Structuring Unpaid Internships to Avoid FLSA Violations

Recent court decisions may curtail the use of unpaid internships at for-profit businesses, as companies now face substantial liability for improperly classifying interns under the "trainee exception" of the Fair Labor Standards Act (FLSA). Traditionally, unpaid internships have proven to be a crucial resource for inexperienced students and recent graduates. According to the National Association of Colleges and Employers, 55 percent of the class of 2012 had an internship during college, almost half of which were unpaid. Although companies are generally receptive to such arrangements, recent legal exposure will likely upend the traditional unpaid internship model.

The term "intern" is neither defined nor provided as an exception in the FLSA. Courts faced with the issue of whether unpaid internships are violative of the FLSA look to the U.S. Supreme Court's decision in Walling v. Portland Terminal, 330 U.S. 148 (1947), which established the trainee exception. In Walling, the court found that trainees who worked for seven or eight days for the defendant railroad without pay during "a course of practical training" were not "employees" under the FLSA based on "the unchallenged findings that the railroads receive no 'immediate advantage' from any work done by the trainees." Specifically, the court reasoned that the trainees did not displace any of the regular employees and the trainees' work did not provide any immediate advantage to the company business; rather, at times, it actually impeded it. The court held that the FLSA was not intended to penalize employers for providing the same kind of instruction akin to a vocational school at a place and in a manner that would most greatly benefit the trainee.

Further, in determining whether interns at for-profit businesses fall within the trainee exception, courts are guided by the framework provided in the Department of Labor's "Fact Sheet 71: Internship Programs Under the Fair Labor Standards Act," published in April 2010. In its fact sheet, the Department of Labor enumerates six criteria for determining whether an internship may be unpaid: "The internship, even though it includes actual operation of the facilities of the employer, is similar to training that would be given in an educational environment.The internship experience is for the benefit of the intern.The intern does not displace regular employees but works under close supervision of existing staff.The employer that provides the training derives no immediate advantage from the activities of the intern and, on occasion, its operations may actually be impeded.The intern is not necessarily entitled to a job at the conclusion of the internship.The employer and the intern understand that the intern is not entitled to wages for the time spent in the internship."

While the Department of Labor test is not necessarily conclusive of the inquiry, courts have generally afforded it some deference in determining whether an unpaid internship would overcome the employment label.

A few general principles may be gleaned from recent court decisions in which courts have addressed whether an unpaid internship violated the FLSA. To ensure compliance with the law and reduce potential liability, employers should consider the following with respect to structuring unpaid internships:

•Teach fungible skills.

Courts have acknowledged that classroom training is not a prerequisite for an unpaid internship; however, internships must provide something beyond on-the-job training that employees receive. Internships that only provide exposure to menial tasks, such as photocopying or making coffee, are not likely to meet this standard. To the contrary, if the internship is engineered to be more educational than a paid position, it will likely be considered comparable to vocational school. For example, provide training similar to that which would be given in school and is related to an intern's course of study. Interestingly, one court has held that whether an intern actually learned anything is not dispositive of whether training or useful knowledge was offered by the company, reasoning that even a classic educational environment sometimes results in surprisingly little learning.

•Ensure the experience benefits the intern.

Undoubtedly, interns receive benefits from their internships, such as resume listings, job references and an understanding of how a particular office works. The latter benefits, however, are incidental to working in an office like any other employee and are not the result of internships intentionally structured to benefit the intern. Courts have held that resume listings and job references result from any work relationship, paid or unpaid, and are not the academic or vocational training benefits envisioned by the law. Unpaid internships that benefit the intern often involve the receipt of academic credit for his or her work and/or satisfy a precondition of graduation.

•Do not have interns perform routine tasks.

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Jurisdiction Issues in Global Intellectual Property

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"An underlying premise in pure intellectual property issues is that the law should encourage and reward innovation," wrote Raymond T. Nimmer in his book, "The Law of Computer Technology: Rights, Licenses, Liabilities." In the modern digital world, traditional trade borders are collapsing and competitors can steal valuable intellectual property and send it around the world at the speed of light.

