REPORT FROM COUNSEL
FALL 2001 ISSUE
Table of Contents
- MANAGING E-COMMERCE RISKS
- TO COMPETE OR NOT TO COMPETE
- BEWARE OF IDENTITY THEFT
- TOWNS VS. TOWERS
- (OVER)REGULATION OF WETLANDS
- CASE BY CASE
MANAGING E-COMMERCE RISKS
By Terrence P. Maher
The rise of the Internet and related technologies creates numerous business opportunities; however, with these new opportunities come new risks, many of which have not been confronted before. As businesses expand into e-commerce, existing insurance needs to be reviewed to ascertain that appropriate types and coverage are in place.
Traditional Insurance Policies
Traditional insurance policies, such as Comprehensive General Liability ("CGL"), Directors and Officers ("D&O"), and Errors and Omissions ("E&O"), may cover some of these new risks, but on the whole, they lack the necessary overall protection.
CGL policies consist of property damage, bodily injury, and advertising injury and personal injury coverage. Property damage liability coverage includes damage to tangible property and loss of use of tangible property not actually physically damaged. What is tangible property? If we damage the software or data of a third party will the CGL policies provide coverage? Most courts have held that electronic data is not tangible property. As a result, loss of electronic data may not be covered under the property damage clause unless the hardware or disk on which such data is stored is physically damaged along with the loss of the electronic data.
The "advertising injury" clause of a CGL policy offers protection to a business promoting its name or goods and services. Claims for copyright infringement are covered by the advertising clause if there is a connection between the injury and the insured's advertising activities. But if the infringement claim arises from actions unrelated to the insured's advertising activities no coverage will be provided. For example, if third party technical information is included on a web site, and the owner of the technical information asserts a claim against the business for copyright infringement, the CGL carrier may deny coverage on the basis that the infringing materials were not included on the web site as part of the insured's advertising activities.
Claims for defamation and invasion of privacy arising out of e-commerce activities may also be asserted against a business. Such claims are typically covered under the advertising injury clause of the CGL coverage; however, there is an exclusion from coverage for an offense committed by an insured whose business is advertising, publishing, broadcasting, or telecasting. Some carriers have asserted that an insured's web site operations made it a publisher or advertiser, especially if the web site includes third party advertisements, the hosting of third party materials, or compensated links to other web sites.
Two other traditional forms of insurance are D&O and E&O policies. D&O provides coverage against losses arising from wrongful acts of the company's directors and officers. E&O policies provide coverage for wrongful acts committed by the company and its employees. These policies provide coverage for purely economic damage and do not provide coverage for property damage and bodily injury. Where a company's directors or officers are held liable for economic damages resulting from an e-transaction gone wrong, the D&O policy may provide the needed coverage. However, it is important to remember that the D&O policy will not cover the wrongful acts of the company itself or its employees: an E&O policy would provide that coverage.
Traditional casualty and business interruption policies provide coverage only for damage to tangible property, not the loss of intangible property, such as software or data. A review of casualty and business interruption policies in force is needed to see if coverage is available for e-business losses from computer system malfunctions, internal hacks, third party hacks and denial of service attacks.
New Internet and E-Commerce Specific Insurance Policies
The lack of comprehensive coverage by traditional insurance policies has led to an emergence of new and more Internet specific insurance policies. These new insurance policies may provide coverage for the following Internet and e-commerce related claims:
- Loss of business income due to unauthorized access to or theft of software, data, computer viruses, unauthorized transactions, and unintentional programming and processing errors. This coverage would replace the loss of business income to the insured and additional expenses incurred by the result of interrupted service.
- Public relations coverage for expenses incurred in rebuilding reputation from negative publicity resulting from one of the above incidents.
- Development or replacement coverage for loss of intellectual property as a result of one of the above incidents. This protection would cover investment in systems and information that are critical to the business, such as the costs to rebuild customer files or unique software.
- Interruption of service coverage for payment of claims made for any e-commerce activity losses caused by or resulting from one of the above incidents. This coverage includes reasonable defense expenses.
- Electronic publishing liability for intentional or inadvertent defamation, disparagement or harm to the character, or reputation including libel, slander, product disparagement, trade libel, or outrageous conduct. This protection includes liability for invasion of privacy, copyright infringement, plagiarism, or misappropriation of ideas.
