Board certification is a notable accomplishment.  Within the North Carolina legal community, board certification means that a lawyer has substantial, relevant experience in a select field of law as well as demonstrated, and tested, proficiency in that practice area. 

There are more than 25,000 active lawyers licensed to practice in North Carolina.  Only 826 are board certified.  Board certified lawyers earn the right to publicly represent themselves as specialists in select areas of the law.  In fact, they are the only attorneys allowed by the North Carolina State Bar to do so.  This designation sets them apart as being lawyers with a public commitment to excellence in their area of law.  The process is voluntary and can only take place after an attorney has been in practice for five years, with significant practice experience in the specialty area.  Board certification requires an ongoing commitment to the specialty area which must be verified every five years with references from peers in that field.  It also requires additional annual continuing legal education courses so that specialists stay abreast of current trends in law.

It might surprise some people to find out just how many companies selling their own products do not actually own a manufacturing facility.  This is not at all uncommon today, and is true for both large and small companies and across all industries, including pharmaceutical, food, electronics, biotechnology, automotive parts, and medical supplies.  Owning and operating a manufacturing facility requires a company to purchase or lease equipment, raw materials, tooling, and space; and to establish an entire additional level of management, logistical support, and administration.  To eliminate these disadvantages, you can rely on third parties, often called "contract manufacturers," to manufacture your products.   

A contract manufacturer can manufacture your company's products to your specifications and with your name and label.  If your company doesn't own and maintain warehouse and shipping operations, the contract manufacturer can also ship your products directly to your distributors, retailers, or consumers.  Negotiating a well-crafted agreement ("Manufacturing Agreement") with the contract manufacturer is important for ensuring that each party clearly understands its rights and obligations, and will help you to avoid the disputes that commonly arise as a result of a poorly defined relationship.  It would be impossible to cover in this article every issue to be addressed in a Manufacturing Agreement, but it will highlight a few of the more significant issues that should be covered.

Product Specifications

Unless your contract manufacturer is going to manufacture its own product for you to sell under your name (often referred to as "private labeling"), you will need to establish in the Manufacturing Agreement the product specifications to be used in the manufacture of your products.  This is where you will set your expectations regarding the functionality of your product; its quality, appearance, dimensions, design, features, and characteristics; and whether specific components or raw materials will be required.  You will provide your contract manufacturer with drawings, schematics, photographs, models, or other demonstrative examples of your product.  Your product specifications can also be set out in a separate document that can be incorporated into your Manufacturing Agreement and modified from time to time during the relationship without the need to amend your Manufacturing Agreement itself.

Warranties

Your Manufacturing Agreement should also establish the warranties being provided to you by the contract manufacturer with respect to your product.  There are some warranties implied by law, such as the implied warranty of merchantability (i.e., the goods reasonably conform to an ordinary buyer's expectations), the implied warranty of fitness for a particular purpose (i.e., when a purchaser relies on the seller to select the goods to fit a specific request), and the implied warranty of title (i.e., the title to the product is good and the product is delivered free from any security interest or other lien or encumbrance of which the purchaser has no knowledge).  These implied warranties may be specifically disclaimed by the contract manufacturer in the Manufacturing Agreement. 

However, some common express warranties you might receive from a contract manufacturer include warranties that:

• Your products are manufactured in accordance with the specifications provided by you;
• Your products comply with all applicable laws; and,
• Your products are new, safe, and free from defects in materials, manufacture, and assembly. 

Depending on the particular circumstances of your Agreement, these warranties are not unreasonable, particularly if the contract manufacturer is manufacturing a product to your specifications.   

Exclusivity/Minimum Purchase Orders

The issue of exclusivity and minimum required purchases is overlooked in many Manufacturing Agreements.  It is important that this issue is addressed in your Manufacturing Agreement even if it only involves adding a provision clarifying that the parties are not entering into an exclusive contract or that no minimum orders will be required.  A contract manufacturer might be reluctant to invest the time and money necessary to up fit its equipment and facilities and train its employees to manufacture your product if the manufacturer is not assured that you will order all of your needs from it or at least order a minimum quantity of your product.  A contract requiring that you order all of your product from the contract manufacturer is referred to as a "requirements" contract.  If you agree to a requirements contract, you will not be able to contract with any other manufacturer for your product, even if the other manufacturer offers you a lower cost, a better quality, and better service.    

Intellectual Property

One of the more valuable assets that your company may own is its intellectual property portfolio, commonly referred to as its "IP."  Your company has spent a great deal of time, effort, and money to develop its IP and it may be necessary for you to provide your IP, or a substantial part of it, to the contract manufacturer in order to manufacture your product.  Your Manufacturing Agreement should clarify your ownership of any IP to be used during the manufacturing process. 

It also is important to address ownership of any IP that might be created during the contract relationship, including any improvements to your product.  Sometimes this new IP is created separately by the contract manufacturer or you.  Other times the improvements or new IP might be created jointly by both of you.  Your Manufacturing Agreement should clearly define ownership of newly created IP, including improvements to your product.  The law that applies to ownership of jointly-developed IP, or to IP created by improvements to another's IP, is complex.  It will be worth your time and effort to address these issues when entering into your Manufacturing Agreement.     

Liabilities and Disclaimers

When negotiating your Manufacturing Agreement, you should give attention to the negotiation of liability allocations and disclaimers.  By relying on another party to manufacture your product, you are giving up some level of control over the manufacturing process. 

A defect in your product as a result of a manufacturing error could have a significant negative impact on your company, particularly if someone is injured.  Your business also could be damaged if the contract manufacturer fails to comply with its obligations under the Manufacturing Agreement, such as failing to deliver products timely to one of your large retail customers.  The Manufacturing Agreement should address who is responsible, and to what extent, for damage to third parties and to each other, including economic or reputational damage. 

Your contract manufacturer may desire to disclaim certain liabilities, including liability for damages such as your lost profits, consequential damages, and for punitive damages.  These kinds of damages, if not disclaimed, could be significant under certain circumstances.  An alternative for you to consider when faced with a contract manufacturer that wants to disclaim liability is to offer to cap the contract manufacturer's potential damages, either to a specified amount or to an amount not exceeding the amount you have paid to the contract manufacturer.   

Conclusion

There can be significant advantages to using a contract manufacturer, including lowering the cost of your product; reducing your liabilities; and avoiding the need for you to equip, train, and manage a manufacturing division.  The importance of negotiating and preparing a comprehensive Manufacturing Agreement cannot be stressed enough.  You sometimes have only one chance to clearly establish the rights and obligations of each party when entering into a manufacturing relationship.  Failing to address these issues at the beginning of the relationship may result in a greater likelihood that you will find yourself in a damaging dispute.

When a significant dispute arises between parties in a contractual or commercial relationship, phrases such as the following are often heard:

• "I'll see you in court."
• "This is headed to litigation."
• "Our contract requires that we arbitrate."
• "We are required to mediate first."

Frequently, these terms are used interchangeably and imprecisely.  Knowing what these terms actually mean is important for understanding what you are likely to encounter if you end up in a dispute that requires resolution by formal legal means.

Litigation

Litigation refers broadly to any legal procedure by which parties to a dispute seek a resolution.  The roots of our dispute resolution processes go back nearly a millennium to a time when judges were sent by the King of England throughout the kingdom to resolve disputes.  This was done in an effort to prevent parties from resolving disputes themselves, which typically involved destruction of property, injury, or even death.

Without the King's assistance, if a property owner refused to pay for the materials, effort, and money a homebuilder put into the construction of a house, then the homebuilder had three basic "self-help" options:  threaten to tear (or burn) down the house; threaten to injure or kill the property owner; and, if those options didn't work, carry out one or both of the threats just to feel better! 

Obviously, these options not only were counterproductive, but also were ineffective in actually getting the homebuilder paid for his work.  Further, the homebuilder could reasonably expect retaliation from the property owner's family or friends which itself induced further retaliation, home burning, injury, and death.  Thus, the king's concern.

If home burning, personal injury, or killing seems like a dark or extreme outcome for a commercial dispute, then this is a testament to the effectiveness and value of the system of Anglo-American litigation initially conceived of more than a thousand years ago.  We have come to accept that if we are harmed by the wrongful actions of another, then our recourse is to a relatively peaceful dispute resolution process administered by our judicial system.  It is now generally accepted – even if not commonly understood or appreciated – that this process is better than having the parties resolve the dispute themselves by wreaking more havoc on and loss to society.

Today, the most basic form and, in fact, the default form, of litigation is dispute resolution through recourse to the courts.  Outside of the criminal context, this procedure typically involves a plaintiff initiating a formal lawsuit by filing a complaint naming the other party to the dispute as a defendant.  The complaint sets forth the factual basis of the plaintiff's claims, the legal theories upon which the plaintiff is relying to obtain recovery from the defendant, and the recovery the plaintiff is seeking to obtain from the defendant.  The defendant next files an answer and then the parties will engage in a period of discovery which involves the exchange of information relevant to the case.  If the case does not settle or is not decided in a summary fashion beforehand, the parties will then present their case in an adversarial fashion at a formal trial where the ultimate outcome will be decided by a judge who determines what law applies and a jury that makes a determination of facts.

In most, but not all, cases, the ultimate remedy will be some form of directive by the court that one party pay money to the other.  A party disappointed with the results obtained at the trial court can typically pursue an appeal to a higher court where significant outcome-effecting errors can be reversed or corrected.  Litigating in court often involves mediation (discussed below) which can occur before, during, or even after litigating in court.

Arbitration

Arbitration is a form of litigation that involves an agreement between the parties to submit their dispute to an arbitrator or arbitrators in lieu of the court system.  Arbitration was developed under the premise that litigating in court with a judge and jury is overly expensive, complicated, and time consuming.  The undergirding principle of arbitration is that the parties themselves can fashion a flexible procedure applicable to their dispute that is no more time consuming or costly than is absolutely required by them.

Arbitration, although once highly favored as an alternative to court-based litigation, is now recognized by many as not substantially different in terms of cost and time from litigating in court.  The basic principles of dispute resolution applicable to litigating in court and litigating through arbitration are substantially similar.  However, arbitration does differ from litigation in the following significant respects:

• There are generally no appeals.  Thus, the arbitrators' decision is typically final and unchallengeable.
• Most procedures used are guided by the parties' agreement rather than by the inflexible and rigid rules used in court-based litigation.

However, these benefits are balanced out by the fact that, notwithstanding other costs such as filing fees, the major costs of court-based litigation – such as the cost of the judge and jury – are borne by the government.  In arbitration, the parties must bear all of the costs.

Mediation

Mediation is a procedure whereby a third‑party neutral seeks to assist the parties in resolving their dispute.  Mediation typically commences with the parties and the mediator meeting in a single room.  The mediator provides an overview of the mediation process, followed by the parties providing a brief summary of their respective positions in the dispute.  The parties then adjourn to separate rooms.  The mediator travels between the rooms, discusses the dispute with each party, and attempts to facilitate the flow of information and settlement offers between the parties.

The mediator has no actual power to render a result or compel either party to settle.  Indeed, the only formal power the mediator really has is to require the parties to continue mediating so long as the mediator feels that continuing to mediate will be productive.  This is not to say that the mediator can't play a powerful role in effectuating a settlement.  Mediators are typically trained in the art of negotiation and settlement and act as an intermediary between the parties while also attempting to disabuse parties of incorrect notions regarding the strengths of their legal positions in the case and the weakness of the other party's case.

Put simply, mediators are often highly successful in getting parties to realize that if they do not resolve their dispute in mediation, they will be forced to spend substantial sums in legal fees to continue litigating for an ultimately uncertain result which, even if favorable to them, may not be sufficiently favorable to fully compensate them for the time, effort, and money spent to obtain that result.  Frequently, the mediator's most powerful tool is the ability to facilitate the flow of information and settlement offers between the parties without either party having to technically "go first."

Arbitration and mediation are not mutually exclusive.  Mediations are often conducted alongside, as part of, or before arbitrations or litigation.

Conclusion

There are various methods and components of dispute resolution, with the three most prevalent in the United States being litigation, arbitration, and mediation.  All of these methods and components fall under the general category of dispute resolution which involves an effort to efficiently resolve disputes without additional or unnecessary harm or loss.

David grew up in New Bern, the son of a former state senator who also grew up in New Bern.  After earning his degree in accounting from The University of North Carolina at Chapel Hill, he served two years in the United States Navy and spent a tour of duty on a destroyer.  He then returned to college and ultimately earned a law degree in 1962 from the Duke University School of Law.

David was admitted to the North Carolina State Bar in 1962 and returned to New Bern where both his father and grandfather practiced law.  In an interview with the New Bern Sun Journal, David said, "New Bern was hurting in 1962 and my dad, my parents, wanted me to come back.  A lot of people here helped me.  I wanted to see the community grow and be better and, if somebody didn't step up, it wouldn't have happened."  His leadership at Ward and Smith, P.A. has taken the Firm from one office in New Bern in 1962 to five offices throughout North Carolina today.

David's individual leadership has been felt throughout New Bern and Craven County.  He was instrumental in making Tryon Palace an historical site in New Bern and has been a member of the Tryon Palace Commission and the Tryon Palace Council of Friends.  He also was a founding member of the Craven County Committee of 100, has served several terms as a member of the vestry at Christ Episcopal Church, and has served as Board Chair for the New Bern Area Chamber of Commerce.

