Can a Business Sue for a Bad Review?

The Confluence of Free Speech and Free Enterprise

In the digital age, the culture surrounding how a business is “reviewed” by a customer or patron has become one of the most determining factors of a businesses’ success. The growing popularity of websites such as Yelp, Google, Bing, and other services which allow people to rate and review businesses has in turn resulted in a surge in the importance and impact that these reviews can have. With reviews now becoming the driving force behind influencing where consumers choose to take their business to, it is more essential than ever to understand what options a business has after receiving a negative review.


One of the more common causes of action which businesses bring forth against the poster of a negative review is for defamation. Although the definition of “defamation” varies from state to state, it generally encompasses a false and unprivileged publication which “exposes a person to hatred, contempt, ridicule, or which is injurious to such person’s occupation.”[1] Defamation can be in the form of a written publication, known as libel, or a spoken publication, known as slander.[2] In the context of reviews that are published about a business, the applicable form of defamation is “libel.” Although bringing a libel case against someone typically requires a plaintiff to show damages which result from the libelous statement, such as showing is not required if the statement is defamation per se.[3] Examples of libel per se are statements that: “(i) relate to the person’s business or profession to the person’s detriment; (ii) falsely claim that the person committed a crime of moral turpitude; (iii) imputes unchastity on the person; or (iv) claim that the person suffers from a loathsome disease.”[4]

Often, a negative review that is published about a customer’s experience with a business could constitute defamation per se, as such a review would relate to the plaintiff’s business or profession. However, there are several privileges and defenses that a defendant has available with regards to defamation claims making an effective defamation case difficult. In the context of a negative review, statements that are merely one’s opinion, hyperbole or which are understood as mere ridicule, rather than an allegation of fact, are subject to the “Opinion and Fair Comment Privileges” and are therefore not deemed to constitute a defamatory statement.[5] Additionally, truth and the substantial truth are absolute defenses against a finding that a statement is defamatory.[6]

Despite the potential availability of certain privileges or defenses, in cases where the person who published statement had fabricated the events surrounding the review or had otherwise falsified parts of the review, there is a greater likelihood that an injured business owner may prevail in a defamation claim against the reviewer. One such example occurred in 2016 when Florida’s Fourth District Court of Appeal awarded a business owner $350,000 for a negative review in which the business owner was able to prove that the reviewer had falsified information related to the review.[7]

First Amendment Protection

The First Amendment to the Constitution of the United States prohibits the making of any law which abridges the freedom of speech.[8] When one party sues another in response to a party’s publication of speech, such suit is often referred to as being a “strategic lawsuit against public participation” or “SLAPP”. In an effort to defend the citizen’s right to the exercising of their freedom of speech, states across the country have in turn passed what are generally referred to as “Anti-SLAPP” statutes, which are intended to provide protection in cases where a lawsuit has been brought against a party primarily to chill the valid exercise of the constitutional rights of freedom of speech.[9] In such cases, where a defendant is able to prevail on an Anti-SLAPP motion, the plaintiff would in turn be liable for the defendant’s attorney’s fees, court costs, and other expenses.[10]

The Consumer Review Fairness Act of 2016

Considering the increased vulnerability that businesses had become exposed to as a result of negative reviews, businesses have often turned to including or embedding non-disparagement clauses within certain agreements and licenses. The intent and effect of such clauses are to restrict a consumer’s ability to publicize negative and disparaging statements against a business. As a response to such oppressive actions against consumers, the Consumer Review Fairness Act of 2016 (CRFA)[11] was passed which solidified consumers’ “right to Yelp” and effectively invalidated non-disparagement clauses in certain “form contracts.”[12] Additionally, the CRFA makes it unlawful for a person to offer or enter into a form contract containing a non-negotiable non-disparagement clause.[13] The CRFA further empowers the Federal Trade Commission (FTC) with investigating and enforcing the act by providing the FTC with the ability to bring forth an action against a party who has violated the CRFA with causes of action such as unfair or deceptive acts or practices.[14]

