REPORT FROM COUNSEL

HAVE WEBSITE, MUST TRAVEL (TO COURT)

The ease with which an online business can deal with customers in other states has a downside. Setting up a website and reaching out to anyone online could expose a business to lawsuits in any state where a disgruntled customer claims injury. This threat applies even to the smallest of businesses who may think of themselves only in local or regional terms.

The traditional rule, established long before the arrival of the Internet, required that a business have "minimum contacts" in a particular state in order for the business to be sued in the courts of that state. Opening a branch office in a state or sending a sales representative there is easier to categorize as "contacts" than are activities that take place only in cyberspace. Adaptation of the concept to business conducted on the Internet is a work in progress, but some patterns are starting to emerge.

Passive vs. Active Websites

Some courts distinguish between "passive" and "active" websites. A website that is clearly passive is limited to describing the company or providing its address or telephone number. It is unlikely that a passive website, by itself, will subject the business to lawsuits wherever it can be seen. On an active website, customers can make online transactions by signing up for services or buying products. Among courts adopting this approach, the consensus is that an active website constitutes doing business in the users' home states, subjecting the business to the jurisdiction of courts in those states.

The passive/active website distinction is flawed because there are large gray areas between the two ends of the spectrum. Courts have struggled with how to characterize "interactive" websites that do not permit online transactions but allow customers to get on mailing lists, communicate with company representatives, or check on orders.

Internet Server Location

Other courts find jurisdiction in the state where the Internet service provider is located. The problem with this approach is that businesses may use one or more servers not as part of a plan to do business where the server is located but simply for technical reasons. In fact, many businesses and individuals do not even know the location of their server. One state appellate court has concluded that a New York organization could not be sued for defamation in a California court on the ground that it had contracted with an Internet service provider in California. The court accepted the argument that choosing a server with a few keystrokes at the computer was for the purpose of giving access to people all over the world but not to target California in particular.

Non-Internet Factors

If no clear answer to the jurisdiction question emerges from the nature of a business's website activities, the scales may be tipped by non-Internet factors. For example, a manufacturer of beds in one state maintained a passive website in that no sales were conducted through it. The site was accessible to over two million residents in another state halfway across the country, and sales by conventional means in the second state represented over 3% of the manufacturer's gross sales. A federal district court in the second state allowed two of its residents to sue the manufacturer in their home state when their three-year-old was asphyxiated in a bunk bed.

Preventive Measures

Short of retreating from the age of the Internet, there are measures that can be taken to reduce the likelihood of being hauled into court up to three time zones away from your home state. Give thought to the kind of website you use and to its purpose. Some courts have held that the likelihood that jurisdiction can be asserted over an out-of-state business is directly proportionate to the nature and quality of the commercial activity that an entity conducts over the Internet.

While courts may not always enforce the practice against individual consumers, businesses can try to protect themselves by posting choice-of-jurisdiction and choice-of-law provisions on their sites. This is the online version of including in written contracts clauses in which parties agree that any dispute will be resolved in the courts, and according to the laws, of a specified state.

While such agreements can be in written form in the product's packaging, it is more effective to use "click wrap" agreements where a potential customer first must click on a button that says "I accept these terms." A federal court has upheld such an agreement, ruling that a couple who sustained personal injuries at a Las Vegas hotel could not sue the hotel in their home state. Although any customer in any state could reserve a room through the hotel's website, the customer first had to agree to have legal disputes settled in a court in Nevada as part of making the online reservation.

TRADEMARK INFRINGEMENT

Is a "Hog" Always a "Harley"?

A federal appellate court answered that question in a recent trademark infringement suit, in which the defendant operated a motorcycle repair shop known as "The Hog Farm." In his promotional materials, he prominently displayed the bar-and-shield design mark owned by Harley-Davidson, the renowned manufacturer of large motorcycles. The defendant's materials also referred to his business as an "Unauthorized Dealer." Harley sued to forbid the defendant's infringing use of Harley's design trademark and his use of the term "hog," for which Harley claimed protection as a trademark.

For many years, motorcycle aficionados informally used the term "hog" to refer to large motorcycles, and in particular to those manufactured by Harley. At first, Harley was not entirely content with the association of its products with the term "hog," since that term had become identified with some of the more unsavory motorcycle enthusiasts. Later, however, Harley changed its corporate mind and decided that the association of the term "hog" with its brawny motorcycles was, on balance, positive. Accordingly, it sought and obtained trademark registration for the term "hog," used in connection with motorcycle products and services.

