LegalMatch: Business Law

Residents in Several States Will See New State Taxes After the 2016 Election

On a less shocking note about the 2016 Election, several states have enacted new state tax laws. In recent years, there has been a trend towards direct democracy when it comes to state taxes. Instead of elected officials making new tax laws, states have allowed voters to choose whether to increase taxes on their ballots.

It appears that voters in several states have elected to increase taxes during this recent election. Most of these new state tax laws are targeted at specific products; such as cigarettes, legalized marijuana, and soda. Some states have also increased income taxes on high wage earners. Below is a list of the recent state tax increases.

1. Tax on Legalized Marijuana

Not only have voters in California, Massachusetts, Nevada, and Maine decided to legalize recreational marijuana, they have also decided to tax marijuana at increased rates.

Under California’s Proposition 64, recreational marijuana consumers will pay an additional 15 percent sales tax on top of the California sales tax rate of 6.25 percent. Recreational marijuana will also be subject to local sales tax rates, ranging from 1.25 percent to 3.75 percent. Thus, recreational marijuana consumers in California may be paying up to 25 percent in taxes for each purchase.

Nevada will have a 15 percent excise tax upon the wholesale value of marijuana, in addition to the state tax rate of 4.6 percent and local sales taxes up to 3.55 percent.

Massachusetts and Maine will tax marijuana at lower rates than California and Nevada, but taxes in these states will still be high (no pun intended). Maine will impose a 10 percent sales tax and Massachusetts will impose an excise tax of 3.75 percent.  Also, local governments in Massachusetts may impose an additional 2 percent on top of the statewide 6.25 percent sales tax.

The new recreational marijuana taxes in Nevada, Massachusetts and Maine will likely raise millions in revenue. California estimates that tax revenue will be about $1 billion. Nevada plans to use the revenue for school funding. Maine will be depositing the taxes into the general fund and the Local Government Fund. California plans to use the funds for several programs, including drug research, youth programs, and regulating impaired driving. Massachusetts will use the funds for regulation of the new law.

2. Tax on Sugar-Sweetened Beverages

Boulder, Colorado and three cities in California; San Francisco, Oakland, and Albany; have imposed a tax sugar-sweetened beverages, such as soda. Boulder will be imposing an excise tax of 2 cents per ounce on distributors of sodas. Albany, San Francisco, and Oakland will impose a 1 cent per ounce excise tax.

Taxes on sugar-sweetened beverages have been somewhat controversial. Soda and other sugary drinks are a leading cause of obesity. Proponents of the tax argue that it will help stem obesity. Critics of the tax argue that it imposes a burden of poorer families, who are already struggling financially in this economy.

Berkeley, California enacted a similar tax in 2014, and has raised $1.5 million in revenue. The four cities that recently enacted this legislation are expecting a similar result. Further, Berkeley has observed a 21 percent decrease in consumption of sugary beverages.

3. Tax on Cigarettes

California’s voters have elected to increase taxes on cigarettes from 87 cents to 2.87 cents per pack under Proposition 56. The new law is also the first in the country to impose a tax on e-cigarettes containing nicotine. The tax is expected to raise $1.4 billion a year in revenue and funds will be used for health care, smoking prevention programs and cancer research.

4. Income Tax for High Wages Earners

Voters in California and Maine passed state income tax laws during this election. California enacted a 13.3 percent income tax rate on the wealthiest residents in 2012. This election, California’s voters passed Proposition 55, that extends the 13.3 percent rate for individuals earning over $263,000 and joint-filers earning over $526,000. This is the highest state income tax rate in the country and should raise $4 to $9 billion in revenue for schools and health care funding.

Maine voters also elected to increase income taxes on its highest wage earners. Maine’s state income tax rate for individuals earning over $200,000 will increase from 7.15 percent to 10.15 percent. The 3 percent increase is projected to raise $142 million in revenue and will be used to fund public education.

Authored by Robin Sheehan, LegalMatch Legal Writer

What Natural Disaster Victims Ought to Know About IRS Tax Relief

Each year, approximately 900,000 Americans are adversely affected by natural disasters, such as hurricanes, droughts, forest fires, and earthquakes. There are many tax relief options available to the victims of natural disasters. Most recently, the Internal Revenue Service (IRS) has provided Hurricane Matthew victims with additional filing extensions.

Tax Relief Options for Natural Disaster Victims

There are several tax relief options for natural disaster victims, including tax-compliance deadline extensions, casualty loss deductions, and tax-free natural disaster assistance.

Tax-compliance deadline extensions are the most common form of natural disaster tax relief. Most taxpayers must pay tax by the April 15^th deadline. But the IRS will extend this, and other deadlines, for taxpayers adversely affected by natural disasters to reduce the stress of having to file taxes. The IRS will also allow extensions for businesses to send payroll taxes. However, if a taxpayer does not meet the extended deadline, interest and penalties may apply.

Casualty loss deductions are also available to natural disaster victims. Under this tax relief option, a taxpayer may deduct hardship expenses from their taxes. Since casualty loss is a deduction, it is not a dollar-for-dollar reimbursement. The deduction does, however, lower tax liability and can lead to a larger refund.

It is also important to note that natural disaster assistance is tax-free. Employees who receive additional financial assistance for natural disaster relief from their employers do not need to pay tax on the extra financial assistance.