David's leadership is not limited to New Bern, but extends across the state.  He has served as a trustee and a member of the Board of Visitors at The University of North Carolina at Chapel Hill and has been a member of the North Carolina Banking Commission, the North Carolina Bar Association, the North Carolina Chamber, and the Medlin Commission on the Future of the Courts.  He also has served as Chair of the Research Triangle Foundation Board of Directors.

Over the course of his legal career, David has been recognized as one of North Carolina's most accomplished attorneys.  He is a member of the North Carolina Bar Association Hall of Fame and has been listed for many years among the Best Lawyers in America.[1]  He also is included in "Legal Elite,"[2] a list of the best attorneys in North Carolina by Business North Carolina magazine, and is a member of the "Legal Elite Hall of Fame" in the field of Corporate Counsel.

David is admitted to practice law in all North Carolina courts as well as the United States Supreme Court, the United States Court of Appeals for the Fourth Circuit, and the United States District Court for the Eastern District of North Carolina.

In addition to David, the other two recipients of the 2012 Community Fabric Awards were CarolinaEast Health System (G. Raymond Leggett III, President and CEO), Award for Business Leadership; and Donald Carpenetti, Chemistry Instructor at Craven Community College, Award for Leadership in Education.

A variety of gifting strategies may be employed for this purpose, including some that allow the donor to retain an economic benefit from the gifted assets.  Implementation of these strategies, however, often takes months to complete. 

Individuals interested in pursuing this opportunity should act without delay.  If you are interested in 2012 gifting strategies, please call any of our estate planning attorneys listed below:

Asheville
Michael L. Miller

New Bern
Jennifer J. Dacey
Jeannette A. Parrott
Gregory T. Peacock

Raleigh
Carrie B. Cline
Stuart B. Dorsett

Wilmington
Eldridge D. Dodson
John R. Sloan
Matthew W. Thompson

Faced with mounting losses, and perhaps even foreclosure, many borrowers with "underwater" loans are turning to bankruptcy in an attempt to achieve a structured reorganization in order to salvage whatever they can.  In a bankruptcy reorganization pursuant to Chapter 11 of the United States Bankruptcy Code ("Code"), the debtors typically negotiate with their creditors and attempt to reach a mutually agreeable plan of reorganization.  Oftentimes these negotiations are unsuccessful, as the debtor and creditors are unable to agree on how the creditors' claims should be treated.

In these situations, the debtors may attempt to "confirm" their plans of reorganization over the objections of their creditors.  A growing trend for debtors that have no ability or incentive to keep property is to propose to surrender all or part of the commercial real estate to the secured lender in satisfaction of the lender's claims. 

These so-called "dirt for debt" or "partial dirt for debt" plans raise a number of issues for lenders and can result in lengthy plan confirmation battles.  After all, lenders are not in the business of holding, developing, marketing, or selling real estate.  They are financial institutions, not developers, that negotiated for payment from revenue and, only in the dreaded event of a foreclosure, the right to quickly reduce their collateral to payment with the right to sue for the remaining deficiency, if any.  Through dirt for debt plans, debtors often seek to alter or eliminate the lender's rights without adequate compensation.

The Bankruptcy Code

The Code imposes numerous requirements that must be met before Chapter 11 reorganization plans can be confirmed, and the debtor bears the burden of proof on each requirement.  For instance, the plan must provide creditors with at least as much compensation as the creditors would receive in a bankruptcy pursuant to Chapter 7 of the Code where all of the debtor's non-exempt assets are either liquidated by the bankruptcy trustee or immediately surrendered to creditors holding liens. 

If a creditor rejects a debtor's proposed plan, then the debtor must demonstrate that the plan is "fair and equitable" as to that creditor.  The debtor bears the burden of introducing evidence of its current financial situation, assets, and liabilities sufficient to satisfy the bankruptcy court that the proposed plan will provide the creditor with at least as much compensation as it would receive in a liquidation.

"Fair and Equitable"

The debtor's proposed plan must be "fair and equitable" with respect to each class of lenders.  One way a plan may satisfy the "fair and equitable" requirement is by providing the lender with the "indubitable equivalent" of its claim.  To make a determination that a creditor will be provided with the indubitable equivalent of its claim, the court must have no doubt that the lender will receive consideration equal in value or amount to its claim.

A Question of Value

Although lenders routinely accepted real property as security for their loans prior to the "Great Recession," they generally did so with the express understanding and comfortable assumption that, in the event of a default, they could foreclose on the collateral and quickly reduce their claim to a cash payment.  Three generations of lenders (and everyone else) had come to the irrefutable conclusion that the value of real estate only increased over time! 

But now, in the "new normal," a secured lender acquiring its collateral through a dirt for debt plan has little option but to market and sell the collateral at considerable risk. 

The issue in dirt for debt cases ultimately boils down to the value of the collateral the debtor proposes to surrender.  The debtor must either surrender all collateral to a secured lender or demonstrate that the portion of the collateral being surrendered will fully compensate the lender for the value of its claim.  The "indubitable equivalent" standard considers whether the lender's proposed treatment under the plan is completely compensatory and also the likelihood the lender will receive payment.

Of course, by surrendering collateral, the debtor shifts all risk of loss to the secured lender.  For example:

• The lender will be required to incur holding, sales, development, and marketing costs, yet will not receive any proceeds unless and until it is able to sell the collateral at some uncertain future date.
• The amount of cash the lender can expect to receive will be largely speculative.
• Depending on the particular real estate market, there may be substantial delays and risks associated with the lender's attempted sale of the collateral.
• The market may be saturated with more desirable properties, with insufficient buyers (and lack of available financing) to absorb that surplus within a reasonable time.
• The lender may end up marketing the collateral for sale in direct competition with the debtor who continues to market and sell properties it has retained.

It is obvious that these risks are exacerbated where the real estate market in question is depressed and is saturated with more attractive properties, and also where the debtor proposes to retain a portion of the collateral to sell and market in direct competition with the secured lender.

Type of Valuation Required

The Code requires consideration of a debtor's proposed disposition or use of the property regardless of the Chapter of the Code under which the bankruptcy petition was filed.  For example, when the debtor opts to avoid foreclosure and liquidation and retain the property in the plan, a "replacement-value" standard is appropriate in order to fairly compensate the secured lender for the deprivation of its immediate value and for the lender's exposure to the attendant risks of the plan (e.g., the risk of the debtor's future default and the risk of collateral depreciation). 

Bankruptcy courts struggling with partial dirt for debt plans have found that the assets proposed to be surrendered to secured lenders should be valued conservatively and that those values should be scrutinized carefully.  Unfortunately, conservative valuations are difficult, if not impossible, in an uncertain and troubled real estate market where considerable doubt exists as to the value of the property to be surrendered.  In such a market, a dirt for debt plan rarely offers the creditor the "indubitable equivalent" of its claim unless the appraised value of the property, demonstrated by competent proof, far exceeds the amount of the debt to be paid. 

Factors to be considered in a conservative approach to valuation include:

• Development costs;
• Completion costs;
• The sell-out period needed in order to convert the value of the property to cash;
• The holding costs including, but not limited to, accruing taxes, costs of insurance, maintenance costs, entitlement compliance costs, and stormwater and erosion control maintenance;
• Absorption rates specific to the collateral and the location;
• Competition with similar development property;
• Disposition costs associated with a bulk sale; and,
• Any other factor that would detract from the value of the collateral. 

These considerations are necessary to produce a conservative valuation that accounts for the heightened risk of error inherent in valuations of this nature and in order to properly protect the secured lender from the risks associated with dirt for debt plans.

Conclusion

"Dirt for debt" cases force secured lenders to:  (i) incur considerable risks and costs in holding and marketing their collateral over a prolonged period of time in the hope that they can sell the collateral for an amount equal to the present value of their secured claims; and/or (ii) take a substantial loss upon a bulk sale of the collateral in an effort to produce an immediate, but partial, cash payment on their claim. 

Dirt for debt plans typically, but often in today's saturated market unreasonably, predict that the secured lender will be able to accomplish what the debtor could not:  sell the collateral in a weak, oversaturated market for an amount sufficient to fairly compensate the lender.  As a result, secured lenders faced with proposed dirt for debt bankruptcy plans should be proactive in seeking an appropriate collateral valuation that accurately reflects the risks and burdens associated with the plan.

Consider the average time a job is held in the United States; one source tells us slightly less than five years.  It would seem, therefore, that youth should actually play less of a role in the selection and retention of employees than in years gone by.  Nevertheless, age does play a role, recognized by some as a serious impediment to the older worker and explained away by others as a "fact of life."  The latter was actually a quote from a federal Court of Appeals opinion used in a 2009 New York Times editorial.  The Court was reportedly assessing the evidentiary weight to be given to a statement by a company's vice president in an age discrimination case that "[t]here comes a time when we have to make way for younger people."  The Court held that the statement was "irrelevant," as it was simply stating a "fact of life." 

The editorial suggested that "age discrimination is not taken as seriously as other biases."  Although race discrimination is viewed generally as inherently wrong, "there is something natural about the old making way for the young."  The editorial nevertheless concluded:

To be rejected on account of old age may or may not feel the same as being rejected on the basis of race or sex.  But it is clearly unjust and dehumanizing, and the law should take it more seriously than it does.

The law alluded to was the federal Age Discrimination in Employment Act ("ADEA").  Originally enacted by Congress in 1967, it has been amended a number of times through the years.  Like Title VII of the Civil Rights Act of 1964 ("Title VII"), the ADEA was part of a wave of employment legislation in the 1960s, the goal of which was to level the playing field for certain classes of disadvantaged members of the labor force.  In the case of the ADEA, employees over age 40 were afforded protection from discrimination in the workplace.

The statement of congressional intent contained in the ADEA is worth repeating:

[T]o promote employment of older persons based on their ability rather than age; to prohibit arbitrary age discrimination in employment; [and] to help employers and workers find ways of meeting problems arising from the impact of age on employment.

In enacting the ADEA, Congress took the issue of age discrimination quite seriously.  It did not grant leeway to employers (or the courts, for that matter) to tell older workers to face up to reality; make way for fresh faces, so to speak; or "take it to the barn." 

However, application of a law to the facts of life, real or presupposed, sometimes thwarts the law's good intentions.  Forty‑five years after enactment of the ADEA, one very real fact of life is prolonged hard times.  A 2010 New York Times article, entitled "For the Unemployed Over 50, Fears of Never Working Again," quoted statistics that older workers have been disproportionately unemployed not only since the economic collapse in 2008, but also for periods of six months or longer:  a large‑scale disparate impact.  It may get worse before it gets better. 

More recently, an article in the Wall Street Journal, "Oldest Baby Boomers Face Jobs Bust," cited U.S. Department of Labor ("DOL") statistics that four million Americans aged 55 to 64 are unable to find work, a number that has doubled over the course of five years.  The article also cited DOL statistics showing that the average duration of unemployment for those aged 55 to 64 is 56.6 weeks, as compared to 35.9 weeks for 25- to 34-year-olds, and 47.8 weeks for 45- to 54-year-olds.

It is probably no coincidence then that the Equal Employment Opportunity Commission ("EEOC") reports a significant increase in age discrimination charges.  In terms of gross numbers and percentage of all charges (made on the basis of age, sex, race, national origin, color, religion, and disability), the number of age discrimination charges increased from 16,548 (21.8% of all charges filed) in 2006 to 22,778 (24.4% of all charges filed) in 2009.

A tongue‑in‑cheek review in the Wall Street Journal, entitled "Revenge of the 60‑Year‑Old Has Beens," recently suggested that, "Once you're past 60, you should be thinking about making a graceful, dignified move towards the exit."  No wonder those who have attained the sixth decade of life may face the competitive job market not only with fear and trembling, but also with exquisite sensitivity for their legal rights.  Consequently, employers' time will also be well‑spent considering in detail the ADEA and other laws that deal with duties to older workers.

Age Discrimination: A Primer

Age discrimination is illegal.  That is true under the ADEA as well as state law, but not everyone of a certain age is entitled to legal protection.  Individuals over the age of 40 are covered by the ADEA.  Most employed and employable persons who are over 40 and who have suffered an adverse job action because of age may make a charge of discrimination under the ADEA against a covered employer.  But not all.  Independent contractors, partners in partnerships, and uniformed personnel in the active or reserve military are not protected by the ADEA. 

ADEA protection is subject to limitations.  Coverage under the ADEA is slightly more circumscribed than under Title VII, which is the federal law that protects against workplace discrimination on the basis of sex, race, national origin, color, and religion.  Title VII applies to employers who have at least 15 employees, while the ADEA applies only to private employers who have 20 or more employees.  Thus, the employees of small private businesses generally lack protection under either or both the ADEA and Title VII.

The ADEA does apply to labor organizations, employment agencies, and state and local governments.  Coverage of state government employment gets more complicated, however, as the United States Supreme Court has held that, pursuant to the doctrine of sovereign immunity, state employees may not sue for monetary damages under the ADEA unless the state consents to be sued or another exception applies.  However, the ADEA still may be enforced against the states by the EEOC, and state employees may sue state officials for declaratory and injunctive relief.

To fill in some of the ADEA gaps in individual protection, complementary state laws have been enacted.  State employees in North Carolina, for example, have state-granted protection against age discrimination within the State Personnel System.  Governed by state law, all departments, agencies, and local political subdivisions of the State of North Carolina are required to give equal opportunity for employment and compensation without regard to age (40 years of age or older) except where age requirements comprise a bona fide occupational qualification ("BFOQ") necessary to the proper administration of public business. 