Many of these new policies overlap the traditional policies; therefore, it is important to sit down with an insurance consultant to determine what traditional policies will cover and what, if any, new Internet specific policies may be needed for additional coverage and to ascertain what may be excluded from the coverage offered by new Internet and e-commerce policies.
TO COMPETE OR NOT TO COMPETE
It is nothing new for employers to require employees to sign noncompetition agreements, but such agreements are now more commonly used by all types of employers and for a broader range of employees. They are especially popular among high-tech and Internet businesses, where the risks of being at a competitive disadvantage are most significant when a departing employee exploits the former employer's "trade secrets." In these fields, the traditional criteria used by the courts in judging the reasonableness of an agreement--the geographic and time limits of the restrictions--may have reduced relevance. As a result, the strategies used by employers to protect their interests, and by employees to protect theirs, are still evolving.
Employers can enhance the prospects for court approval of a noncompetition agreement by customizing it to fit the particular business and job in question. The agreement should restrict the former employee no more than is necessary to protect the employer's legitimate business interests. Requiring noncompetition agreements only of employees with access to sensitive information may also improve their enforceability. Given the variation in the states' treatment of such agreements, employers with a presence in more than one state should draft agreements very carefully.
The scope of a noncompetition agreement generally depends on its terms. Courts in some states, however, have accepted the argument that, even if an employee is not barred from working for a competitor by the language in the agreement, such competition should be prohibited on the ground that the employee inevitably will make use of a trade secret of the former employer. Other courts have been less willing to make that assumption. For example, in one case a court held that an agreement did not apply to a departed employee because the new employer was not a "competitor" as defined in the agreement. Finding no prohibition against the former employee's new job in the noncompetition agreement itself, the court refused to rewrite the agreement or to let the former employer "make an end-run" around the agreement in the guise of preventing the disclosure of trade secrets.
From an employee's perspective, the argument can often be made that a noncompetition agreement should be enforced for a shorter time period than used to be considered reasonable. This is especially true in information technology, where the technology itself and the competitive dynamics change rapidly. As for the secrets that the employer may be attempting to protect by enforcing the agreement, the employee sometimes can counter that the information is already in the public domain, giving the former employer no right to prevent the former employee from using it in a new job.
BEWARE OF IDENTITY THEFT
Intent on taking a free ride on the good name and reputation of others, identity thieves obtain personal information and then essentially impersonate their victims as they open credit-card accounts, make purchases, or take out loans. It can take a while for the victim to know that he has been wronged, and even longer to sort out and to clean up the damage. In the meantime, the innocent party may be denied financial and employment opportunities.
While there is no way to have complete protection against identity theft, these common-sense measures can decrease the odds of becoming a victim:
- Jealously guard personal information like your Social Security number and account numbers and passwords, divulging it only in a communication that you initiate. Use this information sparingly online and only if it will be encrypted.
- Keep your wallet from becoming a gold mine for potential thieves by carrying the minimum in checks, credit cards, or other bank items, and do not keep your Social Security number there.
- Retrieve your mail promptly and do not leave outgoing mail in your doorway or home mailbox.
- Tear up private papers like bank statements, receipts, and credit-card applications before throwing them away. It is not just archaeologists who sift through old garbage in search of valuable information.
- Store valuable financial information at home in a place that is not available to prying eyes.
- Review bank account and credit card records regularly, as well as your own credit report prepared by a credit bureau, so that you can pick up the first signs of trouble, such as a missing payment or an unauthorized withdrawal.
TOWNS VS. TOWERS
When it passed the Telecommunications Act of 1996, Congress intended to expand wireless services and increase competition among providers by reducing the regulatory burden. At the local level, this meant limiting the traditionally broad powers of local governments to restrict land use through the zoning power. Under the Act, local governments retain some control over the placement of "personal wireless service facilities," the most controversial of which are tall telecommunications towers for cell phone service. However, Congress placed limits on that authority. For example, local authorities may not unreasonably discriminate among providers of similar services, nor prohibit personal wireless services in their localities. They must respond with reasonable speed to any request to build facilities. If an application is denied, the denial must be in writing and must be supported by substantial evidence in a written record.
When a provider of wireless telecommunications services was denied permission by a town zoning board to build a 150-foot-high telecommunications tower, it sued the town in federal court. The provider argued that the town exceeded its authority under the Act by basing its decision on citizens' statements of general opposition to cell towers, not "substantial evidence." The court ruled in favor of the town, allowing it to prohibit the tower even though the decision was based largely on an aesthetic judgment.
