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Legal Alert:
Current legal trends affecting you and your business

November/December 2003

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In this issue . . .

• Don’t Let Software Piracy Shipwreck Your Company
  You Can Be Liable if Your Employees Use Unlicensed Programs
• Toxic Mold Can infect Your Bottom Line
• Funding Long-Term Care Without Draining Your Estate
  Start Now, Before YourOptions Become Limited
• Tips for Better Leases
• Can A Rich Debtor Ever Be Truly Judgment Proof?

Don’t Let Software Piracy Shipwreck Your Company
You Can Be Liable if Your Employees Use Unlicensed Programs

Many companies’ software policies go something like this: “Employees should not download, install, use or copy software without authorization or a license, except once in a while – after all, everybody does it. Besides, who would ever know if an employee loads a program on 17 computers when we paid for only 16? (Just don’t tell management about violations, so they can’t be held liable.)

Recognizing the Penalties

Software developers and sellers now combat software piracy more aggressively. Many have formed a coalition, the Business Software Alliance (BSA), to detect license and copyright violations and take violaters to court.

Under the U.S. copyright statute, civil penalties for software piracy may include damages of up to #150,000 for each program illegally copied or installed. Criminal penalties range up to five years in prison and may include fines up to $250,000.

Under the statute’s “vicarious liability” clause, you as an employer can be held liable and fined for illegal acts your employees commit, even if you didn’t know about them when they occurred. And you can be held vicariously liable even if no employer-employee or employer-independent-contractor relationship exists. Under this theory, all someone would have to prove is that you 1) had the right and ability to control an infringer’s acts, and 2) benefited financially from the infringement.

“Softlifting” a Program

Before we discuss the basic elements of a good software policy, here is a summary of the copyright statuette as it relates to software you acquire from an outsider. (It doesn’t apply to programs that your company creates in-house or those written exclusively for your company under a work-for-hire contract.)

When you buy software - whether on a disk or downloaded from the Internet – you must abide by the accompanying license terms. The license serves as a contract between you and the copyright owner. A license typically specifies, among other things, how many copies of the program you may make or how many computer workstations or terminals you may use it on.

If you make unauthorized copies, or use the program on unlicensed terminals, you are committing a crime, breaching a contract or both. And each unauthorized copy and each unauthorized installation may constitute a separate criminal act.

You may also be liable if your employees:

• Take advantage of an offer to up-grade software when you don’t have a legal copy of the version to be upgraded.
• Use an academic or other restricted version of software for commercial purposes without a license, or
• Share unlicensed software with outsiders.

Even if you outsource your information-technology (IT) function to an IT consulting firm, you are still responsible for complying with software licenses.

Writing a Software Policy

A good software policy can go a long way toward eliminating piracy in your company and relieving managers and owners of liability when employees steal applications. Your policy should include:

• A clear purpose statement in the introduction that the company won’t tolerate illegal acts or infringements and that it will strictly enforce the policy.
• Property procedures for software acquisition, including: 1) what sorts of vendors or developers to contract with, 2) who in the company may authorize purchases, and 3) guidelines on complying with copyright law,
• Instructions for registering and installing software in accordance with license agreements,
• A list of acts barred by copyright law – including usage, copying, installation and downloading,
• Directions on how to find copyright law online for further reference.
• Procedures for reporting violations,
• Reprimands and penalties for violations,
• A signature line where each employee must sign the agreement, and
• Updates yearly or as needed.

Because every company, every computer system and every software product is unique, tailor your policy to your particular situation. We can help you fill in policy details.

Bring Your Company Into Compliance

Software developers and sellers and their organizations are getting better at catching pirates. Some now offer rewards, for example, to encourage people – often disgruntled employees – to report violators via toll-free hotlines. Also, help desks and technical support workers can often detect whether a customer is running too many copies of a program on its network.

If you find that your company is currently using unauthorized software, don’t ignore it. Contact us as soon as possible, and we’ll help you decide how to bring your company into compliance.

