E-Newsletter, July 2006

ARTICLES IN THIS ISSUE:

CORPORATE LIABILITY FOR EMPLOYEE FILE SHARING ON COMPANY EQUIPMENT

By: Ali A. Beydoun, Esq.

In the past five years, the legal community in the United States has taken a close look at the cyber-world of file-sharing and has begun to examine the unavoidable issues regarding liability for copyright violations. With an estimated 60 million Americans using computers with file sharing software to download music and games, (and the numbers continue to grow), our legal system will soon be pressed to provide domestic copyright holders with some measure of protection against the increasing occurrence of internet file-sharing violations by those who decide to use the technology for wrongful purposes. The United States courts have been increasingly amenable to accepting petitions for judicial review regarding lawsuits that examine the legality of file sharing. The courts have examined arguments developed for and against perceived and actual issues surrounding file sharing and those who choose to use the innovative technology for legal and illegal functions. The emerging judicial review model focuses on the intent of the user of the file sharing technology, rather than the technology innovator, and seeks to punish those who encourage or abet copyright violations.

As computers have now become common in the workplace, employers are slowly beginning to grapple with managing policies regarding computer usage. While the employee listening to the latest pop album on her computer is not the top concern of most corporations assessing the various financial and legal risks to their day-to-day operations, such behavior does, in fact, have a real a risk of liability. Furthermore, when the number of employees listening to music on their computers is multiplied, the office place is exposed to additional risk of vicarious copyright liability.

Let’s assume an employer provides his employees computers that have high speed internet access in order to carry out the tasks assigned to them by their employer. Let’s further imagine that the employer come to learn that some employees are using their computers and high speed internet connections to access music downloads or play computer games from the internet. If the employer does nothing and allows the employees to continue using file-sharing software to download music or games, the employer may become liable for contributory copyright infringement if he knows, or should have known, about the copyright infringement and induces, causes, or materially contributes to the violation. The employer may also be subject to vicarious liability if he is aware of, but ignores, its employee’s illegal activities. Now that P2P service providers are unlikely to be held liable and actions against individual P2P users are met with heightened scrutiny, copyright holders may consider large corporations as the prime targets. Most large corporate entities have elaborate computer networks, vast amounts of bandwidth, and thousands of employees who may be sharing music files. These days Internet usage in the workplace is nearly as common as telephone usage. Yet despite numerous reports that P2P usage is widespread on many corporate computer networks, the RIAA has only filed lawsuits against individuals in its 2003 enforcement program.

To date, the Recording Industry Association of America (the vanguard of the movement to curtail illegal downloading) has focused its attention on individual file-share users who are flagrant in their copyright violations. The absence of enforcement actions against corporations is expected to change, however, and will likely be the target of copyright holders seeking to protect the illegal distribution or use of their work. Given the substantial money damages that accompany copyright infringement and the increasing likelihood that the music and entertainment industries will soon focus their enforcement actions on corporations, online file-sharing in the workplace should be a major concern for every employer. There are two important factors which indicate that such suits are likely in the near future.

First, corporations are easier to sue. To begin with, corporate users are easier to identify and track down than are the individuals using P2P software to illegally download. It is simply easier to trace the origins of a corporate P2P user than a home P2P user. Individuals accessing P2P services from home generally connect to the internet through broadband or dial-up internet service provider, such as telephone and cable companies and AOL and MSN. These ISPs randomly assign each user an Internet Protocol (“IP”) address to access the Internet. Generally, a user’s IP address changes each time he accesses the Internet. Thus, in order to match an IP address to an individual user, the copyright owner must subpoena records from an ISP. Many large corporate users, however, have large pools of IP addresses permanently reserved for their use. Therefore, once an IP address is associated with online file sharing, it can be easily traced directly back to a large corporation thus eliminating the need to file a subpoena to reveal the identity of an individual user. Since employers can be held liable as contributory or vicarious infringers for the acts of their employees while using the company’s computer networks, as long as the prohibited use can be traced back to the corporation in question, the copyright holder’s search can end there.

