Legal Guide to Hiring Your First Employee

January 17, 2018

I have been advising small businesses, including startups, for a long time now on all types of legal issues. Recently a client asked me a question that I had never been asked in that way before. He said that he was about to hire his first employee. What legal steps should he take? What a great question I thought. Probably many people would like to know the answer. So I wrote this blog article. This is intended as only a brief overview (I am not good at brief, but I will try). You should talk to your own attorney about these issues as they come up.

1. Incorporate before you hire

If you have not already done so, you should incorporate before you hire someone,. A corporate entity provides a shield from liability for the individual owners. Contrary to common belief you are not shielded from liability for your own negligent acts. However you are shielded from liability for acts of your employees. Let’s say you send an employee out to deliver something to a customer. On the way back, the employee stops at a bar and gets drunk before returning to the office. Then he causes an accident seriously hurting or killing someone. Your incorporated company may be liable, but generally you will not be personally liable.

There are many different types of legal entities. The three most popular are the ‘C’ corporation, the ‘S’ corporation (the letters refer to the labels for certain paragraphs in the Internal Revenue Code), and the limited liability corporation (’ LLC’.) I think the ‘S’ corporation and the LLC are both overrated for reasons I will not get into here. I usually recommend incorporating as a ‘C’ corporation. The ‘C’ corporation is commonly just referred to as a corporation. By default if you register as a corporation and do not elect with the IRS to create an ‘S’ corporation, you have created a ‘C’ corporation. Most of the time, you should incorporate in the state where you have your office and do most of your business. This is definitely a good topic of conversation to have with your investors, your lawyer, and/or your accountant.

2. Get an EIN

An EIN number (a bit of a redundant phrase I know) is an Employee Identification Number. It is like the social security number for individuals, but it is for a businesses. You do not have to be incorporated or have employees to get an EIN. The name is left over from days when you only got one if you had employees. You must have an EIN in order to pay federal employee taxes. Given how much indentify theft there is using stolen social security numbers, it is a good idea to get an EIN and use it as soon as you start to operate a business. These days you can get an EIN online from the IRS very easily.

3. Have a written employment agreement

Any attorney will tell you that it is always a good idea to put any agreement in writing. In an employment agreement, you could describe the company policies on sick leave, vacation, use of company equipment, whether outside employment is allowed, and use of email and social media.

If you have valuable intellectual property (IP) such as patents, copyrights, or even customer lists, you should spell out who owns what (usually the company owns all of this). In particular, if the employee will be creating IP, then you should definitely state that all such IP belongs to the company. If you put this in an employment agreement then in some states, including Washington, you must include certain very specific language. (In Washington, see RCW 49.44.140.)

You should emphasize that all employment is at-will. This is a legal term that means that you can fire the person at any time for any reason or for no reason at all. Of course, it works both ways – an employee can quit at any time as well. Even if you are hiring someone for a specific project and time period, it is always a good idea to preserve the at-will status. At least in Washington, all employment is at-will unless there is an agreement otherwise. The safe course is to put it in writing anyway. Otherwise, it is not uncommon for employees to interpret company action as promising employment for a specific period.

You may have other express or implied contracts with your employees, whether you intend these results or not. Do you have an employee handbook? Do you have company policies that affect employees? Do your actions imply a policy of treating employees a certain way? These and other factors may become part of the company’s agreements with its employees.

4. Consider non-compete and confidentiality agreements

Depending on the nature of the work, you might want to have a non-competition agreement and/or a confidentiality agreement with the new employee. These are separate issues but they are often handled together. Neither one is easy to enforce.

A non-compete agreement has to be carefully worded. You cannot simply prohibit someone from working in a particular field. You have to have a valid business reason for limiting their future work. A worker acquiring general knowledge of your industry is not enough. They have to have acquired certain specific information and skills that are unique to your company. Even then, you should define the amount of time they can not compete, the geographic area in which they can not compete, and the area of business in which they can not compete, as narrowly as possible. If your agreement is too broad in any one way, it may be totally unenforceable. It is best to have an attorney draft a non-compete agreement for you.

