Recently in Business Litigation Category

December 2, 2014

COMPLEX BUSINESS LITIGATION PROGRAM ESTABLISHED IN NEW JERSEY

On November 13, 2014 the New Jersey Supreme Court added New Jersey to the growing number of states that have established complex business litigation programs. Effective January 1, 2015, designated judges in each county will provide individualized case management to complex commercial and construction cases that meet the required criteria. The Supreme Court of New Jersey will designate the specific judge who will participate in the program and these judges will receive extensive specialized training in areas that are specific to business litigation.

Attorneys will self-designate their case for this program on the civil case information statement or they may move for inclusion or removal from this program depending on what opposing counsel may or may have not selected. Case will have a minimum $200,000 threshold but in certain circumstances a case may be included in the program due to the complex nature of issues even if the amount in controversy is less than $200,000.

The result of the program will be a win for all parties involved. Consistency will be developed as fewer judges will be ruling on complex commercial disputes. This will help the attorneys provide better cost benefit advice to their client based upon what they can expect at trial.

Judges will benefit as well as they will gain more experience in handling complex business disputes and gain experience and insight into what works and does not work from the point of view from the bench. For example, the judges will see what impact their discovery ruling has at the trial stage and whether they would have liked more information on a particular topic. Now the judges will see what impact their discovery ruling has at trial. In the past, a discovery judge might limit an area of inquiry, but at trial you are faced with a different judge looking down at you with a perplexed look wondering why you did not develop this through further discovery.

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November 13, 2014

Pennsylvania's Breach of Personal Information Notification Act

Last month I had a business client come into my office concerned about a data breach. A disgruntled former employee hacked into the company server. While it appears this employee did not enter into any sensitive areas on the server, my client wanted to know what his responsibilities were with regarding to notifying customers of this unauthorized intrusion. After quickly moving for an injunction to prohibit further intrusions, we sat down with our client to review his data breach policy. Not surprisingly, he did not have one.

Every data breach policy has to be created with an eye towards the sector your business operates. For example, HIPPA notification requirements with regard to "protected health information" are different from the requirements for a web based business.

In Pennsylvania we have the Breach of Personal Information Notification Act. This law has been on the books since June 2006 and is currently in the process of being amended as it relates to municipalities and school districts. This applies to any business organization (for-profit or non-profit) that maintains or stores computerized data that includes personal information. The impact of this Act is far reaching because it applies to businesses of other states whose customers are Pennsylvania residents.

Notification requirements are triggered when there is a breach of a computer data system where any "resident of Pennsylvania's unencrypted and unredacted personal information was or is reasonably believed to have been accessed and acquired by an unauthorized person." I won't bore you with the details of the intricacies of how all these seemingly simple to understand words have definitions that go on for pages. Suffice to say even the definition "reasonably believed" is complicated. The key take away however is that the notification requirements are NOT triggered if the information is encrypted or redacted. Failure to comply will prove costly as the Act provides that a violation is deemed to be a violation of the Pennsylvania Unfair Trade Practices and Consumer Protection Law.

Circling back to my client who contacted me last month, his records were encrypted and thus Pennsylvania's Breach of Personal Information Notification Act did not apply. However, we reviewed and updated his data breach policy to bring it into compliance with the existing laws that affected his business. At Danziger Shapiro & Leavitt we understand the global environment that affects your business and are here to assist you navigate the complicated web of laws and regulations that need to be complied with in this new electronic world. Please feel free to contact any of our attorneys for a free consultation to discuss any concern that is affecting your business.

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October 9, 2014

NEW JERSEY SUPREME COURT TIGHTENS REQUIREMENTS FOR CONSUMER ARBITRATION AGREEMENTS

On September 23, 2014, the New Jersey Supreme Court in a unanimous decision held that an arbitration clause in a consumer contract was unenforceable because it did not clearly and unambiguously signal to the consumer that she was surrendering her right to pursue her claims in court. The Court was troubled that the arbitration clause did not clearly explain what arbitration is and how it is different from proceeding in a court of law.

The Court stated that no prescribed set of words is required. Notwithstanding the foregoing, the arbitration clause must contain a clear and unambiguous statement that explains that the consumer is giving up his or her right to bring their claims in court or have a jury resolve the dispute. This for obvious reasons will have dramatic impact upon consumer class actions and how they proceed.

