In September 2013, California signed into effect three new laws relating to privacy and data breach. The first is online privacy bill A.B. 370 which amends the California Online Protection Act to add privacy policy disclosure requirements regarding online tracking activity by website operators.  This amendment goes into effect on January 1, 2014.

Under current California law, operators of commercial websites or online services (including mobile applications) that collect personally identifiable information (commonly referred to as “PII”) through the Internet about consumers residing in California who use or visit their commercial website or online service to conspicuously post a privacy policy on its website or online service and to comply with that policy.  The privacy policy is required to disclose the categories of PII that are collected and the categories of entities with whom such information is shared.

The 2013 law requires an operator that collects PII concerning a consumer’s online activities now also to disclose (1) how it responds to Web browser ‘do not track’ signals or other mechanisms that provide consumers the ability to exercise choice regarding the collection of a PII, and (2) whether third parties may also collect PII about an individual consumer’s online activities over time and across different websites when a consumer uses the operator’s website or service.

To be compliant with the new law, a privacy policy must not meet all of the following requirements:

The second new law is S.B. 46, which adds to the current data security breach notification requirements a new category of data triggering these notification requirements: A user name or email address, in combination with a password or security question and answer that would permit access to an online account. The new law also provides more guidance on how website operators can satisfy disclosure obligations when a breach involves personal information that allows access to an online or email account.  This law also goes into effect on January 1, 2014.

Finally, S.B. 568, relates to online privacy protection for minors. This law will prohibit online marketing or advertising of certain products and services (such as alcohol, tobacco, and U/V tanning products) to children and teenagers under 18.  This law goes into effect on January 1, 2015.

Impacted companies must take the opportunity presented before these laws come into effect to examine their data collection, data privacy, and security policies and practices to determine whether they demand any updates. If you have any questions about this topic, please feel free to email us.

Tags: California Online Protection Act, data security, do not track, Online privacy bill A.B. 370, personally identifiable information, PII, privacy policy, S.B. 46, S.B. 568, startup, terms and conditions, terms of service

A recent SJC decision involving a personal investment by Jack Welch in a failed Massachusetts hedge fund. The full decision can be read here.  Welch sued the fund and its manager for their failure to disclose that the manager was involved in a civil litigation (a landlord-tenant dispute over a former residency of the manager in New York), claiming that if he had known about that matter, he never would have invested.

The SJC upheld the summary judgment entered against Welch, holding that omission ultimately was not material enough to find the fund liable.
This case is interesting for its confirmation of certain provisions under the Massachusetts law on the following issues:

• The statutory standard of a misstatement or omission is material  under the Massachusetts Securities Act is whether there is a “substantial likelihood” that the omitted information would have “significantly altered the ‘total mix’ of information” available to the ordinary reasonable investor.
• A “material” fact is oneA “material” fact is one to which a reasonable person would attribute importance for his or her choice of action in the transaction at issue. Zimmerman v. Kent, 31 Mass.App.Ct. 72, 78 (1991).
• The court also held that if there is finding in this regard under the Uniform Securities Act, then there cannot be a finding that the actions were deceptive under Chapter 93A.
• The decision also provides a helpful summary of Massachusetts common law on fraud and negligent misrepresentation:
  • Intentional misrepresentation (or “deceit”): (a) an intentional or reckless (b) misstatement (c) of an existing fact (d) of a material nature, (e) causing intended reasonable reliance and (f) financial harm to the plaintiff.
  • Negligent misrepresentation: (a) a provision, in the course of the defendant’s business, profession, employment, or in the course of a transaction of his pecuniary interest, (b) of false information for the guidance of others in their business transactions, (c) without the exercise of reasonable care or competence in the acquisition or communication of the information, (d) causing justifiable reliance by, and (e) resulting in pecuniary loss to, the plaintiff.

If you have any questions about this topic, please feel free to email me directly.   My email address is dimitry.herman@hermanlawllc.com.

Tags: massachusetts supreme judicial court, Material fact, Securities law, seed investments, Unfair or deceptive act, Uniform Securities Act. Consumer Protection Act

Employee stock options are an essential component of compensation in technology companies.  Options and other equity incentives allow employers to attract and retain talented personnel who hope to profit from a successful sale of the business that they help create.  While there has been substantial attention in recent years to the manner in which options are awarded, a topic less often discussed, but equally important, is how they may be rightfully terminated by an employer following a separation.  A recent decision by a New York appellate court’s decision in Lenel Systems Intl. v. Smith illustrates what can arise if this issue is not expressly addressed in the option agreement.

In Lenel, an employer sought to terminate an employee’s stock options who had violated his noncompetition agreement after leaving Lenel’s employment.  While the stock option agreement did not have an express provision entitling the company to terminate the agreement, it did provide that the employee’s agreement not to compete was consideration for the options.  Not having the express right to terminate, the employer sought to rescind the option on equitable grounds.

The court summarized that rescission is an equitable remedy that allows a court to declare a contract void from its inception.  As a general rule, rescission of a contract is permitted where there is a breach of contract that is material and willful, or so substantial and fundamental “as to strongly tend to defeat the object of the parties in making the contract.”  The court rejected the defendant’s argument that an express forfeiture clause in the option agreement was required in order for option to be subject to rescission.  Instead, the court reasoned that the noncompetition covenant was the sole consideration for the option agreement, and when the defendant chose to compete with Lenel “in violation of the only material condition of the agreements,” he would give up his right to the stock options promised in exchange.

In is also worth noting that two of the appellate judges dissented from this decision, arguing that the consideration for the option consisted of two parts, one being the compliance with the covenant during the term of employment and the other part for the post-termination period.  The dissent reasoned that since the defendant did comply with the covenant during his six years of employment with Lenel, it cannot be said that he did not provide any consideration for the option, thereby reducing the argument in  favor of rescission.

As a lower appellate court decision, the Lenel case is more likely to lead an academic interest than to have an binding impact on the law on this issue.  However, the case illustrates that while rescission may be available as a remedy for employers, it is a difficult path to travel and that addressing termination rights in the option agreements may be advisable.

Tags: equitable remedies, new york law, rescission, stock options

From the editor:  We saw many companies raising capital in 2010 and 2011 to take advantage of the tax relief under Section 1202 of the Internal Revenue Code to give investors the potential for tax-free gains if they held the stock for the required 5 years and the company met certain conditions.  While that relief went away in 2012, recent tax law enactments have brought back this tax treatment for 2012 and 2013. We would like to thank our tax colleague Travis Blais from Travis Blais & Co.  for preparing the following post on this topic:

Most of us know that the American Taxpayer Relief Act of 2012, better known as the “fiscal cliff bill,” extended lower across-the-board tax rates, including those for dividends and long-term capital gain, for all but a handful of taxpayers.  Less well known is that the ATRA extended many business tax benefits, including the possibility of tax-free capital gains for “qualified small business stock” (QSBS).

Tags: 1202, American Taxpayer Relief Act, angel investment, c corporation, capital gain, fiscal cliff bill, qualified small business, qualified small business stock