S Corporations: Loss of S Election Due to Disparate Distributions

Another item that could cause an entity taxed as an S corporation to lose the election is disparate distributions.  Like most things, this is simple in theory but more complicated in application.  The theory is that the shareholders of an S corporation are entitled only to the proportion of corporation distributions based on their percentage ownership of the stock.  In other words, if you are a shareholder of an S corporation, you are entitled to the same proportion of distributions as you own shares (if you own 1/3 of the shares, you are entitled to 1/3 of the distributions). Continue reading

S Corporations: Losing S-Corp Status Due to Passive Income

Owners of corporations elect S corporation taxation status for the pass through and other benefits the election provides. There are various things that can arise that would cause an S corporation to lose its election.  In this and following posts, I’ll walk through some of the most common.  The one I want to discuss now is the S corporation passive income restriction.  Continue reading

S Corporations: Electing to be taxed as an S Corporation

I’m going to be posting a number of posts on the ins and outs of electing and operating a corporation which elects to be taxed as a small business corporation (an “S Corp”) with the IRS.  There are many benefits to such an election, but there are also pitfalls that many owners run into that could jeopardize the election.

The first post in this series is simply how to make the election. Continue reading

Clickwrap License Cases: Other/Misc @ Paper This Deal

  • Starke v. Gilt Groupe, Inc., 2014 U.S. Dist. LEXIS 58006 (S.D.N.Y. 2014) (arbitration provision in clickwrap license, which had a link to the text of the license, was upheld, and found not to be unconscionable).
  • Motise v. America Online Inc., 346 F. Supp 2d 563 (S.D.N.Y. 2004) (user that signed on with another user’s id and password still bound, as sub-licensee, of the terms including forum selection clause).
  • Hoffman v. Supplements Togo Management, LLC 18 A3d 210 (N. J. App. Div. 2011) (found forum selection clause unenforceable due “the manifestly unfair manner in which defendant’s website was structured” and court seemed to imply that it believed the website owner was intentionally hiding the terms).
  • Caspi v. Microsoft Network, LLC, 323 NJ Super 118 (N.J. App. Div. 1999) (upheld forum selection clause where users had to click on scrollable window and click “I agree” or “I don’t agree.”)
  • Mortgage Plus, Inc. v. DocMagic, Inc., 2004 WL 2331918, 2004 U.S. Dist. LEXIS 20145 (D. Kan. 2004) (clickwrap agreement upheld)
  • Taxes of P.R., Inc. v. TaxWorks, Inc., 2014 U.S. Dist. LEXIS 37765 (D.P.R. 2014) (upheld forum selection clause in clearly stated clickwrap agreement, following ProCD precedent).

Browsewrap License Cases: Specht v. Netscape Communications Corp., 306 F.3d 17 (2nd Cir. 2002)

In Specht v. Netscape Communications Corp., 306 F.3d 17 (2nd Cir. 2002), Users who downloaded certain software programs provided by Netscape filed a class action in federal court.  Netscape then moved for arbitration which was required as per the download terms. There were, however, multiple ways to download the Netscape programs, some of which required an affirmative assent and some of which did not require any assent to the terms of the license (case is about the latter).

The 2nd Circuit found that users could download and use the software without having to view the full terms of the contractual arrangement including the arbitration clause. The Court stated that a reasonably prudent consumer would not assent to contractual terms that were so inconspicuous that they could use the product while totally overlooking them. You had to scroll down and click on the terms to see them.

The Court said what is needed is “clarity and conspicuousness” to ensure the user is cognizant of the terms of the license (emphasis mine).  This is the phrase to keep in mind when clients are creating browsewrap and clickwrap agreements to bind users online.

Aside: Court seemed concerned that the Internet gives companies too many opportunities to exploit unsuspecting users. Simple rule is that if the user is not reasonably alerted to the contractual terms, she cannot assent to them.

Browsewrap License Cases: Fteja v. Facebook 2012 WL 183896 (SDNY 2012)

In Fteja v. Facebook  2012 WL 183896 (SDNY 2012), the Southern District of New York held that the forum selection clause in Facebook’s terms of service was enforceable against a site user.  The user sued Facebook in New York for terminating his account. He essentially claimed he was emotionally distraught over being kicked off of the site.  Facebook made a motion to remove the case to California pursuant to the forum selection clause in its Terms of Service.