Enforcement of the ADEA

The ADEA includes enforcement procedures similar to those in Title VII.  The EEOC is the agency with original jurisdiction over charges of age discrimination.  A charge of age discrimination ordinarily must be filed within 180 days of the last discriminatory act.   

The EEOC will investigate a charge, attempt to reconcile the parties, and then either sue the employer or issue a right to sue letter to the person who has made the charge of age discrimination ("Charging Party").  The Charging Party has 90 days from the issuance of the right to sue letter in which to file an age discrimination suit. 

The ADEA prohibits discrimination on the basis of age in all terms of employment.  So, it applies not only to hiring, placement, promotions, compensation, demotions, transfer, discipline, and discharge, but also to leave and employee benefit plans such as health coverage and pensions. 

ADEA protection applies when a person over 40 is treated less favorably than a person under 40.  Its protection can also apply when an over-40 individual has not been hired, has been passed over for a promotion, or has been laid off in favor of a younger person who is also over 40.  In that case, however, the age difference must be significant or substantial.  The courts have not offered up a precise definition of significant age difference under the ADEA, but nine- or ten-year age differences have been said to be sufficient by the United States Court of Appeals for the Fourth Circuit, which has jurisdiction over federal lawsuits arising in North Carolina.

Furthermore, the ADEA prohibits an employer from publishing advertisements relating to employment that indicate any preference or limitation based on age.  EEOC regulations therefore prohibit ads for applicants "age 25 to 35" or for "young people."  Exceptions will be made where age is a BFOQ for the position.

The ADEA also prohibits retaliation against any employee who has opposed a practice that is made unlawful by the ADEA, who made a charge of discrimination, or who assisted a co-worker in an investigation, proceeding, or litigation under the ADEA.  Illegal retaliation, or employer "payback," includes extreme job actions such as termination, demotion, or pay reduction, or less overt behavior such as an onerous shift change, the relocation of an office, a decrease in administrative support or benefits, a bad evaluation, exclusion from meetings, a bad job reference, or changed job assignments.  The test is whether the employer's retaliatory act would chill a reasonable employee's resolve to complain about, or assist in complaints against, discrimination or harassment in the workplace.

There is no top end, generally speaking, to protection against age discrimination.  Under the strict letter of the ADEA, an 80-year old has the same protection against age discrimination as a 40-year old.  As the population in general ages and the economy further degrades the value of retirement plans, the phenomenon of the "working aged" steadily increases.

The good news is that there is no such thing as reverse age discrimination, so older workers may be favored over younger workers, whether the younger person is under 40 or not.  Although a 40-year-old is within the protected class, it would not be illegal for an employer to favor someone even older, a point sometimes made by commentators, but unlikely to give comfort to those labeled as part of the "working aged."

Proving Age Discrimination

What does it take to establish proof of age discrimination?  There is no set formula.  The following are some evidence patterns that have been held by various courts to demonstrate sufficient evidence to make out colorable cases of age discrimination:

• Remarks made by a decision maker that age was the "major and only factor" for discharge, and the work involved was "meant for people in their thirties."
• An email to several employees discussing management's intent to go forward with a plan to "strategically hire some younger engineers and designers," combined with unflattering remarks about the lack of flexibility by incumbent employees.
• A manager's statement that he wanted to fire the plaintiff and "replace her with a young chippie with big ...."
• A statement by a decision maker at the time of termination that a 56-year-old employee was "getting too … old" and that a 33-year-old employee could "give him more years."
• A memo noting the employee's length of service, that there are 14 sales associates "in their early fifties or older" with the same tenure, that a severance package ought to be directed at them, and that the effect would be to "thin the ranks," together with evidence that younger sales associates took over the employee's territory and that the employee was given inconsistent explanations for his termination, and that the national sales manager and the president made remarks that the employer "needs race horses, not plow horses" and criticizing the "graying" of the sales force.
• Statements by senior management about an employee demoted in a meeting where his age (60) was noted as a negative factor ("you don't need the aggravation, stress"; "going to really be grinding their managers in the future"); senior management's routine unflattering reference to the employee's age, calling him names such as "pops" and "old man"; and an announcement to employees the next day positively emphasizing the successor's youth (e.g., "terrific kid"; "fine, proper young man"; "youth").
• A superintendent's statement to a bus driver that he was too old to drive a bus.
• The statements of a supervisor who fired an employee, warning him that the company wanted "younger single people" and that, because of the employee's age, he "wouldn't be happy there in the future."
• A decision maker's alleged statement that he did not want to hire an "old pilot."

In addition to cases with attention-getting facts like the above, the cases hold that a claim can also be made on circumstantial evidence – for example, a qualified over‑40 employee is replaced by a substantially younger individual for reasons that are shown to be pretextual.  However, the pitfalls for such cases are many in the absence of dramatic direct evidence of age‑based motivation.

Mixed Motive

Age may have been a part of an adverse decision regarding an employee, but the analysis is sometimes complicated by other factors in play which the employer claims are performance‑based.  Such cases fall under the rubric of "mixed motive."  The United States Supreme Court's 2009 decision in Gross v. FBL Financial Services, Inc. significantly affected the analysis of age discrimination claims in mixed-motive cases.  The Court specifically stated in Gross that "the ADEA's text does not provide that a plaintiff may establish discrimination by showing that age was simply a motivating factor."  Rather, "the plaintiff retains the burden of persuasion to establish that age was the 'but-for' cause of the employer's adverse action."  More specifically, "the burden of persuasion necessary to establish employer liability is the same in alleged mixed-motives cases as in any other ADEA disparate treatment action.  A plaintiff must prove by a preponderance of the evidence (which may be direct or circumstantial), that age was the 'but-for' cause of the challenged employer decision."  The Court reiterated its position at the end of the majority opinion, stating, "The burden of persuasion does not shift to the employer to show that it would have taken the action regardless of age, even when a plaintiff has produced some evidence that age was one motivating factor in that decision." 

The burden remains unequivocally on the plaintiff to prove that age was the but-for cause in a case of alleged age discrimination.  This burden of proof under the ADEA is more onerous than in mixed-motive cases arising under Title VII.  Under Title VII (sex, race, national origin, color, and religion), the plaintiff has to prove only that the protected trait was a consideration that moved the employer toward the decision – that is, it played a role even if it was not the only reason for the contested job action. 

A Senate Bill introduced in the United States Congress in March 2012 would bring the ADEA in line with Title VII in cases of mixed motive.  If the Bill is enacted into law, the aggrieved party would have to prove only that age was a motivating factor, not the "but-for" cause.  The ADEA, however, remains unchanged on this point at the present time.

Disparate Impact

Disparate impact occurs when the employer’s acts or policies are facially neutral, but adversely impact a protected class of employees.  When the law allows, disparate impact claims may be established without proof of discriminatory intent. 

For many years, it was unclear whether an employee could assert a disparate impact theory of recovery under the ADEA.  In 2005, however, the United States Supreme Court held in Smith v. City of Jackson that the ADEA allows disparate impact claims.  Although counterintuitive in light of Gross, if the reduction-in-force of 30 employees results in 30 over‑40 employees losing their jobs, then reason suggests that the purportedly neutral rationale should be scrutinized.

In order to bring a disparate impact claim under the ADEA, a plaintiff must first establish a prima facie case of age discrimination by demonstrating that an employment practice has disparately impacted members of the protected class to a degree that is statistically significant.  The employer may then rebut the prima facie case by proving that the action was taken based on a "reasonable factor other than age" ("RFOA").

In Meacham v. Knolls Atomic Power Laboratory, the United States Supreme Court held that the employer has the burden of proving that its action was reasonable.  By invoking the shield of a statutory exception (such as an RFOA), the employer must bear the burden of proving that its actions were justified.  Thus, disparate impact is a viable theory under which ADEA plaintiffs may recover.

Hostile Work Environment

Making out a case of hostile work environment based on age under the ADEA is much more problematic than making out a case of harassment based on sex, race, and national origin.  Theoretically, a case of age harassment could be made if the work environment, to paraphrase the United States Supreme Court's formula for sexual harassment, was permeated with discriminatory "ageist" intimidation, ridicule, and insult that is sufficiently severe or pervasive to alter the conditions of the victim's employment and create an abusive working environment.  Stray workplace age-based or ageist remarks that have no demonstrated connection to the job action subject to the employee's complaint are regularly held to be insufficient to support an age discrimination case.  General statements such as older workers are not as aggressive as younger employees, or expressions of concern about the higher costs of employees with greater seniority, or a manager's comment that she did not know the plaintiff was "that old" all have been held too abstract, insufficient, or irrelevant to create liability.  However, it is probably a good policy for employers not to create a regime in which banter (e.g., "you are old as dirt") could give rise to a lawsuit.

Conclusion – To Be Continued

This article will be continued in the Summer Edition of Legal Currents.  It will address additional issues related to the "working aged," employer compliance with the pertinent regulatory schemes, and an update on the progress of the now-pending Senate Bill to amend the ADEA.

Website Privacy: A Growing Risk

During the past year, Facebook®, Twitter®, and Google® each have settled disputes with the Federal Trade Commission ("FTC") relating to website privacy.  Class action lawsuits have been brought based on similar claims, and a recent suit reportedly settled for several million dollars.  Even though national and international businesses capture the media headlines, privacy policies are not just for large companies or "Internet-based companies."  Almost all businesses with websites collect information from people in some way and, therefore, are advised to establish, post, and comply with website privacy policies and terms of use to protect them from liability.  Websites that facilitate transactions may trigger additional obligations and, if credit is extended for online transactions, the number of applicable laws – and the corresponding compliance burdens – increases significantly.

Don't Promise the Moon

In the area of website privacy, one of the most frequent violations of the law and source of liability occurs when businesses make assurances in their website privacy statements that they fail to honor in practice.  This shortcoming is considered by the FTC to be an "unfair and deceptive trade practice," and allegations of this sort can be found in many of the FTC's recent enforcement actions in this area.  This is particularly unfortunate when a business has inadvertently created an avoidable risk by establishing privacy standards that are stricter than those required by law.  This problem most often arises when a business (or its third-party website designer) simply mimics a privacy policy statement found online or uses a "do-it-yourself" document service without carefully tailoring the policy to the company's specific industry, location, and practices.  A policy required for a medical practice in California may be far beyond that required for a retailer in North Carolina.

Caution!  Children at Play

Websites directed at children, whether in whole or in part, are subject to additional restrictions and requirements under the Children's Online Privacy Protection Act ("COPPA").  If a website has a section directed at children, specific disclosures and policies must comply with the COPPA rules which include limitations on third-party sharing and parental consent, review, and control requirements. 

A number of factors are used to determine whether a website is directed at children, such as whether its subject matter and language are child-oriented, whether it uses animated characters, and even whether advertising on the site (which may come from third parties) is directed at children.  Even if a website is not directed at children, it has become customary to include COPPA language in a privacy policy or terms of use to protect the business and remove any ambiguity that may exist.

Location, Location, Location

A few states have their own website privacy rules, some of which apply generally and others specifically to the online arena.  California's privacy laws are widely regarded as the most rigorous.  California's Constitution recognizes an "inalienable right" to privacy, and California's privacy laws are policed by a dedicated state agency – the Office of Privacy Protection.  If a company's website or email marketing is directed at California residents (including efforts directed at national audiences generally), the company will need to comply with California's very specific privacy requirements.  California law regulates, for example, the font size and color of a required link from a website's home page to its privacy policy statement. 

Online Advertising and "CAN-SPAM"

Companies may collect information through their websites, or in other ways, for the purpose of marketing products and services through email or other electronic messages.  These companies sometimes neglect the requirements applicable to electronic advertising messages.  The federal Controlling the Assault of Non-Solicited Pornography and Marketing Act of 2003 (commonly known as the "CAN-SPAM Act") requires those advertisers, among other things, to "clearly and conspicuously" identify every commercial electronic message as an advertisement, provide the physical address of the sender, and include an opt-out mechanism to allow recipients to avoid future communications.  Requests to opt out must be honored within ten days, and there are specific limitations on the opt-out mechanisms that may be used.  For example, a telephone number, even if toll-free, is not an acceptable opt-out mechanism.

In addition, the CAN-SPAM Act prohibits the use of misleading information in the header fields of a message.  For example, an advertising email message with the subject "You've Won!" is probably in violation of the CAN-SPAM Act if the recipient has not actually won anything.  Similarly, if the name displayed in the "from" field does not correctly identify the sender, there is likely a violation. 

The CAN-SPAM Act limitations do not apply to communications relating to a transaction or relationship that has already begun.  For example, an email that merely confirms payment for a transaction previously initiated is not required to include CAN-SPAM Act disclosures.  In many cases, companies attempting in good faith to differentiate between advertisements and transactional or relationship communications struggle to do so, particularly with regard to messages containing both categories of communication.  For this reason, some companies are advised to include CAN-SPAM Act disclosures in all email messages to avoid the risk of inadvertent violation.

More businesses are entering the social media arena every day to take advantage of the marketing potential it offers.  They are well-advised to remember the CAN-SPAM Act when crafting innovative social media marketing strategies.  Courts have recently ruled that the CAN-SPAM Act, which was written before social media became prominent to address widespread abuse of the then new concept of email advertising, nevertheless applies to social media messages. 