Filing Extensions for Hurricane Matthew Victims

Like most natural disasters, the IRS has issued tax-compliance deadlines extensions for the Hurricane Matthew victims. Tax return and payment deadlines for hurricane victims in parts of North Carolina, South Carolina, Georgia, and Florida have been extended to March 15, 2017 for some tax payments. This extension is available to taxpayers with valid October 17, 2016 filing extensions and taxpayers with the January 17 deadline for making quarterly estimated tax payments. Also, the October 31 and January 31 deadlines for businesses’ quarterly payroll and excise tax returns are now extended to March 15, 2017.

How Do Natural Disaster Victims Obtain Tax Relief?

The threshold requirement for obtaining tax relief is to live in a presidentially proclaimed “disaster area.” Usually, if the taxpayer’s IRS address of record is within the designated disaster relief area, the taxpayer will automatically receive filing and penalty relief without having to contact the IRS.

For the casualty loss deduction, taxpayers are also required to provide documentation for expenses incurred. It is important to take photos, keep receipts, and keep records of insurance payments to provide the evidence required for tax relief.

Authored by Robin Sheehan, LegalMatch Legal Writer

Could Hilary Clinton’s Estate Tax Proposals Cost You Money?

Under Hillary Clinton’s estate tax proposals, those standing to inherit multi-million or billion dollar estates would face significant tax increases. Donald Trump has opposed estate tax increases and has supported repealing the tax altogether. In general, only a few wealthy people must pay estate tax, thus, most middle-income Americans are not directly impacted by the tax. So, why are the candidates raising this issue? Should middle-income Americans even care about the proposed estate-tax increase or is this just another rich-people problem?

Hillary Clinton’s Estate Tax Proposal

Estate tax is a tax on property left to the beneficiaries of an estate.  Under current laws, only estates worth over $5.45 million (or $10.9 million for married couples) must pay estate tax.

Mrs. Clinton’s proposed plan would increase the current 40% tax rate for the largest estates and would reduce the exemption amount. Mrs. Clinton has proposed a 50% rate for single estates exceeding $10 million and a 65% rate for single estates exceeding $500 million (or $1 billion for married couples). Mrs. Clinton would also reduce the exemption, so estates exceeding $3.5 million would pay estate tax. Mrs. Clinton’s proposal, if enacted, would be the highest estate tax rate since 1981.

Estate tax usually has no direct impacts on middle-income Americans. Since the threshold is in the millions, only 0.2% of estates in the U.S. must pay estate tax. But, the estate tax can have many indirect impacts on middle-income Americans.

Benefits of an Estate Tax Increase on Middle-Income Americans

Mrs. Clinton’s proposal could indirectly benefit middle-income Americans by relieving extreme wealth inequalities in the United States. When estate tax rates decreased in 1982, wealth inequality skyrocketed. In 1982, the 400 wealthiest Americans held under 1 percent of the nation’s wealth. Today, the wealthiest 400 own over 3 percent of the nation’s wealth, with the top tenth of the top 1 percent holding as much wealth as the bottom 90 percent. If the trend continues, the wealthiest 400 could control 10 percent of the nation’s wealth within the next 40 years.

Estate tax proponents argue more drastic rate increases are needed to remedy wealth inequalities. The rich accumulate wealth faster than the rest of us because they derive most, if not all, of their income from investments. Furthermore, there are many loopholes in the Internal Revenue Code that can be used to significantly reduce the amount of property subject to estate tax. Under Mrs. Clinton’s plan, a $1 billion married couple’s estate would still produce $460 million after taxes to the beneficiaries. Mrs. Clinton’s plan would only slightly slow wealth accumulation.

Estate tax increases could also generate more tax revenues and help alleviate deficits which could lessen tax burdens on working taxpayers. However, many argue that the costs of administrating the estate tax cancel out the increased revenues. Thus, the revenue increase would unlikely impact middle-income Americans.

Negative Impacts of an Estate Tax Increase on Middle-Income Americans

Arguably estate tax could have direct negative impacts on some middle-income Americans. Estate tax may pose hardships on family farms and small companies meeting the $5.45 million threshold. Many smaller family-owned businesses face management difficulties upon the death of the main owner. In addition to management difficulties, taxes can lead to a forced sale of the business. Estate and tax planning can help reduce estate taxes for these companies, but many times death can be unexpected and difficult to plan for. Mrs. Clinton’s proposal to reduce the exemption amount to $3.5 million could negatively impact even more small businesses.  

Estate taxes pose several ethical questions as well. Critics argue that estate tax leads to double taxation because a person is taxed on his or her income earned during life, and then their estate is taxed at death. However, double tax is not an issue for many modern-day wealthy Americans because much of their income is from unrealized capital gains, and thus, was never taxed during life. Critics of estate tax also argue that when people work hard during life, they should have the right to pass their success to their children. Deterring wealth transfers from generation to generation could discourage entrepreneurship and investment which would negatively impact the U.S. economy.

It is clear both the middle class and wealthy would be impacted, on some level, by Mrs. Clinton’s proposed estate tax increase. So, no, estate tax is not just another rich-people problem.

Authored by Robin Sheehan, LegalMatch Legal Writer

Businesses Busted on Background Checks: Knowing Your Rights and Protecting Your Business

We live in a world where almost anything we do can be recorded and stored digitally. Many businesses have sprung up around aggregating this data into consumer reports—more colloquially known as background checks. Loan companies, employers, and many more all rely on consumer reports in making decisions as to how to proceed with any given individual. 

