One of the hot topics among planners over the last several years has been how to utilize the laws enacted by several states (now five) allowing a person to create his own self settled trust or domestic asset protection trust (called a “DAPT”), which have been promoted as not reachable by creditors, if they satisfy the elements of the particular state statue. In this type of trust, the client transfers his own assets to a Trust in which he is a beneficiary and, while trying to get the best of all worlds, remains a beneficiary of his own assets, but prevents creditors from reaching those assets if financial times turn south on him. Clients also have utilized the laws of foreign jurisdictions such as Bermuda, Cayman Islands and other offshore havens which were friendly to debtors and not so to creditors to try to achieve these same goals with mixed success. A recent case in the Bankruptcy Court for the District of Alaska, one of the five states having such favorable legislation, has raised a real question of whether these DAPTs will work, especially if a bankruptcy is involved.

 In Battley v. Mortensen, an Alaskan resident who was solvent at the time, set up his own DAPT, which was for his own benefit as well as his children. Subsequently he fell into hard times and filed for bankruptcy protection within the 10 year clawback period under the applicable Federal Bankruptcy Code provisions. The Bankruptcy Trustee successfully attacked the trust on behalf of creditors and was able to reach the assets. Battley claimed under Alaska law that the Trust met all the safe harbors rules, including that it was not created to hinder, delay or defraud creditors as he was solvent at the time it was created. The Bankruptcy Court did not agree, however, and held that the Federal Bankruptcy law superseded Alaska law, which had a 4 year clawback period. The Court’s view was that one of the purposes for a person to create one of these types of DAPTs was to do exactly that, i.e. to hinder, delay or defraud creditors at some time in the future, even though they were solvent at the time such Trust was created. The case was ultimately settled and therefore will not be appealed. Where the law goes from here is only a matter of speculation and time as this favorable result will clearly spur creditors to challenge these types of trusts in order to try to reach their assets.

Why does this matter to a Virginia resident? There have been groups advocating for similar legislation to be passed in Virginia in order to be on parity with these other states. Also, some advisors have recommended Virginia residents create a DAPT under the laws of the one of the states which has this favorable legislation, attempting to create enough nexus with that other state to have their trust governed by that state’s favorable laws. The question of what is sufficient to create that nexus has always been an open question, especially in current times, with each respective state trying to generate more revenues, through taxes and applying its own laws to reach such income. If there is not sufficient nexus, there is an additional risk that the trust may not be recognized under the other state’s laws.

So does this mean that a client should not utilize DAPTs? One must remember that the Mortensen case involved a bankruptcy within the 10 year clawback period under the Bankruptcy Code. If there had been no bankruptcy, there may have been a different result. A client needs to realize that if he elects to utilize one of these Trusts, he must have the risk tolerance of operating in a world where the rules are uncertain and sometimes develop after the fact in ways which may be substantially different than assumed under his plans. However, there still remain other alternatives for Virginia residents to consider. These include trusts set up by parents or other third parties for the person to be protected, transfers to spouses, joint tenancies, transfers to trusts for children and the use of LLCs and other entities to protect the assets from claims of creditors. If the Mortensen case remains good law (which clearly is not known at this point), it appears that there still may be no such a thing as a free lunch. –James G. Steiger

Franchisors continue to pursue claims for lost future profits (e.g., lost future royalties and advertising fees), even after the franchisor has terminated the franchise agreement.  The only sure way for a franchisee to eliminate claims for such damages is up front, when the franchise agreement is being negotiated.  Franchisees often bargain to exclude (or attempt to exclude) liquidated damages clauses – specifically granting the franchisor a set sum of damages upon termination of the franchise agreement, even by the franchisor – particularly in non-hotel franchise agreements, where the use of such liquidated damages provisions are not as well-established.

Franchisors may assert the right to recover such lost future profits damages from terminated franchisees, even when the franchise agreement is completely silent on the franchisor’s right to recover future lost profits damages.  For example, in Meineke Car Care v. RLB Holdings, Bus. Franchise Guide (CCH) ¶14,580 (4^th Cir. April 14, 2011) the United States Court of Appeals for the Fourth Circuit recently held that North Carolina law generally permitted the recovery of future lost profits and that nothing in the parties franchise agreement or in the nature of the franchise relationship precluded such an award.