Dealing with the Review Platforms

Besides dealing with the actual poster of a negative review, another common avenue that business owners looked to are the platforms in which the review is published on. Before the CRFA was passed, certain business review platforms such as Yelp had begun taking matters into their own hands. In 2012, Yelp starting issuing “Consumer Alerts” through it’s “Yelp’s Consumer Protection Initiative” which alerted visitors to a businesses’ profile that the business owner had previously threatened a reviewer with legal action.[15]

Additionally, business owners had often sought out to obtain the identity of anonymous negative review posters through subpoenaing records which would reveal such poster’s identity. Although ultimately reversed on jurisdictional issues, the Court of Appeals of Virginia held that the anonymity of the poster of a review can in fact be upheld if the reviews were in fact lawful.[16] However, such anonymity may not be upheld in cases where a plaintiff has a legitimate, good faith belief that such reviews are defamatory, such as is the case when the reviewer had not actually been a customer of the business.[17]

Lastly, have been the attempts for business owners to sue the review platforms themselves for having the published defamatory statements against them. However, after years of litigation, the California Supreme Court held in the landmark case Hassel v. Bird[18] that review platforms, such as Yelp in this case, are not liable for defamatory statements posted on their service due to the immunity granted to content service providers under Section 230 of the Communications Decency Act.[19]

Ultimately, it is an uphill battle for businesses to sue for a bad review. While some have been successful, case law, the burden of proof, and the level of anonymity make it difficult to sustain even a bona fide claim for defamation as a result of a falsified bad review.

[1] Cal. Civ. Code §§ 45-46. [2] Cal. Civ. Code § 44. [3] See Yow v. National Enquirer, Inc. 550 F.Supp.2d 1179, 1183 (E.D. Cal. 2008). [4] Restatement (2nd) of Torts, §§570-574. [5] See Leidholdt v. L.F.P. Inc., 860 F.2d 890 (9th Cir. 1988). [6] See Time Inc. v. Hill, 385 U.S. 411 (1967). [7] See Blake v. Giustibelli, Case No. 4D14-3231 (Florida 4th DCA, January 6, 2016). [8] U.S. Const. amend I. [9] California Code of Civil Procedure § 425.16. [10] Id. [11] 15 U.S. Code § 45(b). [12] 15 U.S. Code § 45(b)(a)(3). [13] 15 U.S. Code § 45(b)(c). [14] 15 U.S. Code § 45(b)(d). [15] Vince Sollitto, Protecting Free Speech: Why Yelp is Marking Businesses That Sue Their Customers, Yelp Official Blog (July 25, 2016) [16] See Yelp, Inc. v. Hadeed Carpet Cleaning, Inc., 752 S.E.2d 554 (2014). [17] Id. at 560. [18] Hassell v. Bird, 420 P.3d 776 (Cal. 2018). [19] 47 U.S.C. § 230.

Racing Against the Clock: How Somers Forces Whistleblowers into Silence or Premature SEC Reporting

On February 21, 2018, the Supreme Court in Digital Realty Trust, Inc. v. Somers[1] narrowly construed the definition of “whistleblower” in the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (“Dodd-Frank Act” or “Act”) and thus limited who qualifies for the anti-retaliation protections afforded by the Act. The Court narrowly interpreted the Dodd-Frank Act, holding that a whistleblower is entitled to the anti-retaliation protections of the Act only if the employee reports alleged securities law violations directly to the Security Exchange Commission (SEC) while still employed by the issuer[2].[3]

The Supreme Court’s decision in Digital Realty arose after it granted certiorari[4] to resolve a conflict in the courts highlighted in the Ninth Circuit Court of Appeal’s decision in Somers v. Digital Realty Trust (2017) .[5] Paul Somers (Somers) worked as Vice President of Digital Realty Trust from 2010 to 2014.[6] Somers’s complaint asserted that Digital Realty terminated him only after he reported potential violations of the securities laws internally to company management.[7] Somers did not provide this information to the SEC while employed.[8] Somers subsequently brought a whistleblower retaliation claim under the Dodd-Frank Act against Digital Realty for his termination.[9] The company moved to dismiss the claim on the grounds that Somers did not qualify as a whistleblower under the Dodd-Frank Act because he had not reported the alleged securities law violations to the SEC before his termination.[10] The district court denied the motion, reasoning that the whistleblower provisions under Dodd-Frank were ambiguous and, as a result, the SEC’s broader Rule 21F-2, which accorded protection to internal reports, was entitled to Chevron deference.[11] The Ninth Circuit affirmed, concluding that adoption of the statutory definition of whistleblower, as the company urged, would narrow the anti-retaliation provisions to protect only active employees who report possible violations of securities laws both internally and to the SEC, which was unlikely to occur.[12]

