Retailers, Importers, and brands need to immediately be sure there is no cotton from Turkmenistan in their supply chains. The U.S. Customs and Border Protection (CBP) has finally announced it will turn away or seize and withhold any shipments of cotton originating in the Central Asian nation of Turkmenistan. Affected importers will clearly experience a significant, and probably costly, disruption of production- related procurement. The International Labor Rights Forum (ILRF) urged the U.S. to ban Turkmen cotton two years ago but was rejected until findings of state-enforced slave labor was documented after extensive investigation.
CBP was given the authority to ban tainted products like cotton from Turkmenistan when The Trade Facilitation and Trade Enforcement Act of 2015 (TFTEA) removed the “consumptive demand” exception to the United States Tariff Act of 1930, a commonly exploited loophole to the prohibition against importing products of forced labor. Prior to the new provision, CBP used the law only 39 times since 1930 to apprehend goods tainted at some point from creation to delivery by forced labor. Since the passage of TFTEA, CBP has issued four new Withhold Release Orders (each a WRO) on specific goods from China (soda ash, calcium chloride, and caustic soda from Tangshan Sanyou Group and its subsidiaries on March 29, 2016; potassium, potassium hydroxide, and potassium nitrate from Tangshan Sunfar Silicon Industries also on March 29, 2016; Stevia and its derivatives from Inner Mongolia Hengzheng Group Baoanzhao Agricultural and Trade LLC on May 20, 2016; and peeled garlic from Hangchange Fruits & Vegetable Products Co., Ltd. on September 16, 2016).
A March 31, 2017 Executive Order establishing enhanced collection and enforcement of antidumping and countervailing duties and violations of trade and customs laws authorized the Secretary of Homeland Security, through the commissioner of CBP, to develop implementation plans and a strategy for interdiction and disposal of inadmissible goods and to develop prosecution practices to treat significant trade law violations as a high priority.
Although 2017 saw more antidumping and countervailing duty orders and intellectual property rights protection activity under TFTEA, there have been no published detentions prior to the ban of any shipments of Turkmen cotton, although CBP pledged to the U.S. Congress that more import bans under section 307 would be forthcoming. Perhaps this is just the beginning of a long awaited CBP crack-down on forced labor imports to combat human rights abuses in global supply chains.
Goods Tainted by Forced Labor
Reprinted with permission from Business Law Today April 2018.
The global fight against child labor and forced labor has been led for decades by the International Labor Organization (ILO). The ILO’s most recent estimate is that 25 million people around the world, including millions of children, are currently subjected to forced labor. Under U.S. law, section 307 of the Tariff Act of 1930 prohibits the importation of merchandise mined, produced, or manufactured, wholly or in part, in any foreign country by convict, forced, or indentured labor. This law gave the U.S. Customs Service (now the U.S. Customs and Border Protection (CBP)) authority to seize commodities imported into the United States where forced labor was suspected to have been used anywhere in the supply chain.
The Tariff Act defines “forced labor” as “all work or service which is exacted from any person under the menace of any penalty for its nonperformance and for which the worker does not offer himself voluntarily.” Products of forced labor include goods that were produced by convicts and indentured laborers. The ILO defines forced or compulsory labor as service that involves coercion—either direct threats of violence or more subtle forms of compulsion under the menace of any penalty. Goods made by child labor, defined as work that deprives children of their childhood, their potential, and their dignity and that is harmful to their physical and mental development, are included in the forced-labor prohibition especially when combined with any form of indenture. Such tainted merchandise is subject to exclusion and/or seizure by the CBP, may lead to corporate criminal liability, and could even support prosecution of culpable employees individually.
The Trade Facilitation and Trade Enforcement Act of 2015 (TFTEA) removed the “consumptive demand” exception to the United States Tariff Act of 1930, which was a commonly exploited loophole to the prohibition against importing products of forced labor. Prior to the new provision, CBP used the law only 39 times since 1930 to apprehend goods tainted at some point from creation to delivery by forced labor. Since the passage of TFTEA, CBP has issued four new Withhold Release Orders (each a WRO) on specific goods from China. Although 2017 saw more antidumping and countervailing duty orders and intellectual property rights protection activity under TFTEA, there have been no published detentions to date, although CBP has pledged to the U.S. Congress that more import bans under section 307 are forthcoming.
In the many years I have been working as outside counsel to closely held businesses, one of the frequent pitfalls leading to costly litigation and operational conflicts is the failure of shareholders to adequately document and formalize their expectations, especially as it relates to minority shareholders. The first question I ask when contacted by a business owner who is dealing with shareholder conflicts is “What does your shareholders’ agreement say?” Unfortunately, too often, the answer is “What shareholders’ agreement?”