In addition, many social media companies require users to agree to terms of use or similar contracts that may prohibit or restrict advertising practices.  Facebook® and MySpace® each have sued commercial users under the CAN-SPAM Act for misleading advertising practices that violated the social networks' respective terms of use.  Because the nature of social media platforms is usually more complex than email, CAN-SPAM Act compliance issues can be more complex as well; an advertiser's responsibilities are less clear the more a social media platform differs from traditional email.  For example, if a social media platform limits the number of characters that can be used in a message, how does that affect the sender's compliance obligations?  As in many areas, the law is struggling to keep pace with technology and social phenomena.

It has become customary, although not required, to address the CAN-SPAM Act in a business's website privacy policy statement or terms of use by including a link to an opt-out mechanism.  Although website privacy and opt-out are legally separate issues, users have come to expect to find both kinds of information in the same location.  Integrating disclosures may also help to avoid confusion as to which statement applies in some cases.

Businesses are advised to give careful attention to CAN-SPAM Act compliance before sending electronic advertising messages.  Failure to observe the requirements of the CAN-SPAM Act can result in penalties of up to $16,000 per violation, as well as criminal prosecution. 

Conclusion

Violations of the various laws and policies regulating commercial websites and email are gaining increasing attention from governmental entities, consumer advocacy groups, and plaintiffs' class action attorneys, and are expected to be an emerging source of risk for many businesses.  Fortunately, much of that risk is avoidable if care is taken to learn the patchwork of applicable legal requirements, adopt appropriate policies, and enforce those policies consistently.

Picture the following scenario:  your company is having a soiree for some of its most important clients in order to display a brand new product line.  You are responsible for organizing the function, and you know that your company is encouraging its clients to bring their children with them to the event.  In order to promote this family-friendly environment, you arrange for a local warehouse club to provide hamburgers, hot dogs, potato chips, and similar food items.  Some of your salespeople object to your approach to the event, feeling that the inexpensive food will give clients a negative impression of the company and affect their opportunities for commissions.

When the event was over, however, you felt it was a success.  Furthermore, several people, including some important clients and the owner of your company, went out of their way to tell you that the event was outstanding.  Feeling pretty good about yourself after a long day of work, you log into Facebook® to relax and check in with your friends.  Much to your dismay, however, your find that one of your salespeople has posted photos of the event on the salesperson's Facebook® page and made negative comments about the quality of the food provided.  For example, one photograph displaying the hot dog stand noted that the "hot dogs were overcooked and the buns were stale….I'm sure our clients loved that!"  Furthermore, your salesperson made negative comments about you and other supervisors of your company, stating that "the scumbag managers never listen to us in sales!" 

Incensed, you send a link to the salesperson's Facebook® posts to the owner of your company, noting that many of the same clients at the event have access to Facebook® and could see the comments.  After seeing the offensive posts, your owner fires the salesperson for the offensive Facebook® comments.  Months later, however, your owner gets a notice in the mail, stating that the National Labor Relations Board ("NLRB") is investigating whether your company fired this employee for engaging in protected concerted activity.

Protection for Concerted Activity under the National Labor Relations Act

The NLRB is tasked with enforcing the National Labor Relations Act ("NLRA").  The NLRA primarily affects employers with unionized workforces because it governs issues related to collective bargaining and unionization.  As the owner of our hypothetical company will soon find out, however, the NLRA authorizes the NLRB to regulate non-unionized companies in one very important area.

Section 7 of the NLRA gives employees the right to discuss their wages, working conditions, hours, and other terms of employment with not only their coworkers, but also the general public.  This right protects the employees of all companies subject to the NLRA, regardless of whether the workforce is unionized.  In the past, employees' comments about the terms and conditions of their employment may have been limited to the proverbial water cooler chat sessions and thus unlikely to reach a mass audience.  With the advent of social media websites like Twitter® and Facebook®, however, anyone with computer access has a platform to air any dissatisfaction about an employer.  Such comments have the possibility of portraying the company in a negative light and potentially affect its bottom line.

The NLRB's Social Media Reports

Recognizing that many employers may be unfamiliar with their obligations under Section 7 of the NLRA with regard to social media, the NLRB has released two extensive reports ("Reports") to the general public.  The first Report was issued in August of 2011 and the second was released in January of this year.  Both Reports describe the facts of cases in which the NLRB investigated either: 

• A termination based on an employee's social media comments;
• An employer's unlawfully broad personnel policy regulating employees' use of social media; or,
• Both.

With regard to terminations, the Reports show that the NLRB makes a distinction between employees who are actually and substantively commenting on the terms and conditions of their employment and those employees who are merely griping about their jobs.  The line between the two, however, sometimes can be difficult to locate.  For example, the majority of the facts regarding our hypothetical picnic were drawn directly from cases described in the Reports in which the NLRB found protected use of social media by employees.  Because our hypothetical salesperson engaged in Facebook® activity in part to protest the commissions the company's salespeople would receive as a result of the event, the company's termination under these circumstances would likely be an illegal violation of Section 7 of the NLRA, despite the fact that the salesperson called many of the company's supervisors "scumbags."

On the other side of the difficult to locate line is insubstantial griping, which is not protected by Section 7.  For example, the NLRB's January Report discusses a case in which a bartender posted on Facebook® that a new bartender was "screwing over" customers by using a mix in alcoholic beverages rather than premium liquor.  The complaining bartender stated that she was concerned about the new bartender's behavior because she feared that if customers found out, she might lose business or receive lower tips.  Other employees discussed the new bartender with her and, although they had concerns about the new employee, they did not share her concern regarding his use of a mix in beverages.  Eventually, the complaining bartender was fired, specifically for using unprofessional communications on Facebook® to contact fellow employees. 

The NLRB determined that the bartender's Facebook® postings regarding her fellow bartender's practices "had only a very attenuated connection with terms and conditions of employment."  She did not "reasonably fear that her failure to publicize her coworker's dishonesty could lead to her own termination."  Furthermore, although she later stated that she was worried that her coworker's practices would affect her wages, she did not state this in her post.  As a result, the NLRB found the bartender's Facebook® postings to be mere griping, not protected activity.

The Reports also indicate how broad a company's social media policies can be.  It is clear that the NLRB will strike down any policy that can be reasonably construed by employees as restricting their activity under Section 7 of the NLRA.  For example, the NLRB has objected to policies that prohibit disparaging, confrontational, harsh, or even inappropriate speech at work, because it believes that an employee could reasonably interpret such policies as prohibiting discussions regarding wages, working conditions, and other terms and conditions of employment. 

Similarly, the NLRB has regularly struck down policies prohibiting the disclosure of "confidential information," on the basis that information regarding wages, hours, or other working conditions could be incorrectly interpreted to be confidential.  In order for such a policy to be enforceable, it has to explicitly exempt discussions regarding these terms and conditions. 

Finally, the NLRB makes it is clear that a disclaimer stating that nothing in a company's policy should be construed to limit employees' rights under Section 7 will not be sufficient to redeem an otherwise offensive policy.  The NLRB wants companies to inform employees that they have the right to use social media to discuss the terms and conditions of their employment.  In fact, the NLRB has expressed a willingness to give employees greater leeway in this arena than the typical water cooler situation because, rightly or wrongly, it feels that employees' comments about employers on social media sites will have less impact on companies' actual day-to-day activities.

Conclusion

As evidenced by its two comprehensive Reports on the issue, the NLRB is actively enforcing employees' Section 7 rights in the context of social media.  Because the NLRA is applicable to nearly all employers in the United States, it is important for companies of all sizes to review their obligations in this area and to update their personnel policies to conform to the NLRB's most recent directives.

However, while the long-term future for wind energy remains positive, several complicating issues have emerged in the short term that may slow its development in North Carolina. 

First, the federal incentives that have helped make wind turbines economically feasible expire this year, with prospects for their renewal somewhat uncertain. 

Second, the Senate Bill 3 mandate that alternative energy sources account for a certain percentage of a North Carolina utility's energy mix may be eased by the General Assembly.   

Third, North Carolina's flagship project, the Desert Wind project in Pasquotank and Perquimans Counties (planned by the Spanish wind energy company Iberdrola Renewables, LLC), has been unable to date to negotiate a satisfactory Power Purchase Agreement with Progress Energy or other regional utilities.  Without a buyer for the electricity generated by the project, Desert Wind is on hold until conditions improve. 

Fourth, the price of natural gas, which competes with wind energy as a "clean" fuel, has been dropping in recent months.  This price decline has been brought about by the rapid development of extensive shale gas reserves in several states including Pennsylvania, Ohio, Texas, Louisiana, Arkansas, and Montana.  As recent news stories have pointed out, North Carolina could be next to become a producing shale gas state.  If natural gas continues to glut the energy marketplace, it may be difficult for wind energy projects to "get the blades moving." 

Lastly, projects in coastal North Carolina must contend with the presence of extensive military-restricted airspace.  Wind turbines towering as high as 500 feet can interfere with low-flying military aircraft by presenting physical obstacles as well as causing radar problems.  The United States Marine Corps has attempted to identify the areas in eastern North Carolina that are safe for wind turbines, but the presence of military airspace substantially reduces the area available for wind energy development.  In part because of military airspace restrictions (as well as adoption of a highly restrictive county ordinance), the very early three-turbine Golden Wind Energy Project in eastern Carteret County never was constructed. 

Current obstacles aside, there are a couple of wind projects proposed for North Carolina that appear to be moving forward.  Invenergy, LLC, which claims to be the world's largest independent wind power generation company, has proposed a 49-turbine project in Beaufort County (in the same area as the Navy's well-publicized and ill-fated Outlying Landing Field was proposed to be located).  The Invenergy project recently received approval by the North Carolina Utilities Commission, but still faces local opposition.  Also, Wind Capital Group has proposed construction of a 44- to 94-turbine project in eastern Pamlico County.  This project is still in the land-leasing stage. 

While the wind power form of alternative energy has been buffeted by issues that have, at the very least, temporarily slowed its development in North Carolina, wind energy still offers the prospect of re-shaping North Carolina's energy profile, and interest remains strong.

Losing the Valuable Employee

Almost all employers must deal with the loss of valuable employees from time to time.  Many employers wisely utilize noncompetition agreements to limit the ability of key employees to directly compete against the employer immediately upon leaving.  If a former employee begins to directly compete with the former employer and thereby violates a valid noncompetition agreement, the former employer can bring a lawsuit against the former employee.  This is a breach of contract claim, where the particular contract happens to be the noncompetition agreement.

When a former employer brings suit for violation of a noncompetition agreement, it typically makes other legal claims as well.  The employer may assert certain general "business torts" (e.g., fraud, tortious interference with contract, and tortious interference with prospective economic advantage), as well as a claim for misappropriation of trade secrets.  However, a recent ruling by the North Carolina Business Court suggests that North Carolina courts are viewing these additional remedies with great skepticism in the context of standard noncompetition disputes.  In most cases, a lawsuit for breach of the noncompetition agreement will be an employer's only possible remedy.  North Carolina employers need to be aware of this limitation and take proper steps to ensure that they are able to fully protect their rights.

What Are "Business Torts"

"Business torts" are common law causes of action created to protect individuals and businesses in economic interactions.  In some cases, the North Carolina General Assembly has expanded or modified these protections.  Business torts include the following:

• Fraud: A material misrepresentation intended to be acted upon which actually deceives and harms another party;

• Negligent misrepresentation: False or incorrect information prepared without reasonable care and that is then acted upon to the harm of the misled party;

• Tortious interference with contract: Intentionally inducing a party not to perform a valid contract the party has previously made;

• Tortious interference with prospective economic advantage: Intentionally inducing a party not to enter a contract the party otherwise would have entered into;

• Unfair and deceptive trade practices : A claim based on § 75-1.1 of the North Carolina General Statutes for wrongful conduct that affects commerce and harms another party;

On their face, these claims seem perfectly applicable to various situations that commonly occur when a former employee violates a noncompetition agreement by improperly competing against the employee's former employer.  For instance, former employers often want to bring claims for tortious interference with prospective economic advantage if the former employee convinces a potential customer not to enter into a business contract with the employer and instead to enter into a similar business contract with the former employee. 

However, the North Carolina Business Court recently indicated in Akzo Nobel Coatings, Inc. v. Rogers that these claims are typically unavailable in situations that simply involve violations of a noncompetition agreement.  The Business Court held in Akzo that there must either be some additional duty that the former employee owed to the employer – in addition to that spelled out in the noncompetition agreement – or the employer must prove that the former employee engaged in other improper acts beyond those associated with breaching the noncompetition agreement by competing against the former employer.  

In the majority of noncompetition disputes, however, such additional considerations will not exist.  The Business Court reasoned that the former employer's real gripe is usually simply that the former employee is competing with it even though the employee entered a noncompetition agreement promising not to do so.  The Business Court is wary of allowing employers to "piggyback" other claims on top of this underlying contractual violation.

What the Future Holds

Moving forward, business torts are not going to provide any additional relief in the context of typical noncompetition disputes.  Also, courts are inherently skeptical of noncompetition agreements, given the restrictions such agreements impose on freedom of employment.  Courts engage in searching analysis to find any supportable basis to reject such agreements as unreasonable based on their duration, territory, and scope.  In light of the fact that business tort claims will often be dismissed, it is vitally important to employers that proper, unassailably reasonable noncompetition agreements are in place.  If an employer has a valid and enforceable noncompetition agreement, it will be able to successfully assert its right to stop any violations of the agreement and/or collect appropriate damages from the former employee.  If not, the former employer may find its business tort claims dismissed by the court, only to discover later that it is also unable to obtain full relief under its noncompetition agreement.  

