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Archive for March, 2019

SEC Holds Public Forum as Part of Increasing Efforts to Regulate Digital Assets, Cryptocurrency Exchanges, and ICOs

Posted on: March 28th, 2019

By: Jennifer Lee

The Securities and Exchange Commission will be hosting a public forum on distributed ledger technology and digital assets in Washington DC on May 31, 2019. This is a part of the SEC’s increasing efforts to regulate cryptocurrency exchanges and initial coin offerings (ICOs) that have been proliferating unchecked until very recently.

Since digital assets are still an emerging concept, regulators, such as the SEC and the Financial Crimes Enforcement Network (FinCEN), a bureau of the U.S. Department of Treasury, have been struggling to figure out how the existing regulatory framework applies to cryptocurrencies, exchanges, and ICOs. However, as established financial institutions, such as Fidelity, begin to enter the digital asset space, the SEC has ramped up its efforts to ensure that companies are aware of and are in compliance with all applicable laws and regulations. Depending on the nature of the services provided, companies may be subject to the Securities Exchange Act of 1934, Bank Secrecy Act, and states’ money transmitter licensing statutes.

The push for more oversight over cryptocurrencies comes at the heels of high-profile scandals involving cryptocurrency exchanges and ICOs that left consumers and investors alike with nothing but questions after losing their fiat and digital currencies.

The very first incident involved Mt. Gox, a bitcoin exchange based in Tokyo, Japan that operated between 2010 and 2014. Cryptocurrency exchanges allow its users to exchange fiat currency (e.g., U.S. Dollars) into cryptocurrency and provide digital wallets for users to store their cryptocurrency. At its heyday, it was handling over 70% of all bitcoin transactions worldwide. However, it ran into a host of problems in 2013 continuing on to 2014 until it stopped operations and filed for bankruptcy. During the litigation that ensued, it was revealed that Mt. Gox somehow lost approximately 750,000 of its customers’ bitcoins, valued at around $473 million at that time.

More recently, in February 2019, the cryptocurrency exchange QuadrigaCX announced that it was missing approximately $145 million in digital assets. Its executives, consumers, and law enforcement are in a frenzy to determine what happened to the missing digital assets as the only person who had access was QuadrigaCX’s founder Gerry Cotten, who had passed away the month prior.

These incidents are not limited to cryptocurrency exchanges, especially as ICOs have become more popular in recent years. ICOs are similar to IPOs in the sense that investors can buy a stake in a particular cryptocurrency (referred to as a token), but unlike IPOs, a token’s value is not tied to the value or performance of an underlying company. In November 2018, the SEC settled charges against professional boxer Floyd Mayweather Jr. and singer/producer DJ Khaled for failing to disclose payments they received for promoting investments in ICOs. This suggests that despite the decentralized nature of cryptocurrencies and ICOs, the SEC has assumed jurisdiction over the space and its players.

Accordingly, broker-dealers and investment advisory firms looking to get involved in the digital asset space, including operating cryptocurrency exchanges, providing trading platforms for cryptocurrencies, or facilitating ICOs, must ensure that they are in compliance with all existing laws and regulations that govern traditional financial transactions and investments.

For more information or to inquire about the firm’s services related to digital currencies, please contact Jennifer Lee at [email protected].

Sexual Harassment Settlements in New Jersey – Out Of The Dark But Into The Unknown

Posted on: March 28th, 2019

By: Justin Boron

Earlier this month, New Jersey joined the growing group of states that – spurred on by the #MeToo movement – have passed laws regulating settlements of sexual harassment and discrimination claims.

With an asserted purpose of improving transparency and exposing workplace harassment to public view, New Jersey and other states, including California, New York, and Washington,[1] have made confidentiality agreements and non-disclosure agreements unenforceable in sexual harassment cases.[2] Several other states have similar bills pending in their respective legislatures.[3] And Congress similarly has eliminated the tax deduction for settlement of sexual harassment cases when there is a confidentiality clause related to the sexual harassment claims that is included within the settlement agreement.[4] Notably, however, the recent amendment to the New Jersey Law Against Discrimination is broader than many of its counterparts because it encompasses – in addition to sexual harassment claims – claims based on discrimination, retaliation, and harassment involving protected classes beyond sex.

Consistent with the national conversation on this issue, the passage of the New Jersey law invigorated debate about whether the legislation is constitutional, whether it is practicable, and whether it will ultimately achieve the end that it seeks.

At this point, it is simply too early to tell. But the legislation is raising interesting issues to watch as it takes hold in the legal practice across the country.

Is a confidentiality provision important to employers?

NDAs and confidentiality agreements have become part and parcel of almost every settlement agreement. They are so standard that attorneys regularly assume they will be included in a final settlement agreement without ever mentioning them in the negotiations. But the presumption begs the question of how important confidentiality is to an employer in a settlement agreement.

