North Dakota Supreme Court Invalidates Pore-Space Statute

This seems to be the season for oil patch courts to return property to its rightful owners. Last week it was a regulatory taking by the City of Dallas. This week it is Northwest Landowners Association v. State of North Dakota, in which the North Dakota Supreme Court deemed unconstitutional on its face a statute that stripped landowners of their rights in subsurface pore space.

SB 2344

In 2019 the North Dakota Legislature passed SB 2344, which allowed an oil and gas operator to use subsurface pore space in its operations and denied the surface owner the right to exclude others or demand compensation for subsurface use. The Bill granted the North Dakota Industrial Commission rulemaking authority to effectuate the purposes of the Bill and revised the definition of land to exclude pore space. The purpose was to overcome North Dakota’s Damage Compensation Act, which requires mineral developers to compensate landowners for lost land value and use. Finally, the Bill barred tort claims for injection or migration of substances into pore space.

The suit

The Association alleged that 2344 constituted an impermissible taking because it stripped landowners of their right to possess and use pore space and allowed the State to redistribute that right to others without the consent of or compensation to the landowners. The Fifth Amendment of the US Constitution guarantees that private property shall not be taken for public use without just compensation. The North Dakota Constitution prohibits taking or damage to private property for public use without just compensation having been first made to or paid into court for the owner.

The result

In its analysis the Court found a number of existing laws establishing the surface owner’s right to subsurface pore space, providing a statutory definition of pore space, and confirming that title to pore space is vested in the surface owner. The Court concluded that the surface owners demonstrated a constitutionally protected property interest in pore space that is recognized under state law.

The Court concluded that 2344 constituted a per se taking by allowing third-party oil and gas operators to physically invade a landowner’s property by injecting substances (such as CO2 or produced water) into the pore space.

An oil and gas operator does have an implied easement to dispose of wastewater into pore space produced within the same unit or pool, but the operator must compensate the surface owner for such disposal.

The Court relied on the plain meaning of ths statute to reject the State’s argument that the dominant mineral estate principle saved 2344 from constitutional infirmity. The statute applied to a broader set of circumstances.

The Court noted that although the use of pore space does not seriously interfere with a landowner’s use of the rest of his land because the pore space is beneath the surface, compensation is required for physical invasions even if the owner suffers only a minimal economic impact. This refuted intervenor Continental Resources’ assertion that pore spaces have no inherent value.

The Court denied the State’s argument that 2344 is not an unconstitutional taking because it is a proper exercise of its police power. The State may use police power only within constitutional limitations.

The Court determined that the constitutional and unconstitutional portions of the statute are independent and that the valid portions could be given effect without the invalid portion. Thus, the entire statute was not unconstitutional.

Your musical interlude

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TYLA Director Spotlight: Hisham A. Masri

Editor’s Note: In this blog series, we are getting to know the members of the Texas Young Lawyers Association Board of Directors. TYLA, commonly called the “public service arm” of the State Bar of Texas, works to facilitate the administration of justice, foster respect for the law, and advance the role of the legal profession in serving the public. All TYLA programs are accomplished through the volunteer efforts of its board and committee members, with the cooperation of local affiliate young lawyers associations. Learn more at tyla.org.

Name: Hisham A. Masri

Employer/Organization: Flowserve Corporation

Practice Area(s): Labor and Employment Law

Why did you join the TYLA board? In short, to make a difference. I am the first lawyer in my family, and I want to help law students and young lawyers with navigating this old and noble profession. I also want to improve diversity, equity, and inclusion, especially within the legal profession.

What advice would you give to other TYLA members who are looking for ways to grow professionally? Focus on your brand, and your local bar association can help. Your local bar association can help you create and promote projects focused on your passions. Your leadership on those projects then helps your reputation grow, and more people will know you as someone with a particular character. Find your passions and volunteer for opportunities to talk about those passions.

Before joining the TYLA board, what is your favorite experience with community or public service? My favorite experience was organizing the Dallas Association of Young Lawyers Dinner and Dialogue series for the Lawyers Promoting Diversity Committee. It felt meaningful to help young lawyers, and we felt recognized for the work with our fantastic event turnout.

What was your favorite movie, TV show, musical artist, or song from high school/college? My favorite musical artist from high school was Linkin Park. Runners-up were Eminem and Rascal Flatts.

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How to Prove a Material Breach of a Business Contract

Contracts are an integral and unavoidable part of doing business. As such, it is critical that business owners have at least a basic understanding of what goes into creating a strong business contract and what can happen when a contractual relationship does not work out. For example, knowing about what constitutes a material breach of contract can be invaluable to a business owner. A material breach is one that goes to the heart of a contract between two parties. It is one that renders the contract irreparably broken and one that essentially disregards the whole purpose behind establishing the contract in the first place. In the event of a material breach by the other party, a business owner has the right to terminate the agreement. Furthermore, the business owner can seek damages caused by the breach.

How to Prove a Material Breach of a Business Contract

In order to prove that a material breach of a business contract has occurred, you must be able to show evidence of that material breach. Evidence of a material breach can come in many forms and works to support the assertion that the contract has been rendered useless for all intents and purposes of the parties involved. For example, the contract itself will be a central piece of evidence in a breach of contract case. Look to what the contract says. Oftentimes, the contract itself will provide guidance on what a material breach would look like. Even more specifically, the parties to the contract may have provided stipulations which dictate which provisions would constitute material breaches if violated.

The court will also look to what type of loss has been suffered as a result of the breach and whether the effects of the breach created problems that could still be solved. The less likely a problem created by the breach is likely to be solved, the more likely it was a material breach. The timing of the breach will also be important in deciding whether or not a material breach has occurred. If most of the contract has already been performed, the loss of the nonbreaching party is likely to be less. It is less likely that the breach will be found to be material and, therefore, is not likely to be canceled.

Despite any breach occurring, proving a material breach will also require demonstrating the likelihood that the breaching party is still ready, willing, and able to perform the contract. If the breaching party is still likely to try and fix the problems caused by the breach and work towards performing the contract to completion, the less likely it is that the court will find that a material breach has occurred. To counter any assertion that the breaching party is still willing and able to perform the rest of the contractual obligations, you could show things like the breaching party’s financial situation to show that they are unable to fulfill their contractual obligations.

Business Law Attorney

Are you having a problem with your business contracts? The Kumar Law Firm can help review the terms of the contract and counsel you on your options going forward. Contact us today.

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City of Dallas Owes $33+ Million for Drilling Permit Denials

Co-author Trevor Lawhorn

If you have ever wondered how many ways a cocktail of stupidity*, treachery and feckless government can inflict financial harm on the undeserving, including the citizens the feckless government leaders are supposed to serve, see City of Dallas v. Trinity E. Energy, LLC.

 Facts

In 2008 during the Barnett Shale drilling boom, the City of Dallas issued an RFP to lease several thousand acres owned by the City. Trinity won the bid and agreed with the City that two additional tracts (the “Radio Tower Tract” and the “Gun Club Tract”) would be included in the lease, but only as drill site locations. Trinity paid a $19 million bonus for the lease.

Trinity submitted applications for special use permits (SUPs) from the City for the two tracts and a a private tract. The applications were filed correctly and in accordance with applicable laws. Pulling a Lucy on Trinity’s Charlie Brown, after a lengthy delay the City Plan Commission denied the applications. No other drill sites were feasible for various reasons. Trinity lost its appeal of the SUP denials to the city Council.

The City then amended its gas drilling ordinance to impose restrictions that effectively precluded drilling anywhere on the lease. The lease expired and the interest reverted to the City, never to be drilled.

Procedure

Trinity sued the City on several causes of action. The jury found the City committed statutory fraud and negligent misrepresentation and awarded damages to Trinity.

Over the City’s objection, the trial court submitted a jury question of the fair market value of Trinity’s property before and after denial of the SUPs. The jury found the FMV before denial was $33,639,000 and zero after. The trial court determined that the City committed a regulatory taking by failing to approve the SUPs and awarded Trinity $33,639,000.  The City appealed.

Regulatory taking

The Texas Constitution prohibits the taking, damaging or destroying of private property for public use without adequate compensation.  Inverse condemnation is a cause of action against a governmental defendant to recover the value of property which has been taken in fact by the governmental defendant, even though no formal exercise of the power of eminent domain has been attempted by the taking agency.  To plead a claim for inverse condemnation, the claimant must allege an intentional government act that resulted in the uncompensated taking of his property.

The City’s arguments:

• There was insufficient evidence to support the finding that the City’s action constituted a regulatory taking. Trinity still had beneficial use of its property because it had other drill sites from which it could access some of the leased acreage. Trinity produced evidence that the best way to maximize the value of its interest was to use the three tracts as drill sites. This was why the sites were included in the lease.
• Trinity could have drilled on other tracts in Irving and Farmers Branch to access its acreage. The City produced no evidence that those drill sites provided reasonable or economically viable access to Trinity’s minerals. Trinity showed that those sites would require complex drilling and excessively long well bores.
• Trinity could have sought SUPs for different sites. But there was no evidence that Trinity would have been able to obtain SUPs for other sites that would have permitted Trinity to reasonably and economically develop its interests.

