and it’s very rewarding to be able to achieve a resolution with which the client is pleased.” Sensitivity to the costs of litigation is also a driving factor for most clients.
While it may seem counter-intuitive to keeping costs down, Bob recommends getting your lawyer involved in disputes earlier rather than later. “Decisions made early on can have significant impact on how a dispute unfolds, and an unfortunate choice can narrow the range of alternatives in the dispute resolution process.” Bob’s natural affinity for finding business resolutions has made him a highly effective mediator as well. His mediation experience includes large commercial contract and construction cases. He cites his love of problemsolving again as a key driver behind his knack for alternative dispute resolution. When litigation is unavoidable or advised, Bob, a battle-tested trial lawyer, is more than capable of bringing his formidable experience to bear. Shortly before his interview for this piece, he concluded a hard fought jury trial where he obtained a defense verdict for a security company in a premises liability case where an apartment management company (which was held liable to the plaintiff in the amount of $350,000.00) alleged that Bob’s client had breached its contract with the management company and negligently supplied security services. When Bob does go to trial, you can rest assured that he has first considered all other options which might be beneficial to his client.
Selected by Law & Politics Magazine for inclusion in Georgia SuperLawyers, Construction Litigation, 2012 Atlanta Bar Association Chair, ADR Section (2011) Board of Directors of ADR Section (2009-2012) Construction Law Section (1990-present), Board of Directors (1995-99) State Bar of Georgia Board of Directors, Professional Liability Section (2012) Committee on Legal Malpractice Insurance (19972007), Chair (2003-2007) American Bar Association Forum Committee on the Construction Industry (1980-present) Fidelity and Surety Law Committee of Tort and Insurance Practice Section (1980-present); Vice-Chair (1987-90) Fellow, Lawyers Foundation of Georgia Member, Lawyers Club of Atlanta
Bob Wedge is a partner in Smith Moore Leatherwood’s Atlanta of¿ce and can be reached at 404.962.1077 or firstname.lastname@example.org
The Truths and Myths about Estate Planning: By Jill Raspet
The prevailing myths of estate planning are common misunderstandings or misconceptions that may impact your decision to plan in the first place. The corresponding truths in estate planning are intended to dispel those myths, and reveal the merit of a carefully, thoughtfully executed plan. Remember, itâ€™s never too early to start.
1. Myth: 28
Only people with significant assets need estate planning.
2. Myth: Once I have a Will, I can stick it in a drawer and not look at it ever again.
3. Myth: Estate planning only consists of a Will.
4. Myth: If I am married but do not have a Will, all of my individually owned assets would automatically pass to my spouse at death under Ga, NC and SC law.
1. Truth: Not all assets pass according to the terms of a Will.
2. Truth: The only way I can be sure of the beneficiaries of my assets at death is to do proper estate planning.
3. Truth: Every person should have a financial power of attorney and health care power of attorney to name who should handle their finances and health care decisions in the event of incapacity.
4. Truth: Regardless of your circumstances, it would be wise to be sure you have the proper estate planning in place, which includes powers of attorney, a Will and potentially a trust. Jill Raspet is a partner in Smith Moore Leatherwood’s Wilmington of¿ce. She is a Board Certi¿ed Specialist in Estate Planning and Probate Law by the North Carolina State Bar. She has also been selected by Law & Politics Magazine for inclusion in North Carolina Super Lawyers-Rising Stars Edition, Estate Planning and Probate, 2009-2011. email@example.com | 910.815.7128
beyond fraud and abuse
Why Health Care Mistakes Can Be So Costly By Erin Shaughnessy Zuiker
Discussions of combating fraud and abuse within the federal health care system are seemingly everywhere. The Centers for Medicare and Medicaid Services (“CMS”) estimate that millions of dollars are lost each year to individuals who intentionally and unlawfully abuse the system for their own financial reward. Examples of fraud include physicians who bill for services that they never provided, pharmacists who fill prescriptions for deceased patients, or providers who bill Medicare for wheelchairs or other costly durable medical equipment (“DME”) using false names or stolen social security numbers. As a result of the actions of these unscrupulous individuals, the federal government has empowered its various agencies to stop fraud in its tracks, prosecute the perpetrators, and recoup the monies lost. However, this kind of fraud is not the only focus of the federal government in its efforts to recapture funds already paid to providers.
