Virtual currencies have exploded recently and have been used as investment devices and freely tradeable currency. There has been a growing trend of businesses accepting virtual currencies as payment, despite warnings from the U.S. Securities and Exchange Commission and the Consumer Financial Protection Bureau. However, virtual currencies, such as Bitcoin, have not been regulated by the federal government nor by any of the States. New York is seeking to be the first State to do so.
Last month, New York's Department of Financial Services released proposed legislation for businesses that provide virtual currency financial services. Notably, this legislation does not apply to merchants and consumers that utilize virtual currency solely for the purchase and sale of goods or services. Instead, the proposed legislation focuses on businesses that provide Virtual Currency Business Activities, which it defined as any one of the following activities involving New York or its residents:
Under the proposed legislation, businesses engaged in any of the above virtual currency financial services must obtain a Bitlicense from the Department of Financial Services to operate. The Bitlicense necessitates that the businesses also be subject to a multitude of rules governing:
One of the most notable aspects of the proposed legislation is the record keeping provision, which requires that information regarding all parties to a transaction (including names, addresses and account numbers) be kept for at least ten years. Such a requirement is instrumental for the regulation of virtual currency as anti-money laundering efforts and protection from theft or fraud require this information to hold people accountable for their actions. However, anonymity had been a highlight of utilizing virtual currency thus far.
As of July 23, the Department of Financial Services' proposed virtual currency legislation is in its 45 day public comment phase. After the phase ends, the Department will revise the proposed legislation and re-release it for further review. It is important to note that the final version of this proposed legislation may be very different than its initial proposal.
This proposed New York legislation, which can be accessed through a link above, is the first attempt in the United States to regulate virtual currencies such as Bitcoin. As New York moves forward with some form of this legislation (pending revisions and approval) other States will certainly take notice. Of course, the real wild card is that the federal government has not yet regulated virtual currencies. Regulation by the federal government has been much anticipated, as favorable regulations could help virtual currency prices soar or conversely, tight regulations could depress prices. Federal regulation also helps guide states, who may wish to enact stricter regulations as they see fit.
Whether businesses that provide virtual currency financial services like it or not, regulation is coming. If businesses disapprove of New York's proposed legislation, they should submit their commentary to the Department of Financial Services while the public comment period is still open.
On August 8, 2014, one of the most important Sports Law cases was decided. The case, O'Bannon v. NCAA, was a class action lawsuit brought by current and former college athletes that sought to challenge the NCAA's rules prohibiting compensation for FBS football and Division 1 basketball players on antitrust grounds. Specifically, the athletes were challenging the rules that disallowed athletes from receiving a portion of the revenue the NCAA, and its institutions, receive for the use of the athletes' names, images and likenesses in video games, game broadcasts, and other forms of media. The athletes alleged that these rules violated the Sherman Antitrust Act.
Ultimately, the Court found in favor of the athletes, holding that "the challenged NCAA rules unreasonably restrain trade in the market for certain educational and athletic opportunities offered by NCAA Division I schools. The procompetitive justifications that the NCAA offers do not justify this restraint and could be achieved through less restrictive means." Based on its findings, the Court imposed an injunction to:
This case is notable for the implications it has on college sports in both the present and the future. Although the remedies were limited in scope, much of the decision reads of contempt for the NCAA's business practices under the guise of amateurism. This decision may not be the deathblow to the NCAA and/or its practices, but it certainly provides a step in the right direction for athletes to be compensated. Further, and perhaps more importantly, this decision provides the foundation for future legal challenges to the NCAA's practices. Currently, there are multiple challenges to the NCAA's business practices, and since the O'Bannon decision was filed, another class-action antitrust suit has been commenced against the NCAA.
Effects of the O'Bannon decision
Unfortunately, this ruling does little to put money in the players' pockets during college, when they need it. Athletes who have full scholarships can struggle financially during their time in college, as scholarships do not cover the full cost of attendance. Further, there is a public perception that all collegiate football and basketball players are scholarship athletes. This notion is simply untrue. Many athletes, even at the Division 1 level, do not have scholarships. For instance, per NCAA regulations, a FBS football team can have up to 85 players on full scholarship at any given time. However, prior to the college's first day of classes or the team's first game (whichever is sooner) a team's roster cannot exceed 105 players. This means that football teams are allowed to have 20 athletes, approximately one-fifth of the total roster, who are not on scholarship prior to their first game. These walk-on athletes must attend college on their own dollar, and many struggle financially to do so.
