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Retail Law Advisor

A Case of Caution: the Effect of Redevelopment on Existing Mall Leases

Posted in Development, Landlords, Leasing, Real Estate, Retail, Tenant

Escalators at shopping mallIn a follow up to our other posts regarding the White Flint Mall redevelopment, the jury has reached a verdict. Until recently, White Flint Mall in Bethesda, Maryland was a prime example of retail mall success. However, as the mall began to lose tenants and customers, its owner decided to redevelop the mall into a mixed-use town center. One of the mall’s tenants, Lord & Taylor, balked at the redevelopment and sued. Lord & Taylor recently gained a multi-million dollar jury verdict, and the case gave pause to retail landlords and tenants across the country.

In the 1970s, enclosed shopping malls were at the height of development. Developers looked to attract large, popular “anchor” stores to ensure a mall’s success. To attract such stores, landlords were often willing to give tenant-friendly leases with low fixed rents, long lease terms, and anchor-tenant control over changes in the mall.

In 1975, Lord & Taylor entered into a lease with White Flint LLLP, the owner of the mall, to become an anchor tenant. The lease term lasted until 2042 and provided that White Flint Mall would be operated as an “enclosed mall,” prohibiting the owner from making major changes without Lord & Taylor’s consent.

After the recession in 2008, White Flint Mall began struggling. According to the owner, the mall was no longer economically viable, especially after Bloomingdale’s, another anchor tenant, left the mall in 2011. The owner argued that other tenants left quickly and re-development became the only option.

Lord & Taylor instead claimed the owner’s plans for re-development began much earlier, and the departure of Bloomingdale’s was used as an excuse to encourage other tenants to leave. Lord & Taylor argued that the owner secretly negotiated the terms of the re-development, while letting maintenance and operations at the mall become abysmal.

When approached by the owner to discuss lease modifications, Lord & Taylor initially negotiated with White Flint LLLP but requested $100 million as compensation for losses it claimed it would suffer during the long course of the proposed re-development. Negotiations stalled following the refusal by the mall owner to pay such a large figure. Lord & Taylor then brought suit, alleging White Flint LLLP breached their lease by failing to get their consent to the re-development and requesting over $50 million in damages. Following a jury trial, the jury agreed with the plaintiff that White Flint LLLP had indeed breached the lease and awarded Lord & Taylor $31 million in damages. White Flint LLLP has said it plans to appeal the verdict.

This case provides a caution to landlords in the changing retail scene across the country and a relief to tenants who see landlords not keeping their best interests in mind during redevelopment.  The key takeaway from the events in White Flint for landlords is to retain flexibility in their long-term leases because market forces may require changes not envisioned at the time of lease execution. As a landlord considering redevelopment, review all leases at the outset to determine whose approval you need and what you can offer in return. The key takeaway for tenants is to know what areas of the property are most important for you to protect and negotiate, as Lord and Taylor did here, for certain consent rights in those areas. As a tenant, it is important to understand what leverage you have in your lease so as to play your hand to your maximum benefit. Both tenants and landlords should remember that taking a hard line on any issue may result in the decision being made by a judge or jury.

Trends in Urban Grocery Store Development in Washington, D.C.

Posted in Real Estate, Retail, Zoning

Shopping carts in a rowContinuing our coverage of trends in urban grocery store development, this post examines recent and ongoing activity in Washington, D.C., which is a leader in grocery-anchored, mixed-use redevelopment projects.

It’s not by accident that DC leads in urban grocery store development. District leaders have undertaken a concerted effort to attract new grocery stores through public incentives, and grocery stores are more frequently than not a focal point of rapidly changing District neighborhoods. By one count, more than thirty grocery stores have been developed or re-developed in the District since 2000, with twenty-five of those stores being supermarkets in excess of 30,000 square feet. Reports of the demise of grocery stores have, so far, been greatly exaggerated – at least in DC.

