Articles Posted in Business Litigation

Last week, President Obama signed the Defend Trade Secrets Act of 2016 or DTSA into law.  This new law provides the owners of trade secrets a private right of action against those individuals or entities who misappropriate trade secrets.  This new law for theft of trade secrets must be brought in federal court within three years of the theft.

While there are other benefits of the DTSA, the most powerful arrow it adds to your quiver is a civil ex-parte seizure of property.  In extraordinary circumstances, where you can show that an injunction alone will not be sufficient, you can actually petition the court to seize the property or trade secret you allege is in the control of the defendant.  As expected, the threshold for this type of relief is extraordinarily high and requires you to describe with a high degree of specificity the location and description of the property to be seized.  Once seized, a hearing will be held within seven (7) days of the seizure to determine if this was appropriate.  As with injunctive relief, a bond must be placed with the court in case your allegations are ultimately not true.

This new law does not replace the various trade secret laws in each state, but rather provide a uniform approach at the federal level that is more in line with the protections for patents, copyrights and trademarks. Previously if a trade secret was stolen there may have been several states to choose from with regards to where a plaintiff might commence its lawsuits.  Obviously, it would make sense to file in the state where the laws were the most favorable to the client.  Now however, the newly enacted DTSA, being a federal law, will greatly curb against this type of abusive forum shopping.

Last week we recognized the passing of Prince and discussed what impact the lack of a business succession plan might have upon his business empire.  This week we’ll cover the elements of a business succession plan.  First, it’s important to understand what a business succession plan is, and what it’s not.  A succession plan is a way to transfer control and ownership of a business to predetermined key people over time in a way that does not harm current operations.  It is generally comprised of a series of documents, including shareholder agreements, buyouts, stock pledge agreements, insurance policies and even your Will and trust documents.  These documents all need to be coordinated to carry out your overall plan in a way that reduces confusion and removes the potential for lawsuits at what may be the most perilous time for your business.  What you generally want to keep out of your plan are surprises.  This isn’t the place to tell junior you’ve always disapproved of his moral compass because surprises lead to conflict, which often results in costly litigation.  This is one of those times where Main Street can learn from Wall Street.  Just like everyone wants to know Warren Buffett’s successor, your customers, partners, vendors and employees are happiest when everyone knows what to expect.

The core of any business succession plan is to spell out in writing how a change in control is going to impact the operation, and thus success, of your business.  While there are lots of options, your choice will most likely be driven by your relationship to the person assuming control.  For example, if the business is being left in the hands of a family member, or a trusted existing member of your business, you may want to consider having a stock buy-out that is funded by insurance or through a tax deferred account.  This can be accomplished through a separate agreement or it may already even be in place if you have a well thought out shareholder or operating agreement.  You can also structure the plan so the business assets can be leveraged for purchase financing, although this carries additional risk.  Alternatively, if control is going to a new individual, or business for that matter, the insurance policy doesn’t work as well for obvious reasons.  In those cases, we often see earn out agreements where retiring shareholders receive an up-front lump sum followed by a series of payments over time.  Often these agreements require the departing owner to help transition clients to the new owner, gradually reducing their role in the company over time.  For tax purposes, these deals may take the form of a “sweetheart” consulting agreement or just straight cash payments.

How these deals are structured, and financed depend on multiple factors unique to each business, but they all have some of the same considerations at the planning stage.  Does it make sense to have your CPA do regular valuations of your business in case a shareholder wants to leave at some point in time?  Should there be limitations on when a departing shareholder can cash out in order to protect the financial condition of the company?  Are there key people who should be covered by non-compete agreements as part of any sale?  These and other considerations are best discussed with your business attorney long before the succession plan actually needs to be used.

By now, it is common knowledge that we have lost Prince, one of the greatest artists of our time. Though he is gone, his legacy will live on in his music, movies, and various other distributions of his image and art. Unfortunately, Prince had no will.  According to various estimates, Prince’s net worth at the time of his death was roughly 300 million with an additional 100 million expected in the next five years alone from fans that will continue to purchase the late singer’s songs and other memorabilia in his honor.  And if this is indeed true, this may be one of the worst business succession failures in recent memory in the music industry.  It just takes a second to recognize that Prince’s impact on society was far greater than just his music.  There were literally hundreds of thousands of tweets, articles and blog posts reflecting the impact Prince made upon them.  In short, Prince was an iconic brand that conducted business at his compound known as Paisley Park Studios just outside of Minneapolis.  Without having a will that established who will control his iconic brand, Prince essentially was running a multi-million dollar business without succession planning.

So why then do you want to have continuity succession planning in place? There are many considerations to take into account and in no particular order they are: mortality, tax planning, life changes or events to just name a few.