Unlike most areas of law, the exact wording of confidentiality agreements is not very important. Almost any statement will do. Make sure your employee knows what information the company considers confidential, and that the requirement for keeping this information confidential continues even after employment ends. If something is not confidential either because it is general knowledge or because you do not treat it as confidential, then saying that it is confidential will not make it so. Have a system in place to protect your company’s confidential information. Especially in the tech field, where confidentiality is very important, it is hard to protect information. Some courts have held that since technology information changes so rapidly, any confidential information is out of date and therefore no longer protectable in as short a time period as one year.

Watch out for the flip side as well. Ask your new employees if they are subject to any non-compete and confidentiality agreement with their former employees. Ask for copies of such agreements and let your employees know, preferably in writing, that you do not want them to violate those agreements.

5. Have employees sign contracts before they start work

In order for a contract to be enforceable, each party must give something and must get something in return, what lawyers call “consideration”. In an employment contract, the new employee agrees to certain conditions and in return gets a job. In Washington if you offer an existing employee new employment contract terms or a new non-compete or confidentiality agreement, continued employment is not adequate consideration. So if you say to an existing employee, sign this new agreement or you lose your job, and they sign it, it is not enforceable. You have to give them something new in return for their agreement to the new terms, such as increased wages, a promotion, a bonus, a fixed term of employment, or access to protected information.

6. Pay taxes

There are always taxes to be paid. There are a number of state and federal taxes specifically related to the payment of wages. Make sure you stay on top of this. Many new businesses that have only a small number of employees hire a company to pay these taxes for them. I have also seen the payment of taxes made a part of the employee’s responsibilities.

7. Avoid personal liability for wages and taxes

Anyone who has any control over the payment of wages and taxes can and usually will be held personally liable if these are not paid on time. A recent case in Washington ruled that this personal liability for wages still exists after the company goes bankrupt. If you do not learn anything else from this article, know that you should not employ anyone unless you already have the money to pay them and related taxes. If you have employees and you are running short of cash, let them go. Do not keep them onboard hoping that more money will come in. The risks of keeping them on the payroll are too great. You may be held personally liable for at least double the wages and attorneys fees and taxes and penalties. It does not matter if they agree to assume the risk of payment. If you have any control over the payment of wages and taxes you are strictly liable, pretty much no matter what.

As a reminder, you are always liable for your own negligence, regardless of the form of the business entity. If you see a safety issue, do not put it off: fix it now.

8. Post required notices

The federal government — and as far as I can tell, all states — require employers to post certain notices at the place of employment. These notices advise workers of their legal rights. Some cities and other municipalities may require notices as well. These notices are usually available for download on the Internet. These notices are often referred to as posters.

It can be hard to figure out which notices are required for a particular employer. Many of the notices are only required if your company meets certain requirements. The rules and the notice contents change often.

A good place to start to determine federal requirements is the FirstStep Poster Advisor, http://webapps.dol.gov/elaws/posters.htm. This website focuses on the Department of Labor requirements. Another good website is https://www.hr360.com/Human-Resources/Federal-Poster-Requirements.aspx.

The state of Washington has a website that lists federal and Washington state notices required in Washington: http://www.lni.wa.gov/IPUB/101-054-000.pdf. Other states may have similar websites.

9. Do not discriminate, but do accommodate

Many types of employment discrimination are prohibited in the work place. Common categories of discrimination are race, gender, religion, national origin, physical or mental disability, age, sexual orientation, and gender identity. Employment discrimination is prohibited by a complex set of federal and state laws, which often overlap, sometimes with unusual results. For example, even in states where marijuana use is now legal, it is still legal to require drug tests and not to hire anyone who uses marijuana even on their own time. Discrimination for drug use is covered by federal law, and because marijuana use is still illegal on the federal level, there is no protection for marijuana users. See an employment attorney in your state for more detailed information.

There is law prohibiting some forms of discrimination against individuals with disabilities. Most of these prohibitions are covered by the Americans with Disabilities Act (ADA). The ADA is a civil rights law that prohibits discrimination against individuals with disabilities in all areas of public life including jobs. The definition of what constitutes a disability is very broad. It is not always easy to determine if a particular individual is protected under the act. Employers are required to provide reasonable accommodations to employees and prospective employees with disabilities. What constitutes reasonable versus unreasonable accommodations is often difficult to determine. See an employment attorney in your state for more detailed information.

