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Morning Valley View.P.S.R.When someone sues you or your company, you have to pick a lawyer who knows the rules of the game.   The rules are intricate and, even two situations that look similar, are not always governed by the same rules. When even judges can apply the wrong rule,  it is better  to know what should have happened, so you can decide what your options are.  That is what a good attorney does:  she explains what your options are, and  your realistic chances of success with each, so you can best protect your interests.

A recent appellate decision makes this point.  1259 Lincoln Place Corp. v Bank of N.Y., 2018 NY Slip Op 02177, Appellate Division, Second Department, was decided on March 28, 2018.  It really is a fight over a lot of money, disguised as an attempt to quiet title pursuant to RPAPL Art. 15; and the fight ultimately turned on which set of rules should be used to decide the dispute. The trial court selected one, and the Appellate Division determined that another should have been used.

The facts are straightforward:  A bank took a mortgage on a property in Brooklyn.  The mortgage secured a large loan.  The borrower evidently defaulted so the bank attempted to foreclose and filed a notice of pendency against the property.  The problem was, the borrower apparently did not own the property; even worse, the Bank already paid approximately $200,000 in property taxes on it.  The titled owner wanted to keep its property, so it sued the Bank to quiet title; i.e., it asked the court to declare it was the rightful owner of the property and to cancel the notice of pendency. The titled owner made a summary judgement motion, which means it asked the court to declare it the rightful owner of the property without a trial, just based on the motion papers alone.  Faced with losing the case outright, the Bank came up with a backup plan:  It tried to assert a new claim that it should have an equitable lien; i.e., it paid out money to maintain the property (the real estate taxes), which the rightful owner received the benefit of, so it is only fair that the Bank should get the money back.  The problem was that it needed the court’s permission, so it made a cross-motion to assert a counterclaim for an equitable lien to at least recover some of the money it paid.

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sunrise-963348-m.jpgThere was an interesting article in Wired.com, the magazine, recently that put a new twist on an old topic: What’s the best way to make sure the internet, and all of the information that travels on it every day, is safe? How do you really make cybersecurity, secure? After all, the safer the information, the more secure people will feel, and the use of the web, for everything from e-commerce to portable electronic healthcare records, will grow. The flip-side is just as true: the more hacks, hackers and data-breaches, the slower the pace of progress. The good will be harder to come by if the bad is hard to avoid.

Peter W. Singer, who wrote the article, entitled, “How to Save the Net: A CDC for Cybercrime,” which was posted on 08.19.14, 6:30 a.m., proposes an interesting idea.

The CDC, otherwise known as the Centers for Disease Control, is much in the news recently. Chances are, if you’ve seen news stories about the Ebola outbreak in West Africa, or the MERS outbreak earlier this year, the CDC has come up in more than just passing. It’s the clearinghouse for health related information, combating communicable diseases, the world over. There was just an article, by Betsy McKay, Nicholas Bariyo, and Drew Hinshaw, that appeared in the August 23-24, 2014 Weekend Edition of the Wall Street Journal in the Review Section, which talks about the invaluable help the CDC gave to another country that used to be at risk of virulent Ebola outbreaks. Uganda used to send blood samples to the CDC’s facilities in Atlanta, to be screened for Ebola. Now, thanks to technology and training the CDC provided, Ugandans do the same for themselves, in country, which lets them detect outbreaks of the deadly virus sooner, respond to them quicker, and stop them before they do large scale damage.

A central clearinghouse for ideas, both proven and proposed, to safeguard digital information seems like a good idea. Having a one size fits all approach, in which the government entity is the one upon whom everyone fighting the problem relies, may not be. That’s not really even the job the CDC is doing with Ebola.

Look at how the Federal Trade Commission is policing cybersecurity: the whole point of the its Reasonable Precautions cybersecurity standard, and its enforcement, and codification, on a case by case basis, is that “Reasonable Precautions” become reasonable, or not, based on the particular facts of a given situation. What might be the right protection for digital information exchanged between wholesale distributors and retailers, might not be sufficient to protect information between retailers and consumers, and that in turn might not be enough to safeguard patients’ healthcare histories when they are exchanged among medical providers. What might be a commercially reasonable effort to safeguard information in one industry, might not be in another.