 The court of appeals affirmed the judgment.

 Sufficiency of expert testimony

 The City argued that Trinity’s expert’s testimony on market value was unreliable and therefore the evidence was insufficient to support the jury’s findings. In short, the court found that the expert’s testimony regarding value using the “proposed units” method was sufficient.

 The court also found that the expert’s use of the “comparable sales” method was sufficient. Testimony regarding comparable sales from other counties was appropriate because those sales included acreage with similar thickness as the City acreage. Comparable sales need not be in the immediate vicinity of the subject land, so long as they meet the similarity test.

Finally, the court found that the expert’s “discounted cash-flow” analysis was sufficiently certain. The expert relied on estimated future production, future prices, and estimated costs of production to calculate the net income for the property. He used publicly available price forecasts for his calculations.  While there was conflicting evidence regarding whether Trinity’s interests would be productive, resolving those conflicts was for the jury.

Your musical interlude.

* This is an opinion of course. We can’t certify that the then-City Council members who voted against granting the SUPs have IQ’s of two digits. Maybe they were driven by misinformed and misplaced ideology. Either way, $36 Million would fill a lot of potholes in South Dallas. Can’t blame Mayor Rawlings; he warned them.

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Stories of Recovery: Life can get better

Editor’s note: This post is part of the Texas Lawyers’ Assistance Program’s Stories of Recovery blog series. TLAP offers confidential assistance for lawyers, law students, and judges with substance use or mental health issues. Call or text TLAP at 1-800-343-8527 (TLAP) and find more information at tlaphelps.org.

I have always felt like an outsider and a loner. As a child, living in a household with parental drug addiction, poverty, severe physical abuse, and serious violent trauma, certainly contributed to those problems. I worked very hard to make a better life for myself and took pride in leaving my past in the past. I scorned weakness in others.

My immediate family splintered, and I started finding my own home at 13 years old. Living in a shadow foster care system, I experienced serious emotional and psychological abuse, as most of the households I lived in were full of adult drug abuse, alcoholism, and severe dysfunction. Fortunately, though, I moved to Austin from rural impoverished areas in Texas at a young age. I had access to more education and progressive thinking than I would have had otherwise.

I love practicing law, and the type and manner of law in which I practiced gave me the perfect arena in which to battle my childhood demons. I feared authority figures, so I became very aggressive and reactive. The negative aspects of our legal culture reinforced many of my most self-destructive survival skills from childhood. I enjoyed success on paper, but my personal life with my husband and child was a train wreck.

I developed a crippling pill addiction, horrible drinking problem, and chronic pot smoking habit as a way to tolerate life and cope with normal life and practice issues. I almost died more than once during this time period, but I maintained a perfectly normal façade to show others. Of course, no one really knew me at all. I had no friends outside of professional acquaintances. Even professional acquaintances were not real friends, as I was always posturing and competing with others in my mind.

When I found recovery, I learned that some of my substance use issues were related to self-treatment of Post-Traumatic Stress Disorder (PTSD). I learned that unresolved childhood trauma can still affect our lives as severely as the worst of substance use problems. It was not uncommon for me to disassociate after becoming sober, before I began additional self-work to heal childhood trauma.

I had severe PTSD and had to do a tremendous amount of family of origin self-work after I got sober. It was a very difficult time, but with excellent therapists, Eye Movement Desensitization and Reprocessing (EMDR) treatment, and three 12-step fellowships, I was able to recover and find a way to live that is happy, joyous, and free. I can establish clear boundaries in my life and practice loving detachment with others. I am no longer the lone martyr of law but a happy legal practitioner. I did not lose my “edge” becoming a sober, well-adjusted lawyer, which is what I most feared.

In recovery, with the support of TLAP groups and resources, I now practice law more effectively than ever. I can now serve my clients and my community as a real lawyer. My experiences have allowed me to assist others out of very dark times, and I do not regret a thing about my life. I am comfortable in my own skin, and I love myself very much. I am present for my family and can be a real friend to others. I am so grateful recovery offers another chance to live and that I had the courage to take that chance. Sharing fellowship with others who have also made that choice to live makes life that much more meaningful and rewarding. Life is peaceful, not full of turmoil. I wish the same for all lawyers who may be struggling with substance use, mental illness, and unresolved trauma. Life can get better if you are willing to share the recovery with others.

 

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If a Federal Courthouse is not Accessible to a Person With a Disability, What Remedies do They Have?

Today’s blog entry is a case sent to me by Prof. Leonard Sandler, a clinical law professor at the University of Iowa. The case of the day is Wilds v. Akhi LLC decided on July 29, 2022 by Magistrate Judge Jones of the Northern District of Florida. It deals with the question of what happens when a person with a service animal shows up at the federal courthouse with his service animal not on a leash. Plaintiff alleged that the animal was under his control and could not be on a leash in order to best compensate for his disability as he has blackouts. The security agency refused to let him in the federal courthouse. So, he sues alleging violation of the ADA and state law claims. As usual, the blog entry is divided into categories and they are: Federal Buildings Are Exempt from the ADA and a Federal Courthouse Is Not a Place of Public Accommodation; While Plaintiff Has a Constitutional Right of Access to the Courts, He Cannot Enforce That Right against the Defendants under §1983 or under Bivens; While No Private Cause of Action Exists under Florida Statute §1413.08(3), Plaintiff Does Have the Ability to Sue for Damages for Violations of the Florida Civil Rights Act; and Thoughts/Takeaways. Of course, the reader is free to focus on any or all of the categories.

 

 

I

Federal Buildings Are Exempt from the ADA and a Federal Courthouse Is Not a Place of Public Accommodation

 

1. Only one Federal District Ct. has addressed the question of whether a federal courthouse constitutes a place of public accommodation under title III of the ADA. That court held that a federal courthouse was not a public accommodation.
2. The lack of case law on whether a federal courthouse constitutes a public accommodation under title III of the ADA is likely because federal governmental buildings are generally exempt from the ADA.
3. Federal buildings are governed by the Architectural Barriers Act of 1968.
4. The Architectural Barriers Act does not provide a private right of action and courts have refused to imply one.
5. An aggrieved person under the Architectural Barriers Act may file a complaint with the U.S. Access Board regarding any alleged Architectural Barriers Act violation.
6. Courts allowing a private cause of action under the Architectural Barriers Act, have insisted that a litigant must first exhaust his administrative remedies with the Architectural Barriers Board before filing suit in federal court. Accordingly, a remedy the plaintiff has is to file a complaint with the Access Board.

 

II

While Plaintiff Has a Constitutional Right of Access to the Courts, He Cannot Enforce That Right against the Defendants under §1983 or under Bivens

 

1. The defendants, the security companies providing security services to this particular federal court, are not state actors.
2. The United States Supreme Court has refused to extend Bivens to private entities.
3. Defendants are federal contractors and §1983 does not provide a cause of action against a federal official or contractor.
4. By its own terms, §1983 only applies to state actors acting under color of state law and not to federal actors acting under color of federal law.
5. A Bivens claim is available when a federal actor violates a plaintiff’s federal rights while acting under color of federal law. However, the United States Supreme Court has refused to extend Bivens liability to private entities that contract with the federal government.
6. Since the purpose of Bivens is to deter individual federal officers from committing constitutional violations, inferring a constitutional tort remedy against a private entity is not possible.
7. The defendants are private security companies providing security services for U.S. District Court for the Northern District of Florida in the Gainesville division under a federal contract.
8. The Supreme Court has said that merely private conduct, no matter how discriminatory or wrongful, does not constitute state or federal action and is excluded from §1983 or Bivens.

 

III

While No Private Cause of Action Exists under Florida Statute §413.08(3), Plaintiff Does Have the Ability to Sue for Damages for Violations of the Florida Civil Rights Act

 

1. Florida courts have refused to recognize a private right of action under §413.08 of the Florida statutes.
2. Plaintiff may seek relief under Florida statute §760.01.
3. The Florida Civil Rights Act provides a mechanism to obtain private relief and damages under §413.08 because §760.07 states that any violation of any Florida statute making discrimination unlawful gives rise to a cause of action for damages.
4. Since plaintiff is proceeding pro se, the court construes a state law claims for violations of §413.08(3) to arise under the Florida Civil Rights Act.
5. Whether plaintiff can bring a Florida Civil Rights Act claim against defendants denying him access to a federal building is a question that should be decided by Florida courts and not the federal court because plaintiff has no federal claim.
6. A court should decline to exercise supplemental jurisdiction over state law claim when the court is dismissing all federal causes of action.
7. In a footnote, the court noted that even if a federal courthouse was somehow considered to be a place of public accommodation under title III, the particular defendants sued in this case do not own, lease, or operate it. Instead, federal courthouses are owned and operated by the Gen. Services Administration of the United States government. Also, very few courts have considered whether security officers can be characterized as owners, lessors, or operators under title III of the ADA and those that did decided in the negative.
8. In another footnote, the court noted that the Supreme Court recognize a constitutional right of access to the courts arising under the 14^th amendment in the case of Tennessee v. Lane. Florida courts have recognized a number of affirmative obligation flowing from that principle, including: the duty to waive filing fees and in certain family law and criminal cases; the duty to provide transcript to criminal defendants seeking review of their conviction; and the duty to provide counsel to certain criminal defendants. Each of those cases make clear that ordinary considerations of cost and convenience alone cannot justify a State’s failure to provide individuals with meaningful right of access to the courts.
9. In another footnote, the court notes that the Florida Civil Rights Act has exhaustion requirements.