10. Watch out for and obey employment conditions laws

There are a number of laws that govern the conditions of employment. These include federal and state laws and in some cases city or other municipality laws. For example, the federal government requirement most types of worker to be paid a specified minimum hourly wage. The state of Washington requires payment of a higher minimum hourly wage than required under federal law. The city of Seattle requires payment of a higher minimum hourly wage than required under federal or state law. There can also be requirements for sick leave, vacation, health insurance, maternity leave, and number and length of breaks. For certain jobs there can be federal and state safety requirements. In any particular employment there may be other requirements as well. This list is only intended as a starting point.

 11. Make sure independent contractors are really independent contractors

Employees are subject to various employment laws, rules and taxes. Independent contractors are not subject to many of these and are taxed differently. Government entities will classify workers according to how you treat them. Whether you call them independent contractors or not is only one factor in that analysis. In many cases, it is obvious that someone is or is not an employee. But in some cases a person is treated as an employee in some ways, and an independent contractor in other ways. In these cases, the question is are they more like one or the other. There is no one factor that determines that outcome. The answer is based on all of the relevant facts of the specific case. These factors include but are not limited to

  • do you set their hours or do they?
  • do they work under your direction and supervision or are they independent?
  • do they work only for you or do they have other clients?
  • do they work in your office and/or with your equipment?

In Washington you can find a general guide at http://www.lni.wa.gov/IPUB/101-063-000.pdf. Other states probably have similar booklets. The IRS has published various rules at various times. A general IRS guide is at https://www.irs.gov/businesses/small-businesses-self-employed/independent-contractor-self-employed-or-employee. You can find a lot more information on this topic by googling “independent contractor guide.”

 12. Avoid the intern trap

Beware of the changing government attitude towards unpaid interns. It is common in many industries for companies to hire interns and to not pay them wages. The thought is that they are gaining valuable experience, learning particular skills and adding value to their resume. They are already being well compensated, and do not need to be paid as well. In many cases the employer receives benefit from the employment of the intern. There is a growing trend among government agencies to treat interns who do work of benefit to the company as regular employees subject to regular employment laws such as minimum wage requirements.

That covers the basics, and just the basics. Feel free to ask questions in the comments section and I will try to answer them there. Also, feel free to add comments and suggestions. Be sure to check with your local employment attorney for more detail.


Why I Hate Arbitration

October 29, 2014

Arbitration is very popular as an alternative to lawsuits for settling disputes. I do not understand why. I do not like binding arbitration clauses and try to discourage my clients from using them. I believe that they have many more disadvantages than advantages.

Arbitration is perceived as less expensive than litigation. This is only marginally true. In both cases the parties need to hire attorneys, conduct discovery, prepare their cases for trial, and present their case to a decision maker. The rules of arbitration tend to be more flexible than the rules of court, so evidence issues can occasionally be dealt with in a less costly manner. This is the only true cost savings of arbitration over litigation.

But the same results can be achieved in litigation when both parties cooperate with each other over evidence issues.

Where the parties are not cooperative, the resultant battles can be expensive whether in litigation or arbitration. In fact, the flexibility of arbitration rules can make arbitration more expensive than litigation in some cases. The rules of arbitration are very short and general. There is very little written guidance on what the rules mean. Therefore, it is easy to dispute how to interpret the rules. On the other hand, the rules of court are very detailed, and are likely to cover most situations. In addition, there is much case law exploring the various finer aspects of the court rules. Parties are less likely to have a dispute over court rules.

By way of example, in a recent case that I was involved in, on a particular issue each side was to present a three-page argument. I did. The other side used a small font and almost no margins to fit their argument on to three pages. It was really over a four-page argument if formatted normally. I complained. I was told that because there were no rules in the arbitration on page format, the opposing party’s submission was acceptable. In the courts in which I practice there are specific rules on page format. This kind of cheap trick could not have been used.

There are other disadvantages to arbitration. First, discovery is limited in arbitration. This can help the party who controls most of the information, and can hurt the party that does not have independent access to the key information. Typically, the party who has committed the wrong has better access to information about the wrong than the party that was victimized by the wrong. The limited discovery in arbitration tends to help the wrongdoer.

Arbitration also produces poorer decisions than litigation. I find judges make somewhat arbitrary decisions. But arbitrators are far worse. A typical arbitrator is a practicing attorney who handles only a few arbitrations a year. Judges are used to dealing with all types of people. Where appropriate, they are willing to make a ruling that is entirely one-sided. Arbitrators, on the other hand, as a general rule, are not as experienced at making decisions affecting other people. They tend to give everyone the benefit of the doubt. They also try to please everyone. So, with an arbitrator you are likely to end up with a compromise ruling, even when such a ruling is not called for. These factors favor the wrongdoer over the victim.