Corporations are also attractive to copyright holders as the resources of most individuals to contest such lawsuits are not as significant as those of large corporations. Simply stated, corporations have deeper pockets than do individuals. Thus, suing corporations may prove to be more effective than suing individual users. Many individuals, while receiving lawsuits alleging liability for hundreds of millions of dollars in statutory damages, have settled such cases for a few thousand dollars. However, if the copyright holders’ priorities shift from making examples of randomly selected individuals to collecting larger sums of money from infringers, it is likely they will refocus their enforcement actions against deep-pocketed corporations.

Moreover, the risks to the office place goes beyond simple legal liability. P2P software presents several risks to a corporation’s data security, computer resources and network availability. Some P2P programs will share everything on a computer with anyone by default. Employees have accidentally exposed confidential information by having file-sharing software on their computers. Similarly, viruses, Trojan horses and worms are being distributed, as well as spyware. Spyware is software that covertly gathers user information through the use of internet connections without the user’s knowledge, usually for advertising purposes. Once installed, the spyware monitors the user’s activity on the internet and transmits that information to someone else. Spyware can also gather information about e-mail addresses and even passwords and credit card numbers and diminish the computer’s memory and system resources.

In order to avoid exposure to liability for copyright infringement and other risks associated with P2P software, companies that permit internet access in the workplace should take firm measures to stop illegal file sharing. Corporations need to adopt practices to deter illegal file sharing on corporate networks and begin protecting their company from liability. Initial steps should include assigning responsibility for legal compliance with regards to copyrights to as senior officer and senior IT department member. Employees should be informed that they will be held personally responsible for any damages as a result of copyright infringement. Office places should consult with lawyers and develop a file sharing policy which prohibits the downloading of any software or entertainment materials from the internet for storage or use on company equipment, unless specifically authorized by senior management. Employers should not hesitate to take immediate disciplinary action against any employee that violates the company’s policies regarding copyrighted materials. Additionally, internet access into web sites that provide P2P software and services should require specific manager approval when access to such a site is necessary for a legitimate business purpose. Alternatively, the company can decide to completely block P2P software internet access by disabling the Network Address Translation, by blocking access to and from the common P2P ports or simply by using firewalls.

It is incumbent upon every company that permits Internet access in the workplace to take firm measures to stop illegal file sharing, lest the company become subject to millions of dollars in liability. It is no longer a risk-free alternative to ignore the actions of employees using the corporate network. By taking a proactive approach to prevent the use of the corporate network for infringing purposes, a company can minimize the risk of inviting a lawsuit which would be costly to defend and potentially even more costly in a settlement or adverse judgment.

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THE RIGHTS OF TRANSSEXUALS IN THE WORKPLACE

By: Tina M. Maiolo, Esq. and Susan E. Delaney, Esq.

It is time for employers to take notice: in an ever evolving and changing society the law in the area of transsexual employment rights is undergoing some drastic changes. Estimates indicate that one in 11,900 persons “born male” and one in 30,400 persons “born female” have undergone hormone therapy to initiate the sex change process.1 Given this statistic, if your employees total in the thousands, you may encounter transgender employees. As such, it will be important for employers to understand and or be aware of the rapidly developing rights of transsexual employees.

At the outset, it is important to define the various, often confused, terms that employers may encounter when dealing with transgender legal issues. The term transgender has become somewhat of an umbrella term encompassing anyone who is at odds with the traditional concepts of gender, including transvestites and transsexuals.2 Generally, a transvestite can be categorized as a “cross dresser” who is content with their birth sex.3 A transsexual, is a person who is (or could be) diagnosed with a medical condition known as Gender Identity Disorder (GID).4 In other terms, a transsexual is a person who desires to change bodily sex characteristics, irrespective of whether the person has undergone, or intends to undergo, corrective genital reconstruction surgery.5 To date, most of the expanding laws deal with transvestites, whether they will continue to expand to include all transgendered individuals is yet to be seen.6

Currently, there are five states which have, for the most part, added transsexualism as a protected class under their civil-rights statutes.7 Therefore the legal status of transsexuals in those states is clear. However, if you are not an employer in one of those states it will be important to learn whether Federal sex-discrimination laws protect transsexuals or whether Federal or state disability-discrimination laws protect transsexuals.