IV

Thoughts/Takeaways

 

1. I cannot see how federal courthouses can be a place of public accommodation.
2. Courts are split on whether the Architectural Barriers Act allows for a private cause of action. At a minimum, a person would need to exhaust administrative remedies first before filing such a suit, assuming such a suit flies in the first place.
3. Bivens and §1983 are of no help to a plaintiff faced with a similar situation.
4. State law is something plaintiffs lawyers should look to when dealing with disability discrimination matters. They sometimes go further than federal law or are applied more broadly.
5. About a month after this decision, the U.S. District Court accepted the magistrate’s report without objections from the parties.
6. The General Services Administration is an executive agency. So, one wonders why a plaintiff when faced with this situation would not pursue a claim under §504 of the Rehabilitation Act. See for example, Bartell v. Grifols Shared Servs. NA, 1:21CV953 (M.D.N.C. Aug. 15, 2022)-holding that the Rehabilitation Act and the ADA get interpreted the same way when it comes to service animals.
7. The court did direct the clerk to conduct a reasonable investigation, whatever that means, to see whether plaintiff’s request that he be permitted to enter the courthouse building with his service dog unleashed could be accommodated.

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Extending Title VII to Federal Judicial Employees | Aliza Shatzman

Judicial clerkships have traditionally served an important role in helping attorneys transition into practice and learn from experienced judges and practitioners. But the power imbalance between judge and clerk and the cloak of confidentiality surrounding judicial proceedings sometimes puts clerks in bad situations. Further, employment laws like Title VII of the Civil Rights Act of 1964 do not apply to the judicial branch. Aliza Shatzman, Co-Founder and President of The Legal Accountability

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Can I File an EEOC Claim if I’m Not a Member of a Protected Class?

If you’re not a member of a protected class, can you still file an EEOC claim?

The short answer is yes, but there are some things you should know first.

 

In this article, we’ll discuss what protected classes are and when you can file a claim even if you aren’t being targeted because of your protected class. We’ll also cover some basics on EEOC claims, including retaliation.

 

What is an EEOC Claim, and Who Can File One?

The U.S. Equal Employment Opportunity Commission, or EEOC, is a federal agency charged with enforcing anti-discrimination laws in the workplace. One of the ways it does this is by handling discrimination complaints (or claims) filed by employees.

If an employee is a member of a protected class and believes they have been a victim of discrimination, they can file an EEOC claim or a TWC claim with the Texas Workforce Commission – Civil Rights Division, which oversees the same issues as the EEOC.

The EEOC will then attempt to resolve the issue through mediation between the employer and employee, investigate the claim and, if it finds evidence of discrimination, concludes its process with a dismissal notice for the employee. The notice will likely include a Right to Sue, enabling the employee to file a lawsuit. If the case cannot be resolved through this process, the EEOC may file a lawsuit on behalf of the employee.

 

What Qualifies as a Protected Class?

It is illegal to discriminate against a job applicant or employee on the basis of certain protected characteristics that are beyond a person’s control.

These characteristics, known as protected classes, are defined by law and include (but are not limited to):

• Race,
• Color,
• Religion,
• Sex,
• National origin,
• Disability,
• Genetic information, and
• Age (40 or older).

While the list of protected classes varies from state to state, the above classes are protected throughout the United States. Protected class status is important because it gives employees and applicants the right to file an EEOC/TWC claim if they believe they have been the victim of discrimination. For example, an employee who is not hired for a job because of their race could file an EEOC claim alleging racial discrimination.

Most of the laws governing discrimination protect all members of a protected class. For example, a person of any religion could potentially bring a claim of religious discrimination. However, disability discrimination and age discrimination laws only protect certain members of those protected classes. A person without a disability cannot bring a discrimination claim for not being disabled, nor can a person under 40 bring a claim for age discrimination.

While protected class status is an important factor in determining whether someone can file an EEOC claim, it is not the only factor. The EEOC and TWC also consider whether the employer has a policy or practice that disproportionately affects employees in a protected class. For example, if an employer has a policy of only hiring recent college graduates, this may disproportionately affect older workers and could be found to be discriminatory. Such policies can indicate a pattern of discriminatory behavior and lend credence to an EEOC/TWC complaint.

 

Some EEOC Claims are Available to Everyone, Not Just Members of a Protected Class

The EEOC plays a vital role in ensuring that all workers are treated fairly, not just those of certain protected classes. Some of the claims that are available to everyone are those that involve whistleblowers and retaliation.

It’s worth noting that whistleblowers and retaliation claims are not mutually exclusive; in fact, they often go hand-in-hand. Let’s take a closer look at how these claims work.

Whistleblowers

A whistleblower is an employee who reports discrimination, harassment, or other unlawful behavior that has occurred in the workplace. Whistleblower complaints can be filed by any employee, regardless of protected class status. For example, a Black employee that witnesses harassment against her Hispanic coworkers can file a whistleblower complaint on behalf of those coworkers, even if the Black employee is not experiencing discrimination herself.

There are several reasons an employee, even one who is not a member of a protected class, might want to file a whistleblower complaint. First, filing a complaint and reporting the unlawful behavior can help stop the discriminatory behavior from continuing. It can also provide relief for the victim of discrimination, and it can send the message to other employers and employees that discrimination will not be tolerated in the workplace. In some cases, whistleblowers may even be eligible for financial compensation.

Retaliation

Workplace retaliation occurs when an employer takes negative action against an employee who engaged in a protected activity, such as:

• Filing a discrimination complaint
• Asking for an accommodation for a disability, pregnancy, or religious reason
• Whistleblowing
• Filing a complaint that overtime has not been paid
• Taking leave under the Family and Medical Leave Act (FMLA)
• Refusing to participate in an illegal act
• Participating in an EEOC investigation

Common forms of retaliation include termination, demotion, and denial of benefits.

Any person can file a retaliation claim if their employer took adverse action against them for filing a complaint, reporting unlawful activity, or participating in an EEOC investigation. Not only can filing a retaliation claim discourage future instances of retaliation, but it may also result in compensation (or other relief) for the claimant.

 

Jackson Spencer Can Help With Filing a EEOC Claim

If you have been a victim of workplace retaliation or want to blow the whistle on unlawful conduct, it is important to speak with an experienced employment law attorney.

At our employee rights law firm, our experienced attorneys can assess your case and may help you determine the best course of action. And if you decide to move forward, we’ll stand by your side as zealous advocates to ensure you have the best chance of success.

Contact us today for a free consultation.

The post Can I File an EEOC Claim if I’m Not a Member of a Protected Class? appeared first on Jackson Spencer Law.

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What is a Non-Compete Agreement?

A non-compete agreement or a non-compete clause prohibits employees from working for their employers’ competitors within a certain geographic area, for a certain period of time after they leave their employer.

The geographic area may be limited to a particular radius around a certain location where the employee worked or where that employee’s company operated. Alternatively, the geographic restraints can include certain counties, states, or even be nationwide or worldwide.

While the language of non-compete clauses varies widely, depending on who drafted them, here are a couple of examples of such clauses:

For C-Level Employees:  Unless otherwise agreed in writing by the Company, the Executive will not, directly or indirectly, in any capacity (including as director, officer, employee, stockholder, partner, owner, consultant or advisor) provide services of any kind, anywhere in the world, until eighteen (18) months following the end of the Executive’s employment by the Company (“Restricted Period”), to any Issuer of MasterCard, VISA, American Express, Discover Card or any other type or credit card or charge card, any bank or other lender which makes consumer loans of any kind, any insurance company or agency which issues or markets personal lines insurance policies, or any affiliate of any such entity. These services include, but are not limited to, services relating to (i) sales, endorsement, co-branding or similar agreements, (ii) product development and marketing, (iii) credit approval and collections, (iv) customer service, (v) funding or other treasury matters, (vi) loan portfolio acquisitions, mergers or other acquisitions, (vii) financial, legal or accounting matters, or (viii) acquisition of or advice or assistance to others to acquire the Corporation or the Bank or beneficial ownership of 10% or more of the Corporation’s Common Stock. In addition, the Executive agrees that during the Restricted Period, the Executive will not provide services to any affinity group or commercial organization, or any affiliate of such entity, relating to an affinity or co-branded credit card, consumer loan or personal lines insurance program with the Company or any other entity. The Executive agrees that these restrictions are reasonable.

For sales employees: For a period of one (1) year immediately following the termination of your employment, You will not, for yourself or on behalf of any other person or business enterprise, engage in any business activity which competes with the Company within ______ miles of the facility in which you were employed.

The time period for most non-compete agreements will typically range from 6 months to 2 years. Some agreements will say that the restriction period will be extended if the employee has engaged in activities in violation of the non-compete restraints during the restricted period specified in their agreement.

The language and the definitions used in a non-compete clause are very important as that is the first thing that a judge will look at when an employer tries to enforce a non-compete agreement against an employee.

