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.

Caveat

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. 

The issuer is permitted to communicate with potential crowdfunding investors if the communications occur through the platform but, in spite of the use of the platform or a website link, the final rules limit the ability of the issuer, as well as the ability of others acting on the issuer’s behalf, to advertise.  Pursuant to Rule 204, the issuer-company is permitted to advertise the Section 4(a)(6) exempt offering by releasing an offering notice (similar to tombstone ads permitted under Securities Act Rule 134) that contains only the following information:
 
• a statement that the issuer is conducting an offering;
• the name of the intermediary and a link to the intermediary’s offering page;
• the amount of securities offered (target and maximum);
• the nature of the securities;
• the price of the securities;
• the closing date for the offering;
• the name, address, phone number and website of the issuer;
• the email address of a representative of the issuer; and
• a brief factual description of the issuer’s business.

Will compliance with all of these crowdfunding rules be easier than the traditional Regulation D private placement (without general solicitation)?  Certainly the hope was that the crowdfunding rules would allow smaller issuers (and smaller investors) greater opportunities to access capital markets.  But the procedural and informational requirements justifiably deemed necessary to protect investors and reduce the risk of fraud make crowdfunding far less accessible than hoped.  Only the passage of time will determine which of the recent SEC initiatives prove most popular and affordable to small issuers with limited budgets.

The crowdfunding offering must be conducted through a registered broker-dealer or a funding portal with a “platform”. A “platform” is defined as “a program or application accessible via the Internet or other similar electronic communication medium through which a registered broker or a registered funding portal acts as an intermediary.…”  No more than one intermediary can be used for an offering, and the issuer-company is required to make certain disclosures to the SEC, investors and the intermediary facilitating the offering, including:

• A discussion about the size and scope of the offering.
• The specific use or range of possible uses for the offering proceeds, as well as the factors impacting the selection by the issuer of each such use.
• Information about the securities being sold to the public.
• A description of the company’s business operations.
• Information about the company’s officers and directors during the prior three years, including how long they have held those positions and their respective business experience.
• Information about the holders of 20% or more of the company’s outstanding voting securities, as well as a description of the capital structure and any special voting rights or investor rights.
• Identification of Rule 501 and any issuer-company imposed transfer restrictions on the securities offered.
• A discussion of risks associated with an investment in the securities and with participation in a crowdfunded offering.
• A discussion of the financial condition and financial statements of the company, tiered in accordance with the size of the offering such that:

1. Offerings of $100,000 or less require financial statements certified by the company’s principal financial officer.
2. Offerings of more than $100,000 but less than $500,001 require audited financial statements if available or, if a first time crowdfunding exemption user, financial statements reviewed by an outside auditor.
3. Offerings of more than $500,000 up to the $1,000,000 limit require audited financial statements

The offering materials must also include a description of the offering or subscription process and a disclosure of the investor’s right to cancel his/her investment up to 48 hours prior to the deadline identified in the offering materials.  

The issuer must complete Form C, which includes details of the initial disclosure about the offering. The completed Form C must be filed with the SEC and either posted by the intermediary on its platform or viewable by investors through a link.   The issuer-company must report material changes on Form C-A,  periodic updates on Form C-U and ongoing annual filings on From C-AR until the filing obligation is terminated on Form C-TR.

The new rules allow the issuer to engage in limited advertisement of the offering, but there are traps for the unwary. These rules are discussed in the next installment of this blog.

In Socko v. Mid-Atlantic Systems of CPA, Inc., the Pennsylvania Supreme Court held that the Uniform Written Obligations Act (“UWOA”) could not render a restrictive covenant not supported by adequate consideration enforceable nonetheless.  In so doing, the Court emphasized that such restrictive covenants – agreements that restrict an employee’s ability to compete against an employer after termination - are disfavored restraints on trade.  As the dissent noted, the opinion does appear contrary to the plain language of the UWOA, but this dissonance highlights the disfavored nature of restrictive covenants. 

