Citing Third Party Disclosure, Court Rules Attorney-Client Privilege does not Protect Certain Emails

Communications between attorneys and their clients are generally thought to be confidential under the protection of attorney-client privilege and work product doctrine.  On May 6, 2019, however, the United States District Court Southern District of New York ruled that attorney-client communications, in the form of emails, shared with a public relations firm were neither privileged nor protected by attorney work-product doctrine. In the trademark case of Universal Standard Inc. v. Target Corp., S.D.N.Y., No. 18 Civ. 6042, 5/6/19, Magistrate Judge Gabriel W. Gorenstein demonstrated the narrowness of circumstances in which a company can assert privilege after sharing information with third parties. The court held that since the PR firm hired by Universal Standard was not necessary to the emails between Universal Standard and its attorneys, was not an agent of the company, and was not hired to aid in legal tasks, privilege and work product did not apply to the communications.

 

Universal Standard creates women’s apparel with “size-inclusive” clothing brands and in 2018 brought suit against Target alleging that Target’s “Universal Thread” line of women’s clothing willfully infringed upon its trademark.  During a deposition for the case, Target’s attorney questioned one of Universal Standard’s witnesses about the email chains between Universal Standard, their PR firm, BrandLink, and their attorneys.  Universal Standard objected that the emails were privileged.

 

The court ruled the emails aren’t protected by attorney-client privilege as disclosure to a third party generally eliminates that privilege.  While Universal Standard argued three separate exceptions applied, the court disagreed with their conclusions:

 

  1. BrandLink was not necessary to the understanding of facts between attorney and client: The court said the emails in question involved the public relations strategy relating to the lawsuit; which could have been relayed directly to the attorneys alone to invoke privilege.
  2. BrandLink was not a “functional equivalent” of an employee or agent of Universal Standard: The court cited that BrandLink did not represent the company to third parties, maintain an office at the company, nor seek legal advice from Universal Standard’s counsel, failing the “functional equivalent” standard.
  3. BrandLink was not hired to complete legal tasks: The court noted a distinction regarding privilege in that there is a difference between when a client hires a third party versus when an attorney hires a third party to implement a legal strategy.  As BrandLink was hired for business purposes, the court held this exception did not apply.

 

The Court also rejected Universal Standard’s for work product doctrine protection as “conclusory” when they stated all the emails were created in anticipation of litigation and reflected the opinions of their counsel, as these statements were confined to a single sentence, and, as the court stated, a mere recital of the law.

 

Thus, when communicating with an attorney and the utilizing the convenience of email, it is important to be diligent on who you are including in your communications and what necessity they bring to the privileged conversation.

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Virginia Expands the Virtual Meeting Space, Allowing Nonstock Corporations to Hold Annual Meetings in Cyberspace

Trying to find a location for your annual shareholder meeting, but concerned about cost and picking a place that is convenient for and will be attended by most of your members?  Virginia lawmakers recently enacted legislation with the aim to address these problems for nonstock corporations grappling with the difficulty of getting member participation at their annual meetings.  The Virginia General Assembly, effective July 1, 2018, passed House Bill 1205, which amended the Virginia Nonstock Corporation Act, allowing nonstock corporations to conduct annual and special meetings of members via electronic means, provided their Articles of Incorporation and bylaws do not require the meetings to be held at a specific location.  This allows nonstock corporations to move their meetings from a physical boardroom to a virtual boardroom.

Allowing virtual meetings for corporations is not a new phenomenon.  Delaware amended its General Corporation Law in 2000 allowing stock corporations to conduct virtual shareholder meetings.  In the age of the convenience of the Internet, many corporations have begun utilizing virtual meetings to reduce costs for both the corporation and individual shareholders, while increasing shareholder participation and board of director control over the structure of the meeting, as board of directors can limit any or all member communication.  Since 2000, additional jurisdictions have also begun allowing corporations to use online real estate and conduct their meetings without any in-person attendance.  Virginia, however, is one of the first jurisdictions to expand the use of virtual meetings from stock corporations to nonstock corporations as well.