The FTC encourages individual companies, and the industries in which they compete, to voluntarily join together to ensure data security. By making the terms Industry Standard Practices and Commercially Reasonable Efforts mean something substantive, companies can protect themselves against FTC enforcement actions for lax data security, as we’ve previously noted. Look no further than the April 7, 2014 decision of U.S.D.J. Esther Salas, in The Federal Trade Commission, Plaintiff, v. Wyndham Worldwide Corp., et al., Defendants, Civil Action No. 13-1887 (ES), United States District Court, D. New Jersey, to see why. If a company can’t figure out what the FTC wants it to do to protect its customers’ data, then it should create, and live by, Industry Standard Practices which will become Commercially Reasonable Efforts if all the major companies in the industry implement them. Many companies already say they do this anyway, right in their privacy policies. Instead of meaningless legal verbiage, make the terms mean something concrete; show they can work, and the FTC will have little to complain about, even if those efforts occasionally fail. Some of the most vulnerable industries, including retail, are banding together to do just that.

The Retail Industries Leaders Association, or RILA, as we previously noted, formed a voluntary clearinghouse, known as the Retail Cyber Intelligence Sharing Center, or R-CISC, to develop and share industry leading practices in cybersecurity, by communicating amongst themselves information they learn regarding threats and defenses. The reported backers of the initiative have put in a lot of effort: they’ve conferred with cybersecurity experts and involved interested government agencies. They also have a lot at stake: credit cards and financial information are common targets; just ask the RILA members.

One main benefit of a CDC for the wired world, according to Peter W. Singer, is the trust and confidence it will bring to all those who rely on it. By bringing the best and brightest together under one centralized government-funded roof, it would allow users to know that independent experts, with their best interests in mind, were on the job, fighting off the bad guys. That’s a good thing; but is that the only way to achieve it?

What if the businesses which hold their customers’ information on line were held accountable for not doing enough to protect that data? What if they faced the loss of business, and profits, as well as a government enforcement action, if they didn’t do enough? What lengths would they go to in order to keep their customers’ trust?

If you look at some quotes in the RILA press release, from the people involved in forming the R-CISC, you’ll see that trust is a recurring theme there, too:
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mountain-haze-1130128-m.jpgWe spent our last entry talking about when a trial court faced with a motion for summary judgement can consider an affidavit from an expert even though the expert was not disclosed until after the Note of Issue and Certificate of Readiness were filed. The answer, more often than not, at least in the Appellate Division, Second Department in New York: When the expert makes a difference by establishing the existence of a material issue of triable fact. See Rivers v. Birnbaum, 102 A.D.3d 26, 953 N.Y.S.2d 232 (2nd Dept. 2012), and Begley v. City of New York, 111 A.D.3d 5, 972 N.Y.S.2d 48, 72 (2nd Dept. 2013), leave to appeal denied, 23 N.Y.3d 903, 988 N.Y.S.2d 130 (2014).

Rivers v. Birnbaum, supra, and Begley v. City of New York, supra, were not the actual sea changes they might appear to be at first. Though important decisions, the rule they enunciated was applied in many cases before they were decided and the ones in which it was not applied were the exceptions that proved the rule.

King v. Gregruss Mgmt. Corp., 57 A.D.3d 851, 852-53, 870 N.Y.S.2d 103 (2nd Dept. 2008), was a personal injury action in which the plaintiff was injured when he tried to cut open a steel drum containing windshield washer fluid with an electric saw. The Second Department held that the trial court should not have considered the affidavit from the plaintiff’s expert in opposition to the defendants’ various motions for summary judgement and should have precluded the expert from testifying at any stage of the proceedings.

The expert in King v. Gregruss Mgmt. Corp., supra, undoubtedly would have made a difference. It just appears that there was no way to verify the facts on which his opinion was based and his testimony actually was more about basic, critical, and unverifiable facts, than scientific opinion. All told, the case is a fine example of a plan too smart by half, and illustrative of the type of behavior that more often than not will be penalized, if for no other reason than it should be. It is that behavior, more than the simple late disclosure of the expert, which prevented the expert’s affidavit from being considered:
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case-ilustration-1015897-m.jpgIt has been some time since we last spoke about the use of experts to oppose motions for summary judgement in New York. The topic, however, is still relevant. Some continue to believe there is a hard and fast rule, at least in the Appellate Division, Second Department, which forbids a trial court from considering an affidavit from an expert unless the party offering the expert’s affidavit served full expert’s disclosure pursuant to CPLR 3101(d)(1) prior to the filing of the Note of Issue and Certificate of Readiness or at least moved to vacate the Note of Issue and Certificate of Readiness if they had not served expert’s disclosure by then. As we pointed out in our last entries on the subject, there is no such concrete rule and there never really was. A case that should go to trial most often does; it withstands a motion for summary judgement, unless the party who uses the affidavit nefariously refused to disclose the expert in time.