Accordingly, a prudent franchisee should insist on an addendum to the franchise agreement eliminating any obligation to pay future lost profits damages (e.g., any amounts designed to compensate the franchisor for royalties, advertising fees, etc. for the remaining term of the franchise agreement after its termination). — Stephen E. Story

On November 2, 2011, the Center for Medicare & Medicaid Services (CMS) final rule governing Accountable Care Organizations (ACOs) under the Medicare Shared Savings Program appeared in the Federal Register. ACOs are legal entities that are designed to encourage collaboration between health care providers by allowing members of the ACO to share in any savings it generates with respect to Medicare beneficiary expenditures. The final rule presents several substantial changes from the proposed rule, many of which may make the formation of an ACO a more attractive option to healthcare providers. The most significant of the new developments are discussed below.

First, the track one ACO model no longer presents a downside risk to formation as the final rule eliminates the requirement of the proposed rule that an ACO pay back any incurred shared losses. In line with this change, the provision that CMS will withhold the first 25% of any savings in order to recover potential future losses has been eliminated. Second, the addition of the advance payment ACO initiative now offers selected participants access to capital to aid in the formation of an ACO. CMS will recoup the advance payments from the ACO’s shared savings. Third, the proposed sixty-five quality measures used to establish quality performance standards have been reduced to thirty-three. Fourth, ACOs may now share in the first dollar of any savings that they generate. This rule is in contrast to the proposed rule requirement that the ACO shares only in savings that are in excess of 2% of the savings benchmark. Finally, the savings cap has been increased to 10% for the first three years of participation (up from 7.5% in the first two years).

A copy of the final rule can be found here.  –Meagan J. Thomasson

Question:  What do the Navy Seals and Occupy Wall Street have in common? 

Answer:  Trademark envy.

In an earlier post I commented on a situation in which a number of would be owners of trademark rights in NAVY SEALS and SEAL TEAM names filed applications with the U.S. Patent and Trademark Office, after the real Seals succeeded in taking down Osama Bin Laden.  My hope then was that those entrepreneurial attempts to capitalize on the media attention paid to Seal Team 6 would fail, and that the U.S. Navy would end up as the sole owner of these names.  That has pretty much come to pass, as all of the trademark applications noted in the previous posting except for two filed by the U.S. Navy have either been abandoned or run into problems.

Now we have another name getting the same kind of media attention as the Navy Seals did earlier this year – Occupy Wall Street.  Just as happened then with the Navy Seals names, a number of applications have been filed seeking federal trademark rights in Occupy Wall street or variations of that name.  Prior reports indicate that two of those applications, both for Occupy Wall street, were filed hours apart on the same day, October 24, 2011.  Of those two applications, the one that was filed first was by a private company seeking trademark rights in OCCUPY WALL STREET as a brand name for a variety of products, including such things as backpacks and t-shirts and other clothing items; whereas the later-filed application covering some of the same products was filed by participants in the actual Occupy Wall Street protest. 

To the extent of overlap between the products covered by those two applications, the one that was filed first will be first in line for consideration by the U.S. Patent and Trademark Office (PTO).  So, ironically, the applicant whose actions have resulted in the name’s prominence and popularity will have to wait for their application to be considered until the PTO has completed its consideration of the one filed earlier by a capitalist-minded company.  Moreover, both of these October 24 applications may have to wait for the PTO to process and rule on another one for the same types of products for the name OCCUPY WALL ST., which was filed by yet another party on October 18, 2011. 

In addition to these three applications, others have been filed since the protests began in mid-September, attempting to obtain rights in the word OCCUPY or variations of it.  These include OCCUPY D.C. 2012, EVERYWHERE I GO I OCCUPY and my personal favorite, OCCUPY LAMBEAU CAMP RANDALL WATER STREET KK STATE STREET PACKARD AVENUE RUSH STREET. 