Nonstock corporations are corporations that generally do not have owners or members that share in the corporation’s profit and are formed with no intention of generating a return of income.  Examples of these types of corporations are organizations that have Internal Revenue Code Section 501(c) tax-exempt status, such as charitable, fraternal, political, religious, trade, or civil organizations.  Nonstock corporations are typically managed by a board of directors and members have voting rights, just not a right to corporate profits.  Similar to the concerns of stock corporations preferring virtual meetings over physical meetings, nonstock corporations are also concerned with cost, convenience and member participation.  For example, without a bylaw specifying what constitutes a quorum, Section 13.1‑849 of the Virginia Nonstock Corporation Act only requires 10% of members to meet a quorum.

Virginia’s latest expansion allowing nonstock corporations a virtual means to hold annual shareholder meetings versus the confines of a physical venue is likely an attempt to remediate these problems and increase member participation.  It should be noted, Virginia House Bill 1205 does not alter notice requirements for the annual meetings.  The amendment also requires the nonstock corporation to implement reasonable measures to (1) verify that each person remotely participating is a member or proxy, and (2) provide the members a reasonable opportunity to participate in the meeting, vote on matters, and to read or hear the proceedings of the meeting.

While there is still little guidance on how nonstock corporations should organize virtual meetings with their members, it is yet to be seen how many nonstock corporations begin conducting virtual meetings or how many other jurisdictions follow suit and expand the ability of nonstock corporations to conduct virtual meetings.  As the Internet and technology, however, continue to connect the way people communicate, so too could formal corporate mechanisms enter the cyber world to conduct business meetings with their members.

© 2018 Vandenack Weaver LLC
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U.S. Supreme Court Expands Rights of States to Collect Tax on Internet Transactions

by James S. Pieper

Since the dawn of the Internet, online sellers have benefited from a line of United States Supreme Court precedent that prevented states from requiring out-of-state businesses to collect and remit sales tax on sales in states where the seller has no “physical presence.”

On June 21, 2018, the Court discarded its longstanding “physical presence” test, thus opening the door for state governments to impose a broader range of duties on remote sellers, including the duty to collect and remit sales tax.

In South Dakota v. Wayfair, Inc., South Dakota sought to defend its statute that imposed a duty on all retailers with more than $100,000 of sales or 200 transactions within the state to collect sales tax on transactions and remit the tax to the state.  For retailers with no physical presence in the state, the statute was clearly in violation of the historic interpretation of the Commerce Clause of the United States Constitution, which limits the ability of states to regulate “interstate commerce” unless there is a “substantial nexus” between the state’s interests and the commercial activity.

Prior court decisions concluded that a state could have no “substantial nexus” with a seller that had no “physical presence” in said state.  As a result, online sellers with no “brick-and-mortar” presence or employees working in a state were free from the obligation to collect tax on their sales.

In South Dakota v. Wayfair, the Court rejected its prior interpretations of the Commerce Clause and held that a “substantial nexus” could be created by online sales alone despite the lack of “physical presence.”  The decision was decided with a bare 5-4 majority.

As a practical matter, the majority of online sales already entail the collection of sales tax due to either requirements that were valid under prior law or voluntary compliance by larger online retailers (including amazon.com).  Some retailers with no physical stores, however, will lose the advantage of being able to undertake transactions without collecting tax (including the respondents in the case, wayfair.com, overstock.com and newegg.com).

It will be up to each state to set the parameters of which remote sellers might be exempt from collecting tax due to a lack of significant sales, and the Court did not set a constitutional standard for what level of sales would constitute a sufficient “substantial nexus” to allow a state to impose duties (only that South Dakota’s standards were more than sufficient).

Perhaps more importantly, by jettisoning the “physical presence” standard as inappropriate in an era of “substantial virtual connections,” the Court has raised the prospect of greater opportunity for individual states to tax and regulate the actions of businesses whose only connection to said state is via online presence.

All businesses that connect with customers in other states via online connections will need to have heightened awareness that state tax and regulatory requirements in those other states may now apply to those interactions due to the Court’s new reading of the scope of a state’s authority under the Commerce Clause.

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IRS Notice Provides Penalty Relief to Certain Partnership Return Filing Taxpayers

by Monte L. Schatz

The IRS has issued Notice 2017-47 that provides penalty relief to partnerships that filed certain untimely returns or untimely requests for extension of time who filed those returns for the first taxable year that began after December 31, 2015.

