Archive for the 'Business Law' Category

Federal Court Rules That Yelp’s “Hard Bargaining” Is Not Extortion

Yelp has been plagued by accusations of extortive business practices for years. Consumers and small businesses alike have taken to their websites and blogs to report how businesses that purchase advertising through the Yelp are rewarded with the removal of negative reviews from their business profiles, while businesses that refuse to pay Yelp for advertising are punished – their positive reviews are removed and mysterious negative reviews begin to appear.

yelp lawsuitAt this point, those who frequent the website should know to take Yelp reviews with a grain of salt. However, given Yelp’s status as the juggernaut of online business reviews, if these allegations are true, small businesses that decline to advertise with Yelp stand to take a sizeable hit.

Class Action Lawsuit against Yelp
Last July, a group of California small business owners proposed a class action lawsuit against Yelp, alleging that Yelp’s business practices amounted to extortion. The business owners claimed that Yelp hid positive business reviews and fabricated false negative reviews in order to threaten the businesses and coerce them to purchase advertising through Yelp; and claimed Yelp also used these tactics as a way to penalize business that refused.

When the U.S. District Court dismissed the case for failure to state a claim upon which relief can be granted, the plaintiffs appealed their case to the Ninth Circuit Court of Appeals.

The Ninth Circuit Ruled: Yelp’s Behavior Was Merely “Hard Bargaining”
The Ninth Circuit upheld the District Court’s dismissal of the case, saying that Yelp’s behavior was “at most, hard bargaining.” The court stated that in order to prove extortion, a plaintiff must show either a pre-existing right to be free from the threatened harm or that the defendant had no right to seek payment for the service offered.

The court ruled that businesses have no pre-existing right to have positive reviews appear on Yelp. It explained that because Yelp is not under any legal or contractual duty to publish business reviews, removing them doesn’t violate anything other than Yelp’s own purported practice. Regarding the negative reviews, the court stated that re-posting negative reviews or moving negative reviews to the top of a business’s profile are, similarly, not a wrongful acts because they do not violate any legal or contractual rights of the business to be free from these negative reviews.

The court declined to discuss the legal consequences Yelp would face for fabricating false negative reviews, because the court found that there was no evidence that this had actually occurred.

In terms of Yelp’s right to seek payment for the service offered, the court held that there was no evidence to suggest that Yelp’s advertising services are a worthless sham or a privilege to which the plaintiff business owners were already entitled. The court held that businesses are free to decline to purchase advertising, but Yelp is not act wrongfully in offering it.

What Does This Ruling Mean for the Future of Small Business Owners?
While the Ninth Circuit’s dismissal of this case might seem like tacit approval of Yelp’s business practices, it is important to note that the ruling is limited to the alleged claim of extortion. There are other avenues through which Yelp’s actions might be challenged:

  • Other legal theories. The Ninth Circuit took care to point out that their ruling did not state that no cause of action exists that might cover the alleged conduct. The ruling simply states that Yelp’s actions did not meet the definition of extortion.
  • Contractual claims. One of the small business owners claimed that she gave in and purchased advertising through Yelp after Yelp removed nine five-star reviews from her business profile. However, after an initial improvement in her business rating, Yelp agents began contacting her about increasing her advertising purchase. Declining caused her rating to fall again. The Ninth Circuit noted that if this allegation is true the business owner could have a claim for breach of contract.
  • Consumer protection laws. Finally, just because the court decline to shield small businesses from Yelp’s “hard bargaining” does not mean that consumers will be left unprotected. The Federal Trade Commission has already issued guidance requiring search engines to distinguish search results that are the result of paid advertising from organic results (i.e., search results must be ranked on relevance not on third-party payment). It is easy to see the FTC expanding this policy to online business review sites such as Yelp, which, despite the Ninth Circuit’s ruling, states on its website, “Your trust is our top concern, so businesses can’t pay to alter or remove their reviews.”

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The Debate over Commercial Insurance Coverage and Ride-sharing Reaches a Boiling Point

Commercial liability insurance protects the owner of a company against claims of liability for bodily injury and property damage. As opposed to personal passenger vehicles which only require minimum state limits for liability insurance, vehicles used in the course of a business are usually required to carry insurance with higher coverage for bodily injuries and property damage in the event of an accident. Pretty simple and not much room for debate, right? Wrong.

Ride Sharing InsuranceMuch to the dismay of both insurance companies and taxicab companies, ride-sharing start-ups such as Uber, Sidecar, and Lyft have swept across the country in the last few years. All are venture capital funded, San Francisco-based companies that have grown into billion dollar industries, operating in almost every state in the U.S.

Transportation Service or Technology Company?

These companies have long argued that they are merely technology companies and should not be subjected to all the rules, regulations, and permits that state and local agencies mandate for other transportation companies like taxi services. More importantly, they argue that they should not have to maintain the type of commercial insurance that is required for vehicles used in the course of a business. Consequently, states, counties, departments of insurance and public utilities commissions are scrambling to deal with this debate across the country. California’s struggle is a perfect example of the conflicts presented in the majority of states.

When Uber, Sidecar, and Lyft first started operating in San Francisco, they required their drivers to carry personal minimum liability insurance, which in California is $15,000 for injuries, $30,000 for total liability and $5,000 in property damage.

Taxi companies’ primary concern is eventually going out of business because, they argue, licenses, permits and insurance premiums make it impossible to compete with ride-sharing prices. On the other hand, insurance companies maintain that they want ride-sharing companies to continuing to prosper, as long as they are adequately insured. They claim that do not want to get stuck with the bill if the drivers only have personal insurance policies, but they refuse to admit they are trying to upset these companies business models.

Consequences of the Insurance Gap

Adding more fuel to the fire, in January of 2014, a 6-year-old girl was run down by an Uber driver in San Francisco. Although, Uber had a $1 million umbrella insurance policy, they maintained the driver was not covered because he didn’t have a passenger in the car. Here lies the problem. In San Francisco, authorized taxis are required to provide $1 million of liability coverage per incident, 100% of the time.

Now there were real-world consequences to the perceived gap in insurance coverage, where the umbrella commercial policy was not yet in effect because the driver did not technically have any passengers.

The insurance industry’s stance is that any time drivers are logged into a ridesharing smartphone app and looking for a ride they are providing a commercial service. The argument is that, because drivers are going to go where potential riders are, based on the pings the apps send to them, they will inevitably be driving to crowded urban areas. This often occurs at night when there is a greater chance for accidents, triggering insurance pay-outs. Therefore, when they enter these areas based on their running apps, they are engaged in “changed behavior” and transition to commercial drivers. Essentially, insurers argue, the drivers are no longer entitled to personal liability coverage and must now have commercial coverage.

In California, the Public Utility Commission (PUC) stepped in and set regulations for ride-sharing companies, such as Uber, Lyft, and Sidecar. Not technically exclusive to these companies, the regulations targeted all “New Online Enabled Transportation Services” (TNC.) They defined this as an organization that provides pre-arranged transportation services for compensation using an online enabled app or platform to connect passengers with drivers using their personal vehicles. Included are requirements that the TNC get a permit from the PUC, a criminal background check be issued for each driver, there be a driver training program, a zero tolerance policy on drugs and alcohol and increased insurance coverage. As for insurance coverage PUC mandates that a TNC maintains commercial liability insurance policies of not less than $1,000,000 per incident coverage if the accident occurs while the driver is providing services.

The new PUC regulations did little to satisfy the insurance companies and they insisted the commercial coverage extended to whenever the driver had their app running. In response, several proposals backed by insurance company lobbyists, were presented to the California legislature calling to overwrite PUC’s regulations and include stricter rules for permits and licensing. However, their principal demand was for mandatory commercial liability insurance for drivers even when they have no passengers.

The Compromise

At this point the legislature has conceded that PUC, and PUC alone, has regulatory authority over ridesharing companies. Local taxi cab regulators have no authority, meaning special city permits and licensing requirements do not apply. The bill, which was passed by the California State Assembly and State Senate in late August of 2014, will require drivers to have $50,000 coverage per person for death and injuries; $100,000 damage coverage per accident; and $30,000 coverage for property damage. The ride-share companies also must have $200,000 in excess liability to cover costs of accidents that exceed policy limits. However, the question remains, which insurance policy provides the extra $200,000 in coverage for drivers who cause accidents on personal trips while running on apps on their smartphones. This has yet to be adequately addressed and resolved.

Are There Any Other Alternative Solutions?

Many states are claiming that the ride-share companies are coming into their communities in full force, blatantly ignoring any regulations or restrictions that are passed. However, ride-shares have agreed in several states to provide $1 million in commercial coverage for whenever a ridesharing driver has a passenger. They claim to have offered solutions to deal with the insurance gap but, at this point, they have not agreed to the level of commercial coverage during the times that insurers are demanding.