After years of relatively ineffective oversight by the federal government, this renewed commitment to fighting fraud is commendable and likely is necessary to preserve the Medicare Trust Fund for future generations. The concern for health care providers, however, is that in today’s climate the line between “fraud and abuse” and “mistake” has blurred dramatically. The result for providers is that what used to be a routine billing mistake may now be “fraud” and may subject the providers to the same penalties and fines as an intentional and deliberate act to defraud the system. Therefore, health care providers, as participants in the federal health care programs, must be keenly aware of their obligations to ensure that they are fully in compliance with all rules and regulations or face the potential for the recoupment of monies paid or the assessment of civil monetary penalties (“CMPs”), additional fines, and in some cases, program exclusion.
The Legal Trifecta For some time, the federal government has been working hard to recapture improperly paid Medicare and Medicaid funds. However, with the passage of the controversial Patient Protection and Affordable Care Act (“PPACA”), the federal government has created a trifecta of laws, the combined effect of which has significantly changed the landscape for all providers. The three important laws are PPACA, the False Claims Act (“FCA”), and the Fraud Enforcement and Recovery Act of 2009 (“FERA”). Historically, a key distinction between fraud and abuse and mistake has always been intent. However, for purposes of health care fraud, the distinction may no longer be a meaningful one with respect to Medicare claims submitted to the federal government.
Interestingly, the often mentioned Section 1501 of PPACA, titled the “Requirement to Maintain Minimum Essential Coverage,” and commonly referred to as the “individual mandate” has largely been the source of PPACA’s controversial buzz. And most recently, Section 2713 titled, “Coverage of Preventive Health Services” sparked a stand-off between the Catholic Church and the Obama administration over issues of contraception and employer-sponsored health insurance. While the constitutionality of the individual mandate and other provisions of the law make their way through the courts or otherwise are resolved under a bright media spotlight, a few sections of PPACA have and will continue to have a far greater impact on health care providers. Specifically, Section 6402 of PPACA creates an affirmative obligation for a health care provider to return an overpayment to CMS w i t h i n 6 0 d ay s o f “identification” or the date any corresponding cost report is due, whichever is later. As a result, a seemingly innocuous billing error may quickly become a reverse false claim because the failure to timely refund an “identified” overpayment now creates an “obligation” under the FCA, potentially subjecting the
provider to treble damages and additional fines. For over two years now providers have speculated about what precisely is meant by the term “identified” in the context of the 60-day requirement; on February 16, 2012, CMS provided its answer in proposed rules regarding the reporting and refunding of overpayments. See 77 FR 9179, February 16, 2012. “A person has identified an overpayment if the person has actual knowledge of the existence of the overpayment or acts in reckless disregard or deliberate ignorance of the overpayment.” Id. at 9182. CMS notes that providers must have an “incentive to exercise reasonable diligence” and to investigate any potential overpayments “with all deliberate speed.” Id. CMS acknowledges, for example, that, upon learning of a billing error, a provider must have time to “make a reasonable inquiry.” Id. Presumably, once the investigation, which is pursued “with all deliberate speed,” is concluded and the overpayment amount identified, then the provider has 60 days to report and return the overpayment. However, the line is less clear when a provider learns of a billing error and fails to timely make such inquiries. As noted above, the reporting and returning of an overpayment is now expressly required—thus creating an “established duty” for purposes of FCA liability. Therefore, any overpayment retained beyond the 60 days from “identification” creates an “obligation” for purposes of the FCA and may result in FCA liability, with the possibility of treble damages and fines, if the provider demonstrates a “knowing and improper” failure to return the overpayment. To add further insult to injury, in addition to FCA penalties, which are mandatory, PPACA has added discretionary CMPs up to $10,000 for each item or service, plus treble damages. The voluntary and prompt refunding of overpayments is thus a significant obligation of providers.
