PRESIDENT OBAMA SIGNS RESTRICTION ON ARBITRATION CLAUSES FOR MILITARY CONTRACTORS INTO LAW

Most military contractors will no longer be able to enforce mandatory arbitration clauses in their employment contracts under a provision signed into law over the weekend. Specifically, no money can go to a defense contractor unless the contractor agrees not to enter into or enforce any employment contract "that requires, as a condition of employment, that the employee or independent contractor agree to resolve through arbitration any claim under title VII of the Civil Rights Act of 1964," or many tort claims. The restrictions will apply also to subcontractors starting in six months. Contracts and subcontracts under $1 million are exempt from the provision.

As a result of the new law, we recommend that all military contractors include a provision in their employment agreements whereby the parties agree to resolve all disputes related to the employment relationship by bench rather than jury trial. This means that the parties agree to have a judge, rather than a jury, make a decision with regard to any such dispute.

For more information on this topic, please contact Nicole Windsor at windsor@bowie-jensen.com.

Federal Estate Tax Legislation

The U.S. Congress may yet act before the year is out to extend or change the federal estate tax. If not, the 2001 legislation that has established exemptions and tax rates through this year is scheduled to expire for the year 2010. Then, in 2011, the exemptions and rates will revert to their pre-2001 rates. Here are the differences:

For persons dying in 2009, the last year of the 2001 legislation, an estate worth up to $3.5 million is exempt from federal estate tax, and from there tax is applied on the excess at graduated rates up to a top rate of 48%. After the one-year repeal, for persons dying in 2011, the exemption will be $1 million, with a top tax rate of 50% on larger estates.

Of course, Congress may act at the last minute to extend the current law in the short term, or enact something new. The uncertainty makes it all the more important for persons with potentially taxable estates to plan to take advantage of whatever exemptions may be available. (These changes do not affect Maryland’s estate tax structure, which has a $1 million exemption but a much lower tax rate on the excess.)

Typically the way estate tax planning is done, at least for married couples, is to provide in their Wills for the creation of a trust upon the first death for the benefit of the survivor. The survivor usually has an absolute right to distributions of income, sometimes small distributions of principal, with the rest subject to the trustee’s discretion to distribute more subject to the health, maintenance and support needs of the survivor. Upon the death of the surviving spouse, the trust is not part of his or her taxable estate, and what remains in the surviving spouse’s estate is subject to available federal and state estate tax exemptions. In this way, estate tax exemptions are applied to the assets of each spouse.

The trust created for this purpose can be funded upon the first death with a specific amount, such as the available federal exempt amount or the Maryland exempt amount. In the alternative, the Will can provide that such a trust is created and funded only to the extent the surviving spouse disclaims any of the estate initially passing to the surviving spouse. This approach provides for maximum flexibility for dealing with the uncertainties of the future estate tax.

Congress has been discussing the future of the estate tax, though no clear direction has emerged as yet. Even persons who believe they would not be subject to estate tax should consider tax planning because their assets may increase in the future and the available exemptions may change.

For more information on this topic, please contact Jay Merwin at Merwin@bowie-jensen.com.

More Privacy and Identity Theft Developments

Demonstrating that regulation of privacy is hard, the Federal Trade Commission (FTC) has AGAIN pushed back the enforcement of the Red Flags rule, now until June 1, 2010. http://www.ftc.gov/opa/2009/10/redflags.shtm. This might have followed a court loss, in which the American Bar Association convinced a court to hold that the red flags rule should not apply to lawyers. See https://ecf.dcd.uscourts.gov/cgi-bin/show_public_doc?2009cv1636-21. The ABA had previously won a similar case, where a court held that the privacy components of Gramm Leach Blilely also did not apply to lawyers. In case the reader thinks any of this is unfair to exclude lawyers . . . there is a long, long history of cases at the federal level noting a general intention in federal law not to regulate lawyers – and to allow that regulation to occur at the state level.

The Red Flag rules require “creditors” to establish a plan to fight identity theft. It sounds like a good thing on its face. The problem lies in the FTC’s overreaching definition of “creditor” in the Red Flag rules. As the FTC views it, if you accept payment at any time in the future, you are a “creditor.” This means, essentially, that everyone is a creditor under the rule. However, most of us do not have the capability to implement and monitor a real identify theft detection plan. Indeed, many “creditors” accept credit cards through third party vendors – often not even having possession of credit card data. The FTC is apparently going back to the drawing board in light of the ABA case and fixing its proposed rules.