Section 2006 of the Surface Transportation and Veterans Health Care Choice Improvement Act of 2015 (the Surface Transportation Act), Public Law 114–41, 129 Stat. 443 (2015), amended section 6072 of the Internal Revenue Code (the Code) and changed the date by which a partnership must file its annual return. The due date for filing the annual return of a partnership changed from the fifteenth day of the fourth month following the close of the taxable year (April 15 for calendar-year -2- taxpayers) to the fifteenth day of the third month following the close of the taxable year (March 15 for calendar-year taxpayers). The new due date applies to the returns of partnerships for taxable years beginning after December 31, 2015.

Many partnerships failed to timely file their various partnership returns (1065, 1065-B, 8804, 8805 or 7004 Extension requests for any of the other various partnership returns).  The assumption of these taxpayers was that the normal deadlines for their 2016 Partnership returns applied (namely April 18, 2017 for the actual returns and September 15, 2017 for those that filed the Form 7004 extension for any of these returns).    Normally in these circumstances the taxpayer is subject to late filing penalties; however, the new filing deadlines shortening the return filing period by one month resulted in many taxpayers filing late returns and the IRS has provided relief for those late filed returns.

The IRS in Notice 2017-47 has announced relief will be granted automatically for penalties for failure to timely file Forms 1065, 1065-B, 8804, 8805, and any other returns, such as Form 5471, for which the due date is tied to the due date of Form 1065 or Form 1065-B. Partnerships that qualify for relief and have already been assessed penalties can expect to receive a letter within the next several months notifying them that the penalties have been abated.  For reconsideration of a penalty covered by this notice that has not been abated by February 28, 2018, contact the number listed in the letter that notified you of the penalty or call (800) 829-1040 and state that you are entitled to relief under Notice 2017-47.

SOURCE: IRS Guidewire Issue Number N-2017-47

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Legacy ERISA Regulation Triggers Fiduciary Acknowledgement and Disclosures from Plan Advisers

By Monte Schatz

The Department of Labor’s fiduciary rule became effective June 9, 2017.  A whole new set of client disclosures will be required for advisers who previously were not operating under the fiduciary standard.  Interestingly, many of these disclosure requirements are not mandated by the fiduciary rule itself, but under a regulation that was part of the Employment Retirement Income Security Act of 1974 commonly referred to as ERISA.

29 C.F.R. § 408(b)(2) requires certain pension plan service providers to disclose information about the service providers’ compensation and potential conflict of interests.   Ironically, this regulation was introduced originally as an interim rule in 2010.  It was published as a final rule on February 3, 2012.  The intent and purpose of the regulation was to assist plan fiduciaries in assessing the reasonableness of compensation paid for services.  Also, the disclosure requirements are designed to assist plan fiduciaries to act prudently and solely in the interest of the plan’s participants by defraying reasonable expenses of administering the plan and avoiding conflicts of interest.

From 2012 to the present day, brokers and other non-fiduciary providers to ERISA retirement plans largely didn’t disclose they were fiduciaries.   However, with the institution of the fiduciary rule the status of those types of advisers have been elevated to the fiduciary standard which triggers the new disclosure requirements.  This subjects those groups to covered provider status.  The three major categories of covered service providers include:

(1) fiduciary investment managers and advisors,

(2) record keeping platforms and broker/dealers, and

(3) providers of other types of services that also receive revenue sharing payments                   or other “indirect” compensation other than from the plan or plan sponsor

The groups that fall under the provisions of 408(b)(2) must provide updated disclosures to plan fiduciaries within 60 days from the date of which the covered service provider is informed of such a change in status.   The 60 day standard is vague as it doesn’t define whether it is June 9th, 2017 or if the 60 days begins to run from the first day an adviser makes an investment recommendation post-June 9th.   The general consensus is to take the conservative approach and commence providing updated disclosure immediately and assume the 60 day clock runs from June 9th, 2017.

For advisers who previously have operated under the fiduciary standard the 408(b)(2) requirements will be “business as usual”.  For those advisers that are new to the fiduciary standard it is imperative that they provide the required disclosures in a concise and understandable one page format.   Previous plan adviser agreements that placed disclosures in multiple documents will no longer satisfy the disclosure requirements that are a critical part of the fiduciary rule.