An arbitrator’s rule is final. There is no appeal, not even a request for reconsideration. This reduces cost and shortens the time to final judgment. But it also means that obvious mistakes of law or fact cannot be corrected. This has happened in at least one of my cases. It was very frustrating to my client and me.

The filing fee for starting a lawsuit in court is usually only a few hundred dollars. That is the only fee the parties must pay. The taxpayer picks up the court salaries and other expenses. But in arbitration the parties have to pay for everything. I recently concluded an arbitration where the arbitration fees alone were about $25,000 for each side.

There are of course advantages to an arbitration. An arbitration usually takes much less time from the start of the case until the trial/arbitration judgment. Because there is no appeal, that is the end of the case. In arbitration the parties can pick the arbitrator. This can be helpful if the case requires a judge to have a particular expertise. Arbitration proceedings are private. There is no public record of the arbitration. All evidence submitted to the arbitrator is private. In a court case, usually everything that is submitted to the court at any time is a public record that is accessible by anyone.

Even without a binding arbitration clause, the parties are free to use arbitration if it seems to be a good way to settle a particular dispute, and if both parties agree. When a dispute is over relatively small amounts of money and the parties are behaving fairly reasonably, they can always agree to forgo expensive litigation and use less expensive arbitration instead.

Arbitration might make sense in certain other cases. I have heard that a telephone company that was supplying services to its business customers had a unique arbitration clause. Any disputes over bills had to be submitted to arbitration. If the telephone company won, the customer was free to file a lawsuit to rehear the case. If the customer won, the judgment was final. The telephone company could not appeal. Most disputes were about a small sum of money, usually $5,000 or less. The telephone company was more concerned with keeping its customers satisfied than in winning lawsuits. It also turned out that when customers lost, they rarely refiled in court. They wanted an opportunity to be heard, and once that happened, they were willing to move on.

But where the amount of money at stake is great and/or the parties have become polarized in their positions and are not getting along at all, the resultant battle tends to be very expensive, whether it is fought in the courts or by arbitration. The result will be fairer in litigation.

 


Legal Advice on Taking Equity As Compensation When You go to Work for a Company

January 25, 2013

On a business/company start-up email list I subscribe to, someone asked for advice in the  negotiation of taking equity as compensation (either equity alone or equity and salary) when you go to work for a company. Here is one item that is often overlooked: after you get an equity offer from the company, have them put it in writing, and get it reviewed by an attorney. Too often I see poorly worded offer letters that include vague phrases that only lead to confusion or disappointment later.

For example, the offer letter might say that you will get three percent of the company. What does this mean? Three percent as of the date of the offer? when the options vest? before or after that next major round of equity financing? When calculating percentages, the company includes actually issued stock. Does it also include vested stock options? issued but not yet vested stock options? You get the idea.

Make sure your attorney reviews all of the related documents. Even though it may cost you a little more, it will be worth it in the long run. In law the fine details matter. More often than you would think, I find unpleasant legal terms in the related documentation that my client needs to know about. For more discussion on this issue, see my blog article The Lesson from Skype: Don’t Count Your Stock Options Before They Hatch.


Revenge Porn Websites such as yougotposted.com Raise Complex Legal Issues

January 14, 2013

The Internet brings up such interesting legal issues. Here is one example.

What it is

Disgusting is a good word for it. Revenge Porn Websites such as yougotposted.com allow visitors to post pictures online that are then viewable by everyone. They encourage people to post compromising, usually nude, pictures of ex-boyfriends and -girlfriends, often without their permission or even knowledge. Some of these pictures were taken without their consent. Many of the pictures were taken with their consent or by them, but only for private viewing. The clear intent of yougotposted.com is to embarrass and harass people. Here is what their sister website has to say:

Search results are your reputation.

Misleading, inaccurate or negative links in your search results adversely affect the impression you make when people Google you and can substantially impact you or your business. What Google shows people, whether it’s accurate or not, is your reputation.

Bad search results can be a real problem.

Unfavorable search results can influence how your job, school, neighbors, insurance companies, loan officers, landlords, clients, and even romantic interests view you.