Trade Secret Misappropriation

Claims for trade secret misappropriation often arise in the context of noncompetition disputes when an employee has taken commercially-valuable information from the former employer and then uses it to compete against the former employer.  The North Carolina Trade Secrets Protection Act defines a trade secret as information that "derives independent actual or potential commercial value from not being generally known or readily ascertainable" and "is the subject of [reasonable] efforts…to maintain its secrecy."  If someone acquires, discloses, or uses a trade secret without the proper authority or consent, the owner of the trade secret can bring a lawsuit for misappropriation. 

In the same Business Court decision discussed above (and in another case this past February), the Court dismissed a claim for trade secret misappropriation based on the failure of the former employer to identify the trade secrets with "sufficient particularity."  The employer had accused the former employee of misappropriating "proprietary formulas, methodologies, customer and pricing data and other confidential information concerning…fiberglass door coating products."  These cases continue a growing trend in which North Carolina courts dismiss trade secret claims based on a lack of "sufficient particularity." 

These Business Court trade secret decisions provide important lessons for North Carolina employers.  First, it is important to know exactly what information the employer considers a trade secret.  Such identification will help the employer in placing the appropriate restrictions on the distribution of the information, including monitoring exactly which employees should have access to it.  Second, North Carolina courts are becoming increasingly skeptical of general business information being declared a trade secret – including basic customer information and sales data.  Not all information used by a business is a trade secret.  Businesses can rely only on having valid legal claims for specific types of information that they identify and treat as trade secrets.  Much like claims based on the general business torts discussed above, the success of claims for trade secret misappropriation is likely to be more limited moving forward. 

Conclusion

Noncompetition disputes are a fairly common occurrence in today's fluid labor markets.  Business torts provide valid claims in various situations, but North Carolina courts are now indicating that such claims will be ineffective in general noncompetition disputes.  Generalized claims for trade secrets also will be less successful.  Employers need to be aware that the law is treating these claims with increasing skepticism and that this trend reinforces the need to comply with what have always been good business practices:

1. Ensuring that any noncompetition agreements are properly drafted and valid under North Carolina law;

2. Identifying what specific information constitutes true trade secrets; and,

3. Taking reasonable steps to protect that information.

The Leahy-Smith America Invents Act ("AIA") was signed into law on September 16, 2011, amid much fanfare, or at least as much fanfare as patent legislation can muster.  The AIA represents the most significant change in United States patent law since 1952.  Among the most significant changes under the AIA is the conversion of the U.S. patent system from a "first to invent" to a "first-to-file" system.  Even the most casual observers of patent law recognize this change to the patent system.  The AIA also significantly changes how patent applications are prosecuted before the U.S. Patent and Trademark Office ("USPTO") and how issued patents are reviewed.

The Proposed Fees

The USPTO recently proposed fees pursuant to its new authority under Section 10 of the AIA, and rules for implementing certain provisions under the AIA.  The USPTO has just completed a "road show" to solicit feedback on the proposed fees and rules.  A summary of the proposed fees and rules can be found on the USPTO website and the periods for public comment on many of the proposed rules are still open.  The USPTO plans to publish the proposed fees in the Federal Register in early June of 2012, followed by a 60-day period for public comment, and expects to issue the final fees in February of 2013.  Inasmuch as the AIA contains many new provisions that might be of interest to patent applicants, patent holders, and interested third parties, the proposed fees might result in some sticker shock.  However, fees may be set only to recover the USPTO's aggregate estimated cost of operations, including administrative costs.  To that end, the USPTO relied on the following two principles in its fee-setting policy:  (1) to have a more sustainable funding model for the USPTO; and (2) to reduce patent application pendency and the backlog of unexamined patent applications.

"Pay to Play"

The AIA contains many provisions an applicant or interested third party might want to consider.  To take advantage of these provisions, however, the applicant or interested third party will have to "pay to play."  For example, under one provision of the AIA, an applicant can delay submission of an inventor's Declaration up to the Notice of Allowance.  This provision is attractive because the applicant might not be able to identify the true inventor(s) until the claims are allowed.  However, it will cost $3,000 to take advantage of this provision.  Further, it will cost $1,700 to correct inventorship during examination when an executed inventor Oath/Declaration was not filed before examination.  So, even though it might be sound strategy to postpone submission of the inventor’s Declaration, most applicants will likely find that the price tag to do so is too steep.

The Hefty Cost of Post-Issuance, Supplemental, and Post-Grant Review

The most significant changes under the AIA, however, involve revisions to existing mechanisms for post-issuance review and new provisions for supplemental and post-grant review.  For example, under the AIA, a patent owner may request Supplemental Examination of a patent to consider, reconsider, or correct information believed to be relevant to the patent that could serve as the basis for a claim of inequitable conduct which, if successful, would render the patent unenforceable.  The proposed fee for filing such a request, however, is $7,000.  If a substantial new question of patentability is raised in the request, the USPTO will order a Supplemental Examination, which will be carried out under ex parte reexamination procedures.  The proposed fee for a Supplemental Examination proceeding is $20,000.  Although these proposed fees might appear to be high, they might well be worth the price if the enforceability of a patent is in question.

The Cost of Using the New Post-Grant Review Provisions

A new provision under the AIA allows a third party (i.e., a person who is not the owner of a patent) to file a petition with the USPTO to institute a Post-Grant Review of the patent.  Under this new Post-Grant Review, a petitioner may request to cancel, as unpatentable, one or more claims of a patent on any grounds.  A petition for Post-Grant Review may only be filed within nine months after the date on which the patent was granted.  A request for Post-Grant Review of 20 or fewer claims will cost $35,800 and 61 to 70 claims will cost $125,300, with intermediate fees set for other number of claims, and $35,800 for each additional group of ten claims.  Although these proposed fees might seem high, and some might even argue they are exorbitant, they are significantly less than the cost of patent litigation, which can escalate into millions of dollars relatively quickly.

Inter Partes Reexamination is Replaced with Inter Partes Review

The AIA also replaces the current procedures for Inter Partes Reexamination with Inter Partes Review.  In an Inter Partes Review, a third party may file a petition with the USPTO to institute a review of an issued patent with respect to issues raised under 35 U.S.C. § 102 (novelty) or 35 U.S.C. § 103 (obviousness) on the basis of prior art consisting of patents or printed publications.  The proposed fee for a Request for Inter Partes Review of 20 or fewer claims is $27,200 and of 61 to 70 claims is $95,200, with intermediate fees set for other numbers of claims, and $27,200 for each additional group of ten claims.

New Fees for Ex Parte Reexamination

The AIA retains the current procedures for Ex Parte Reexamination through which any person, including the patent owner, may request a reexamination of any claim of patent at any time during the period of enforceability of the patent on the basis of prior art patents or printed publications.  The proposed fees for filing a request for Ex Parte Reexamination is $17,760, of which $13,430 will be refunded if the USPTO decides not to order an ex parte reexamination proceeding.  Nevertheless, the proposed fee represents a significant increase over the current fee of $2,520.

Increased Fees for Current Patent Prosecution Procedures

In addition to setting fees for the new provisions under the AIA, the USPTO proposes to increase the fees for many current patent prosecution procedures before the USPTO.  For example, the USPTO proposes to raise the utility application filing fee, including basic filing, search, and examination fees, for large entities from $1,250 to $1,840 (small entity fees are reduced by 50%), with the examination fees, which are included in the filing fee, more than tripling from $250 to $750.  Further, excess claim fees will increase from $60 to $100 for total claims in excess of 20 and from $250 to $460 for independent claims in excess of three.  The proposed increases in fees, however, will not significantly impact the total cost of preparing and filing a utility patent application, especially for small or micro entities, most of which is directed to attorney or agent fees for drafting the application.  Note, however, that with the proposed increases in excess claim fees, the total cost of filing a patent application with many more than 20 total claims and/or many more than three independent claims will ramp up relatively quickly.

Further, the fees for a Request for Continued Examination ("RCE"), which is a relatively common mechanism for continuing prosecution of a pending patent application, will nearly double, from $930 to $1,700.  One concern with this increase in fees is that patent examiners earn "counts" for each RCE filed on their docket, and are thus incentivized to compel an applicant to file an RCE.  The USPTO is purportedly reviewing options to address these concerns, including ways to encourage examiners to place more consideration on amendments after final rejection to identify allowable subject matter.  Also, the fees for appeals will be restructured, with $1,500 due at the time of filing a Notice of Appeal, up from $620, and $2,500 to actually file an Appeal.  Provisions also are proposed to lower the net payment to the USPTO if the examiner withdraws the final rejection prior to filing an appeal.  Additionally, maintenance fees for keeping an issued patent in force will increase about 40%, from $1,130 to $1,600, in the first stage (3.5 years after grant); 25%, from $2,850 to $3,600, in the second stage (7.5 years after grant); and 60%, from $4,730 to $7,600, in the third stage (11.5 years after grant).

Conclusion

In conclusion, the AIA offers many provisions that might be of interest to patent applicants, patent owners, or interested third parties.  The costs to take advantage of these new provisions, however, can be relatively high.  The USPTO also has proposed to raise fees associated with filing and prosecuting patent applications with the USPTO.  Thus, patent applicants will have to take the new proposed fees into consideration when establishing a patent budget or developing a patent strategy.

Beware of Preferences

By way of background, a "preference claim" in a bankruptcy case is a legal device created by Congress.  The purpose of the preference claim is to ensure that all similarly-situated creditors receive equal treatment for their claims or, said another way, to avoid preferential payments by the bankrupt debtor to certain favored creditors.  Congress wanted to make sure that insolvent debtors did not prefer one creditor over another before filing bankruptcy.  The preference law is used to bring all transfers or payments made during the "preference period" (which is a specified time period prior to the date the debtor files bankruptcy) back into the bankruptcy estate for distribution to all qualified creditors.  For "insiders" of the debtor (owners, officers, or relatives of a debtor), the "preference period" consists of the one-year period immediately preceding the bankruptcy filing.  For "non-insiders," the "preference period" consists of the 90-day period immediately before the filing.  The end goal of the preference statute is an equal distribution to all creditors, not just a chosen few. 

A "preference" is defined as follows:  (i) a transfer of an interest of the debtor in property; (ii) to or for the benefit of a creditor; (iii) on account of an antecedent debt; (iv) made while the debtor was insolvent (insolvency is presumed by statute); (v) within 90 days before the bankruptcy filing date (or one year, for insiders); and (vi) that enabled the recipient to receive more by virtue of the payment than the recipient would receive in a straight liquidation bankruptcy case.  If the bankruptcy trustee can prove all of these things for any payment or transfer, the trustee can avoid the payments or transfers – except when a defense is available. 

While the list is long, there are three primary defenses to a preference claim available to your business:

• A contemporaneous exchange for new value;
• Subsequent new value provided; and,
• Payments made in the ordinary course of business.

The Contemporaneous Exchange Defense

This defense applies where there is a contemporaneous exchange for "new value" provided to the now-bankrupt customer.  A payment to you cannot be avoided by the bankruptcy trustee and recovered from you for deposit back into the bankruptcy estate if you can show that the payment was made to you with the intention of being a contemporaneous exchange for new value given by you to the debtor (i.e., goods or services) and was, in fact, a substantially contemporaneous exchange.  For example, a contemporaneous exchange would likely be found where your customer pays you the full value of the goods or services at the time those goods or services are provided.  Additionally, this defense may apply where the goods or services were sold on very short-term credit – say, on 30-day repayment terms – and were fully paid for by the customer within that 30-day term.

The Subsequent New Value Defense

This defense requires a showing that you provided "new value" (i.e., goods or services) for the benefit of your customer after your receipt of a preferential transfer or payment.  For this defense to apply, you must prove two elements:  (i) the new value must have been given by you after the preferential payment was received; and (ii) you must not have received any other payment for that new value.  To the extent subsequent new value is provided, this defense can be used to offset some or all of your exposure for the preferential payments received.

For example, assume you have received a $100,000 payment within the preference period for goods and services you previously provided to your customer.  After your receipt of that payment, you provided that customer, on credit, with additional goods and services that are valued at $75,000.  The customer then files for bankruptcy protection without paying for the additional goods and services provided.  The subsequent new value defense would apply to reduce your preference exposure to $25,000 – offsetting your exposure by the value of the goods and services you subsequently provided and for which payment was not received.

The Ordinary Course of Business Defense

This defense is intended to protect recurring, customary credit transactions that are incurred and paid in the ordinary course of business.  This defense is available if the debt was incurred between you and your customer in the ordinary course of business and you can prove one of the following facts:  (i) the payments were made to you in the ordinary course of the business between you and your customer; or (ii) the payments were made according to ordinary business terms.

To defeat a preference based on ordinary business terms, you must show that payments were made according to the ordinary industry standards for your business and your customer's business.  Analysis of this "objective" defense requires consideration of the normal industry practices and standards for both your business industry and that of your customer.  The payments received must be ordinary from the perspective of each industry.  By "industry," I mean firms similar in some general way to your business and your customer's business.  The focus will be on standards prevailing in the industry of both businesses.  Dun & Bradstreet Registered Reports provide some evidence of payment history and trends.  Generally, analysis and testimony from an expert familiar with the respective industries are required.

In addition to the industry-focused "objective test," the determination of whether the payments were made in the ordinary course of business for you and your customer also requires that you prevail with respect to a "subjective test" in which the Bankruptcy Court will compare your and your customer's course of dealing both inside and outside of the applicable preference period.  Typically, this will result in an analysis of all transactions between you and your customer made during a sufficiently long period of time prior to bankruptcy.  By comparing the frequency and amount of payments made both prior to and during the preference period (both in terms of the average days late and the range of days for payments made), your argument will be that some or all of the payments were made within the ordinary course of business between you and your customer.