However, like any aggregate of personal information, these reports can really damage a person’s a life if they are misused or simply contain incorrect information. With this in mind, there are laws protecting against how somebody can access, collect, and use the dirty laundry of any person off the street.  The Fair Credit Reporting Act (FCRA) holds both those who collect and sell consumer reports and those who use them under strict obligations as to how they must operate. When a business steps out of line, the lawsuits can be extremely costly.

For example, Frito-Lay has recently agreed to a $1M settlement in response to claims that it failed to act in accordance with the Fair Credit Reporting Act by failing to provide sufficient notice to prospective employees before taking adverse employment action against them based on information disclosed in a consumer report.

Frito-Lay is far from alone; litigation based on FCRA violations is at an all-time high. The restaurant chain Waffle House is embroiled in a similar ongoing lawsuit over their alleged systematic failure to take adequate steps to ensure information in background checks was accurate. In the last few years Chipotle, Food Lion, Home Depot, BMW, Chuck E Cheese, and Whole Foods have all been sued for FCRA violations and settled for amounts hovering between around $1M to $3M.  Earlier this year, Wells Fargo even settled a suit for a whopping $12M.

It’s crucial to understand rights and obligations under the FCRA; whether to protect your business or ensure the protection and accuracy of highly personal information.

What are My Rights as an Individual Under the FCRA?

First and foremost, the FCRA gives individuals the power to sue based on violations of the act. This means that if your information is mishandled, you have the right to have the situation remedied through either court ordered action or damages.  This means that a lot of your rights are intertwined with the obligations of both credit reporting agencies (CRA) and employers.

For instance, CRAs are under an obligation to identify and remove inaccurate or obsolete (many things on a consumer report are required to be removed after 7 years) information from your consumer report and their failure to do so allows you to sue them.  However, your rights under the Fair Credit Reporting Act also encompass a great deal of ability to ensure that the information that is collected about you is accurate.

You are allowed to request and receive a copy of your credit report, including all information in the file at the time you request it, from any CRA. If you don’t think any part of the report is accurate, then you may file a dispute and the company that gave you the report is obligated, unless your dispute is obviously ridiculous, to investigate the information and update it to ensure accuracy.

If you have been a target of identity theft, or are active duty military, your rights under the FCRA are expanded. The rules are also slightly different in the trucking industry.

What are My Obligations as an Employer Under the FCRA?

As mentioned above a great deal of the individual rights provided by the FCRA involve the right to sue over an employer’s failure to live up to their FCRA obligations. For this reason, it’s crucial for a business to ensure its procedures are in compliance with the act lest they end up in Frito-Lay’s situation.

Before accessing a background check or credit rating, an employer must receive written permission from the employee or would-be employee that they seek to look into. This permission can be for a one time deal or at any time throughout employment, but it must be explicit what level of access you will seek.  You must also notify the person you are seeking information if the report may be used in decisions related to their employment.  Both these requirements can often be folded into a properly worded conditional job offer or similar document. 

The access must also be for a permissible purpose under the FCRA. These purposes include hiring and promotion decisions.  However, be careful of the timing of your request as situations where an employer is not yet sure if they are going to hire or knows they will not hire a person and still seeks a background check might be enough to establish the background check was not actually used in a hiring or promotion decision.

Before receiving a consumer report, an employer must certify to the CRA they are working with that they have a permissible purpose and will follow all FCRA guidelines.

If you intend to take adverse action based on a background check (eg. fire, not promote, not hire), then there are further steps you must take. An employer needs to, before the adverse action is taken, notify the employee or would-be employee of your intent to take negative action and provide them a copy of the consumer report you used to reach your decision and a summary of their rights under the FCRA. The idea is to give them a chance to make sure the information is correct before you take action.

Once you finally do take action, an employer is required to give notice of that action over the phone, in person, in writing, or electronically. This notice has to include: (1) the name and address of the CRA you got the report from; (2) an explanation that the CRA didn’t make the adverse decision and can’t explain the reasoning behind it; (3) notice of the right to dispute the information in the report.  Once you’re finished with a consumer report, you’re required to destroy it.

An employer also needs to be careful in how and when they request background checks. If you don’t check every applicant or employee as a matter of policy, checking only a few people can give rise to discrimination lawsuits if the checks are more common for a protected class such as person's race, national origin, color, sex, religion, disability, genetic information (including family medical history), or age (40 or older). If information within a background check which is more common among a protected class is used in employment decisions, this too can lead to discrimination suits.

State Protections

The FCRA isn’t the only source of protection when it comes to background checks. State law often provides substantially more rights to consumers than the FCRA itself.  It’s important to ensure that you know these rights as an individual and avoid treading on them as an employer.

Shelling out a cool million may be pocket change for Frito-Lay, but most businesses aren’t ready to take that kind of hit. With FCRA litigation on the rise, it’s time for employers to double-check their policies and workers to ensure they’re not being misrepresented or mistreated on how their sensitive information is being used.

Authored by Jonathan Lurie, LegalMatch Legal Writer and Attorney at Law

Has the IRS Abused Its Power to Punish Groups For Less Taxes?

