Philadelphia Business Lawyer Blog

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."

Continue reading "BEST PRACTICE TIP: CRIMINAL BACKGROUND CHECKS OF POTENTIAL EMPLOYEES ONLY UNDER CERTAIN LIMITED CONDITIONS" »

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 short answer to all of these questions is, "I don't know, more facts are needed." What I wanted to point out however is what I want to call a "Best Practice Tip". An employer whose employees use mobile devices, be it smartphones or tablets, needs to have a clearly defined privacy policy in place with either a very limited expectation of privacy (or no expectation of privacy) and specific guidelines on how these devices are handled on a day to day basis and at the end of their useful life.

Continue reading "BEST PRACTICE TIP: PRIVACY CONCERNS WITH EMPLOYEE SMARTPHONES AND iPADS IN THE WORKPLACE" »

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.

Continue reading "NEW JERSEY REVISES ITS LIMITED LIABILITY COMPANY ACT" »

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.

Continue reading "It's All in the Family... Tips for the Family Owned Business" »

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.

Continue reading "Litigation Alert: Pennsylvania Adopted Uniform Interstate Deposition and Discovery Act" »

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?

Continue reading "SEARCH AND SEIZURE IN THE DIGITAL AGE" »

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 employee 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.

Continue reading "PENNSYLVANIA EMPLOYERS WILL NEED TO UPDATE EMPLOYEE HANDBOOKS AND OTHER CORPORATE POLICIES IF NEW SOCIAL MEDIA BILL PASSES" »

At the bottom of virtually every website is a link titled "Terms of Use" or "Terms and Conditions." Click on this and you will see the conditions a company wants to impose on its customers who click through their website. Traditionally courts have held that "terms of use" and "privacy policy" sections of a website are binding. However, a recent federal court decision ruled that a major company's Terms and Conditions was not enforceable and how the implementation of the user agreement (user agreements are what the courts typically call Terms of Use and/or Privacy Policies) was why the court decided the user agreement was not enforceable.

There are two categories of user agreements. The least effective user agreement is the browsewrap agreement. Businesses who adopt this approach take the position that the customer agrees to the user agreement by virtue of the customer merely visiting the website. No affirmative action is required by the customer other than visiting the website.

Contrast this approach with the clickwrap agreement. In the clickwrap agreement, the customer must click "OK" or "Agree" in order to accept the User Agreement before he can access the website. The best example I can think of is Apple. Anybody who has iTunes is familiar with the almost biweekly updates to the "terms and conditions" and that if you want to continue to use iTunes, you have to "Agree" or click "OK".

However, as much as people may criticize Apple, they are doing it correctly. Every time a change is made to a user agreement, it is a best practice to obtain the affirmative consent of the user. Failure to do so leaves the user agreement open to attack. The argument is that because the user was not aware of the one-sided unilateral change, it will not be controlling. In fact, this is exactly why the federal district court invalidated the Zappos user agreement. Because Zappos failed to obtain the customer's acceptance of new terms and conditions, Zappos was unable to impose its mandatory arbitration provision against its customer.

Continue reading "DO WEBSITE TERMS OF USE BIND CUSTOMERS? SOMETIMES." »

In a breach of contract case last month (January 2013), a Pennsylvania trial court correctly ruled (in my humble opinion), that a seller did not violate the terms of a covenant not to compete in an asset purchase agreement by providing services to its former clients. The new owners of the company argued for a broad interpretation of the word "solicit" and a holding that the seller had solicited its former business clients. The court disagreed, and in a very clearly worded opinion held the word "solicit" means more than just accepting work from a former client. In this case, the seller did not proactively reach out to any of his former clients, but merely agreed to work for them after the former clients unilaterally approached him.

This unfortunately was a case of a lawyer not paying attention to the details. The main asset in this sale appears to have been the customer list, and the buyer failed to ensure it was properly protected. This problem could have easily been easily avoided by including in the agreement a list of clients the seller could not work with, a mandatory referral clause, or perhaps a broader geographical restriction, just to name a few options. Realize now, every case turns on its own unique set of facts and circumstances and your situation may differ from what the court analyzed here. In the above example, the key fact for this particular court was that the plaintiff was unable to produce any evidence to contradict the seller's statement that he did not reach out to former clients.

Continue reading "CLIENT ALERT: RECENT COURT RULING REGARDING THE VIOLATION OF A COVENANT NOT TO COMPETE - SOLICITATION OF PAST CUSTOMERS" »

The General Counsel's Office for the National Labor Relation's Board has recently provided guidance regarding at-will employment disclaimers in employee handbooks. In the past, challenges of unfair labor practices (violation of Section 7 rights) have been successful before administrative law judges where the challenged language was read to imply that the at-will employment relationship could never be changed. Language that has recently found to be acceptable was where the employment was considered to be at-will, but that it could be changed only by the president of the company and that it must be in writing.