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September 17, 2014

NEW JERSEY EMPLOYERS MAY NOT INQUIRE INTO CRIMINAL HISTORY OF JOB APPLICANTS UNDER NEW "BAN THE BOX" LAW

On August 11, 2014, New Jersey Governor Chris Christie signed the "Opportunity to Compete Act" (Bill 1999) into existence. The Act will become law in New Jersey on March 15, 2015. The Act limits the ability of "covered" New Jersey employers from looking into an applicant's criminal record at any time during the "initial application process". Employers will no longer be able to have on their written or online applications a box to mark or a question concerning whether the applicant has a criminal record. In addition, employers cannot ask (verbally) applicants if they have a criminal record. However if an applicant brings this up of their own accord, then the employer is free to explore the nature of the applicant's criminal history.

Obviously there are exceptions to the Act. For example, law enforcement, homeland security, corrections, judiciary and jobs of a similar nature allow employers to inquire if an applicant has a criminal background. Interestingly though, after the "initial application process" an employer may inquire into an applicant's background to see if they have a criminal record and then make a determination on whether to hire the employee. For purposes of the Act, a covered New Jersey employer is defined in the Act as an employer who employs 15 or more employees over 20 calendar weeks.

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July 1, 2014

LAWYERS CAN DELETE CIRCULAR 230 WARNINGS ON EMAILS

For those of us that actually read the bottom of their lawyer's email you probably noticed the arcane "IRS Circular 230 Disclosure" that stated the advice contained in this email is not intended and cannot be used for tax avoidance purposes etc... You then probably thought to yourself, but I was just confirming lunch, what the heck does this have to do with tax advice anyway? Perhaps a little perspective is in order.

Circular 230 was the IRS's compilation of regulations regarding tax services provided by lawyers and other tax professionals with respect to the tax shelter abuses of the 1990s. Circular 230 set the minimum standard with respect to written tax advice and therefore wound up being placed on everything.

Thankfully the IRS issued new rules on June 12 (click here for PDF of rule) which included the following statement; "Treasury and the IRS expect these amendments will eliminate the use of a Circular 230 disclaimer in email and other writing." Good riddance and where are we meeting for lunch again?

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June 25, 2014

COURT CONTINUES TO MISUNDERSTAND HOW WE USE TECHNOLOGY

The Supreme Court continued its trend of significant decisions today, issuing rulings in favor of copyright holders over technological innovation (ABC v Aereo) and in favor of upholding privacy rights in the face of police searches (Riley v California). While the decisions were broad in scope, they also both created substantial unanswered questions that the Court is essentially pleading with Congress to resolve. From a political standpoint, that appears unlikely, and I predict both of these issues will be back before the Court in the not too distant future.

Looking first at the Riley case, the Court held cell phones contained private information which the police are not entitled to review merely incident to an arrest. Unlike the contents of your pockets or items in plain view, the government now cannot access your cell phone without a warrant during an arrest. This rule applies to both smartphones and so called dumb phones alike (the police viewed the incoming caller ID in one of the defendant's older style flip phones to determine where he lived), and actually signals real concern for future business cases.

While this may seem like a boon to privacy advocates, there are holes in this ban big enough to steer Google's self driving car through. First, there are exceptions for when the police believe they need to access your device in exigent circumstances. No warrant is required when the police are trying to prevent a disaster, or save someone else. Second, the Border Search exemption does not come up in this case. This exemption, still on the books but possibly overruled by today's decision, allows for a warrantless customs search anywhere within 100 miles of an international border. That includes our offices in Philadelphia, and most of the population of the US who live within 100 miles of an international coastline. Is every police search now going to have a customs element to get around the Riley decision?

The bigger concern with this decision, from a business perspective, is the growing use by the Roberts Court of anecdotal evidence not truly before the Court. The Riley decision in some ways is based upon a faulty understanding of technology and how we interact with it on a daily basis. Justice Roberts cites to the iPhone User Guide as definitive proof that "Law enforcement officers are very unlikely to come upon such a phone in an unlocked state because most phones lock at the touch of a button or, as a default, after some very short period of inactivity." While many phones have this feature, it's frequently not used. Various surveys have shown between 40% to 70% of cell phone users don't lock their phones. The Court similarly dismisses out of hand the potential for automatic wiping via geofencing as simply not a real concern. I'll grant Justice Roberts that most criminals are not IT specialists, but it's not difficult to set up a directive for your phone to be wiped if it enters the local police station. In fact, the controls to set that up are right in the apps at the heart of the Riley decision. Finally, the Court suggests merely turning the phone off or removing the battery as a way police can prevent a remote wiping signal, failing to understand that (i) many, if not most, new smartphone have integrated non-removable batteries; and (ii) a phone is not rendered completely inaccessible simply because it's turned off.