There have been a series of decisions that have clarified that this is the rule. The first was Rivers v. Birnbaum, 102 A.D.3d 26, 953 N.Y.S.2d 232 (2nd Dept. 2012). Another, more recent example, is Begley v. City of New York, 111 A.D.3d 5, 972 N.Y.S.2d 48, 72 (2nd Dept. 2013), leave to appeal denied, 23 N.Y.3d 903, 988 N.Y.S.2d 130 (2014), which is especially instructive because of the way it summarizes the reasons for the rule. It holds, in relevant part:
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crowbar-854266-m.jpgThere are a few recent news stories that business owners, fraud investigators, and consumers should be aware of. Though not necessarily related, they point out the ever-growing need to protect digital information and the consequences for those who do not. Cybersecurity, it seems, is something that will affect everyone, eventually.

The topic of the first story, unfortunately, is common; the numbers, thankfully, are not, though we should all hope they stay that way. According to an article by Danny Yidron in the Wall Street Journal, which was last updated at 2043 hrs Eastern Time on August 5, 2014, a gang of Russian hackers has amassed 1.2 billion stolen user names and passwords from approximately 500 million unsuspecting people. According to the private security firm that discovered the theft, Hold Security in Milwaukee, the hackers obtained the information from 420,000 websites, allegedly ranging from leaders in major industries to small businesses and personal websites. No measurable harm evidently has come from the theft, at least not yet. The hackers reportedly so far are using the data only to send spam messages on social media accounts. That doesn’t mean the people whose information was stolen are free and clear: There is a growing trend in recent years, according to the report, where cybercriminals amass online credentials for later use. While that later use isn’t specified, it shouldn’t be all that hard to determine. Consumers, according to the report, often use the same user names and passwords across various websites. If a hacker learns a user name and password for one account, it’s not that hard to imagine that the hacker also could gain access to the consumer’s other accounts, including on websites that store, or have access to, the consumers’ financial information, including credit card numbers.

In order to see the harm that was done already, merely because the hackers have the user names and passwords, you have to remember that just exposing your customers’ confidential information sometimes is enough to trigger an enforcement action by the Federal Trade Commission to force businesses to take reasonable precautions to protect their customers’ digital information. If you remember the LabMD case, which we already spent some time discussing, the FTC’s claims of unfair or deceptive acts or practices in, or affecting, commerce, were directed against LabMD for allegedly inadvertently posting the confidential information of less than 10,000 individuals on a file sharing platform that was intended to share music files instead. During the FTC’s administrative law trial against LabMD, it reportedly did not even plan to present any witnesses who were the victims of the alleged ID theft; exposing the information, allegedly, was enough.

We’re not comparing the theft of user names and passwords to exposing confidential health information, which allegedly is what occurred in the LabMD case. Allowing the theft of user names and passwords could lead to some real trouble, though, especially if it leads to the theft of user financial information, such as credit card numbers. That leads straight to the second news story.
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sunset-on-lake-purple-light-1406480-m.jpgUnfair competition is back in the news. The U.S. Justice Department sued American Express a few years ago for unfair competition in the credit card business. Since such things take time, the trial just began on Monday July 7, 2014. The issues, the accusations, and the justifications seem fairly familiar, especially when you recall the last big antitrust trial and the unintended consequences that followed. Whether the same thing will happen this time, though, is something only time will tell.

The last time, the Justice Department sued Apple, to prevent what it said was anti-competitive practices in the e-book business. As we previously wrote, these included the agency model, in which the publishers set the price of the e-book, and the seller, in this case Apple, takes a set percentage of that price; and most-favored nation clauses, in which the seller, is allowed to match its lowest competitor’s price. Well, Apple lost, the Justice Department won, and, some would say, so did Amazon. Apple was trying to break into the e-book market and its job was made harder; Amazon was the dominant seller in the e-book business and some would say its job was made easier because it could use its market share to leverage ever better deals for itself and, it would say, for its customers, too.

This time, the Justice Department reportedly takes issue with American Express’ rules that prohibit merchants that accept its cards from offering discounts or otherwise steering customers to use cards that are less expensive for the merchants to process. Credit card companies, it seems, make money by charging merchants a set percentage of the sales price for every sale made on one of their credit cards. These swipe fees vary and, reportedly, American Express cards have some of the higher ones. Merchants would be able to keep more of the purchase price if a customer used a credit card that had a lower swipe fee and they could give credit card customers a discount, some portion of the money saved, as an incentive. American Express evidently does not want that to happen because its customers presumably would have to pay more, i.e. not receive a discount or incentive, to use an American Express Card.

