EMV, credit card, small business, nevada, liability

Taking the Shock out of the Shock-and-Awe of EMV Liability

Nevada retailers and other merchants who accept credit card payments are rightfully confused and concerned about new EMV liability rules that will take effect on October 1, 2015. Though it is certainly disconcerting to hear that the retailer or merchant might be liable for fraudulent credit card transactions (as opposed to the credit card companies), the reality is that Nevada retailers and merchants are not facing impending doom and business ruin by not updating to EMV-compliant technology immediately. Of course, Nevada retailers and merchants should be aware of how these new rules affect their business and should make their own cost-benefit analysis before investing in new technology.

 

What is EMV and the “liability shift”

In the best layman’s terms I can think of, an EMV credit card includes a small chip rather than the standard magnetic stripe that we have all been used to seeing on the back of our credit cards. It is claimed that EMV-enabled cards incorporate safety features that will avoid almost all possibility of fraudulent credit card transactions. When literally billions of dollars of credit card fraud occurs every year with the standard magnetic stripe cards, this is a great development in the fight against financial fraud.

However, there has been a great amount of concern about the new EMV rules that take effect on October 1, 2015. The biggest question is about the “liability shift” that occurs on October 1, 2015. In uncomplicated terms, on October 1, 2015, retailers and merchants that accept credit card transactions that turn out to be fraudulent may be left on the hook for those losses, instead of the credit card companies who have always previously covered all instances of fraud1)It is important to note that there are many businesses that will not have any liability whatsoever for various reasons. The nuances of these differences is not examined here.. In short, the new EMV rules push some of the financial loss from fraudulent credit card transactions to the retailer, rather than the credit card companies.

Nevada retailers, particularly small businesses, should rightfully be concerned about this liability shift. One large fraudulent transaction could ruin a small business. To protect against this liability shift, the credit card companies are pressuring retailers to purchase expensive new credit card processing equipment that is EMV-compliant. Should Nevada retailers invest hundreds or thousands of dollars in new credit card processing equipment that is EMV-compliant? Should they take the risk of not having the equipment? What exactly is the risk of not paying for upgraded EMV-compliant equipment? Let’s try to take a bit of the shock out of these questions.

 

When a Nevada retailer might be liable for fraudulent transactions

Most importantly, Nevada retailers will be responsible for the financial losses from a fraudulent credit card transaction only in one circumstance: when a customer presents an EMV-enabled credit card, but the retailer is not using EMV-compliant credit card processing equipment to run the transaction. In this situation, if the transaction turns out to be fraudulent, the retailer will bear the liability (i.e., the financial loss) from the fraudulent transaction. It is also important to consider that if a customer presents a traditional magnetic stripe credit card, which is processed on either the old non-EMV-compliant equipment or the new EMV-compliant equipment, and the transaction turns out to be fraudulent, the retailer is not financially liable for this loss.

 

Should Nevada retailers take the risk?

Nevada retailers should justifiably be concerned about the financial harm to their business if the retailer is liable for a fraudulent transaction. However, as with most business matters, the retailer simply has to calculate a risk analysis and determine as a business matter whether it makes sense right now to protect against this risk by purchasing the expensive new equipment. The first consideration for Nevada retailers is the general fact that the vast majority of credit card transactions in Nevada will likely continue to be processed with the traditional magnetic stripe cards for quite some time. Only a relatively small number of credit card holders have and use an EMV-enabled card2)Las Vegas’ retailers do more business [particularly per capita] than most American cities. When calculating your risk, know that other countries, European ones in particular, have used EMV-enabled cards for a few years now. Remember, any time that a fraudulent transaction occurs with the traditional magnetic stripe card, the retailer is not liable. Nevada retailers would do well to study their transactions in their business over the next month or two to determine how many credit card transactions are processed with EMV-enabled cards. If the number of these transactions is relatively few, the retailer may choose to take the business risk of possible liability on those few transactions.