The problem here is not holding itself, which may actually be a bit of a pendulum swing against the destruction of privacy standards we've seen since 9/11. Rather, the issue I see is that the Court continues to decide cases based upon a misunderstanding of how people interact with technology. This has led to, and will continue to create, decisions which raise significant business issues. We'll have more in the next few days on the Aereo decision, which even the Court acknowledged will hang over SAS and cloud computing services for some time to come. But in the meantime, it's clear that if we are going to continue to see technological growth, Congress needs to get on the ball and deal with some of these issues before they're dumped at the courthouse steps.

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May 29, 2014

"VALUABLE CONSIDERATION" REQUIRED TO ENFORCE NON-COMPETE AGREEMENT DESPITE COMPLIANCE WITH PENNSYLVANIA UNIFORM WRITTEN OBLIGATIONS ACT

The Pennsylvania Superior Court recently examined what impact, if any, the Pennsylvania Uniform Written Obligations ACT (PUWOA) has on an employment agreement that contained a covenant not to compete entered into after the employee started working with the employer. The short answer is - no effect at all.

First a little background is in order. In order for a covenant not to compete to be enforceable against an employee, the employee must receive something valuable (consideration) from his or her employer. If this covenant is bargained for by the employer prior to the employee starting work, then the prospect of future employment with the employer satisfies the "valuable right" or "valuable consideration" needed for a court to enforce a covenant not to compete. However, if the employee is already employed by the employer, continued employment is not sufficient additional consideration; something more must be given by the employer.

The case before the appellate court involved the situation where an employer wanted to enforce a covenant not to compete that was entered into after the employee was already employed by the employer. The employer tried to avoid the requirement of providing additional consideration by relying upon the PUWOA. This act states that an agreement will not be enforceable for lack of consideration if the words "intending to be legally bound" are in the agreement. Unfortunately for the employer, the appellate court held that the language "intending to be legally bound" did not constitute sufficient additional consideration in the context of a covenant not to compete.

So what is the important take away here? Review your employment agreements and if you have a restrictive covenant, revisit what consideration was given to your employee and when it was given. Ask yourself if the employee is mission critical and whether you really want to enforce the covenant? It does just have to be money that will support a court finding sufficient additional consideration.

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April 1, 2014

DO I NEED TO FILE AN S ELECTION IN PENNSYLVANIA - LEGAL RESEARCH ON YOUR OWN: A FOOL AND HIS MONEY ARE SOON PARTED

These are dangerous times to be starting your new business. The economy is tight, money is not readily available and your legal budget is next to nil. You've heard that you need to incorporate to protect your family assets and you keep hearing on the radio that you don't need a lawyer. In fact, you do some quick internet research and feel you can do it yourself. Having practiced for over 20 years now I am confident in stating that yes you can do this on your own but you might make a critical mistake. Doing legal research online without the appropriate background is dangerous. The first answer you get may not be the correct answer and you really are not in a position to recognize whether what you found on the web is just what you "wanted" to find or really the legally correct answer.

For example, after you incorporate you need to decide whether you want to be a C corporation or an S corporation. Usually the S election is preferable for smaller entities because it eliminates taxation at the shareholder level whereas a C corporation is taxed at both the corporate level and the shareholder level. Seems straightforward enough, right? You google S election and click on a link to the Department of Revenue website (click here) where it clearly states that any federal S election is automatically a S election unless you opt out. However, right under the Department of Revenue's link is Pennsylvania's Open for Business website link (click here) that clearly states you must file for S-corporation status within 75 days of incorporation. This is a website that was created for the purpose of assisting new business owners and has the Governor's name on the top yet its advice is 180⁰ opposite the Pennsylvania Department of Revenue.

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March 4, 2014

WHISTLEBLOWER AWARDS IN EXCESS OF $14 MILLION IN 2013

The SEC's Office of the Whistleblower (OWB) awarded individuals over $14 million in 2013 for their "significant and original contributions" to successful enforcement of the securities laws. The OWB is now in its 3rd full year and the number of tips and complaints is trending upward. OWB reports that it received 3,001 tips and complaint in 2012 and 3,238 in 2013. These numbers are certain to increase as the OWB continually expands the whistleblower laws.