How to Avoid Buying Illegal Software

You are responsible for ensuring that the applications you buy, install and use don’t infringe on someone’s copyright. Here are some steps to take before buying business software:

• Buy from reputable developers or vendors only. The vendor’s full name, address and phone number - as well as a live customer service rep – should be readily available. If in doubt, do business only with vendors who sell familiar brand names.
• If the price of the software seems to good to be true, check it against leading retail prices. If much lower, it could be pirated or counterfeit.
• Avoid software packaged in plain jewel cases (plastic CD containersz0 without commercial labels or documentation and software whose packaging doesn’t describe the product you’re buying.
• Don’t buy software labeled “For distribution with a new PC only” or “Special CD for licensed customers only” unless you’re a licensed customer.
• Make sure the product includes a license with: 1) terms of use, and 2) a warranty stating a deadline for returning defective products for refunds.

Toxic Mold Can infect Your Bottom Line

Toxic mold and asbestos have nothing in common from biochemical viewpoint. But from a business perspective, they share one big thing. Both cause expensive legal problems for insurers, construction companies, property developers, building owners and managers, landlords, contractors and subcontractors, school districts, suppliers, investors, lenders, and employers.

Understand the Surge

In the past few years, insurers have spent billions of dollars paying toxic-mold claims. Meanwhile, toxic mold litigation has surged – triggering lawsuits for personal injury, property damage, construction defects, business interruption and lease terminations. The most prominent of these lawsuits was a $32 million bad-faith award to a Texas homeowner in 2002 against Fire Insurance Exchange (a subsidiary of Farmers Insurance). The carrier failed to cover damage from mold resulting from a plumbing leak. That case – as well as high-profile lawsuits brought by Ed McMahon with Erin Brockovich – has spawned lots of media attention.

As a result of this surge in toxic-mold cases – some call it a crisis – more and more insurers are reducing mold coverage, increasing premiums or both.

Learn the Health Effects

Scientists and health officials don’t dispute that toxic molds can damage property and affect human health. The EPA has stated that the ability of molds to cause allergic reactions and flu-like symptoms is “well documented.”

Whether mold can cause serious health problems, though, is a matter of contention, often played out I courtroom battles between expert witnesses. Some researchers contend- while others dispute – that some molds can cause or contribute to respiratory infections; asthma; immune-system disorders; cognitive disorders; cardiovascular illness; cancer; and damage to the lungs, brain, kidneys and liver. But unlike asbestos litigation over the past few decades, expert toxic-mold witnesses haven’t firmly established a strong casual relationship between serious health problems and toxic-mold exposure.

Limit your Liability

The lack of scientific causation proof doesn’t scare off all plaintiffs and the potential damage awards can be enormous. It just complicates toxic-mold litigation. Lack of federal rules or standards on indoor toxic molds creates even more uncertainty. This leaves many property owners and managers unprepared for the growth in mold litigation.

To limit your liability and avoid litigation over toxic-mold damage, here are some steps you can take, depending on your position.

Investors and buyers of existing property. Perform thorough due diligence before investing in property by, among other things:

• Investigating past occurrences of moisture infiltration, mold contamination and remediation by checking old property records and maintenance files,
• Being a stickler about physical inspections and seller-disclosure forms,
• Asking for warranties and interviewing maintenance personnel who have worked on the premises, and
• Conducting further testing behind ceiling panels, wall cavities, floor coverings, base moldings and the like – if you find evidence of water damage.

Building managers and landlords. Attack mold problems as soon as you become aware of them:

• Develop inspection and maintenance programs to identify and remedy all water-infiltration problems, Attack water leaks and moisture accumulations quickly and aggressively. For example, actively remove moisture and apply disinfectant or
• biocide if appropriate. Don’t wait for ventilation and evaporation to solve the problem.
• Hire experienced, trained professionals for remediation projects. Don’t rely on in-house maintenance projects. Don’t rely on in-house maintenance workers unless they’re specifically trained to handle mold – especially
• with extensive contamination of porous surfaces.
• If you’re a landlord, add a provision to your leases requiring tenants to promptly report all water leaks, moisture accumulation or mold growth to your office.