First, do Federal sex-discrimination laws protect transsexuals? The not so simple answer is: possibly. Pursuant to Title VII of the Civil Rights Act of 1964, employers may not discriminate “because of . . . sex.”8 The question becomes whether the term “sex” in the statute encompasses transsexuals, or discrimination based upon people who are discontent with the gender to which they were born. Originally, courts that considered the issue consistently denied transsexuals’ claims under Title VII.9 In sum, the courts narrowly defined the term “sex” and refused to judicially expand the definition to include transsexuals.10 Courts found support for their position in the fact that there was no legislative history suggesting that “sex” should be interpreted to include transsexuals, and also in the fact that Congress repeatedly refused to add sexual orientation to Title VII’s protected class.11 In 1989 however, one Supreme Court decision weakened this precedent.

The Court’s decision in Price Waterhouse v. Hopkins, which did not involve a transsexual, still had the potential to expand employment rights of transsexuals.12 The Price Waterhouse case involved a female manager who was not selected to become a partner, despite her success at the company, because of her “interpersonal skills.”13 It was later determined that she did not receive the partnership due to her perceived masculinity.14 The Price Waterhouse Court determined that such sex stereotyping is actionable under Title VII stating that “ . . .we are beyond the day when an employer could evaluate employees by assuming or insisting that they matched the stereotypes associated with their group.”15 Essentially, the Court found that Title VII barred discrimination against Hopkins based upon the fact that she did not act like a woman.16 This expansion of the meaning of the word “sex” under Title VII severely undermines the narrow definition relied upon in previous decisions.17 Since transsexuals almost certainly do not conform to traditional stereotypes of their gender, and if discrimination for failure to conform to these norms is protected under Title VII, then transsexuals may be protected under Title VII.18 Since the Price Waterhouse decision, at least one court has expanded the decision and held that discrimination against transsexuals and discrimination because of sex, are one and the same thereby affording transsexuals’ protection under Title VII.19 Should the Supreme Court or other Federal courts follow this ruling, then transsexuals will surely have protection under Title VII.

Next, since transsexuals are sometimes defined as having GID, employers might be curious as to whether discrimination against a transsexual may constitute prohibited discrimination on the basis of disability or handicap.20 Under Federal law, transsexuals are not protected against disability discrimination. The Americans with Disabilities Act and the Rehabilitation Act expressly exclude transsexuals from their protections.21 Both provide that transsexualism is not a result of physical impairment and is not a disability.22

So, are transsexuals protected from employment discrimination? The answer is a resounding “maybe.” It will be important for employers to know whether they are in a state that explicitly protects transsexuals. If the state does not have an express prohibition, then the employer will need to learn whether their federal jurisdiction interprets Title VII so as to protect transsexuals. Finally, it will be important to continually monitor this changing area of law to ensure that your workforce is in compliance.

1.   Phyllis Randolph Frye & Katrina C. Rose, Responsible Representation of Your First Transgendered Client, 66 Tex. B.J. 558, n.1 (July 2003) (internal citations omitted).

2.   Neil Dishman, The expanding Rights of Transsexuals in the Workplace, 21 The Labor Lawyer 121, 124 (2005).

3.   Id. at 123.

4.   Id

5.   Frye & Rose, supra at 558-559.

6.   Dishman, supra at 124.

7.   Id. These states include, California, Maine, Minnesota, New Mexico and Rhode Island. Id.

8.   42 U.S.C. § 2000e-2(a)(1)(2005).

9.   Dishman, supra at 127. One such influential case was Ulane v. Eastern Airlines, Inc., in which a male pilot who worked for Easter Airlines for eleven years underwent hormone therapy and sex-reassignment surgery. Ulane v. Eastern Airlines, Inc., 742 F. 2d 1081 (7th Cir. 1984). Ulane was fired after the surgery. Id. at 1083. Ulane sued Eastern Airlines for, among other things, transsexual discrimination under Title VII. Id. at 1082. The Court that Title VII does not protect Transsexuals. Id.at 1084.

