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Tilting the Scales

Business Issues with a Legal Slant

Cyber Security: Forewarned is Fair-Warned

Posted in Legal Risk Management

When Wei Wong, owner of Sushi Mushi, a popular Japanese food bistro in Texas, installed a phone add-on to take credit and debit card payments straight from his employees’ phones, his revenues skyrocketed. Yesterday the Feds told him that his customers’ credit and debit card numbers were posted for sale on an underground website. Malware planted in his employees’ point-of-sale telephone systems snared over 10,000 card numbers, encrypted PINs, and CVV codes. Every hacker in the Ukraine now wants their own missile launch system. Is Sushi Mushi to blame?

Notice Required

Yes, Texas law requires Wei Wong to notify each of the 10,000 customers because their “sensitive personal information” was, or is reasonably believed to have been acquired by an unauthorized user. A May 2013 Cost of Data Breach Study sponsored by Symantec reported that the average United States data breach cost per record was $188. A 2012 Verizon Risk Team study shows that in 2011, over 174 million records were reported breached. The average cost to an organization resulting from a data breach incident is now reported to be upwards of $6.65 million.

When? What if Not?  

Sushi Mushi is required to provide notice “as quickly as possible,” with exceptions made for criminal investigations (which must be documented). If no notice is issued, Wei Wong risks statutory penalties of $100 per individual per day for any failed or delayed notification, not to exceed $250,000 for a single breach. But these notice costs plus forensic investigation, credit monitoring, public relations efforts, and lawsuits are nothing compared to the biggest possible cost – the company’s reputation.

Who’s to Worry about Cyber Theft?

Most businesses that maintain a computer network with “sensitive personal information” [an individual's first name initial and last name with social security number, driver's license or government-issued identification number; or account number or credit or debit card information with security code]. Also, almost any health care-related business.[1]

Could It Be Worse?

If Sushi Mushi’s customers can get a class certified, Wei Wong’s liability will almost certainly include mandatory payment of identity theft and credit monitoring services, imposed auditing requirements, injunctions to cease and desist improper retention of customer data, reimbursement of funds stolen and costs expended in issuing new cards, disgorgement of Sushi Mushi profits during the time of the breach, and forced adoption of certain security measures.

Tilting the Scales in Your Favor

Consider Insurance. Many businesses purchase Commercial General Liability policies. However, it is increasingly likely that a general CGL policy will not cover a cyber-security breach; more insurance carriers are excluding cyber security breaches from their CGL policies. Check out purchasing cybersecurity insurance going forward to mitigate losses from a variety of cyber incidents, including data breaches, business interruption, and network damage. 

Steps to Protect Your Company –

  • Identify all sensitive data handled by your company.
  • Make sure it is secure. Encryption mitigates the Texas statutory liability and penalties.
  • Implement and maintain security systems – both computer system security measures and physical. Passwords, encryption, firewalls, anti-virus software are important; physical security measures are also important.
  • Lock sensitive data and dispose of it by making sure it is properly shredded. Simple employee negligence, such as losing a lap top or failing to shred personal data before disposing of it in the trash is a frequent culprit. Confirm that all employee’s know the protocol to keep customer data safe.
  • Implement a response plan to deal with a breach after it occurs. A plan in place will help reduce your risk of incurring fines as well as cut costs for notifying.

If you are hacked?

  • Detection, confirmation and quick remediation are key.  If you are compromised, know where and when bad things are happening – real compromises, not false alarms – so they can be shut down.  As Verizon’s 2014 Data Breach Investigations Report shows, speed matters, both in detection and dwell time (time between discovery and remediation). After mere minutes critical data can be exfiltrated from a network.
  • Quick remediation is critical, but so is insight. With so many states pushing to codify stringent breach notification      requirements, waiting days or weeks to let customers know what may have happened with their data simply won’t cut it going forward.

[1] The definition under the Texas statute also includes information regarding an individual’s physical or mental health information; the provision of health care to the individual; or the payment for the provision of health care to the individual;4 this information is referred to as “protected health information” or “PHI” in the health care industry, and is also subject to the privacy and security restrictions of the federal privacy statute known as HIPAA. Texas entities subject to HIPAA will have to determine whether they have breach reporting obligations under HIPAA, the Texas statute, or both, since the standards and requirements of HIPAA and the Texas statute are different.