For example, assume that over the last few years, your customer has routinely paid for goods and services received from you within 30 days after you send an invoice for payment.  Your argument will be that the ordinary course of business defense applies to each payment you received during the preference period that was made within 30 days after the date you sent an invoice to your customer.  Payments made much earlier or later than the typical 30 days from the invoice period may be considered outside of the normal course of business between you and your customer and may not be protected from avoidance by this defense.  If you had to exert pressure on your customer to get paid within the preference period, that factor would work against your ordinary course of business defense. 

Conclusion

The facts of each case and the timing of payments received by you will control both the existence of a preference and the availability to you of the preference defenses.  Due to wide-ranging factual considerations, preference analysis is never an exact science.  If your business receives a demand letter from a bankruptcy trustee for the return of preferential payments, you would be well advised to consult with an attorney who is knowledgeable about preference claims and defenses.  This attorney can provide a preference analysis and calculate your estimated exposure.  By understanding the claims and possible defenses, you may be able to limit your exposure and negotiate a settlement that is fair within the context of bankruptcy laws.

Overview of the 2012 OVD

In general, U.S. taxpayers must report their worldwide income on an income tax return and disclose their ownership of foreign assets on an information return.  However, many taxpayers have neglected to comply with these filing requirements and, as a result, face substantial penalties and criminal charges. 

The 2012 OVD gives taxpayers the opportunity to come forward without the fear of criminal prosecution and the opportunity to take advantage of reduced penalties.  The 2012 OVD is available for individuals and entities, including corporations and partnerships.  However, a taxpayer who has already come under investigation by the IRS is not eligible to participate in the 2012 OVD.

To seek relief under the 2012 OVD, a taxpayer must:

• Pay all back taxes and interest for a period of eight full tax years prior to the disclosure ("Look-Back Period"); and,
• Pay a 20% accuracy-related penalty on the total amount of the back taxes for the Look-Back Period; and,
• Pay a 27.5% penalty on the highest aggregate account balance or value of foreign assets during the Look-Back Period (certain taxpayers may be eligible for a reduced penalty).

The IRS has indicated that it will release additional guidance in the future on how to take advantage of the 2012 OVD.

Unlike the prior two OVDs, the 2012 OVD does not have a set deadline and is open for an indefinite period.  However, in an effort to encourage taxpayers to come forward soon, the IRS warns that the terms of the 2012 OVD could change (including an increase in penalties or termination of the program) without advance notice.  

Importance of FBAR Compliance   

In general, a U.S. taxpayer with either a financial interest in, or signatory authority over, foreign financial accounts with an aggregate value of more than $10,000 is required to file Form TD F 90-22.1 (Report of Foreign Bank and Financial Accounts) ("FBAR").  A foreign financial account includes a bank account, brokerage account, mutual fund, or trust.  The form is filed separately from the taxpayer's income tax return and is due on June 30 of each year.

The FBAR is a significant tool used by the IRS to identify noncompliant taxpayers and the IRS has been focusing more of its attention on this filing requirement.  Many taxpayers are unaware of the FBAR requirement, but ignorance is not a defense.  The IRS can still impose penalties despite the taxpayer’s lack of knowledge of the tax rule. 

The penalties for the failure to file an FBAR are severe.  The taxpayer is subject to a $10,000 penalty for each year of noncompliance.  If the IRS determines that a taxpayer has willfully failed to file the FBAR, the penalty is increased to the greater of $100,000 or 50% of the total balance of the undisclosed foreign accounts each year.  In addition, accuracy-related penalties and criminal penalties can be imposed.  The 2012 OVD can be an important source of relief for certain taxpayers who have failed to file an FBAR.

A simple example illustrates the severity of the penalty and the magnitude of relief potentially available under the 2012 OVD for a taxpayer who is determined to have willfully failed to file the FBAR.  

Assume the Taxpayer deposits $1,050,000 into a foreign account in 2004 and earns $50,000 in interest income each year for seven years as follows:

Assume the interest is not compounded and the income is subject to a 35% tax rate.  Therefore, the total tax on the interest income equals $122,500 (7 years x $50,000 in annual interest x 35%).  Assume further that the taxpayer did not report the account or the income and the IRS determines that the taxpayer willfully failed to file an FBAR for tax years 2004-2010.  In that case, in addition to having to pay the tax of $122,500, plus interest and other penalties, the taxpayer is subject to an FBAR penalty of $4,375,000, which is more than triple the amount of the account balance.  The penalty of $4,375,000 is the sum of 50% of each year's account balance (2004-$550,000, 2005-$575,000, 2006-$600,000, 2007-$625,000, 2008-$650,000, 2009-$675,000, 2010-$700,000).

Under the 2012 OVD, the taxpayer would owe approximately $532,000, plus interest, and escape the risk of criminal prosecution.  The tax liability of $532,000 is the total of the following amounts:  (1) tax of $122,500; (2) accuracy-related penalty of $24,500 ($122,500 x 20%); and (3) OVD penalty of $385,000 ($1,400,000 x 27.5%).

By participating in the 2012 OVD, the taxpayer in the above example could save approximately $4 million.

Is the 2012 OVD Right for You?

One drawback of the OVDs is that penalties can apply regardless of whether the taxpayer made an honest mistake or intentionally attempted to evade paying taxes.  Depending on the circumstances, the 2012 OVD may be too severe and a taxpayer may be better off by electing to resolve the issue outside of the 2012 OVD.  For example, under general IRS rules, if the taxpayer can successfully demonstrate that the violation was due to "reasonable cause," the taxpayer would not be subject to a penalty.  Therefore, taxpayers who did not act willfully and who have a strong "reasonable cause" argument for their failure to file may be better off to consider alternatives to the 2012 OVD.

Conclusion

The IRS’s ongoing foreign bank investigations, expanded reporting requirements, and whistleblower awards are making it more difficult for taxpayers with undisclosed foreign assets and income to remain anonymous.  Therefore, it is not surprising that the IRS is increasing its efforts to identify those noncompliant taxpayers.  The IRS warns that the consequences are going to be much worse for a taxpayer if the taxpayer is investigated before making a voluntary disclosure.  However, taxpayers need to carefully evaluate their particular situation before determining whether the 2012 OVD is the best alternative for them.

There are several specific matters that should be considered by lenders prior to the acquisition of a distressed development. 

The Asset

Lenders should carefully analyze not only the physical and environmental condition and the legal title to the real property, but also the development plan, the adequacy of the legal formation of the development, and the developer's compliance with the development plan.  The asset should be viewed not just as raw land, but as land with a value that has been enhanced by a development plan, burdened by liability associated with that plan, or both.

Lenders should keep the following goals in mind:

•  Obtaining a thorough understanding of the status of the development and the steps necessary to correct the non-complying actions of a failing developer;
• Acquisition of legal title that is as similar as possible to the title that will be most valuable on resale;
• Acquisition of development and declarant rights important to completion of the project; and,
• Limiting liability exposure arising from the developer's prior actions and omissions.

Compliance with the Development Plan

Distressed developers often fail to comply with the legally-required development steps of a condominium or planned development.  The greater and more prolonged the level of the developer's distress, the more likely it is that property releases, annexation of additional phases, reservation of necessary future easements, and other development-related actions were not handled correctly.  Lenders must consider the impact of these issues on the asset's value, including:  (i) whether the problems can be solved by the lender acting unilaterally; (ii) whether the developer can (and is willing to) cooperate to solve the problems; and (iii) whether other parties whose consent may be necessary for correction of a problem are willing to give their consent, and at what cost.

Successor's Obligations for Prior Acts or Omissions of the Developer

Purchasers may want or require assignment of some or all of the development and declarant rights associated with the asset.  Therefore, lenders must carefully consider the status of those rights, as well as any obligations attached to them.  Liability for those obligations may arise out of the community documents, defective workmanship, or breach of warranties.

Of course, foreclosing lenders will want to limit their exposure to liabilities related to the actions, errors, or omissions of the failed developer.  Successor liability for development and declarant rights is allocated under North Carolina law based on the type of development.  For condominiums, the liability of the successor to a developer is clearly set out in the North Carolina Condominium Act.  However, successor liability for planned communities is not clearly described in the North Carolina Planned Community Act, and courts have varied in imposing liability on successors to developers in planned communities based on the particular facts of a case.  A plan to reduce exposure to potential liability as a successor is therefore essential for a foreclosing lender, and must be based on an analysis of the particular facts and circumstances of each transaction.

Successor Obligations under the Development Plan

Another important consideration for foreclosing lenders is the financial obligations of the developer under the condominium or community documents that will fall upon the potential successor, particularly if the successor becomes the owner of development and/or declarant rights.  Those obligations may include an obligation to cover the association budget shortfalls or delinquent assessments unpaid by the failed developer.

A foreclosing lender also may be bound to perform promised and once-viable actions that no longer give added value to the development (for example, building and operating a golf course, country club facility, clubhouse, or pool).  Such amenities may be very expensive to construct, but demanded by owners of lots or units who bought in reliance on the promise of having them to enjoy.

Status of the Owners' Association

A lender considering foreclosing on real property that is included in a condominium or planned community must assume that the property is governed by an owners' association, and an investigation of the association is prudent.  The lender should evaluate:

• The fundamental association documents;
• The financial status of the association; and,
• The historical and current governance of the association (including the failed developer's continued involvement, if any). 

Lenders should also investigate any disputes or potential disputes among the association, the current members, and/or the developer.  Whether or not there is any real potential liability for the lender, these claims can be costly to defend and also have a chilling effect on the resale market.  Accordingly, they are pertinent to the lender's evaluation of its options.

CONCLUSION

Failed real estate developments can expose foreclosing lenders to unforeseen burdens.  Lenders considering whether to foreclose or take a deed in lieu from a defaulting developer should carefully consider all aspects of the development before negotiating or making a decision.

Keep in mind, however, that not every unknown person found on your farm will necessarily be a "trespasser."  The key is whether the person has permission or a right to come onto your farm.  In addition, even if you haven't given express permission, a stranger may have implied permission (for example, a delivery truck driver) or might have simply wandered onto your farm by mistake (for example, a lost or inexperienced hunter).  In these instances, the intruder may be unwelcome, but would not necessarily qualify as a "trespasser." 

Types of Trespass

It is important to distinguish between civil and criminal trespass.  Civil trespass derives from the "common law" developed from court decisions and can involve a civil lawsuit for the payment of damages to you as the farm owner or an injunction prohibiting the trespasser from returning to your farm without your express permission.  Criminal trespass is a statutory offense enacted into law by the North Carolina General Assembly and involves either a First Degree Trespass or Second Degree Trespass.  See Article 22B of Chapter 14 of the North Carolina General Statutes.

Civil Trespass.  There are many examples of civil trespass, such as sneaking onto someone's property to spy on them, openly entering someone's property to protest or demonstrate, or constructing or placing a building or other structure or thing on someone else's property.  Some are classified as continuing (i.e., permanent), while others are considered as recurring (i.e., intermittent).  If the trespass is malicious in nature (for example, to damage your property or shut down your operations), a court hearing a civil trespass action may impose both compensatory and punitive damages on the offender, and the trespasser still will be subject to prosecution for criminal trespass. 

Criminal Trespass.  With respect to criminal trespass, a person commits the offense of Second Degree Trespass if the person enters or remains on the property of another:

• After having been notified not to enter or remain on the property by the owner, a person in charge of the property, a lawful occupant, or another authorized person; or,

• That is posted, in a manner reasonably likely to come to the attention of intruders, with notice not to enter the property.

So, for example, if an intruder is discovered and told by you, your operator, or other authorized person to leave your farm but fails to do so, the intruder would be guilty of a Second Degree Trespass.  Furthermore, if your farm is posted with signs that sufficiently notify persons not to enter it (for example, "No Trespassing," "No Unauthorized Persons," "Posted Keep Out"), the intruder also would be guilty of a Second Degree Trespass.  A Second Degree Trespass is a Class 3 misdemeanor, the punishment for which is a fine of up to $200.00 and imprisonment for up to 20 days.  N.C. Gen. Stat. §§ 14-159.13, 15A-1340.23.

A person commits the offense of First Degree Trespass if the person, without authorization, enters or remains:

• On the property of another that is enclosed or secured so as to demonstrate clearly an intent to keep out intruders; or,

• In a building of another. 

So, for example, if you find an intruder inside one of your barns, silos, storage areas, or nurseries, the intruder, if otherwise not authorized to be there, would be guilty of a First Degree Trespass.  That would be especially true if the doors to your facility had signs indicating that no unauthorized personnel are allowed.  A First Degree Trespass is a Class 2 Misdemeanor, the punishment for which is a fine of up to $1,000.00 and imprisonment for up to 60 days.  N.C. Gen. Stat. §§ 14‑159.12, 15A-1340.23.

Posting of Property

There are no specific requirements for posting your farm property.  The key is for the posting to adequately notify an approaching person that entry is not permitted.  Thus, your sign may include such wording as "No Trespassing," "No Unauthorized Personnel," "Authorized Persons Only," or other similar forms of notice.  Your notice must be clear and displayed in a manner that is readily visible from the perimeter of your farm property.  Accordingly, notice signs should be installed at the entrance to your farm and around the entire perimeter at adequate intervals. 