Conclusion: Employers should use plain English, precise language to describe their non-compete restrictions, and employees should not sign an agreement unless they understand what restraints they are agreeing to, as these agreements are enforceable in Texas, when written correctly.

Leiza Dolghih is the founder of Dolghih Law Group PLLC.  She is board certified in labor and employment law and has 16+ years of experience in commercial and employment litigation, including trade secrets and non-compete disputes. You can contact her directly at leiza@dlg-legal.com or (214) 531-2403.

The post What is a Non-Compete Agreement? appeared first on North Texas Legal News.

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Dern Reminds that Settlement Language is Important in Section 104(a)(2) Physical Injury Cases

Taxpayers initiate lawsuits for a variety of reasons.  For example, a taxpayer may bring a lawsuit against a defendant for breach of contract, personal negligence, defamation, or for a litany of other claims.  Believe it or not—these individualized claims have significance for federal income tax purposes.

As a general matter, lawsuit recoveries (whether through judgment or settlement) are deemed fully taxable to the recipient.  Indeed, there is a presumption under well-established federal case law that the receipt of a damage recovery is taxable.  The taxpayer must therefore rebut the presumption and demonstrate that, for one reason or another, the recovery is not taxable.

In many of these instances, taxpayers commonly point to a statutory exclusion from gross income under section 104(a)(2).  Under that provision, certain damages related to “personal physical injuries or physical sickness” are excluded from gross income—i.e., those damages are not taxable.  Because damage awards outside the scope of section 104(a)(2) are generally taxed at ordinary income tax rates, taxpayers who can prove that their damages fall within the purview of section 104(a)(2) can reap significant tax savings.

Of course, the IRS knows this as well.  Accordingly, in many cases, the IRS simply waits until after the taxpayer files a tax return for the year in which the damages are paid and matches the return reporting with the information return issued by the defendant (e.g., IRS Form 1099), examining the return to see if the payment was reported in full.  If there is a mismatch in the information return reporting and the tax return, the IRS selects the return for examination.

When the examination occurs and the taxpayer raises section 104(a)(2), the IRS will try to determine the payor’s intent.  For federal income tax purposes, the payor’s intent is often gleaned from the terms of a settlement agreement if one has been entered into amongst the parties.  But exactly how precise does the language need to be to convince the IRS or the courts that the payment falls within section 104(a)(2)?  This issue is litigated often, but the best answer is usually the clearer the better.  As shown in the recent Tax Court decision in Dern v. Comm’r, T.C. Memo. 2022-90, taxpayers who fail to adequately specify the purpose of the settlement payment do so at their own peril.

Facts in Dern.

Thomas Dern (Mr. Dern) worked as a sales representative for PFI, Inc. (PFI), a manufacturer and distributor of paint and paint-related products.  In September of 2015, Mr. Dern was hospitalized for acute gastrointestinal bleeding and a resulting heart attack.  Because Mr. Dern was hospitalized off and on for several weeks, he was required to perform his sales duties by email and phone in lieu of in-person sales calls.

During this period of time, an officer of PFI asked Mr. Dern to resume making in-person sales calls.  When Mr. Dern continued to perform his sales duties by email and phone, PFI notified him that it had terminated his sales representative agreement.  PFI’s letter in this regard stated:  “[Y]our prolonged health conditions have unfortunately had a significant impact on your ability to effectively represent the Company and perform the duties of a sales representative.”

After receipt of the letter, Mr. Dern hired an attorney to represent him in a lawsuit against PFI for the following causes of action:  (1) willful misclassification in violation of California Labor Code § 226.8; (2) disability discrimination in violation of the California Fair Employment and Housing Act (California FEHA); (3) failure to accommodate disability in violation of the California FEHA; (4) failure to engage in the interactive process in violation of the California FEHA; (5) age discrimination in violation of the California FEHA; (6) failure to take all reasonable steps to prevent discrimination in violation of the California FEHA; (7) wrongful termination in violation of public policy; (8) intentional infliction of emotional distress; (9) failure to timely pay all wages under separation from employment; and (10) breach of contract.

As happens in most lawsuits, the parties settled.  The settlement agreement was memorialized in a settlement agreement and mutual release of claims.  Under the terms of the settlement agreement, the PFI defendants agreed to pay $550,000 “to compensate [Mr. Dern] for alleged personal injuries, costs, penalties, and all other damages and claims.”  In addition, the agreement provided that it was “for and on account of [Mr. Dern’s] claims alleging compensatory damages, emotional injuries, penalties, and punitive damages.”  The settlement agreement also included a general release of claims which was “intended to include in its effect, without limitation, all claims known or unknown at the time of the execution” of the settlement agreement.

On September 8, 2017, Mr. Dern’s attorney sent him a check for $327,416.31, which was for the $550,000 settlement payment minus attorney’s fees and other litigation expenses.  Mr. Dern and his wife (collectively, the “Derns”) filed a joint income tax return for 2017 that reported only $6,000 of nonemployee compensation (i.e., Schedule C) income pertaining to an appraisal business.  That is, the Derns omitted the $327,416.31 settlement payment from PFI.

Years later, the IRS issued a notice of deficiency to the Derns for 2017 determining, on the basis of a Form 1099-MISC, that they had unreported employee compensation of approximately $327,000 (the IRS goofed on the computations).  The Derns filed a petition with the Tax Court contending that the settlement payment was excludible from gross income under section 104(a)(2).

The Court’s Decision. 

At trial, the Derns contended that the payment should be excluded from gross income under section 104(a)(2).  However, the IRS offered into evidence a copy of the settlement agreement and contended otherwise.  After reviewing the settlement agreement, the Tax Court acknowledged that the agreement provided for a payment to compensate Mr. Dern “for alleged personal injuries.”  However, as the reader may recall from above, section 104(a)(2) only excludes payments for “personal physical injuries or physical sickness.”  Because the settlement agreement did not address whether Mr. Dern’s injuries were physical or not, the Tax Court held in favor of the IRS, particularly because the settlement agreement also contained a proviso that indicated that PFI had demanded a general release of “all claims known or unknown.”

With the settlement agreement ambiguous as to whether the payment was for “personal physical injuries or physical sickness,” the Tax Court looked at other evidence to determine whether the Derns could meet their burden of proof to show that the payment fell under section 104(a)(2).  In this regard, the Tax Court noted that Mr. Dern’s complaint only alleged violations of California’s labor and antidiscrimination laws, wrongful termination, breach of contract, and intentional infliction of emotional distress.  Because there was no evidence that PFI intended to compensate Mr. Dern for personal physical injuries or physical sickness, the Tax Court concluded that the IRS had correctly determined that the Derns owed approximately $100,000 in federal income taxes (plus interest).

The Takeaway.   

There are several takeaways from the decision in Dern.  First, to the extent a taxpayer intends to later claim on a tax return that all or a part of a settlement payment is not taxable under section 104(a)(2), the taxpayer (or his or her counsel) should ensure that the settlement agreement provides for the same.  In this author’s experience, defendants will often push back on characterizing the payment as a section 104(a)(2) payment—however, this should not stop taxpayers from raising good-faith arguments otherwise.  As Dern shows, taxpayers who fail to specify in the settlement agreement that all or a portion of the settlement payment is intended for personal physical injuries or physical sickness create headaches come tax return preparation time.

Second, taxpayers should be aware that in most settlement payment situations, a Form 1099 will likely be issued and provided to the IRS.  That is, the IRS will be well aware that the taxpayer received a payment, and its computer system will attempt to match the information return reporting with the taxpayer’s tax return reporting.  If the taxpayer fails to include the payment as gross income on the tax return, it is extremely likely that the tax return will be selected for examination.  In these instances, where the taxpayer intends to raise section 104(a)(2), the IRS will ask for a copy of the settlement agreement and the complaint.  Accordingly, wise counsel will address the information return reporting in the settlement agreement including who will issue the Form 1099 and for what amount.

Third, taxpayers should be aware that they can obtain tax opinions from tax professionals regarding the proper tax treatment of a payment.  In many cases, the tax opinion can provide some comfort on the proper tax reporting and whether the payment at issue is taxable or not.  Taxpayers who request a tax opinion often fare better against any potential IRS examination as the IRS usually views a taxpayer’s request for a tax opinion as a factor in determining whether the taxpayer was reasonable or not in taking the position on the return (which goes to the issue of whether penalties should be imposed).

For more on this topic:

Are Lawsuits or Settlement Damages Taxable?

A Primer on the Tax Implications of Settlements and Judgments

The IRS’ Lawsuits, Awards, and Settlements Audit Techniques Guide

Are Settlement Payments for Emotional Distress Taxable?

 

We invite you to join us on October 20th and October 21st for our 2022 International Tax Symposium!

The virtual event will qualify those in attendance for up to 14 hours of CLE, CPE, and CE and includes well-recognized speakers and panelists, such as the Commissioner of the IRS, a prior Chief Counsel of the IRS, a former Acting Assistant Attorney General of the U.S. Department of Justice Tax Division, and many others.

Register here for this one-of-a-kind event!

The post Dern Reminds that Settlement Language is Important in Section 104(a)(2) Physical Injury Cases appeared first on Freeman Law.

