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Articles Posted in Business Entities

classified-1432995-m.jpgThere are a few recent developments in the field of cybersecurity that businesses, individuals, and fraud investigators alike should take note of. One is a recent case which, if followed, could expand a business’ liability for security breaches and the others are new tools businesses possibly could use to protect against that same liability.

Digital information, including how to protect it and prevent fraud, is always a fascinating topic. New advances in digital security go hand in hand with ingenuous ways to steal digital information. It is fun to follow, in the same way it is fun to watch Wile E. Coyote chase the Roadrunner: the chase never really ends, they always come back for more, and they use bigger and better gadgets every time.

Cybersecurity, though, is more than just a fun-read. It has real-world implications. According to a report published in the Wall Street Journal, Federal District Court Judge Esther Salas, on Monday, April 7, 2014, upheld the Federal Trade Commission’s right to police corporate cybersecurity practices to ensure businesses take reasonable precautions to safeguard their customers’ data. The FTC reportedly sued Wyndham Worldwide Corp. and three subsidiaries, in 2012, after hackers broke into the company’s corporate computer system and the systems at several individual hotels, between 2008 and early 2010, and allegedly stole credit and debit card information from hundreds of thousands of customers. The FTC alleged that Wyndham did not take reasonable measures to protect its customers’ information from theft. It cited what it alleged were wrongly configured software, weak passwords and insecure computer servers. Wyndham argued that the FTC did not have the statutory authority to police corporate cybersecurity. The FTC argued that its authority came from its 100 year old statutory power to protect consumers from businesses that engage in unfair or deceptive trade practices. There was no finding of liability, but the court reportedly upheld the FTC’s right to bring the suit. The lawsuit reportedly seeks to have the court order Wyndham to improve its security measures and fix whatever harm its customers suffered.

With the possibility of federal enforcement of what amounts to a “reasonable-precautions” cybersecurity standard, businesses, not just fraud investigators, should pay attention to the potential tools at their disposal to protect their clients’ information.

The technological advances in keeping things secret are ingenuous. Much like the mythical jackalope, or my favorite, the basselope, they use things that do not seem to have anything to do with each other, to come up with something better: A more effective lock and key to turn away prying eyes from private information they should not see.
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1414944_posted_sign.jpgThe last time we spoke about injunctions, we described what they are and how to obtain them. These effective, if hard to get, remedies play a pivotal role in New York litigation, in all sorts of disputes, ranging from those involving businesses large and small, to neighbors fighting over a boundary line. Illustrating how they have been used is a good way to know how they can be used to effectively protect your business’ rights and interests in New York.

One of the biggest recent commercial disputes in which a preliminary injunction played a key role was the patent dispute between Apple and Samsung Electronics, in which Apple claimed that Samsung smartphones and tablet computers impinged on Apple’s patents for its versions of those products. Apple twice asked the United States District Court for the Northern District of California to issue a preliminary injunction forbidding the sale and distribution of Samsung’s Tab 10.1 tablet. The first time, the court refused because it held that Apple was not likely to succeed on the merits at trial. The second time, after the appellate court ruled that Apple was likely to succeed on the merits, at least as to the enforceability of its relevant patent, the trial court issued the preliminary injunction. That was a large victory in an even larger case. Apple and Samsung are two of the largest competitors in the tablet computer market and one was ordered not to sell its product anywhere in the United States, even before the merits of the dispute could be fully decide at trial. According to news reports, Samsung sells approximately 300,000 tablets in the United States every three months. That is a large amount of product that a major corporation no longer could sell and a large share of the tablet computer market that no longer was available for the purchasing public to buy.
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1280219_rocks_rocks_rocks.jpgIn our last entry we discussed how piercing the corporate veil can result in the owner of a New York corporation being personally responsible for the corporation’s debts and obligations. We also set out the test for piercing the corporate veil: A Plaintiff must show that the owner of the corporation exercised complete domination of the corporation in the transaction the Plaintiff has complained about; that the owner’s domination was used to commit a fraud or wrong against the Plaintiff which resulted in the Plaintiff’s injury, and that the owner, through her domination, abused the privilege of doing business in the corporate form to perpetrate the wrong against the Plaintiff. See Morris v. New York State Dept. of Taxation & Fin., 82 N.Y.2d 135, 141-42, 623 N.E.2d 1157, 1160-61 (1993); E. Hampton Union Free Sch. Dist. v. Sandpebble Builders, Inc., 66 A.D.3d 122, 126, 884 N.Y.S.2d 94, 98 (2nd Dept. 2009) aff’d, 16 N.Y.3d 775, 944 N.E.2d 1135 (2nd Dept. 2011); Love v. Rebecca Dev., Inc., 56 A.D.3d 733, 868 N.Y.S.2d 125 (2nd Dept. 2008).

There are some interesting cases that illustrate just how difficult it is to pierce the corporate veil. One is E. Hampton Union Free Sch. Dist. v. Sandpebble Builders, Inc., 66 A.D.3d 122, 126, 884 N.Y.S.2d 94, 98 (2nd Dept. 2009) aff’d, 16 N.Y.3d 775, 944 N.E.2d 1135 (2nd Dept. 2011). There, the Plaintiff was a Long Island school district that sued not only a construction company, Sandpebble Builders, Inc., but also its president and principal owner, for breach of contract. The School District alleged that the construction company had negotiated the terms of a construction services contract in bad faith. According to the School District, the company came to an agreement in principal with it on the terms of the contract numerous times only for the company to try to negotiate better terms, and, when it could not, the company would refuse to execute the contract. The company, according to the School District, was trying to delay the project on which it was supposed to work, by prolonging the negotiations, and using that as leverage to negotiate a better deal, one closer to a previous contract which the School District evidently canceled. That, without more, would make the dispute nothing more than another example of why it is important to spell out all of the terms of the contract in writing and to make it clear that the parties involved in a transaction do not wish to be bound unless and until there is a written, executed agreement.
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1191957_grey_emblem.jpg“Piercing the Corporate Veil” is a term that may sound strange, archaic, or even intimidating; but when you dig through the lawyer-speak, it is really a simple concept. Piercing the corporate veil basically means that the owner of a corporation will be personally liable for the debts or obligations of the corporation. That is a concept with which every New York business owner should be familiar.

When people want to start a business in New York, they often form a corporation or other legal entity, such as a Limited Liability Company, to operate the business. They often will not do business under their own name, but, instead, under the corporation’s name. Most people know the reason for this is to limit the owners’ liability for the acts and debts of the corporation. In New York, as in most jurisdictions, a corporation is a separate legal entity that exists independently of its owners, the owners normally are not liable for the corporation’s debts, and a business owner can form a corporation for the very reason that she wants to limit her liability for the corporation’s debts. See Morris v. New York State Dept. of Taxation & Fin., 82 N.Y.2d 135, 140-41, 623 N.E.2d 1157, 1160 (1993); and E. Hampton Union Free Sch. Dist. v. Sandpebble Builders, Inc., 66 A.D.3d 122, 126, 884 N.Y.S.2d 94, 98 (2nd Dept. 2009) aff’d, 16 N.Y.3d 775, 944 N.E.2d 1135 (2nd Dept. 2011).

Most business owners form a corporation because they do not want to put their personal assets at risk if they do not have to. If the corporation they own incurs a bill, they intend to pay it, that is how they stay in business; but if the corporation goes out of business or does not have the money to pay the bill, they do not want to have to pay it out of their own pockets. Every New York business owner should remember, however, that this shield against personal liability is not bulletproof. There are ways to hold an owner personally liable for the corporation’s debts; i.e., to pierce the corporate veil.
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