As part of his employment with Mid-Atlantic, Socko signed three restrictive covenants:  one upon the beginning of his employment, a second upon return to Mid-Atlantic after terminating his employment, and a third, more restrictive, agreement signed during his employment.  Along with the third restrictive covenant, Socko did not receive a bonus, promotion or other consideration.  The document recited the magic words of the UWOA that “the parties intended to be legally bound.”  Socko resigned from Mid-Atlantic and went to work for a competitor, and Mid-Atlantic filed suit for breach of the restrictive covenant. 

Pennsylvania law requires that restrictive covenants must be accompanied by adequate consideration.  To meet this requirement, the employee must sign the agreement at the commencement of employment, or the employer must supply new consideration for restrictive covenants signed after the commencement of employment.  “New consideration” includes a benefit to the employee or a beneficial change to the employee’s status.  Socko did not receive any new consideration for the new restrictive covenant that Mid-Atlantic sought to enforce.  Importantly, the new restrictive covenant also included language superseding all previous restrictive covenants, thus rendering the second restrictive covenant, which was supported by sufficient consideration, ineffective. 

To address this problem, Mid-Atlantic argued that Socko was barred from challenging the restrictive covenant on the basis that it was not supported by new consideration because it contained the UWOA language.  Mid-Atlantic asserted that the “magic words” foreclosed the usual analysis of consideration for restrictive covenants signed after the commencement of employment.  The Supreme Court, affirming the Superior Court’s holding, held that the UWOA language does not foreclose such an analysis as it relates to restrictive covenants.  In so doing, the Supreme Court rejected Mid-Atlantic’s framing of the issue.  The issue was not, as Mid-Atlantic asserted, that the UWOA foreclosed Socko from challenging the validity of the agreement based on a lack of consideration.  Instead, the Supreme Court stated that the issue was whether the UWOA acted as a substitute for consideration.  

The Supreme Court relied on principles of statutory construction and the body of case law holding that restrictive covenants are disfavored restraints of trade to find that the UWOA language would not act as a substitute for consideration to support a restrictive covenant.  The Supreme Court noted that the unique treatment of restrictive covenants in the law, including rigorous judicial scrutiny, required this outcome. 

While this holding will not shock employment lawyers, as it is consistent with the court’s jaundiced approach to restrictive covenants, it does highlight important considerations for the use of such documents.  Employers strive to foster their entry level employees into valuable positions, and such a practice benefits employer and employee.  Employers must consider when and whether to require those employees to execute restrictive covenants, the consideration they will provide for new restrictions, and whether there are other, more productive, ways to retain a valuable employee and protect the business.  The Supreme Court’s decision does not change the analysis, but it does clarify that no mere technicality will encourage a court to set aside the rigorous scrutiny of restrictive covenants required by the case law. 

In Roman v. McGuire Memorial, the Pennsylvania Superior Court announced a new basis for challenging terminations of at-will employees.  While Pennsylvania law has always recognized a “public policy” exception to at-will employment, the case law has limited that exception.  Roman expands the exception to include terminations of health-care workers who refuse to work mandatory overtime.
 
Roman worked as a direct care worker, subject to McGuire Memorial’s mandatory overtime requirement.  She was an at-will employee.  The mandatory overtime policy allowed for termination of employees who refused to work mandatory overtime on four occasions. McGuire terminated Roman’s employment after her (disputed) fourth refusal, and Roman sued for wrongful termination in violation of public policy.  After a nonjury trial, the trial court found in Roman’s favor, awarded her $121,869.93 in back pay and lost benefits, and ordered reinstatement to her former position.
 
Relevant to the dispute is Pennsylvania’s Prohibition of Excessive Overtime Act (43 P.S. § 932.1 et seq.).  The Act prohibits a health care facility from requiring employees to work in excess of an “agreed to or previously determined and regularly scheduled daily work shift.”  43 P.S. § 932.3(a)(1).  Further, the Act prohibits retaliation against an employee who refuses to accept work in excess of those limitations.  43 P.S. § 932.3(b).  The Act does not provide for a remedy for employees terminated in violation of its requirements.  It does contemplate a regulatory scheme to address complaints by employees, but those regulations are not yet final.
 