How can the general counsel of a Texas company obtain justice when the company is the target of theft, infringement, fraud or other unfair business practices? How can he navigate jurisdictional issues when protecting the company's intellectual property from foreign corporations? What are alternatives to financing multiple lawsuits throughout the world?

Determining where to fight the battle to protect these rights is a crucial decision. To date, there is no clear law on how the global community will handle international intellectual property jurisdictional issues. Here are some steps general counsel can take when thinking through these issues.

Unearth electronic evidence: Gathering evidence of theft, infringement and other unfair business practices often will include using computer forensics. Investigating electronic evidence can include looking at email messages, evidence of hacking, telephone communications, bank transactions, web sites, browser histories, press releases, file transfers, etc. Such electronic evidence, including the money trail, will help determine the identity of the potential defendants.Identify defendants: Using the gathered evidence to identify responsible parties can be difficult, so the legal department may need to dig deeply to figure out the corporate shell game. Separating various corporate subsidiaries and independent contractors that may be responsible for the theft and fraud will take time. Evidence trails can lead to employees, partners and officers, as well as other businesses.Review jurisdictional issues: Determining potential jurisdictions and venues for a lawsuit can be difficult when the offending party is not a Texas or even a U.S. business. Unfortunately, there is no true global intellectual property law. International intellectual property disputes often can involve simultaneous lawsuits in multiple countries throughout the world.

There are currently four main legislative proposals to establish rules on international jurisdiction, choice of law and enforcement of foreign judgments in intellectual property lawsuits. The American Law Institute (ALI) principles are based on the laws of the United States. But businesses considering global litigation should be aware that other principles exist, including the European Principles on Conflict of Laws in Intellectual Property (CLIP), the Japanese transparency principles and Korean Waseda principles, as well as private international law.

When the potential defendant is not a Texas or U.S. business, the legal department may need to establish specific jurisdiction by proving that the defendant purposely availed itself of the privilege of acting in the forum state, the cause of action arises from such acts, and exercise of jurisdiction is not unreasonable. Specific jurisdiction can stem from the stream of commerce, hacking trails, a website sliding-scale test (in which courts are more likely to find jurisdiction as the website's interactivity and the business' electronic contacts increase), licensing and franchise agreements, posted defamatory comments, commercial activities, agency and civil conspiracy with other defendants, patent and trademark infringement, securities fraud, etc.

Overall, in determining whether a court has specific jurisdiction over a defendant, the court will look to see if the defendant was doing business in the forum state. This case-by-case determination often hinges on the foreign business' use of intellectual property or wrongful actions in Texas or the United States.

Anchoring jurisdiction: Selecting a favorable court, jurisdiction and remedy can be essential in protecting a company's intellectual property. General counsel can improve the company's ability to select a favorable jurisdiction by including anchor-jurisdiction clauses in all contracts, including letters of intent, license agreements and employment contracts. Such language also should exist on all company websites and its other marketing materials. Registering the company's intellectual property in all places where it needs to be protected is key, as is identifying the most crucial markets in which to seek protection.Limiting costs and risk: It's worth exploring whether law firms will handle large infringement cases on a contingent or hybrid contract. That can prevent the company from paying large retainers to investigate and litigate expensive lawsuits that may last years.Governmental resources: When evaluating any significant commercial litigation case against a large international corporation registered to do business in the United States, general counsel should be aware of potential governmental resources. Corporations that commit fraud, violations of the Foreign Corrupt Practices Act or other significant illegal acts may have violated U.S. Securities and Exchange Act regulations, and they may be held accountable in whistle-blower recovery lawsuits. Exposing the illegal actions of the opposing corporation can result in a whistle-blower recovery, as well as a finding against the corporation that can be used in a civil action.

In the modern digital world, technology is breaking down many traditional borders. International trade and competition is more common than ever before. Many Texas and other U.S. businesses will find themselves in a highly competitive business environment where they are the target of intellectual property infringement and corporate espionage. It pays to prepare now.

Jason S. Coomer of The Law Offices of Jason S. Coomer in Austin handles international IP litigation, SEC Foreign Corrupt Practices Act bounty actions, and international probate matters.

This article originally appeared in Texas Lawyer.

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Justice Ginsburg: 'Optimistic' About Women in the Courts

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