The answer will likely depend on the particular case and the particular employer, but typically employers will insist on a confidentiality agreement so the chatter about the dispute does not live on in the public eye (particularly through social media) even after the matter is resolved. Having said that, confidentiality is probably more important in a particularly bad sexual harassment case against a particularly high-profile employer than in an isolated claim against a mid-sized, single-shop employer. Going forward, counsel should seek input from their client on this issue given that federal law could impact tax treatment of the settlement payment and given that state law might outright prohibit it.

Will plaintiffs actually disclose the settlement and nature of the case?

This question bears on whether the legislation will achieve the transparency that it set out to accomplish. Advocates of the legislation presumably would not want to require an alleged victim to disclose his or her claim involuntarily. Indeed, some of the state laws passed, like New Jersey’s, would allow an employee to keep a settlement confidential if he or she chose to. If prior experience is a guide, many plaintiffs are relieved to have resolved what would be a difficult case involving public testimony about a sensitive subject. In those cases, an express confidentiality agreement might not even be necessary (although typically advisable from a belt and suspenders perspective).

Will it lower the amount that an employer is willing to pay to settle a case?

Again, the data set is not there yet to answer this question. But it is a legitimate concern. If an employer expects to confront continuing publicity about sexual harassment in its workplace even after settlement, particularly for a case where the employer might question the credibility of the allegations, it might be less inclined to pay as much money to resolve a single claim. Another reason would be that a public settlement could invite “copycat” claims, and the initial settlement amount would set a precedent for the value of each claim. This risk would motivate an employer to keep publicly disclosed settlements low to avoid a run of high dollar demands.

Final Takeaway

Generally, we expect employers to view this legislation skeptically, and it will continue to stoke critics of governmental restraints on the freedom of contract. But the silver lining is that the legislation elevates confidentiality agreements from being an after-thought in settlement discussions to a topic that attorneys must discuss with their clients and each other before reaching a final resolution.

If you have any questions or would like more information, please contact Justin Boron at [email protected].

[1] See Rev. Code Wash. (ARCW) § 49.44.210; NY CLS Gen Oblig § 5-336; Cal Code Civ Proc § 1001.
[2] See N.J. Senate Bill 121 at https://legiscan.com/NJ/text/S121/2018.
[3] See https://www.shrm.org/resourcesandtools/hr-topics/behavioral-competencies/global-and-cultural-effectiveness/pages/states-take-action-against-nondisclosure-agreements.aspx.  For a full list of state legislation, see https://www.jdsupra.com/legalnews/the-sexual-harassment-legislation-watch-24212/.
[4] See 26 U.S. Code § 162.

Can a California Lawyer be Disciplined for a Paralegal’s Misconduct?

Posted on: March 27th, 2019

By: Greg Fayard

In some circumstances, a California lawyer can be disciplined by the State Bar for a paralegal’s misconduct. This type of discipline was not possible under the State’s old lawyer-ethics rules. Rule 5.3 of the new rules requires attorney-managers to make sure nonlawyers—such as law students, investigators, legal assistants or paralegals—are not violating any ethical rules. A supervising lawyer, which could be an associate (so long as he or she has direct supervisory authority over the nonlawyer), can be responsible for the ethical breach of a paralegal if the lawyer is aware of an ethical violation, had a chance to avoid or mitigate the ethical lapse, but did nothing.

For example, if a paralegal is disclosing confidential client information without the client’s consent (a clear ethical breach, see Rule 1.6) and the paralegal’s supervisor knew about it, but did nothing, the supervising lawyer can be disciplined for the paralegal’s misconduct.

California lawyers, therefore, are obligated to make reasonable efforts to ensure that their law office has measures which assure that nonlawyer conduct is compatible with the professional obligations of lawyers. This directive applies to both nonlawyer employees and independent contractors. Further, under Rule 5.3, any measures ensuring nonlawyer ethics compliance should consider whether the nonlawyers have legal training.

If you have any questions or would like more information, please contact Greg Fayard at [email protected].

How Do You Like Them Apples? Eleventh Circuit Slices Up New “Comparator” Standard for Intentional Discrimination Cases

Posted on: March 26th, 2019

By: Tim Boughey

Last week, in Lewis v. City of Union City, Ga. et al., No. 15-11362 (11th Cir. March 21, 2019) (en banc), the Eleventh Circuit issued an important decision addressing the proper comparator analysis applied to circumstantial claims of intentional discrimination (whether under Title VII, Equal Protection, or Section 1981).  At the core of every discrimination case, the employee must produce evidence the employer acted with an impermissible, discriminatory motive or else suffer the dismissal of their case at summary judgment. In most discrimination cases, the employee lacks direct evidence of discrimination – such as clearly sexist, racist, or similarly discriminatory statements or actions by the employer in connection with an employment decision. Without direct evidence, the employee must instead come forth with circumstantial evidence supporting an inference of intentional discrimination. In most cases, the employee proceeds down the familiar McDonnell Douglas framework and attempts to establish that the employer treated a so-called “similarly situated” employee outside of the employee’s protected class more favorably (in lawyer speak a “comparator”).