Many small businesses are formed by a group of people who share a collective belief at the time of formation. There are often unwritten understandings as to the division of roles within the business. Almost universally, the expectation is that all of these founding shareholders will devote ongoing resources to the business. Conflicts arise when those expectations diverge, when one shareholder fails to perform within the business, or even when a shareholder exits the company.
When conflict does arise, mechanisms for resolution can be limited, complex and expensive. Certainly a transfer of a non-performing shareholder’s stock seems like a simple straightforward course of action. However, in the absence of an agreement providing for transfer upon specified events, the business has no absolute right to remove a shareholder or force a transfer of the share ownership interest. Even a shareholder who has ceased to be actively involved in the business continues to enjoy all of the rights attendant to the ownership of the shares: the shareholder need not come to work, need not contribute capital, need not pursue business opportunity in the name of the company. Employment may end, but the right to enjoy distribution of profits does not, as long as share ownership persists. As most small businesses are organized as subchapter “s” corporations, profits must be distributed in accordance with share percentage.
Ownership of stock gives rise to all of the rights provided by statute. Minority shareholders enjoy the right to obtain information about the performance of the company, attend and vote at shareholders’ meetings, and receive distributions of profits derived from corporate operations. Minority shareholders can be an impediment to stock transfers, anchors against change and obstacles to capital expenditures. Such situations are a constant bone of contention among owners of small businesses.
Of course, the best solution is an agreement that accurately reflects the understandings of the shareholders at the time the shares are assigned, or the company is formed. Such agreements can provide clearly defined roles within the business, mandatory transfer upon termination of employment, death or disability, valuation mechanisms and provisions restricting transfer. Adopting an agreement, at minimum, provides a foundation for the business relationship, and may provide a roadmap in the event of disagreement.
In the absence of an agreement, a dispute with a minority shareholder requires careful management. The majority must take care to avoid vesting a minority shareholder with breach of fiduciary duty claims or shareholder oppression. Compliance with corporate formalities is imperative. While there is no guaranty of continuing employment for a minority shareholder (with exceptions), distributions or profits in accordance with ownership percentages is required if the company has elected “s” corporation treatment. Certainly, majority and employed shareholders may receive compensation for services rendered, but an artificial manipulation of corporate profits would certainly be relevant to a minority shareholder oppression claim.
Pennsylvania Business Corporations Law provides little relief to a majority shareholder who continues to run a profitable business without the assistance of his or her minority shareholders. The statute provides no right to extract a non-performing shareholder against his/her will at any price, and provides no absolute right of liquidation. Even the nuclear option of judicial corporate liquidation requires that the complaining shareholder allege irreparable harm to the company; an allegation which may be impossible if the business is successful as a result of the majority’s efforts.
Formation of an appropriate and workable shareholders’ agreement requires legal representation; as does management of divergent goals between shareholders. Owners of s corporations with minority shareholders would be wise to review their governing documents and take proactive steps to safeguard the future value of their shares, and avoid crippling and costly litigation. Antheil Maslow and MacMinn business attorneys are highly experienced in such matters and leverage a team of professionals in differing disciplines to navigate these complex waters.
Earlier this year, amendments to Pennsylvania’s statutes governing partnerships and limited liability companies (often referred to as unincorporated entities or alternative entities) went into effect. I recently blogged about the “transferable interest” concept adopted by the Act. Today, in Part 2 of this series, I highlight another significant change brought about by Act 170: the clarification of the fiduciary and other duties owed in the context of an unincorporated entity. In general, there are three basic duties:
• Duty of loyalty: generally, a duty to avoid self-dealing, competing and usurping company or partnership opportunities
• Duty of care: a duty to refrain from gross negligence and recklessness
• Duty of good faith and fair dealing: a duty to deal fairly and consistently with the terms of the parties’ agreement and the purpose of the entity
In a general partnership, each partner owes the above duties to each of the other partners and to the entity.
In a limited partnership: (a) the general partner owes each of these duties to the limited partners and to the partnership; and (b) the limited partners owe only a duty of good faith and fair dealing to each other.
In a manager-managed LLC: (a) the manager owes these duties to the members and to the entity; and (b) the members owe a duty of good faith and fair dealing to each other. In a member-managed LLC, the members owe these duties to each other and the company.