10. Dishman, supra at 128.

11. Id. at 127.

12. Id. at 129.

13. Price Waterhouse v. Hopkins, 490 U.S. 228, 234-235 (1989).

14. Id. at 235.

15. Id. at 250-251 (internal citation omitted).

16. Dishman, supra at 129 (internal citation omitted).

17. Id. at 128

18. Id.

19. Smith v. City of Ohio, 378 F.3d 566 (6th Cir. 2004).

20. Dishman, supra at 135.

21. Id.

22. U.S.C. § 12211(b)(1) (2000) (ADA); 29 U.S.C. §705(2)(F)(I) (Rehabilitation Act).

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WHISTLEBLOWER PROTECTION IN PRIVATE EMPLOYMENT

By: Edward J. Krill, Esq.

Many federal and state laws contain provisions that are intended to protect private sector employees who report actual or potential violations either to their employer or to the enforcement arm of government. This paper will summarize two of those provisions that relate to financial impropriety, describe the circumstances in which the protection that the legislature may have intended is actually available to the “whistleblower” employees and suggest to employers methods of approaching these situations.1

Sarbanes-Oxley

Perhaps the most important whistleblower provision of recent vintage is contained in the Sarbanes-Oxley Act of 2002. The importance of this legislation is its broad scope in terms of the situations in which an employee can claim its protection. Unlike the anti-retaliation provisions of, for example, the Americans with Disabilities Act, which are limited to situations in which the rights of the disabled are being advocated,2 Sarbanes-Oxley offers protection for those who provide truthful information to any law enforcement officer regarding the possible violation of any Federal law, especially where that violation has financial implications, as well as to employees who report such violations internally within the employer organization.3

Under Sarbanes-Oxley the focus is not limited to providing compensation or another remedy to employees who have been discharged for complaining about an employer’s potentially improper business practices, the law requires a framework for accepting, investigating and remedying the underlying situation in a manner that protects the identity of the employee who makes the allegations. This framework, which is described in some detail in the statute,4 requires all publicly traded companies to establish an internal procedure that permits employees to file complaints with the Audit Committee of the Board of Directors, thus allowing employees to completely bypass employer Management. Since the Audit Committee is to be composed primarily of outside Directors with expertise in financial and regulatory matters, this framework is designed to encourage and protect those who wish to complain about the conduct of the most senior corporate executives.

The courts have broadly interpreted activity protected under whistleblower statutes and the protection afforded those who make complaints of possible violations of law, making it problematic for an employer to respond directly to allegations that appear unfounded.5 Retaliation against an employee who complains about “questionable accounting or auditing matters” or takes any action harmful to the employment status or livelihood or any person for “providing truthful information to a law enforcement office relating to the commission or possible commission of a federal offense” will invoke the sanctions of Sarbanes-Oxley, which can include criminal penalties.6

False Claims Act

A related statute dealing with financial impropriety is the False Claims Act.7 Any employer who receives direct payment from the United States Government for products or services needs to anticipate that an employee may avail himself of this legislation as a means of receiving personal economic benefit, if a complaint leads to recovery of payments by the Government. A violation of the False Claims Act can occur if an employer presents a claim for payment to the Government that is factually false, i.e. any “overbilling” due, for example, to negligent accounting methods, mistakes or intentional inflation of costs, exaggerated descriptions of services or other billing practices that overstate the basis for payment.

In False Claim Act cases, the “relator,” that is the person who files a lawsuit8 alleging the transmittal of false information to the Government, is entitled to fifteen to thirty percent or more of anything that the Government recovers, whether by judgment in court or settlement. Such cases are called “Qui Tam” actions because they may be taken over and conducted directly by and on behalf of the Government.

Given the potential sanctions, including debarment from future Government work, that normally accompany the results of a billing fraud audit,9 most parties faced with a False Claims Act case settle with the Government. The typical settlement requires repaying a substantial portion of what is alleged to have been paid out as a result of billings based on false information.

Should an employee file a claim under the False Claims Act, they are protected from discharge, demotion, harassment or any other adverse employment action. If discharged, and a case of retaliation is proven, the remedies can include reinstatement, double back pay and compensation for special damages including attorneys fees.10 In this circumstance, an employer would be well advised to do nothing that could be construed as an adverse job action during the pendency of any Qui Tam action.