Despite the registration of the mark, the appeals court concluded that the term "hog" had become generically associated with all large motorcycles, not only those manufactured and sold by Harley. No protection could be claimed by Harley for the term "hog" and thus there could be no infringement by the defendant in using that term in the context of his motorcycle repair business. While a rose may always be a rose, a hog is not always a Harley.

The defendant's unauthorized use of Harley's design mark was quite another matter. The defendant claimed it was merely using the mark as a parody of the Harley name and identity. A lawful use of a trademark as a parody must comment on or inform the original use of the mark by the mark's owner. Here, the defendant was using the alleged parody not to comment on Harley's mark but instead to sell a competing service, because Harley's authorized dealers also provide motorcycle service and parts. The court concluded that the defendant's use of the mark infringed Harley's design mark.

In addition, the defendant's use of the phrase "Unauthorized Dealer" was not sufficient to disclaim association with Harley-Davidson. Rarely will the use of a disclaimer be sufficient to avoid the possibility of confusion and thus the defendant was found liable for infringement.

REAL ESTATE

Fair Housing Act

The federal Fair Housing Act prohibits discrimination in housing because of race or color, national origin, religion, sex, handicap, or familial status. Familial status refers to the discriminatory treatment of pregnant women, or of parents or legal custodians of children under the age of 18. The Act applies to most kinds of housing, but there are exemptions for owner-occupied buildings with no more than four units, single-family housing sold or rented without a broker, and housing operated by private organizations that limit occupancy to members.

The Act prohibits a broad range of discriminatory conduct. Regarding the sale and rental of housing, for example, no one can, on the basis of any of the protected classifications: refuse to rent or sell housing; refuse to negotiate for housing; set different terms or conditions for obtaining housing; provide different housing services or facilities; or falsely deny that housing is available for inspection, sale, or rental. It is also illegal to threaten, coerce, intimidate, or interfere with anyone exercising a fair housing right or assisting others to exercise such rights. Advertising for renters or buyers (or other statements) may not indicate a limitation or a preference based on a protected category, even as to single-family and owner-occupied housing that is otherwise exempt.

A person claiming to have been victimized by discrimination prohibited by the Fair Housing Act can file an administrative complaint with the Department of Housing and Urban Development. If the matter is not resolved by that means, it will be heard in an administrative hearing or, at the option of either side, in federal district court. Or, the complaining party may go straight into federal or state court at his or her own expense. Either procedural track can lead to an award of damages, injunctive relief, and recovery of attorney's fees and costs if violations of the Act are proven.

A recent decision by an administrative law judge illustrates the breadth of coverage under the Act. Gayle, a single mother of a 12-year-old son who lived with her, responded to an advertisement for renting an apartment that was one of two units in a duplex. The owners occupied the other unit. While describing the apartment to Gayle over the phone, one of the owners stated, "This apartment has a pool, so we don't want children or pets." Gayle responded that, given her son's age, the pool was not dangerous. The owners stood their ground.

Since the owners occupied one-half of the duplex, they were free to discriminate with impunity in renting the apartment. They remained subject, however, to the Act's prohibition on making a statement with respect to rental of a dwelling that indicated any preference, limitation, or discrimination based on familial status.

According to the judge, the violated section of the Act gives persons seeking housing the right to inquire about its availability without having to endure the insult of discriminatory statements. In her view, the owners' comment rejecting anyone with children because of the pool was such a statement. The statement expressed a blanket ban on renting to a family with a child or children, even if it stemmed from a concern for the safety of children. The judge stated that the decision on whether a dwelling poses unacceptable risks to a child is for the prospective tenant/parent to make. Gayle and her son were awarded damages for emotional distress, and a civil penalty was assessed against the apartment owners.

SKYBOX DEDUCTIONS

A Nebraska corporation made a substantial contribution to a university for a skybox being built in the university's football stadium. Resolving a dispute over deductibility of the contribution, the IRS has ruled that 80% of the contribution is deductible as a charitable contribution where, as in the case before it, the donor receives the rights to purchase tickets for seating in the skybox at athletic events. Amounts representing the value of ticket purchases, the right to use the skybox, passes to visit the skybox, and parking privileges are not deductible as charitable contributions.

