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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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?
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.
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.
FEDERAL JUDGE BANS EXPERT TESTIMONY IN INSURANCE CASE - JURY CAN RELY UPON THEIR GENERAL KNOWLEDGE AND EXPERIENCE
For the second time in the last year a judge has precluded expert testimony regarding bath faith claims asserted against insurance companies. The most recent case out of the Western District of Pennsylvania involved a motor vehicle accident where the insurance company offered $13,000 on a policy with a $300,000 limit. In response to the paltry offer where plaintiff had sustained substantial injuries, plaintiff sued Geico alleging it had breached its contract with plaintiff and was handling the claim in bad faith.
To support his claim, the plaintiff attempted to introduce an insurance claims expert to provide the jury with information about the concept of bad faith. There have been cases in the past where insurance experts testified with explanations about standards and practices within the insurance industry. In this case however, the judge determined that the concept of bad faith and how it relates to the insurance industry was not too difficult or complex for the average juror to understand. Accordingly, the judge prevented the plaintiff from presenting his expert to the jury.
This is the most recent in a series of decisions in Pennsylvania since 1997 to establish that while bad faith is a legal concept, the general population doesn't require scientific or technical knowledge to understand it. In other words, the judge decided that the members of the jury were smart enough to understand the concept and any additional information presented to the jury in court would simply impede on the jury's fact finding function.
New proposals coming from the White House this week should give small business owners hope for relief from costly patent troll litigation. This type of lawsuit has been an increasingly expensive threat to small businesses, most of which never imaged they'll be involved in patent litigation. The common perception is patent disputes are for manufacturers to worry about, and the number of small business manufacturers is dwarfed by those in construction, services, retail and health care. Unfortunately, patent trolls, politely called non-practicing entities (NPEs), have turned that perception on its head.
The way NPEs work is frustratingly simple. They acquire patents, often in large packages at a time, and then look for existing products which could be deemed to infringe on the patent. But instead of going after the business which is making the product, NPEs frequently go after the end users. Think of this in terms of the Samsung v Apple litigation that's been in the headlines so often lately - imagine if Samsung had not sued Apple but rather demanded licensing fees directly from every iPhone user in the country. This is the tactic the NPEs take.
The NPEs know their patents are often worthless. If they were forced to defend them against an actual manufacturer, with financial resources behind them, they'd face the real risk of having the patent invalidated. So by pursuing the end user, often a business who bought a particular software program or copier, they're pursuing those least able to defend themselves. The NPE sends out mass mailings demanding penalties and licensing fees, and waits to see who responds. In most cases, the targeted business never even learn who's behind the NPE, they only deal with the law firms who make a living fronting for these entities. That may soon change.
The proposals from the White House include seven legislative recommendations and five executive actions. While the legislative recommendations would certainly be most helpful, the chances of Congress passing anything requested by the Administration seem slim. The executive actions appear to be more likely, and should ultimately help small businesses who are targeted by these trolls.
In the short term, suggested changes requiring the true owner of a patent to identify themselves should help targeted businesses and provide a claim history for their counsel to track. This will certainly help. Also, the Administration has proposed an education and outreach program so targeted businesses can learn more about their rights.
The biggest improvement, however, is likely to be in the long term as new efforts are implemented to improve training for PTO examiners. The goal is to restrict the acceptance of overly broad claims in issued patents. Applicants will be forced to improve the explanation of their claimed invention, and the patent will be limited to a specific method of accomplishing a task, instead of all method for accomplishing the task.
On May 29, 2013, the Pennsylvania Supreme Court decided an interesting case regarding how an initial offer letter to a prospective employee can potentially impact a restrictive covenant in an employee's employment agreement. Before discussing this case, we need a very brief summary regarding what courts look to when deciding whether to enforce a restrictive covenant.
In Pennsylvania, the law is clear that a restrictive covenant (non-compete or non-solicitation of clients or employees for example) is valid and enforceable against an employee under certain conditions so long as the covenant does not impose an illegal restraint of trade. There are many different components that make a restrictive covenant enforceable. However, this post will only focus on the timing requirement.