The Superior Court held that the Act established a public policy that healthcare facilities should not require its direct care workers to work overtime hours, and, as such, Roman’s termination for refusing to work overtime hours amounted to wrongful termination in violation of public policy.  Further, the Court distinguished cases in which it had refused to recognize a public policy exception to the at-will doctrine because a statute had already created a remedial scheme to address violations of the particular policy identified in that statute, such as the Pennsylvania Human Relations Act.  In the case of the Prohibition of Excessive Overtime in Health Care Act, there existed no remedial scheme to address the wrong.
 
The Superior Court has thus used The Act to identify a new public policy exception to the at-will doctrine.  Health care entities should be mindful of this exception in creating and enforcing overtime policies for direct care workers. 

Part 1 of 3 Part Series:

General Rules

After years of hand-wringing and speculation by entrepreneurs, re-occurring angels, venture capital firms, registered brokers and lawyer types involved with private placements, on October 30, 2015, the U.S. Securities and Exchange Commission (SEC) finally adopted equity crowdfunding rules pursuant to Title III of the Jumpstart Our Business Startup Act of 2012 (JOBS Act).  These rules, which rely on Section 4(a)(6) of the Securities Act, are scheduled to be issued in the Federal Register early in 2016 and will become effective 180 days after publication.

Assuming the issuer is not otherwise ineligible, the crowdfunding rules will permit the following:

• A company can raise a maximum aggregate of $1 million through crowdfunding offerings in a 12 month period.

• Individual investors can invest an aggregate sum, over a 12-month period, in any number of crowdfunded offerings, based on the following formulas:

1. If either the individual’s annual income or net worth is less than $100,000, s/he can invest the greater of $2,000 or 5% of the lesser of his/her annual income or net worth.

2. If both his/her annual income and net worth are equal to or more than $100,000, s/he can invest 10% of his/her annual income or net worth, provided that the total investment does not to exceed $100,000.

Not all companies can rely on crowdfunding under the final rules.  If the issuer is (i) not organized under the laws of a state or territory of the United States or the District of Columbia; (ii) subject to the Securities Exchange Act of 1934 reporting requirements; (iii) an investment company as defined in the Investment Company Act of 1940, or a company that is excluded from the definition of “investment company” under Section 3(b) or 3(c) of that act; (iv) has a “bad actor” in management or as a major equity holder;  (v) has sold securities in reliance on Section 4(a)(6) and failed to make the required ongoing reports within the two-year period before the proposed new offering; or (vi) is a development stage company that has no specific business plan or purpose or does not identify a proposed merger or acquisition target.

The new rules include detailed provisions relating to mandatory disclosures and other requirements, which will be discussed in subsequent posts on this blog.

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:

•  Association: a corporation for profit or corporation not-for-profit, partnership, limited liability company, statutory or business trust, or an entity or two or more persons associated in a common enterprise.
• Governor: a person by or under whose authority the powers of an association are exercised and under whose direction the activities and affairs of the association are managed (e.g., a corporate director, the general partner of a limited partnership, a partner of a general partnership, a manager of a manager-managed LLC, etc.).
• Interest holder: a direct or record holder of an interest (e.g., a shareholder, member, general or limited partner).
  
  While much of the Act is simply a reorganization of the statute, some changes are substantive. For example, the Act expands the use of conversions. In a conversion transaction, one Pennsylvania entity type converts to another Pennsylvania entity type. Until now, this result could be accomplished by using a 2-step process: forming a new entity of the desired type and merging the old entity into it. Alternatively, a business seeking to change its form would have to wind down its business and dissolve, then start again by forming a new entity type. Both approaches were cumbersome and can involve significant transaction fees and delays so the new one-step process is welcomed. But even the simplified conversions can have tax consequences, so a tax advisor should be consulted.
  
  At the opposite end of the transaction spectrum is the division transaction. Prior to the Act, an entity could only divide into like entity types. The Act permits an entity to divide into different entity types (e.g., a corporation can now divide into a corporation and a limited liability company). Once again, care should be taken to avoid unintended tax consequences.
  