Open-Carriers Pose a Threat to Restaurants with Liquor Licenses

Posted in Constitutional Rights & Issues

Regardless of their personal stance on any hot-button social issue, most business owners do not want their place of business to be the focus of demonstrations on that issue – wisely so, because rarely does being the focus of a political demonstration go hand-in-hand with making money.  

However, recently some gun enthusiasts in Dallas put Chipotle in the spotlight by openly carrying loaded semi-automatic rifles – commonly known as “assault rifles” – into a downtown Dallas area Chipotle’s restaurant. Chipotle released a statement asking customers not to bring firearms into their restaurants, reading in part:  

Recently participants from an “open carry” demonstration in Texas brought guns (including military-style assault rifles) into one of our restaurants, causing many of our customers anxiety and discomfort. Because of this, we are respectfully asking that customers not bring guns into our restaurants, unless they are authorized law enforcement personnel. 

Historically, we felt it enough to simply comply with local laws regarding the open or concealed carrying of firearms, because we believe that it is not fair to put our team members in the uncomfortable position of asking that customers refrain from bringing guns into our restaurants. However, because the display of firearms in our restaurants has now created an environment that is potentially intimidating or uncomfortable for many of our customers, we think it is time to make this request (emphasis added).  

As well-meaning as Chipotle’s request may be, it shows that, like many business owners, they are not aware of their obligations under Texas law. Many businesses follow Chipotle’s historical approach and, instead of asking their employees to intervene, attempt to leave it up to local law to determine if a gun-toter is acting legally or not.  

However, in Texas businesses with liquor licenses do not have that luxury. Under Texas State Law, any business with a liquor license – including all Chipotles and most family-style restaurants – which knowingly permits a person possessing a firearm to remain on their premises is subject to having their license revoked.[1] The Texas Alcoholic Beverage Commission has further stated that rifles and shotguns are not permitted inside establishments with liquor licenses and warns that “[i]f an individual does choose to carry a rifle or shotgun into a TABC-licensed business, the individual is placing the business owner’s TABC license at risk.”  

So if you own a business with a liquor license, what should you do? You have an affirmative obligation to prohibit Open Carriers from entering or remaining on their premises, but the presence of weapons may well unnerve employees who do not want to be responsible for asking them to leave. The TABC is not helpful, reminding business owners that “a business owner may ask a patron to leave the premises. If the patron refuses, that individual may be subject to criminal trespassing charges under Texas Penal Code Section 30.05.”

Ultimately, businesses with liquor licenses will simply have to bite the bullet – pun definitely intended – and the owner or manager must ask, respectfully, and once, for the Open Carriers to leave. If the Open Carriers refuse to leave, at that point they are trespassing and it is a matter for the local constabulary.

Tilting the Scales in your Favor

  • If you’ve got a liquor license, you put it at risk by not removing persons with firearms from your premises;
  • Open Carriers are trying to make a political point – so politely ask them to make it elsewhere; and
  • If they refuse, the police will ask them, less politely, for you.

[1]               There are exceptions for, among others, concealed carry permits and peace officers. Tex. Alc. Bev. Code § 11.61(e).



Happy Fourth of July Weekend!

Posted in Around the Holidays

Sure, fireworks are fun, but be cautious and careful.

Below are Texas’ Top 10 fireworks laws (but remember, laws may vary county to county) reposted from our July 2008 blog.

For a great Independence Day Parade, check out the Rotary Club of Park Cities 4th of July Parade for parade route and time.

Happy Independence Day to America, this July 4, 2014!