Recent efforts by conservative groups to impeach Internal Revenue Service (IRS) Commissioner John Koskinen have highlighted potential abuses by the agency. In recent years, the IRS has been accused of inappropriately flagging several conservative groups’ 501(c)(3) applications and abusive anti-corporate inversion regulations. Former Chairman of the House Ways and Means Committee, Bill Archer, recently stated that despite protections the committee has put in place, these "recent events make it clear that the IRS remains abusive towards taxpayers and often unaccountable." Is Bill Archer correct? Has the IRS abused its power?

Inappropriate Flagging of 501(c)(3) Applications

In True the Vote, Inc. v. IRS, the US Court of Appeals for the District of Columbia Circuit’s ruled that the IRS had committed “unconstitutional acts against” several conservative groups. The complaint alleged that IRS officials had flagged several conservative groups’ applications for additional scrutiny because of the groups’ political beliefs. Some of these groups were Tea Party organizations that advocate for lowering taxes. This additional scrutiny led to delays in processing their 501(c)(3) applications for tax-exempt status. The Court of Appeals agreed with the groups’ arguments that their applications were “subjected to extended delay” and “were not receiving the same processing as those of other organizations.” Moreover, two groups are still waiting for their applications to be processed and the IRS has resisted court orders to disclose a list of targeted groups. Based on the facts laid out in this case, it is likely that the IRS abused its discretion.

Abusive Anti-Corporate Inversion Regulations

In April 2016, the IRS released several anti-corporate inversion regulations by arguably failing to follow rulemaking requirements applicable to all federal agencies. A corporate inversion is where a US based company buys a foreign company to take advantage of the foreign company’s lower-tax jurisdiction.  For a corporate inversion to reap maximum tax benefits, the foreign company must be at least one-quarter and ideally two thirds the size of the US based company. The IRS’s new inversion regulations disregard stock attributable to acquisitions from the previous three years to determine the company’s size, making it difficult for companies to achieve the ratios needed for the tax incentives.

There is speculation that these new regulations targeted the then-pending merger between Pfizer and Allergan. The $150 million merger would have relocated Pfizer, the biggest American pharmaceutical company, to Ireland and would have lowered its taxes. The new regulations issued by the IRS effectively removed the tax incentives to merge with Allergan and the merger did not take place. Mergers with foreign companies tend to uproot American companies and decrease tax revenues in the United States. But, moving the company to a lower tax jurisdiction would allow the company to stay competitive on the global market and gain access to Allergan’s growing product line. Critics also believe the regulations have no basis in law and the US Chamber of Commerce and the Texas Association of Business have filed a lawsuit. 

Is Bill Archer Correct?

Does the IRS remain abusive and unaccountable towards taxpayers? To some extent, it is correct that the IRS is shielded from regular rule making procedures, which may have led to abuses by the agency. Under the Anti-Injunction Act of 1867, no suit “for the purpose of restraining the assessment or collection of any tax” can be brought in federal courts. Consequently, the IRS can issue a potentially illegal rule increasing a taxpayer’s federal taxes and the taxpayer must wait for the IRS to assess the tax before bringing suit in federal court. Moreover, the taxpayer would have to risk incurring penalties before the court makes a decision. Since a taxpayer would bear majority of the risk in bringing suit, most are unwilling to attempt the process. Thus, it is difficult to hold the IRS accountable in court.

The IRS may have respectable motives behind its initiatives, such as protecting much-needed revenue streams. But, based on recent events, it appears that the IRS may have abused its power by targeting tax-exempt groups and business entities who threaten tax revenues.

Authored by Robin Sheehan, LegalMatch Legal Writer

What Voters Ought to Know about Donald Trump’s Taxes

A hot topic this election season has been Donald Trump’s federal income taxes, or, should I say, lack thereof. Over the course of the 2016 presidential race, Mr. Trump has said he is “smart” for not paying his federal income taxes. So, here’s the million-dollar question - how does Mr. Trump get away with not paying federal income tax?

Donald Trump’s Taxes

Only fragmentary information about Mr. Trump’s taxes is public knowledge since he has not released his tax returns. It is primarily speculation as to whether Mr. Trump does not pay federal income taxes, but it is likely that he enjoys significant tax reductions due to loopholes in the Internal Revenue Code (IRC).

As a general rule, income earned throughout the year is taxed, and thus, an individual or business entity must pay taxes unless that individual or business has earned no income. There are, however, loopholes in the IRC that reduce federal income tax. Mr. Trump has said he knows “our complex tax laws better than anyone who has ever run for president.” Over the years, it appears that Mr. Trump has used his business losses and charitable donations to significantly reduce his taxes.

Donald Trump’s Business Losses and Carryovers

Business losses are deductible and, in some cases, may be used to reduce taxes for past or future years. Certain business owners, including Mr. Trump, can use these deductions to reduce personal income tax.

In general, when a business has more losses than profits; there is a net operating loss (NOL). An NOL may be used to reduce the business’s taxes for past or future years. Reducing taxes for prior years is called a carryback. Businesses may reduce taxes from the two years prior to the loss. Carryovers allow taxpayers to apply NOLs against taxable income for 20 years into the future. For instance, if a business lost $1 million in 1996, that business may use that loss to reduce its taxes for the next 20 years. After the 20-year period is over, the business cannot use the loss.