FINDERS NOT KEEPERS

When a maritime salvage company discovered the wreck of a Spanish ship that disappeared off the Virginia coast nearly 200 years ago, it thought it had hit the jackpot. Along with its hundreds of passengers, the ship had on board many millions of dollars in coins and precious metals. Not long after the company had begun to explore and mine the site, it was sued by Spanish officials who claimed that Spain still owned the ship because it was never technically abandoned. A federal judge agreed with Spain.

The basis for the court's ruling is even older than the shipwreck. The judge interpreted the 1763 treaty that ended the French and Indian War as making Spain the rightful owner of Spanish ships that sank off the United States coast after 1763, while defeating any Spanish claims to ships that went down before that date.

The salvage company did win the rights to a second ship that had sunk in the same area in 1750. The partial victory will do little for the company's bottom line, however. The second ship was not known to have been carrying any treasure.

ESTATE PLANNING

Transferring Assets to Your Minor Children

In many cases, it makes sense for a parent/taxpayer to start transferring his wealth to his children well before the end of his own life expectancy and even before his children have reached their majority. There are two primary advantages to making such transfers. The first advantage is that of estate tax savings. When assets are transferred by the taxpayer and he retains no control over their ultimate disposition, they will not be included in the taxpayer's estate for federal estate tax purposes upon his death. Also, any appreciation in the value of the assets following their transfer would not be included in the taxpayer's estate.

The second advantage to making transfers of assets to the next generation at a relatively early point in the taxpayer's life is the nontax advantage of securing the inheritance of the taxpayer's descendants and safeguarding resources that can be used for their present needs, such as education. The taxpayer can retain control as to the amounts to be distributed and as to the purposes for which the distributions can be used.

One means of transferring property to a minor without giving the minor immediate control of it is to establish a custodianship for the minor. Such a transfer is an outright gift that resembles a trust because it is held and administered by a third person (the "custodian") who has the power to expend the custodial property for the use and benefit of the minor. If the donor is himself the custodian, however, there is a possibility that the full value of the transferred property would be included in the donor's estate for federal estate tax purposes.

An alternative means of transferring property to a minor is through the use of a trust for the minor's benefit. In order to secure tax savings, the trust has to satisfy the following Internal Revenue Service requirements. First, the transfer has to be for the benefit of a minor, meaning an individual who has not attained age 21 as of the date of the transfer. The trust must provide that trust income and principal may be used for the donee's benefit prior to his reaching age 21 and any income and principal not expended for the donee's benefit during his minority must pass to the donee upon his attainment of age 21. If the donee dies before reaching age 21, such unexpended income and principal must be paid either to the donee's estate or as the donee might appoint. The trust can provide that when the minor reaches age 21 he has a limited period in which he can force immediate distribution of the trust fund. If such power is not exercised, the trust can continue on its own terms.

If the foregoing requirements are met, the donor of the trust is allowed the advantage of an Internal Revenue Code gift tax provision that has become a familiar feature of gift-giving programs. A donor is permitted to exclude from the total gifts made in the tax year the first $10,000 of a gift made to an individual. If the donor's spouse joins in the gift (the spouse need not have any interest in the property being transferred), the exclusion is $20,000. Stated simply, either $10,000 or $20,000 worth of property can be transferred by a donor free of federal gift tax to a single individual in a given tax year. Such a gift can be repeated in each succeeding year.

In regard to the gift tax exclusion where the transfer is in trust, the exclusion applies only to the transfer of a "present interest." A right to a distribution of trust principal at the termination of a trust constitutes a future and not a present interest. Were it not for the special dispensation given in the case of a trust for the benefit of a minor, a transfer to such a trust would typically not qualify for the $10,000/$20,000 exclusion because the transfer would not be of a present interest.

The Internal Revenue Code, however, eliminates the "present interest" requirement where the trust is for the benefit of a minor and the requirements described above are satisfied. Thus, if amounts no greater than the annual exclusion are given to the trust for the benefit of a minor each year, such transfers would escape gift tax and would not be subject to estate tax upon the donor's death. The donor's appointment of himself as trustee would not negate the tax benefit.

Trusts and other estate planning instruments require careful planning and knowledge of the law. Always consult a qualified professional for advice on estate planning issues.