So what does this mean to employers? Word choice matters. Drafting an employee handbook alone or going to an office supply store and purchasing a form may seem like a good way to save money up front but can quickly cost more money in the long run. It is much better to have an attorney meet with you and actually observe and understand how your company operates and then draft a handbook that is tailored to your business and your state laws. In fact, insurance companies frequently will offer you a discount if you have an employee handbook that clearly states, for example, that sexual harassment and discrimination will not be tolerated and provides an employee a way to report such misconduct. Other issues a well thought out handbook should address include privacy and internet policies, as well as what benefits are and are not provided by the company. This is not meant to be an exhaustive list but is designed to get you thinking about what issues you should want to be clearly written down so that your employees know exactly what is expected of them in the workplace.

Continue reading "AT WILL EMPLOYMENT DISCLAIMERS - WORD CHOICE MATTERS" »

On July 9, 2012, the Financial Industry Regulatory Authority (FINRA) implemented a new securities rule governing the obligation of brokers to make "suitable" investment recommendations to customers. While FINRA Rule 2111 is based upon NASD Rule 2310 - the prior suitability rule - FINRA Rule 2111 expands the old rule in several significant ways.

The Suitability Obligation

Investors go to their stockbrokers not only to get advice as to which stocks are likely to offer good returns. They also are seeking input on which investments are suitable for their specific circumstance. The suitability rule is intended to provide the investor with peace of mind that his/her broker has reasonably believes the broker's investment recommendations are appropriate at the time the investment is made. Unfortunately, we have seen far too many situations where the proposed investment makes more sense for the broker than for the investor.

Rule 2111 requires that brokers:

"have a reasonable basis to believe that a recommended transaction or investment strategy involving a security or securities is suitable for the customer, based on the information obtained through the reasonable diligence of the member or associated person to ascertain the customer's investment profile"

FINRA Rule 2111(a) essentially takes existing case law and codifies it into three specific suitability claims. (1) reasonable-basis suitability; (2) customer-specific suitability; and (3) quantitative suitability.

1. Reasonable-Basis Suitability
Reasonable-basis suitability means that a broker must perform reasonable diligence to understand the investment products and strategies that the broker recommends to her customer. The broker must also be able to demonstrate that she actually understands the product that she is recommending to her client.

2. Customer-Specific Suitability
Customer-specific suitability means that a broker must have a reasonable basis to believe that her recommendations are suitable for a customer based on the customer's "investment profile." The broker must be able to establish that she understands who her client really is, what their needs are, and how this recommendation fits into what they are trying to accomplish.

3. Quantitative Suitability
Quantitative suitability means that a broker who has control over a customer's account must have a reasonable basis to believe that a series of recommended securities transactions is not excessive (often called a churning analysis). The broker's must be able to establish that her overall trading record comports with the client's goals.

New Requirements Imposed Upon Brokers

FINRA is clearly trying to send a message to brokers in this new economic climate and that message is "You will be responsible to your clients." They are also expanding the potential definition of "clients" to include those who only had an informal relationship with the broker or prospective customers who may never have opened an account with the firm. Even recommended strategies, such a "hold" recommendation, may come under the purview of new FINAR Rule 2111. There is no requirement that the advice resulted in a commission before Rule 2111 comes into play. Simply put, brokers are now responsible for all customer recommendations.
While this is not an exhaustive discussion of the impact the new FINRA Rule will have upon brokers and their customers, it is clear FINRA is trying to chart a new course with an emphasis on protecting the individual customer from abuse. FINRA arbitration is relatively cheap and quick, especially in comparison to litigation a case in court. In fact, there is an expedited process for the elderly wherein you can file your complaint and have your case heard in less than 9 months.

Continue reading "FINRA's Adopts New Suitability Rule" »

Just this spring, what is usually seen as a pro-business Supreme Court issued a ruling clearly on the side of workers. The case, Kasten v Saint-Gobain Performance Plastics Corp., addressed the question of protection for workers who file complaints against their employers. Smart business owners, with the right policies, will be able to turn this case to their advantage in keeping government investigators out.

The general rule has historically been that workers who report the illegal activities or illegal working conditions of their employers are protected from retaliation. This makes sense, we want those with inside knowledge of their employers fraud or illegal activities to feel they can come forward without risking their livelihood. But if the employee reported the problem internally, to an owner or supervisor instead of the government, there was always a question of whether protection applied. In other words, by trying to get the company to fix the problem in house, quietly and without a governmental investigation, did the employee lose the protections of the anti-retaliatory laws? The Court said no, employees who try to solve problems in house are still protected by the law (in this case, it was the Fair Labor Standards Act), even though the government was not involved. To qualify for protection against retaliation, the complaint can even be as simple as a verbal statement to a supervisor, it doesn't have to be in writing.