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Who Has Jurisdiction in Child Custody Matters?

With people on the move like never before, you and your family may have recently moved to or from Texas. On top of all the typical ways that families need to adjust after a big move, you all may have some concerns about how to address issues related to child custody for your family. Specifically, it is important to be aware of when a Texas court has jurisdiction over a case involving your child.

Jurisdiction is the right to hear and decide a case that is filed in a particular court. When we talk about jurisdiction, we are referencing both the ability and right to hear and decide cases based on the parties involved in the case as well as the subject matter. For families who have resided only in Texas then this is a simple question to answer. However, if you and your family have resided in multiple states then the question becomes more complicated. In situations like this, we would turn to the Uniform Child Custody Jurisdiction and Enforcement Act to help figure out what state is the appropriate one for you to file a child custody case in.

Explaining the Uniform Child Custody Jurisdiction and Enforcement Act

The Uniform Child Custody Jurisdiction and Enforcement Act applies to families like yours regarding child custody cases that relate to more than a single state. The state of Texas has its own child custody laws just as every state in the country does. These laws help to determine how courts make decisions every day regarding child custody cases. Where this gets complicated is when you have a situation where your child has lived in multiple states or where you live in Texas and your co-parent lives in another state.

In situations like this, the Uniform Child Custody Jurisdiction and Enforcement Act helps to cut through the uncertainty regarding jurisdiction. This series of laws will provide your family with guidelines on how to determine which court in which state has jurisdiction over the child custody matters related to your family. The Uniform Child Custody Jurisdiction and Enforcement Act applies to situations where there is an issue involving custody of your child, either legal or physical in addition to visitation. These are the hallmark issues of a child custody case.

In terms of dividing up the Uniform Child Custody and Jurisdiction Enforcement Act, we need to be aware of two sections that relate primarily to the topic that we are discussing in today’s blog post. The first section relates to jurisdiction and which state will be able to make orders regarding your child custody case. The other section that is critical for our discussion today involves the enforcement of a previously issued child custody order. For families like yours, the ability to enforce a child custody order can be extremely important. Without the ability to enforce a child custody order the language contained in that order is not worth the paper that it is printed on.

If you have any questions about what state is the appropriate location to file, the child custody case related to your child then you should pause and consult with one of the experienced family law attorneys with the Law Office of Bryan Fagan. One of our attorneys can sit down with you for a free-of-charge consultation to look over the facts of your case and provide you with information about jurisdiction within the state of Texas. The Uniform Child Custody Jurisdiction and Enforcement Act applies in all U.S. states besides Massachusetts. As a result, there is quite a bit that can be at stake for a family like yours regarding this series of laws.

When does the Uniform Child Custody Jurisdiction and Enforcement Act apply to my family?

The Uniform Child Custody Jurisdiction and Enforcement Act should be used in your circumstances to help you and your family decide whether Texas has jurisdiction over your case when you, your co-parent, or your child lives outside of Texas. The problem with filing a child custody case in Texas when this state does not have jurisdiction over your case is that time, money, and effort can be wasted since a court in this state may not be able to issue valid orders. Your Co-parent could appeal the decisions of a Texas court and have your orders invalidated.

Before deciding to file a child custody case in Texas you should seek out information from trustworthy family law attorneys in Texas. This is the critical stage of a case where you can begin to develop a strong base of knowledge that will guide you throughout your case. The more you can learn at the beginning of a case before the lawsuit is even filed the better off you and your family will be. Do not go into a family law case if the details will sort themselves out over time or if you and your family will be able to figure things out on the fly. This is a recipe for a major disaster.

Keep in mind that we all have limited resources from which we can choose to spend money on different items in our lives. Even if you believe that someone else will be able to assist you in paying for your child custody case it is unrealistic to think that you will have an unlimited amount of money to spend on your case. As a result, you need to be careful with how you spend money and should be very confident that you are moving forward with your child custody case in the right location. Choosing to file a child custody case in Texas or any other state before you are sure it is the right decision from a jurisdiction standpoint can set your case back a great deal and can waste resources that could be better spent elsewhere.

Are there jurisdiction issues that the Uniform Child Custody Jurisdiction and Enforcement Act does not apply?

There are issues related to jurisdiction which it could impact your children that the Uniform Child Custody Jurisdiction and Enforcement Act does not apply to. Legal custody, physical custody, and visitation issues are the only child custody topics that are covered by the Uniform Child Custody Jurisdiction and Enforcement Act. Included in this are orders there are classified as final orders, temporary orders, or modification cases.

When we talk about legal custody, what we are discussing is conservatorship. Specifically, legal custody relates to which parent, you, or your co-parent, can make decisions for your child on a primary basis. In Texas, this is known as a managing conservatorship. As a result of a child custody case, it is very likely that you and your co-parent white both have rights and duties regarding your child. However, only one of you will be the managing conservator of your child. This puts that parent in the driver’s seat as far as making important decisions for your child including determining the primary residence of him or her.

On the other hand, physical custody of your child refers to the ability to physically care for your child and supervise him or her. Legal custody is more of a theoretical discussion whereas physical custody considers your ability to be present with your child and care for his or her needs. For most parents, this is a primary consideration in a family lowercase. Physical custody has a great deal of emotion tied up in it and, understandably, parents want to ensure that the needs of their children are met regarding daily care.

Finally, visitation means possession and access two your child. When a parent has visitation rights to a child in Texas that means that he or she is not the primary conservator of the child. Rather, this parent would have the ability in right under a family court order to have possession and access to a child because of a court order. A visitation schedule is frequently laid out in a possession schedule. The most common possession schedule, for example, in Texas is known as a standard possession order. You may be familiar with this possession schedule and its hallmark first; 3rd and 5th weekend of the month visitation periods.

How does the uniform child custody jurisdiction enforcement act help courts determine whether Texas has jurisdiction over an initial child custody case?

Sometimes the most difficult part of this entire discussion on jurisdiction in child custody cases relates to being able to decide on what court is the appropriate site for an initial or original child custody case. Many times, if you know where your original case was filed, a modification of that original court order there’s a lot more straightforward because you would simply go back to the original court. However, if you have not yet filed the case and need to be able to have some guidance on the appropriate venue to file then the Uniform Child Custody Jurisdiction and Enforcement Act can help to guide your family to make a good decision as far as where to file a case.

Specifically, a Texas court would have jurisdiction to make an original decision regarding child custody if Texas is the home state of your child. Bear in mind that the home state of your child is not merely a state of mind or a feeling regarding where your child considers being their home state. Rather, Texas would be your child’s home state if he or she lived here with you, your co-parent, or another person acting as a parent for at least six consecutive months immediately before the child custody case was filed.

This means that your child could have Texas as a home state even if it were a grandparent or other family member in Texas who was caring for your child on an extended basis. Remember that the uniform child custody and jurisdiction enforcement act applies to you, your Co-parent as well as your child. For children who are under the age of six months, Texas would be considered the child’s home state if your child has lived in Texas since his or her birth with you, your Co-parent, or a person acting as a parent.

Additionally, Texas could still be the home state of your child even if he or she no longer lives in Texas. This is true if Texas was your child’s home state within six months immediately before the filing of your child custody case and you or your Co-parent have continued to live in Texas. If your child has been moved out of state for any reason but has resided in Texas for six months immediately before the filing of the child custody case, Texas would likely still have jurisdiction over the child custody case.

There still may be some circumstances not covered by the above two components of the Uniform Child Custody Jurisdiction and Enforcement Act. If neither of these situations applies to your family then Texas may still be the appropriate place to file a child custody case if there is no other state which has jurisdiction, either. These types of questions can get complicated, and are best addressed by an experienced family law attorney before deciding one way or the other in terms of determining where to file a child custody case.

How do you inform the court if you believe that the Uniform Child Custody Jurisdiction and Enforcement Act applies to your case?

A worthwhile question to ask regarding determining the appropriate court for jurisdiction purposes in your case relates to how you would go about informing the court that there is a question regarding jurisdiction in the applicability of the Uniform Child Custody and Jurisdiction Enforcement Act. The most direct way to inform the court of this would be to state certain information in your petition or to attach a document to the petition as an exhibit.

First, you would need to provide the court with your child’s current address as well as the places where your child has lived during the prior five-year period. Additionally, you should provide the court with the names and current addresses of any people with whom your child has lived during that period. Providing this basic information can help a court determine a timeline for your child to better acclimate itself to the question of jurisdiction.

Can Texas modify a child custody order from another state?

This is a question that the attorneys with the Law Office of Bryan Fagan receive frequently. With so many people moving to Texas over the past several years it is a relevant question to ask. A Texas court can have jurisdiction sufficient to modify a previously issued child custody order from another state. However, for our Texas court to have this jurisdiction to modify the same court would have had to have had jurisdiction to make an initial child custody determination. Frequently, this would involve your child residing in Texas and having Texas as a home state for the prior six months immediately before your filing the modification. Or your child could have resided in Texas for the prior six-month period and only recently moved to another state.