Some of these duties may be modified by agreement of the parties. In their operating or partnership agreement, the parties may modify, but not eliminate, the duty of loyalty and the duty of care, as long as the modification is not “manifestly unreasonable.” This standard is not defined and is left to the courts to interpret, but in general the agreement cannot convert the relationship into a strictly arm’s length relationship. The duty of good faith and fair dealing may not be modified or removed, but the owners’ agreement can identify the standards by which this duty will be measured.
The Pennsylvania General Assembly, with significant input from the Pennsylvania Bar Association’s Business Law Section, recently passed Act 170, which overhauls the statutes governing partnerships and limited liability companies (often referred to as unincorporated entities or alternative entities). This Act brings these statutes up to date with the uniform laws on which they are based and is now in effect for all new and all existing unincorporated entities. These comprehensive amendments provide default rules for governance and other matters that fill the gaps in the absence of an operating agreement or partnership agreement (or the absence of applicable provisions in those documents). Accordingly, it is important for owners of partnerships and LLCs to review their governing documents and be sure they have a clear understanding of how these new rules apply to them. Owners should work with counsel to draft provisions to vary these default rules if that is the desired outcome.
One significant change brought about by the Act is the recognition that equity interests in unincorporated entities are bifurcated into governance rights (including consent, management, and information rights) and economic rights (i.e., the right to receive distributions). The amendments adopt a concept called a “transferable interest”, which is an interest in the partnership or LLC that includes only economic rights. The holder of a transferable interest has no governance rights; he or she has only the right to receive distributions from the entity (but not the right to demand or sue for distributions). The transferable interest approach honors the “pick your partner” principle, which assures owners of a business entity that they will be able to choose the co-owners of the enterprise. Under the revised statute, the only interest that can be conveyed to a non-member is a transferable interest, unless the operating agreement provides otherwise or the other owners expressly agree. Thus, a creditor foreclosing on a member’s equity interest or a person seeking to attach a spouse’s equity interest in a divorce proceeding can take only a transferable interest. This limitation on the rights of non-members affords owners important protections from assertions of control by outsiders which may not be in the best interest of the entity or its members. The exception to this rule is that a creditor foreclosing on an equity interest in a single-member LLC will take the full membership interest (governance and economic rights). The rationale for this exception is that because there is only one member, the “pick your partner” rationale does not apply to limit the rights of the lender.
Avoiding Bad Press, Brand Impairment and Costly Litigation
Reprinted with permission from the February 28th edition of the The Legal Intelligencer © 2017 ALM Media Properties, LLC. All rights reserved.Further duplication without permission is prohibited
A significant amount of press surrounded the US Department of Justice (DOJ) one year trial pilot program on April 5, 2016 and the earlier September 29, 2015 “Yates Memo”, instructing companies to self-disclose possible violations of the Foreign Corrupt Practices Act (FCPA) and fully cooperate with the DOJ. What has not been as broadly made known is that, a few days later, the U.S. Customs and Border Protection (CBP) establish a Trade Enforcement Task Force within its Office of Trade to focus on issues related to enforcement of antidumping and countervailing duty laws and interdiction of imported products using forced labor.
Antidumping and countervailing duties are historic tariffs imposed on foreign imports priced below fair market value to ensure a level playing field for domestic producers. The interdiction of products using forced labor stems from The Trade Facilitation and Trade Enforcement Act of 2015(TFTEA), enacted in February 2016. TFTEA eliminates an earlier “consumptive demand” exemption, meaning that goods made with indentured, child, or other forced labor are no longer allowed in the US just to meet US demand. With this change, CBP will no longer be legally required to weigh demand considerations when processing information concerning forced labor. CBP will be updating its regulations to clarify the TFTEA amendment but, since March 10, 2016, CBP started training personnel and has executed several withhold/release orders related to goods made by convict or forced labor using a Department of Labor (DOL) list of foreign-made products for which the DOL “has a reasonable basis to believe might have been mined, produced or manufactured” by forced or indentured labor. The CBP has also established within its Office of Trade a Trade Remedy Law Enforcement Division and seems intent on taking action.
To limit warranties or disclaim liability for products sold in online commerce or advertised online, most businesses create a Terms and Conditions or a Rules of Use page on their business website. A significant uptick in cases filed in New Jersey, however, cite these common broad warranty limitations and disclaimers posted on a business’ website as violations of the New Jersey Truth-in-Consumer Contract, Warranty and Notice Act (TCCWNA).
