New Developments: Liability for Identity Theft  
 

A landmark new case poses an interesting question: Can an entity be held liable for identity theft through the actions of one of its employees? The answer, when combined with recently enacted federal legislation in this area, should make employers sit up and take notice.

Before we discuss the new legislative requirements, let’s take a look at the new case decided by the Michigan Court of Appeals.

The facts: A union treasurer was working at home with documents containing the names and Social Security numbers of other union members. Without the treasurer’s knowledge, his daughter stole the data and used it to commit identity theft against more than a dozen union members. The jury determined that the union was negligent for failing to adequately safeguard the personal information from theft.

In its appeal, the union argued that it should not be held liable for the “unforeseeable” criminal acts committed by a third party who was not an employee of the organization. However, under the prevailing law in Michigan, this legal doctrine does not apply if there is a special relationship between the parties.

The Court determined that a “special relationship” did in fact exist based on these factors:
Since the union was the legal representative of the plaintiffs, it had an obligation to act in their best interests by safeguarding their personal information.

The union was in a better position than its members to control access to the personal information that was used to commit identity theft.

The risk to sensitive information stored in an unsecured environment, such as a personal residence, was foreseeable because of the increasingly prevalent threat of identity theft.

The severity of the potential harm was substantial due to the monetary concerns surrounding the theft.

Despite the prevalence of identity theft, the union did not require any safety precautions for documents taken off the premises.

As a result, the union was held legally responsible for the identity thefts committed by the daughter of its treasurer.

This new case dovetails with the Fair and Accurate Credit Transactions Act of 2003 -- known as FACTA, for short. Under FACTA’s “disposal rule,” employers are required to dispose of records that can personally identify an employee. The law doesn’t mandate the method of disposal, but suggests shredding paper files, deleting electronic files or using whatever “reasonable” means are necessary.

The new law applies to every business regardless of its size or nature of work. Failure to do so is punishable by civil fines up to $2,500 per employee and possible class action lawsuits. Note: Other laws may apply to employers on a state level. For instance, several states restrict the use of Social Security numbers for identification purposes.

Obviously, it is important for an employer to put procedures in place for protection against identity theft. Legal assistance in this area is recommended.

Preserve the Benefits of Charitable Trusts

For affluent individuals, a charitable remainder trust (CRT) remains a valuable income tax and estate-planning tool. However, new IRS requirements may require donors to obtain the consent from their spouses.

Basic premise: You transfer appreciated property (e.g., stock or real estate) to a trust and designate a beneficiary to receive income from the trust for life or a period of years. For instance, you might name your spouse as the income beneficiary. The beneficiary pays tax on the amounts received from the trust. At the end of the stated period, the property goes to the charity named when you set up the trust.

What have you accomplished? For starters, you can claim a current tax deduction for the value of the remainder interest that passes to the charity. The value of the donation is based on special government tables. In addition, you can avoid a potentially large capital gains tax on the sale of appreciated property. At the same time, the designated beneficiary can rely on a steady stream of income.

Although there are several variations, the two main types of charitable remainder trusts are CRATs (charitable remainder annuity trusts) and CRUTs (charitable remainder unitrusts). No matter which one you use, the income beneficiary must be entitled to an annual payment each year for life or for a period of no more than 20 years.

Be aware that a charitable remainder trust is irrevocable (i.e., you can’t get your assets back). In addition, there are fees for establishing and maintaining the trust. This arrangement is not for everybody, so make sure you understand all the ramifications before you take action.

Update: For trusts created after June 27, 2005, the CRT won’t qualify for tax benefits without a timely waiver from the donor’s spouse. Generally, the failure will date back to the inception of the trust. Furthermore, a waiver is required for a change of address, marriage or any other occurrence that would result in a claim for a surviving spouse.

If the trust fails to qualify, the donor forfeits the upfront tax deduction and the funds will be included in the donor’s taxable estate. To compound the problem, the trust will be taxed on capital gains from the sale of assets as well as the accumulation of funds.

Trends In Good Samaritan Laws

If you hear the cries of someone in danger, are you legally obligated to help that person? This is a controversial area of the law.

Most states have passed “good samaritan” laws that relieve physicians of liability when they come to a person’s aid in an emergency. In some states, this legal protection has been extended to other do-gooders.

General rule: Assuming that you do not have a special relationship and/or did not cause the problem, there is no legal obligation to rescue someone who is in harm’s way. However, if you begin to rescue the person and then abandon your efforts, you might be held liable if the victim is left in a worse condition because of it.

Lately, the courts have begun to look at the facts and circumstances of each particular case.

Recent trend: If you know that someone is in extreme danger and you could have assisted that person with little inconvenience on your part, you must provide the person with reasonable care.

How to Profit from a Patent

Let’s say that you figured out a way to build a better mousetrap. That’s a great accomplishment, but it won’t necessarily put money in your pocket, even after you have patented your invention. If you are not in the business of selling, producing or marketing products -- and you are not an entrepreneurial sort of person -- how can you profit from your ingenuity?