The yougotposted.com website adds the caption in the form of “Jane Doe of Seattle Washington” to every set of pictures. Often these identifiers include other personal information such as what high school and college the person went to, place of employment and a link to their facebook page . As a result, if anyone searches for “Jane Doe Seattle Washington”, the first entry that comes up will be yougotposted.com’s nude pictures. Friends looking for Jane Doe, or worse, potential employers, will be directed to this website.

Unfortunately there are many similar websites, including IsAnyoneUp (now defunct), IsAnybodyDown, Pinkmeth, Texxxan (now defunct?), huntermoore.tv and 1upem. There are also websites with variations on the theme.

How they make money

Like many websites, yougotposted.com makes money from ad revenue. There appears to be an additional source of revenue as well: charging people $199 to have their pictures removed from the yougotposted.com website. yougotposted.com has a complicated procedure for requests to remove pictures and largely ignore those requests, even when their procedures are followed. The web page that tells you how to complain has an ad for another website that for $199 will protect your reputation. (“IF YOU NEED ASSISTANCE MANAGING YOUR REPUTATION ONLINE PLEASECLICK HERE –AD”) It appears that all that website does is get your pictures taken down within minutes of paying their $199 fee. There is evidence that the two website are owned and operated by the same people.

Legal Issue No. 1. Extortion and Blackmail

In my opinion, the most serious legal issue is the appearance of extortion. Extortion is illegal in most if not all states. In Washington it is illegal knowingly to obtain or attempt to obtain by threat property or services of the owner. See RCW 9A.56.110. Is it extortion if yougotposted.com encourages people to post compromising pictures of third parties and then insists that the third parities pay them money to have the pictures taken down (assuming it can be proven that the two websites are in fact linked?) It is not clear, but I will go out on a limb and say that I think so. Extortion and blackmail are closely related topics. I could not find a clear definition of the difference, but a common distinction made is that blackmail is a form of extortion that threatens to reveal embarrassing, disgraceful or damaging information about a person to the public, family, spouse or associates unless money is paid to purchase silence. yougotposted.com’s action also might constitute harassment, See for example Washington RCW 9A.46.

Legal Issue No. 2. Child Pornography

Many of the pictures were taken while the subjects were in high school or earlier when they were minors. It is against federal and state law to possess or display pictures of minors that are intended to sexual stimulate the viewer. From my experience, the website will take down any obvious pictures of minors. For pictures that are not obvious, they require so much information that it is practically impossible to convince them to remove the pictures. See their website contact page, which states

If an entry violates any state or federal law, please submit the following supporting documentation along with your request for removal: if the subject of a post is under the age of 18, a copy or photo of a driver’s license, or valid photo ID along with a copy of a birth certificate; Removal requests that are submitted without the appropriate documentation, or requesting the removal of entries not in violation of any state or federal law will NOT be reviewed or removed.

It is probably true that some people who object to their pictures being posted will claim to be underage when they are not. Can yougotposted.com be held criminally liable because they are encouraging other people to post underage pictures and they make it difficult for the pictures to be removed? The answer is not clear. The magazine and online website Backpage has been running prostitution ads for many years. It is generally accepted that many of the prostitutes that are advertised are underage. Law Enforcement officials have been trying to get Backpage to stop running these ads. They have not succeeded. (See for example Backpage Takes Heat, But Prostitution Ads Are Everywhere.) Is yougotposted.com in a similar position? Backpage cooperates with law enforcement in specific cases. If yougotposted.com is truly cooperative in taking the pictures down when asked, then I do not think they can be held criminally liable. If yougotposted.com does not cooperate in removing the pictures they might be liable.

Legal Issue No. 3. Invasion of Privacy

Most states allow for a private action for invasion of privacy. There is a common law right of privacy in Washington. This right has been described as:

One who intentionally intrudes, physically or otherwise, upon the solitude or seclusion of another or his private affairs or concerns, is subject to liability to the other for invasion of his privacy, if the intrusion would be highly offensive to a reasonable person.