On review, the Supreme Court held that a plain reading of Dodd-Frank’s definition of “whistleblower” in conjunction with its anti-retaliation provision, as well as the intent of Congress in enacting the statute, cut against the Ninth Circuit’s expansive reasoning. The issue before the Supreme Court in Digital Realty was the language of the Dodd-Frank Act, which defines “whistleblower” as “any individual who provides . . . information relating to a violation of the securities laws to the Commission, in a manner established . . . by the Commission.”[13] The Supreme Court unanimously, with two concurrences, overturned the Ninth Circuit’s holding and concluded that Mr. Somers’s failure to make a report to the SEC while employed was fatal to his case.[14]

First, the Court pointed to the explicit statutory language of Dodd-Frank, noting that the specific text of the statute defined a whistleblower as someone who reported to the SEC, and the statutory definition of whistleblower applied to govern the anti-retaliation provisions under the Act.[15] The Court also reasoned that Congress must have intended to use a government-reporting requirement because it incorporated such a requirement into the whistleblower definition but not elsewhere in the statute.[16] Second, the Court relied on the legislative intent, holding that the “core objective” of Dodd-Frank was “to prompt reporting to the SEC” and interpreting Dodd-Frank’s definition of whistleblower strictly furthered that goal, even if it narrowed the field of eligible employees.[17]  Since Congress had directly spoken to the precise question before it, the Court saw no need to accord deference to a contrary view adopted by the SEC in Rule 21F-2.[18]

The Court therefore held that individuals not meeting the threshold requirement of providing pertinent information to the SEC cannot benefit themselves of Dodd-Frank’s anti-retaliation protections; the Court noted that such a requirement is by statutory design.[19] The Court stressed that Congress enacted Dodd-Frank “to motivate people who know of securities law violations to tell the SEC,” and, in connection with this purpose, Congress granted such individuals “immediate access to federal court, a generous statute of limitations . . .  and the opportunity to recover double backpay.”[20] The Court, however, found that the reason for such incentives was to effectuate Dodd-Frank’s narrow objective of motivating individuals to “tell the SEC,” and not to “disturb the ‘corporate code of silence’” and embolden employees to report fraudulent behavior “not only to the proper authorities . . . but even internally.”[21]

In sum, Digital Realty determines an employee is entitled to no anti-retaliation protections if the employee only reports such purported violations internally, utilizing the employer’s internal compliance processes. Time will tell whether the Supreme Court’s ruling will deter or increase the number of whistleblower actions. Employees may either fail to report altogether for fear of unprotected retaliation, or, to ensure protection against retaliation, simultaneously report to both the regulators and internal compliance departments before those teams have a chance to review, investigate, and remediate as necessary. The decision is limited to the Dodd-Frank whistleblower statute involving securities laws and does not appear to affect or mention the numerous other whistleblower protection statutes. In the wake of Digital Realty ruling, employers should review their whistleblower policies frequently, in conjunction with legal counsel, to ensure that employees have multiple avenues to report suspected illegal and/or unethical conduct. Likewise, whistleblower polices should assure employees that such reports will not be met with retaliation.

[1] Dig. Realty Tr., Inc. v. Somers, 138 S. Ct. 767 (2018). [2] “Issuer” is a term which refers to an organization offering one or more securities for investment. [3] Id. at 778. [4] The Supreme Court grants certiorari when a party challenges the decision of a lower court and the Court decides to review the case. It’s effectively like asking for a manager and having the manager decide to closely review the subordinate’s work. [5] See, Somers v. Digital Realty Tr., Inc., 850 F.3d 1045 (9th Cir. 2017). [6] Id. [7] Id. at 1047. [8] Id. [9] Id. [10] Somers, 850 F.3d at 1047. [11] The scope of the Chevron deference doctrine is that when a legislative delegation to an administrative agency on a particular issue or question is not explicit but rather implicit, a court may not substitute its own interpretation of the statute for a reasonable interpretation made by the administrative agency; see, generally, Thomas W. Merrill & Kristin E. Hickman, Chevron’s Domain, 89 Geo. L.J. 833 (2001); see also, Chevron U.S.A. Inc. v. Natural Resources Defense Counsel, Inc., 467 U.S. 837 (1984). [12] Somers v. Digital Realty Tr. Inc., 850 F.3d 1045 (9th Cir. 2017). [13] 15 U.S.C. § 78u-6 (a)(6). [14] Dig. Realty Tr., 138 S. Ct. at 772. [15]Id. at 775. [16] Id. at 777. [17] Id. at 780. [18] Id. at 781-82. [19] Dig. Realty Tr., 138 S. Ct. at 781-82. [20] Id. at 778. [21] Id.