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SOURCES:

http://www.investmentnews.com/article/20170608/FREE/170609941/the-disclosure-401-k-advisers-may-be-missing-under-the-dol-fiduciary?utm_source=Morning-20170609&utm_campaign=investmentnews&utm_medium=email&utm_visit=655100

http://www.investmentnews.com/article/20120202/FREE/120209978/labor-department-unveils-kinder-gentler-fee-disclosure-regs

http://webapps.dol.gov/federalregister/PdfDisplay.aspx?DocId=25781

Federal Judge Orders IRS to Refund Tax Preparers for PTIN Fees

In 2014, tax return preparers brought a federal class action lawsuit challenging the legality of fees charged by the IRS for PTINs (Preparer Tax Identification Number). Regulations promulgated in 2010 and 2011 imposed requirements on tax return preparers including obtaining a specific PTIN and paying a fee associated with obtaining such PTIN. Currently, the application and renewal fee for a PTIN is $50.00.

The preparers in the class action argued that the fees are unlawful since tax preparers receive no special benefits from the PTIN and secondly the fee is unreasonable in comparison to the costs the IRS incurs to issue the PTIN.

On June 1, 2017, Judge Royce C. Lamberth of the United States District Court for the District of Columbia held that the IRS may continue to require PTINs but granted summary judgment in favor of the tax preparers stating, in part, that the IRS may not charge fees for issuing PTINs. Following a review of applicable case law, the Court found that PTINs are not a “service or thing of value” provided by the IRS. The IRS will be enjoined from charging fees in the future and is required to refund fees charged for the PTINs to all members of the class.

The order granting summary judgment is not yet a final judgment. Such final judgment will indicate the amount owed to each member of the class and may be subject to appeal by the IRS.

For more information, including court documents and the opinion rendered by Judge Lamberth see http://ptinclassaction.com/

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IRS Issues Tax and Reporting Relief for Proposed Fiduciary Standard Consistent with Department of Labor Regulations

By Monte Schatz

There have been a significant series of regulatory announcements and rulings related to the fiduciary duty and its application to employee benefit plans.  The final fiduciary duty rule became effective on June 7, 2016, and has an applicability date of April 10, 2017. The President by Memorandum to the Secretary of Labor directed the Labor Department to examine the impact of the fiduciary duty rule.  On March 2nd the DOL published 82 FR 12319 seeking public comments about questions raised in the Presidential Memorandum.  The March 2nd notice also provided that a 60-day delay in implementation would be effective on the date of publication of a final rule

The Principal Transactions Exemptions and the accompanying Best Interest Contract provisions, included as part of the fiduciary duty rule, also have an applicability date of April 10, 2017, with a phased implementation period ending on January 1, 2018. The BIC Exemption effectively states that the fiduciary advisor must sign a “Best Interests Contract” (BIC) with the client, stipulating that the advisor will provide advice that is in the Best Interests of the client.   The Principal Transactions Exemption allows compensation for certain transactions by certain broker-dealers, insurance agents, and others that will act as investment advice fiduciaries that would otherwise violate prohibited transaction rules that trigger excise taxes and civil liability.

Most investment industry groups’ concerns regarding any non-compliance during a “gap period” of the financial fiduciary rule focused on Department of Labor and its potential civil liability enforcement provisions as outlined under ERISA.  Additional concerns were raised concerning Internal Revenue Service enforcement provisions found in Internal Revenue Code §4975 prohibited transaction rules that provides for the imposition of excise taxes for violations of that rule.

As a result of delays of the Fiduciary Standard rules, the Department of Labor published Field Assistance Bulletin (FAB) 2017-01.  FAB 2017-01 provides that, to the extent circumstances surrounding its decision on the proposed delay of the April 10 applicability date give rise to the need for other temporary relief, including retroactive prohibited transaction relief, the DOL will consider taking such additional steps as necessary with respect to the arrangements and transactions covered by the DOL temporary enforcement policy and any subsequent related DOL enforcement guidance.

In Announcement 2017–4 the IRS stated, Because the Code and ERISA contemplate consistency in the enforcement of the prohibited transaction rules by the IRS and the DOL, the Treasury Department and the IRS have determined that it is appropriate to adopt a temporary excise tax non-applicability policy that conforms with the DOL’s temporary enforcement policy described in FAB 2017-01. Accordingly, the IRS will not apply § 4975 and related reporting obligations with respect to any transaction or agreement to which the DOL’s temporary enforcement policy, or other subsequent related enforcement guidance, would apply.

SOURCES:

http://www.asppa.org/News/Article/ArticleID/8480

https://www.irs.gov/pub/irs-drop/a-17-04.pdf

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