Builders and HVAC contractors. You must try to serve as “gatekeepers,” preventing problems before they occur:

• Use high-quality materials. Cheap materials - such as low-quality cutoff valves – might save you a few dollars now, but malfunction could cost ten thousand dollars later.
• Install tight seals around windows, doors and roofs to prevent water leaks that can cause mold to grow. Treat foundations with impermeable water barriers.
• Monitor construction work to prevent excessive moisture levels. For example, check on moisture from curing, paint, plaster and concrete.
• Inspect all newly installed systems until you’re sure no moisture problems arise. If they do, fix them immediately.
• Review your general liability policy to make sure it covers mold-related claims. Even if your installations and repairs are faultless, you may have cut into a wall or floor and released mold spores into the air.
• Ask us to review your contracts to assure they address potential liability for mold claims arising from construction methods or materials.

Real estate sellers. Include mold-disclosure statements in your offerings and sales agreements. The disclosure should include monitoring and testing procedures and results, action taken to control and prevent excess moisture and mold growth, and remediation efforts and follow-up testing.

Invest in Prevention

The costs of ongoing inspection, testing, remediation and prevention are miniscule compared to the potential liability that could result if you’re sued. At the very least, determine your liability exposure and whether your insurance is adequate. We can help you assess liability, develop a remediation plan or settle a claim.

Mold Ecology

Mold thrive in energy-efficient, airtight buildings with temperatures staying between 40 and 75 degrees Fahrenheit. Molds feast on – and thereby weaken – cellulose-rich materials, such as wood, drywall, ceiling tiles, insulation, drapery and carpeting. They emit spores that can drift into air ducts and propagate throughout a building via the ventilations system.

Most types of mold are nearly harmless. The most common toxic molds are those that contain mycotoxins, including stachybotrys, spergillus and penicillium.

Funding Long-Term Care Without Draining Your Estate
Start Now, Before YourOptions Become Limited

Good news: Thanks to medical advances in the past few decades, you – and your parents, if they’re still alive – will probably live longer than previous generations.

Bad news: The cost of living in a nursing home for a year, now averaging around $51,000, will triple over the next 20 years, according to the General Accounting Office. So will the cost of other long-term care (LTC) – such as assisted living and skilled home care.

Start planning now if you want to be sure that you can afford the care you’ll need as you age – without depleting the wealth that you hope to leave to your heirs. Most important, decide whether you can afford to fund LTC out of your personal assets or whether to buy LTC insurance to cover it. If you choose insurance, you’ll have t decide whether to start paying premiums now or wait until you’re older.

Coverage

LTC insurance typically covers broad range of services other than hospitalization – including nursing

home care, assisted living, in-home healthcare and, sometimes, adult day care. (Your health insurance will still cover hospitalization and short-term illness.)

The choice between self-funding and LTC insurance depends on your:

• Financial situation (disposable net worth and income),
• Age, and
• Health condition.

Let’s look at each of these factors individually.

Net Worth and Income

If your disposable net worth is more than $3 million ($6 million for a couple), then you may be able to cover the cost of LTC out of the interest and dividends that you earn and preserve the principle for your heirs.

Keep in mind that the cost of LTC varies from place to place and according to the level of care you’ll need. So check out the costs in your area before you determine that your net worth is sufficient to cover them.

If you don’t think you’ll be able to fund long-term care on your own, consider buying insurance for it. Just be sure you can afford the premiums without compromising your standard of living. (Depending on your adjusted gross income, you may be able to fully or partly deduct qualified LTC insurance premiums as a medical expense.)

Those with low income and net worth may qualify for Medicaid assistance to help pay for LTC. Levels vary from state to state, but you generally cannot have more than $2,000 in assets – excluding your primary residence and basic necessities – to be eligible for Medicaid.

Some people try to qualify for Medicaid by giving away assets to relatives, but this strategy requires long-term planning because of strict transfer eligibility rules. For example, any assets that you give to another person within three years – or transfer to a trust within five years – before applying for Medicaid will be included in your total assets for eligibility determination.