The government’s position was summed up nicely in an article in the Wall Street Journal by Robin Sidel that was last updated on July 3, 2014 9:01 a.m. ET:
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3rd.Small.2nd.IMG_20140713_170245 - Copy.jpgWe have been discussing what businesses can do to protect against the Federal Trade Commission commencing an enforcement action against them for allegedly failing to take reasonable precautions to ensure the safety of their customers’ private data, such as financial information, dates of birth, social security numbers, and even health records: Develop, and implement, industry standard, and commercially reasonable, data security practices. This time, we will see just how effective those efforts are by, in effect, asking Target.

What makes such Industry Standard Practices and Commercially Reasonable Efforts so promisingly effective is that:

  • They were approvingly cited as source of guidance as to what a business must do to properly protect its customers’ data, by the court in the case entitled, The Federal Trade Commission, Plaintiff, v. Wyndham Worldwide Corp., et al., Defendants. Civil Action No. 13-1887 (ES), United States District Court, D. New Jersey. This was the same case which approved the FTC’s right to police data security practices.
  • Many businesses use those terms in their posted privacy policy.
  • The FTC already has demonstrated a willingness to allege deceptive acts or practices against companies that claim they follow Industry Standard Practices and take Commercially Reasonable Efforts to ensure data security but nevertheless suffer data breaches. This is what the FTC did in the Wyndham case. The FTC, in effect, will see a data breach; examine how it happened; determine that the precautions the company took to safeguard the data were inadequate and therefore did not meet Industry Standards or amount to Commercially Reasonable Efforts; and claim that the company deceived their customers by putting those terms in their privacy policy without abiding by them.
  • Companies can define, on their own, what Industry Standard Practices and Commercially Reasonable Efforts, actually mean, for their business and their customers

Some companies, and industries, have gone to great lengths to define Industry Standard Practices and Commercially Reasonable Efforts for themselves. We previously pointed out the extraordinary data security efforts leading retailers were taking to protect the safety of their customers’ sensitive, private information; how they were sharing information, between themselves and governmental agencies, and collaborating with outside experts, to develop industry standard practices in data security; how they established an independent entity, the Retail Cyber Intelligence Sharing Center, or R-CISC, to do exactly that. We also examined a benefit of, if not the actual reason for, the retailers’ efforts: To protect themselves.

Retailers seem to be some of the most tempting targets of data security breaches. They handle large amounts of their customers’ financial information every day. Credit and debit card numbers are perhaps the most inviting targets because they are so lucrative and can be turned into illicit gains so quickly by cyber-criminals. Here are some facts which might put the retailers’ efforts into perspective:
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miror.image.untitled-1430946-m.jpgIf a business’ privacy policy says it will protect its customers’ sensitive private digital information in certain ways, then it probably is a good idea for the business to keep that promise. The Federal Trade Commission has sued businesses for allegedly making promises in their privacy policies that they did not keep.

How difficult is it for a company to comply with its own data security, or privacy, policy? Evidently, it is difficult, labor intensive and time-consuming; mostly because of the problems translating the words of the policy into detailed computer instructions or code, and the vast amount of code that needs to be checked to ensure it complies with the policy.

Is there a way for a business to protect itself by ensuring that its privacy policy is properly, and consistently, carried out? There might be, and it involves something called Legalease, which actually clears things up rather than makes them more confusing.

The highest profile recent case in which the FTC has alleged that a company deceived the public by failing to live up to the promises made within its own privacy policy, is the FTC v Wyndham Worldwide Corp., et al. We previously wrote about the April 7, 2014 decision of Esther Salas, U.S.D.J., which denied the motion of one of the defendants, Wyndham Hotels and Resorts, LLC (“Hotels and Resorts”), to dismiss the complaint against it. In that decision the court describes the FTC’s deception claim this way, beginning on p.33:

Hotels and Resorts also challenges the FTC’s deception claim (HR’s Mov. Br. At 23). In this claim, the FTC cites the Defendants’ privacy policy disseminated on Hotels and Resorts’ website and alleges that, “in connection with the advertising, marketing, promotion, offering for sale, or sale of hotel services, Defendants have represented, directly or indirectly, expressly or by implication, that they had implemented reasonable and appropriate measures to protect personal information against unauthorized access” but that “Defendants did not implement reasonable and appropriate measures to protect personal information against unauthorized access.” (Compl.paragraph 21, 44-45). Accordingly, the FTC alleges that Defendants’ representations “are false or misleading and constitute deceptive acts or practices” under Section 5(a) of the FTC Act. (Id. Paragraph 46).