It appears that Mr. Trump has been using a nearly $1 billion business loss from 1995 to reduce his own federal income taxes under pass-through rules. Certain businesses operate as pass-through entities, such as LLCs, S-Corporations, and partnerships. In other words, the businesses’ income gets passed through to the business’s owners and they either get taxed on the profits or take deductions for the losses. The Trump Organization operates as an LLC pass-through organization. Under the carryover rules above, Mr. Trump was able to offset his own federal income taxes since the 1995 business loss. Thus, it is possible that Mr. Trump has not paid - or has paid very little- federal income taxes for the past 20 years.

Donald Trump’s “Charitable” Donations

Mr. Trump most likely uses charitable donations as another tax reduction method. In general, charitable donations of money or property may be deducted. Mr. Trump claims he has given over $102 million in charitable donations. Since Mr. Trump has not released his returns, it is unknown exactly to what charities he has donated or how much these donations have been. But, there are reports that most of the $102 million comes from “conservation easements” that allow landowners deductions for agreeing to not construct buildings on their land.  Mr. Trump has been accused of constructing gulf driving ranges, instead of buildings, on his land for deductible charitable donations.

Although we can only speculate what Mr. Trump’s tax returns would really say, it does appear that at least one of Mr. Trump’s insinuations is correct. Mr. Trump - or at least his tax advisors - thoroughly understand IRC loopholes.

Authored by Robin Sheehan, LegalMatch Legal Writer

Should Not Believing in Global Warming Be Illegal?

In a time where Americans don’t seem to agree about anything, it is no surprise that some people do not believe in global warming. Some argue that publicly questioning the severity or even existence of global warming is dangerous—that such behavior influences those who might not know any better. But should questioning climate change be illegal?  

A bill introduced by California Senator Ben Allen, D-Santa Monica, called for the prosecution of climate change dissenters, making global warming denial a business fraud. Although the bill ultimately did not pass, its introduction drew outrage from some who called it an overreach of government control as well as an attack on First Amendment rights to free speech and free press.

What Did Senate Bill 1161 Cover?

Senate Bill 1161, also known as the California Climate Science Truth and Accountability Act of 2016, would have allowed prosecutors to sue fossil fuel companies, think tanks and others who have questioned global warming under the principle that information disseminated by these groups has “led to confusion, disagreement, and unnecessary controversy over the causes of climate change.”

According to the bill, there is no room for disagreement on the global warming issue as: “There is broad scientific consensus that anthropogenic global warming is occurring and changing the world’s climate patterns, and that the primary cause is the emission of greenhouse gases from the production and combustion of fossil fuels, such as coal, oil, and natural gas.”

Furthermore, Senate Bill 1161 positions itself as necessary for the public good, declares that misinformation about climate change has “confused and polarized the public on the need to aggressively reduce emissions to limit risks from climate change.”

How Can Climate Denial Be Considered Fraud?

California’s Senate Rules Committee noted that Senate Bill 1161 allows district attorneys and the Attorney General to use California’s unfair competition law to allege that a “business has directly or indirectly engaged in unfair competition with respect to scientific evidence regarding the existence, extent or current or future impact of anthropogenic induced climate change.”

The unfair competition law referenced in the Senate Rules Committee’s analysis is a reference to legislation (in particular, the Unfair Competition Act section 17200) that makes it illegal for a California business to engage in any “unlawful, unfair or fraudulent business act or practice and unfair, deceptive, untrue or misleading advertising.” In other words, a corporation or person alleged to have spread misinformation about climate change could be charged under the principle that they were engaging in unfair business practices.

Interestingly, while the statute of limitations under the Unfair Competition Law is now four years, climate “fraud” lawsuits pursued under Senate Bill 1161 would have no statute of limitations. In other words, if Senate Bill 1161 had passed, there would have been no limit on how far back people or corporations could be sued on climate “fraud” claims.

Senate Bill 1161 and the First Amendment

In a June 6th letter to California Attorney General Kamala Harris (a Senate Bill 1161 supporter), nineteen California lawmakers wrote that, in their view, freedom of speech “is not designed to protect fraud and deceit” of those (such as oil company ExxonMobil) who have doubted climate change. In contrast, Stephen Frank, editor of the California Political Review, called Senate Bill 1161 a “totalitarian statement by Democrats that the First Amendment is now dead.”

So would Senate Bill 1161 have violated the First Amendment? The Supreme Court has held that restrictions on speech based on its content usually violate the First Amendment. However, the Court has ruled that certain types of speech are of “low” First Amendment value, including: defamation (false statements that damage a person’s reputation), threats to commit a crime, “fighting words” (face-to-face personal insults), obscenity (like hard-core pornography), child pornography, and commercial advertising (speech advertising a product or service is constitutionally protected, but not as much as other speech). It is unclear how opinions about global warming fits into these “low” First Amendment value categories.

When you consider that the right to freedom of speech guaranteed by the First Amendment allows people to express themselves without interference from the government, Senate Bill 1161 starts to sound less like a measure to help the environment, and more like a way for those with dissenting opinions to be silenced.

As Texas Attorney General Ken Paxton said of the controversy, “They have every right to have their opinions on climate change. In my opinion, you cross the line when you start prosecuting individuals for disagreeing with you.”