The tower stirred opposition because of its location. It was to be built on top of a 50-foot hill in the middle of a cleared field, in the geographic center of the small town. Visible during all seasons, the tower would be seen daily by about one quarter of the town's population. It was close to three schools and two residential subdivisions.
The telecommunications provider argued to no avail that the town could not deny the application without showing that there was a suitable alternative site with less visual impact. However, the unmet burden had been on the provider to prove the absence of any other feasible site in the town, in which case the provider might have been able to win by showing that the town's denial effectively prohibited personal wireless services in the area.
(OVER)REGULATION OF WETLANDS
The federal Clean Water Act authorizes the Army Corps of Engineers to require permits for the discharge of dredged or fill material into "navigable waters." Under the "migratory bird rule," the Corps asserted its jurisdiction over even isolated intrastate waters if they provided a habitat for migratory birds.
A consortium of municipalities mounted a challenge to the legality of the migratory bird rule when it posed a hurdle for the consortium's plan to use an abandoned sand and gravel pit for a solid waste disposal site. The site was far from any navigable waterway, but migratory birds used some trenches that had evolved into permanent and seasonal ponds. The U.S. Supreme Court ruled that the Corps had overstepped the limits of its regulatory authority. No longer may the Corps regulate the development of isolated wetlands and waters that are not adjacent to navigable waterways. By some estimates, such isolated wetlands constitute 20% of all wetlands in the country, and thousands of applications pending before the Corps could be affected by the ruling.
Landowners and developers with isolated wetlands on their lands should pause, however, before firing up the bulldozers. Questions remain about whether the Corps retains jurisdiction over smaller streams, creeks, and tributaries that do not empty directly into a navigable waterway. In addition, the Supreme Court ruling was confined to federal law, and some states and local governments have their own restrictions on development of wetlands.
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CASE BY CASE
Overtime Pay for On-Call Duties
Three utility workers responsible for monitoring security systems in the utility's buildings were essentially on the job 24 hours a day, 7 days a week. When they were not working their regular shifts, they had to be ready to receive and respond to alarms, using computers at their homes. If they did not respond to an alarm within 15 minutes, they could be disciplined. The utility paid overtime for the time spent actually responding to an alarm, but not for the rest of the on-call time, which consumed all of the employees' waking (and sleeping) hours.
The employees were successful when they sued under federal law for around-the-clock overtime for everything beyond 40 hours per week. On-call time usually does not qualify as compensable overtime, but the issue is highly dependent on the facts of each case. Key factors include any agreements between the parties, the nature and extent of the restrictions, the relationship between the services rendered and the on-call time, and, perhaps most importantly, the degree to which being on call interferes with the employee's personal pursuits.
In this case, the employees on average were required to respond to three to five emergency calls per on-call period. They generally did not have to report to the plant when called, but the requirement that they take some action by computer within 15 minutes of a call made the on-call commitment more burdensome. For the court, this was all the more reason to award overtime pay for the workers who were on call during all of their off-premises time.
Guidance Counselor Liability
In his senior year in high school, Bruce was a star on the basketball court who caught the attention of college coaches. He was on-track academically, having registered for courses that would allow him to satisfy core eligibility requirements established by the National Collegiate Athletic Association (NCAA). Bruce became dissatisfied with an NCAA-approved English literature class. With the help of a guidance counselor, he dropped that class and replaced it with another English class. According to Bruce, the counselor told him that the new course was also approved by the NCAA.
Late in his senior year, Bruce accepted a full basketball scholarship from a university. After graduation, the bottom fell out of his plans when the NCAA informed Bruce that the English class he completed did not satisfy its core requirements because it had not been submitted by the school for approval. This left him short of the minimum NCAA requirements and caused the university to revoke his scholarship.
Bruce sued the school district on a theory of negligent misrepresentation by the guidance counselor. The state supreme court allowed Bruce's lawsuit to continue. Unlike most educational malpractice claims, the majority of which fail, Bruce's claim did not challenge classroom methodology or theories of education. The claim was more akin to those brought for misrepresentation by clients against professionals who have been sought out for their expertise. While the claim of negligent misrepresentation usually arises in a commercial context, the court saw no reason not to extend it to anyone, including a high school counselor, who is in the business or profession of supplying information to others.