  1. Ever notice how we don’t shoot fireworks off for Easter? Fireworks can only be sold from June 24th through July 4th and December 20th through January 1st.
  2. It is illegal to sell or shoot fireworks within 100 feet of a place where flammable liquids, flammable compressed gasses or fireworks are sold or stored. Makes sense to me!
  3. Despite what you may have seen in the movies, it is illegal to shoot fireworks from or towards a motor vehicle, including boats.
  4. It is illegal to shoot fireworks from a public roadway, public property, park, lake or U.S. Corps of Engineer Property. Would hate to set a lake on fire.
  5. The minimum age to buy or sell fireworks was recently changed from 12 to 16. Should probably be 26.
  6. It is illegal to shoot fireworks within 600 feet of a church, hospital, day-care center or school. I most certainly wouldn’t want to go into surgery with a constant barrage of fireworks outside the building.
  7. It is illegal to shoot fireworks within city limits and, in many cities, it’s also illegal just to possess them. Selling, igniting or possessing fireworks within city limits can carry hefty fines approaching $2,000. Yet, country clubs just keep getting away with this.
  8. In unincorporated areas where fireworks are legal, you may only shoot off fireworks if you own property there, or if you receive written permission from a property owner. A county “burn ban” outside incorporated areas often translates into a prohibition against shooting fireworks. So no blowing up the neighbor’s mailbox without their permission!
  9. If you start a fire by shooting fireworks and the fire was found to be started intentionally, you may be subject to the charge of arson. If the fire is found to be accidental, you may be subject to a fine. In either case, you may be held civilly liable for damages.
  10. Beginning January 2, 2008, bottle rockets (a.k.a. pop rockets) were banned. You know you’re addicted to fireworks if you built up a reserve supply of bottle rockets prior to the ban.

In all seriousness, play it safe and keep in mind that fireworks are somewhat unpredictable.

WARNING to Liquor License Holders – “Open Carriers” Can Cost you your Liquor License

Posted in Constitutional Rights & Issues

“Open Carry” advocates recently made the news by openly carrying rifles and shotguns into Texas businesses. The Texas Alcoholic Beverage Commission (TABC) issued a REMINDER to all those who hold a Liquor License that businesses licensed to sell or serve alcoholic beverages are prohibited by state law from allowing rifles or shotguns in the building.

Specifically, Section 11.61(e) of the Alcoholic Beverage Code says that TABC shall, after the opportunity for a hearing, cancel a permit if the permittee knowingly allowed a person to possess a firearm in a building on the licensed premises. Some exceptions include licensed concealed handguns and peace officers.

Tilting the Scales in Your Favor

If an individual carries a rifle or shotgun into a TABC-licensed business and the business owner knowingly fails to remove them, the business owner’s TABC license is at risk. The business owner should ask the patron to leave the premises. If the patron refuses, the permittee may contact the police and file criminal trespassing charges under Texas Penal Code Section 30.05.

If this is of interest to you, stay tuned for more next month.

Affluenza – Is It Contagious?

Posted in Family Issues, Legal Risk Management, Money

Taking advantage of his car dealership owning parents being on vacation in the Bahamas, Cache Bar, a minor, invites his high school buddies over to liberate his parents’ locked libation cabinet. Well lubricated, Cache builds quite the bonfire in the backyard knowing that no one in their hometown of Daughtry, Texas, can water their lawns because of the severe drought.  The bonfire consumes Cache’s backyard grass, and then spreads and destroys three million-dollar mansions on Cache’s street. When Cache is charged with intentionally starting a fire that recklessly damaged his neighbors’ homes, his parents scramble for a defense to help him avoid arson charges – a state jail felony. Cache’s parents read a news article about another Texas teenager who avoided jail by asserting an “affluenza” defense – that the teenager was the product of wealthy, privileged parents who never set limits for their son.  Will “affluenza” keep Cache out of jail? If so, does that affect his parents?

Criminal Defense

Cache’s parents think the “affluenza” defense might keep Cache out of jail.  Fearing that their son, who was arrested before for public intoxication and minor in possession, is facing real jail time, the Bars introduce Cache to a psychologist. Agreeing that Cache’s behavior results from his belief that he’s entitled to do anything he pleases because his parents did not punish his child misbehaving, the psychologist concludes that Cache does suffer from “affluenza” – a mental disease resulting from the Bars buying him any toy or object he wanted. But, if the criminal defense succeeds, will it affect the Bars’ potential civil liability?

Parental Liability

Generally, minors are civilly responsible for their own torts; however, they rarely have any assets to satisfy a judgment. When a minor with an adverse judgment starts working, his or her wages cannot be garnished to pay the judgment.  Therefore, injured parties routinely search for ways that parents might be financially responsible for their child’s conduct. If there is property damage and if a plaintiff can prove the child’s negligent conduct was reasonably attributable to the parent’s negligent exercise of the duty of control and reasonable discipline of the child, the parents can be held liable for their minor child’s acts.  Texas Family Code § 41.001(1).  There is no limitation on the parents’ liability for damages in that situation.