For example, in July 2013, a new pilot program was put into place that protected federal grant workers from whistleblower retaliation. In a nutshell, the new program is designed to protect an employee from employment retaliation for reporting mismanagement of a federal grant or contract funding. An employee who claims to have been retaliated against must file a claim with the Inspector General of the agency involved. If no retaliation is found, the employee can then file a complaint in federal court. If successful, in addition to reinstatement and back pay, attorneys' fees and costs will also be awarded

Last month I discussed the new path the Securities and Exchange Commission was embarking upon in its efforts to enforce the securities laws from the outside in with the use of deferred prosecution agreements. I noted this was a philosophical change made from the highest levels of the SEC to pursue companies that violate the securities law by targeting employees of suspected target companies. The questions you need to ask yourself as an employee of a company that is involved in fraud are; do I wait until the government agency contacts me as part of its investigation, or do I contact the government agency when I have knowledge of my employer's widespread fraud? By contacting the government first, you may be entitled to a piece of the substantial awards discussed above. In addition, by taking preemptive action you can protect yourself from being brought down by fellow employees who allege you were part of the fraud.

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January 21, 2014

SEC ENTERS INTO FIRST DEFERRED PROSECUTION AGREEMENT WITH INDIVIDUAL

Late last year the Securities and Exchange Commission announced that it had entered into its first deferred prosecution agreement (DPA) with an individual who worked in an administrative capacity at a large hedge fund. The DPA allowed the SEC to successfully go after hedge fund manager Berton Hochfield who reportedly stole more than 1.5 million from his hedge fund and overstated the fund's performance to investors.

A deferred prosecution agreement is a voluntary agreement between an individual and a government agency, in this case the SEC, where the agency will agree to lesser charge in exchange for the individual's cooperation in connection with the investigation. In the Hochfield case, Scott Herckis voluntarily came to the SEC with concerns over certain accounting irregularities involving Hochfield's hedge fund, Heppelwhite Fund, LP. Herckis produced a substantial number of documents and described in detail to the SEC how Hochfield perpetrated his fraud. Based upon the information Herckis provided, the SEC was able to take emergency action and freeze the fund's assets within weeks of Herckis reaching out to the SEC. While Herckis did not get off "scot free" for his participation in the fraud scheme, he did receive a substantially reduced penalty. For example, instead of being unable to be a hedge fund administer for the remainder of his life, Herckis was only prohibited from being a fund administrator for 5 years. Herckis also had to disgorge the fees (approximately $50,000) he received in connection with the fraud.

This DPA is significant because it seems to support new SEC Chair Mary Jo White's earlier statement that the SEC is going to strongly pursue individuals on the periphery to build its case against greedy insiders and their business entities. By adopting this outside in approach and offering DPAs to periphery individuals, the SEC is placing a significant carrot in front of those who were part of an overall fraud scheme but perhaps feel trapped and want out but do not know how to safely do so.

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December 16, 2013

Danziger Shapiro & Leavitt, P.C. Announces Investigation of NQ Mobile, Inc.

For Immediate Release

Contact: Douglas M. Leavitt
Danziger Shapiro & Leavitt, P.C.
215-545-4830
leavitt@DS-L.com

Danziger Shapiro & Leavitt, P.C.
Announces Investigation of NQ Mobile, Inc.

PHILADELPHIA, PA, December 16, 2013- Danziger Shapiro & Leavitt, P.C., a Philadelphia based litigation law firm, (www.DS-L.com) is investigating securities fraud claims against NQ Mobile, Inc.. (NYSE: NQ). This inquiry centers on allegations that statements issued by NQ Mobile regarding its business operations and the company's financial condition were deceptive and false.

NQ Mobile purports to provide security solutions for the mobile phone market. On October 24, 2013, a report issued by Muddy Waters states that NQ Mobile had engaged in fraudulent practices by, among other things, vastly overstating its market share in China by asserting it had a 55% share of the market when in fact it only had a 1.5% market share and that at least 72% of NQ Mobile's alleged Chinese security revenue is fictitious. Upon the release of this news, in less than 36 hours, shares of NQ Mobile dropped approximately 56%, representing over $500 million in losses to investors

Individuals who purchased NQ Mobile shares between May 5, 2013 and October 24, 2013 who would like to learn more about this investigation, have an interest in joining a class-action lawsuit, or have any questions concerning this announcement and their rights, should on or before December 23, 2013, contact Douglas M. Leavitt, Esquire: (215) 545-4830 or visit: www.DS-L.com. You may also email Mr. Leavitt at leavitt@DS-L.com.

This press release may be considered Attorney Advertising in some jurisdictions under the applicable law and ethical rules.