If the incriminating pictures were taken without the person’s consent in a place where that person had a reasonable expectation of privacy, then posting them online would be invading their privacy. There are not clear lines of what constitutes privacy. What if someone participated in a public event such as a nude bicycle ride and someone took pictures. It is unlikely that posting of those pictures would be an invasion of privacy. What if the person visited a nude beach where no cameras or photography were allowed, and someone took pictures anyway? Not clear. The most relevant case for yougotposted.com is nude pictures that an individual took of themselves and shared with an intimate friend with the understanding that the pictures would remain private. It might depend on the facts and circumstance of each case. I would think that in the past this would be invading someone’s privacy. I hear that sharing of these pictures, often called sexting, is becoming quite common. If this is true, and it is common that the pictures get shared beyond the immediate recipient, an argument can be made that there is no longer an expectation of privacy in the pictures.

There are similar related causes of action such as false light, intrusion on seclusion, public disclosure of private facts, appropriation of name and likeness, and intentional infliction of emotional distress.

Legal Issue No. 4. Copyright Infringement

Some of the pictures are being posted without the copyright owner’s permission. For example, taking pictures taken from a persons facebook page and posting them would constitute copyright infringement. There is a limited safety net from copyright infringement for online publishers. Title II of the federal Digital Millennium Copyright Act (DMCA) limits the copyright infringement liability of certain online service providers. The act protects online service providers who store and post content online at the direction of their users. In order to qualify for the protection, a service provider must establish a system for accepting claims of copyright infringement on its website and establish a procedure to remove materials from its website that infringe upon someone else’s copyright. There is a very specific procedure that must be followed. The procedure must be posted on the website. Provided that yougotposted.com posts the proper procedure and follows it, it can not be held liable for copyright infringement committed by its users. The website has posted the proper notices, and I have no reason to assume that they are not following the procedures.

Some of the other Revenue Port Websites do not follow the proper procedures. They claim to be protected by the DMCA but because they do not comply with its requirements, they are not entitled to its protections.

The DMCA only protects websites from liability for copyright infringement. It does not protect them from liability for other legal causes of action.

Legal Issue No. 5. Voyeurism

Most of the pictures on the website appear to have been taken by or with the subject’s knowledge. But some of them were taken without the subject’s knowledge or permission. These days almost everyone has a high quality camera available at all times in their cell phone. It is easy to take compromising photos of unsuspecting victims. In response to this new technology, and for other obvious reason, some states has passed laws making it illegal to take pictures of people without their permission when they should have a reasonable expectation of privacy, in public or in private, for the purpose of arousing or gratifying the sexual desire of any person. In Washington the law is RCW 9A.44.115. The person taking the picture violates this law.

Does yougotposted.com violate the law by posting the pictures? It is not clear. The Washington statue makes taking of the pictures a crime, but it says nothing about distributing the pictures. Maybe an argument can be made that yougotposted.com is assisting in the criminal activity or encouraging the criminal activity. I am not a criminal attorney, but those arguments seem weak to me. Again, if Backpage is not committing a crime by advertising underage prostitution, how can yougotposted.com be criminally liable for posting voyeuristic pictures?

There are other problems with holding yougotposted.com criminally liable as well. In most cases you can not tell by looking at the pictures if the person being photographed gave permission. What if that person notifies yougotposted.com that the pictures were taken without their permission and asks yougotposted.com to take them down? It would be impossible to distinguish between pictures that were truly taken without permission, and pictures that were taken with permission, but now that they are posted online, the subject has had a change of heart and has changed the facts to try to get the pictures taken down. I think it would be hard to hold yougotposted.com liable for posting the pictures until there has been some formal determination, probably in a court of law, that the pictures were in fact taken without the subject’s permission. The subject should probably focus on getting the person who posted the pictures to admit to yougotposted.com that they were taken without permission. If yougotposted.com refuses to take them down after being notified by the poster, then there is a good argument that yougotposted.com is liable at least in civil court, probably for invasion of privacy (see above).

Legal Issue No. 6. Intent

The courts have struggled for some time now as to how to deal with companies that develop technology or websites that people can use to violate the law. They have held these companies not liable unless there is clear intent to encourage the unlawful activity. Can yougotposted.com be held liable in civil or criminal court simply because it is encouraging and facilitating damaging and possibly criminal behavior in others?

The first major case was the Sony Betamax case, Sony Corp. of America v. Universal City Studios, Inc., 464 U.S. 417 (1984). Sony had introduced the first successful consumer video taping machine. People were using the machine to tape programs and movies from television broadcasts. This was being done without the permission of the owners of the copyright in the materials. The court held that copying television programs and movies in order to watch them at a different time was not copyright infringement. The court went on to say that even though the Betamax machine could be used to make illegal copies of programs and movies, as long as the machine was “capable of commercially significant non-infringing uses” Sony could not be held liable for copyright infringement.

