Recently in Commercial Litigation Category

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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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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July 2, 2013

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.

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June 7, 2013

New Proposals to Fight Patent Trolls

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.

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June 4, 2013

INITIAL OFFER LETTER OF EMPLOYMENT ALMOST INVALIDATES RESTRICTIVE COVENANT

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.

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May 22, 2013

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.

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May 8, 2013

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."

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April 2, 2013

It's All in the Family... Tips for the Family Owned Business

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.

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March 26, 2013

Litigation Alert: Pennsylvania Adopted Uniform Interstate Deposition and Discovery Act

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.

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March 19, 2013

SEARCH AND SEIZURE IN THE DIGITAL AGE

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?

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February 12, 2013

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

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.

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