For guidance on signs, you can look to the provisions of the Landowner Protection Act, Session Law 2011-231 ("Act"), adopted in the 2011 Regular Session of the General Assembly.  While the Act does not apply specifically to farms and deals with posting only to prohibit hunting, fishing, and trapping, compliance with its posting requirements is likely to carry great weight with a court considering whether your posting is sufficient.  The Act provides that any notices, signs, or postings shall measure not less than 120 square inches in size and shall be conspicuously posted not more than 200 yards apart, close to and along the boundaries of the posted property.  As an alternative to signs (which are easily subject to theft and vandalism), landowners may also paint a purple stripe on trees or posts that are no more than 100 yards apart.  The specific words "No Trespassing" are not required.   

Practical Tips to Protect Your Farm

• Instruct all of your farm employees on trespass law and how to respond if an unauthorized person is discovered on your premises.

• Place "Posted No Trespassing" or "Posted No Unauthorized Persons" signs at all entrances to your farm and every 200 yards around the boundary of your farm.

• Place "Posted No Trespassing" or "Posted No Unauthorized Persons" and appropriate bio-security warning signs on the doors of your barns, silos, storage areas, and other buildings.

• Install physical barriers such as gates, fences, hedges, and/or trees at entrances and along your farm's roadside frontage to deter people from walking or driving onto your farm property.

• Plant vegetative screens to block the view of fields, lagoons, and farm buildings from the road.

• Install alarms and motion detectors on your buildings.

• Call the sheriff if an intruder refuses to leave, returns to your farm after being told to leave, or threatens you or any of your employees.

• Remember that when a law enforcement officer is called by a landowner alleging trespass, the officer may not want to get involved.  Instead, the officer may tell you either that you should "swear out a warrant" or that it is only a civil matter.  If you get that type of response, contact the Sheriff and/or the District Attorney directly and ask for assistance.  Do not swear out a warrant on trespassers until you consult with an attorney.  Individuals who "swear out warrants" often become the targets of malicious prosecution and/or abuse of process lawsuits by the trespassers.  These are civil torts and could subject you to punitive damages (allowing the court to punish you by requiring you to pay damages to the trespasser in an amount sufficient to likely prevent you from wanting to repeat the act).  Theoretically, the more you are worth, the more the punitive damages are justified if the trespasser sues you and wins.  In most instances, it is preferable to file a civil action against the trespasser and seek an injunction and compensatory and punitive damages as appropriate.

• Do not point a gun or brandish any weapon at trespassers, as this could lead to violence and also provide the trespasser with "ammunition" for a punitive damages claim in court.  Similarly, do not provoke a fight, threaten reprisals, or use profanity.  Remember, activists who may want to challenge your farm operations or an aspect of it (be that use of chemicals, livestock operations, or clean water procedures) are seeking confrontation and may be accompanied by the news media who love nothing more than a show of emotion when the camera is rolling.  If individuals persist in remaining on or returning to your farm, it is best to call law enforcement and let them deal with the trespassers.

Regardless of how information is put into electronic form as a record, metadata is created with or without input from the users.  Metadata weaves its way into all forms of electronic use and, in doing so, creates a trail of information.  The North Carolina General Assembly's addition of metadata to the scope of discoverable information means that litigants have, with some limitations, a means to acquire this metadata.  However, with the right planning and preparation, businesses may be able to avoid potential litigation-related problems created by this trail of information.

 What Exactly Is Metadata?

Trying to find a simple and concrete definition for metadata is tantamount to trying to define pornography.  There is certainly a collective concept in the technological community about what metadata is, but even a brief survey of the term returns a multitude of different definitions applicable to different situations.  The most commonly accepted general definition appears to be that metadata is "data about data."  As un-illuminating as that definition may be to ordinary people, perhaps a more understandable definition is that metadata is electronic information that is either created automatically as part of the electronic process or input manually by the user or creator of the electronic information and which can be used later to locate files containing the record.

Metadata appears in three types:

• Descriptive – Descriptive metadata describes things such as the subjects the record is about, the party to whom the record pertains, or the record's creator; 

• Structural (or system) – Structural metadata is the more technical form of metadata and includes such things as data about format, styling, processing, encryption, and authentication; and,

• Administrative – Administrative metadata pertains to data such as ownership, access rights and restrictions, usage history, and even copyrights.

Regardless of the type or kind of metadata, the common theme is that all metadata provides searchable information about the electronic record at issue.  This searchable information allows search engines to locate records or items in a database.  A very simple example is where an online record storage program requires the creator of a record to disclose the creator's identity before a record is created.  Obviously, that identification can be used later to search for and locate that record.  In addition, the record can be located based on the date it was created or its particular location in the database, each of which is metadata that may be created and attached to the record electronically or automatically without any direct input from the user. 

A slightly more complex example involves searchable information created and stored about the history of a record, such as the date and time of modifications to, or access of, a record and the identity of the person or entity that made the modification or accessed the record (or at least the user whose computer was used to modify or access the record).  The clear benefit (or danger) is that the more searchable information is created and linked to a record, the easier it is for a searching party to locate the record quickly and efficiently, regardless of the type of databases.

 So, What Is The Problem?  

Simply stated, the good comes with the bad.  In making electronic information more searchable, a trail of sometimes unwanted or unnecessary metadata is created.  As discussed above, this can come about from intentional user input or as just a function of the particular program.  A good example involves one of the most common forms of metadata:  track changes.  This is an incredibly useful feature that appears in nearly all word processing programs and is a regular part of drafting and revising documents.  The problem is that each entry, revision, and comment is stored somewhere in the particular document.  So, metadata not only keeps track of each and every time that a particular document has been modified or even viewed, and by whom, but metadata can also store the actual changes themselves. 

Horror stories abound about users amending documents in track changes and turning the feature off before saving and sending, only to have the recipient open the document and use the document's metadata to see all the changes made.  Sometimes this is intended; other times it is not.  Other examples involve users making comments on documents that include confidential client or trade secret information.  A simple deletion intended to cleanse the document of the comment may leave behind a trail of metadata that could include that very confidential information.  Regardless of the form of the trail, the trail exists and businesses should be mindful of it.

How Can A Party Get Another's Metadata?

Parties in litigation frequently engage in a formal exchange of information called "discovery."  Discovery requires parties to disclose records, documents, information, and testimony prior to a trial.  Discovery was initially intended as a way to encourage pretrial resolution of cases by revealing the strengths and weaknesses of each party's position prior to trial.  However, critics lament that discovery has become tedious, time-consuming, and generally excessive in breadth.

The scope of what information must be disclosed, also called "discoverable information," has been relatively broad since the inception of discovery.  Discoverable information typically includes things like relevant records and documents, the names and addresses of persons with knowledge of the allegations in the case, and testimony about case events.  Effective October 1, 2011, this scope was broadened further in North Carolina to include "electronically stored information."  At first glance, one would think that this is a reasonable addition designed to keep the discovery process relevant in the information age.  However, the North Carolina General Assembly took it one step further and specifically defined "electronically stored information" to include "reasonably accessible metadata that will enable the discovering party to have the ability to access such information as the date sent, date received, author, and recipients."  The General Assembly also included a qualifier which states that "[t]he phrase does not include other metadata unless the parties agree otherwise or the court [so] order[s.]"

In other words, adverse litigants can now seek to discover from one another metadata as it has been defined by the General Assembly.  The General Assembly's definition offers some guidance on the metadata that is discoverable, but it also leaves many questions unanswered.  The definition seems to be limited to typical data associated with creating, sending, and receiving records.  In the case of email, this information is obvious.  In the case of a record that has not been sent or received, the issue becomes more complicated.  For instance, it would seem that a party may request that the producing party hand over the metadata associated with the creation of internal records and documents that have never been emailed or otherwise disclosed.  This may or may not have relevance to the matter at hand in litigation.  These types of questions will have to be worked out as the new rules are applied by the trial courts and interpreted by the appellate courts.  Regardless, the time for businesses to take notice of and address this issue is now.

What Can Be Done?

Enormous amounts of information are input into, and generated by, electronic systems each day.  To require that a person or business be able to produce each piece of that information would be utterly unreasonable.  Luckily for business owners, the discovery rules pertaining to sanctions for failure to comply with discovery requests were also amended to account for the normal day-to-day use of electronic systems.  Specifically, this amendment states that:

Absent exceptional circumstances, a court may not impose sanctions under these rules on a party for failing to provide electronically stored information lost as a result of routine, good-faith operation of an electronic information system.

Since electronically stored information includes reasonably accessible metadata, this amendment would appear to apply to metadata as well.  Although nothing is certain at this stage, this amendment may give businesses the ability to customize their electronic programs, data storage, and file management in ways that may minimize the storage of potentially harmful metadata.  It is already common for businesses to use programs that cleanse metadata from documents prior to sending.  Programs that store less metadata can be purchased, developed, and implemented.  Archiving practices can be adopted that could address the storage of metadata.  These steps should be evaluated with input from both information technology personnel and attorneys who can provide advice as to the legal benefits and drawbacks.  Doing so in advance of litigation will ease the potential hassle and expense of discovery, and the possible negative ramifications of the disclosure of certain information, should litigation ever ensue.

Conclusion

The reach of the addition of electronically stored information to the litigation discovery process extends far beyond the scope of this article.  But, it would be folly to overlook the potential pitfalls tied to the metadata that hides in our electronic systems.  While no one looks forward to litigation, all business owners must plan for just that possibility and the tedious process of discovery; it is simply an unfortunate reality of modern day life.  As is often the case, proper planning before litigation occurs can save significant costs and stress if it ever does.  Attorneys will always have various tools to fight the production of information in discovery, but it would be wise to take action to protect oneself or one's business long before those tools ever enter the picture.

The following are various aspects of website privacy law that you should ensure your company does not overlook.

Capturing Information

If your company has a website that collects information in any way, including through email, an embedded "contact" form, or even cookies, you should establish a website privacy policy for it to protect it from liability.  Privacy policies are not just for large corporations and "Internet companies."  Applicable laws control what must be disclosed in a website privacy policy statement and how it is presented, as well as the underlying privacy practices.

Making Promises

Companies sometimes make promises in their website privacy statements that they fail to fulfill in practice.  Allegations of such behavior can be found in most of the FTC's recent enforcement actions in this area.  This is particularly unfortunate because, in many instances, the companies created an otherwise avoidable risk by establishing privacy standards that were stricter than the law required.  This type of risk is increased if your company, or its third-party website designer, simply copies another company's privacy policy statement without first understanding all of the legal and practical considerations that went into that statement, including what different or additional policies your company may need to have because of the different ways in which it does business.  To be effective in protecting your company from liability, your website privacy policy must be tailored to your company's own practices.

Conducting On-Line Business

If your company does business through its website, it may well have additional financial privacy protection obligations and disclosure requirements under various federal and state financial privacy laws, particularly if credit is extended for on-line transactions.  Any company engaging in transactions through its website needs to be aware of the many additional legal obligations created by the patchwork of financial privacy laws.

Protecting Children

Websites directed at children are subject to additional restrictions and requirements under the Children's Online Privacy Protection Act ("COPPA").  If your company's website, or a section of the website, is designed for children, COPPA disclosures and policies are necessary.

Opt-Out Requirements for Advertising

The federal Controlling the Assault of Non-Solicited Pornography and Marketing Act, commonly known as the "CAN-SPAM Act," which limits electronic advertising, is not a privacy law per se, but it does require Internet and email advertisers to provide an opt-out mechanism for electronic marketing, among other things.  If your company advertises through its website or by email, you must have CAN-SPAM policies and an opt-out procedure.  It is customary and advisable to address the CAN-SPAM Act and opt-out rights in a website privacy policy.

Don't Forget State Laws

A few states have their own website privacy laws with which your company must comply if you are directing your website to residents of any of those states.  For example, if your company's website is directed at California residents, or at U.S. audiences generally, your website will need to comply with California's rules, which are reputed to be the most rigorous and which include specific requirements that may go beyond the requirements of the federal rules.

Conclusion

Internet privacy is gaining increasing attention from governmental entities, consumer groups, and plaintiffs' class action attorneys, and is expected to be an emerging source of risk for many companies.  Fortunately, much of that risk is avoidable if care is taken to observe the patchwork of applicable legal requirements.

The Ward and Smith attorneys acknowledged as "Super Lawyers" are: Albert R. Bell, Jr., Employment & Labor; Stuart B. Dorsett, Estate Planning & Probate; A. Charles Ellis, Personal Injury Plaintiff: General; Donalt J. Eglinton, Business Litigation; E. Bradley Evans, Business Litigation; Paul A. Fanning, Bankruptcy & Creditor/Debtor Rights; Michael P. Flanagan, Banking; John M. Martin, Business Litigation; Michael L. Miller, Estate Planning & Probate; Gary J. Rickner, Business Litigation; Frank H. Sheffield, Jr., Environmental; J. Troy Smith, Jr., Business/Corporate; Jason T. Strickland, Business Litigation; David L. Ward, Jr., Banking; and Kenneth R. Wooten, Business Litigation. 

Our "Rising Stars" include E. Bradley Evans and Jason T. Strickland. Both were recognized in the category of Business Litigation.

We are pleased to announce that Stuart B. Dorsett remains on the Top 100 list.

The Current Status of the Gift and Estate Tax Exemption

In late 2010, the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 ("Act") was enacted.  One of the provisions of the Act increased the federal gift and estate tax exemption to $5,000,000 for 2011 and 2012.  Unless Congress acts, the exemption will decrease to $1,000,000 on January 1, 2013.  Of course, it is possible that Congress will enact new tax law before then, but most commentators are not optimistic that the current $5,000,000 exemption will remain.  (Note: The $5,000,000 and $1,000,000 exemptions referred to in this Article will be indexed for inflation.)