Enforcing a previously issued court order from another state in Texas

As we talked about earlier in today’s blog post it is critical for you as a parent to be able to know that a Texas court can enforce a previously issued child custody order. At the end of the day, this is probably the most important function of the court order: to hold you and your Co-parent accountable to one another and your child regarding child custody-related matters. Having a court order that you cannot enforce is a hopeless situation to find yourself in.

A Texas family court must both recognize and enforce a child custody order from another state so long as it was issued in conjunction with the Uniform Child Custody Jurisdiction and Enforcement Act. When enforcing an out-of-state child custody order, a Texas family court judge can use any remedy available under the law in Texas.

With so much at stake in interstate child custody circumstances, you do not want to take any chances with not knowing how the law applies to your case or how your family may be impacted by different sets of laws in different states. It can make a tremendous difference where your family law case is filed in what court has jurisdiction over you, your co-parent, your child, and the child custody case in question.

Questions about the material contained in today’s blog post? Contact the Law Office of Bryan Fagan

If you have any questions regarding the material presented in today’s blog post, please do not hesitate to contact the Law Office of Bryan Fagan. Our licensed family law attorneys offer free of charge consultations six days a week in person, over the phone, and via video. These consultations are a great way for you to learn more about the world of Texas family law as well as about how your family’s circumstances may be impacted by the filing of a divorce or child custody case.

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School’s back in session: Starting with Trade Secrets

Privacy Plus+

Privacy, Technology and Perspective

School’s back in session: Starting with Trade Secrets. This week, let’s join “Professor Hosch” at the start of a new law school year, looking at trade secrets.  Specifically, let’s consider the measures required to protect trade secrets.  Can we find an objective way to show that measures are “reasonable?”  We welcome your thoughts!

“Reasonable” or not:  Whoever claims to own a trade secret must show that she has taken “reasonable measures under the circumstances to keep the information secret” or otherwise protect it from loss, wrongful disclosure or misuse.  Absent taking reasonable measures to preserve secrecy, a “trade secret” probably won’t be held to be a trade secret at all.  So how can you tell when your protective measures are “reasonable enough?”

 Beyond the “reasonably prudent person:” Ask a second-year law student what are “reasonable measures,” and her immediate reaction will be, “whatever a reasonably prudent person would do in those circumstances.”  The reasonably-prudent person principle is correct as far as it goes, but it isn’t easy to use as a guide for business (especially in close cases), because what you believe is plenty might seem like just a jumping-off point for someone else, especially in hindsight.  Can we be more objective?

Toward the “objectively prudent person.”  Here are some ideas on how to “objectify” the “reasonable measures” you’re taking to protect your trade secrets.

• Start with the obvious.  Especially in trade secret law, never overlook the simple basics.

  • Identify your trade secrets. You can’t enforce what you can’t define. Articulate what they are — never take refuge in generalities (e.g., “everything,” or long strings of noise you’ve cut and pasted from someplace). Make a list or inventory.

  • Make sure people know they’re trade secrets and commit to keeping them secure, through non-disclosure agreements, policies regarding confidential and trade-secret information (including return of all confidential and trade-secret information at end of employment), data classification policies, terms of use, training regarding the handling of confidential and trade-secret information, “awareness reminders” to stay alert (not the same thing as “training”), and otherwise.

  • Limit access.  Access to your trade secrets should be provided on a need-to-know basis only.  Monitor access.  Set up technical access controls to lock people out of places where they have no business, and to restrict their ability to access, save, copy, print, or email protected information.

  • Secure them.  Locks, password protection (with at least industry standard for password requirements), encryption, code obfuscation, storage in protected repositories and multi-factor authentication.

• Treat your trade secrets according to their economics/value. “Value” is increasingly an element of what constitutes a trade secret in the first place. Certainly if you expect a court to treat your “trade secrets” seriously, you must show how you have tried to treat them that way yourself. Of course, not everything is priceless and must be guarded like Fort Knox; as Judge Richard Posner used to say, “perfect security is not optimum security” and many things can be protected with less than ultra-sensitive, perfect security. Conversely, nearly everything must be guarded better than the closets at Mar-a-Lago. Match your level of security proportionately to the economics/value of your trade secret.

• Plot out a “bell curve” of cases.  Instead of looking for one white-horse case, draw a spectrum from where measures have been found to be “obviously unreasonable” across to those that were “obviously reasonable.” Read as many cases as you can find and plot them along your spectrum. You’ll find that they cluster in a classic bell curve.  Measures from the middle of that curve to the right are more likely to be “objectively reasonable.”

• Look to standards.  We suggest looking far beyond trade secret cases. Some states have statutory duties of care related to data security, which generally impose obligations to maintain reasonable administrative, technical, and physical safeguards. Consider the NY SHIELD Act, Massachusetts’s Data Security Regulation, Alabama Data Breach Notification Act of 2018, along with the FTC Act, the SEC Safeguards Rule, HIPAA and other federal laws all require “reasonable” data security. Look also at “cybersecurity assessment frameworks,” the standards that industry groups, regulators, and others are developing for objectively assessing cybersecurity, especially in the context of privacy. There are many of these – SOCs 1, 2, and 3; NIST; SANS Critical Controls; HITRUST; and others.  These are an emerging, underused resource that can be used in trade secret analysis.

“Cutting edge?”  We’re indebted to Milt Springut for (with much else) the thought-provoking question of whether trade secret owners must sometimes – or always? – use cutting-edge devices in order to be taking “reasonable precautions.” He reminds us of the TJ Hooper case from the Second Circuit in 1932, where Learned Hand wrote that a tugboat owner could be negligent for failing to have working, two-way radios on board, even though those were not yet industry standard at the time. We suggest that where the value/risk of the trade secret is high enough, cutting-edge protections might indeed be necessary, especially where the cost of protections would be low.

—

Hosch & Morris, PLLC is a boutique law firm dedicated to data privacy and protection, cybersecurity, the Internet and technology. Open the Future℠.

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Country-by-Country Reporting: VIEs, PEs, Grantor Trusts and Other Nuances

International tax issues sit high on the political agenda for most countries.  Among those issues, few rank higher than transfer pricing policies.  Recent years have seen a trend toward Country-by-Country (CbC) reporting, with many countries adopting the OECD’s Base Erosion and Profit Shifting (BEPS) CbC reporting regime to target transfer pricing risks.  The United States, indeed, adopted a CbC reporting regime consistent with Action 13 of the OECD’s Final BEPS regime, requiring U.S. multinational enterprises (MNEs) to report high-level financial information to the IRS on a country-by-country basis.  In this Insight Post, we take a brief look at several structures that engender somewhat unique considerations for Country-by-Country reporting: Variable Interest Entities; Permanent Establishments; Grantor Trusts and Decedents’ Estates; and Deemed Domestic Corporations.

As background, U.S. Treasury regulations require that the ultimate parent entity of a U.S. MNE group report tax information, on a country-by-country basis, related to the group’s income and taxes paid, together with certain indicators of the location of the group’s economic activity. The IRS anticipates that CbC reports will shine light on high-level transfer pricing risks.  In other words, MNEs can expect to see increased transfer pricing scrutiny in years to come.

A U.S. MNE group is essentially defined as the ultimate parent entity of a U.S. MNE group and all of the business entities that are required to consolidate their accounts with the ultimate parent entity’s accounts under U.S. GAAP (or that would be so required if publicly traded), regardless of whether any such business entities could be excluded from consolidation solely on size or materiality grounds.  Thus, there are a number of “constituent entities” that flow up into the ultimate U.S. MNE group.

And what entities, exactly, make up the “constituent entities” that comprise a U.S. multinational enterprise (MNE) group?  With respect to a U.S. MNE group, a constituent entity is any separate business entity of the U.S. MNE group.  There are, however, some exceptions — such as foreign corporations or foreign partnerships for which information is not otherwise required to be furnished under section 6038(a) or any permanent establishment of the foreign corporation or foreign partnership.  Below, we look at several structures — such as variable interest entities and deemed domestic corporations — and address their current treatment under the tax law.

Variable Interest Entities

Variable interest entities fall within the constituent entities that are part of a U.S. MNE group.  In general, a variable interest entity may be consolidated with another entity for financial accounting purposes, even though that other entity may not control the variable interest entity within the meaning of section 6038(e).  Note that the Financial Accounting Standards Board (the “FASB”) generally defines a variable interest entity, for GAAP and financial accounting purposes, as an entity in which a public company has a variable interest that is not based on majority voting rights.

Permanent Establishments

Under Treasury regulations, the term “business entity” includes a permanent establishment that prepares financial statements separate from those of its owner for financial reporting, regulatory, tax reporting, or internal management control purposes.

For these purposes, the term permanent establishment includes:

• a branch or business establishment of a constituent entity in a tax jurisdiction that is treated as a permanent establishment under an income tax convention to which that tax jurisdiction is a party,
• a branch or business establishment of a constituent entity that is liable to tax in the tax jurisdiction in which it is located pursuant to the domestic law of such tax jurisdiction, or
• a branch or business establishment of a constituent entity that is treated in the same manner for tax purposes as an entity separate from its owner by the owner’s tax jurisdiction of residence.