Court found the Terms of Service was a hybrid clickwrap/browsewrap stating that it was “somewhat like a browsewrap agreement in that the terms are only visible via a hyperlink, but also somewhat like a clickwrap agreement in that the user must do something else — click ‘Sign Up’ — to assent to the hyperlinked terms. Yet, unlike some clickwrap agreements, the user can click to assent whether or not the user has been presented with the terms.” Id. at 838.

I think it was a clickwrap agreement, and this is an example of a court treating a clickwrap agreement as a browsewrap agreement, a trend which has leaked into other cases.  As browsewrap agreements require a little bit more as far as assent from the user this trend is important to note.

The Terms of Service required that to create an account each user had to click on a “Sign Up” button and agree to the following “By clicking Sign Up, you are indicating that you have read and agree to the Terms of Service” where the words Terms of Service were a hyperlink to another page which contained the Terms of Service (which you did not have to view to sign up).

The Court held that the forum selection clause was enforceable against the user, and that failure of a user to read the terms does not let them avoid the agreement (user was savy enough to know how hyperlinks work). Court analogized to the cruise ship cases (below) where ticket holders were deemed to have had actual or constructive knowledge of the terms on the back of the ticket regarding forum selection.

See Effron v. Sun Line Cruises, 67 F.3d 7 (2d Cir. N.Y. 1995) (upheld forum selection clause requiring all suits be brought in Greece, where NY resident bought ticket in FL, and was injured in cruise off of Brazil).

See Also Carnival Cruise Lines, Inc. v. Shute, 499 U.S. 585 (1991) (held that United States federal courts will enforce forum selection clauses so long as the clause is not unreasonably burdensome to the party seeking to escape it.  There, the contract was printed on the back of the ticket.  The customer bought the ticket in WA, the ticket’s forum selection said claims would be heard exclusively in FL.  The customer boarded in CA, and was injured off Mexico.  The court held the clause enforceable.).

A similar decision on Facebook’s terms of use was rendered in E.K.D. v. Facebook, Inc., 885 F. Supp. 2d 894 (S.D. Ill. 2012).

Other NY courts have followed the precedent in Fjeta.  See 5381 Partners LLC v. Shareasale.com, Inc., 2013 U.S. Dist. LEXIS 136003, 24-25 (E.D.N.Y. Sept. 23, 2013) (“The instant case presents circumstances that are quite analogous to those in Fteja, and the Court agrees with the Fteja court’s analysis. Unlike the license terms at issue in Specht, defendant’s reference to its Merchant Agreement appears on the same screen as the button a prospective merchant must click in order to activate its account. (See Littleton Decl. Ex. B.) Plaintiff did not need to scroll or change screens in order to be advised of the Merchant Agreement; the existence of, and need to accept and consent to, the Merchant Agreement was readily visible. Moreover, whereas Facebook’s Terms of Use were referenced below the button a prospective user had to click in order to assent, defendant’s reference to its Merchant Agreement appears adjacent to the activation button (id.), thereby making it even more clear [*25] that prospective merchants of ShareASale are aware that by clicking the button to activate their account, they manifest their assent to the Merchant Agreement.”).

Clickwrap License Cases: Treiber & Straub, Inc. v. UPS, 474 F.3d 379 (7th Cir. 2007)

Treiber & Straub, Inc. v. UPS, 474 F.3d 379 (7th Cir. 2007).

I think this case gives a more “substantive” holding than some of the other cases which merely hold that procedural items are enforceable, such as forum selection, class action waivers, etc.  This case actually enforces UPS’s online shipping website’s Terms of Use to the detriment of the shipper.

In this case, a user shipped a ring worth $100,000 via UPS’s online shipping website.  He submitted the ring in a package for shipping with the shipping label.  UPS then lost or misplaced the package.

In order to ship the ring the user had to click not once, but twice, to agree to UPS’s websites shipping Terms of Use.  The terms provided that UPS would not be responsible for any item of “unusual value” which it stated was anything over $50,000 (which is the maximum amount UPS let you insure an item for).

The shipper then put in a claim with UPS, and UPS disclaimed stating it did not have to pay him anything because it was an item of unusual value. The shipper then sued for the value of the ring and the court upheld UPS’s Terms of Use, finding that UPS provided adequate notice on its website to anyone shipping an item.

The Court held that using a clickwrap agreement for online transactions was “common in Internet commerce” where “one signifies agreement by clicking on a box on the screen.”  The court reasoned that merely because the user chose not to read the terms, that does not let him avoid any of the provisions he does not like.