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Archive for June, 2014

Bitcoins: Have You Started Thinking About the Concept?

Posted on: June 10th, 2014

By: John Goselin & Stephanie Stewart 

Bitcoins.  Have you heard of them?  If not, you probably will.  Are you starting to think about how bitcoins will impact your business?  If not, you probably should.

The media describes bitcoins as a “virtual” or “crypto-“ or “cyber-currency”.  It is a peer-to-peer payment system in which digital bitcoins can be exchanged for money, goods, services, or newly created bitcoins.  Bitcoins are a relatively new development within the last five years.  Governments worldwide are struggling to determine how to classify them, how to regulate them, and what to do about them and with them.

Defining bitcoins as a currency is the subject of some dispute because bitcoins operate without a central authority, have no single administrator, and are not backed by any government.  For example, both Finland and Russia currently treat bitcoins as a commodity as opposed to a currency.  Yet, they seem to be gaining wide acceptance.  Apple recently announced that it will permit apps within the ios Apple Store that process bitcoin transactions.  The first bitcoin ATM has made its debut in a Las Vegas casino and a manufacturer is marketing the new bitcoin ATMs for wider use.  A Malaysian online electronics retailer has added a bitcoin payment option to its website.

Because bitcoins are still in their infancy, there is little clarity regarding the legal rules relating to their use. It is not even clear whether it will be a federal or state issue or a combination thereof.  We do know that the IRS has issued guidance in which the IRS stated that bitcoins are treated as property for federal tax purposes.  That would seem to suggest that if people lose their bitcoins, that can constitute economic damages although nothing is certain.  For a discussion regarding bitcoin depositor protection and developments, click here.

The anonymity and lack of regulation associated with bitcoins has caused some regulatory agencies to note the high potential for fraud and abuse.  Investor alerts have been issued by both the SEC and FINRA  related to bitcoins.  In 2013, the SEC charged a Texas man with operating a bitcoin Ponzi scheme.  And earlier this month, the SEC announced a settlement with two bitcoin ventures for failure to register the offerings with the SEC.  How long before broker-dealers and investment advisors are trying to grapple with the question of whether bitcoins should be part of an investor’s portfolio?  It seems likely that other federal and state regulators will start looking at bitcoins too.  If history holds true, we will see a period of time with few if any rules followed by a period of contradictory regulations before someday in the future, the business community will enjoy certainty regarding how bitcoins work and should be handled.

At present, however, no one really knows how people might decide to use bitcoins as they continue to grow in popularity and acceptance.  In an attempt to study a bitcoin ecosystem, MIT is providing each of its undergraduate students with $100 in bitcoins this fall.  The experiment is designed to encourage research into the technology behind how bitcoins are exchanged and the economics of how people use bitcoins.  It will be interesting to see how the study will turn out.  Nevertheless, real world businesses may find themselves dealing with bitcoins sooner rather than later, and before they really understand how they work.

It appears that bitcoins are here to stay and it is time for the business, legal, and insurance community to start thinking seriously about what bitcoins means for businesses.  Legal disputes involving bitcoins seem to be inevitable.

We will be following the evolution and potential issues regarding bitcoins.  Stay tuned for more information, analysis, and updates.

UPDATE! Georgia’s Expert Affidavit Requirement: Georgia Supreme Court Set to Weigh In on the Right to Cure Defects

Posted on: June 10th, 2014

By: Michael Eshman  

We recently reported on the Georgia Court of Appeals ruling that recognized a broad right to cure defects in the affidavit required in professional malpractice actions in Georgia, which included the right to get a new, competent expert to provide a new affidavit with an amended complaint.  The book is not closed on this issue.  The Georgia Supreme Court recently granted a writ of certiorari to consider this issue and will hear oral argument in September.  The Court stated that it is particularly concerned with the following issue:

In a professional malpractice action, where the plaintiff files his complaint with an affidavit by a person not competent to testify as an expert in the action, does O.C.G.A. § 9-11-9.1(e) permit the plaintiff to cure the defect by filing an amended complaint with an affidavit by a competent expert?