However, this decision is still a victory for players' rights. The NCAA has hidden behind its principles of amateurism and the "student-athlete" since its inception, and has vehemently refused (by both actions and omissions) measures that it believed would align it with professional sports leagues. Some of these measures include:
Although this decision did not provide remedies that impact athletes during their college careers, it effectively obliterated the NCAA's concept of amateurism. In discussing the inconsistencies of how the NCAA has defined amateurism throughout its history, Judge Wilken opined that "Rather than evincing the association's adherence to a set of core principles, this history documents how malleable the NCAA's definition of amateurism has been since its founding." The NCAA's convenient principle of amateurism is the foundation of many, if not all, of players' rights issues that should be addressed in further litigation. Most notably, amateurism is one of the NCAA's primary oppositions to the unionization of college athletes.
Importantly, the O'Bannon case has provided a roadmap for future lawsuits on how to challenge many of the NCAA's practices. The decision itself has provided a large amount of language for Courts to utilize in decisions for years to come. The NCAA is currently facing several similar class action cases. One of the current class action antitrust cases alleges that the NCAA has unlawfully capped player compensation to the value of the scholarship. This effectively seeks a free market for player compensation. This case is similar in theory to the O'Bannon case, and could benefit from utilizing the analysis of the O'Bannon decision, particularly Judge Wilken's discussion of amateurism. Certainly, at least some of Judge Wilken's analysis from the O'Bannon decision will be used to frame that case moving forward. Time will tell whether or not the case succeeds, but the O'Bannon decision has exposed a weakness in what has been the NCAA's strongest argument.
Changes through legislature?
In her conclusion to the O'Bannon decision, Judge Wilken opined "It is likely that the challenged restraints, as well as other perceived inequities in college athletics and higher education generally, could be better addressed as a policy matter by reforms other than those available as a remedy for the antitrust violation found here. Such reforms and remedies could be undertaken by the NCAA, its member schools and conferences, or Congress." This statement, while not a ringing endorsement of change through antitrust challenges, also highlights the ease (technically speaking) by which the NCAA's inequitable practices can be remedied, or solidified, through negotiation or petitioning Congress. As the NCAA has refused to budge thus far on these athletes' rights issues, the only remaining path (other than litigation) is by seeking Congressional action.
In light of the several cases the NCAA was facing recently, the NCAA spent $240,000 on lobbying in the last six months. Not only is this amount approximately $80,000 more than the NCAA spent all of last year on lobbying, it is also the most the organization has ever spent on lobbying. There are likely two reasons the NCAA is pursuing this lobbying campaign. Either the NCAA is attempting to solidify its practices with respect to athletes by seeking Congressional action, or their lobbying is a means of damage control.
Despite the NCAA's lobbying, college athletes' rights have become a topic of discussion in Congress. Recently, Congress formed a bipartisan caucus "to inform Congressional members about physical, academic and financial issues college athletes face so they're treated fairly." The Congressional Student-Athlete Protection Caucus, as it has been named, was designed to foster discussions that would "lead to greater accountability on the part of the NCAA" (Charles Dent [R-Penn]). Perhaps as Judge Wilken opined, Congressional action may obviate the need for further litigation to give athletes the rights they are entitled to.
Although the O'Bannon decision did not result in sweeping changes to NCAA practices, the ruling importantly exposed a weakness in the NCAA's arguments that future litigants may be able to utilize to their advantage. Certainly, the several ongoing actions against the NCAA will borrow some of the analysis from the O'Bannon decision. However, as Judge Wilken opined, Congressional action may obviate the need for further litigation. Hopefully, the Congressional Student-Athlete Protection Caucus yields legislation supporting college athletes' rights. Otherwise, the lawsuits will continue until these athletes get the rights they deserved.
