By July 1, 2013, revise your forms of commercial lease and commercial purchase and sale agreement to include the required energy use disclosure.  Also, remember to make the required disclosure when financing or refinancing a loan secured by a building subject to the new disclosure requirement.

If you have any questions, please contact Lisa Stalteri at: (650) 342-9600 or lstalteri@carr-mcclellan.com.

The dispute arose out of a revocable trust created by William Giraldin, who was the sole beneficiary during his lifetime.  The remainder beneficiaries were William’s wife, Mary, who was entitled to the benefits of the trust during her lifetime, and their nine children, who would share equally in what remained after both William and Mary were deceased.  William appointed his son, Timothy, as the sole trustee.  The trust provided that William was the only beneficiary during his lifetime, and in the event of William’s incapacity, the trustee was to make liberal distributions for William’s needs, and that “the rights of remainder beneficiaries shall be of no importance.”

Before establishing the trust, William had agreed to invest about $4 million dollars, roughly two-thirds of his fortune, in a company called SafeTzone, which another son, Patrick, had started and of which Timothy was part owner.  The company issued stock to William, which was transferred into the trust.  SafeTzone did poorly and, by the time William died in, the trust’s interest in the company was worth very little.

Plaintiffs, four of William’s children and remainder beneficiaries under the trust, sued Timothy in his capacity as trustee for breach of his fiduciary duties, alleging that he had squandered William’s life savings for his and Patrick’s benefit, with the consequence that the other seven children were deprived of any benefit from the trust.  They sought to remove Timothy as trustee and to compel him to account for his actions.

The trial court ruled in plaintiffs’ favor, finding that Timothy had violated his fiduciary duties and ordering that he be removed as trustee and be compelled to provide an accounting.  Additionally, the court ordered that Timothy be surcharged in the amount of $ 4,376,044 for the SafeTzone investment and surcharged $ 625,619 for other “unsupported disbursements, distributions, and loans of Trust funds.”

On appeal, the court similarly found that Timothy’s actions constituted a breach of his fiduciary duties, but only towards the beneficiaries rather than toward William.  The court held that “Timothy owed them no such duties, and thus plaintiffs lacked standing to assert those claims.”

The California Supreme Court granted review as to the limited issue of whether, when the settlor of a revocable inter vivos trust appoints during his lifetime someone other than himself to act as trustee, the remainder beneficiaries have standing to sue the trustee for breach of fiduciary duty committed during the period of revocability once the settlor dies.  The Court explained that the Probate Code affords beneficiaries broad remedies for breach of trust and that, pursuant to Section 16420(a), a beneficiary may commence a proceeding against the trustee to redress such a breach.  While Section 16462(a) provides that “a trustee of a revocable trust is not liable to a beneficiary for any act performed or omitted pursuant to written directions from the person holding the power to revoke,” – in this case, the settlor – the court reasoned that the same section also implies that, if the trustee does not act in accordance with the settlor’s directions, the trustee may, in fact, be liable to the beneficiaries.  Accordingly, the Court held that beneficiaries have standing to claim a violation of the trustee’s duty to the settlor, when that violation harmed the beneficiaries and the harm was not the direct result of the settlor’s instruction.

In an unpublished decision filed on April 16, the Court of Appeal held that, because the issues now largely turned on “the precise nature of William’s intent and Timothy’s duties to William,” they amounted to factual questions best left to be resolved by the trial court on remand.

The long-term implications of Giraldin remain to be seen, but California probate courts could very well see an increase in litigation as trustees may be more likely to petition for court instruction on the use and investment of trust assets during the period of revocability.

If you have any questions, please contact Andrea Smith at: (650) 342-9600 or asmith@carr-mcclellan.com.

Small and mid-size businesses electronically transmit company and employee information throughout the year to their accountants and taxing authorities, and even more so now during income tax season.  Income tax withholding and reporting, sales and use tax remittance, and employee payroll tax reporting all require that companies release private, sensitive information via the Internet or other electronic portal.

Below we describe several cost effective measures you can take to help prevent a cyber attack.