Be Careful What You Ask For

“All mothers think their children are oaks, but the world never lacks for cabbages.”  Every parent hopes and dreams to raise a good child.  If they experience the nightmare of a child in trouble with the law, the parents’ natural reaction is to do what’s necessary to protect their children from harm. Yet, protecting a child might not always be in the parents’ best interest.  Promoting an affluenza defense in Cache’s criminal case may unintentionally create civil liability for the parents. By definition, the expert psychologist’s testimony will be that they failed to reasonably discipline him while growing up.  Although Cache’s parents, technically, admitted nothing in the criminal case, any good plaintiff’s lawyer will use the psychologist’s testimony and Cache’s criminal case defense against Cache’s parents in the civil case. Moreover, the psychologist’s notes and opinions, as well as Cache’s medical records, are likely to be produced to the attorney for the damaged multi-million dollar homes (or their insurance companies) in the civil case. 

Another Problem – Insurance?

Normally Cache’s parents would expect their homeowner’s insurance policy, and any umbrella policy to cover their civil liability.   Because the “Affluenza” defense exculpates the child for his parents’ failure to be good parents, it would not be surprising for the plaintiffs to argue that Cache’s parents were not just negligent, but grossly negligent in failing properly to raise Cache and are, therefore, liable for punitive damages.  Many insurance policies exclude any coverage for claims based on reckless or grossly negligent conduct

Can it Get Any Worse?

Yes. The possibility of no insurance coverage raises another issue: asset protection.  Cache’s parents have two assets that could satisfy a large judgment: (1) their ownership interest in the car dealership; and (2) their Bahama vacation home.  These assets are not exempt from judgment creditors.  Unless Cache’s parents took steps to protect those assets before Cache burned down the neighborhood, their decision to assert the affluenza defense may ultimately ruin them financially.  

Tilting the Scales in Your Favor

Consider ALL of the possible problems – criminal, civil, public relations, family and financial issues. Even if there is an obvious criminal matter, it may be advisable to retain both criminal and civil attorneys from the outset to advise you on the situation from all sides.  If you have not addressed any asset protection options, you may want to consider taking steps today to protect the wealth you’ve built over the years, just in case something terrible happens down the road.  Otherwise, like Cache’s parents, you may unwittingly expose yourself to a myriad of risks and liability for your child’s actions. 

Last-Minute Wills….What Counts?

Posted in Family Issues, Legal Risk Management

Monitoring his emails and gazing at the sights on Elafonisi beach in Crete, attorney Al B. Wise receives a desperate 4:30 a.m. (Texas time) email from his best client Betty Makit Williams – “Going under Slim Cutter’s knife in four hours for emergency surgery. No will. Can you get me one in case I don’t make it?” Sadly, Betty Makit did not make it. Did her will on a Post It?

Yes, at least in Texas. Knowing that a formal will was out of the question, Al B. Wise advised Betty Makit to write a holographic will – her last will and testament, completely in her own handwriting and signed by her. In addition to a will on a Post It note, Texas heirs have successfully probated wills written on a bedroom wall and on the fender of a vehicle. Even a Canadian will of a man trapped underneath was successful by probating the tractor’s fender as the will. About half of the states permit holographic wills.

To Create

A holographic will can be useful in an emergency situation when you have little time to provide for your loved ones. In Texas, it is considered valid, even if you write it on the back of an envelope. To create a valid Texas handwritten will it: must be COMPLETELY in your handwriting (none typed or written by someone else); and must be signed (recommend dated). BETTER to: account for all property like “all to _____;” state who you’d like to serve as executor of your estate; state that it is your “Last Will and Testament;” and, even if later, attach a separate piece of paper (an “affidavit”), and write on it that you were of “sound mind” when you signed the will, that you were at least eighteen years old when you signed the will, and that you have not revoked the holographic will that is attached and dated __________.

Problem Defects

Routinely, handwritten Wills become the subject of litigation after the Testator’s death when another person writes a portion of the Will; when there are obvious mistakes related to unclear wording or intentions (beneficiaries are identified only by their first names); or when provisions are unclear. Even if entirely written by Betty, a handwriting expert might be required to compare samples of her handwriting to her handwriting in the Will to confirm validity. All of these offer opportunities for the family to fight over the correct interpretation – fights that are both costly and time-consuming and the likely effect of tearing families apart.