Over the years, the Eleventh Circuit made efforts to define “similarly situated”, and by its own admission, created something of a “hash” of the concept. In some cases, the Eleventh Circuit defined “similarly situated” to mean “same or similar” and in others as “nearly identical.” In more colloquial terms, the Eleventh Circuit summarized the “similarly situated” concept as one that prevents courts from second-guessing an employer’s reasonable decisions and confusing “apples with oranges.” Faced with the issue of reconciling differing and nebulous definitions, the Eleventh Circuit did some house cleaning Thursday and held “similarly situated” means “similar in all material respects.” In addition, the Eleventh Circuit held courts must apply this standard on the front end of the McDonnell Douglas analysis (commonly referred to as the prima facie stage) before an employer must articulate its legitimate, non-discriminatory reason(s) for making an employment decision.

With the spirit of providing employers “the necessary breathing space to make business judgments,” the Eleventh Circuit provided some guide posts for assessing whether or not an alleged comparator is “similar in all material respects.” Fleshing out the concept, the Eleventh Circuit indicated that a “similarly situated” employee is someone who, when compared to the employee bringing a discrimination claim, (1) engaged in the same basic conduct (or misconduct); (2) is subjected to the same employment policy, guideline, or rule; (3) reports to the same supervisor; and (4) shares the same employment or disciplinary history. The Eleventh Circuit then applied these standards to Lewis’ claims of discrimination and found she flunked the test because the employer applied a different employment policy (implemented two years after her termination) to her two alleged comparators.

This new “similar in all material respects” standard is most important for Human Resources professionals, supervisors, and employment counsel to public and private sector employers on the front lines of cases involving disciplinary action. In this regard, employers should look to past disciplinary decisions under the same work rule and supervisor as well as disciplinary history before making the call to toss a rotten apple from its workforce.

If you have any questions or would like more information, please contact Tim Boughey at [email protected].

Navigating the Employee v. Independent Contractor Landscape in a Post-Dynamex World

Posted on: March 25th, 2019

By: Ariel Brotman

In a post-Dynamex world, hiring entities are finding it increasingly difficult to determine whether or not to classify a worker as an independent contractor or an employee.

On April 30, 2018, the California Supreme Court issued its decision in Dynamex Operations West, Inc. v. Superior Court of Los Angeles. The Court established an ABC test requiring all parts to be met in order to classify a worker as an independent contractor. A hiring entity must prove: “(A) that the worker is free from the control and direction of the hirer in connection with the performance of the work, both under the contract for the performance of the work and in fact and (B) that the worker performs work that is outside the usual course of the hiring entity’s business and (C) that the worker is customarily engaged in an independently established trade, occupation or business of the same nature as that involved in the work performed.” (Dynamex Operations West, Inc. v. Superior Court of Los Angeles (2018) 4 Cal.5th 903, 957.) 

The applicability of this seemingly strict ABC test was clarified in Garcia v. Border Tranportation LLC (2018) 28 Cal.App.5th 558. On October 22, 2018, the Court of Appeal released its opinion on Garcia v. Border Transportation Group, LLC. In Border Transportation, Plaintiff Garcia, a taxi driver, filed a complaint against Border Transportation Group, LLC for wrongful termination, overtime, waiting time penalties, unfair competition and various wage order claims based on his alleged misclassification as an independent contractor. Border Transportation filed a motion for summary judgment arguing that under the Borello test, which largely focuses on control, Garcia was properly classified as an independent contractor. The trial court agreed with Border Transportation. Garcia appealed the ruling granting the motion for summary judgment, and while the appeal was pending, the California Supreme Court released its opinion on Dynamex Operations West, Inc. v. Superior Court.

The Court of Appeal ultimately decided that in determining a worker’s status as an independent contractor, Dynamex only applies to wage order claims. As to all non-wage order claims, Borello remains the proper standard.  (Garcia v. Border Transportation LLC (2018) 28 Cal.App.5th 558, 570-71). Therefore, summary adjudication should not have been granted as to Garcia’s wage order claims but was proper as to his non-wage order claims.

Overall, although the Supreme Court has not ruled at this time, the Court of Appeal in Garcia v. Border Transportation LLC has provided an important exception to the strict Dynamex ABC test as it pertains to non-wage order claims. We will be paying close attention to further developments in the interpretation of this important exception.

If you have any questions or would like more information, please contact Ariel Brotman at [email protected].