Small and Mid-Sized Companies Have a False Sense of Security

Recent high-profile media coverage of large company data security breaches has caused a false sense of security for small and mid-sized companies.  According to a study by the National Cyber Security Alliance, 77 percent of small businesses think that they are safe from cyberthreats, and 87 percent of such businesses do not have a policy in place to try to prevent such attacks.

This false sense of security combined with the fact that smaller businesses generally have fewer resources to devote to combating cyber threats makes them an increasingly attractive target for attackers.  A recent Symantec Intelligence Report indicated that cyber attacks against small businesses are steadily increasing while attacks against large companies with more than 2,500 employees are proportionately decreasing.  Even though cyber attacks on small companies do not make the headlines, almost 20% of cyber attacks are on small companies with fewer than 250 employees.

Cost of Cybersecurity Breaches

The cost of these attacks is staggering.  According to a recent FCC report, the average annual cost of a cyber attack on a small and medium size business is a whopping $188, 242.  If sensitive financial information, the type of which is transmitted to accountants and taxing authorities, is stolen, it is likely the cost will be on the higher side.

This cost has a disproportionate effect on small and medium-size businesses.  A 2011 Business Insider report indicates that nearly 60 percent of small businesses shutter their doors within six months of a cyber attack.

What Can Small and Mid-Size Businesses Do?

First and foremost, you must implement and actively enforce a company-wide data security policy.  The scope of your policy will depend upon the size and nature of your business, but all small and mid-size businesses should, at a minimum, take the following cost-effective measures to potentially decrease the likelihood of a cyber attack:

• Have and actively enforce a mobile device policy – At a minimum:  (1) limit the number of employees (“Authorized Employees”) who may remotely access sensitive financial information; (2) Authorized Employees’ mobile devices should be password protected, and Authorized Employees should be required to frequently change their passwords; (3) log Authorized Employees’ use of the remote access system; and (4) regularly review the logs to determine if the system has been attacked and that Authorized Employees are following corporate procedures.
  
  
• Be on the lookout for phishing emails – Recently, phishers have increasingly attempted to acquire sensitive personal information (such as names, account numbers and financial information) by sending you emails that are allegedly from a trustworthy entity like the Internal Revenue Service (“IRS”), an accountant or a bank.  You should train you employees on how to recognize phishing emails.  If you or one of your employees suspects they received a phishing email, they should not:  (1) respond to the email; (2) click on any links embedded in the email; or (3) go to any websites mentioned in the email. 
  
  
• Install security software – Security software protects against malicious software such as viruses, spam, phishing emails and malware.   If you install and keep security software up to date, you will increase the security of your computers, servers and mobile devices and help protect malicious software or phishers from accessing the sensitive financial information stored on those devices.
  
  
• Have a secure firewall – A firewall is a device that blocks certain Internet traffic from reaching your computers and servers.  Having a secure firewall can prevent phishers, hackers, malware and viruses from accessing your computers and servers.
  
  
• Encrypt data – Although potentially cumbersome to implement, if your information is stolen, encrypting the helps prevent the phishers or hackers who obtain your data from being able to see or use it.

If you have further questions on tax issues, you may contact Brendan Lund at Carr McClellan either by phone: (650) 342-9600 or e-mail: blund@carr-mcclellan.com.

If you have any questions about how to implement a data security policy contact Helen Christakos at (650) 696-2545 or at hchristakos@carr-mcclellan.com.

The facts in Makaeff are in many respects unremarkable.  Donald Trump is the founder and CEO of Trump University, LLC, a for-profit enterprise offering courses focused on the real estate industry.  Trump University utilized an aggressive advertising campaign, including on-line advertising, to promote its curriculum.  In the process, it generated significant controversy, particularly given the sub-prime mortgage crisis over the past several years.  Plaintiff Makaeff invested over $34,000 in Trump University’s “Gold Elite Program” to gain the full measure of Trump University’s real estate investment training.  Makaeff became dissatisfied and asked for a tuition refund, which Trump University declined.  As a result, Makaeff embarked on a letter-writing campaign to the Better Business Bureau and made frequent postings on Internet message boards detailing her dispute and accusing the institution of fraudulent, deceptive, and unfair business practices.