Mortality.  The only certainty in this world is that no one is getting out of here alive.   What will happen to your business when you are gone?  This can be a very emotional question and likely the biggest reason why people do not have estate plans.  People don’t like to talk or even think about their own death.  However, if you don’t deal with it, your survivors under the laws of intestate succession will be the ones running your business.  Think about how much effort you placed into getting your business going.  How hard you worked to create that brand and what it stands for.  Do you want your brothers and sisters or children running the show?  What about your business partners? The people with whom you share your personal and professional life may not be suited or capable of successfully working together and picking up the pieces after you did not plan carefully enough.  Truth be told, if you have partners (fellow shareholders), then they are also partly to blame here. While they are not responsible for your estate plan, they are equally responsible for not having a business succession agreement in place.  More on this agreement later.

For the viewers, reality television offers an escape and a harmless entertaining view of what a new house, fashion choice, or social situation might be like. For participants however, the experience can be anything but harmless.  On the HGTV show “Love It or List It”, homeowners turned to the show producer Big Coat TV and contractor Aaron Fitz Construction to renovate their North Carolina home. The couple had deposited $140,000 into an escrow account with Big Coat TV prior to construction to cover the cost of the renovations performed by Aaron Fitz Construction during the course of the taping. Plans were submitted for what the couple was looking for prior to agreeing to have their experience filmed.

In practice however, the episode shows an entirely different contractor who is not licensed in North Carolina.  A scaled down and subpar version of the original plans was completed.

The homeowners have since filed a lawsuit in Durham County Superior Court asserting claims for breach of contract and deceptive trade practices. The lawsuit contends that the work completed was shoddy and left the home “irreparably damaged”, with holes in the floor, low grade supplies, windows painted shut and more. It also questions why payments were not distributed as agreed to in the original contract as well as Big Coat TV’s use of unlicensed professionals. Instead of the couple paying for their renovation with a licensed contractor and having it filmed for a television program, they essentially paid for a set to be built that benefits the show and its advertisers that leaves this family with a potentially uninhabitable home.

Last week on March 30, 2016 the U.S. Supreme Court rendered a decision that significantly helps white collar defendants defend themselves against the Department of Justice (“DOJ”), Securities and Exchange Commission (“SEC”), Internal Revenue Service or whatever agency might be prosecuting them.  The Supreme Court held that the Sixth Amendment to the U.S. Constitution requires that a defendant must have access to his or her funds that are not tainted by criminal conduct to pay for the defense costs of a lawyer of his or her choosing.  Please click here to read a copy of this decision.

Prior case holdings allowed the government to restrict a defendant’s access to “untainted” or “innocent” assets in an amount sufficient to offset against what the government agency alleged it could expect to obtain after conviction and forfeiture proceedings. Stated differently, at the inception of a case the government would deprive a defendant from using his “clean” or “untainted” money which resulted in a defendant not being able to hire a skilled defense team of his choosing.  Before a defendant’s case even began, he was placed in a position of defeat.  This forced defendants to borrow money from family to defend them or otherwise be defended by an over-worked Federal Defender.

Undoubtedly there will be extensive litigation over the interpretation over what a “reasonable fee for the assistance of counsel” means as that term was used by the Supreme Court.  Also, it is important to remember that “untainted” means that a defendant will not be able to use the money he has from selling cocaine or from liquidating his “burglar tools”.  This too will undoubtedly be subject to great litigation going forward as well.  However, being able to cite to a Supreme Court case that relies upon the Sixth Amendment is a great strategic arrow to have in a defense attorney’s quiver when we now make our emergency motions to set aside government restraining orders that froze our clients’ assets.  Previously we were making these arguments but did not have the power of a Supreme Court case directly on point.

Over the past few weeks several landlord clients called and asked the same question, “My tenant bolted and left some of his junk behind. Can I throw it out?” The answer to each landlord was slightly different but came from the same source – 68 P.S. § 250.505a – better known as Pennsylvania’s “Disposition of Abandoned Personal Property Act.” This Act became effective a little more than a year ago in December 2014 and actually is the second attempt by the Pennsylvania legislature to provide guidance to both commercial and residential landlords on how to properly get rid of property that has been left behind.

The Act starts off by identifying five distinct circumstances when personal property remaining on leased premises may be deemed abandoned.

(1) The tenant has vacated the unit following the termination of a written lease.

Last September Deputy Attorney General Sally Yates authored a six point Memorandum that identified how the Department of Justice would more effectively go after individuals responsible for corporate wrongdoing. The theory behind the new found emphasis on going after individuals being that corporations only act through individuals. Please click here for a detailed entry I wrote last year on this blog about the Yates Memo.

From an officer or director’s point of view in light of the Yates Memo, they need to take a critical review of the indemnity provisions that are currently in place. By this I mean, what is their employer’s obligations to them if the officers, directors or even high level employees are accused of corporate wrongdoing by either an outside entity like the Justice Department, a disgruntled shareholder in the form of a derivative lawsuit, or perhaps even an internal company investigation? Hiring an independent lawyer to protect your interest in any of these situations is expensive so it is better if the company will pay your legal expenses and even better if your company will advance your legal expenses. Click here for a blog entry I wrote two months ago that explains why it is important to have your own lawyer represent you during these investigations.