A No-Brainer: Protecting Your Website Under the DMCA

In the United States copyrights are federally protected under the Copyright Act of 1976.[1] Unaddressed under the Copyright Act of 1976,  exponential advances in technology in the nineties led to the proverbial “opening of the floodgates” for a deluge of a variety of infringing activity. To address these activities and to expand upon the rights of copyright owners in the modern age, the Digital Millennium Copyright Act[2] (DMCA) was passed in 1998.

In light of the liability several provisions of the DMCA imparted upon certain parties, such as online service providers, Congress further embedded the Online Copyright Infringement Liability Limitation Act[3] within the DMCA. The Online Copyright Infringement Liability Limitation Act, which is commonly referred to as the “Safe Harbor” provisions of the DMCA, provides immunity to online service providers from being liable for copyright infringement so long as the requirements and criteria of the Safe Harbor provisions are adhered.

The Safe Harbor provisions are divided into separate sections to address different circumstances.[4] For instance, the Safe Harbor provisions address Transitory Digital Network Communications,[5] System Caching,[6] Information Location Tools,[7] and Information Residing on Systems or Networks At Direction of Users.[8] However, only the “Information Residing on Systems or Networks At Direction of Users” provision requires that service providers designate an agent in order to receive DMCA takedown requests.[9]

DMCA Takedown Requests

Within the Copyright Act, the term “service provider” is defined as a party who, upon a user’s request, facilitates the transmission of requested material without modifying the content that is being transmitted, as well as those individuals or organizations who provide online or network service access.[10] This includes most websites that allow users to post or store material on a service provider’s systems, such as search engines and directories, as well as internet service providers.

In order for a service provider to be exempt from liability from copyright infringement, the service provider must not have actual knowledge or be aware of the circumstances surrounding the allegedly infringing material or activity or, upon obtaining knowledge or awareness of such infringing material or activity, must expeditiously remove or disable access to the material.[11] One of the most common methods a service provider gains knowledge or awareness of infringing material or activities is through what is referred to as the “notice and takedown system” or a “DMCA takedown notice.”

DMCA Takedown Notice Requirements

The requirements for a valid takedown notice are set forth in § 512 of the Copyright Act[12] and include:

  1. A physical or electronic signature of the owner of the allegedly infringed material, or an authorized agent of such owner;
  2. Identification of the material that that is allegedly being infringed;
  3. Identification of the allegedly infringing material or activity that is sufficient to allow the service provider to locate the material;
  4. Contact information of the complaining party;
  5. A statement that the complaining party has a “good faith belief that use of the material in the manner complained of is not authorized by the copyright owner, its agent, or the law”; and
  6. A statement that “the information in the notification is accurate, and under penalty of perjury, that the complaining party is authorized to act on behalf of the owner…”[13]

Notably, where a service provider is in receipt of a takedown notice which does not meet all of the notice requirements but at least identifies the protected work that is allegedly being infringed, the infringing material, and the complaining party’s contact information, the service provider is under a duty to take reasonable steps to contact the complaining party to obtain a proper notice in order for the Safe Harbor immunity to apply in such situations.[14]

Defective DMCA Takedown Notices

Within the Safe Harbor provisions, the requirements for preparing a valid DMCA takedown notice are meticulously set out.[15] Additionally, the Safe Harbor provisions provide that a defective notice, one which fails to substantially comply with the takedown notice requirements, shall not be considered as providing the service provider with knowledge or awareness of the infringing material or activities.[16] The result of such a defective notice is that it rends from the notice any power it would have had to put an infringer on notice of that infringement. In essence, despite receipt of a defective notice, in the eyes of the law a service provider is regarded as not having actual knowledge or awareness of such infringing activities or material, which in turn provides the service provider with immunity from liability.[17]