Authored by Andrea Babinec, LegalMatch Legal Writer

Sidestepping Scandals: The Value of Morality Clauses

It’s rare that a month goes by without a new celebrity scandal bubbling to the surface of the public consciousness. Some of these are more serious than others, such as the recent allegations of physical and emotional abuse that Amber Heard has leveled against her ex-husband Johnny Depp.

Such a serious accusation has naturally drawn extreme criticism to Johnny Depp. However, it has also led to the condemnation of the businesses who use Johnny Depp as a spokesperson. Depp acts as the face of Christian Dior’s Sauvage fragrance line. Dior has drawn the criticism of the public, and legal experts, for maintaining their endorsement contract with Depp despite the despicable behavior his ex-wife says he engaged in.

Almost anybody who’s done business can tell you that ending a contract is not as easy as saying “I don’t feel like it anymore.” In most situations, terminating a valid contract before it has run its course is a breach opening you up to legal liability. 

However, this isn’t the case for Dior due to something called a morality clause in their contract with Depp. These clauses allow the party benefiting from the clause (almost always the company seeking endorsement) to terminate an agreement where the other party engages in conduct that could reflect poorly on the brand of the party being endorsed. The exact nature of the conduct allowing termination varies from contract to contract. However, these clauses tend to be fairly broad.

The goal is to ensure that an organization’s agents do not undermine that company’s brand. Morality clauses accomplish this by allowing a company to quickly, and without consequence, sever ties with “rogue” talent. Cultivating a brand image is a long and expensive process; thus businesses take steps to prevent this work from being undermined.

A Brief History of Morality Clauses

Morality clauses have been standard fare in entertainment, endorsement, and sports contracts for almost a century. In 1921, the comedian Fatty Arbuckle was accused of rape and murder and while he was acquitted by a jury, the court of public opinion never forgave him. Universal Studios, looking at veritable tidal wave of trouble the incident caused, decided that it needed a way to easily distance itself from its contracted talent should things go belly-up for a celebrity. They immediately started to include morality clauses in all their talent contracts which, if breached, allowed Universal to terminate a contract—no questions asked—five days after letting their talent know they had violated the clause.

 Only a year after Arbuckle changed entertainment contracts, the morality clause entered the world of sports in the contract of Babe Ruth. The clause forbad Ruth from, among other things, staying up too late or showing up to practice drunk. 

In more recent history, morality clauses have been used to protect many different brands. Kate Moss was dismissed by H&M in 2005 after she was photographed using cocaine. After Lance Armstrong’s 2012 doping scandal, Nike, Trek, and Oakley all invoked morality clauses to cancel endorsement deals with him.  Many more scandals have led such revocations for celebrities such as Paula Deen, Michael Vick, Kobe Bryant, and Tiger Woods.

What They Solve and What They Don’t

Morality clauses are an excellent way for any business to protect their investment in their brand. However, they are not always going to get every business completely out of hot water. Exactly what a morality clause can do for a business often depends on the exact phrasing of the clause—something that is likely to be hotly contested during negotiation.

There are many elements to a morality clause that have to be hammered out in negotiating an endorsement deal. The type behavior that allows a company to terminate an endorsement contract is a common point of contention—celebrities wanting narrow definitions and companies seeking broader terms. 

The exact action a company can take when invoking a morality clause is also a subject for negotiation. These clauses often allow companies to levy fines against celebrities either in addition to or instead of terminating the contract.

Even with a morality clause in place, the termination of a contract is unlikely to be the end of the story in terms of litigation. Celebrities are likely to sue alleging that their actions were insufficient to allow termination under the contract.  If it comes to litigation, it can sometimes be hard to prove that the behavior that you are terminating the contract for actually took place—although the clauses can be written to include termination for allegations of bad conduct.  What’s more, there is a good chance that a celebrity may sue for money they feel they are owed for the work they have already performed under the contract.

All these considerations, as well as the business considerations of money already invested into upcoming advertising featuring the celebrity under contract, are things that a company such as Dior will take into account before invoking a morality clause. While the behavior of those endorsing them may be appalling, a company will always have to take into account the bottom line when deciding how to proceed on a contract—never mind the potential that they may simply not have grounds to terminate.

Reverse Morality Clauses: When Business Misbehaves

A concept that has been around for a while, but has recently gained much more traction, is the reverse morality clause. As much as businesses build their brand, a celebrity’s business is being a brand.  The extreme value of their public perception is the very reason morality clauses exist in the first place.

With this in mind, some experts have suggested the need for morality clauses that work in favor of celebrities.  It’s not uncommon for celebrities to agree to endorsements with a brand and then regret their choice after a company’s misbehavior comes to light.  For instance, in 2011, Natalie Portman publically renounced an endorsement deal she had recently signed with Dior after the fashion house’s creative director was filmed spouting anti-Semitic sentiments. 

As it stands, a celebrity in Natalie Portman’s situation is often left with two unpleasant options. You can carry on representing a company that you, and your fans, may have serious issues with—risking your credibility and celebrity cachet. Alternatively, you can refuse to continue representing that company—likely breaching your contract with them and risking the damages that could come in a lawsuit against you.

In a way, the greater your celebrity the greater the risk you run. The higher profile you are, the more your association with a company’s bad behavior will be talked about and damage your reputation.  As expensive and difficult as it is to build a brand as a company, building a brand when that brand is yourself is equally challenging. 