To be enforceable, a restrictive covenant has to be part of the initial employment terms at the time the offer of employment is made to the employee. The key is that there must be no employee/employer relationship at the time the covenant is being imposed. The restrictive covenant must be part of the overall prospective terms of employment. A restrictive covenant will always fail where the employer seeks to impose the covenant on an unsuspecting employee (already employed by employer) and offers no additional consideration (value) in exchange for the additional restriction.
With this as background, we can now better understand what the Pennsylvania Supreme Court was grappling with. In this case, an employee resigned from his position at one company and went to work for a competitor. The former employer sought a preliminary injunction to stop its former employee from working for a competitor. What prompted this case to travel through the appellate courts was the wording of the offer letter. The courts were struggling with the issue of whether the offer letter that the employee signed was the actual employment contract and not the later agreement titled "Employment Agreement" that the employee signed on his first day of work. The "Employment Agreement" and not the offer letter contained the restrictive covenant.
If the offer letter was the actual employment agreement because it contained all the essential terms of employment, the restrictive covenant would not have been enforceable. The reason for this conclusion under the fact scenario above would have been that the employee had already accepted his position with the company when he signed the offer letter and thus received no additional consideration when he signed his "employment agreement" with the company on his first day of work.
Luckily for the former employer the Pennsylvania Supreme Court reached the conclusion that the offer letter was just part of the overall process and not the employment agreement. The offer letter clearly stated that employment was conditioned upon the signing of an employment agreement. However, be warned, you cannot simply include language in your offer letter to indicate that employment is conditioned upon the signing of an employment agreement as concurring opinions by certain of the Justices stated their problems with just such a broad holding.
PROPOSED BILL IN NEW JERSEY IF PASSED WILL INVALIDATE COVENANTS NOT TO COMPETE IN EMPLOYMENT CONTRACTS - TIME IS NOW IF YOU WANT EMPLOYEES TO SIGN RESTRICTIVE COVENANTS
Last month the New Jersey Legislature introduced Assembly Bill 3970 that if passed will invalidate any restrictive covenant in an employment contract if the affected employee was eligible to receive unemployment compensation benefits. The reasoning behind this rule is that an employee who lost his job through no fault of his own (and thus be eligible for unemployment compensation) should not be held hostage to a restrictive covenant in an employment agreement. Restrictive covenants include, for example, covenants not to compete, agreements not to solicit employees, and agreements not to disclose information.
This is quite an unusual step for the New Jersey legislature in proposing a law in an area that has typically been left to the courts to decide on a case by case basis. As it stands now, Courts inquire into whether the restriction protects a legitimate employer interest, imposes no hardship on the employee and does not injure the public. Also considered by the court is a temporal component relating to both length and geographic boundaries of the restriction.
BEST PRACTICE TIP: CRIMINAL BACKGROUND CHECKS OF POTENTIAL EMPLOYEES ONLY UNDER CERTAIN LIMITED CONDITIONS
Companies today that routinely perform criminal background checks as part of their hiring process run the very real danger of running afoul of the Fair Credit Reporting Act (FCRA) and other federal and state statutes. Generally speaking, an employer may conduct a criminal background check only with the consent of the job applicant. Upon receiving the report, the employer must provide a copy of the report to the applicant along with a written notice of rights under the FCRA. The requirements are confusing and the costs for not complying are high as Pennsylvania's very own Toll Brothers, Inc. is finding out.
In the recently filed putative class action, it is alleged that Toll Brothers did not comply with the basic FCRA requirements set forth above. If this is true, Toll Brothers will be responsible not only for the damages to a nationwide class of unhappy job applicants, but also be responsible for statutory damages, punitive damages and the attorneys' fees of the plaintiff class, all in addition to their own counsel fees.
Notwithstanding this recent class action, a criminal background check is a useful tool when it is related to the employment being offered. For example, a bank seeking candidates to work as a teller would want to know if a job applicant has convictions for drugs and theft. No problem here as long as the bank complies with the requirements under the FCRA and Pennsylvania state law. On the other hand, perhaps a background check is not relevant to a landscaping company who is seeking employees to cut grass over the summer. The Pennsylvania Human Relations Commission has weighed in on this recently and stated that employers "must be able to show the inquiry into conviction is substantially related to an applicant's suitability to perform major job duties and required by business necessity."