Misrepresentations in DMCA Takedown Notices

However, in instances where a sender has knowingly sent a takedown notice which materially misrepresents the infringing nature of the material or activity, then such sender shall be liable to the service provider “for any damages, including costs and attorneys’ fees, incurred . . . as the result of the service provider relying upon such misrepresentation.”[18] Such “misrepresentation” can arise in many different circumstances, including when a sender of a DMCA takedown request fails to consider the “fair use” defense, acknowledged in the landmark case Lenz v. Universal Music Corp., where Universal Music had wrongfully sent a takedown request for a video of a child who was dancing to Prince’s song “Let’s Go Crazy” without considering whether such activity was protected under the fair use defense.[19]

DMCA Registered Agent

The Safe Harbor provisions further provide that “[t]he limitations on liability established in this subsection apply to a service provider only if the service provider has designated an agent to receive notifications of claimed infringement.”[20] Furthermore, service providers must make the designated registered agent’s name, physical address, phone number, and email address publicly accessible as well as to provide the U.S Copyright Office with such information.[21]

It is required that a service provider appoint a DMCA registered agent in order to be able to avail itself of the DMCA Safe Harbor protection. Indeed, courts have held that service providers were unable to invoke the section 512 Safe Harbor with respect to any infringing conduct occurring until it has a designated agent registered with the Copyright Office.[22] A service provider may only designate one DMCA agent, who may be an individual, a person or position within the service provider’s organization or an independent third-party entity.

In an effort to further facilitate the ease of appointing and managing a service provider’s designated DMCA agent, in 2016 the U.S Copyright Office launched the DMCA Designated Agent Directory which allows service providers to designate a DMCA agent and to pay the requisite fees online.[23] With the potential substantial consequences of failing to designate DMCA registered and the affordability and ease in which a service provider can register a designated DMCA agent, it is imperative that any website owner fully comply with the DMCA Safe Harbor requirements so as to ensure protection from potential liability for infringing material or activities that are made available through your website.

[1] 17 U.S.C. §§ 101-810 (1998). [2] 17 U.S.C. §§ 512, 1201–1205, 1301–1332 (2020); 28 U.S.C. § 4001 (2020). [3] 17 U.S.C. § 512. [4] Id. [5] 17 U.S.C. § 512(a). [6] 17 U.S.C. § 512(b). [7] 17 U.S.C. § 512(d). [8] 17 U.S.C. § 512(c). [9] Id. [10] 17 U.S.C. § 512(k)(1). [11] 17 U.S.C. § 512(c)(1)(A). [12] 17 U.S.C. § 512(c)(3)(A). [13] Id. [14] 17 U.S.C. § 512(c)(3)(B)(1). [15] 17 U.S.C. § 512(c)(3)(A). [16] 17 U.S.C. § 512(c)(3)(B)(1). [17] See, e.g., UMG Recordings v. Shelter Capital, 667 F.3d 1022 (9th Cir. 2011), modified at 718 F.3d 1006 (9th Cir. 2013). [18] 17 U.S.C. §§ 512(f). [19] See, Lenz v. Universal Music Corp., 801 F.3d 1126 (9th Cir. 2015). [20] 17 U.S.C. §§ 512(c)(2). [21] Id. [22] See, e.g., Oppenheimer v. Allvoices, Inc., 2014 3:14-cv-00499-LB (N.D. Cal., June 10, 2014) (indicating that “Section 512(c)(2) ‘plainly specifies that a registered agent is a predicate, express condition’ that must be met and that ‘the safe harbor will apply “only if” such agent has been designated and identified to the Copyright Office for inclusion in the directory of agents.’” citing Perfect 10, Inc. v. Yandex N.V., No. C 12-01521 WHA, 2013 U.S. Dist. LEXIS 65802, 2013 WL 1899851, at *8 (N.D. Cal. May 7, 2013)). [23] 37 C.F.R. § 201.3 (2020).