Of course, in the next few years, we will see more and more credit cards issued with the EMV chip included, rather than the magnetic stripe. But over time, retailers will naturally purchase new credit card processing equipment as part of their normal course of business as equipment becomes outdated or broken. The retailer may choose to wait until the natural cycle of their business to change to the new EMV-compliant processing equipment. In any event, whether retailers choose to make the switch now or in the future, it is unlikely that a retailer will want to hold onto non-EMV compliant equipment forever.

Making the decision to transfer to EMV-compliant equipment is simply a business decision of weighing risks3)When analyzing the risk, remember to account for potential losses as a result of a being held liable for fraud and costs. Will a retailer be liable for the financial loss of a fraudulent transaction if the retailer processes an EMV-enabled card on non-EMV compliant equipment? Yes. Is that risk likely to arise? Maybe, maybe not. If the number of customers using EMV-enabled cards is low in the first place, and if the risk of the customers engaging in fraudulent transactions is even lower, a retailer may just conclude that the “liability shift” of the new EMV rules is much ado about nothing and may just choose to continue business as normal. But, as I like to say, “It doesn’t matter until it matters.” When that one ruinous fraudulent transaction does come through, do not say that you were not warned of the risk.

And, we wish you all a Happy EMV Day on October 1st!

Footnotes   [ + ]

1. It is important to note that there are many businesses that will not have any liability whatsoever for various reasons. The nuances of these differences is not examined here.
2. Las Vegas’ retailers do more business [particularly per capita] than most American cities. When calculating your risk, know that other countries, European ones in particular, have used EMV-enabled cards for a few years now
3. When analyzing the risk, remember to account for potential losses as a result of a being held liable for fraud
google alphabet series LLC

Google, Alphabet, & Your Small Business

Having billions of dollars at your disposal must be a lot of fun. For instance, you could use some of your money trying to develop a self-driving car, try to figure out how to use drones to deliver goods and merchandise to your consumers’ doorsteps, build massive barges in the middle of San Francisco Bay for who knows what reason1)Is it inappropriate to make a Fountainhead joke? Hopefully.. The point is: money may not buy happiness, but it will allow you to have some fun you probably could not have otherwise.

Google’s founders are swimming in money, figuratively speaking and maybe even literally2)who would be surprised if Google announced that one of its secret projects was the development of the first swimming pool full of $100 bills instead of water.. A mid-90s research project to build a better online search engine has ballooned into a behemoth technology company with interests as far flung as you can imagine. Google’s growth certainly presents a systemic organizational challenge in trying to develop the myriad of different products, projects, and business interests that Google has taken on.

 

Enter Alphabet, Inc.

On August 10, 2015, Google announced plans to organize a new corporation, Alphabet, Inc., to act as a parent company for not only Google, but also for many of Google’s other business interests. Why would Google need to add another layer of corporate structure to what appears to be an otherwise, well-oiled machine?

For starters, the parent company model will allow Google to remain flexible and diverse in its various business endeavors and still-under-development business projects. Presumably, Alphabet will also spin off countless other subsidiary companies under Alphabet3)A subsidiary company is a company that is owned 100% by the parent company, while the parent company is owned by individual shareholders. For instance, upon Alphabet’s organization, shareholders of Google stock will receive new Alphabet stock and Alphabet (the parent) will be owned by regular Joes like you and me. On the other hand, Google, now as a subsidiary of Alphabet, will have only one shareholder: Alphabet itself. . Each subsidiary will become its own separate business with its own officers, directors, and employees. Thus, it is assumed that the current arm of Google that is working on developing the self-driving car could be spun-off to a separate business entity (for example: Self-Driving Cars, Inc.), while the search engine aspect of the business will continue to operate under Google, Inc..

Google thrives on ingenuity and creativity. Spreading corporate governance more broadly will take advantage of the creative juices of its people who will theoretically take on more responsibility with new job titles of CEO, President, and Director of Let’s-Make-Stuff-Up-That-Would-Be-Totally-Awesome4)tm pending.

 

Even if you are not Google, an Alphabet may be for you

Similarly, separating out business interests creates a powerful asset-protection model that prevents one division of a company from dragging down the rest of the company in the event of a business disaster. For example, if Google’s wide-ranging business projects are currently doing business all under Google, Inc., then a liability that might arise when5)if a self-driving car goes rogue on the streets of San Jose and runs someone over. This could, in turn, affect business operations in the unrelated Google Translate department. Instead, with subsidiaries, Alphabet will isolate liabilities and protect other subsidiary companies from the dangers of liabilities caused by other aspects of the business.