Hotels and Resorts’ privacy policy seems innocuous, though it does sound suspiciously like the FTC’s “Reasonable Precautions” cybersecurity standard that Wyndham complained so loudly about in the same case. The privacy policy says the company will comply with certain amorphous standards without defining what those standards specifically require. According to the court, beginning on p. 37 of its decision:
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stick-insect-mother-and-baby-1425436-m.jpgIt’s been a while, but claims of unfair competition involving e-books are back in the news. About a year ago the Justice Department won its antitrust case against Apple for horizontal price fixing of e-books. Now Apple’s main competitor, Amazon, is having a dispute with one of the same publishers involved in the Apple case, Hachette. Amazon reportedly is pressuring Hachette to let it keep a bigger share of the sales price of e-books, and driving up the price in the process. Whether there is any comparison, or connection, between what Apple did and what Amazon is doing, is for you to decide.

What Apple Did

Let’s look at what the court determined Apple did wrong. The Apple case was decided, after a bench trial, by U.S. District Judge Denise Cote. In her July 10, 2013 decision, she held, beginning at p. 9:

“The Plaintiffs have shown that the Publisher Defendants conspired with each other to eliminate retail price competition in order to raise e-book prices, and that Apple played a central role in facilitating and executing that conspiracy. Without Apple’s orchestration of this conspiracy, it would not have succeeded as it did in the Spring of 2010.”

The Justice Department’s view of what Apple did was summed up nicely in an article by Bob Van Voris about the Apple trial, which appeared in Bloomberg on Jun 21, 2013 at 12:01 AM ET:

“Mark Ryan, a lawyer for the Justice Department, followed Snyder [Apple’s attorney] yesterday, arguing that Apple headed up ‘an old-fashioned, straightforward price-fixing agreement.’ “

The way Apple conspired to end retail price competition and raise the price of e-books was simple, according to the court. Before Apple, the publishers sold e-books to retailers such as Amazon at a wholesale price and the retailers sold the e-books to the public at whatever price they saw fit. The publishers wanted to raise the price of e-books and Apple gave them a way. Apple agreed to let the publishers set the prices of e-books, which were as much as 50% higher than what Amazon was charging at the time. In return, the publishers agreed to pay Apple a fixed percentage of the sales price. This is the agency model. In return, the publishers gave Apple a Most Favored Nation clause, which is a way of saying they agreed to let Apple match its competitors’ lowest price for the same e-book. According to the court, the publishers also agreed to a harsh financial penalty unless Amazon and other competitors agreed to let the publishers set the retail prices. In effect, the publishers set the price, Apple took a share, and everyone had an incentive to go along.

What Amazon Is Doing
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the-ardennes-1284651-m.jpgIt is not unusual for a Plaintiff to sue more than one defendant. It happens all of the time in New York.

Think of when a homeowner hires a contractor and the contractor damages a neighbor’s property. The neighbor will most often sue both. In New York City it is not uncommon to have a lawsuit that involves two adjacent buildings. The first one is demolished but, because the shoring used to protect the remaining building is inadequate, the land under the second building shifts a little and the second building cracks. The owner of the second building wants to get paid to repair his damaged property. He sues the owner of the first building, the contractors that performed the work, and possibly even his own insurance carrier if he doesn’t like the way the carrier adjusts his first-party property claim.

What happens, though, when the plaintiff settles with only one defendant and goes to trial against the rest? How does a court decide how much the plaintiff can collect from the remaining defendants?

The rules in New York are fairly straightforward. New York General Obligations Law §15-108 permits a plaintiff to settle a claim with a defendant tortfeasor without risking the discharge of other tortfeasors who might be liable for the injury. When one tortfeasor settles with the injured party, the settlement relieves the settling tortfeasor of liability to any other person for contribution. It entitles the non-settling tortfeasor to assert the settlement as a defense to the injured party’s claim and to obtain an appropriate reduction in damages. In order to keep the rule clear, think of the “tortfeasor” as the party who allegedly did something wrong. In our examples it could be the contractor, the homeowner, or the owner of the first building.

New York General Obligations Law §15-108, provides in relevant part:
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