Permanent Establishment through Agent: Dangers of Unintentionally Submitting to Foreign Jurisdiction

Businesses with global operations often pursue and maintain relationships by relying on their globally mobile employees to initiate and sustain relationships with their foreign customer bases. These practices may have developed over a number of years in line with the growth of the business and frequently without any consideration being given to the potential tax consequences of such assignments. Where such employees are regularly conducting business in other jurisdictions, there is a risk of the business creating a permanent establishment and therefore becoming liable for local taxes.

Permanent establishment is a concept defined by a country’s tax laws or by their international treaties. The Organisation for Economic Co-operation and Development (OECD) has published a model convention on income tax entitled “Model Tax Convention on Income and on Capital 2014” (Convention). The Convention defines permanent establishment as “a fixed place of business through which the business of the enterprise is wholly or partly carried on.”[1]  This definition is simply a model, and every income tax treaty has its own variation on this concept. This definition is simply a model, and every income tax treaty has its own variation on this concept. Under the 2014 treaty[2] definition of permanent establishment, the threshold of activity of an enterprise in one jurisdiction that results in the creation of a permanent establishment in another jurisdiction is determined by two forms of presence.[3] The first form of presence is the fixed place of business test. An enterprise has a permanent establishment in another territory if it has a fixed place of business there through which it carries on its business, subject to several specific activity exemptions.[4] The second form of presence is the dependent agent test. Currently, a permanent establishment arises when an agent, acting on behalf of a foreign enterprise, habitually exercises authority to conclude contracts in the name of the enterprise, unless the agent is an independent agent (legally and economically independent from its principal) acting in the ordinary course of its business.[5]  Since the previous definition was limited to the formal conclusion of contracts, the OECD widened the scope of the definition to also include situations in which an agent habitually plays the principal role leading to the conclusion of contracts that are then routinely concluded without material modification by the enterprise.[6]

To determine whether the presence of a representative abroad creates a permanent establishment in another country, the scope of activities undertaken by the representative for that business are essential. Not every activity carried out on behalf of the company will result in the creation of permanent establishment. Activities carried out by a potential dependent agent must be of regular and permanent character. The Convention provides that concluding contracts on behalf of the company does not include only the final stage of signing a contract, but also includes determining terms and conditions of a contract.[7] Therefore, negotiating powers given by a company may be sufficient to recognize such a person as a dependent agent for tax purposes. An important issue is that the person acting on behalf of the foreign enterprise must maintain independence and autonomy. If the agent does not fall into the self-employed category, the agent does not bear the risk arising from contracts concluded, and if the employer is entitled to issue binding instructions and commands, the risk of the foreign establishment is largely reduced.

In Action 7 of the Base Erosion and Profit Shifting (BEPS) Project, the OECD attempts to tackle common tax avoidance strategies used to prevent the existence of a permanent establishment, including through agency or commissionaire arrangements instead of establishing related distributors.[8] Action 7 also aims to prevent the misuse of specific exceptions to the permanent establishment definition, which relate to activities of a preparatory and supporting nature.[9] A company’s supporting activities, such as preparatory work that does not generate revenue does not trigger permanent establishment status.[10] The burden of proof is with the company to demonstrate that the activities are auxiliary and do not warrant a permanent establishment status.[11]

What makes permanent establishment a risk?

The presence of a permanent establishment in the territory of a state is the “combination to the safe” in taxing the business profits of a foreign enterprise. The activities of an agent in a foreign country, can unintentionally trigger permanent establishment.   When a business has permanent establishment in a country and some of its employees working there becomes taxable in that country.[12] Without permanent establishment, some of its employees would not be taxed. The exponential rise in controversy over permanent establishment is the subject of frequent disputes between taxpayers and tax administrations.

Depending on the jurisdiction and the specific terms of the income tax treaty, in the event of noncompliance, companies and some of their employees may be subjected to additional taxation, and there is the possibility that employees could be stopped at the border and prohibited from entering the country, resulting in a lost opportunity or loss of business.[13] In addition, companies may be subject to fines, penalties, and other legal action from a foreign government. This could be a costly result and may also negatively impact reputations and status with other business partners as well as customers.