The case at issue is a medical malpractice action, but the issue to be addressed by the Georgia Supreme Court will have a broader impact on all professional malpractice actions in Georgia.

Even a Blind Monkey Can See an Alabama “Occurrence”

Posted on: June 9th, 2014

By: Michael Lord

The Alabama Supreme Court recently found that Alabama law is part of the growing number of jurisdictions finding coverage for property damage arising out of defective workmanship.  In  Owner’s Insurance Co. v. Jim Carr Home Builder LLC, S.E.3d, WL1270629 (Alabama, March 28, 2014),  the homeowners contracted with the builder to reconstruct a new home in Alabama for $1.2 Million.  Within a year of substantial completion, the homeowners found substantial leaking throughout the house causing water damage to floors and other areas.  The builder’s expert admitted “even a blind monkey” could see the damage.

Despite repair efforts by the builder, the homeowners were unsatisfied and sued.  The builder’s CGL carrier Owner’s Insurance (the “Carrier”) defended under a reservation of rights, then sought a declaratory judgment as to coverage.  After the claim against the builder was submitted to arbitration, the homeowners won an award of $600,000 and then won summary judgment on the Carrier’s prior declaratory judgment action.

The Court rejected the Carrier’s argument that the property damage issue could not be the result of an “occurrence” under the policy.  The Supreme Court noted that the policy defined an occurrence as “an accident, including continuance or repeated exposure to substantially the same general harmful conditions.”  The Carrier argued that the only scenario where faulty workmanship would cause an “occurrence” was where there was damage to property that was not part of the construction or repair project.  The Supreme Court held that the definition of “occurrence” does not exclude property damage caused by the insured’s faulty workmanship and that damage to other parts of a structure caused by the faulty workmanship can constitute “property damage caused by or arising out of an occurrence”.  Thus the Court held that the damages alleged in the case were not excluded by the term “occurrence”.  Simply put, if a contractor builds a house, and the roof leaks and damages the floor, even though both roof and floor were built by the same contractor, damage to the floor may be covered as caused by an “occurrence”.

The Georgia Supreme Court in Taylor Morrison Services, Inc. v. HDI-Gerling America Insurance Co., 293 Ga 456, 746 S.E.2d 587 (2013) made a similar analysis.  The Georgia Supreme Court analyzed the identical definition of “occurrence” as in Carr, and found that damages caused to a house by foundation issues could constitute an “occurrence” even though the house and foundation were built by the same contractor.

The decision in Carr clarifies Alabama law. Under standard CGL policies, Alabama now joins the majority of states in holding that an “occurrence” does not exclude property damage caused by defective workmanship. Damage to other parts of the structure, even if a blind monkey does not see it, can constitute “property damage” covered by the policy. 

Does the First Amendment Protect the Right to Videotape the Police?

Posted on: June 5th, 2014

By: Mark Begnaud 

Yes, according to the First Circuit Court of Appeals.

On May 23, 2014, the First Circuit reaffirmed the right to videorecord officers performing their duties in public, and held that this right is so “clearly established” that New Hampshire officers could not claim qualified immunity after arresting a woman for filming a traffic stop.

In the case, Gericke v. Begin, Carla Gericke was arrested after she videotaped officers conducting a traffic stop of her friend’s car.  Gericke had been driving another car, and she videotaped the traffic stop from a nearby parking lot.  Officers arrested Gericke when she refused to provide either the camera or her license and registration, and they charged her with three offenses, including “unlawful interception of oral communications” (illegal wiretapping).  The prosecutor later dropped all charges.

Gericke brought suit, alleging that the officers illegally retaliated against her for exercising her First Amendment right to videotape the traffic stop when they arrested her for illegal wiretapping.  The officers argued that (1) there is no First Amendment right to videotape a traffic stop, and (2) even if there is such a right, that right is not “clearly established,” and the officers were immune from suit under the doctrine of official immunity, which protects a law enforcement officer from a Section 1983 lawsuits unless the officer violates a right that is “clearly established.”