PPACA and Compliance Another critical change created by PPACA is with respect to mandatory compliance programs. While compliance programs have been incorporated as part of the Conditions of Participation (“COPs”) for over a decade, they were perceived as voluntary in the past. Section 6401(a)(7) of PPACA, which applies to all Medicare providers, mandates that the Secretary of the Department of Health and Human Services (“HHS”) promulgate regulations and establish “core elements” that must be included in all compliance programs. In general, compliance programs must be formalized, robust, and appropriately funded and supported by the organization. This expectation stems from the Office of Inspector General’s earlier guidance regarding compliance programs for hospitals and small physician practices. While the final regulations are forthcoming, PPACA requires that all providers establish a robust and effective compliance program, specifically one that can proactively and efficiently respond to noncompliance issues in view of its other reporting requirements.
The OIG is one player in this fraud and abuse recovery game, but there are several others that have emerged in recent years. There are Recovery Audit Contractors (“RACs”), Medicare Administrative Contractors (“MACs”), Medicaid Integrity Contractors (“MICs”), and Zone Program Integrity Contractors (“ZPICs”), to name a few.
33 The ABC Auditors
While providers develop and implement these compliance programs to catch everything from simple billing errors to complex fraud schemes, the federal government continues to direct more and more resources to proactively combat fraud and abuse. The Obama administration has allocated record amounts of money to fight waste, fraud, and abuse. In the FY 2011 Budget, $1.7 billion alone was included to support a variety of programs. One uniquely positioned program has been the joint team of DOJ/HHS, known as the Health Care Fraud and Prevention Enforcement Action Team (or “HEAT”), which has received a large portion of the increased spending. The HEAT initiative has created multi-agency “strike force teams,” which include DOJ prosecutors, HHS OIG and Federal Bureau of Investigation (“FBI”) personnel, local law enforcement, and CMS data analysis teams.
The PPACA, combined with other laws on the books, is a game changer. The federal government now has more resources at its disposal to combat fraud and abuse and to prosecute the perpetrators. While we all have an interest in protecting the Medicare Trust Fund, we must not lose sight of the distinction between well-intentioned and hard-working health care providers and outright criminals. The provider’s goal, of course, is to deliver high-quality, appropriate medical care to the individual patient and to be correctly reimbursed for doing so. The stakes are high, however, and the room for error is slim. Therefore, all providers must be aware of their legal obligations and the COPs that they’ve agreed to abide by as participants in the federal health programs to ensure that the services they provide are delivered, billed, coded, and reimbursed appropriately.
Early reports indicate that these multi-agency efforts are paying off — the Health Care Fraud and Abuse Control (“HCFAC”) Program report, which is a publication by the OIG, reports that for FY 2011, the Federal government recovered approximately $2.4 billion in health care fraud judgments and settlements. In addition, the DOJ opened approximately 1,100 new criminal health care fraud investigations and nearly 1,000 civil health care fraud investigations. As for program exclusions, in FY 2011, OIG excluded approximately 2,600 individuals and entities.
Erin Shaughnessy Zuiker is an associate in Smith Moore Leatherwood’s Raleigh of¿ce and is a member of the ¿rm’s health care practice. She assists clients with a wide range of issues, including regulatory compliance, fraud and abuse, corporate governance matters, risk management, and HIPAA compliance. firstname.lastname@example.org 919.755.8809
Facebook Has Changed the Game dŚĞEĂƟŽŶĂů>ĂďŽƌZĞůĂƟŽŶƐĐƚĂŶĚzŽƵƌ^ŽĐŝĂůDĞĚŝĂWŽůŝĐǇ by Peter Rutledge
or most employees, acceptable workplace speech is inherently understood: workers know what they should and should not say when they are on the job, and repercussions for violations are expected. It’s also generally accepted that after work, talking about the difficulties of the day with coworkers, friends, and family is routine, and these private discussions are not expected to have repercussions.