Permanent establishment rules vary across jurisdictions and it would be necessary to obtain advice locally in order to ensure compliance. To prepare for new regulations, employers with a global footprint should review their existing structures or planned procedures. Particularly, enterprises should review the activities performed by their foreign agents determine whether their roles and responsibilities may lead to permanent establishment in a foreign jurisdiction.

[1]Org. for Economic Co-operation and Dev., Article 5 Permanent Establishment in Model Tax Convention on Income an on Capital 2014 (full version) OECD Publishing, Paris (2014). [2]The most recent version, as of the date of this article, was published on April 25, 2019 and is entitled “Model Tax Convention on Income and on Capital 2017”. [3] Id. [4] Id. [5] Id. [6] Org. for Economic Co-operation and Dev., Article 5 Permanent Establishment in Model Tax Convention on Income an on Capital 2014 (full version) OECD Publishing, Paris (2014). [7] Id. [8] Org. for Economic Co-operation and Dev., Additional Guidance on the Attribution of Profits to Permanent Establishments, BEPS Action 7 (2018). [9] Id. [10] Id. [11]Org. for Economic Co-operation and Dev., Multilateral Convention To Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting, (2016). [12] Org. for Economic Co-operation and Dev., Article 5 Permanent Establishment in Model Tax Convention on Income an on Capital 2014 (full version) OECD Publishing, Paris (2014). [13]Id.

Corporate Armor: How WH Smith Avoided Corporate Veil Piercing in Florida

WH Smith, PLC v Benages & Associates involved an action to pierce the corporate veil of an entity arising out of the breach of an agreement.[1] On March 30, 2001, Benages & Associates (“Benages”) and WH Smith, Inc. (“ Smith Georgia”) entered into an agreement for Consultancy Services (“Agreement”), in which Benages agreed to assist WH Smith in obtaining a five-year lease for retail concessions at the Miami International Airport (“MIA”).[2] The Agreement provided that it could be terminated by giving ninety days’ written notice.[3] However, the terms provided that once  Smith Georgia started operating the retail concessions at MIA, the Agreement could not be terminated.[4]  In addition,  Smith Georgia would pay Benages a monthly retainer fee until the lease was executed and thereafter, a success fee for five years.[5] The Agreement was signed by the Chief Executive Officer (“CEO”) of Smith Georgia.[6]

In October of 2003,  Smith Georgia notified Benages that it was terminating the Agreement because WH Smith Group Holdings (“Smith Holdings”), the U.S. parent company based out of Nevada, decided to exit the United States airport and hotel markets.[7] As a result, neither of Smith Holding’s subsidiaries would be pursuing or entering a lease to operate retail concessions at MIA.[8] Benages was paid the monthly retainer fee for the ninety days as provided for in the Agreement, but Benages did not receive the success fee.[9]

Benages filed suit against Smith Georgia, Smith Holdings, and Smith Holdings’s two other subsidiaries Smith Airport Partners, WH Smith of Florida, Inc. (“U.S. Defendants”) alleging a breach of the Agreement.[10] Benages filed a Motion to Pierce the Corporate Veil (“Motion”) of U.S. Defendants and to implead and hold liable WH Smith, P.L.C.  (“Smith U.K.”), an indirect parent company, based on an alter-ego theory.[11] The Motion asserted that the U.S. Defendants were dominated and controlled by their parent, Smith U.K., and that Smith U.K. used the U.S. Defendants for an improper purpose.[12] Specifically, the plaintiff alleged that Smith U.K. directed the U.S. Defendants to breach the agreement knowing that any judgment against the U.S. Defendants would be uncollectible.[13] In its motion, Benages relied on a deposition of the former CEO of Smith Georgia, who testified that all decisions regarding the U.S.A. were made in London.[14]

In response, Smith U.K. moved to dismiss the suit for lack of personal jurisdiction, asserting that: (1) Smith Holdings was a Nevada corporation who owned the Smith U.S. entities; (2) Smith U.K. had no minimum contacts[15] with Florida; (3) Smith U.K. was a company organized under the laws of England and Wales; and (4) Smith U.K.’s principal place of business was the United Kingdom and the U.S. Defendants were United States-based subsidiaries.[16]