  Another significant change is a new provision that allows for contractual dissenters rights where such rights would not otherwise be available under the statute. Additionally, the existing concept of share exchanges is expanded to include other association types and bundled into a new subchapter called “Interest Exchanges.”
  
  All of the transactions included in new Chapter 3 require a plan approved by the interest holders of the constituent associations, although the approval process and plan contents vary depending on the type of association. Many of these transactions have tax consequences for the entity and/or the interest holders, so the advice of tax counsel is critical.
  
  The Act is based on the Model Entity Transactions Act (known as META). The Pennsylvania Bar Association’s Section on Business Law, which drafted the Act, continues its work to modernize the remainder of Pennsylvania’s association statutes to make them consistent with the uniform laws passed in other states.

No one (not even us legal corporate types) would ever suggest that bylaws are interesting. But recent Third Circuit and Delaware Court of Chancery decisions have highlighted the complexity of issues regarding a company’s fee advancement bylaws and policies. Some corporate indemnification provisions are mandated and other provisions are simply permitted under Delaware state law. In practice, adopted corporate bylaws refer to the right (or absence of a right) of officers and directors of a company to be reimbursed by the company for losses, including legal fees, incurred in legal proceedings that name individual officers or directors if those proceedings relate to their employment or activities on behalf of that company.   Mandated indemnification obligations under Delaware statutory requirements attach only to an “officer or director” but many companies nevertheless have bylaws and policies that permit indemnification to “any person” (including officers, directors, employees and agents) who act in good faith and in a manner they reasonably believed to not be opposed to the best interests of the entity. The Third Circuit, however, recently held that the definition of “officer” was ambiguous; an executive title like “Vice President” alone does not automatically prove eligibility for indemnification. And the Court of Chancery held that officers and directors need not prove that they will be indemnified to obtain fee advancement where bylaws tie fee advancement to indemnification. In other words, entitlement to advancement of fees under corporate bylaws is to be considered independently of indemnification entitlement. Examining the requirement that the conduct in question of any person seeking indemnification must be “by reason of the fact” of his or her officer/employment status, the same court determined that bylaws may not exclude entire categories of alleged wrongdoing for the purpose of fee advancement denial. If the alleged wrongdoing relates to an officer’s duties owed to the company (such as breaches of fiduciary duty), fee advancement may be required (even where the same bylaws require a clawback if the officer is ultimately found to have engaged in such wrongdoing).

Commercial lenders in Pennsylvania await action by the legislature to fix what appears to be an unintended byproduct of recent amendments to the Pennsylvania Probate, Estate and Fiduciaries (PEF) Code that went into effect earlier this year. You may be wondering what a statute that generally applies to trust and estate matters has to do with commercial lending transactions. The answer is that the recent changes applicable to powers of attorney generally could be interpreted to apply to powers of attorney granted in commercial loan documents, leases and other contracts (such as those granted in connection with confession of judgment clauses and certain other remedies). Historically, these statutory provisions did not apply to commercial agreements. It appears that the legislature was focusing on trust and estate documents when enacting this legislation and didn’t understand the impact of these amendments on commercial transactions.

These amendments are troubling from a lender’s perspective because they require that an agent must “act in accordance with the principal’s reasonable expectations to the extent actually known by the agent and, otherwise, in the principal’s best interest.” In a commercial loan transaction, the agent is the lender and the principal is the borrower, so the tension is obvious: a lender that is foreclosing on property, confessing judgment, collecting rents, or exercising Article 9 remedies  is not likely to be acting in the best interest of the borrower.

Pennsylvania House Bill #665 would amend the PEF Code to clarify that the power of attorney requirements do not apply to commercial transactions. This bill is presently in the Senate Judiciary Committee. Until this bill becomes law, lenders should consider making the following adjustments to commercial loan documents containing powers of attorney (typically these include documents with confessions of judgment, security agreements, assignments of rent, and mortgages):

• Include an acknowledgement by the borrower that its reasonable expectations include confession of judgment, foreclosure and other actions typically taken by a lender under the power of attorney;

• Include a waiver of the duties imposed by the PEF Code; and

• Add a notary page.