In April 2010, Makaeff filed a class action against Trump University in the United States District Court for the Southern District of California.  In response, Trump University counter-claimed for defamation.  Makaeff replied to the defamation claim with a motion to strike pursuant to California’s anti-SLAPP statute, California Code of Civil Procedure section 425.16.  The District Court held that Makaeff’s suit arose from protected conduct under the anti-SLAPP statute, and that Trump University was not a public figure.  Trump University was therefore able to demonstrate a reasonable probability of prevailing on the merits of its defamation claim without having to prove “actual malice.”  The District Court denied Makaeff’s anti-SLAPP motion, and Makaeff appealed.  The Ninth Circuit reversed.

At the outset, the Ninth Circuit agreed with the District Court’s assessment that Trump University’s defamation claim arose from an act in furtherance of Makaeff’s free speech rights.  Relying on Cal. Civ. Proc. Code section 425.16(e)(4), the Ninth Circuit agreed that Makaeff made her Internet postings and wrote her letters in connection with an issue of public interest because the statements provided “consumer protection information.”  Trump University unsuccessfully argued that her accusations merely addressed her private concerns rather than any interest in advancing the public good.  In the eyes of the Court, the fact that Makaeff broadly published statements on the Internet and infused them with language that on its face apparently sought to alert other consumers about her experience with Trump University sufficiently qualified her complaints as matters of general interest rather than merely the iteration of a private dispute with Trump University.

More problematic for Trump University, however, was the Ninth Circuit’s conclusion that Trump University was a limited purpose public figure and therefore required to demonstrate it could establish by clear and convincing evidence that Makaeff made her allegedly defamatory statements with actual malice.  The Court rejected the proposition Donald Trump’s fame and close association transformed Trump University into an all-purpose public figure.  However, Trump University’s vigorous advertising about its program rendered it a limited purpose public figure.  Of particular importance to the Court was the direct relationship between Trump University’s aggressive advertising campaign and Makaeff’s allegedly defamatory statements, “which reflects Trump University’s pre-existing involvement in this particular matter of public concern and controversy.”  In reaching this conclusion, the Ninth Circuit aligned itself with the Third and Fourth Circuits, concluding that “large-scale, aggressive advertising can inject a person or entity into a public controversy that arises from the subject of that advertising.  And in so doing, they become limited purpose public figures.”

By focusing on Trump University’s advertising campaign as the basis for determining its limited public figure status, the Ninth Circuit expressly rejected the California Supreme Court’s reasoning in Vegod Corp. v. American Broadcasting Cos., 25 Cal.3d 763 (1979), and other California cases holding that aggressive advertising of a message involving a public controversy cannot render an entity a limited public figure.  Even though the Ninth Circuit addressed a state law claim in assessing the District Court’s denial of Makaeff’s anti-SLAPP motion, it expressly declined to follow what was arguably controlling California authority on the question of whether a company’s advertising could turn a business into a limited purpose public figure.

Makaeff provides several significant guidelines for parties confronting California’s anti-SLAPP statute.  First, a plaintiff with claims of fraud and deceptive practices who might anticipate a counter-suit for defamation would be well served to broadly publicize its claims of misleading conduct on Internet message boards and the like, and include ample language couching the accusations with concerns for the public good and efforts to protect the interests of the consumer.  Second, for defendants, an aggressive advertising campaign that generates controversy can, at least in the Ninth Circuit, transform the company into a limited purpose public figure and thus saddle itself with an actual malice standard to prove a defamation claim and to defeat an anti-SLAPP motion.  Finally, in potential District Court actions involving California state law defamation claims, the conventional wisdom that federal court is more hospitable for a corporate defendant needs to be closely assessed, especially where it is the company’s advertising that fueled the controversy because in the Ninth Circuit, advertising can transform a company into a limited purpose public figure.

If you have any questions, please contact Robert Bleicher at: (650) 342-9600 or rbleicher@carr-mcclellan.com.

(1)  provides standards for uniformity in process and work product;

(2)  designates provisions for documents or policies that the client has identified as absolutes that should inform preliminary negotiations;

(3)  identifies the variations in absolute provisions or in standard provisions that will require additional internal client approvals which may impact process timing;

(4)  identifies critical terms or recurring issues with a contract or transaction and provides context for understanding why certain approaches to these terms and issues may be preferable with regard to outcomes desired by the client;

(5)  provides clarity on process in order to inform expectations, provide certainty regarding timing, and enhance collaboration among client’s non-legal members, in-house counsel, and outside counsel.