Grantor Trusts and Decedents’ Estates

Treasury regulations exclude a decedent’s estate and an individual’s bankruptcy estate, as well as grantor trusts within the meaning of section 671, all of the owners of which are individuals, from the definition of a business entity.  The Service ultimately determined that given the nature of grantor trusts, decedents’ estates, and individuals’ bankruptcy estates and their close connection to individual grantors, decedents, and individual debtors, it was not appropriate to include grantor trusts with only individual owners, decedents’ estates, and individuals’ bankruptcy estates in the definition of business entity.

Deemed Domestic Corporations

For these purposes, the Treasury and IRS define a U.S. business entity as a business entity that is organized, or has its tax jurisdiction of residence, in the United States.  The final regulations expressly provide that foreign insurance companies that elect to be treated as domestic corporations under section 953(d) are U.S. business entities that have their tax jurisdiction of residence in the United States.

 

Transfer Pricing

When unrelated enterprises transact with one another, the underlying assumption is that market forces generally determine the commercial terms of their transaction—e.g., price and conditions of transfer.  But where associated enterprises transact with one another — including entities such as variable interest entities, permanent establishments, and deemed domestic corporations — tax authorities become concerned that the terms of their dealings may be determined by other considerations.  When transfer pricing (the pricing between or among the entities) does not reflect objective market forces, the tax liabilities of the enterprises may be distorted.

Over time, a generally (though not universally) accepted consensus has developed in the international tax community of a concept of an “arm’s-length” transaction—a hypothetical measuring stick against which to measure the pricing and terms used by the related parties.  Where the actual terms deviate significantly from the terms that would have transpired if the transaction had been an “arm’s-length” transaction, tax authorities generally have the authority to recast the transaction and use the “arm’s-length” pricing.  CbC reporting is intended to provide the IRS and other tax authorities with information that provides insight into MNEs’ transfer pricing practices.  And yes, that means that MNEs can expect to see increased transfer pricing scrutiny in years to come.

 

Freeman Law International Tax Symposium

Readers may be interested in the Freeman Law International Tax Symposium scheduled to take place virtually on October 20 and 21, 2022.  Attendees will qualify for CLE, CPE, and CE and the slate of presenters includes well-recognized speakers and panelists, such as a prior Chief Counsel of the IRS, a former Acting Assistant Attorney General of the U.S. Department of Justice Tax Division, and many others in government and private practice.

To Register for the Freeman Law International Tax Symposium, please visit www.its2022.freemanlaw.com.

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Free Act & Deed – 11 Types of Real Estate Deeds in Texas

There are at least 11 types of deeds in Texas used in the transfer of real estate. Since deeds should be recorded in the deed records in the county where the property is located to give notice to the world, deeds should be notarized. The following are some of the types of deeds in Texas:

1. General Warranty Deed – Protects the buyer of real estate from all title defects incurred prior to the buyer’s purchase of the property – even if the seller didn’t know of the defect. Typically, the buyer is mostly concerned that there are no debts or liens against the property purchased, but there can be other defects as well. If there is a defect, then the purchaser can require the seller to solve the issue. As a result, title insurance is often purchased for the security of the purchaser.
2. Special Warranty Deed – Protects the buyer from title defects that occurred when the seller owned the property. So, if there was judgment against the property prior to seller owning the property, the purchaser would not be protected. Typically, special warranty deeds are used after a foreclosure or property seizure.
3. Quitclaim Deed – These deeds give the purchaser no protection or warranty at all. As a result, this would not be desired by title companies. There is no guarantee of full ownership of the property or that there are no debts or liens. Sometimes these deeds are used when money is not exchanged for property (although Gift deeds are sometimes used to give warranty of title). In Texas, quitclaim deeds are more of a release of a claim of title. The grantor may not even have an interest in title.
4. Deed without Warranty – This is a conveyance of property (unlike a quitclaim deed), but it also has no warranty of title. This is sometimes used to clear up title problems – although it is not used very often since it lacks warranties.
5. Grant Deed – This deed implies covenants of title (although not stated in the deed). The seller of the property guarantees there is no conveyance of the property to anyone other than the purchaser and that nothing could stop the transfer.
6. Transfer on Death Deed – This type of deed transfers property at the time of death of the owner. There are no warranties of title. The legislature passed the usage of this type of deed since so many Texans failed to have wills. It is simple to create, and you can cancel if you change your mind. However, there are many problems with transfer on death deeds. See our article “12 problems with TODD” by clicking here.
7. Deed with reservation of life estate – Unlike the TODD, a deed with reservation of life estate is made with warranty of title (either a special or general warranty deed). A Ladybird deed is a form of a life estate deed – the grantor just retains more powers. The grantor retains rights to sell, lease, mortgage or even change his or her mind as to whom the grantee would be – which is why Ladybird deeds are often referred to as enhanced life estate deeds. If the life estate deed is not a Ladybird deed, then the grantees have an immediate interest and the grantees could transfer their remainder interest.
8. Deed of Trust – This is not really a deed – it is more like a mortgage in Texas when the grantor borrows money to purchase the property. The grantor (as a borrower) of this deed grants a lien against the property to secure payment of a note by the grantor to the lender. The trustee (often a title company) of the deed of trust can foreclose on the property without going to court if the grantor is delinquent or fails to pay the lender or fails to otherwise comply with the covenants in the deed of trust to secure the lender.
9. Fee Simple Determinable Deed – When a condition (as set forth in the deed) is not met or is violated, a fee simple determinable automatically ends the interest in of the grantee and automatically reverts back to the owner (grantor).
10. Fee Simple Subject to Condition Subsequent Deed – Unlike a fee simple determinable deed (although it is a form of a fee simple determinable deed), the owner has the right to retake the property if the condition is violated – but is just an option (it doesn’t automatically revert to the owner).
11. Fee Simple Subject to Executory Limitation Deed – Similar to a fee simple determinable deed (although it is another type of fee simple determinable deed), except the property could go to some party other than the owner if the condition is not met or violated.

If interested in learning more about this article or other estate planning, Medicaid and public benefits planning, probate, etc., attend one of our free upcoming Estate Planning Essentials workshops by clicking here or calling 214-720-0102. We make it simple to attend and it is without obligation.

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State Bar of Texas Executive Committee to meet September 13

The State Bar of Texas Executive Committee will meet at 10 a.m. CDT on September 13 at the Texas Law Center, 1414 Colorado St. in Austin. The meeting is open to the public and will be streamed live on the State Bar of Texas YouTube page.

The meeting agenda may be viewed here (find the backup materials here. To sign up to speak remotely during the meeting, please email lowell.brown@texasbar.com or call 512-427-1713 or 800-204-2222 (toll free) before 5 p.m. CDT on September 12. Please provide the agenda item number you wish to speak on.

Written comments regarding agenda items must be received by 5 p.m. CDT on September 8 for timely distribution to the committee members before the meeting. Please submit written comments by email to boardofdirectors@texasbar.com and indicate the agenda item you are referring to.

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Legal Humor

Sometimes lawyers really do have the best responses.  The following is just one example.

Rebuilding New Orleans after Katrina often caused residents to be challenged to prove home titles back hundreds of years. That is because of community history stretching back over two centuries during which houses were passed along through generations of family, sometimes making it quite difficult to establish a paper trail of ownership.

A New Orleans lawyer sought a FHA rebuilding loan for a client. He was told the loan would be granted upon submission of satisfactory proof of ownership of the parcel of property as it was being offered as collateral. It took the lawyer 3 months, but he was able to prove title to the property dating back to 1803. After sending the information to the FHA, he received the following reply.

Continue reading →

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Suit Over a Sand Pit Spawns Citizens Particpation Act Claim

Co-author Jeremy Walter

Ark Sand Co., Inc. v. Bradley Demolition & Constr., LLC, et al has the appearance of a Hatfield and McCoy-grade grudge match. As often happens when litigation gets personal, the Texas Citizens Participation Act was invoked. The TCPA is the statute that protects citizens’ First Amendment rights such as free speech and the right to petition the government. As we will see, the statute will not cure all insults, real or perceived.

Ark owned an industrial sand pit, which it leased to Bradley Demolition & Construction, LLC (“BD&C”).  Ark alleged the lease was oral only, for a term of five years with no option to renew.  BD&C showed a written lease with a term of ten years.  Ark claimed that the signature on the lease was a forgery and the lease was unenforceable. BD&C refused to vacate after the five-year term.

Ark sued BD&C for several causes of action, inflammatory and otherwise, and sought a declaratory judgment.  BD&C counterclaimed.

The parties tried the declaratory judgment claim first because whether the purported written lease was valid would determine whether Ark had other claims.  The jury found that Ark did not sign the purported written lease and that lease was not valid.  The trial court granted declaratory relief and granted possession of the sand pit to Ark.

Ark then amended its petition to reflect that it owned the sand pit and added BD&C’s president Edward Bradley and BD&C affiliate Bradley Sand and Concrete Crushing Company to the suit, alleging BD&C sold them sand without authority, adding conspiracy, conversion, and other claims.

Turning up the heat, Defendants filed third-party claims against the president of Ark and others, alleging the sand pit was worthless when Defendants took over.  Defendants alleged a handshake deal whereby the president tricked Defendants into revitalizing the sand pit by leading them to believe they would own and operate it for ten years.  They argued the president always secretly intended to evict Defendants once the pit was profitable and that he operated Ark as his alter ego.

