Monthly Archives: September 2012

May a Principal Officer be Held Liable for Corporate Actions?

Should a principal corporate officer be able to avail himself of the corporation’s liability shield which would protect his personal assets from suits arising from actions taken in his corporate capacity? When should a principal officer be held liable for the actions of a corporation based on the principle that the corporation is merely a façade in order to protect the officer from personal liability? These questions were addressed in the recent New York case, Deborah S. Carlone v. The Lion & The Bull Films, Inc. et al., 10 Civ. 6275 (S.D. N.Y. Apr 30, 2012).

The initial holding in that case was that the corporate defendant, L&B Films (“L&B” or “Defendant”), breached its contract with the plaintiff, Deborah Carlone (“Carlone” or “Plaintiff”). The factual basis of that holding was as follows. Plaintiff lent $115,000.00 to L&B for the purpose of making a motion picture.  The loan needed to be made rapidly, without the normal document review. As an incentive, L&B promised Carlone that the principal loan amount of $115,000.00 would be repaid within 30 days, along with an additional $185,000.00.

Plaintiff brought suit against the Defendant because she had not received any of the repayment. Carlone prevailed against L&B Films in her claim for breach of contract. Accordingly, she was awarded $300,000.00 plus prejudgment interest. Subsequently, Carlone sought to hold Mr. Luna, the principal officer, director and 50% shareholder of L&B, personally liable for the judgment by piercing the corporate veil.

New York law establishes two requirements for piercing the corporate veil and thus holding an individual liable for corporate action:

1) the owner exercised complete domination over the corporation with respect to the
transaction at issue; and

2) such domination was used to commit a fraud or wrong that injures the party seeking
to pierce the veil.

MAG Portfolio Consultant, GMBH v. Merlin Biomed Group LLC, 268 F .3d 58 (2d Cir. 2001).

Courts consider the following factors when determining whether it is appropriate to pierce the corporate veil:

1) the absence of the formalities and paraphernalia that are part and parcel of the corporate existence, i.e. issuance of stock, election of directors, keeping of corporate records and the like;

2) inadequate capitalization;

3) whether funds are put in, and taken out of, the corporation for personal rather than corporate purposes;

4) overlap in ownership, officers, directors, and personnel;

5) common office space, address and telephone numbers of corporate entities;

6) the amount of business discretion displayed by the allegedly dominated corporation;

7) whether the related corporations deal with the dominated corporation at arms-length;

8) whether the corporations are treated as independent profit centers;

9) the payment or guarantee of debts of the dominated corporation by other corporations in the group; and

10) whether the corporation in question had property that was used by other of the corporations as if it were its own. 

William Passalcqua Builders, Inc. v. Resnick Developers South, Inc., 933 F. 2d 131, 139 (2d Cir. 1991).

The District Court applied the factors set forth above to the facts of this case. L&B Films was exceedingly undercapitalized, having only $50.00, when it was formed.  Other than the money it had
received from the Plaintiff, the corporation had no other assets nor did it conduct any other business during its existence. Additionally, it did not have corporate headquarters; it conducted business out of Luna’s residence. The sole officers of the corporation were Luna’s and his partner Mr. Pereyra. The meetings between them were informal; there were no formal board meetings at which minutes were kept. There was no evidence of any exercise of discretion by L&B that was independent of Luna’s discretion.  Furthermore, Luna used his control of L&B to effect the entering into the agreement with the Plaintiff.

On this basis, the Court held that it was proper to pierce the corporate veil in order to hold Luna personally liable for the award against L&B Films because Luna completely controlled and dominated the corporation.

Creating a corporate entity will not always protect you from being personally liable for corporate actions. It is important to keep Carlone factors in mind when conducting business through an entity.

Comments/Questions: gdn@gdnlaw.com

© 2012 Nissenbaum Law Group, LLC

When Are Online Forum Selection Clauses Enforceable in New York?

Should a defendant, who uses the Internet to market and sell nationally, be able to restrict jurisdiction with the use of a forum selection clause (“FSC”)? On the other  hand, should a plaintiff be able to drag an online company, that provides convenient and often times cheaper services, into court across the country?

In Guillermo Jerez v. JD Closeouts, LLC, JD CLOSEOUTS.COM, Inc., 2012-22070 (District Court of Nassau County, First District, March 20, 2012),  the Court addressed the issue of whether FSCs are enforceable. In that case, the plaintiff, Guillermo Jerez “plaintiff”, brought suit against two Florida corporations; JD Closeouts, LLC and JD Closeouts.com, Inc. (collectively, “Defendants”). The plaintiff purchased several tube-socks from the defendants’ online company via the defendants’ website. Plaintiff claimed that the tubes-socks were “defective” and that the defendants’ refused to refund his money. The plaintiff filed suit in New York, the location where he accessed the Internet to purchase the socks and where the socks were shipped.  However, the defendants claimed that because there was an FSC in the terms and conditions of their website, the plaintiff was limited to suing in Nassau County, Florida.  