Following the motion to dismiss, Benages filed an affidavit that showed that Smith U.K. decided to exit the United States market before the Agreement was made and that Benages was unaware that Smith U.K. made all significant decisions for the U.S. Defendants.[17] The trial court denied the motion based on the U.S. Defendants’ decision to go forward with the Agreement even though Smith U.K., the alleged controlling parent company, had decided not to go through with the Agreement.[18] Smith U.K. appealed and argued that the trial court erred by denying its motion to dismiss.[19]

In Florida, a non-resident shareholder of a corporation doing business in the state may be subject to long-arm jurisdiction if the alter-ego test can be met.[20] To establish jurisdiction under the alter-ego theory, the plaintiff’s pleading must set forth sufficient jurisdictional allegations to pierce the corporate veil of the resident corporation.[21] The corporate veil cannot be pierced unless the plaintiff can establish both that the corporation is a mere instrumentality or “alter-ego” of the defendant, and that the defendant engaged in improper conduct in the formation or use of the corporation.[22]

To establish the first prong of the test, the plaintiff must plead and prove that the shareholder dominated and controlled the corporation to such an extent that the corporation’s independent existence was absent and the shareholders were essentially alter egos of the corporation.[23] Here, the evidence showed that the U.S. Defendants were incorporated and existed in the United States years before the execution of the Agreement.[24] The U.S. Defendants had thousands of employees and hundreds of retail stores, significant assets and revenues, and had their own bank accounts with United States-based employees.[25] Also, U.S. Defendants never leased any property from Smith U.K., and Smith U.K. did not cosign or guarantee any of their leased properties.[26] Finally, Smith U.K. and U.S. Defendants each had, except for one overlapping officer, separate directors and officers.[27] The appellate court found that Benages could not establish that U.S. Defendants were mere instrumentalities or alter-egos of Smith U.K.[28]

The court addressed next whether Smith U.K. engaged in improper conduct in the formation or use of the U.S. Defendants.[29] Here, Smith U.K. was not a party to the Agreement, did not participate in obtaining the retail concession at MIA, and had never done business with Benages.[30] The court concluded that, even if Smith U.K. had instructed U.S. Defendants to breach the Agreement, this conduct alone did not constitute the type of improper conduct necessary to pierce the corporate veil.[31] Therefore, Benages failed to establish improper conduct on the part of Smith U.K.

Because Benages could not show that Smith U.K. was the alter-ego of U.S. Defendants by improper conduct or by domination, Benages could not establish personal jurisdiction against Smith U.K. in Florida[32]

Courts are generally reluctant to pierce the corporate veil of an entity. Establishing sufficient evidence to be able to pierce the corporate veil is often an insurmountable challenge for many plaintiffs. WH Smith points out that a single act of misconduct alone is insufficient to overcome this challenge.

[1] WH Smith, PLC v. Benages & Associates, Inc., 51 So. 3d 577 (Fla. Dist. Ct. App. 2010).  [2] Id. at 579. [3] Id.  [4] Id. [5] Id.(a “success fee” is a fee that is generally contingent upon the completion of the paying party’s goal). [6] WH Smith, 51 So. 3d at 579. [7] Id.  [8] Id.   [9] Id.    [10] Id.    [11] WH Smith, 51 So. 3d at 579.  (alter-ego theory is a method of piercing the corporate veil, accessing the assets of the parent corporation or shareholder(s) because the two are essentially the same entity). [12] Id.  [13] Id. [14] Id.  [15] See Int’l Shoe Co. v. Wash., 326 U.S. 310, 316 (1945) (In order for a court to have personal jurisdiction over someone, due process requires that, if the party is not present within the territory of the forum, he must have certain minimum contacts with the forum so that the maintenance of the suit does not offend traditional notions of fair play and substantial justice.). [16] Id. at 580.  [17] WH Smith, 51 So. 3d at 580.  [18] Id. at 580-81.[19] Id. at 581.[20] Id. (This can be done under the alter ego theory.) [21] Id. [22] WH Smith, 51 So. 3d at 581.  [23] Id. [24] Id. at 582.[25] Id. at 580.  [26] Id. [27] WH Smith, 51 So. 3d at 580. [28] Id. at 583. [29] Id. at 581. [30] Id. at 580. [31] Id. at 583. [32] WH Smith, 51 So. 3d at 579-81.