Ark moved to dismiss all third-party claims under the TCPA, arguing those claims were based on Ark’s exercise of its right to petition because they complained of Ark’s conduct in the lawsuit, pleadings, and previous trial. Defendants argued that Ark lacked standing to dismiss the third-party claims, that the motion was premature because those parties had not yet answered the lawsuit, and that the TCPA did not apply. The trial court denied the TCPA motion.

Ark argued on appeal that the TCPA applied to the third-party claims, specifically that those claims were based on Ark’s exercise of its right to petition and that Defendants failed to provide prima facie evidence of their claims.

Holding:

Ark Sand was not a named party in the third-party petition and the TCPA only allows “parties” to move to dismiss.  Although the third-party petition alleged Ark’s president operated Ark as his alter ego, it did not seek to hold Ark liable for the president’s conduct (only vice versa).

The Court held that a party cannot avail itself of a TCPA motion to dismiss unless the target of the TCPA motion seeks relief from the moving party. “Because Ark [Sand] is not named as a third-party defendant and the third-party petition does not otherwise seek to hold Ark [Sand] liable, Ark [Sand] has no need of protection from the third-party action [under the TCPA].”, said the Court.

The Court upheld the denial of Ark’s TCPA motion.

Your musical interlude.

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ADA Mandates Deaf Access to the Criminal Justice System

Before we get to the blog entry of the week, a housekeeping matter. I will be out of the office from Friday evening and returning late Tuesday. So, a blog entry for the week after this will come up later in that week rather than earlier to middle of the week as is usually the case.

 

Our case of the day is Luke v. State of Texas, here, a published decision from August 19, 2022. The case asked the question about whether denying a culturally deaf individual, Deaf, an interpreter during his criminal proceedings violates the ADA. The Fifth Circuit holds that it does. As usual the blog entry is divided into categories and they are: facts; court’s reasoning on sovereign immunity and that Luke did adequately state a claim for violating title II of the ADA; and thoughts/takeaways. Of course, the reader is free to concentrate on any or all of the categories.

 

I

Facts

 

Like many Deaf individuals, Luke has trouble speaking and reading English. He also has difficulty lip reading. In order to effectively communicate, Luke requires an American Sign Language (ASL) interpreter.

 

Such an interpreter was never provided during Luke’s case for marijuana possession. No interpreter was provided the night of his arrest during a traffic stop, even though his mother, who was watching the scene via FaceTime, urged the officers to provide him with one. No interpreter was present when Luke was booked and detained at Lee County Jail. Nor was one present when a Lee County justice of the peace arraigned him and released him on bond. No interpreter ever explained to Luke his legal rights, the charges against him, or the terms and conditions of his bail.

 

The county court said that an interpreter would be provided for the hearing at which Luke was going to plead guilty in exchange for one year of probation. But the court did not follow through on that commitment. Instead, it insisted that Luke’s mother, who has only basic knowledge of sign language, interpret for her son during the hearing. Thus, no qualified interpreter ever explained to Luke the terms of his probation.

 

Luke’s experience on probation, which began with Lee County’s Community Supervision Corrections Department but was later transferred to San Jacinto County’s, was more of the same. Neither department provided Luke with an interpreter for his meetings with probation officers. Just like at the hearing, the probation officers instead had Luke’s mother interpret for him. No qualified interpreter ever explained to Luke what happened during those meetings or whether he was satisfying the terms of his probation.

 

Contending that the lack of interpreters left him “isolated and confused” during the criminal proceedings, Luke sued the following entities under Title II of the Americans with Disabilities Act: (1) Lee County, which operated the jail and court; (2) the Community Supervision and Corrections Departments of both Lee County and San Jacinto County (the “Supervision Departments”), the Texas state agencies that oversaw his probation; and (3) the State of Texas. Luke sought injunctive relief against the Supervision Departments and the State of Texas and compensatory and nominal damages from all defendants.

 

The District Court wound up concluding that the supervision department enjoyed sovereign immunity. It also granted Lee County’s motion for judgment on the pleadings for the same reason. It granted the state of Texas motion to dismiss for improper service of process because Luke serve the wrong Texas official. Luke appealed.

 

II

 

Court’s Reasoning on Sovereign Immunity and That Luke Did Adequately State a Claim for Violating Title II of the ADA

 

 

1. Lee County is a political subdivision of Texas and not an arm of the State. Therefore, it does not enjoy state sovereign immunity.
2. To make out a claim under title II of the ADA, Luke had to show: 1) that he is a qualified individual with a disability; 2) that he was excluded from participation in, or denied the benefits of, services, program, or activities for which the public entity is responsible, or was otherwise being discriminated against; and 3) that such discrimination is because of his disability.
3. Luke’s deafness makes him a qualified individual with a disability.
4. Luke can show that he was discriminated against because of his disability as both Lee County and the Supervision Departments knew he was Deaf yet failed to provide an accommodation despite multiple requests for an interpreter.
5. Title II regulations, 28 C.F.R. §35.160(b)(1), lists auxiliary aids, which include qualified interpreters, as reasonable accommodations that public entities have to provide when necessary.
6. Luke also alleged that he was denied the benefit of meaningful access to public services. In particular he alleged that he was not able to understand his legal rights or effectively communicate throughout his proceedings. Not being able to understand a court hearing or a meeting with the probation officer is by definition a lack of meaningful access to those public services.
7. Citing to Tennessee v. Lane, the court said that a core purpose of title II is for public entities to accommodate persons with disabilities in the administration of justice.
8. A theory that Luke was not denied a public service because he successfully completed his probation anyway is entirely inconsistent with the ADA. Nothing in the ADA’s text or the case law applying it requires Luke to have alleged a bad outcome. There is a good reason for that because lack of meaningful access itself is the harm under title II regardless of whether any additional injury follows. Luke’s title II injury is not being able to understand the judges and probation officers as a defendant who is not Deaf would.
9. Under the District Court’s reasoning, the state could refuse to provide an ASL interpreter for a culturally deaf individual’s trial and then avoid title II liability if the defendant is acquitted. It simply doesn’t work that way and courts have rightly rejected that position.
10. While it is true that the positive outcome of Luke’s criminal case may affect his damages, that does not allow courts to escape their ADA obligations.
11. The argument that Luke’s mother served as an interpreter means there was no ADA violation doesn’t wash either for several reasons: 1) his mother knows only basic sign language. So, his mother’s involvement would not have fully informed him of the proceedings or otherwise provide the meaningful access the ADA requires; and 2) if one considers 28 C.F.R. §35.160(c)(2) public entities cannot force a person with a disability’s family member to provide the interpretation services for which the entity is responsible.
12. Since Luke sufficiently stated a title II claim, his claim against Lee County gets past the pleading stage.
13. With respect to the Supervision Departments, Luke clearly satisfied the first step of the sovereign immunity abrogation elements in that he clearly stated violations of title II. However, it remains for the District Court on remand after full briefing and consideration to determine whether the misconduct also violated the 14^th amendment and if not, whether Congress’s abrogation of sovereign immunity to that particular conduct was nevertheless valid.
14. With respect to the State of Texas, Luke did indeed serve the wrong officer. Therefore, Texas is dismissed from the case.
15. The District Court erred when it said that Luke failed to specifically allege facts supporting compensatory damages. Luke alleged that not being able to understand the proceedings against him caused him fear, anxiety, indignity, and humiliation.
16. In a footnote, the court noted that it is a separate issue whether compensatory damages are available to title II plaintiffs at all because of Cummings v. Premier Rehab Keller, which we discussed here. It is up to the District Court on remand to decide what effect if any Cummings has on Luke’s ability to recover emotional distress damages under title II. Regardless, Luke also seeks nominal damages.
17. In another footnote, the court noted that meaningful access is a standard that comes from the Supreme Court in a Rehabilitation Act case. However, the ADA and Rehabilitation Act are interpreted the same way. So, that standard applies equally to the ADA.

 

III

Thoughts/Takeaways

 

1. For sovereign immunity to apply, an entity must be an arm of the State. Political subdivisions do not get the benefit of sovereign immunity.
2. Communication with a culturally deaf individual must be effective communication as we discussed in this blog entry.
3. Tennessee v. Lane did hold that when it comes to accessing the courts people with disabilities are at least in the intermediate scrutiny category if not higher with respect to equal protection jurisprudence.
4. The lack of meaningful access itself is the harm under title II and an injury is not required. So, by way of analogy you might also be able to argue that a failure to accommodate in a title I case does not require an adverse action.
5. Escaping damages under the ADA is not the same as escaping liability.
6. When we discussed Cummings v. Premier Rehab Keller, a question I raised was whether damages under title II are ever in play because title II’s remedies are hooked into the Rehabilitation Act remedies. This case specifically mentions that Cummings may preclude damages for violations of title II of the ADA. The court did note that nominal damages would still be in play even so. It will be interesting to see how this plays out.
7. Both title II and title III of the ADA work off a meaningful access standard.
8. Remember, as we discussed here, that ADA causation is undoubtedly not sole cause.
9. As we discussed here, the ADA is a nondelegable duty.

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