Age and Health

The younger you are when you buy LTC insurance, the lower your monthly premiums, Those starting at age 60, for example, can cost more than twice as much as premiums for the same coverage starting at age 50. And if you’re 84 or older, you’ll have a hard time buying any LTC coverage at all.

Likewise, if you’re in poor health, you may have a hard time obtaining LTC coverage. As with any kind of insurance, you can’t wait to buy it until you need it.

Of course, the younger you start coverage, the longer you pay premiums. And LTC policies written decades before you need it may not be flexible enough to meet changing care standards.

As a rule of thumb, the ideal time to buy LTC coverage is between ages 50 and 60 - but closer to 50 if your income can easily cover the expense.

Many Options

LTC insurance varies widely in coverage, premiums, exclusions, inflation protection, duration of benefits and other provisions. So investigate your options carefully before choosing. We will be happy to help you decide how to fit LTC plans into your overall estate plan.

Tips for Better Leases

If you own commercial or manufacturing real estate, you’ll want to ensure your leases continue to be profitable. Reviewing the basics of lease agreements can help.

For example, every agreement should reveal all hidden costs. Leases also should anticipate different scenarios that could strain the landlord tenant relationship. Finally, they should stay current with market developments.

Also, keep these pointers in mind:

• Make sure your lease covers all details.
• Put everything in writing.
• Be prepared if tenants bring in their own specialists to detect errors.
• Build in an out-of-court dispute-resolution process for issues other than eviction.
• Update your leases regularly.

Finally, engage an attorney right from the start.

Can A Rich Debtor Ever Be Truly Judgment Proof?

There is an industry which claims that it can teach anyone (for a fee) how to make themselves “judgment proof”. This is usually accomplished through the creation of various corporate entitles, limited liability companies and limited partnerships with the disbursal of the equity ownership to various family members. This practice has given hope to persons who have risked their wealth for a number of reasons including improvident loan guarantees, the failure to pay taxes or an impending judgment for a personal injury claim that exceeds insurance coverage.

The State of Virginia joined the ranks of jurisdictions that call into question the ability of anyone to truly make themselves judgment proof while at the same time allowing them to maintain their assets. In C.F. Trust, Inc. v. First Flight Ltd. Partnership , 266 Va. 3, 580 S.E. 2d 806 (June 6, 2003), the Supreme Court of Virginia held that creditors could engage in “reverse corporate veil piercing” in limited circumstances.

Corporations, Limited Liability Companies and Limited Partnerships are all designed to protect equity owners from the liabilities incurred by those entities. When those entities are used as a sham to prevent a creditor from reaching what should be corporate assets, courts will allow the “corporate veil” to be pierced; i.e. a corporate creditor will be allowed to seek payment out of the assets of the equity owner of the sham entity in order to avoid manifest injustice.

“Reverse veil piercing” allows the creditor of an equity owner to reach the assets of a business entity to satisfy the personal debts of the equity owner. In order to engage in reverse veil piercing, however, a creditor must prove clear and convincing evidence: (i) the fact that the equity owner so dominates the business of the entity as to make the entity the equity owner’s “alter ego”; (ii) the creditor cannot have its claim satisfied through normal collection methods against the debtor; (iii) there are no innocent equity owners who will be harmed by the action and (iv) veil piercing will avoid a manifest injustice.

“Reverse veil piercing” is, by no means, common or universally recognized. The Supreme Court of Virginia made it clear that a court should not routinely allow reverse piercing. Less than a month after C.F. Trust issued, the Supreme Court of Georgia rejected the doctrine of reverse piercing by a creditor who was not also a creditor of the corporate entity in Acre v. McMahan , - S.E.2d - , 2003 WL 21709627
(Ga. July 10, 2003).

The C.F. Trust case demonstrates the value of both careful asset planning and aggressive collection efforts. Pat Kearney at Selzer Gurvitch Rabin & Obecny has represented numerous debtors and creditors in complex collection cases or for collecting from a particularly difficult debtor.