Tilting the Scales in Your Favor

Not surprisingly, your best bet is to work with an estate lawyer and your accountant. Even though easier and cheaper for you, a handwritten will is NOT easier and cheaper for your loved ones. Dying without a will or even with a handwritten will almost certainly costs more money. The stress, wasted time, and frustration for your loved ones translates to an almost certain cost – that may well exceed out of pocket expenses.

See prior Tilting article – Where There’s a Will, Is There Always a Way? addressing when an on-line will might work for you, and when you may want to reconsider the “savings.”

Texas Bar Books offers “Wills Road Map: Practical Considerations in Will Drafting.”

Online Reputation Protection and Repair

Posted in Legal Risk Management

Arriving at his warehouse last week Knott Faire, owner of Faire Carpet Cleaning, discovered yet another complaining critique posted on WELP: “Lots of hype, a mediocre cleaning and a hassle at the end. Don’t get tied up with Knott!” In over 75 previous reviews only 3 were slightly negative. Since the “hype” complaint, another dozen scathing complaints were logged. Believing that the negative reviews are from a competitor, not his customers, Knott called his trusty lawyer Icahn Ficksit for help. Icahn issued WELP a subpoena demanding production of identifying information and ISP (Internet Service Provider) addresses for the dozen offenders. Will Ficksit win? 

In Virginia, yes; in Texas, no. The Virginia Court of Appeals held that a Yelp reviewer is generally entitled to First Amendment protection if the reviewer is critiquing a business they patronized; however, [i]f the reviewer was never a customer of the business, then the review is not an opinion; but is based on a false statement. Virginia only requires that Icahn Ficksit and Knott Faire show, among other things, that the WELP reviews “are or may be tortious or illegal,” or that Faire Carpet Cleaning has “a legitimate, good faith basis” to believe that they were the victim of actionable conduct.

Texas Law

On the other hand Texas courts require that a defamation plaintiff submit sufficient evidence to establish a prima facie case for each essential element of the claim in question, consistent with rules identified in the two related cases of Cahill and Dendrite. In other words, in Texas, to survive WELP’s challenge to Ficksit’s subpoena, Knott Faire would have to show some evidence creating a genuine issue of material fact for all elements of his defamation claim. Just saying that the postings might be tortious or illegal or that you are a victim is not enough. In other words, Texas businesses seeking personal details about website users – whether in an effort to silence online critics or otherwise – must lay out actual facts before such information is allowed to be obtained.

Anonymous Free Speech v. Right to Protect One’s Reputation

The right of free speech, including anonymous speech, is protected under the First Amendment, but this general protection relies upon an underlying fact assumption – that the reviewer was a customer of that company and the posted review was based on personal experience. If this assumption is false and the reviewer was never a customer, then the review is not an opinion. Instead, it is based on a false statement for which there is neither constitutional value nor constitutional protection. But, how much actual proof is required before the balance tips in favor of piercing the constitutional shield and disclosing the identity of the anonymous blogger? Courts must balance anonymous communication with the right to hold accountable those who freely defame individuals. Those defamers must face civil responsibility for their acts.

Tilting the Scales in Your Favor

Our advice on this subject of almost two years ago in Keeping a Good Name: Protecting Yourself From Internet Defamation is the same today. Consider carefully your options and the time and expense that are likely to be related to each. While, you really can sue someone for just about anything, there are other options to consider before pulling the pin on the litigation hand grenade.

·         Be Proactive – consider releasing your side of negative information first. If it is reasonable, it will be believed. “Nip it in the bud.”

·         Be Upfront – consider contacting and offering to meet with the online poster if the negative comments have already been posted. Be conciliatory.

·         Apologize if Necessary – consider ‘fessing up to your mistakes. A quick apology is less painful and costly than years of litigation, and is likely to put you in a better light as one who owns up rather than appearing to be clueless and defiant.

·         Negotiate to Get the Post Down - consider the cost to get it down. Words are forgotten. Even newsprint fades. The permanence of the web creates a major branding challenge.

·         Own Your SEO (Search Engine Optimization) – consider creating your own content and drive the bad stuff down in search engine rankings. Only your worst enemy will look for dirt on you past the first Google search page. See Reputation Repair below.

And, know that there are those who believe that any company that sues over online reviews someone makes is clearly a company not worth doing business with, since they might, potentially, sue you over any bad review you write online about them.