 In the decision, the Court provided the background law regarding how courts generally treat FSCs. They are presumptively valid in regard to online contract formation. However, FSCs need to be fair; online companies must provide notice of such a clause so that a reasonable person would be aware of the terms prior to entering into the agreement. Online companies need not negotiate online contracts with their users in order to be valid; they only need to provide reasonable notice of the terms.  Therefore, as long as a website’s FSC “is not unreasonably masked from the view of the prospective purchaser,” courts will hold FSCs enforceable.

In analyzing this requirement, the Court cited cases with contrary holdings. In Specht v. Netscape Communications Corp., the Court held that the plaintiff, a user who downloaded from the defendant’s
website, was not put on reasonable notice of the contract terms. The Court explained that the terms were not reasonably communicated to the user because they were located on an “unexplored portion of the webpage” underneath the “download button.” Specht v. Netscape Communications Corp., 306 F.3d 17 (2d Cir. 2002). However, in Caspi v. Microsoft Network, LLC., the Court held, the terms of a contract enforceable where the user of online software was required to click “I agree” or “ I don’t agree” before the use of the software. This required affirmative step, on the part of the user, provided reasonable notice of the terms of the agreement.

The Court, in JD Closeouts held that the defendants’ FSC was not enforceable.  The court based its decision on the fact that the defendants’ FSC was “buried” and “submerged” on the defendants’ webpage. The only way the plaintiff could have become aware of the FSC would be if, by chance, he happened to find it by clicking the “About  Us” tab. Online users are not expected to conduct a wild goose chase; searching every corner of a website for contractual obligations that will be imposed upon them by online companies.

Comments/Questions: gdn@gdnlaw.com

© 2012 Nissenbaum Law Group, LLC

New York Assembly Seeks to Restrict Anonymous Free Speech on the Internet

The New York State Assembly has proposed a law that would
make sweeping changes to how people communicate on the Internet.  The Bill called the “Internet Protection Act”
A:8688 /S.6779 would require the following:

A web site administrator upon request
shall remove any comments posted on his or her web site by an anonymous poster
unless such anonymous poster agrees to attach his or her name to the post and
confirms that his or her IP address, legal name, and home address are accurate.
All web site administrators shall have a contact number or e-mail address
posted for such removal requests, clearly visible in any sections where
comments are posted.

Clearly, this would create
profound problems for civil libertarians and others who believe that people should
be allowed to post their views anonymously.
In fact, it might be unconstitutional, to the extent that a court would
find that it violates the principle that anonymous free speech are matters of
public concern is protected by the First Amendment.

Specifically,
in McIntyre v. Ohio Elections Commission, 514 U.S. 334 (1995), the United States
Supreme Court stated:

Anonymity is a shield from the tyranny of the
majority. . . . It thus exemplifies the purpose behind the Bill of Rights and
of the First Amendment in particular: to protect unpopular individuals from
retaliation . . . at the hand of an intolerant society

Id.at357.    

People
who post on websites, as well as webmasters, should follow this development to
see if the law ultimately is signed by the Governor, and if so, whether it
starts a nationwide trend.

Comments/Questions: gdn@gdnlaw.com

© 2012 Nissenbaum Law Group, LLC

What Intellectual Property Issues Will Arise if The NBA Sells ad Space on Its Uniforms?

In July 2012, Adam Silver, the deputy commissioner of the NBA announced plans to allow corporate logos on team jerseys.  If the plan is formally approved, the ad space will be 2.5-in.-by-2.5-in. and will be placed below the left shoulder. This would be significant because prior to this year, none of the American big-four sports (the NBA, MLB, the NFL or the NHL) had contemplated providing
ad space on their players’ uniforms. 

The decision to allow advertisements to be placed on NBA members’ uniforms could undoubtedly generate large revenue per annum, but a bigger concern will be the intellectual property disputes that could arise from the deal. 

Is there a likelihood that the venture could create sponsorship confusion for basketball fans? If more than one brand advertises on a single player’s uniform, could this create confusion over corporate association and dilute the brand?  These are all important questions to consider as this initiative proceeds to fruition.

Comments/Questions: gdn@gdnlaw.com

© 2012 Nissenbaum Law Group, LLC