Again, imagine that the self-driving car caused personal injury, and a fine personal injury attorney6)hopefully our hypothetical victim is lucky enough to be represented by lawyers as fine as our own Mr. Richards or Mr. Featherstone, Esqs. sued Self-Driving Cars, Inc., and won a court verdict of $5,000,000 in damages. With subsidiary companies, the injured person can look only to Self-Driving Cars, Inc., for payment of the court verdict. The injured person cannot look to Google Translate, Inc., to tap into its resources to pay the verdict because Google Translate, Inc., is treated by the law as a wholly separate legal entity that is not subject to the debts or liabilities of the other subsidiaries. This kind of asset protection allows Google to continue to innovate with speculative projects that may be more dangerous and prone to liability than you might expect from a company like Google Translate.

 

Dr. Canal is kind enough to provide us with an example

Google’s reorganization with Alphabet at its head does raise some interesting tips that even Jane Doe in Nevada could follow to her benefit. Most of us regular Nevadans do not have swimming pools full of $100 bills, nor are we investing our funds in the development of the first working time-machine, Delorean. However, many Nevadans do have varying business interests that could be protected from each other.

For example, consider your local dentist, Dr. Root Canal. Dr. Canal’s dental business actually consists of several different aspects: the practice of dentistry itself, the purchase, leasing, and use of medical equipment, and possibly the purchase and ownership of the building that the dental office is located. Thus, Dr. Canal actually has three separate business interests, all of which could be safely and legally protected from the other.

For example, imagine that Dr. Canal does a poor job on his next tooth extraction and his patient, Ayall B. Suing, sues him and his company, Root-Canals-R-Us, for dental malpractice. Dr. Canal loses the trial and the District Court for Clark County tells Dr. Canal and Root-Canals-R-Us that they must pay Mr. Suing $500,000 for his pain and suffering. Dr. Canal, unfortunately, kept all of his business interests (the dental practice, the dental equipment, and the office building) under just one umbrella: Root-Canals-R-Us. Thus, when Mr. Suing begins poking around for payment on his judgment, Mr. Suing first takes all of the business bank accounts, but he does not stop there. Next, he literally takes all of Dr. Canal’s examination chairs, the x-ray machine, and a box of promotional toothbrushes and even the dental floss to boot! Finally, Mr. Suing puts a lien against the building for the remaining amount of his judgment that was not covered by the other items he collected from Root-Canals-R-Us.

If Dr. Canal had followed Google’s lead, he would be in a much better situation. Dr. Canal could create separate business entities for each of his business interests: Root-Canals-R-Us to operate the actual dental practice; Dental Equipment, Inc., to own the dental equipment (which leases the equipment to Root-Canals-R-Us); and Dental Building, Inc., to own the dental building (which leases office space to Root-Canals-R-Us). Thus, when Mr. Suing looks for payment on his judgment against Root-Canals-R-Us, he will be limited to only that which Root-Canals-R-Us actually owns, which in this case would only be the business bank accounts (in general). Mr. Suing would not be able to swipe the examination chairs or put a lien on the building because those assets are owned by totally separate legal entities, which do not owe Mr. Suing anything.

 

Google, Alphabet, and the Series LLC in Nevada

Unlike with Alphabet, however, most Nevadans in these situations probably would not have a pressing need for a parent corporation to own separate subsidiaries because doing so for the average Nevadan unnecessarily adds another layer of corporate structure with minimal purpose. However, think again. Nevada is one of a handful of states that allows an ingenuous business entity called a Series LLC. In a Series LLC, the owner creates just one business entity with the State of Nevada, but then is allowed to create a “series” under the main LLC. Each series does not have to be registered with the State; only the main LLC. The beauty of this is that each separate series LLC is treated as if it is a totally separate business entity. For example, Dr. Canal can create Root Canal, LLC, as a series LLC, and then he would create Series A: Root-Canals-R-Us, Series B: Dental Equipment Company, and Series C: Dental Building Company. Thus, Dr. Canal accomplishes a parent-subsidiary type relationship (his own little Alphabet) where each series is treated as a separate business with asset protection between the different series.

