This week I reviewed three Non-Disclosure Agreements and was surprised when two of the NDAs were silent regarding employee solicitation. Working with clients over the years I have found that in virtually every successful company, it is almost always the employees, along with the technology, that are among the most valuable assets that need protection. Yet in the deals my clients were exploring, these valuable assets were not protected, or at least would not have been protected had my clients not shared the NDA with me before signing. First however, I want to take a step back and discuss why the NDA (also called a Confidentiality Agreement) is used, and identify common NDA scenarios.
The American Rule
In the United States, each party is responsible for its own legal fees. This is known as the “American Rule.” In other countries, the U.K. for example, the loosing party is responsible for the winner’s legal fees. This critical difference in approach to the general legal framework explains why litigation in the United States runs amuck as compared to our British counterparts. New Jersey however has an oft forgotten procedural rule that when used properly turns the “American Rule” on its head and effectively makes the losing party pay for the winner’s attorney fees if certain conditions are met.
Attorney Fees in NJ
If you are reading this then one of two things have probably happened. You have a business relationship with another person or entity that is taking advantage of you and you need to change it immediately. You were just served with a complaint that provides a response deadline. In either scenario, you should hire a lawyer to protect your interests. But when do you this? How do you do this? Do you even know any lawyers? What if I choose the wrong lawyer? How do I hire the right lawyer? Lawyers are intimidating and jerks (so I have been told). These questions and statements are very common when I meet clients for the first time. Knowing this, I have always wanted to prepare a cheat sheet that clients can refer to help them navigate the very unfamiliar process of how to hire a lawyer.
Step 1. Be proactive – Start Your Search and Do Not Wait to Hire Your Lawyer
If you were served with a complaint and do not respond before the indicated deadline, the plaintiff (the person who filed the complaint) can ask the Court to enter a default judgment against you. Do not wait until the last day to reach out to hire an attorney. It is always a better strategy to meet with an attorney (or with several attorneys) as soon as possible so you can see if you can work together. The quicker you start your attorney search, the quicker you will hire an attorney. Do not wait. This only leaves you with less time to choose the best lawyer for you. So, where do you begin?
A recent court decision from the Philadelphia Courts should cause anyone with a commercial lease to review their contracts. The issue in this case required the court to determine if a confession of judgment clause in a commercial lease was enforceable. The Court ruled the confession of judgment clause was not enforceable against the tenant because the landlord did not strictly follow the statute. As a result, the Court struck down the confessed judgment. While not ground breaking in and of itself, the opinion serves as a reminder that a court will closely scrutinize all confessions of judgment. You can read the court’s decision by clicking here. Before we look closer at the court’s decision, a basic understanding of what a confession of judgement is and why it is so powerful is required.
What is a confession of judgment?
A confession of judgment clause is usually found in most commercial lending transactions and commercial leases. In a nutshell, a confession of judgment clause flips our notion of due process on it head. A confession of judgment clause authorizes the attorney for the bank or landlord to appear for the borrower or tenant without any notice and enter a judgment for a specific amount of money (or for possession of the premises in a lease situation). Think about this for a second. The first pleading your lender serves is the paper that informs you a judgment was entered against you. Game over. Or is it?
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.
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.
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.
In today’s business climate we cannot seem to go a few weeks without the next big company fraud that has been foisted upon the public. The current scandal du jour is Volkswagen and tomorrow it will be who knows. At some point however, either as a result of a whistleblower or anonymous tip, a corporation will conduct an internal investigation to (1) uncover the facts surrounding the current problem and (2) advise management, including the board of directors, of the potential liability and suggest a course of action. It is a “best practice” that when conducting an internal investigation, that a company retain an outside law firm specifically for the investigation to show that the directors of the company are zealously discharging their fiduciary duties to investigate suspected wrongdoing. While these outside attorneys will undoubtedly have access to all company documents and emails, including servers, a large part of the investigation will center upon these attorneys and their interviews with company employees.
If you find yourself in the situation where you are about to be interviewed in connection with a company investigation you need to ask yourself two questions. Do I need a lawyer? Who pays? If you truly played no role in what the company is investigating you don’t need a lawyer. However, if you are a key insider who has information that will shed important details on what transpired you certainly would want to retain your own lawyer. There are many reasons why and I will address them below.
First, consider that earlier this year the Department of Justice set forth a Memorandum that identified that it would go after the individuals responsible for corporate wrongdoing and work its way inward towards the corporate hub. In addition, Justice conditioned any corporate cooperation credit that a corporation could hope to receive would be conditioned upon the disclosure of all corporate wrongdoings and all of the individuals that performed them. Think about this for a second. If the company you are working for is the subject of an investigation and wants in effect what is leniency in its “corporate sentence,” it must turn you over to Justice.