Companies today are increasingly allowing employees to use a company issued smartphone or iPad for personal use. Companies actually invested money and polled employees and found that employees hated having to carry around a business and personal mobile device. While it may have seemed like an easy concession to appease employees, there are hidden dangers lurking in the weeds. What privacy concerns are triggered when the employee returns the company device when fired or just receives an updated smartphone or tablet? What if the employee downloaded Facebook onto the device and has the automatic login feature enabled? Does the employer now have the ability to review all of the employee's personal information on Facebook? What if the employee does online banking through his device?
The problem also rears its head in the reverse scenario as well. What happens when an employee's personal smartphone has company data, contacts and trade secrets on it? What happens when the employee returns the smartphone for an upgrade, loses the device or donates the phone to a battered woman's shelter? What happens to all of your company trade secrets? Did you just breach a few dozen confidentiality agreements?
The New Jersey Uniform Limited Liability Company Act (the Act) was enacted in 1994 and governs NJ limited liability companies (LLCs). The Revised Uniform Limited Liability Company Act (the Revised Act) is the first major revision to the Act since its inception. Only NJ LLC's formed after March 18, 2013 will currently be governed by the Revised Act. Effective March 1, 2014 however, all LLCs will fall under the authority of the Revised Act.
The amendments are designed to bring the Act more in line with the Model Revised Uniform Limited Liability Company Act. As of this posting, only seven states and the District of Columbia have adopted the RULLCA in some fashion. While it is beyond the scope of this post to identify all changes made by the amendment, I have listed some of the major changes below.
1. Perpetual Duration. Under the Revised Act LLCs will have perpetual duration while under the old Act duration was limited to 30 years.
2. Business Purpose. The Revised Act allows an LLC to be formed for any business purpose, including operating as a non-profit organization.
3. Oral Operating Agreements. Believe it or not, oral operating agreements are now allowed under the Revised Act. Under the old Act, oral agreements were not allowed. If the agreement was not in writing it did not exist. Under the amendments, a course of conduct or behavior can be used as evidence to support the terms of an "oral agreement."
4. Indemnification. The Revised act now requires that the LLC indemnify and hold harmless its members and managers. Under the old Act indemnification was discretionary.
5. Fiduciary Duties. Fiduciary duties are allowed to be altered if not "manifestly unreasonable" although the operating agreement cannot authorize or otherwise allow intentional misconduct/violation of laws.
Other issues affected by the amendments relate to charging liens, disassociation, oppression and limitations on a member's liability to another member - to name a few. While we always recommend that shareholder operating agreements are reviewed every few years, it is now critical that LLCs in existence prior to March 18, 2013 have their operating agreements updated to conform to the new rules.
The vast majority of family owned businesses fail to reach the next generation of owners as a result of poor succession planning. In fact, according to the Small Business Administration, while almost 90% of business are family owned, less than 30% of these businesses survive its second generation. Family businesses face unique intra-familial succession issues that can devastate a successful business if they are not dealt with in advance.
While not an exhaustive list, the top succession issues that a family business should examine include:
1. Reconfirm the goal or mission statement of the business and identify the best personnel suited to carry the stated goal forward.
2. The development of an exit strategy for founding that not only defines the reduced roles but future compensation (cash and/or stock) after the transfer from one generation to the next.
3. The development of a training program to educate and/or mentor the next generation of leaders.
4. Reexamine compensation system and determine whether members are being compensated fairly and establish a system based upon objective criteria or goals.
5. Consider employment agreements designed to prevent key personnel from competing with your business during transition period.
Effective December 24, 2012, Pennsylvania became the 29th state to adopt the Uniform Interstate Depositions and Discovery Act (UIDDA). The UIDDA is a model uniform law that allows out of state litigants to obtain discovery in Pennsylvania quickly and in a more cost efficient manner. Here is a link to to the act as adopted in Pennsylvania.