One trend in DC’s urban grocery growth has been the repositioning of older grocery-anchored strip centers or standalone supermarkets into multi-story, mixed-use developments. Examples include the Giant-anchored Cathedral Commons on Wisconsin Avenue, the Giant-anchored O Street Market in Shaw, and the so-called “Swift Safeway” in Petworth. The re-development of the so-called “Social” Safeway in Georgetown, like the Cathedral Commons, includes additional in-line retail alongside the grocery store. Below are a few themes that have emerged in DC and may apply to other older grocery stores and supermarkets prime for conversion into denser, mixed-use projects elsewhere in DC and in urban markets around the country.

Urban Design/Zoning

The urban design trend among the re-developed DC grocery stores has been to flip the script: whereas the conventional supermarket design places the store to the rear of its lot behind a large parking field, DC’s new grocery stores have uniformly built to the street line. Parking and loading are generally tucked underground or behind the building so that the building becomes an inviting and integrated part of the neighborhood streetscape.  Transit access and bike parking are often major features as vehicle parking is de-emphasized.

Another way DC’s grocery stores are flipping the script on the traditional model is with respect to use. While the legality of the vernacular DC residential district “corner store” languishes in the city’s comprehensive zoning re-write, many of DC’s new grocery stores brought multi-family residential components to the commercial use rather than the reverse – trying to shoehorn a grocery store into a residential area. As a result, many of the new grocery stores have multiple levels of residential development above the new stores, giving grocers a much-sought, built-in customer base immediately adjacent.

Neighborhood Relations

Complying with dimension, use and parking requirements of zoning is a key consideration of these new grocery-anchored developments. Just as important are neighbors’ concerns regarding, among other things, traffic, parking and other impacts from the new development, as well as the temporary closure of the store while redevelopment is underway. A community outreach and benefits strategy is as important for a grocery-anchored mixed-use project as it is for any other project. Even so, disputes are occasionally unavoidable.

Ownership Structure

A grocery chain faces many options about how to complete an infill development or re-development.  The store owner could partner with a local developer to handle the entitlements process and/or to develop, manage, and ultimately sell other uses (e.g., multi-family residential) integrated into its project. Depending on the jurisdiction, these options can include engaging in a sale-leaseback, creating a condominium with separate retail and residential units, subdividing the parcel, entering into a space lease or ground lease, or having a third party developer do the work on a turn-key basis. The precise structure of the arrangement will be unique in most instances and will depend on financing and the capital structure funding the redevelopment.

While neighborhood groups may initially be resistant to re-development from a traditional surface-parked grocery store to a denser mixed-use development, once constructed these developments offer the benefit of providing what is often additional transit-oriented residential development without ousting the original grocery store use.  (This is in stark contrast to what is happening with the re-development of gas station and car wash sites, where the original use is being eradicated.  DC has become so concerned about the loss of so many gas station sites that it has created an approval process required to permit an owner to eradicate a gas station use.) As developers around the country search for well-located urban sites for additional residential development and as grocers seek to establish and/or strengthen their foothold in urban markets, we may well see the models for re-development applied elsewhere.

3D Printing: Potential Pitfalls For Retailers

Posted in Intellectual Property, Liability, Retail, Technology
What is 3D printing? 

3D printing, a seemingly futuristic method of manufacturing objects, is steadily moving into the mainstream as three dimensional printers have relocated from labs to the shelves of retail stores.

3D printing, or additive manufacturing, is a method of production where small machines –robots – build three-dimensional objects layer by layer, directed by computer-assisted design (CAD) software, until the entire object is finished.  3D printers are used to build a host of materials, from the mundane – children’s toys or jewelry, to the useful – parts for your toaster or washing machine, and even the highly controversial, such as the functional guns made by 3D printers that have been profiled in the New York Times and the subject of recent television crime shows.

How is 3D printing currently being used in retail?

3D printers have been used commercially for decades, for example to produce prototypes in manufacturing.  Now, producers such as MakerBot have lowered the price point of 3D printers so they are accessible to the general public, and are being sold for use in homes and schools.

Established online 3D printing companies include Thingiverse, a MakerBot-affiliated website that people use to share designs, and Shapeways, which provides 3D printing services as well as an Etsy-like marketplace, which provides a place for aldesigners to sell the objects that Shapeways prints from their plans to the general public.  Now, major retailers such as UPS and Staples are creating brick-and-mortar locations for 3D printing.  UPS Stores throughout the United States are now offering 3D printing services where customers bring a CAD file, as well as selling printers to manufacture customers’ designs.  Staples, meanwhile, has partnered with a German 3D print retailer at a store in Hamburg to provide live demonstrations that will hopefully educate and entice customers to purchase 3D printers.

Intellectual Property and Liability Concerns with Retail 3D Printing

As with many new technologies, the rise of 3D printing triggers a host of intellectual property and liability concerns.  These concerns are most evident for retailers who are contemplating providing new 3D printing technology in their stores.  For example, it is entirely possible that a customer may bring a 3D design of a copyrighted object for printing at a retail 3D print shop.  If retailers facilitate the printing of copyrighted materials, they may expose themselves to liability and a potential lawsuit from a copyright owner for assisting in a customer’s copyright infringement.  (We note that although the safe harbor provisions of the Digital Millennium Copyright Act, which updated U.S. copyright law to conform U.S. law to the requirements of the World Intellectual Property Organization and address other copyright concerns in the digital age, apply to website providers, those protections do not currently apply to retailers who facilitate copyright violations at physical retail locations.)  Similarly, customers may request printing of patent-protected materials, and retailers who print such objects may be deemed to contribute to patent infringement.

3D printing also raises potential products liability concerns.  For example, if objects designed by customers and produced by retailers ultimately cause harm to an end user – which can include the obvious, like a functional gun, as well as harder-to-predict defective toy, then retailers who provide 3D printing services can potentially be liable for those harms, even if the retailers did not directly contribute to the alleged defect.

Given the host of potential liability that can arise from providing 3D printing services, retailers considering delving into the new world of 3D-based additive manufacturing should discuss their plans and the associated risks with counsel.

An A+ in Back-to-School

Posted in Retail, Retail Sales

7-Money-Saving-Tips-Back--School-ShoppingIt may only be the first week of August, but the retail world is already in full swing with one of its most important times of the year: back-to-school. Back-to-school is the second-biggest shopping season of the year, trailing only the holiday season. And the shopping trends, patterns and preferences of consumers continues to reflect broader consumer behavior trends and gives us a peek into what may come as we approach the holiday season. This year we’re seeing two important trends in back-to-school season: a slight decrease in overall spending and an increasing use of all retail channels, not just in-store visits.

After a decade of year-over-year growth, the National Retail Federation finds that families are expected to scale back their back-to-school shopping this year. It should be a fairly modest decrease ($38.92 per family) but it does point to a trend of families looking to shop smarter, perhaps in preparation for a larger splurge later in the year. To that end, consumers will seek more generic products, shop sales more frequently and reuse big-ticket items such as electronics for the younger students in the family as older students need new devices. This trend is also reflected in back-to-college shopping. Consumers are not retreating entirely; they are simply prioritizing. However, it does mean that  to capture the consumer’s interest and make the sale, retailers need to offer the right kind of experience and be ready at all times to deliver it to the influx of school shoppers.

As we wrote in an earlier blog post, consumers of all ages–and not just Millennials– are beginning to embrace the omni-channel shopping experience. Shoppers are looking for ways to find efficiencies in what can be a time-consuming project. Almost everyone, parents and students alike, can remember comparison shopping for the best price, seeking “just the right brand/size/color” to meet that year’s trends and scouring the aisles to find the newest gadget or coolest notebook. We still participate in the same shopping expedition today, yet it is often sandwiched in between two busy careers and multiple sports practices. Free shipping, online reservations, same-day delivery and ship-to-store are some of the online shopping features that parents want as they squeeze in a last week of vacation, shuttle their children to sports tryouts and practices, and prepare for a busy fall.

Retailers are making this job a little easier on families: offering in-store shopping lists and interactive maps to help power through the job, particularly useful for busy working parents and/or families with several children going back to school. Technology providers like Point Inside are helping retailers like Target build and launch these customer-centric offerings.

Even though we might be gazing out at tranquil water, reapplying sunscreen and leafing through the latest beach read, all indicators point to the world gearing up for its next retail push. The ever-savvy shopper continues to evolve and demand more from the stores in which they shop, the technology fueling the transactions, and the people behind the customer experience. Before we know it, we’ll be writing about the lessons learned from 2015 back-to-school and what we foresee for the holidays.

Uber Drivers: Employees or Independent Contractors?

Posted in Employment, Retail, Tax

uberdriverSince its founding in 2009, Uber has gained both praise and notoriety for shaking up the taxi industry by allowing individuals who meet minimum requirements to provide an on-demand car service via the Uber mobile app.  In December 2014, there were 162,037 active Uber drivers in the United States alone.  In San Francisco, where the taxi industry reportedly grosses $140 million a year, Uber now generates approximately $500 million a year.  Investors have flocked to Uber, too, pouring $2.7 billion into the company, bringing Uber’s estimated value to a whopping $41 billion as of December 2014.  But this meteoric rise has been accompanied by legal challenges in many jurisdictions around the world.  In particular, Uber is having to defend itself against claims that it has misclassified its U.S. drivers as independent contractors rather than as employees.

Why companies favor independent contractors

A company with employees must pay a variety of federal employment taxes and similar state taxes.  A company pays none of these taxes for an independent contractor, and the contractor pays its own expenses of doing business.  Thus, Uber’s independent contractors pay expenses such as gas and vehicle maintenance as well as self-employment taxes, all of which reduce Uber’s costs of doing business.

The risk of misclassification

It is difficult to calculate the monetary exposure Uber would face if all of its drivers were deemed employees, but the recent $228 million settlement between FedEx and 2,300 of its drivers provides an apt comparison.  In that case, the federal appeals court determined that FedEx had misclassified its California drivers as independent contractors.  Notably, the decision said: “Labeling the drivers ‘independent contractors’ in FedEx’s Operating Agreement does not conclusively make them so.”

Uber’s recent experience in California and New York

On June 16, 2015, the California Labor Commission awarded one Uber driver $4,000 in back wages and interest to which she was entitled as an Uber employee.  In the words of the hearing officer:

“Defendants hold themselves out as nothing more than a neutral technological platform, designed simply to engage drivers and passengers to transact the business of transportation. The reality, however, is that defendants are involved in every aspect of the operation. Defendants vet prospective drivers, who must provide to defendants their personal banking and residence information, as well as their Social Security Number. Drivers cannot use defendants’ application unless they pass defendants’ background and DMV checks.”

The decision further notes that Uber controls the prices and cancellation fees charged to riders, the payments to drivers, and the app that enables the drivers to work, all of which describe an employment relationship.  In addition to this regulatory proceeding, Uber is defending a pending class action lawsuit in California in which the judge, on March 11, 2015, denied Uber’s Motion for Summary Judgment.  The plaintiffs there are trying to extend the class action to include all drivers nationwide.

Uber’s followers did not have to wait long to see how similar cases would fare in other states.  On July 14, 2015, in an interview with Bloomberg TV, the chairwoman of the New York City Taxi and Limousine Commission gave the opposite opinion of the California Labor Commission: “We have wholeheartedly supported driver flexibility as independent contractors when we allow them, much to the consternation of the industry, to drive for several bases…so a driver is not an Uber driver.”

Takeaways from the Uber experience

Uber will likely face additional regulatory enforcement proceedings, lawsuits brought by individual drivers, and class actions representing many drivers in a variety of jurisdictions, each with its own laws governing the distinction between employees and independent contractors.  Thus, the results will likely be mixed.

Retailers should follow Uber’s experience and learn from it.  Know the relevant law in the state(s) in which you operate.  Also know that numerous federal lawsincluding those enforced by the IRS – are implicated by improper classification of independent contractors.  The IRS allows a company to submit Form SS-8 for a ruling as to the proper characterization of a contractor/employee, which a company may find particularly worthwhile if it has many of one type of contractor/employee.  As always, seek guidance from your lawyer regarding compliance with state and federal employment laws.

ICSC’s New England Idea Exchange Talks Trends and Technology

Posted in Retail

ICSCAs ICSC’s New England Idea Exchange closes on yet another successful conference, the message is clear:  the retail industry is reinventing itself once again.  Attendance was on the increase again this year as real estate professionals gathered at the Boston Convention and Exhibition Center, appropriately located within the quickly expanding Seaport District, to hear about the latest trends in the industry and how those trends are here to stay.

Attendees heard from the experts on everything from big picture issues in the finance sector, to more nuanced discussions on how the single tenant net lease may be changing the real estate investment landscape.  The trend of high-end retailers expanding discount affiliates was also of great focus.  For example, while Nordstrom intends to open just a handful of new flagship stores in the coming year, it plans to open dozens of locations for its bargain brand, Nordstrom Rack.  In like fashion, the industry will see the rollout of Macy’s “Backstage” and an increasing number of Saks “Off Fifth” locations. On the owner/developer side, while enclosed mall expansion has ground to a halt, outlet centers continue to spread rapidly into new areas of the country.

This was the first year that the conference was scheduled on a Wednesday through a Friday.  Concern was expressed by attendees, however, that a Friday in July may be a challenge to assure solid attendance through the end of the show.  It will be interesting to see if ICSC returns to the more typical Tuesday through Thursday schedule to ensure that the New England show continues to be a major attraction for all sectors of the retail industry.

Cyber Liability Insurance – Does Your Retail Business Need It?

Posted in Insurance, Intellectual Property, Liability, Risk Management

cyberliabilityThe news is full these days of hackers stealing credit card and other customer information from United States retailers such as Home Depot, Target, and Neiman Marcus (and the federal government) among others. These mega-breaches make great headlines, but what about smaller retailers? Are smaller retailers and restaurants targets for cyber criminals? The answer is yes. Although hackers rarely attempt to directly breach the firewall protections of specific small businesses, identity thieves will frequently send out tricky mass emails to hundreds of small businesses claiming to be from PayPal, QuickBooks, Xerox, etc., and once the email is opened or the link accessed by an unwitting employee, the hackers have access to the system.

According to the Chairman of the House Committee on Small Business, “nearly 71% of cyber-attacks occur at businesses with fewer than 100 employees,” because they have less sophisticated security defenses and cyber policies and consequently are more vulnerable to hackers and human error. According to Benetrends Financial, responding to an average cyber-attack typically costs small businesses around $21,000 (approximately $215 per lost record). Response costs can include notifying customers of the breach, hiring forensic investigators to review how the hacker gained access to the system, providing complimentary identity protection services to affected customers, reimbursing banks for the reissuance of breached credit cards, and paying public relations consultants to rebuild the company’s reputation. These costs don’t include expenses associated with lost business or litigation arising from the breach.

Although some insurers may have provided limited coverage for cyber liability claims on older commercial general liability forms, the frequency and severity of cyber liability claims have forced insurers to create exclusions on existing forms clarifying that cyber liability claims are excluded from general liability policies. Furthermore, use of an outside vendor to manage data (in the cloud or otherwise) does not necessarily relieve a business owner of his or her obligations. Under state and federal privacy laws, a business owner who accepts personal information, such as credit card data, from a customer remains responsible for the security of the customer’s information even though the business owner hires a third party to process and store the information. Therefore, business owners now need to consider obtaining standalone, dedicated cyber liability insurance policies to cover their cyber liability risk. Depending on the coverage obtained, all of the costs mentioned above can be covered by cyber liability insurance. A summary of the different elements of cyber liability insurance can be reviewed here.

When applying for cyber liability insurance, a business owner should select an insurance broker who has an experienced, cyber liability knowledgeable team. The broker should be in a position to help the business owner use an application that is thorough and appropriate for the owner’s line of business. The application form will require detailed information from the IT and network security team (regarding cloud providers and monitoring mechanisms), the finance department (regarding premium limits, deductibles, and scope of insurance), and the legal department (regarding indemnities and other contractual protections from outside vendors). The best rates are given to those businesses that have cyber breach detection and response plans in place, and have internal policies designed to avoid a data breach and to protect personal identity information. Some helpful suggestions can be found in this list of Top Five Ways to Avoid a Data Breach prepared by the Beazley Group.

Cyber liability insurance is obtained as a separate policy, and can be obtained from an owner’s regular insurance broker or through an insurance broker specializing in cyber liability coverage. Because cyber liability insurance is a relatively new insurance product, the cost, coverage terms, and limit of coverage can vary widely from insurer to insurer making it worthwhile to shop around.

Are You Ready for the Attack? Online Brand and Reputation Protection

Posted in Intellectual Property, Retail, Risk Management

Laptop Magnifying glassIt starts with an inaccurate, possibly fake, online review. Then a post appears on a consumer complaint forum. Suddenly, there is a surge of false postings about your company on social media sites. Invariably, these anonymous postings appear prominently in search engine results, including Google. If you haven’t implemented proactive monitoring for attacks and are not prepared to counter them, otherwise controllable threats could balloon rapidly into full-scale crises.

The internet and related technological developments provide valuable platforms for the open exchange of information and ideas. However, the internet is equally available to unscrupulous individuals and bad actors disguised as bona fide consumers. Although the internet is full of false and misleading information, consumers still rely on internet reviews before making purchasing decisions. A recent survey found that 88% of consumers trust online reviews as much as personal recommendations. This underscores the importance of identifying and tackling online risks to a company’s brand and reputation.

There are certain steps that should be considered when an online attack occurs:

  • Assess the damage and establish a strategy. It is critical to assess the damage from an attack first and not just respond reflexively. There is no effective one-size-fits-all approach. A thoughtful and comprehensive strategy must be crafted to address the specific issues and challenges.
  • Protect intellectual property. Online attacks may implicate copyright, trademark, trade secrets, counterfeiting, false advertising, and other intellectual property. When an attack does involve intellectual property, federal and state laws may provide expedited and efficient remedies.
  • Identify defamatory and other unlawful content. Online attacks usually include defamatory and other unlawful content. Before initiating litigation or seeking other remedies, the unlawful content must be identified. This will allow a company to consider its available claims and the different venues where it could assert those claims.
  • Identify the sources. Typical sources of online attacks are disgruntled employees, dissatisfied customers, unscrupulous competitors, and other bad actors. While the First Amendment protects certain types of anonymous speech, it does not protect individuals, groups, or organizations from making threatening, defamatory, or other unlawful comments. It is often appropriate to deploy various legal tools to reveal the sources of online attacks. This is an important step to stop an attack.
  • Seek removal of unlawful content. State and federal laws dealing with intellectual property rights, unfair competition, and defamation provide for the removal of such materials.  Many websites and social media platforms also will remove unlawful content under certain conditions. Seeking the removal of this content may require a cease-and-desist letter, subpoena, initiation of a lawsuit and request for a court order, or other dispute resolution procedures.
  • Implement curative and preventative measures.  Even if an attack is stopped and content is removed, remnants of this content will remain online. Additional steps must be taken to identify and address these sources. In addition, preventative measures must be implemented to prevent reoccurrences and future attacks. Such measures may include gaining control over certain internet domains, increasing social media presence, and generating fresh marketing and advertising content.

The nature and prominence of the internet requires companies to monitor their online presence, manage their brands and reputations, and remain vigilant for potential attacks. When these attacks occur—which they do with increasing frequency—the response must be informed, proactive and strategic.

Let Freedom Ring!

Posted in Holiday, Retail

RainbowAmericanFlagGoulston & Storrs has a long and proud tradition of supporting diversity. It’s not just a theoretical goal; we believe diversity helps us recognize and appreciate alternate viewpoints which ultimately improves our firm and our ability to serve our clients.

Two years ago we spoke in support of the Supreme Court’s decision declaring Section Three of the Defense of Marriage Act (DOMA) unconstitutional. As longtime supporters and pro bono counsel for MassEquality we were gratified by this result. A few days ago, the Supreme Court legalized same-sex marriage nationwide, marking the end of a long chapter of activism. And just last week, Marc Solomon visited our offices to share insights from his book, Winning Marriage.

We celebrate our clients and colleagues who have labored tirelessly for many years in the fight for marriage equality, and share in their pride with the Supreme Court’s historic decision.

As we look to Independence Day, we are reminded what those brave patriots in 1776 achieved for us: limitless possibilities for individuals, families, governments, academic institutions and businesses. Since our founding, we have strengthened the links across a broad continent and an increasingly diverse population.  We have built a cross-country railroad linking our coasts; united fifty states; accomplished air travel, put humans on the moon and countless other achievements. All of those initiatives were possible because of the people behind them– including waves of immigrants from all continents– and the businesses they created to support the endeavor. In fact, many retail establishments are likely in business today due to the advent of rail travel and they will continue to adapt as mobile commerce evolves.

Two centuries later, we still enjoy limitless possibility: from the local small business owner looking to expand his business to the big box retailers who grew their brands from humble beginnings, we are all reminded that Friday’s Supreme Court decision is just one more milestone on the long path to progress. The wedding-planning business, and retailers in general will likely see a boost as a result of Friday’s decision, as we have already seen with companies like Target and insurance provider Esurance beginning to market specifically to gay couples.

Happy Fourth of July and let freedom ring!

Does Your Website or Mobile App Discriminate?

Posted in Compliance, Retail, Technology

Keyboard - access key Contact usAre you confident that your business complies with federal anti-discrimination laws?  If you offer goods or services to the public through the Internet, the answer may not be as simple as you think.  Increasingly, lawsuits are targeting retailers and other service providers that have an online presence, claiming that if their websites and/or mobile apps cannot be used equally by consumers who are blind, deaf, physically impaired or otherwise disabled, they violate the Americans with Disabilities Act of 1990 (the “ADA”). This area of law is still evolving, but taking some measures now may reduce the risk that your business will be the target of a discrimination lawsuit.

Title III of the ADA prohibits discrimination against disabled persons in places of “public accommodation.” This generally requires most businesses that provide goods or services to the public to be as accessible for persons with disabilities as they are for those without.  Traditionally, Title III has been applied to require businesses to provide equal access to stores, restaurants, and other physical spaces.  As our society has increasingly moved beyond the physical world and into the virtual, however, there has been a growing debate about whether the ADA also applies to our virtual stores, supermarkets, libraries, movie theaters, and other businesses.

The law on the ADA as it applies to the Internet remains unsettled.  Enacted in 1990, the ADA was not drafted with the Internet in mind, and Congress has not amended the ADA to modernize it in that respect. Courts across the country have disagreed on whether the ADA applies to Internet-only businesses, or only to those that also have a physical space.  For example, a federal court in Massachusetts ruled the ADA does apply to Netflix’ streaming service, while federal courts in California disagreed and ruled it does not.  Unfortunately, the United States Department of Justice (the “DOJ”), which is tasked with enforcing the ADA, continues to delay the release of its long-anticipated rulemaking on the topic – most recently pushing back the expected release from June 2015 to April 2016.

The lack of settled law and clear regulations has not stopped the DOJ and other complaining parties from aggressively pursuing claims against businesses that host websites or apps thought to be violating the ADA.  Even if not won outright, these claims can force large settlements, generate hefty legal expenses, and cause significant damage to a business’s reputation.  Until the law is clarified, how are businesses to protect themselves?

Though we do not yet know what the DOJ’s rules will look like, the DOJ has given some clues along the way that should help businesses to avoid being targeted in these suits.  In settlements with businesses alleged to have violated the ADA on the Internet, the DOJ consistently has required that the business comply with the World Wide Web Consortium’s Web Content Accessibility Guidelines 2.0 (“WCAG”).  These guidelines focus on making the Internet more accessible for persons with disabilities, suggesting accommodations such as having text alternatives for non-text content to help hearing-impaired users, being fully navigable by keyboard for physically impaired users who may be unable to use a mouse, and being compatible with ‘screen readers’ for vision-impaired users.  The WCAG sets three levels of conformity – from the lowest at level A to the highest at AAA – and the DOJ has generally required compliance with levels A and AA.

The WCAG are only guidelines, and are not mandatory for private businesses.  Still, they signal what the DOJ views as appropriate and what the DOJ’s rules may ultimately look like. In addition to aiming for WCAG Level AA conformity, the DOJ has also suggested through settlements that it would be reasonable to require businesses to have an executive or employee charged with ensuring WCAG compliance, and to hire independent auditors to conduct periodic evaluations of such WCAG compliance.  Finally, it may also be advisable to train your customer service staff to escalate complaints about website or mobile app inaccessibility so that problems can be remedied quickly.  Whether the ultimate rules look like the WCAG or are different, it is clear that rules are coming.  Taking the above steps may help to protect your business by keeping you ahead of the curve.