Earlier this week, the New York Post reported that the Union Street Guest House, a hotel in Hudson, New York, had a unique method of controlling negative reviews online. According to the New York Post, the hotel's website stated that “If you have booked the inn for a wedding or other type of event . . . and given us a deposit of any kind . . . there will be a $500 fine that will be deducted from your deposit for every negative review . . . placed on any internet site by anyone in your party.” However, the money would be refunded if the negative review is removed.
Effectively, this policy means that if a wedding guest posted a negative review of the hotel on the internet, then the couple whose wedding took place at the hotel would be fined $500.
Although the hotel's owner stated that the company policy was a joke, a Yelp review from November 12, 2013 (notably several months before the New York Post article) states that the reviewer received an email threatening to enforce the policy.
Businesses are always seeking to protect their reputations, especially online. However, this hotel's policy is not legally sound.
Challenging the hotel's policy
Should the hotel have enforced this policy, it could have been successfully challenged in court as the policy is an unconscionable contract. New York courts have defined an unconscionable contract as being "so grossly unreasonable...in light of the mores and business practices of the time and place as to be unenforcible [sic] according to its general terms" (Gillman v. Chase Manhattan Bank, N.A., 73 N.Y.2d 1, 10, 537 N.Y.S.2d 787, 791 ).
In order to determine whether a contract is unconscionable, New York courts utilize the following two-part test:
Essentially this means there must be a showing of an absence of meaningful choice with contract terms that are unreasonably favorable to one party. The substantive element allows a court to analyze whether the contract unreasonably favors the Defendant.
Should the Union Street Guest House's policy be challenged in court, it would fail the above test. Procedurally, it does not appear as if a complaining party would have had any choice to enter into the contract if they wished to hold a wedding at the hotel. Nothing has been reported as to the negotiability of this policy, and placing the policy on the hotel's website creates the impression that it is a standard policy of the hotel.
However, analysis of the substantive element provides much stronger evidence for the policy to be found unconscionable. First and foremost, it is unclear whether any couple holding a wedding at the hotel was made aware of the policy. If the policy truly was a joke as the hotel owner stated, then it likely would not have been found on, or annexed to, any of the other contracts the couple would have signed. Additionally, should the policy have only been located on the website, it can be argued that the hotel was deliberately hiding the policy from couples seeking to hold their weddings at the hotel.
The terms of the policy, as written, are unreasonably favorable to the hotel. The policy has the effect of limiting the speech of third parties to the contract, which is odd, unexpected, and a violation of society's mores and business practices. On public policy grounds, the court would likely find the policy unenforceable because society wants to encourage speech about businesses to empower consumers.
Potential recourse for Union Street Guest House's negative viral publicity
Shortly after the New York Post article was published, news of the hotel's policy went viral on the internet. As a result of this negative viral publicity, internet users quickly took to websites such as Yelp to post one star reviews citing the hotel's policy for negative reviews as the reason.
Although approximately 5 pages of such reviews on Yelp have been removed in the past few hours, there are negative reviews that have been posted subsequent to the hotel's viral publicity that discuss previous stays at the hotel. Should these reviewers be lying in their negative posts, the hotel could potentially have recourse against them. As previously discussed here, businesses can sue reviewers for false, negative reviews on defamation grounds.
If some of the recently posted negative reviews are based on lies, it would be difficult for the hotel to succeed. One of the elements of a defamation claim is proof of damages that resulted from the false statement. Given the fact that the hotel has experienced a great deal of negative publicity in the past few days, it would be extremely difficult to prove that any false reviews caused damage to its business. Nonetheless, the hotel should continue to monitor its reviews, especially as time distances the hotel from its viral notoriety.
It is difficult for businesses to protect their online reputations, but they should employ legally sound measures to do so. Instead of threatening $500 fines, the Union Street Guest House should have engaged its negative reviewers in a positive manner. If the hotel received negative reviews that contained lies, it could have then proceeded with a defamation suit against those reviewers. Hopefully, the Union Street Guest House's policy to limit negative reviews, and the viral notoriety it spawned, serves as a cautionary tale to other business owners.
Quiles Law is an esports and sports law firm based in New York City.
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