The TCCWNA gives standing to consumers who have suffered no financial loss or injury against sellers who, with no intent to mislead, have provided a consumer with, or even shown, a warranty, contract, sign or notice of any sort relating to personal, family or household merchandise that includes text that violates New Jersey (or federal) law. Using software to find Terms and Conditions or Rules of Use and other web-based advertising and social media campaigns that include the offensive text, the organized plaintiffs’ bar has increasingly relied on TCCWNA to bring class actions to generate huge fees for the attorneys and $100 to each consumer in the class under the statute’s automatic damages provision.
What is the TCCWNA ?
The TCCWNA can be found in N.J.S.A. 56:12-14, et seq. The law, which became effective over 30 years ago, is a broad consumer protection law that requires that a plaintiff/consumer only show:
1. the consumer or potential consumer was given or shown a warranty, notice, contract, or sign by the seller;
2. the product offered was consumer related – used primarily for personal, family, or households purposes; and
3. the document or notice included some language that breaches New Jersey or Federal law in some manner.
According to the TCCWNA, N.J.S.A. 56:12-15:
No seller, lessor, creditor, lender or bailee shall in the course of his business offer to any consumer or prospective consumer….or give or display any written consumer warranty, notice or sign…which includes any provision that violates any clearly established legal right of a consumer or responsibility of a seller, lessor ,creditor, lender or bailee as established by State or Federal law at the time the offer is made or the consumer contract is signed or the warranty, notice or sign is given or displayed.
Why are the TCCWNA lawsuits being brought?
TCCWNA lawsuits are being brought for a variety of reasons. The core reasons are:
• Most business websites include warranty waivers or indemnity provisions that try to limit a consumer’s legal right.
• The consumer does not have to show any specific injury or any loss.
• Good faith of the business is not a defense. The plaintiff does not need to prove an unconscionable act.
• There is no privity requirement; i.e., the plaintiff does not have to prove that he/she actually bought our used the product.
• Damages include attorney’s fees and court costs.
• There is an automatic $100 damages per plaintiff provision within TCCWNA so actual damages need not be proven. Just a thousand member class means $100,000 in damages.
How does TCCWNA affect a business website?
Business webpages are “notices” under the TCCWNA even if they are not intended by the business to mislead a consumer about the applicable law or to form a contract. This includes the Terms and Conditions, Menus, Disclaimers, and almost any page of the website. Any type of advertisement or print material may be considered a “notice” to consumers and the great variety of state laws and complexity of the Federal Magnuson-Moss Warranty Act make it easy to inadvertently include an impermissible warranty or disclaimer provision. Examples of text that can trigger problems include:
• disclaiming implied warranties (of merchantability or fitness for a particular purpose) on any consumer product if you offer a written warranty for that product or sell a service contract on it.
• requiring a purchaser of a warranted product to buy an item or service from a particular company to use with the warranted product in order to be eligible to receive a remedy under the warranty.
• requiring customers to return a registration card when stating that the business is providing a “full” warranty.
• offering a warranty that appears to provide coverage but in fact provides none (like a warranty covering only moving parts on an electronic product that has no moving parts).
• excluding or imposing limitations on incidental or consequential damages or on how long an implied warranty last in some states.
• including a provision that requires customers to try to resolve warranty disputes by means of an informal dispute resolution mechanism before going to court that does not meet the requirements stated in the FTC’s Rule on Informal Dispute Settlement Procedures.
You should always have a lawyer review the Terms and Conditions and Rules of Use pages (and perhaps all the pages) of your website before you publish to see what clauses or statements may be in violation of New Jersey or Federal law. Prohibited limitations on the legal rights of a consumer under implied or express warranties should be edited or deleted. No business that is acting in good faith should face huge litigation costs and a stiff statutory penalty in a class action lawsuit brought by plaintiffs who suffer no actual harm.
By Bill MacMinn
A client Googled the name of his own retail store. When he saw the results he was alarmed to learn that the result returned his store name with the name and telephone number of his biggest competitor, and a link to the competitor’s website, appeared in the top three search results and before the link to his own site. My client’s business name included a trademarked national brand. Surely, this must be unlawful?
Google searches return a natural or organic list of results produced by the keywords entered by the user. In addition, Google’s search engine also displays paid advertisements known as “Sponsored Links”. Google’s AdWords advertising platform permits a sponsor to purchase keywords that trigger the appearance of the sponsor’s advertisement and link when the keyword is entered as a search term. My client’s crafty competitor purchased the name of my client’s business as a “keyword” so that when a user searched on my client’s business name his competitor’s name was displayed as a “Sponsored Link” within the top three results and before the information and link to my client’s website. Google, which earns significant revenue from the AdWords platform, permits the use of trademarks as keywords.