But what happens when an employee vents about their employer on Facebook for others (including coworkers or employers) to see? Posting every micro-thought on Facebook is now so commonplace that it’s easy to forget that it’s largely uncharted territory from an employment law perspective. Should repercussions from talking about your employer on Facebook be expected?
According to the NLRB, employers need to make employees aware of their right to engage in concerted activity, which is when two or more employees take action for their mutual aid or protection regarding terms and conditions of employment. A single employee may also engage in protected concerted activity if he or she is acting on the authority of other employees, bringing group complaints to the employer’s attention, trying to induce group action, or seeking to prepare for group action. Last year, there were several incidences of employees being terminated for comments they made on Facebook, and in each case, they attempted to claim that their rights under Section 8(a)(1) of the NLRA had been violated. In the first example, a step-sister asked her step-brother, a bartender, about his night at work. He replied that his employer’s customers were “rednecks” and that he “hoped they choked on glass as they drove home drunk.” None of his co-workers who were Facebook friends participated in the conversation. He was subsequently fired by his employer (on Facebook, ironically). The NLRB did not find that the employer had violated the employee’s rights. In the second example , a worker at FritoLay commented about his treatment by a female supervisor before threatening her, using rather profane language. Although six of his co-workers were his Facebook friends, none commented on their perception of his treatment by the supervisor. The NLRB Advice Memo stated: “The Employer contends that the
charge should be dismissed because the Facebook postings were not concerted activity for mutual aid or protection and, even assuming otherwise, the Charging Party’s use of profanity was so opprobrious as to deprive him of the Act’s protection.” The NLRB agreed.
While the National Labor Relations Board has been traditionally associated with union worker issues, non-union workers have rights under the National Labor Relations Act.
Three Advice Memoranda written by the National Labor Relations Board (NLRB) last year indicate the answer is yes—under certain circumstances. While the NLRB has been traditionally associated with union worker issues, non-union workers have rights under the National Labor Relations Act.
In the third example, a Wal-Mart employee griped about his working conditions, and hurled insults towards his female manager. Two of his coworkers who were also Facebook friends commented on his post: one indicating that they found the post humorous, and one offered moral support. Upon review, the NLRB stated that they saw “no language suggesting the Charging Party sought to initiate or induce coworkers to engage in group action; rather they express only his frustration regarding his individual dispute with the Assistant Manager over mispriced or misplaced sale items. Moreover, none of the coworkers’ Facebook responses indicate that they otherwise interpreted the Charging Party’s postings.” 1. https://www.nlrb.gov/case/13-CA046689#case details 2. h t t p s : / / w w w. n l r b . g o v / c a s e / 3 6 CA-010882 3. h t t p s : / / w w w. n l r b . g o v / c a s e / 1 7 CA-025030
What do these cases mean to the average employer who is made aware of disparaging comments on Facebook? First, it’s important to understand examples of real protected concerted activity: t
Two or more employees addressing their employer about improving their pay. Two or more employees discussing work-related issues beyond pay, such as safety concerns. An employee speaking to an employer on behalf of one or more co-workers about improving workplace conditions.
If an employee is venting inappropriately, and not engaged in protected concerted activity, then you may have grounds for termination. However, if your social media policy prohibits employees from making defamatory statements, the policy should contain limiting language to ensure that it does not interfere with employee rights or restrain protected activity. Social media is continuing to change our day-to-day interactions, and as it does, it will continue to change employment law. It’s vital for employers to stay abreast of changes, and adapt as not only technology evolves, but as our culture changes as well. Peter Rutledge is a partner in Smith Moore Leatherwood’s Greenville of¿ce. Mr. Rutledge handles the defense of a variety of employment disputes, including claims for wrongful discharge, sexual harassment, and discrimination. email@example.com 864.240.2410
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