State governments and other regulators have varied on their methods when trying to deal with ride-sharing companies. The following are some examples of the different approaches:

  • In Washington, D.C. the state legislature is considering a bill that would set minimum commercial insurance. There is a proposal from the D.C. Taxi Cab Commission to regulate ride-sharing companies so that their commercial insurance coverage would be the primary coverage for personal vehicles.
  • Connecticut and Kansas send alerts to ride-sharing drivers that they may not be covered by their personal auto insurance policies while driving for the company.
  • In Washington State there was a proposed state bill mandating a study of ride-sharing companies that must provide a report to the legislature examining issues such as insurance coverage requirements and safety regulations. This bill was defeated. However, the Seattle City Council passed an ordinance that requires drivers to have commercial insurance coverage whenever that driver is available for a ride.
  • The Chicago City Council passed an ordinance requiring ride-sharing companies to provide $1 million of primary noncontributory coverage. Additionally, they must have $1 million in liability coverage for themselves, and $1 million for the drivers from acceptance to the conclusion of the ride.
  • Cease and desist letters have been issued to ridesharing companies by cities in Michigan, Missouri, Nebraska, New Mexico, Ohio, Pennsylvania and the Texas cities of Austin, Dallas, Houston and San Antonio.

Although the ride-sharing companies have agreed to comply with some state legislation, critics continue to argue that the legislature is not entitled to regulate the “sharing economy” and interfere with legitimate technological business models. With the rise of technology will come an increased number of unforeseen issues concerning insurance coverage, the state legislatures will continue to wrestle with new snags in the system and the law will change at a rate that the public has never before seen?

NBA Will Likely Slam Dunk Sterling in Upcoming Lawsuits

In the aftermath of his famous racist comments, billionaire Donald Sterling has hired a posse of lawyers. Apparently he is not willing to go down without a fight. In fact, as of May 16, Sterling’s lawyers wrote the NBA, stating Sterling is refusing to pay the $2.5 million in fines, and has threatened to sue the league. The letter claims Sterling is not in violation of any rules of the NBA constitution, and the NBA is violating Sterling’s due process rights by banning him and slapping him with such a huge fine.

donald sterling lawsuitA lot has been said about this case already, from violating California’s wiretapping laws, to free speech, to antitrust suits. The problem with evaluating those issues is that they all miss the point. This isn’t a case about privacy, free speech, or corporate regulation. It’s a case about a contract, and whether Sterling has lived up to the terms of that agreement. Quite simply, it doesn’t look like he has.

What about Free Speech and Due Process?

Any concerns about free speed or due process can be dismissed immediately, because the NBA is a private organization and not the government. There is a small exemption for private organizations that receive government support, but it’s tangential to this matter. Plain and simple, Sterling does not have free speech protection shielding him from recourse from being slam dunked by the NBA. Nor is he entitled to due process; it’s a unique argument to make, but as far as legal doctrine goes, it’s a foul.

What about Privacy?

How this communication was disseminated to the public is irrelevant. Therefore, wiretapping and privacy concerns are likely not material. The only remotely relevant argument Sterling can make is that under Article 13(a) of the NBA constitution, which requires violations to be “willful.” He can argue his acts were not willful violations because they were surreptitiously and secretly documented. The weakness with that argument is that the ‘willful’ standard is not only vague, thus open to the Board’s discretion, but it is widely reported and there is ample evidence to support that Sterling knew he was being recorded, yet continued to say the things he did. This fact diminishes an argument that his actions were not “willful,” and eliminates any expectation of confidentiality, a requirement under the wiretapping statute, and along with it any wiretapping claim he may have against anyone.

What Is This Case Really About?

At the heart of the issue is “the contract”—i.e. the terms of the NBA constitution. It’s being called a contract because Sterling signed onto certain terms that go along with owning an NBA team. Specifically, Article 13(d) bars NBA owners from violating contractual obligations, and in particular the owner’s obligation not to engage in unethical conduct, or to act in a way that is adverse to the NBA. Sterling’s conduct certain appears to fit this bill, considering his remarks caused sponsors to reconsider backing the Clippers and nearly lead to a boycott by the players.

Moreover, filing a suit could be more disastrous than Sterling realizes. Over an issue such as this, California’s discovery laws and depositions could leave what little is left of his private life exposed to public view and scrutiny.