Reputation Repair

Managing your internet reputation is not a new idea. In fact Gray Reed regularly works with some of our clients on crisis communications and dealing with damaging or misinformation on the internet. There are also internet service providers and websites like Reputation ChangerReputation Management ConsultantsIntegrity Defenders,and Online Reputation Management that promote their ability to clear negative search results arising from an internet search engine.

By the way, consumer-review websites—whether Yelp, Angie’s List, Google + Local, Yahoo Local Listings, or Amazon.com—are shielded from liability for defamation claims stemming from user comments under the Communications Decency Act of 1996.

Last month Tilting and Alex Fuller wrote about The Case of the Defamed Doctor – SLAPP’ing Down Defamation Cases in Texas and the Texas Anti-SLAPPing statutes (Strategic Lawsuit Against Public Participation) aiming to prevent businesses or other powerful groups from filing baseless lawsuits against their critics. Typically, these statutes promote speedy resolutions and charge all legal fees to the losing party. See also SLAPP Happy – Can a Business Sue a Customer who Gave a Bad Online Review?

See prior Tilting articles –  Defamation Primer (2009) and When is a Tweet Not So Sweet? (2009)

Also check out – Defamation Law: The Basics

What and How You Sign a Contract Matters

Posted in Legal Risk Management

Needing a sales boost for his new line of fashion catheters, Sy Noff, owner and President of Med, Inc., retained advertising gurus Draper & Olson. Their contract provided for signature by Sy Noff as “President and CEO” of “Med Catheter Corp, Inc.”

After a three-martini lunch, Draper & Olson run up a $100,000 bill creating an instantly iconic advertising campaign featuring the Medicorp Man, a rugged rancher who isn’t afeard to proudly use Medicorp’s “Healthy Heartland”-brand catheter whilst cow-punching on the range. Despite the instantly iconic advertising campaign, Med’s business goes down the tubes. Sy and Med stiff Draper & Olson on their $100,000 ad bill. Noticing that the ad contract was signed by Sy Noff using the wrong company name, Draper & Olson’s diligent attorneys sued Sy Noff himself for Med’s debt because he did not disclose the true legal name of the company he was signing for. But surely,” Sy says, “I cannot be held personally liable for Medicorp’s debt simply because the company name was wrong on the contract!”

First, don’t call us Shirley. Second, you bet he can.

The Case of John C. Flood

The Texas Supreme Court recently upheld an advertising company’s judgment secured by Gray Reed attorneys Cleve Clinton and Alex Fuller against the president of the insolvent company, personally, in the case of John C. Flood of DC, Inc. v. SuperMedia, LLC.[1](“Flood”), holding him personally liable for the debts of his company. Like Sy Noff, the Flood name was not exactly right. It did not state the company’s full legal name – instead, the contracts listed the company with a number of other names that were incorrect. Relying on a legal doctrine known as the “partially disclosed principal,” the vendor sued the company’s president, personally, alleging that the true legal name of the company was only partially disclosed on the contracts.

Once the vendor proved that the contracts did not have the company’s correct legal name, the company president had to both plead and prove that the vendor had actual knowledge of the true legal identity of his principal (the company) at the time the contract was signed. When the company president and his attorney failed neither to plead nor prove that SuperMedia had actual knowledge of the company Flood’s true legal name, SuperMedia was entitled to judgment against the company president personally for the full amount of over a quarter million dollars.

Tilting the Scales in Your Favor

Yes, Cleve and I are tooting our horns a bit. There are at least two important “takeaways” for anyone who signs contracts on behalf of their company.

Sign Only for the Correct Entity. First, figure out who the correct entity is. Then make sure that when you sign a contract, it properly names the correct entity. Sign only under the correct, legal name of that entity.

Sign Only with Your Correct Company Title (or, at the very least, as “Agent”). Second, always make sure that your authorization to sign as an officer, director, agent, duly authorized agent, or other capacity is clearly indicated adjacent to your name (over, beside or under your signature). For example, Sy Noff, CEO,” Sy Noff, President,” “Sy Noff, CEO and President,” or some such. By the way, this specifically includes Company Checks.

If you want to read more: check out all of the legalese describing the Flood case, from the Dallas Court of Appeals or as blogged by other lawyers at “CAPACITY” OR “STANDING” IN A BREACH-OF-CONTRACT CASE, AND THE IMPORTANCE OF TIMELY FILING A VERIFIED DENIAL OF CAPACITY, and at Incapacitated,

[1]               408 S.W.3d 645 (Tex.App.—Dallas 2013, pet. denied).