Employer Compliance

It should be recognized that not all employees who claim whistleblower status deserve that protection. In many cases, practices that have been in place for years are not the subject of an employee complaint until there is a termination, failure to promote or another perceived adverse job action. Nonetheless, because of the penalties for retaliation against an employee protected under Sarbanes-Oxley, the False Claims Act, or one of the several other federal and state laws that protect whistleblowers,11 these are my recommendations for mitigating those risks:

•  Establish an internal employee grievance process that permits employees to file a complaint by name or anonymously, and make this a prominent component of the Employee Handbook. Draft this to make it a requirement of all employees to utilize the internal grievance process before taking a complaint outside the company, recognizing that this requirement is not legally binding.12

•  Staff this grievance process with competent, secure and objective personnel who on paper and in fact report to the Audit Committee of the Board of Directors and who are free of potential management interference with their work.

•  Protect the confidentiality and identity of any employee who complains and is following the written grievance process.

•  Conduct investigations using individuals experienced in confidentiality, thoroughness and tact and in appropriate cases, use counsel who reports only to the Audit Committee so that the report will be protected by the attorney-client privilege. Adequately fund this activity and separate it from close organizational, functional and political involvement with the management of the company. Contracting for the conduct of investigations in serious matters by outside firms is frequently necessary to attain the required objectivity.

•  Where an investigation concludes that there is or was an action or practice that could be viewed as a violation of law or contrary to appropriate business practices, formulate an appropriate remedy and, without necessarily disclosing the details of the investigation, present the requested remedy to senior management for implementation.

•  Recognize that it is not necessary to report back to the complaining employee either on the investigation or on the recommended or implemented remedy. Such an employee can be told that an investigation was conducted and that steps have been taken to end and possibly cure the conduct complained of, but it is normally a mistake to go into details in this situation.

•  Take no action whatsoever in regard to an employee who has filed a complaint that could be seen, in any way, positive or negative, as a consequence of the complaint. There should be no rewards, no punishment, no special treatment of such an employee except, in the rare case, at the request of the employee, a quiet transfer to another part of the company.

•  Keep track of all complaints, investigations, recommended remedies and implemented remedies and report this to the Audit Committee on a regular basis. This is the correct reporting relationship. Regular reports to company management of ongoing investigations and even concluded investigations, in detail, is not recommended beyond what is necessary to obtain agreement with management to the proposed remedy, if any.

1.   The extensive protection afforded those who complain of discrimination or sexual harassment in the workplace is reviewed in other papers. See Burlington Northern and Santa Fe Railway Co. v. White, No. 05-259 decided by the United States Supreme Court on June 22, 2006.

2.   29 U.S.C. § 794(a)(3)(A). Other federal laws that offer protection for complaints of violations limited to that particular law are, for example, O.S.H.A. 29 U.S.C. § 660 (c) and C.E.R.C.L.A. 42 U.S.C. §

3.   See 18 U.S.C. 1514A(a)(1) and 29 CFR Part 1980.

4.   15 U.S.C. §78j1.

5.   See Clean Harbors Environmental Services v. Herman, 146 F.3d 12 (1st Cir. 1998) and Passiac Valley Sewerage Commissioners v. D.O.L., 992 F.2d 474 (3rd Cir. 1993)(liberal interpretation of “good faith” on the part of a complaintant.).

6.   18 U.S.C. §§ 1513(e) and 1514A.

7.   31 U.S.C. §§ 3729-33.

8.   The action is filed under seal in Federal District Court and serves it on the U.S. Attorney for that District. The Government then has the option to take over the case and prosecute it or hand it back to the relator for private prosecution.

9.   Treble damages and civil penalties of up to $10,000 for each false claim are provided by the Act.

10. 31 U.S.C. § 3739(h).

11. For example, D.C. Code Annotated, § 1-1188.3 et seq. establishes a “false claims act” law for payments to vendors by the District of Columbia.

12. Forcing an employee to waive the right to file a complaint with the Government is seen as “adverse action” and, therefore, a violation of whistleblower protection. Connecticut Light & Power v. Secretary of Labor, 85 F.3d 89 (2nd Cir. 1996).