Relying on their 2011 ruling in Gilk v. Cunniffe, the First Circuit reaffirmed that the First Amendment protects the right to film officers performing their duties in public.  The Court then made clear that such right is so “clearly established” that the officers were not protected by official immunity:  “any reasonable officer would have understood that charging Gericke with illegal wiretapping for attempted filming that had not been limited by any order or law violated her First Amendment right to film.”

Importantly, the Court tempered its ruling by noting that some traffic stops may be different, and may require safety measures that incidentally prevent a person from videotaping.  For example, an officer could command that bystanders disperse, and this command could be appropriate for safety reasons even when directed at a person who is filming.  This question – when may an officer command a person to stop filming for safety reasons? – remains open for further litigation.

With the rapid proliferation of smartphones, more and more citizens carry with them what are, in essence, small videocameras, easily able to record videos and upload them to the internet.  As the First Circuit noted in its 2011 ruling, “changes in technology and society have made the lines between private citizen and journalist exceedingly difficult to draw.”  As Gericke demonstrates, the courts appear to recognize this shifting technological landscape and to protect the citizen-as-journalist.  In fact, both the Seventh Circuit and the Civil Rights Division of the U.S. Justice Department have also recognized the First Amendment right to videotape police officers performing official duties.  It is crucial for private citizens and law enforcement officials alike to understand this newly-recognized right in a technologically advancing world.

The case is Gericke v. Begin, 12-2326, 2014 WL 2142519 (1st Cir. May 23, 2014).

Lessons from The eBay Data Breach

Posted on: June 3rd, 2014

By: David Cole and Behnam Salehi 

Earlier this month, eBay became the latest victim of a high-profile cyber-attack, following recent attacks on large businesses like Target and Adobe. The attack on eBay resulted in one of the biggest data breaches in history, affecting 145 million of their users. The compromised data included user names, addresses, phone numbers, encrypted password, and dates of birth. While hackers were able to access non-financial user information, they do not appear to have retrieved any credit card or banking information. This is because eBay stored user financial information separately and in encrypted formats.

There has been a lot of criticism of eBay’s response over the past few weeks.  Some argue that it waited too long (approximately two weeks) to notify affected users after it first discovered the breach, and then downplayed the severity of the breach when it went public.  Perhaps the criticism is justified, but as anyone who has gone through a data breach knows, there are many nuances involved when making decisions about how to respond.  Sometimes these nuances are overlooked when the media takes hold of a story.  For instance, giving notice of a data breach too quickly, without conducting a full forensic examination to determine the scope of the breach, can be harmful by causing misstatements or requiring multiple notices to be sent.  Also, reassuring users that information like credit card and bank account numbers was not exposed is important and not necessarily an effort to downplay a breach.

What do you think?  Was eBay’s delay in notification proper? Did eBay maintain an effective data security plan?  Did it downplay the severity of the breach too much?  These answers may depend on factors we may not know.  Still, there are few lessons that can be learned from eBay’s experience:

  1. The fact that there is so much debate and public attention on eBay’s response shows how complex these situations are.  We have talked about it so many times, but this is a good example of why it is important to work with experienced breach counsel when responding to a data breach.  The decisions that need to be made – such as when and how to give notice – are too varied and complex to risk going it alone.
  2. All organizations needs to have a data breach response plan in place before an incident occurs.  Having this plan will establish a protocol for when and how to sound the alarm when a data breach occurs, who the members of your data breach response team will be, what outside vendors you will use, and how you will handle notice to affected individuals.  You do not want to be asking these questions for the first time in the midst of a breach.
  3. Organizations should encrypt all sensitive data, such as PII, financial, and health information.  Most data breach notification laws only require notice when unencrypted data is lost.  In eBay’s case, the situation would have been even worse than it is if financial information had not been encrypted.