Gimme a U-N-I-O-N!

Posted in Employment & Labor

Willa Bepayed is a standout attacker and a Senior on State Tech’s volleyball team. Willa read about Kan Doit, the Southeastern quarterback who’s leading the unionization drive before the National Labor Relations Board (NLRB). Like Kan, Willa Bepayed and her teammates also routinely spend 40 to 50 hours a week on volleyball – a full-time job. She also contends that her commitment discouraged her from entering State Tech’s pre-med program. Can Willa Bepayed and her teammates form their own union and bargain collectively? If so, do they risk encountering negative consequences if they are permitted to unionize?

Not likely to unionize, in Texas. The NLRB decision is limited to private universities as public institutions are governed by state labor laws. And, given that 24 states, including most of the South, are right-to-work jurisdictions, the vast majority of major college football teams could not unionize as Southeastern may.

The NLRB Ruling. The football players contended that their receipt of grant-in-aid scholarships from the university made them “employees” within the meaning of the National Labor Relations Act (NLRA) and entitled to choose whether to be represented for the purposes of collective-bargaining. The university asserted that its football players receiving grant-in-aid scholarships are not “employees” but are more akin to graduate students whom the Board found not to be “employees.” Rejecting the arguments of the university, the NLRB’s regional director determined that Northwestern football players were employees, finding: (1) the football players were not primarily students; (2) their labors as football players did not connect to their studies; (3) academic faculty didn’t sponsor athletic endeavors; and (4) the scholarships were for football not academics.

So, who could unionize? Theoretically every scholarship team at Southeastern would be eligible (except walk-on players who receive no remuneration from the university). Apparently, every student athlete with a full or a partial athletic scholarship would have to be defined as an employee by the NLRB. How about the women’s volleyball team that has four scholarships divided among twelve players with each getting a partial scholarship? The band? the cheerleaders? The university orchestra? Arguably, anyone who receives a scholarship and is required to perform any activity for the university is a common law employee.

Pro-Union. The newly formed College Athlete Players Association, comprising the majority of Southeastern’s team, claim to seek better representation with the stated intent to address concussion overhaul, enhanced health coverage and education change from the more than $10 billion generated annually by Division I college athletics. The Department of Education reports that there are more than 140,000 Division I athletes throughout the United States who collectively receive more than $2 billion in athletic scholarships annually.

Pro-Student-Athlete. The NCAA argues that, while needing repairs, its organization can be remodeled without demolition and full reconstruction that otherwise risks impairing the education of the more than 10,000 student-athletes participate in 23 different March Madness related championships at all levels of the NCAA. Moreover, events like March Madness help the NCAA provide opportunities for more than 460,000 student-athletes to get an education, under the guidance of the world’s finest coaches and professors, and to become leaders on the field and off. One group of athletes is not more hardworking, more dedicated or more driven than another. Unionization will create unequal treatment not only among student-athletes competing in different sports, but, quite possibly, even among student-athletes on the same team.

Unintended Consequences?

Title IX? What about the difference in value of employees and their respective unions? The Southeastern men’s football union creates greater value than the Northwestern women’s swim team union, for example. Would it be legally permissible for the football team to collectively bargain for more than the women’s swim team? Title IX specifically forbids this from happening — all scholarships have to be equal between the sexes.

IRS Implications? Redefining a “student-athlete” to an employee could change the way the IRS classifies scholarship income. If athletic scholarships are considered compensation for work, the IRS would at least explore taxing that income. And for a football player at Southeastern — where tuition, room and board cost $61,000 — that might mean a $15,000 tax bill. Section 117 of the code says scholarships do not qualify as gross income for any individual who is a candidate for a degree at a school or university. But that exclusion does not apply to any amount received as payment for services required as a condition for receiving the scholarship. Though the NLRB ruling asserts that grant-in-aid athletic scholarships are not financial aid, the IRS ruled in 1986 that athletic scholarships should be treated the same way as academic scholarships in terms of tax liability.

Title VII?As employees, college athletes would be covered under Title VII of the Civil Rights Act, which prohibits employers from discriminating based on race, religion, gender or national origin. That means universities could be subjected to harassment lawsuits and hostile work environment claims that currently have little merit.

See prior Tilting article – You Have the Right to Vote MY WAY: Can Companies Influence their Employee’s Vote? (2012)