Another major case was A&M Records, Inc. v. Napster, Inc., 239 F.3d 1004 (2001). Napster was a website that allowed users to store music files online and share these files with every other user of the Napster system. Most of the files were protected by copyright and posted without the copyright owner’s permission. The court held that Napster could not be held liable simply for posting the files, since the service could be used for non-infringing purposes. But the court held Napster liable because it continued to post the files even after receiving complaints from copyright owners.

The last court decision I will discuss is the Grokster case, MGM Studios, Inc. v. Grokster, Ltd. 545 U.S. 913 (2005). Grokster tried to replicate the Napster music sharing service with one significant change; the files remained on the individual users’ computers. Grokster merely facilitated the sharing of music files from one personal computer to another. The files were never stored on a Grokster-owned computer. Grokster blatantly advertised and promoted its website as a means to share copyright protected music files. The court found that the Sony test did not apply and a company can be held liable for copyright infringement when the company actively promotes the illegal activity.

Finally there is a case in the courts right now that challenges the limits of Grokster and Napster. Recently, consortium of U.S. federal agencies, working with police forces from around the world, shut down a series of file sharing/file storage websites best known as MegaUpload. They also arrested the senior executives of the companies behind the websites — including the flamboyant apparent leader of the group Kim Dotcom — and seized various assets of the company and the individuals. There is no doubt that MegaUpload was used for the illegal sharing of copyright protected files of all types, including software, movies, and music. MegaUpload encouraged people to post files on its system and encouraged copyright by paying users who posted files based on the traffic their files generated on the system. The more traffic a person generated, the more that person was paid. MegaUplaod did have a system in place to take down files when the copyright owner notified them of the infringement.

MegaUpload is a huge website. Based on the sheer volume of use, only a small percentage of infringing files were ever taken down. MegaUpload itself claimed that it had 50 million daily visitors and traffic on its websites accounted for 4% of all Internet traffic. The website could not possibly maintain 100% compliance with take down requests. They also made no effort to prevent the same files from being uploaded again. Does that make the owners of the website civilly liable for copyright infringement? Does it make them criminals? Those are tough question and ones where I do not think there has been any case law yet. See my blog post Why the MegaUpload Arrests Bother Me) for further discussion on this particular case.

yougotposted.com is clearly actively promoting its users to post pictures that in some cases are criminal in nature, and in many cases violate individuals’ civil rights. Can yougotposted.com be held liable under the Grokster theory? Only time will tell. I hope so, but it will be a difficult argument to win.

The strongest case against these websites is for extortion, because they are actively participating in that activity and directly benefiting from it rather than passively allowing it to take place.

Legal Issue No. 7. Violation of the Consumer Protection Act

Many states have broadly-worded consumer protection laws. In Washington there is the Consumer Protection Act, RCW 19.86 which prohibits unfair methods of competition and unfair or deceptive acts or practices in the conduct of any trade or commerce. Violators can be held liable for treble damages up to $25,000, and most importantly may have to pay the complaining party’s attorneys fees. It is likely that yougotposted.com’s activities are in violation of Washington’s Consumer Protection Act.

Legal Issue No. 8. Practical Considerations

There are practical considerations as well. There is considerable talk on the Internet about who is behind these types of websites. Specific names are mentioned. But suspecting that someone is responsible for a particular website and proving it are very different. If you can not prove a particular person is responsible for a particular website, you will not be able to get a judgment against them even if you can show that the website violated your legal rights.

It may also be difficult to locate these individuals. In order to start a lawsuit against someone, you must have that person personally served with a copy of the lawsuit. If you can not locate them, you can not serve them and you can not proceed with your lawsuit.

Even if a judgment is obtained, you still have to collect. It is unlikely that these individuals have much money. Their business model may result in several payments of $200 or so per day, but that is not a lot of money after paying for the cost of maintaining and defending the website. Also, in my experience the type of people who would run websites like these do not do well at business. They may be able to obtain small amounts of money with minimal work, but they are usually not capable of holding on to that money or converting it to large scale success.