Since it's not unusual for less then stellar employees to have complained to a supervisor about working conditions or practices, this certainly creates an additional burden for the employer to comply with prior to terminating these under performing workers. It's not hard to image a scenario in which a company's failure to plan appropriately creates retaliation liability even when there was no provable case of an underlying violation. Of course, it also presents a huge opportunity for a proactive company to encourage internal self-reporting. As an owner, it's always preferable to learn about potential problems directly from your employees, rather then after they've reported your business to the governmental authorities.

Continue reading "Protections for Employees Reporting Illegal Activity" »

Confidentiality terms in settlement agreements are fairly commonplace, but most people do not know that until recently the courts would often ignore them. Historically, the public's "right of access" to judicial records outweighed a party's desire to keep their settlement confidential. This makes sense when the issues involve public interests or safety concerns. But when the settlement involves trade secrets or other proprietary information, businesses have long argued the public's right of access should be more limited. In many cases, especially with regard to hi-tech and growth companies, the desire for confidentiality is the prime motivation for settling the case.

In a recent 3rd Circuit ruling, LEAP Systems Inc. v. MoneyTrax, the court shifted away from previous decisions to allow business's a better chance at maintaining the confidentiality of settlement agreements. In the LEAP case, the settlement was based on assurances from the court that the agreement would remain confidential. The district court's assurances of confidentiality were clearly a pervasive factor for the 3rd Circuit, and not something every trial judge is going to agree to put on the record. But counsel certainly should ask for a statement on the record that confidentiality is a key term of the settlement. Also, in most cases the business will want to justify the reasons for the confidentiality on the record, since the importance of trade secrets may not be as apparent to courts reviewing the matter in the future as it is to the trial judge overseeing the settlement discussions. These were both factors considered by the 3rd Circuit in finding in favor of LEAP on the confidentiality issue.

One way around this privacy risk has always been to keep the terms of your settlement agreements away from the courthouse. But in many cases, especially in certain federal courts or business law courts like Philadelphia's Commerce Program, judges may be highly involved in facilitating the settlement process. When that happens, the settlement agreements or even the oral transcripts of the proceeding may be considered judicial records subject to public access. Even if the parties reach a settlement on their own, the court often becomes involved with motions to enforce down the line. The LEAP case begins an outline of how to maintain the confidentiality of these records.

Continue reading "Confidential Settlement Agreements and the Public's Right of Access" »

The Pennsylvania Supreme Court in a recent decision stated that residential and commercial property owners who hire contractors are not responsible for personal injuries happening during construction on their property. Previously, plaintiffs had argued for a "retained control" exception where property owners could be held responsible for injuries to workers if the owner was present at the job site and exercised control over the construction project. The theory was if the owner was present at the job site, then the owner bore a responsibility to recognize any unsafe condition and do something about it. This recent decision by the court ends this avenue of attack created by the plaintiff's bar, which had put owners in the uncomfortable position of weighing liability burdens against the need to supervise their own projects. Now the law is clear that property owners are not liable for the injuries to the contractors and their subs so long as the owners did not control the "means and methods" of how the work was performed. In other words, did the owner actually tell the injured party how to ply his trade?

The impact of this decision is clear. With a little proper drafting, both residential and commercial property owners can greatly reduce their risks from personal injury claims of workers injured on their property. Commercial property owners should seek legal advice to have their contracts reviewed to insure they have language in place that require a safe and organized work site. From the contractor and subcontractor perspective, the gun has clearly been leveled in your direction and care needs to be taken to make sure you have the proper insurance in place in light of your increased singular exposure; as well as to make sure your contracts have the appropriate contractual protections as well. Contractor's agreements also now need to be especially careful not to take on unnecessary liability in those situations where the owner is dictating the work or acting as their own GC.

Continue reading "Pennsylvania Property Owners Not Always Liable for Contractor's Injuries" »

Many clients have often been surprised to learn that the attorney client privilege in Pennsylvania did not necessarily apply to advice their attorney's gave them. Previously, the Pennsylvania Superior Court had held that only communications made from the client to the lawyer were privileged, not those flowing from the attorney to the client. That holding, which is in conflict with the approach taken by most other states, was recently overturn on February 23, 2011 by the Pennsylvania Supreme Court. The Supreme Court held that the attorney client privilege now operates to protect confidential client to attorney and attorney to client communications made for the purpose of obtaining or providing legal advice. This decision is extremely important to both Pennsylvania lawyers and clients alike because it allows for a much more open flow of information between client's and their attorney advisors.

The benefits afforded to clients as a result of this broader interpretation of the Pennsylvania privilege statute is that counsel may now, for example, proactively advise clients about a compliance issue without the attendant privilege concern that existed under prior law. Attorneys will be able to guide their clients through the process of curing ongoing legal problems without the fear that their advice could be discoverable in court. Not only will this benefit the client, as it will certainly facilitate a more open dialogue, but the benefits will also hopefully trickle down to benefit society as a whole.

Continue reading "Attorney Client Privilege is now a Two-Way Street in Pennsylvania" »