Looking at the looming legal battle between a lone billionaire and a league of basketball superstars, the outcome seems clear, and even before the start of the game. Sterling, standing down court, with the clock shot winding down, is tossing the ball from across the court, hoping to score. But as the buzzer sounds, he isn’t even close.

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Subway “Footlong” Lawsuit Is within Inches of Settling

Last year, the sandwich artists of Subway found themselves embroiled in a handful of legal battles and a potential class action lawsuit. However, it wasn’t over serving bad meat or food poisoning, but rather over the actual size of their subs that they tout as “footlongs.” As it would turn out, these sandwiches only measure up to be about 11 inches, exposing the chain to claims of deceptive sales practices.

subway footlong lawsuitAlmost instantly, business journals and news outlets started to cry “frivolous lawsuit.” After all, they’re sandwiches, who cares? This really can’t be important. Well, federal courts have clearly disagreed. And I have to admit, so do I.

Now nearly a year later, stories have begun to sprout up that a settlement agreement is approaching, with only attorney’s fees left to determine. So what was the big deal? The meat of these lawsuits are heavy allegations of “fraudulent, deceptive or improper advertising, sales and marketing practices.” But if that feels extreme, consider this: Subway averages about $2.85 billion in the sale of their footlongs, making the rough value of what that inch they have duped customers out of close to about $142 million. That’s a lot of dough.

Subway retorts that they use the same weight of dough in each sandwich, and how a loaf of bread bakes, grows, and conforms is difficult to guarantee every time. While that may be true, and it may be hard to get angry at a sandwich store for not always being accurate, if they are aware of discrepancies, they shouldn’t be advertising these subs as “footlongs.” Call them “the bigguns” or “subway cars” or anything other than something that purports to be an actual measurement. After all, I’m sure most people would have less sympathy for a bespoke chair maker who, having advertised as making a great fitting, 24” tall chair that was actually 22” and shoddily made, blamed the uniqueness of the wood for various imperfections. This would be especially true if those imperfections lead to them earning substantial profits off of unsuspecting consumers.

What these legal battles are really about is protecting consumers from companies short changing them in anyway. Regardless of how you feel about these lawsuits, one age old principal remains true: give them an inch, they’ll take a mile. Or, maybe more accurately: give them an inch, they’ll take $142 million.

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A Proposal of Punishments for GM

Despite “New” General Motor’s promises, the company looks exactly the same as “Old” General Motors. Federal safety regulators want to fine GM $7,000 a day for failure to respond to federal questions. GM CEO Mary Barra promised new standards and then answered every other question with “We’re still investigating.” Sen. Kelly Ayotte gave the response that most of the victim’s families had on their minds: “I don’t see this as anything but criminal.”

old GM

To be sure, GM is breaking more laws than I can count, if not in letter, than in spirit. For instance, GM’s bankruptcy actually gets around the rule that only individuals can discharge their debts in bankruptcy. All that talk about “new” GM and “old” GM is not metaphor. GM was literally divided into two companies, General Motors LLC and Motors Liquidation. The bankruptcy allowed GM to escape liability for its civil suits by dumping all the claims into Motors Liquidation, a “company” which holds all of GM’s debts, but none of GM’s assets.

Criminal prosecution of GM would be counterproductive at best. Even if the Justice Department could prove that GM officials and employees were guilty “beyond a reasonable doubt,” the only remedy would be lengthy prison sentences. For the families of the victims, that might be sufficient vindication of their loss. In many cases, punishment of the wrongdoer has to be enough. I think we can do better in this case though.

GM hired Kenneth Feinberg before the Congressional hearings. Feinberg is the attorney who set up compensation funds for 9/11 victims, BP Oil Spill victims, and the Boston Marathon Bombing victims. Hiring Feinberg was probably the smartest thing GM, old or new, has ever done. During the Congressional hearing though, CEO Barra reframed from promising victims a compensation fund.

That was the wrong move. The victims deserve a compensation fund, but they deserve more than money. GM engineers should repair the victims’ cars, free of charge, if the victims need car repairs. GM executives should help the children who lost their parents by training the children in business, accounting, or law if the children want to go into those fields. GM insiders should personally make amends to the families they have wronged.

These proposals are radical. They replace lost family members with GM employees and wrongdoers would be active participants in the lives of their victims. There is no judge in the country who would order these types of relationships. However, creating a support network for the auto accident victims would be a more moral solution than simply throwing GM employees in jail. Prosecutors have the discretion and the ability to craft a deal where GM insiders could help heal the victims they injured.

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