To determine what your company will or will not indemnify requires a review of the company’s by-laws. Additional places indemnity provisions can be found are in an employment agreement and not surprisingly, an indemnity agreement. The best protection for an officer or director is actually to have a separate indemnity agreement. Too often I see my clients come to me with their problems but say, “I am not worried, I have indemnification. Look at the by-laws I brought.” Don’t get me wrong, this is a good start, but that is all it is. Do the by-laws require indemnification or is it permissive and require a vote of the board of directors? Even if it is required, are legal fees advanced or only paid after you are found not to have violated your fiduciary duties? Even if the by-laws state it is required and legal fees are to be advanced, what is the process for advancing legal fees? Will the company and its insurance carrier be able to hide behind a convoluted process to delay payments? Does the employer have the ability to restrict your choice of counsel? As you can see there are a myriad of issues even when it seems clear. Even if you have D&O Insurance, keep in mind that the carrier’s policy has exclusions. For example, a typical D&O policy will not cover attorneys’ fee in an internal corporate investigation. Also, D&O policies change year to year as companies are always shopping for better prices so what coverage you have in year one may not be what you have in year two and beyond. However, a well drafted indemnity agreement will require the company to cover all expenses, including legal, incurred in connection with your position as an officer or director of the company to the fullest extent permitted by law and will not change in scope from year to year. These are big differences.

At the end of last year on December 15th , Philadelphia’s Mayor Nutter signed into law an amendment to the city’s Fair Criminal Screening Standards Ordinance. The amendment, which goes into effect on March 14, 2016, limits an employers’ ability to inquire about the criminal history of a potential employee and provides prospective job applicants with criminal records considerable protection.

Beginning next March 2016, employers will no longer be able to inquire into an applicant’s prior criminal history until a conditional job offer has been made to the prospective employee. Employers are precluded from categorically denying an applicant an offer of employment based upon a criminal conviction without first making an individualized assessment that analyzes whether the criminal record serves as a legitimate basis for withdrawing the conditional employment offer. The employer should consider the following 6 factors when making this individualized assessment:

  1. The nature of the offense.

Earlier this year a Pennsylvania federal district court decided that a defendant could invoke his Fifth Amendment right to avoid self-incrimination by refusing to provide production of his smartphone passcode. In this case, the court denied a motion filed by the Securities and Exchange Commission (SEC) asking the Court to compel the defendant to produce his passcode. The Court held that the production of the passcode was personal in nature thus the defendant properly invoked his Fifth-Amendment rights.

The SEC tried to argue that because the smartphone was not the defendant’s personal property but rather the property of his employer, combined with the fact that the documents the SEC were interested in reviewing were company records, the employee was more akin to a custodian of records. Based upon this, the SEC argued that compelling the employee to produce his passcode was not a communication subject to the Fifth Amendment. The Court did not buy into the SEC’s argument.

The Court stated that the SEC’s reliance on the underlying documents was misplaced. The application of the Fifth Amendment does not turn on the nature or character of the underlying documents but rather on the production of the documents themselves. In this case, the production of the documents required testimony (in that he needed to provide the password) and could not be characterized by a “physical act”. The Court stated that where an act requires the use of the contents of a person’s mind or personal thought process… it cannot be “fairly characterized as a physical act”. Based on this, the Court held that the Fifth Amendment was properly invoked to preclude the defendant from being ordered to provide his passcode to his company smartphone.

One day you may find yourself unexpectedly involved in a grand jury investigation as a target, subject or witness. Before I explain the important differences between these legal distinctions I want to briefly cover the grand jury basics.

The grand jury is a group of individuals as a collective legal body whose function is to determine if criminal charges (an indictment) should be brought against a particular person or entity. Federal grand juries are comprised of between 16-23 individuals. What happens in a grand jury is kept secret. This is done for two purposes. First, it encourages witnesses to talk freely. Second, if the grand jury decides not to indict, the potential defendant’s reputation is not harmed. There is no judge in a grand jury and thus it is more relaxed than a typical court room. The prosecutor will explain the law to the grand jury and present witness testimony and exhibits for the jury to consider. The rules of evidence that pertain to the introduction of exhibits and testimony are relaxed at this stage and the grand jury has the ability to see and hear much more than what a typical jury would be allowed to consider. The prosecutor is able to compel individuals to give testimony at the grand jury by serving a subpoena-an Order of the Court that compels the individual to appear and testify. Remember, the grand jury does not decide guilt, but only if the prosecutor should bring the criminal charges in the first instance. The jury in a criminal trial is different group of individuals from the grand jury and the jury trial typically does not have the ability to consider everything the grand jury did.

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