Morality clauses were introduced for a reason; protecting your brand is important. Without a morality clause on their side, either a person endorsing a company or the company itself could find themselves high and dry when that Ponzi scheme or dog fighting ring hits the news.

Authored by Jonathan Lurie, LegalMatch Legal Writer and Attorney at Law

Puerto Rico Should Be Allowed to Declare Bankruptcy

Puerto Rico is in economic crisis with $70 billion in debt. On May 2, the island’s Government Development Bank defaulted on most of a $422 million debt payment. The next big payment of $1.9 billion is due on July 1. Puerto Rico is in a total dire situation. As concerns amounted, discussions of whether and how to provide Puerto Rico some relief took place. So far, however, no decision was made on how to help Puerto Rico’s financial crisis. 

Puerto Rico’s Governor Alejandro Garcia Padilla believes that Chapter 9 bankruptcy can be a solution because it would allow the island to restructure some of its debts. Under the U.S. constitution, municipalities in U.S. states have access to federal bankruptcy courts to restructure their debt when necessary. However, because Puerto Rico is not a state but a United States “territory,” the island does not have the same level of protections as other U.S. states, including the right to declare bankruptcy. Furthermore, because Puerto Rico is not an independent country, it cannot ask the International Monetary Fund for help.

In fact, Puerto Rico was included in Chapter 9 of the U.S. Bankruptcy Code until 1984, when Congress excluded it from the nationwide approach to resolving municipal insolvency. Critics of extending Puerto Rico bankruptcy rights say Chapter 9 bankruptcy would not fix the root of the problem. 

Puerto Rico is in deadlock. In recent years, Puerto Rico’s government has made drastic spending cuts and tax hikes to meet its obligations to creditors. The government laid off tens of thousands of public employees and raised the sales tax from 7 percent to 11.5 percent. It has closed 10 percent of Puerto Rico’s schools since 2014.  As the unemployment rises, the younger and more able-bodied workers are leaving the island to the mainland. This, in turn, worsened the economic problem because the government’s spending for public services for those who stay increases as the work-force who pays tax keeps fleeing the island.    

What Caused Puerto Rico to Crumble?

Reasons for Puerto Rico’s financial crisis can be traced to institutional factors and malinvestment. The Jones-Shafroth Act (known as Puerto Rican Federal Relations Act of 1917) made all citizens of Puerto Rico U.S. Citizens and reformed the system of government in Puerto Rico. While the law gave Puerto Rico some quasi-independent government, Washington maintained control over fiscal and economic matters.

The law also exempted Puerto Rican bonds from federal, state, and local taxes. The problem was this tax exemption applied regardless of where the bond holder resides. This “triple tax exemption” made Puerto Rican bond extremely attractive to people all over the U.S. to buy these municipal bonds. This provides a huge incentive to the investors from states with high tax rates. 

The intent of the Jones Act was to increase investment in Puerto Rico’s economy and create stable infrastructure. With the amendment of the law, business operations in Puerto Rico also received federal tax breaks. Many corporations established their businesses in Puerto Rico to benefit from these tax advantages. However, over time, Congress started phasing out these tax breaks in 1996 and ended them entirely in 2006. With no more tax advantage, businesses began to leave the island.

Furthermore, the changes of the world economy worked against Puerto Rico. Puerto Rico’s minimum wage, which is governed and set by the Federal Labor Standard Act, is high considering Puerto Rican productivity, which is far below mainland levels. Also, the Jones Act required that goods traveling between Puerto Rico and the mainland use U.S. ships, raising transportation costs even further. Relying too heavily on the tax advantages even during hard times, Puerto Rico sold more bonds to pay off its existing debt and to earn more money. However, this created even more debt.

Currently, this amasses to 70 billion dollars. Puerto Rico’s public corporation, such as utilities, hold a significant amount of debt. Default on these debt means that Puerto Rican lose necessities, such as gas, electricity, and schools which is already happening. As the economy continues to deteriorate, more and more people are fleeing Puerto Rico, leaving the burden on a smaller number of people and businesses who cannot handle the situation. 

Saving Puerto Rico From Economic Crisis

Puerto Rico is a part of the United States. Whether you like it or not, Puerto Rico’s problem is America’s problem because while Puerto Rico’s government made bad decisions, its economy was inevitably affected by being a part of fiscal union of the U.S.  The island’s status as a territory was conveniently used by the mainland, but was not adequately accounted for in the long run, leading to troubled economy. 

What do we know about the U.S. territories? Besides the 50 states, the U.S. has several foreign territories. Currently, there are sixteen territories of the United States, five of which are permanently inhabited: Puerto Rico, Guam, Northern Mariana Islands, the U.S. Virgin Islands, and American Samoa. The citizens of the territories are granted U.S. citizenship.

The five inhabited U.S. territories have local voting rights, protections under U.S. courts, and pay some U.S. taxes. They do not, however, have the right to vote in federal elections. Compared to other states, the US territories have limited representation in politics. For example, there is one non-voting member who is elected in Puerto Rico who may vote in a House committee on all legislation presented to the House of Representative.  

Basically, these territories are U.S. holdovers from U.S. imperialism. In other words, these territories did not become “territories” by their choice. The fate of these territories varies.

Many territories applied for and were granted statehood. For example, Alaska and Hawaii were once territories, but later became states. Other territories became independent nations. The Philippines were once territory of the U.S. when the islands were ceded by Spain to the United States as a result of the Spanish-American War. The Philippines became an independent country in 1946.