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November 19, 2013

SEC BEING INVESTIGATED (AGAIN) FOR IMPROPER TRADING

Well this doesn't happen every day - or does it? The SEC finds itself being investigated for improper financial holdings. According to a November 2013 Reuters post, federal prosecutors and the office of the inspector general of the SEC contacted employees in the SEC's New York office about trading in companies that are under SEC investigation. This is a direct violation of internal SEC rules. While the report indicates that it does not appear to be a widespread issue, it is another black eye for the SEC that is still marred by the 2009 allegations regarding insider trading by SEC employees. Stay tuned to see how this plays out.

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October 22, 2013

SEC NOW REQUIRES ADMISSION OF WRONGDOING IN SETTLEMENTS OF "EGREGIOUS" CASES

In the past the Securities and Exchange Commission had allowed defendants to settle civil and administrative claims brought by the SEC without requiring defendants to admit or deny liability. However, there has been a change of policy with the recent appointment of the new SEC Chair Mary Jo White. Now, in "egregious" cases, the SEC will push extremely hard for, and in fact almost require, an admission of wrongdoing.

This new policy creates a tactical dilemma for defense counsel on several fronts. Defense counsel needs to be cognizant that shareholders will be able to use the admission of wrongdoing as the main exhibit in any civil lawsuit brought against their client. As a result, timing is a consideration. Settle to early before the statute of limitations runs on the civil side and the results can be disastrous.

However, the real conundrum for defense counsel is predicting how the Department of Justice will react in its parallel criminal investigation when its target has just admitted wrongdoing in writing. Making matters worse is the fact that it is the "egregious" cases that the DOJ is interested in. Will DOJ prosecutors be satisfied with the admission of wrongdoing in the SEC case or use it as low hanging fruit in its criminal prosecution?

In addition, can you even enter into a settlement with the SEC where you admit wrongdoing and not commit perjury? Defendants will occasionally give testimony to the SEC early in the process minimizing their role. Does the admission of wrongdoing in the settlement directly contradict the earlier statements? Do you need to take the 5th amendment earlier on in the SEC investigation to prevent this from happening?

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October 8, 2013

"INSTRUMENT UNDER SEAL" - THESE THREE WORDS REALLY DO MATTER

Ever wonder what an "instrument under seal" is? When the word [SEAL] is placed next to the signature block at the end of the written guaranty or loan agreement, does it have any impact? The answer is a big YES.

Earlier this summer, the Pennsylvania Supreme Court confirmed what we have always told our clients when they have asked us this question. When a written contract states that it is an "instrument under seal" and has the word "SEAL" next to or part of the signature block, the statute of limitations to enforce the terms of the written contract in question has been increased from the standard 4 year limitation period to 20 years!

So what is the important take away here? Review your loan agreements and other agreements (a guaranty for example) to make sure this language is standard on all agreements going forward. Not only does this give you a longer time period to decide if you want to bring legal action for nonperformance, but it also makes your negotiable instruments more marketable should you decide to sell them to third parties.

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August 13, 2013

PUBLIC BENEFIT CORPORATIONS ARE NOW AN OPTION IN DELAWARE

Delaware recently joined the fast growing Benefit Corporation "club". Effective August 1, 2013, Delaware became the 20th state to adopt its own version of the Benefit Corporation. The provisions governing this new business entity can be found under new Subchapter XV of the Delaware General Corporation Law. Earlier this year you may recall (click here) I discussed how Pennsylvania became the 12th state to adopt its version of the Benefit Corporation.

The Delaware Benefit Corporation is almost identical to the Pennsylvania Benefit Corporation. Both acts are designed to allow "social" entrepreneurs to focus not only on the bottom line but to also consider other non economic societal factors (community, environment, employees etc...). Both acts have provisions governing allowed purposes, accountability and transparency requirements (although Delaware has an every 2 year reporting requirement as opposed to Pennsylvania's every year).

One interesting difference between the two states relates to derivative litigation (click here for link to derivative information on Danziger Shapiro & Leavitt website). While Pennsylvania is silent with respect to minimum share ownership requirements for shareholders to bring derivative actions, Delaware decided to establish minimum share ownership requirements. Most likely, this is a reflection of Delaware recognizing the practical consequences that will follow by allowing officers and directors to consider subjective societal concerns when making business decisions. Namely; not everyone shares the same political, religious and social concerns. By placing a minimum share ownership requirement in order to bring a derivative action, Delaware is just trying to reduce the strain on an already overburdened court system.

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