We customarily offer such in-house trainings to our corporate clients on a complimentary basis.  We have found that such trainings enhance the collaborative nature of our relationship with our in-house counsel, enhance our effectiveness to the client, and create measurable value to our client in the form of reduced fees, improved processing time, communication, and collaboration.

If you have questions, please contact Lisa Stalteri at (650) 342-9600 or lstalteri@carr-mcclellan.com.

For months, the defendants had sought information about the plaintiff’s social networking activities because they might shed light on the effects of the personal injuries claimed by the plaintiff.  The plaintiff created a new Facebook password and provided it to defense counsel to permit access to the account.  After learning that a third party had accessed his Facebook account, the plaintiff deactivated the account.  Facebook automatically deleted the account 14 days later.  The plaintiff contended that he terminated the account because he was involved in contentious divorce proceedings and his account had been repeatedly “hacked into” before his personal injury lawsuit.

The defendants requested that the court impose issue sanctions on the plaintiff because the Facebook account would have included information about the physical and social activities that the plaintiff engaged in.  The court granted the sanctions, concluding that the plaintiff’s deactivation of his Facebook account constituted evidence spoliation.

Applying existing Third Circuit case law, the court ruled that the Facebook account was clearly within plaintiff’s control, that it was relevant to the claims or defenses at issue, and that it was reasonably foreseeable that the evidence would be discoverable—particularly since the Facebook account had been requested in discovery five months before.

According to the court, the only significant question was whether there was “actual suppression or withholding of evidence.”  The court rejected the plaintiff’s contention that deactivating the account was reasonable after he learned that an unknown third party had accessed the account, and considering that the account had been previously hacked.  The court also rejected the plaintiff’s contention that the deletion of Facebook data was accidental because Facebook “automatically” deleted the account after 14 days.

The court concluded that the plaintiff had violated his obligations to preserve relevant evidence and granted the defendants’ request for a jury instruction that the jurors may draw an adverse inference against the plaintiff for his failure to preserve the Facebook account.

The order, entered in Gatto v. United Air Lines, Inc. (No. 10-cv-1090-ES-SCM), can be found here.

If you have questions, please contact Scott Atkinson at (650) 342-9600 or satkinson@carr-mcclellan.com.

On January 1, 2013, Congress passed the American Taxpayer Relief Act, which enacted a “permanent” $5.0 million per person federal estate tax exemption equivalency amount (adjusting for inflation for years after 2011) and a top estate tax rate of 40%.  President Obama signed this legislation into law on January 2, 2013.

Just four months later, however, the President released his proposed budget for fiscal year 2014, in which he advocates a return to the 2009 levels of a $3.5 million per person federal estate tax exemption equivalency amount, but which is not inflation-adjusted, and a 45% top estate tax rate, beginning in 2018.  This proposal is part of a wider effort in the proposed budget to prevent the wealthy from accumulating large amounts of wealth in tax favored vehicles, which could then be passed to heirs.  The proposed budget would also cap retirement accounts at $3.4 million of assets (enough to finance an annuity of $205,000 a year) and require those who inherit a rollover IRA to withdraw assets within five years.

Members of Congress on both sides of the aisle have expressed dissatisfaction with this proposed budget, so this proposal is far from a “done deal.”

The larger lesson is that the estate tax rate and estate tax exemption equivalency amount are still subjects of ongoing negotiation, and even traditionally stable wealth accumulation vehicles such as 401Ks and IRAs are now arenas of dynamic discussion.  Those of us engaged in wealth transfer planning have become accustomed to this type of change and uncertainty.

If you have any questions, please contact Janice Tam at jtam@carr-mcclellan.com or at (650) 342-9600.

California Civil Code §1938 is silent as to whether an owner is permitted to qualify the disclosure to be to the owner’s actual knowledge.  An owner may not know whether a CASp assessment has been performed with regard to its current property holdings.

Revise your commercial lease form by July 1, 2013 to include a statement as to whether a CASp accessibility assessment has been performed on the premises and, if so, its results.  If the assessment was performed on the exterior and common areas of the building and not the interior of the premises, make that distinction in the disclosure.  When purchasing commercial property, add CASp assessments to your list of requested documents and to your list of requested representations from a seller.