Puerto Rico is America

Puerto Rico is by far the largest US territory, with more people than every other territory combined. It is also physically the closest territory to the United States mainland. Whether the fate of Puerto Rico would change either to a statehood or an independent country is uncertain. 

To say the U.S. should deny Puerto Rico the ability to declare bankruptcy or refuse to help restructuring Puerto Rico’s debt is to treat Puerto Rico as if it is not a part of the U.S. but a different country.      

Contrary to what many creditors will say, giving Puerto Rico a right to declare bankruptcy will not wash out Puerto Rico’s obligation to pay back its creditors. Chapter 9 bankruptcy is not a bailout, but a debt restructuring plan. Although Congress does not seem to concede and allow Puerto Rico declare bankruptcy, Speaker Paul Ryan is urging and supporting a proposal H.R. 4900, the Puerto Rico Oversight, Management, and Economic Stability Act.  In June, the Supreme Court will determine whether the Puerto Rico Recovery Act violates Chapter 9 and whether the island can pass its own restructuring legislation to allow its insolvent public utility companies to restructure their debt.  

Remember that one of the primary reasons for the troubled economy is because creditors bought those tax saving municipal bonds without paying tax. Furthermore, hedge funds are making the situation worse by their ruthless pursuit of profit from debtor governments. Considering these causations, the Congress should not drag its feet, but must either come up with a workable solution or allow Puerto Rico to declare bankruptcy.   

Authored by Khloe Lee, LegalMatch Legal Writer and Attorney at Law

Parents Rejoice: FTC Sues Amazon for In-App Charges Made by Children

If you ever glanced at your credit card statement and see a dozen $0.99 purchases from Apple, Google, or Amazon, then you are familiar with “in-app” purchases. For a responsible adult, in-app purchases are a nuisance if they forget to keep track. But for a child, an in-app purchase is a harmless, $0.99 purchase that they just make one time. Until the next purchase, which may be $1.99 or $2.99.

It is not uncommon for parents look at their bill and see that the child has made $300 worth of purchases for a one game that advertises as “free”. Now, most people are familiar with the concept of the “pay-to-play” game. Companies like Apple, Google, and Amazon allow parents to put a lock pay-to-play games to prevent in-app purchases.

But what about the thousands and millions of dollars already spent by children on in-app purchases? Can their parents get a refund? If so, why would they get a refund?

The Basics of FTC’s Lawsuit Against Amazon

The Federal Trade Commission (“FTC”) filed a lawsuit against Amazon, Inc. in July 2014. The lawsuit sought to give refunds to customers for unauthorized charges. It also sought to ban Amazon from billing parents (or anyone else) for in-app charges made without their consent.

The FTC found that the games encouraged children to buy virtual items in a way that made it unclear the purchase is made with actual money. The games title the purchases as “coins” or “acorns”, and they can cost up to $99.99 for a bulk purchase.

Amazon stated that they require a password for in-app purchases over $20. But, even if the parent authorizes a purchase, the authorization opens a 15 minute window where any person can make purchases of any value. Ultimately, parents were finding bills for over $300 worth of unauthorized charges. Even children who are unable to read but are able to click buttons at random have racked up a large bill.

Still, Amazon maintained the policy that all in-app charges are final and nonrefundable. Ultimately, the court decided that Amazon violated Section 5 of the FTC Act.

Section 5 and Unfair Practices

Section 5 of the FTC Act bans “unfair or deceptive acts or practices” that affect commerce, In this case, the unauthorized in-app purchases are the deceptive acts that affect commerce.

An act or practice is unfair if they:

• Cause or are likely to cause substantial injury to consumers;
• The injury is not reasonably avoidable by consumers; AND
• The injury is not outweighed by any benefits to consumers.

The court considered billing customers without permission as an injury under Section 5. The court also decided that it is not reasonable for customers to avoid injury because the app’s are “free.” Customers who download the app can believe that advertising the app as “free” means that they cannot make actual purchases within the game.

Finally, the court decided if there were any outweighing benefits from Amazon’s in-app purchase design. The court replied with a resounding “No.” Amazon argued that customers prefer a seamless experience. "Seamless," meaning that they can buy things without interrupting the game. But the court refused to believe that claim. They state that Amazon failed to give any evidence of customers being “upset or harmed” by the existence of a password request.

First Came Apple, then Google, and Now Amazon…. Will Companies Ever Learn?

In January 2014, the FTC settled with Apple, Inc. to refund consumers $32.5 million of in-app purchases. In September 2014, FTC settled with Google to refund consumers $19 million of in-app purchases. As of May 2016, it is unclear how much Amazon will need to return to consumers. But the FTC stated it is seeking full refunds for most of the affected consumers.

The trend is clear: the legal system is cracking down on companies that try to profit off of in-app purchases. In 2014, the popular game “Candy Crush Saga” raked in $1.3 billion from such purchases alone. Over time, consumers began to realize how much they spend on in-app purchases and fought back. However, many apps still require consumers to actively disable in-app purchases.

The courts have caught on to the fact that in-app purchases are deceptive and can amount to a significant purchase. We can only hope that companies like Amazon will realize they must change their practices or face the consequences.

Authored by Janice Lim, LegalMatch Legal Writer