Commercial Litigation

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

by H. Adam Shapiro

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

by H. Adam Shapiro

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

by H. Adam Shapiro

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

by H. Adam Shapiro

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

by H. Adam Shapiro

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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May 23, 2011

Protections for Employees Reporting Illegal Activity

by H. Adam Shapiro

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.
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May 13, 2011

Confidential Settlement Agreements and the Public’s Right of Access

by H. Adam Shapiro

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.
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May 10, 2011

Pennsylvania Property Owners Not Always Liable for Contractor’s Injuries

by H. Adam Shapiro

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.
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March 8, 2011

Attorney Client Privilege is now a Two-Way Street in Pennsylvania

by H. Adam Shapiro

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.
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