If you have any questions, please contact Lisa Stalteri at lstalteri@carr-mcclellan.com or at (650) 342-9600.

State tax nexus – which must be present if a state is to tax a company’s business income or its sales of products or services – is largely fact dependent.  Historically, states have imposed tax on the sale of tangible personal property.  Businesses providing services have largely escaped taxation of these services.  These principles were codified with traditional “bricks and mortar” businesses in mind.

For the past two decades, states have struggled to amend long-standing statutes to address the taxation of digital products.  State legislatures have failed to develop a consistent method of taxing, for example, a digital download of software.  Some states remain steadfast in only taxing tangible personal property provided to taxpayers in their states.  Other states now impose tax on certain services provided within their states.  Still others have adapted their statutes to now tax downloads of digital products or web-based software.  Cloud computing is a further technological evolution that will stretch traditional state tax principles.

Cloud-based services challenge states, providers, and buyers of those services to define exactly what is being bought or sold.  SaaS, PaaS and IaaS models apply to distinct user groups, but all are predicated on borderless global networks.  Should a state treat cloud-based products as tangible personal property or as a service?  How do states tax these services, if at all?  If a business is located in California, servers are located in Washington State and the consumer is located in Arizona, which state’s laws apply?  California’s because the business is headquartered there?  Washington’s because the servers are physically located there?  Or, Arizona’s because the end-user is located there?  The answers to these questions can result in meaningful tax differences that will impact a business’s bottom line.

States have begun to look at cloud computing as a new source of revenue.  In 2009, the State of Washington enacted a statute which specifically taxes SaaS providers.  Other states have issued letter rulings addressing specific fact scenarios.  Missouri ruled that SaaS services hosted on an out-of-state server are not subject to sales tax when accessed by an in-state user.  In contrast, New York has concluded that it can impose a tax on software hosted on an out-of-state server and accessed by an in-state user.  Rulings such as these can subject a provider whose operations are out-of-state to a state’s sales and use tax regime.

States are also focused on end-users as a source of revenue.  Some states have characterized the licensing of cloud-based services as a lease of tangible personal property.  Property leased in a state could result in income tax nexus for the user of cloud-based services.  This could mean that a business that licenses, for example, SaaS products in another state will unwittingly expand its income tax footprint, subjecting it to filing income tax returns in that state.

States will continue to find ways to tax cloud-based services in an effort to fill their coffers with revenue.  Businesses – both providers and users of cloud-based services – should understand the changing tax landscape to avoid being caught in the storm.

If you have any questions, please contact Brendan Lund at blund@carr-mcclellan.com or at (650) 342-9600.

There are two major exceptions in the statute.  First, an employer may require an employee to divulge user names and passwords to access an employer-issued device.  Second, an employer may require an employee to provide access to or divulge the information if it is “reasonably believed to be relevant to an investigation of allegations of employee misconduct or employee violation of applicable laws and regulations . . . .“  The employer must limit its use of the information to the investigation. Even if one of these exceptions appears applicable, employers should think carefully before requesting access to personal social media without the advice of counsel. In the absence of a clearly stated employment policy, employees may still have privacy rights in information contained on employer-issued devices.  Further, there are a number of restrictions on employer investigations governed by other statutes, such as (for most employers) investigations as to whether the employee has been arrested or detained if the employee was not ultimately convicted.  See, Cal. Labor Code § 432.7.

This law arose in response to media reports of a practice some employers followed requiring applicants and employees to provide account names and password to social media accounts such as Facebook, Twitter, and MySpace.  Supposedly, employers used the information as part of their background check for applicants and to monitor employee conduct.  This practice was always problematic, because it could result in the inadvertent disclosure of information that employers are prohibited from inquiring about, including sexual orientation.

Again, the California Legislature’s failure to clearly define the terms “social media” and “personal” will make those questions hotly litigated, and clear guidance for employers will have to wait until the courts or the Legislature clarify what is permissible.

If you have any questions, please contact George Wailes at gwailes@carr-mcclellan.com or at (650) 342-9600.