It is very easy to identify the companies that are hosting the websites. These companies usually have nothing to do with the content of the websites they host. They are just computer operators. It may be possible to get them to remove the offending websites simply by asking. It would certainly be easy to serve them with a cease and desist order if you were to obtain one from the court. But there are many website hosting companies around the world. It is possible that shutting down a particular host will just force these people to place their websites with hosts in some far off country with lax law enforcement where it will be hard to enforce any court order.

It may be that these individuals are not sophisticated enough to avoid the law in which case one hopes that they will eventually be forced out of business.

Legal Issue No. 9. The People Who Post Can Be Liable Too

The people who post the pictures on these websites face similar liability. They are not responsible for extortion or violation of consumer protection acts. Depending on the nature of the pictures, they can be liable for invasion of privacy and voyeurism. They are criminally liable for child pornography if the pictures contain images of children. They are liable for copyright infringement of any pictures they post without permission that are protected by copyright. While the operators of websites may have to be given an opportunity to take down the pictures before they can be liable for copyright infringement, no such protection is available to the people who posted the pictures in the first place. As soon as they copy the pictures onto the website they have committed copyright infringement.

What do you think?

Have you had any experiences with yougotposted.com or any similar website that you care to share? Any thoughts on the law?

Update

yougotposted.com is now ugotposted.com. 

Other Articles on Revenge Porn Websites on My Blog.

Fighting Revenge Porn Websites – some useful links

Some More Thoughts on Revenge Porn Websites Legal Issues


Washington Marijuana Startups present interesting legal issues

December 11, 2012

Washington has just passed new legislation that makes possession of small amounts of marijuana legal within the state. The legislation also authorizes the state to develop a system to license businesses to grow and sell marijuana. Many of the new marijuana businesses may be mom and pop operations. But the market potential is huge, estimates vary up to $6 billion per year in Washington alone. That is attracting venture capital and high tech entrepreneurs who intend to apply high tech startup business methods to marijuana sales. See Investors see profit potential in new pot law and Former Microsoft Exec plans high-end marijuana business.

Most of the legal issues for marijuana businesses will not be new. Regulations for marijuana sales will probably be similar to regulation of alcohol sales. Most marijuana business start up legal issues will be similar to the already existing high tech startup legal issues. There will be issues of management, ownership, control and funding. Intellectual property protection will be important, especially branding, which is a form of trademark law.

But there will be new challenges as well. For example, marijuana possession and sale remain illegal under federal law. Contracts to perform illegal acts are generally not enforceable. Would an agreement to run a marijuana business be unenforceable because it is against federal law, even though it is legal under state law? It may turn out that such an agreement is enforceable in Washington state courts, which apply state law, but not in federal courts, which may be included to apply federal law. To be safe, it is probably best to include a clause in any marijuana business contract that states that the contract is governed by Washington state law and that any lawsuit brought to enforce the contract must be brought in a Washington state court. I am sure that other unusual legal issues will arise as well. I will try to write about them as they arise. 

Please join the discussion. What do you think? Given the risks involved, would you invest in a marijuana startup? Would you work for one in return for equity? Does it make sense to apply the high tech startup business model to marijuana sales?

Update January 28, 2013: See also Pot entrepreneurs seek funding from investors.

 


Upcoming Talk: Legal Issues for Online Publishers

December 3, 2012

Update: The article on my talk “Legal Issues for Online Publishers” is now available on my law firm website.

My next talk is on Legal Issues for Online Publishers.  It is this Wednesday December 5. I am doing something a little different this time. It is a private talk for a single company. I am writing an article on the subject which I will be posting on my website soon.

 


Upcoming Talk: Legal Issues for Online Sellers

September 27, 2012

Update: The article from the talk is now available on my law firm website here.

My next scheduled talk is on Legal Issues for Online Sellers,  at the Sellers’ Conference for Online Entrepreneurs (SCOE) 2012 this Sunday, September 30, 2012 here in Seattle.

I am going to provide an overview of the legal issues you need to be aware of as an on-line seller. I will start with the basics, including what form of business entity you should be and why and where to register that entity, and a review of the Amazon and eBay seller agreements. Then I will cover a number of other important legal issues facing the on-line seller. These businesses touch upon many different areas of law. Most of them are technology related. The law is constantly changing as it tries to keep up with the changes in technology.

I hope to turn that talk into an article available for download on my law firm website and into a series of blog entries.