Unlike the Navy Seals trademark situation, which appears to be marching towards an orderly and proper outcome, the future of the competing OCCUPY trademark applications will most likely be chaotic, maybe even anarchic.

Being obliged to impart at least one insight on trademark law from all of this, it is that both the Navy Seals and Occupy WALL STREET trademark application/registration situations illustrate that to claim and obtain trademark rights in a name, phrase, design or symbol, one does not have to be the originator of it.  Instead, these rights derive from first use of the mark in commerce for particular goods or services, and/or being the first to file an application with the PTO to register as the owner of those rights. 
-Robert E. Smartchan

The Foreign Corrupt Practices Act (“FCPA”) includes two primary components: (1) the anti-bribery provisions, and (2) the recordkeeping and internal controls provisions.  This post will discuss the anti-bribery component, which prohibits the offer or payment of money or anything of value to a foreign official to obtain or retain business.  It is important for companies to realize that the phrase “anything of value” is construed broadly and is not limited to money.  In addition, there is no minimum value that would exempt a payment or gift from the anti-bribery provisions of the FCPA. 

Although the anti-bribery provisions only prohibit bribes to a “foreign government official,” this term is also construed broadly and includes the officials or employees of a foreign government, including its departments, agencies and instrumentalities, public international organizations, and persons acting in an official capacity for or on behalf of such entities.  Furthermore, a foreign government official also includes low level employees of state-owned entities.  You should consider the following when determining whether an entity will be interpreted as a “state-owned” entity:

   -  The foreign state’s characterization of the entity/employees

   -  The foreign state’s degree of control over the entity

   -  The entity’s purpose

   -  The entity’s obligations and privileges under the laws of the foreign state

   -  The creation of the entity

   -  The ownership of the entity (financial support) 

If you would like more information on the anti-bribery provisions of the Foreign Corrupt Practices Act, please feel free to contact me at recoley@kaufcan.com. 
-R. Ellen Coley

In a case filed earlier this year in federal court in the United States District Court for the Eastern District of Virginia (Civil Action No. 2:11cv43), plaintiff, VS Technologies, LLC, alleged that defendant, Twitter, Inc., infringed its patent entitled “Method and System for Creating an Interactive Virtual Community of Famous People.”  In response to the complaint, Twitter, Inc. denied the infringement allegations and claimed that the patent was invalid as anticipated, obvious or abstract.  The technology at issue allegedly was invented by a patent lawyer in Northern Virginia with the rights to the patent later assigned to VS Technologies, LLC.  Through trial, VS Technologies, LLC claimed that Twitter, Inc. used its patented technology to develop Twitter, Inc.’s “browse interest” page on the social networking website.

After six days of trial in the federal court in Norfolk in front of Judge Henry Coke Morgan Jr., the jury returned a verdict in favor of Twitter, Inc. on October 31, 2011.  The jury found no infringement of the patent by Twitter, Inc. and found that the patent was invalid as anticipated, obvious, and abstract.  Based on the comments made after trial, it is unclear whether VS Technologies, LLC plans to appeal the decision to the Court of Appeals for the Federal Circuit.
–Kristan B. Burch

Knowing that companies are dealing with many pieces of the employment law puzzle, K&C is pleased to provide a new program designed to help employers solve the employment law puzzle. The 28th Annual Employment Law Update “Putting the Pieces Together” will debut at the new Virginia Beach Convention Center on Thursday, November 10th.

The K&C Employment Law Team will present a variety of educational workshops and will feature several representatives from a number of government agencies, as well as an intriguing presentation by a lawyer who specializes in suing employers. Topics to include: What Employers Should Know About Social Media; Avoiding Discrimination Claims; Handling Unemployment Claims; Current Wage-Hour Issues; Safe Interviewing/Hiring Practices; and more.

The 28th Annual Employment Law Update will provide employers with valuable tips to piece together their employment law puzzles and reduce potential liability. For more information, click here or contact Kerry Martinolich at (757) 624-3232.  –David J. Sullivan