The United States Patent Office reports that less than 3% of patents ever make any money for the inventor. The success rate cited by the Federal Trade Commission is even lower: less than 1%. As you can see, obtaining a patent is no guarantee of riches.

Practical advice: Don’t be discouraged by the numbers. If you have created a truly valuable invention, there are several ways you can make money on the deal outside of going into business for yourself. Typically, it involves a license or an assignment.

With a license for a patented invention, the company benefits commercially in exchange for paying the inventor royalties. The royalties may represent a percentage of net revenue or payments for total products sold.

The license may be either exclusive -- in effect, only the specified company can develop the invention -- or nonexclusive. It may last for the duration of the patent or a specified period of time. The territory is usually limited to the geographic extent of the patent protection.

In turn, a licensee may then arrange for other companies to market or distribute the invention. These sublicenses are generally covered under the terms of the original agreement between the inventor and the licensee. In some cases, an inventor or a company may even trade licenses with other companies so they can each benefit from the other’s technology.

Any cross-licensing arrangements should be addressed in the original license.

Reversionary rights are common in most license agreements. They are often indicated by terms such as “termination,” “term,” “reversion,” “grant of rights,” “exploitation” or “commercialization.” However, the terms by themselves can be misleading -- the actual language of the contract will control.

Alternatively, the patent holder may agree to sell the rights to the invention for a lump sum or royalties through an assignment. Assignments are often used when the inventor already works for the company. The contract usually includes confidentiality provisions preventing the employee from using his or her knowledge for personal gain. If it is properly designed, an assignment protects both parties to the agreement.

Although assignments are presumed to be permanent transfers of ownership, a company may include provisions for reversion rights in their agreements. This is a different kind of reversion than a license since you have to reacquire ownership -- usually, with a fee attached.

Caveat: Don’t try to do the contracts on your own. Arranging licenses and assignments are best left to the legal experts.

Nailing Down Landlord Duties for Repairs

If you are an owner of one or more residential properties, you have certain obligations to tenants concerning the repairs that must be made. State and local law controls the exact nature of the rights and responsibilities, but there are several basic guidelines for you to follow. Following is a brief overview of the lay of the land.

Duty to repair: Generally, you should make repairs to rental units as soon as possible. This is particularly true with respect to major problems such as plumbing or heating failures. Although the exact law differs from state to state, you generally have to make accommodations to handle major heating problems within 24 hours of being notified about the occurrence, 48 hours where only minor repairs are needed.

Entry to premises: Before you enter rented premises to make any necessary repairs, be sure to provide advance notice to the tenants. Notification of 24 hours ahead of time is the norm. Otherwise, you are generally prohibited from entering the premises unless a dire emergency -- say, a fire or a flood -- exists.

In some states, landlords are permitted to enter the premises when the tenant leaves for an extended period of time in order to maintain the property and inspect for any damage or needed repairs. However, you can’t simply barge in under the guise of “checking up” on your rental property.

Minimum requirements: Under most state laws, you must offer and maintain housing by meeting certain habitability requirements such as heat, water, electricity and sanitary and structurally safe premises. Typically, local housing codes will establish standards for lighting, ventilation and electrical wiring. In recent years, requirements for installing smoke detectors and other security measures have become routine.

As with many legal obligations, using common sense can go a long way towards avoiding legal liability.

Practical approach: Whenever possible, take care of repairs as soon as you can. To ease your burden, you might decide to delegate repair work to one of your tenants in exchange for a reduction of rent. In any event, handle major plumbing or heating problems within 24 hours. Finally, keep tenants informed about pending repairs and provide explanations about any delays.

Legal Briefs

Checking on Employees -- In a new case, a city worker on family leave was required to call in to a special hotline for unauthorized trips. The worker violated the policy and was suspended from his job. Result: The Third Circuit Court of Appeals ruled that the Family and Medical Leave Act does not prevent employers from checking on employees to ensure they are not abusing the rules.

Investment Advice -- The Tax Court recently held that amounts paid by a trust for investment advice must be deducted as a miscellaneous expense. These expenses are deductible only to the extent they exceed 2% of adjusted gross income. The federal circuit courts have been split on this issue, so the United States Supreme Court may have to resolve the issue.

Workplace Tolerance -- A sales director for an aircraft company complained about his supervisor’s attitude towards his religion. The supervisor had said that the director’s refusal to smoke and drink during business dinners was a sales deterrent. Soon after he made the complaints, the director was fired from his job. Eventually, the company settled the case and agreed to participate in a training program designed to prevent religious discrimination.

A Credit Crunch -- Can you access credit reports of employees? In a new case, an employer requested the credit history of employees to investigate employee thefts and other acts of dishonesty. When one worker refused, the employer terminated her employment. The Third Circuit Court of Appeals ruled that accessing the information for this purpose was legitimate, so the employer did not have to obtain specific approval. -

 
 
1 East Wacker Drive
Suite 2610
Chicago, IL 60601
312.782.3636ATTY@SPKLAW.COM
Disclaimer