The procedure to obtain a Pennsylvania subpoena under the UIDDA is simple and straightforward. Foreign litigants merely present the subpoena issued by the foreign state to the prothonotary's (clerk's office) office in the county where the person subject to the subpoena resides. After payment of a nominal fee and compliance with a few local rules, the prothonotary will issue a subpoena for service. The best part of the UIDDA is that foreign litigants do not need to hire local counsel, nor do they have to have their counsel admitted pro hac vice to obtain the subpoena. The process of obtaining a foreign subpoena under the UIDDA will not constitute the unauthorized practice of law.
Prior to the adoption of the UIDDA, if a litigant in California (for example) wanted to compel the appearance of an individual in Pennsylvania to appear for a deposition, the California issued subpoena alone was not enough. The attorney in California would have to embark on a time consuming endeavor where they needed a California court to issue an order that asked a Pennsylvania court to issue a subpoena. This process could take months and get very expensive because once the California court issued the order; local counsel in Pennsylvania was required to obtain a local order asking the Pennsylvania court to issue the local subpoena.
Earlier this month the U.S. Court of Appeals for the Ninth Circuit ruled that border agents may not perform a forensic search of a traveler's laptop merely because he is crossing the border into the United States. In the current climate of heightened security to prevent terroristic acts, we have sacrificed some of our basic freedoms as Americans. In this particular case, it was the breadth of coverage of the Fourth Amendment to our Constitution versus the boarder search exception doctrine.
The Fourth Amendment states in a nut shell that we shall be free from unreasonable searches and seizures. This boarder doctrine is a product of United States criminal law that allows basically unfettered searches and seizures within 100 miles of a border without the need for a warrant.
In the case before the Ninth Circuit, a traveler's laptop computer was confiscated by the government for 5 days while it ran encryption software to break the traveler's security codes. The Court recognized that while the Supreme Court has virtually suspended the Fourth Amendment at international boarders, this type of conduct went too far. The Ninth Circuit clearly stated in its Opinion that the government needed a "reasonable suspicion of illegal activity" before border agents can invade a person's right to digital privacy. In particular, the Court stated, "A person's digital life ought not be hijacked simply by crossing a border." Please click this link to read a copy of the Opinion.
Too bad for the traveler in this case however; while the Court stated a standard that required a reasonable suspicion of illegal activity, the Court found that this standard was met. This traveler had a prior conviction for child pornography and was travelling from Mexico which is known to have a high incidence of child sex crimes. Combined with the fact that significant child pornography was indeed found on his computer's hard drive made for an easy decision to get this predator off the street and rule the seizure valid.
So what should employers in Philadelphia and the surrounding four counties (Bucks, Montgomery, Chester and Delaware) take away from this regarding digital privacy rights? Well, Philadelphia International Airport (and Newark Airport for that matter) is considered an international boarder. Thus, the government conceivably can just walk up to one of your employees and in the name of security confiscate your company laptop, tablet or smart phone. What trade secrets or customer lists are on these digital file servers? What confidential agreements have you just broken by allowing the government to view highly confidential information? Do you have an obligation to immediately file an injunction to prevent the government from viewing the contents of your smart phone? Do you have to report this to your Board of Directors?
PENNSYLVANIA EMPLOYERS WILL NEED TO UPDATE EMPLOYEE HANDBOOKS AND OTHER CORPORATE POLICIES IF NEW SOCIAL MEDIA BILL PASSES
Last month Philadelphia City Council proposed a bill that would prevent employers from legally requiring employees to provide them with access to an employee's social media account.
Highlights of the social media protections afforded to employees or prospective employees under the proposed bill include:
• prohibits requiring an employee to log on to a site in the employer's presence;
• prohibits the employer from gaining access to an employee's social media indirectly;
• protects the employee from retaliation if he refuses to give his username and password, or any other related account information.
The proposed bill does not however prevent an employer from monitoring an employee's use of his corporate computer, email and cell phone for use not consistent with corporate policy. What this bill makes clear is that every employer needs to have a clearly written corporate policy on what is and is not allowed relating to the use of its technology in an employee handbook.