There have been a multitude of lawsuits alleging trademark infringement over this practice. Few result in published decisions and of these; nearly all were losses for the trademark owner. Typical of these is 1–800 CONTACTS, INC. vs. LENS.COM, INC., a 2013 case from the Tenth Circuit, involving two internet sellers of contact lenses and related merchandise. At the time the case was filed, 1–800 Contacts, Inc. was the world’s leading retailer of replacement contact lenses, selling them by telephone, by mail order, and over the Internet. It was the owner of the service mark “1800CONTACTS”. Lens.com is one of 1–800’s competitors in the replacement-lens retail market, selling its products almost exclusively on line. Lens.com purchased the keyword 1800 CONTACTS which caused its “Sponsored Links” to appear when a Google user searched for that phrase. The Court ruled that Lens.com did not violate trademark laws. As with most such cases, the legal analysis turned on whether the alleged infringer’s use of the mark was likely to cause confusion to consumers. In ruling that such confusion was unlikely, the Court examined several factors, including the relatively few users who used the Lens.com link generated by the keyword “1800CONTACTS” to click through to the Lens.com site and the dissimilarity between the two companies websites which the Court concluded would minimize the likelihood of confusion. In other cases Courts have held that such factors as the sophistication of the Google users and the fact that the sponsored links generated by the keyword search appeared in boxes and were visually dissimilar from the organic links were sufficient to avoid user confusion.
Efforts to curtail this practice using state trademark common law and laws regulating unfair competition have also failed as these legal theories rely heavily on Federal trademark law requiring plaintiffs to meet the same likelihood of confusion requirement.
One commentator has observed that in many of the cases the sponsored links generated very few visits to the competitors’ site from users “clicking through” on keyword generated links. The economic value of those visits was small. For example, in the 1 800 Contacts case, the most optimistic estimate of damages was in the range of $40,000, much less than the cost of prosecuting the case.
Although the advice was counter-intuitive, I had to inform my client that any action based on his competitor’s use of his trademarked name as a keyword was not likely to succeed. The silver lining, if there is one, is that the strategy doesn’t appear to result in significant loss of revenue.
Scammers targeting Pennsylvania businesses have been hard at work this summer. The Pennsylvania Department of State reports that three separate direct mail campaigns have sought to get unsuspecting Pennsylvania business owners to pay unnecessary fees:
• A mailing from a company calling itself “Division of Corporate Services – Compliance Division” urges companies to complete a form with officer and director information and return the form with a $150 payment.
• A postcard from a company calling itself “Business Compliance Division” urges owners to call a toll-free number “to avoid potential fees and penalties.” When that number is called, the owner is instructed to pay $100 by credit card to obtain a “certificate of existence” in order to comply with state regulations. The address for this company is the same as the address for the “Division of Corporate Services – Compliance Division” above. According to the Pennsylvania Department of State, this is the address of a UPS store in Harrisburg.
• A letter from a company calling itself “Pennsylvania Council for Corporations” instructs business owners to complete a form with names of shareholders, directors and officers and return it with a $125 fee.
These solicitations include citations to Pennsylvania statutes and look official, but they are not: they were neither prepared nor authorized by the Commonwealth. Essentially, these notices represent a business-generating effort from the sender to prepare generic annual minutes for unwitting companies.
The Department of State cautions that any official notices sent to businesses by the Pennsylvania Department of State or the Secretary of the Commonwealth’s office will contain letterhead and/or contact information for the Bureau of Corporations and Charitable Organizations. If you receive one of these notices or a similar solicitation, contact the Bureau at 717-787-1057, or feel free to call Sue Maslow, Joanne Murray or Michael Mills at 215-230-7500.
On July 1, 2015, the Pennsylvania Association Transactions Act (also known as the Entity Transactions Act) (the “Act”) went into effect. The primary purpose of the Act is to simplify the architecture of Title 15 of the Pennsylvania Consolidated Statutes by moving the provisions applicable to names, fundamental transactions and registration of foreign entities into a new Chapter 3. Presently, those provisions are spread out in numerous subsections applicable to each entity type (e.g., corporations, limited liability companies, etc.). The thinking was that since identical or nearly identical provisions already applied to most or all entity types, they should be moved to a new chapter to streamline the statute and hopefully simplify the process for undertaking fundamental changes. The Act adopts new terms to refer to various entity concepts, so practitioners will have to learn a new vocabulary. For example: