Header graphic for print

Retail Law Advisor

What’s The Buzz Over Drones?

Posted in Retail, Technology

Technology has rendered irrelevant the longstanding debate over whether good fences make good neighbors. Authorities in New Jersey recently arrested a man after he shot down a neighbor’s drone that was flying above his property and recording pictures of his home. The law frowns on self-help, however, especially when it involves the discharge of a firearm in a residential neighborhood.

Although the Garden State all too often finds itself at the forefront of legal and cultural controversies, the growing debate over Unmanned Aerial Vehicles (UAVs)—better known colloquially as “drones”—is a nationwide phenomenon. The New Jersey incident followed an odd effort by a Colorado town to authorize drone-hunting licenses with bounties; a Montana Congressional candidate’s campaign video featuring him shooting down a government drone; and a Utah firearms company’s promotional video featuring the exploits of the eponymous “Johnny Dronehunter” character. The growing popularity and sophistication of UAVs all but guarantees future collisions of property, criminal, and privacy law issues with the application of Second Amendment rights.

These unanswered legal questions parallel the legal ambiguities with commercial UAV use. The ability to operate a relatively inexpensive aerial vehicle mounted with powerful cameras and sensors has unlimited business applications. Drones have been deployed for filming marketing and advertising videos; for inspecting land, construction sites, buildings, and other infrastructure; for agricultural purposes; for news media coverage; and for short-range deliveries of medication. Mega-retailer Amazon.com made news last year with plans to develop a drone-delivery service, and a start-up in San Francisco is working on a taco drone-delivery service called the TacoCopter. Even Martha Stewart has joined the ranks of drone owners.

Despite the growing commercial interest in UAVs, the Federal Aviation Administration (FAA) maintains the position that commercial uses of UAVs are prohibited. At the moment, so-called “Civil Operators” are limited to using UAVs for research and experimental purposes. Mostly academic institutions and defense contractors have obtained permission from the FAA under this exemption, although some commercial businesses have sought permission as well. For example, ConocoPhillips received permission to fly UVAs for mammal surveys, for ice surveys, and to aid oil-spill response teams in Alaska. This limitation to research and experimental purposes greatly limits the permitted uses of UAVs and limits the growth of innovative businesses that could otherwise incorporate UVA capabilities into their products and services.

All is not lost, but merely delayed. The FAA is working on proposed regulations for the commercial use of UAVs. These regulations were required by September 2015 under the FAA Modernization and Reform Act of 2012, but reports indicate that the FAA will miss that deadline. In the meantime, the FAA has issued cease-and-desist letters to businesses using UAVs. The FAA’s limited personnel and resources means that many businesses have decided to take the risk of using UAVs for commercial applications despite the uncertain legality.

There is an interesting case pending that may provide grounds for immediate commercial use. The FAA fined a well-known commercial UAV operator for recording aerial footage of the University of Virginia for an advertising campaign and the operator decided to fight the fine. An administrative law judge agreed with the operator’s arguments and dismissed the FAA’s enforcement action. The judge found that the UAV in question did not qualify as an “aircraft” under FAA regulations. The judge also found that the FAA did not have regulatory authority to prohibit commercial UAV use because the FAA had not followed the required rulemaking process. See Administrator v. Pirker, FAA Case No. 2012-EA-210009, NTSB Docket No. CP-217 (2013). The FAA has appealed this decision to the National Transportation Safety Board (NTSB). A decision from the NTSB in the Pirker case may provide interim permission to operate UAVs until the FAA issues formal regulations.

It seems only a matter of time until companies are permitted to make commercial use of the exciting capabilities that UAVs offer. For the time being, however, retailers and other businesses are cautioned against using UAVs for commercial applications until the FAA issues commercial-use regulations.

Who Is Alice and Why Is She Invalidating Patents?

Posted in Intellectual Property, Retail, Technology

On June 19, 2014, the Supreme Court issued its decision in Alice Corporation Pty. Ltd. v. CLS Bank International, clarifying what it means to be patentable subject matter. With one stroke of the pen, the Supreme Court effectively invalidated thousands of patents that claim a known business method implemented by a computer. The effect of this ruling is already having a significant impact on online businesses. In the retail industry in particular, the affected patents can be found everywhere—from software running an online purchasing platform, to tracking inventory and shipping, to enabling detailed virtual product viewings, to online shopping cart functionality. Moreover, the retail industry is a target for Patent Assertion Entities (PAEs), also known as “Patent Trolls,” which own many of the patents Alice may have invalidated. In the few months since the Supreme Court’s Alice decision, courts have been invalidating patents and the number of patent cases filed compared to this time last year have decreased.

Alice Takes Aim at “Abstract Ideas”

In Alice, the Supreme Court held that a patent claiming a previously known method implemented by a computer, without more, is merely an “abstract idea” not entitled to patent protection under 35 U.S.C. § 101.

Alice Corp., a PAE, sued CLS Bank, which developed and utilized a computer system Alice Corp. claimed infringed its patents claiming a method of investment trading utilizing an intermediary to mitigate risk. The Supreme Court held that “the claims at issue amount to ‘nothing significantly more’ than an instruction to apply the abstract idea of intermediated settlement using some unspecified, generic computer,” noting that, “[u]nder our precedents, that is not enough to transform an abstract idea into a patent-eligible invention.” The Supreme Court added that “[s]imply appending conventional steps, specified at a high level of generality, to a method already ‘well known in the art’ is not enough to supply the ‘inventive concept’ needed to make this transformation.”

The Impact of Alice

Less than a week after the Supreme Court’s decision, the USPTO issued patent examination guidelines instructing patent examiners how to evaluate computer-implemented method patents in light of Alice.

Less than a month after the Alice decision, the U.S. Court of Appeals for the Federal Circuit (CAFC)—the federal court that hears appeals of all patent cases—began invalidating patents in light of Alice. On July 11, 2014, the CAFC affirmed a California federal court’s decision to invalidate digital camera patents asserted by a subsidiary of Acacia (the most litigious PAE in 2013) against several retailers, noting that “[a] process that employs mathematical algorithms to manipulate existing information to generate additional information is not patent eligible.” On August 26, 2014, the CAFC affirmed a Michigan federal court’s decision invalidating patents claiming computer management of bingo games, noting a “straight-forward application of the Supreme Court’s recent holding in Alice” mandated invalidating the patents. One week later, the CAFC affirmed a Delaware federal court’s decision to invalidate patents claiming “methods and machine-readable media encoded to perform steps for guaranteeing a party’s performance of its online transaction,” noting “[t]hat a computer receives and sends the information over a network—with no further specification—is not even arguably inventive.”

In a striking example of Alice’s impact, Lumen View Technology (a heavily litigious PAE), voluntarily dismissed an appeal on September 12, 2014 from a judgment invalidating its patent claiming a “system and method for facilitating bilateral and multilateral decision making,” noting that Alice “has provided greater clarity on patentability.” Additionally, reports indicate that the number of new patent cases filed in September 2014 dropped 40% from September last year.

Audit After Alice

The retail industry utilizes and often owns computer-implemented method patents. While audits of owned and licensed intellectual property portfolios should be a routine part of any retail business, now is a good time to conduct such an audit. Any patents being licensed by retail businesses, especially online business method patents, should be reviewed to determine whether continuing to license such technology remains a worthwhile investment in light of Alice. Moreover, any computer-implemented method patents that are currently or are being considered as part of a lawsuit or settlement should be re-evaluated in light of Alice.

Building Brand Equity: Crowdfunding and the Retail Industry

Posted in Finance, Retail

Ask anyone who follows innovation what topics are hot and it is likely most of them will say “crowdfunding.” By now, sites like Kickstarter and IndieGoGo have created thousands of loyal followers. In recent months even the real estate industry has entered the scene.

 

What is Crowdfunding?

Crowdfunding involves the use of the internet and social media to raise equity or debt capital, typically from a large number of investors, each of whom chooses to invest a relatively small amount. Typically crowdfunding can take two forms: private crowdfunding, through which private entities seek to raise capital from individuals who qualify as “accredited investors” under regulations of the Securities and Exchange Commission (SEC); or public crowdfunding, through which public offerings registered with the SEC are marketed primarily to retail investors.

Crowdfunding has potential to change the way a lot of industries work. In real estate crowdfunding, providers and consumers of equity or debt capital can join to finance specific investments or investment entities. (See our recent post on crowdfunding in real estate.)

Its impact will undoubtedly be felt across the retail industry. In a selective pool of crowdfunding sites culled by Entrepreneur magazine contributor Sally Outlaw, four of the top ten crowdfunding sites have some type of retail industry application.

 

Crowdfunding’s Ripple Effects Through Retail

Why does crowdfunding have such potential to impact retail?

First, crowdfunding otherwise democratized the process for entrepreneurs who may not be able to make their way into the Shark Tank. Rather than dipping solely into personal savings or a securing a line of credit, anyone looking to lease larger space, hire more staff, purchase equipment or create more inventory can now raise capital from more than just friends and family. It also allows midsized brands (of which there are many in retail) the opportunity to grow more quickly. Vehicles like CircleUp help mid-market companies too small for private equity and too large for commercial banks the opportunity to flourish.

Next, since crowdfunding opens the doors to anyone as a potential investor, it allows participants to target money to businesses in which they truly believe. The success of the brand will not just generate a profit but offer the investor a deeper level of engagement with the brand. Crowdfunding turns that pool of “interested parties” or “loyal customers” into valuable stakeholders who can really become brand ambassadors.

 

Where are We Headed?

While gaining in popularity, as with any new platform, there’s more validation to be done. An article in The New York Times recently described some ethical issues raised by asking already-paying customers for more money. There is a potential big reward, but some risk too, in using crowdfunding to boost brand equity. Entrepreneurs and business owners will need to assess the readiness of their potential investor base and their own willingness to assume that risk.

Regardless of industry, crowdfunding is here to stay. Whether you’re an investor looking for a worthy cause or a passionate purveyor of unique goods, growing a business could be as close as a click of the mouse or a swipe of the tablet.

 

Release of the iPhone 6 — Is Apple Riding the Security Wave?

Posted in Banking, Retail, Retail sales, Risk Management, Technology

Another month brings another reported massive data breach. On September 8, 2014, Home Depot confirmed that its payment data systems had been breached, potentially impacting customers using payment cards at the retailer’s US and Canadian stores beginning in April 2014. The breach was purportedly aided in part by a new variant of the malicious software program that stole card account data from Target last December. Analysts immediately hypothesized that the breach could be much bigger than the attack on Target, which resulted in the reported theft of 40 million payment card numbers and another 70 million customer records. On September 18, 2014, Home Depot confirmed that hypothesis and announced that 56 million cards may have been put at risk as a result of the breach.

As the system of exchanging sensitive data through the use of payment cards has proven to be more and more vulnerable to security breaches, it is timely that Apple recently announced an addition of Apple Pay to the next version of the iPhone. Apply Pay, which will be launched in October, reportedly will enable iPhone 6 and 6 Plus users to leave their credit cards at home and make purchases by using their cell phones via a “tokenization” scheme endorsed and recognized by major financial services companies. Through this process, instead of storing a cardholder’s actual credit card number on the device, another account number will be generated by the device to identify the user. This account number (i.e. token number) is then stored on an encrypted chip within the iPhone called the “Secure Element” and is transmitted during a transaction through a Near Field Communication (NFC)-enabled credit card terminal to the merchant and bank to identify a user for payments.

Analysts and bloggers anticipate that Apple Pay will make the breakthrough as not only a more efficient method of shopping, but as more secure than today’s credit card process. Unlike in a conventional credit card transaction where a user’s identity and credit card information are visible to merchants processing the payment, a user’s actual credit or debit card numbers are not shared with merchants or transmitted with payment through Apple Pay. Apple states that it does not store users’ credit card information on the Apple servers or retain any transaction information.

In an interview with Bank Innovation, Jorn Lambert of Master Card said that Apple has additionally erected “some Chinese walls” to prevent Apple from gaining access to payment data. As an added layer of protection, consumers will also be required to authenticate their identity through the Touch ID fingerprint sensor of their devices against the fingerprint copy stored like the credit card information on the Secure Element of each iPhone – effectively the same two-step process used in chip-and-PIN credit card transactions in Europe and Canada.

Notwithstanding the promising security features of Apple Pay, questions naturally remain about the ability of hackers to get around the unique Apple Pay security features. Moreover, it is unknown whether merchants — who may already be spending money on upgrading to EMV –enabled point of sale terminals in anticipation of the liability shift in October 2015 when merchants will be more exposed to liability for fraudulent transactions if they cannot accept a customer’s EMV chip card –will equip themselves with the NFC terminals. While only time can tell whether Apple Pay will offer consumers a truly “more secure” method of shopping, the hype around this payment platform combined with the public’s excitement about Apple products will certainly test the level of consumer loyalty to the conventional routine of swiping a credit card at checkout.

Adaptive Reuse: Boom or Bust?

Posted in Development, Environmental, Green, Real Estate, Retail

Adaptive reuse of older, unused, or under-used buildings is considered by many to be an important component of sustainable and environmentally-friendly development. Also, adaptive reuse is a concept that governmental officials, many developers, and some communities have embraced to revitalize older neighborhoods suffering from abandonment or general decline. Adaptive reuse may be the draw for residents and patrons as an inviting use of a cultural or historic resource, but it also may be a costly endeavor that outweighs the benefits. Regardless, renovating and re-using older buildings can be much more expensive than razing them and constructing new, even if there are significant environmental benefits from adaptive reuse. On the other hand, some evidence shows that it pays to reuse existing buildings because of the building character, the location, the savings from using an existing structure, and the government incentives for adaptive reuse. Therefore, the concept of adaptive reuse presents a complex array of questions about cost, urban character, history, and the environment that governmental officials, developers, communities, and potential new residents/tenants must consider. One of the largest questions that may confront any developer is that of regulation: adaptive reuse may present many challenges different from new construction.

One of the primary regulatory challenges that any developer contemplating adaptive reuse may encounter is historic preservation. Historic preservation laws are intended to ensure protection of historic buildings from unregulated alteration or demolition. Historic preservation laws and regulations, in some form, exist in every state in the United States, but they are typically administered at the local level. Historic preservation laws can range from providing incentives to encourage reuse of historic buildings to a strict review process for any developments that plan to alter historic buildings. The federal government offers tax incentives to developers that rehabilitate historic properties. Many local jurisdictions, like Boston, New York, and Washington, D.C. have robust historic preservation laws that establish regulatory bodies and allow for the designation of individual historic landmarks and historic districts. These jurisdictions also have regulations for the alteration and/or demolition of historic buildings. Because of their location or character, many buildings targeted for adaptive reuse are protected under historic preservation laws, so a developer may have to invest additional time and money into the process for allowing a building to undergo renovations consistent with applicable historic laws and regulations.

While adaptive reuse may promote many environmental benefits, a developer converting an old building into a modern and useable structure may confront multiple environmental regulatory challenges. Old buildings may contain hazardous materials that must be removed to comply with modern environmental standards. Each jurisdiction has laws about how hazardous materials must be handled when renovating an existing building for adaptive reuse. In addition, jurisdictions may have “green” or sustainable development laws that apply to reuse of existing buildings. In Washington D.C. for example, the extensive renovation of an existing building may trigger requirements for on-site storm water retention and a required minimum amount of on-site vegetation or green roof.

Finally, adaptive reuse of a building may invoke additional regulatory consideration concerning building structure and systems. Renovating a building for adaptive reuse may require compliance with modern building and fire codes, and the Americans with Disability Act.

Nevertheless, adaptive reuse has the potential to help revitalize neighborhoods and to promote sustainable development. The appeal of the unique character and history of adaptive reuse may be a worthwhile investment for a developer. However, these benefits have to be weighed against the regulatory costs associated with re-purposing existing buildings. Developers should consult counsel when deciding whether the benefits of adaptive reuse outweigh the potential regulatory costs and challenges.

Reverse Showrooming: A Look at the Other Side

Posted in Retail, Retail sales

In previous blog posts, we have covered developments in showrooming, the consumer behavior of browsing brick-and-mortar stores to evaluate a product before purchasing it online. We warned traditional retailers of this threat to in-store sales and suggested ways to combat the popular behavior. Although brick-and-mortar retailers may have seemed doomed by the prevalence of showrooming, recent studies paint a more hopeful picture.

The Data

“Reverse showrooming” (or “webrooming”) has actually been reported to be more common than showrooming. As the name suggests, reverse showrooming is the consumer behavior of researching a product online before purchasing it in-store. In a 2013 Harris Poll survey, roughly 69% of 2,000 American adults reported having engaged in reverse showrooming, compared to 46% for showrooming. Moreover, when a 2013 Urban Land Institute survey asked over 1,000 Americans ages 18-35 about their preferred way to buy electronics, shoes and cosmetics, more people responded that they preferred to reverse showroom than to showroom for those items. The survey also indicated that while showroomers spend an average of $174 when they make their ultimate purchase online, reverse showroomers spend an average of $204 when they buy in-store. These numbers should be encouraging to traditional retailers, suggesting that the balance may be tilting in their favor.

So where do reverse showroomers commonly begin and end their shopping experience? Perhaps not surprisingly, the online search usually starts with Amazon (the same destination where many showroomers end) and finishes at Walmart, Best Buy or Target (the same destinations where many showroomers begin). These shared destinations can be explained in part by the considerable overlap between the two groups – that is, many customers who showroom also reverse showroom, and vice versa. According to the same Harris Poll survey, nine in ten showroomers have reverse showroomed and six in ten reverse showroomers have showroomed.

Reasons Behind Reverse Showrooming

In general, understanding what drives consumers to shop the way they do is essential to any effective sales strategy. Some of the top reasons that reverse showroomers cite for buying a product in-store instead of online are: avoiding shipping costs; a desire to touch and feel the product; available inventory; and the ability to return the product to the store if needed. On the other hand, some of the top reasons people cite for buying online instead of in-store are: the availability of free shipping and online-only discounts; the lack of crowds and long check-out lines; and an easy-to-use website.

Lessons for Retailers

Armed with these types of data, brick and mortar retailers should feel better prepared to capitalize on reverse showrooming and attract sales to their stores instead of their competitors’ stores. Below are some suggestions:

  • Have a good inventory monitoring system in place. Perhaps this one is too obvious to mention, but if a retailer does not have the product, the consumer will buy it from another store that does, or forgo buying at a store altogether.
  • Create easy-to-use mobile applications and websites and set up in-store terminals that allow consumers to search for inventory, specifications, reviews, offers and coupons. Nielsen’s 2014 Digital Consumer Report estimates that 65% of Americans own a smartphone. And have no doubt that they will use it while in the store (even if they have already done some research beforehand). Great mobile applications/websites and designated terminals enhance the customer’s in-store shopping experience and keep the customer on the retailer’s own sites and content.
  • Incorporate digital marketing programs in the stores. For example, Target has a website and mobile application called Cartwheel which generates offer codes online for consumers to use in-store only. And last holiday season, Nordstrom arranged its in-store displays based on top items pinned on Pinterest, demonstrating that it was listening to its audience and ensuring that those items were in stock.
  • Integrate e-commerce conveniences with in-store ones. Online ordering and in-store pickup is a great example and one that more and more retailers are offering each day.
  • Offer convenient, easy and secure in-store checkout. Eliminate one of the top-cited reasons people avoid stores: long check-out lines.
  • Properly train sales staff. Many consumers still value having their questions answered by real human beings. In a 2013 Deloitte survey, more than half of respondents said knowledgeable in-store staff would make them more likely to buy in-store.

As the suggestions above show, the response to reverse showrooming should not be too different from the response to showrooming (after all, the two behaviors are far from mutually exclusive). As our virtual and physical shopping experiences become increasingly merged through technology and consumers constantly move back and forth between the two worlds, traditional retailers should take an omni-channel approach to satisfy as many consumer desires as possible.

Is Just-in-Time Scheduling Good for Business?

Posted in Employment, Retail

Ten years ago, retail managers created schedules for hourly employees using a paper, pen, and a working knowledge of the store’s busy periods and their employees lives. Now, in many businesses, computers create employee schedules. Known as Just-in-Time (JIT) scheduling or “scheduling to demand,” JIT scheduling closely links labor supply to consumer demand by relying on data such as floor traffic, sales volume, hotel registrations, dinner reservations, and even the weather. In doing so, managers can ensure that stores have exactly the right number of workers for each hour of the day. However, JIT scheduling puts heavy demands on hourly workers and their families.

As currently used, JIT scheduling often has the unintended impact of making hourly shifts unpredictable and employee hours vary from week-to-week. For instance, an employee may work forty hours one week and only fifteen the next. NBC News recently reported in “’Just in Time’ Scheduling Creates Chaos for Workers” that some employees never know what their schedule (or their paycheck) will be, which makes it difficult to manage childcare, arrange transportation, hold a second job, or schedule classes. Additionally, variability in paychecks and in hours worked can affect eligibility for employer-sponsored health-care benefits and government housing assistance and childcare subsidies, which require a certain minimum number of hours worked or weekly pay.

Aside from impacts on hourly workers, JIT scheduling can put a strain on managers as well. According to “Scheduling Hourly Workers” by Nancy K. Cauthen, “Managers are expected to reconcile conflicting priorities: meeting employers’ staffing guidelines and sales targets, providing good customer service, scheduling employees for sufficient hours, and “staying within hours” by constantly adjusting labor-demand ratios.” The increased complexity of managerial jobs and the resentment from employees who feel stressed by the unpredictability of their working lives is taking its toll on managers. Some managers respond by editing the computer generated schedule on their own time, and others feel frustrated that they can’t change the schedule to be more predictable and stable for their employees.

According to “Starbucks Vows to Change Unpredictable Barista Work Schedules” published in the Seattle Times in response to a New York Times report about the chaos created in a single mother’s life by JIT Scheduling, Starbucks is changing its scheduling policies. Schedules at Starbucks now must be posted at least one week in advance, and workers can no longer be scheduled for back-to-back opening and closing shifts. Although Starbucks announced the new policy change only a few weeks ago, it will be interesting to watch and see if Starbucks is able to provide more stability to its employees.

Although no laws currently exist regulating JIT scheduling, this issue has received a lot of media attention recently, and there are calls for legislators to take action to guarantee a minimum number of hours to each part-time employee, to require that employees be paid for a minimum number of hours if they report to work but are sent home, and to mandate that schedules be posted at least a week in advance. In light of Starbucks revising its JIT policies and the negative public attention JIT policies are receiving, retailers may want to revisit their scheduling procedures to create more manageable and predictable work hours for their employees before they are legally required to do so.

Mobile Retail Consumers – Text Me, Maybe?

Posted in Retail, Retail sales, Technology

As much as we all love clipping coupons from circulars (yes, they still do exist), searching through our emails for retail promotions, and, perusing websites, such as Gilt Groupe, for bargains, a new marketing trend is upon us that will forever change the way we shop and interact with our favorite brands. Thanks in large part to the boom in smart phone use, Retail SMS Marketing has emerged as the new kid on the block enabling retailers to reach their customer base in a direct, cost-effective, and personalized manner. In the same vein as subscribing to a company’s email list for promotions, Retail SMS Marketing is an opt-in service whereby customers receive text messages from retailers regarding new products and discounts. Rather than relying upon coupon marketers, such as Groupon, retailers now have the option of cutting out the middle-man and providing customers with mobile coupons directly via their smart phones.

The immediacy of text messaging coupled with the consumer’s ability to purchase products seamlessly either in store or on the retailer’s mobile website has markedly improved sales for some retailers. Text messaging allows retailers to inform their customers of sales and promotions in real time. And, as any marketing guru will tell you, instant action begets instant results. As more and more brick and mortar retail stores morph into show rooms and restaurants fall prey to “empty restaurant” syndrome, SMS Retail Marketing may be the perfect shot in the arm to bring consumers and foodies back to these establishments in droves.

Despite the virtues of SMS Retail Marketing, traditional promotion media such as television, print, and radio continue to reign supreme among traditional retailers who are loath to embrace this new marketing strategy. Although such reluctance may stem from fear of being too aggressive or annoying, consumers actually appreciate messages from retailers, especially in regards to discounted prices. Despite the apprehensiveness of some retailers, Retail SMS Marketing is gaining momentum in the retail industry among the fearless tech-savvy marketing managers who have developed nuanced strategies to realize its value. Some retail marketers have even utilized analytics to understand consumers’ shopping patterns to know when to send consumers personalized offers, and, more impressively, which items to discount to truly pique their interest. Thus far, targeted text messages have proven to be a highly viable means of increasing sales.

Let’s face the facts. Text messaging is the primary means of communication among younger demographics, and personally engaging with the customer is the key to improving the shopper’s experience, creating brand awareness and brand loyalty. Therefore, implementing text messaging into an overall promotional campaign would seem to be a natural choice. We truly are in a revolutionary period in the way brands interact with their customer base as they have become hip with the times and exploited the benefits of the smart phone. Michael Kors, text me, maybe?

Hostile Doesn’t Mean MEAN: Understanding Employment Law

Posted in Employment, Retail

Dealing with employees also means dealing with their misconceptions about employment law. This blog entry highlights some of these misconceptions and reminds employers of the significance of employment at will. Notwithstanding misunderstanding to contrary, it is still generally and genuinely the case that an employer can fire an employee for any reason or for no reason. The exceptions to this principle created by federal and state anti-discrimination laws are significant, but they do not trump the rule. Moreover, the laws make discrimination illegal. They do not create a code of conduct for the workplace or set a general fairness standard governing decisions by employers.

Let’s start with the general rule. Employees are employed at will. This means that an employer can fire an employee for any reason (performance or otherwise) or for no reason. Employees have the reciprocal right to leave their employ without notice and without reason. The notion is simple and, when clearly understood, functions to avoid unnecessary disputes and rancor. If employment at will governs a particular decision, there is really nothing to litigate about.

Title VII, click here for the statute, the principal federal law, and its state analogs (like chapter 151B in Massachusetts, click here for the statute) do not — rumors to the contrary notwithstanding — obviate employment at will. Instead, the laws make it unlawful to fire someone “because of” their membership in a protected class. Said differently, an employer can fire someone because she is not good at her job, but not because she is a she.

This concept doesn’t seem complicated, but it creates enough of a specter of litigation so that employers tend to be hesitant to fire people who fall within a protected class. Indeed, when they consult counsel about such terminations, employers are often advised that they need to be able to show the reason for the termination (performance, absenteeism and so forth) in order to have comfort that they will not find themselves engaged in lengthy and expensive litigation.

It’s good advice. Experience shows that employees often have trouble accepting that they failed and therefore choose to believe that they lost their job because of their age, gender, race, religion, or national origin (all protected classes). It is often easier for employees to believe that they were wronged than to accept responsibility for poor performance. So, employers should act cautiously when terminating members of protected classes and do so only when confident that they will be able to prove why they did what they did.

Things tend to get messier when employees misunderstand the law and trumpet that misunderstanding as if it were a legal right. In practice now, this happens most often with claims of a “hostile environment.” An employer can face liability for a hostile work environment if an employee is harassed as a consequence of his or her membership in a protected class. So, for example, a woman has a hostile environment claim if she is a victim of sex harassment (and the harassing conduct is both objectively and subjectively offensive as well as severe or pervasive).

Again, the concept doesn’t seem that complicated. The work environment only violates the anti-discrimination laws if it is corrupted by hostility targeted against someone (or a group of someones) because of their membership in one of the protected categories. Title VII does not, as the Supreme Court consistently notes, create a code of conduct for the workplace. Harris v. Forklift Systems.

But — employees (and some employers) think it does. Too many employees claim that a demanding or insulting supervisor has created a hostile environment by treating them badly. Because it makes linguistic sense, the idea sometimes has traction with employers. Recent attention to workplace bullying has magnified the problem. As a consequence, employers with a human resources problem (a difficult supervisor) may mistakenly believe they have a serious legal problem (a “hostile environment”). Indeed, calls to employer’s counsel sometimes start with the premise that the anti-discrimination laws have made incivility illegal. They have not done so.

The anti-discrimination laws have powerfully changed the workplace, but they have done so in a narrow and important way. It is unlawful to discriminate against an employee on the basis of his or her membership in a protected class. Moreover, harassment (in the form of the creation of a hostile environment) is a type of discrimination. These are serious laws, but they have limited scope. They make it unlawful to discriminate. Other than that, they do not in any way limit the principle of employment at will or require a level of civility in professional interactions. While civility between supervisors and employees may be good for business (and even right in an aspirational sense), it is not legally-mandated.

Employers would do well to remind themselves both of the power of the law and the limits of its scope. And to not listen to employees whose understanding is based on what they think the law must be. A proper understanding of scope and context can go a long way to minimizing workplace problems and consequential litigation.