The current $5,000,000 exemption can be used during lifetime or at death – or some portion during lifetime and the rest at death.  Any portion of the exemption used during lifetime decreases the amount available upon death.  Since most of us are not planning to die before the end of 2012, most of us will not be able to use any portion of this exemption for transfers at death.  But, wealthy individuals who want to ensure that they will be able to use the current $5,000,000 exemption and are comfortable making significant gifts at the present time should consider using the exemption during their lifetime.  And, because the $5,000,000 exemption may not be available after 2012, it may be a "use it or lose it" proposition.

The Opportunity for Lifetime Gifts

There are many techniques available to those who wish to use the increased exemption during lifetime.  The simplest approach is to make a direct gift to the desired recipient.  This is as simple as writing a check, transferring securities, or deeding real property to the desired recipient.  The fair market value of the gifted asset is used to determine the tax effect of the gift.  If the value of the gift plus the value of all prior taxable gifts made to all recipients does not exceed the current $5,000,000 exemption, then the remaining exemption is reduced by the value of the gift.  If, however, the value of the gifted asset plus the value of all prior taxable gifts exceeds the current $5,000,000 exemption, gift tax would be owed on the value that exceeds the exemption.

A simple gift as described above provides several benefits.  First, the value of the gift is determined by using the valuation at the time of the gift.  If the value of the gifted asset increases between the date of the gift and the donor's date of death, the appreciation is not subject to estate tax upon the donor's death because the asset is not owned by the donor at the donor's death.  This is commonly known as an "estate freeze."  Second, any income earned on the gifted asset will accrue in the name of the donee.  This prevents the income from accumulating in the donor's name, thus preventing the donor's estate from growing by the amount of income accumulated.  Finally, the value of the gifted asset should not be subject to estate tax on the donor's death if the $5,000,000 exemption is not exceeded.

However, the third benefit discussed above has created much debate over the past year.  There is a question as to whether gift or estate tax could be owed on the value of the previously gifted asset if the exemption returns to $1,000,000 in 2013 or future legislation results in a gift and estate tax exemption in an amount less than $5,000,000.  This is referred to as the potential for "claw back."

What is "Claw Back"?

The potential for "claw back" exists because of the manner in which the estate tax is calculated upon death.  Specifically, the estate tax is calculated by adding the value of the assets owned at death and the value of the assets gifted during lifetime to which the gift and estate tax exemption has been applied.  If the total is more than the value of the gift and estate tax exemption at the time of death, then estate tax would be calculated on the amount that the total exceeds the exemption at that time.

For example, assume an individual dies in 2013; has $2,000,000 in assets at the time of death; and the gift and estate tax exemption has returned to $1,000,000.  During 2012, the individual gifted $3,000,000 to which the gift and estate tax exemption was applied.  In order to determine the value of the estate for estate tax purposes, the $2,000,000 owned by the individual at death is added to the $3,000,000 of prior gifts, creating a taxable estate of $5,000,000.  If "claw back" occurs, estate tax will be calculated on $4,000,000, which is the value of the taxable estate reduced by the gift and estate tax exemption at the time of death.  Therefore, the gifted assets actually are subjected to estate tax at death.

Most commentators believe that the potential for "claw back" is an unintended glitch in the legislation and expect a technical correction to eliminate the potential.  But there is no way to predict the actions of Congress.

Tax Advantages Even if Claw Back Exists

Despite the uncertainty as to whether "claw back" will become a reality, consideration still should be given to making gifts in 2012 to use the $5,000,000 gift and estate tax exemption.  Even if the value of the gifts ultimately becomes subject to gift or estate tax, several objectives would still be accomplished.  First, the value of the gift would be "frozen" at its value in 2012.  Therefore, any increase in the value of the gifted asset after the date of the gift would not be subject to estate tax.  If, however, the gift had not been made and the value of the asset increases, the increased value at the time of death would be the amount taxed.  Second, any income earned on the asset would accrue in the name of the donee and estate taxation in the donor's estate would be avoided.  Further, the donee's income tax bracket often is less than the donor's income tax bracket, so there could be some income tax savings as well.

Structure and Reporting of Gifts

There are many gifting techniques available to use the current $5,000,000 gift and estate tax exemption depending on the nature of the assets and the family dynamics.  Often, some type of trust or limited liability company ("LLC") structure is utilized.  A discussion of these options is beyond the scope of this Article.  Any individual considering a gift of this nature should seek legal counsel to discuss the alternatives.

If the gift and estate tax exemption is used during lifetime, a gift tax return must be filed even if no tax is due.  The only exception is if the value of the gift is less than the annual exclusion from gift tax ($13,000 for 2012) or qualifies for the exclusion for medical or educational expenses.

Conclusion

Those interested in making gifts should begin to formulate a gifting plan during early 2012.  Often, individuals do not concentrate on gifting strategies until the end of the year.  However, waiting may eliminate the ability to structure the gifting in the most advantageous manner.

Mr. Cloninger's practice primarily focuses on a wide range of construction law matters.  He represents general contractors, subcontractors, suppliers, architects, engineers, developers, and owners; drafts contracts and subcontracts; and handles collections, lien filings, and bond claims.  Mr. Cloninger regularly represents clients in state and federal courts and in arbitration.  He earned his law degree from The University of North Carolina School of Law and his A.B. from The University of North Carolina at Chapel Hill, where he was a member of Phi Beta Kappa.

Ms. Mann-Stadt's practice experience encompasses various aspects of labor and employment law.  She assists clients with employment discrimination and labor relations issues and has represented clients before administrative agencies and in state and federal courts.  Ms. Mann-Stadt earned her law degree from the University of Illinois College of Law, her M.B.A. from the University of Louisville, and her B.S. from Boston College.

Mr. Osborne's practice primarily focuses on labor and employment law matters.  He provides counsel to clients in the financial, construction, and non-profit sectors.  Mr. Osborne represents clients in state and federal courts as well as before administrative agencies.  He earned his law degree from Duke University School of Law and his B.A. from Duke University.

Ms. Wells' practice experience encompasses various aspects of labor and employment law.  She regularly advises individual and corporate clients in matters of employment discrimination, harassment, wrongful discharge, and personnel policies and procedures.  Ms. Wells earned her law degree, cum laude, from The University of Georgia School of Law where she was a member of the Editorial Board of the Journal of International and Comparative Law.  She earned her M.B.A. from The University of Georgia, Terry College of Business, and her B.A., cum laude, from The University of Georgia.

Governor Beverly Perdue announced Mr. Smith's appointment this week along with 17 other members to sit on the Judicial Nominating Commission she established by executive order to assist in filling judicial vacancies.

The commission will review applications as vacancies occur on the Supreme Court, the Court of Appeals, or Superior Court.  Members select three nominees to fill the vacancy and the governor appoints one of those nominees.

Mr. Smith said he has supported Perdue in the past and had said he would never take another appointment, but "I can't really turn this one down.  I have been one of the most publicly vocal lawyers about what I deem to be the state of the judiciary in the state of North Carolina."

"I appreciate the opportunity to do what I can to improve the situation," he said, a graduate of the University of North Carolina at Chapel Hill, where he received his law degree with highest honors and was editor in chief of the North Carolina Law Review.

"That's what this is all about.  It doesn't have anything to do with party, and not withstanding, with diversity," he said.  "It only has to do with the bottom-line questions that everybody on this commission will need to answer because, with the growing number of laws in this state and country, they may find themselves in front of one of them."

A past member of the N.C. Bar Board of Directors, Mr. Smith has chaired the association's Committee on Ethics, Committee on Recodification of the General Statutes, and the Real Property Committee.  He is a past president of the Craven County Bar Association and former director of the U.N.C. Law Alumni Association.

Copyright © 2012, Freedom Communications, Inc.

Furthermore, conservation easements can be specifically tailored to fit your particular tract of land and allow you to retain many of your rights to use and enjoy it.

What is a Conservation Easement?

A conservation easement is a legally enforceable restriction on the use of your property such as restrictions on residential or commercial development, mining, or road construction activities.  Your conservation easement can be enforced by the organization to which you grant the easement.  The donee organization may be a governmental unit, a nonprofit land trust, or other appropriate public charity.

A conservation easement may allow you to still use your land for some level of timbering and agricultural or horticultural pursuits consistent with the conservation purpose.  Your continued use of the land for hunting, recreation, or other purposes may well be permitted.  Depending upon the conservation purpose, you may not be required to grant a right of public access to your land.

To qualify for tax benefits, your easement must be perpetual and for an appropriate conservation purpose.  Such purposes may include recreation, education, habitat protection, historic preservation, open space protection, and protection of scenic enjoyment of a visual landscape such as along a scenic drive or river.  The conservation purpose and the other attributes of a qualified contribution are subject to a number of regulatory requirements and limitations.

If you reserve rights to use your land, you must agree to notify the donee in writing before exercising certain reserved rights.  The donee must also be given the right to enter your property at reasonable times to ensure your compliance with the easement, as well as the right to enforce the easement by appropriate legal proceedings. 

A baseline report is generally necessary in order to identify and document the natural aspects of your property which are worthy of preservation.  The report will assist in gauging the success of preservation efforts and assist the donee organization in the development of a maintenance plan for your easement.

In the event your property is subject to a deed of trust or mortgage, it must be cancelled or subordinated to the conservation easement.  Subordination means that a foreclosure of the mortgage or deed of trust would not cut off the conservation easement, and any purchaser of your affected property at a foreclosure sale will be subject to its limitations.

Property Valuations

An appraisal of your property by a qualified professional will be required in order for you to obtain many of the tax benefits of a conservation easement.  The appraisal must include certain required information and meet specific standards and timing requirements in order to be considered a qualified appraisal for tax purposes.  Generally, your easement is valued by subtracting the value of your property after the easement is granted from its value if left unencumbered by the easement.

Property Taxes

A conservation easement may allow you to reduce your local property taxes, particularly where your land otherwise would have a potential for development and is valued by the tax collector accordingly.  Your property will be assessed at its fair market value, taking into consideration the limitations imposed by the easement.  This may be important, particularly if your land is forest land which is not being actively managed for commercial forestry.  Such land is generally not eligible for the special use valuation for property tax purposes which would otherwise be applicable and provides valuation discounts for land managed for agricultural or commercial forestry uses.  A conservation easement will allow you to obtain a "discount" which could be less, or could be more, than the lower use valuation you are missing.

Federal Income Taxes

A federal income tax deduction may be available to you in an amount equal to the value of the donation up to 30% of the contribution base of an individual donor and up to 10% of the taxable income of a corporate donor for the tax year of the gift.  If all of the deduction cannot be used by you during that tax year, it may be carried forward for up to five additional years.

North Carolina Income Tax

Because your North Carolina individual state income tax is based upon federal taxable income (which includes deductions for charitable gifts), your federal deduction for the gift of a conservation easement will be included automatically for state income tax purposes.  In addition, North Carolina provides a tax credit for a qualifying conservation easement of up to 25% of the fair market value of the easement.  Currently, the tax credit is capped at a maximum of $250,000 for individual donations and $500,000 for corporate donations.  The credit can be carried forward for up to five additional years if it is not fully utilized during the tax year of the gift.  You will need a certification from the North Carolina Department of Environment and Natural Resources ("DENR") in order to take advantage of the North Carolina Tax Credit.

Federal Estate Taxes

Because estate taxes are based upon the fair market value of the assets of the estate, reducing a property's value by subjecting it to a conservation easement may enable your family members to maintain ownership of your property without having to sell it to fund tax payments.  A charitable estate tax deduction for the value of the easement also may be available if the conservation easement is granted by your Will.

In addition to the benefits to your family resulting from reduced values in computing the size of your estate for tax purposes, Section 2031(c) of the Internal Revenue Code may allow exclusion from your estate of up to 40% of the value of your land which is subject to a qualified conservation easement.  This exclusion may be available even if your qualified conservation easement is granted after your death by your executor or family members.  The exclusion limitation is currently $500,000.

A special election must be made in order to take advantage of the 40% exclusion.  There are also several technical requirements for the exclusion.  For example, your property must have been owned by you or a family member for three years prior to your death, and the exclusion does not apply to any retained development rights.  There are reductions in the exclusion to the extent the value of the qualified conservation easement is less than 30% of the total land value before the easement.

Conclusion

Conservation easements provide a unique tool which may allow you the flexibility of continuing to own and make certain uses of land while at the same time obtaining tax benefits and achieving preservation or other conservation goals.

Ward and Smith attorneys acknowledged by peer recognition and professional achievement to become "Legal Elite" are Derek J. Allen, Real Estate; William Joseph Austin, Jr., Employment; Albert R. Bell, Jr., Employment; Stuart B. Dorsett, Tax/Estate Planning; Donalt J. Eglinton, Intellectual Property; Paul A. Fanning, Bankruptcy; Michael P. Flanagan, Bankruptcy; S. McKinley Gray, III, Employment; E. Eric Mills, Intellectual Property (category winner); Frank H. Sheffield, Jr., Environmental; J. Troy Smith, Jr., Business, Corporate; Thomas E. Stroud, Jr., Young Guns; Allen N. Trask, III, Young Guns; and Kenneth R. Wooten, Construction, Litigation.

David L. Ward, Jr. continues to be included in the Legal Elite Hall of Fame.