Though you may not have billions to play with business ideas like Google, by creating and using a Series LLC you too can and should protect your business interests simply and powerfully. And, now that your business assets are sufficiently protected, you can finally create that Series D you always wanted: Build-a-Moonrover Company.

Footnotes   [ + ]

1. Is it inappropriate to make a Fountainhead joke? Hopefully.
2. who would be surprised if Google announced that one of its secret projects was the development of the first swimming pool full of $100 bills instead of water.
3. A subsidiary company is a company that is owned 100% by the parent company, while the parent company is owned by individual shareholders. For instance, upon Alphabet’s organization, shareholders of Google stock will receive new Alphabet stock and Alphabet (the parent) will be owned by regular Joes like you and me. On the other hand, Google, now as a subsidiary of Alphabet, will have only one shareholder: Alphabet itself.
4. tm pending
5. if
6. hopefully our hypothetical victim is lucky enough to be represented by lawyers as fine as our own Mr. Richards or Mr. Featherstone, Esqs.
Term of lease

Constructive Eviction of Commercial Tenants

Although the law dealing with commercial landlord tenant issues in Nevada is often either confusing or non-existent, the Nevada Supreme Court recently clarified one aspect of the requirement of tenants providing notice to landlords about uninhabitable conditions prior to vacating.

In certain situations, when a leased property is considered unfit for occupancy, and the landlord fails to properly fix the problem, a tenant may be constructively evicted.  If that occurs, the tenant is allowed to vacate the property and abandon the lease. But, if a constructive eviction did not actually occur and the tenant abandons the property, he or she could be on the hook for damages for breach of the lease.

 

New case law regarding constructive eviction

Until recently, the requirements for a constructive eviction were not clear. In the case of Mason-McDuffie Real Estate Inc. v. Villa Fiore Development, 130 Nev. Adv. Op. 83 (Oct. 2, 2014), the Supreme Court clarified exactly what constitutes a constructive eviction such that a tenant is entitled to vacate a property and cease paying on a lease.

Throughout 2006 and 2007, Mason-McDuffie, the tenant, complained to its landlord about water leaks. With each complaint, the landlord had the roof fixed. In October 2007, the landlord was again informed about leaks, and again, he arranged to have them repaired. After that time, the landlord received no notice of further roof leaks. In December 2007, the tenant vacated the property, claiming constructive eviction based on the landlord’s failure to remedy the leaks. But, there was no evidence that the tenant ever informed the landlord about the leaks after October of 2007, despite the tenant calling their own repair companies to investigate the source of the leaks and potential mold. The tenant could not explain why the landlord was not informed of the issues during November and December of 2007.

The Court clarified that four elements must be met to declare a tenant constructively evicted:

  1. The landlord must act or fail to act.
  2. The landlord’s action or inaction must cause all or most of the property to be considered unfit for occupancy.
  3. The tenant must actually vacate in a reasonable time.
  4. The tenant must provide the landlord with notice of the problem and a reasonable opportunity to fix that problem.

 

As such, the Court held that a landlord cannot be held to have constructively evicted a tenant if the landlord is not aware of a problem and was not given the chance to fix it. A tenant that abandons without giving notice to the landlord of the problem to be fixed will still be liable for damages due under the lease.

In sum, the Court held that a landlord cannot be expected to fix a problem he or she does not know about. Notably, the fact that a landlord has notice of prior problems is not sufficient, valid notice when the landlord reasonably can assume the prior problems have been fixed. As such, a tenant must provide a landlord reasonable opportunity to cure problems or a constructive eviction has not occurred. If a tenant vacates without notice, he or she should be prepared to prove that the landlord received notice of all the issues, otherwise, the tenant will be held accountable for breaching the lease.

For questions about this and other landlord/tenant issues, feel free to contact the attorneys at Clear Counsel Law Group.

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