Finally, in a recent case, Amburgy v Express Scripts, Inc., a federal district court in Missouri has thrown out a case where a plaintiff alleged that the defendant’s data breach – in which thousands of records with personal information were stolen – caused the plaintiff damages to protect his credit because of the possibility that his data was lost. The holding, which some blogs have erroneously mischaracterized as carte blanche protection for data owners, only held that the plaintiff had no standing to sue because he could not prove he had suffered a loss. For some reason, the plaintiff was apparently unable to prove that his records were part of the records that were taken by the data thief. All he could allege (and apparently prove) is that his records might have been lost, and that as a result of that possibility, he had to engage in credit monitoring. The case has a limited holding – and other cases have allowed plaintiffs to proceed under various tort and contract theories under similar facts. The law therefore remains rather unsettled in this area. Congress is considering a bill to federalize data breach notification, but as in past years, it is not clear it will bubble up to consideration with all of the other high profile legislative work being done.

For more information on this topic, please contact Mike Oliver at oliver@bowie-jensen.com.

Can I assign my lease?

Under Maryland law, a landlord’s refusal to consent to a lease assignment is only deemed reasonable if it is based on objective grounds and reasonable commercial standards without regard to the subjective personal beliefs of the landlord (Maxima Corp. v. Cystic Fibrosis Foundation, 81 Md. App. 602 (1990)). In Maxima Corp., the court gave the following examples of good faith reasonable objections to a lease assignment:

• Assignee’s inability to fulfill the terms of the lease;
• Assignee’s financial instability or irresponsibility;
• Lack of suitability of the premises for the assignee’s intended use; or
• Assignee’s intended unlawful or undesirable use of the premises.

Conversely, a landlord does not have a reasonable basis for withholding consent if he remains assured of all the benefits bargained for in the lease.

In these difficult economic times tenants and landlords are frequently faced with the need to renegotiate, terminate or assign leases. Landlords and tenants are well advised to keep these rules in mind when considering a potential assignment of a lease.

For more information on this topic, please contact Mark Jensen at jensen@bowie-jensen.com.

The Google Book Settlement Agreement

The Google Book Settlement Agreement may change the way people find or browse for books in the future and it is one of the hottest topics in copyright law in 2009. In 2004, Google announced that it had entered into agreements with various libraries to digitize entire books. Two class action lawsuits on behalf of authors and publishers were then filed against Google alleging copyright infringement. The parties began negotiating a settlement agreement which if approved, could allow Google to digitize and include books in a database, and to sell subscriptions and online access to books.

Authors can either be a part of the Settlement or opt out. If an author does nothing, he or she may be bound by the Settlement; however, in order to receive any benefits of the Settlement if approved, such as cash payments, the author needs to submit a claim form to Google. If the author stays in the Settlement, she can also request that one or more of her works be removed from the database or not be digitized. If the author opted out of the Settlement, the author will not be included in the monetary payments under the settlement, but he or she will retain legal rights against Google and participating libraries, and Google has currently indicated that it will honor an author’s request not to digitize the work.

For more information, see www.googlebooksettlement.com. Feel free to contact Kim Grimsley at grimsley@bowie-jensen.com to discuss further.

Important Information about Business Loans

With access to capital at a premium in the current economy, it is important for potential business borrowers to bear in mind certain essential terms to any loan.

1. If the loan is to be secured by real estate, taxes are payable on the recordation (sometimes close to 5% of the secured loan amount) unless the grantor of the lien is a party other than the borrower. Consider structuring the loan so that the borrower is a related entity and the real estate-owing entity is a guarantor that secures its guaranty with a lien on the real property.

2. A lender typically will want a personal guaranty of the loan from principals of the business. Though this may be unavoidable, consider trying to limit individual exposure as to the scope or duration of the guaranty or as to the individuals on it. If just one spouse in a married couple signs a guaranty, liability is limited to property held in that spouse’s sole name. By and large, in that case, liability would not extend to property held by the couple jointly, as “tenants by the entirety”, because property held that way is reachable only by a creditor of both spouses.

3. Any default on the loan should be conditioned on the lender first giving the borrower written notice and a few days to cure any defaults for non-payment, and 30 days to cure defaults other than for non-payment. Especially for defaults for non-payment, the point is to avoid inadvertent default, if the borrower simply forgets to pay.

4. The business borrower may have certain pre-existing payment obligations – on loans from officers, bonus plans, deferred compensation arrangements and the like. While giving the lender first priority, the loan document should recognize such pre-existing obligations and permit payments to continue so long as no default occurs with the lender.

5. Lenders typically require that business borrowers insure their property, which is the lender’s collateral, at certain levels. Sometimes the lender will require that the insurer be subject to lender approval. In that case, consider offering to confine the choice of insurer to one meeting a certain industry rating standard that is satisfactory to the lender, rather than giving the lender veto power over the insurer. That way, the business borrower preserves some freedom to shop around.

There are many more important considerations to discuss with a lender, and for which a lender may grant some leeway, in arranging a loan. Circumstances differ for each borrower, which is why it is best to ask a lawyer for further advice in any borrowing transaction.