Business Litigation Roundup

As we head to the new year, here is a round up from some fellow bloggers on contracts, cobra, wage disputes, patents, and oral agreements for limited liability companies. 

The California Business Lawyer Blog offers a very detailed post about contractual relationships  between manufacturers and suppliers.  The focus is on well drafted agreements eliminating the fears and concerns of both sides.

A lot of talk about the AT&T suits in different states for $1 billion dollars for unpaid overtime.  The suits picked up a lot of steam with a recent employee favorable ruling from the federal court in Connecticut allowing the claim to proceed as a class action. Rush on Business covers some tips for businesses to avoid these suits.

Just in time for Christmas, President Obama has extended the COBRA subsidy.  Dan Schwartz’s Connecticut Employment Law Blog covers this topic in detail for employers.

Twin Cities Business Litigation Blog has an interesting post on concerns you might have as a shareholder of corporation that fails to follow corporate formalities.  Gavin Craig gives examples of how a shareholder could be exposed to liability.

Anyone who frequently litigates matters involving limited liability companies will tell you that there is not much case law out there in Connecticut.  It is still a developing area of the common law.  Delaware law is often a good option for law in this area because these issues are more frequently litigated by volume in Delaware.  A good resource is the Delaware Corporate and Commercial Litigation Blog.   Two recent posts concerning oral partnerships and LLC agreements are just an example.

PatentlyO hits on some themes for 2010, including an expected increase in patent prosecution and litigation.    They also have a cool picture of heat miser, a childhood classic.

Jeff Mehalic, author of the West Virginia Business Litigation Blog, writes a detailed follow up post to his coverage of the Connecticut dispute between Charter Oak Lending and CTX Mortgage.  Jeff also comments about a post I wrote on the same case.  The case remains significant as it is an example of what can go wrong when a business grows too fast and no written agreements are in place with employees.

Just In Time For Christmas – – Lawsuits, Snowball Fights, and Michael Bolton

 Here’s some humor for the holidays:

  • A very funny post from Faces of Lawsuit Abuse.org.  It is a 2009 poll of the most ridiculous lawsuits of the year.  My vote was for the April winner: "Tourist sues New York club after she slipped while dancing on top of the bar."  (story here). The judge carefully examined the facts and made his ruling according to simple math:  drunk + dancing + wet bar = case dismissed.

 Happy Holidays everyone!

 

Are Settlement Agreements Enforceable In Connecticut

The short answer is that it depends.  Settlement agreements are generally enforceable if the terms of the agreement are clear and authorized by the litigants or parties to the litigation.  In Gengaro v. City of New Haven (to be officially released December 29th), the Appellate Court had another opportunity to comment on the long standing law in Connecticut that "a compromise agreement . . . if free from fraud, mistake or undue influence . . . is conclusive between the parties." 

In Gengaro, a trial court granted summary judgment in favor of the City concerning employment claims because Gengaro had signed a confidential settlement agreement prior to the lawsuit.  Gengaro claimed he was forced to so sign the agreement because of threats of losing his job.  He claimed undue influence to attempt to invalidate the settlement agreement.   Gengaro claimed that he had serious financial and medical problems.  Coupled with the threat  of job loss, he claimed that he had no reasonable alternative but to agree to the settlement.  

The trial court granted summary judgment finding insufficient issues of fact concerning undue influence.  Essentially, the court concluded that the threat of losing his job was not sufficient for the exercise of undue influence.  The Appellate Court agreed.  For a good analysis of what employers should to to avoid these type of claims check of the Connecticut Employment Law Blog post on the case.

To establish undue influence in Connecticut, four elements must be established:

  • a person is who is subject to influence
  • an opportunity to exert undue influence
  • a disposition to exert undue influence; and
  • a result indicating undue influence

Relevant factors in the inquiry include age, physical and mental condition, whether the person had disinterested or legal advice, the consideration of value of the contracted for exchange, and active solicitations and persuasions by the other party.

In summary, undue influence is the exercise of control by one person over another in an attempt to destroy the person’s free agency and "constrain him to do something other than he would do under normal control…"  Undue influence, if demonstrated, may invalidate a contract because the free assent of one party to the contract is lacking.

Settlements agreements are enforceable in court if the terms are clear and authorized by the parties.  Attempting to invalidate the agreement by showing undue influence, fraud, or mistake are difficult claims to make.  The take away here is to carefully review your settlement agreements with counsel because once you sign an agreement, it is likely to be enforced absent special factors.

 

 

Connecticut Guaranty Fund Offers Some Recovery For Homeowners Harmed By Construction Contractors

Recently,the Attorney General’s office announced another criminal conviction against a home improvement contractor responsible for many failed home improvement contracts. The report also indicated that the homeowner consumers were going to get some financial relief from the Home Improvement Guaranty Fund (HIGF).  The HIGF offers up to $15,000 in relief to consumers who meet certain conditions including:

  • failed contract with a register contractor
  • contract was for residential dwelling
  • you must first obtain a court judgment against the contractor
  • you must take reasonable steps to enforce the judgment without success

Any consumer who meets this criteria can file an application that is posted online.  This applies to home improvements, not new construction.  Consumers of new home construction in Connecticut can apply to the New Home Guaranty Fund (NHGF) for  up to $30,000 in relief.  The same basic criteria apply here, but the fund involves new home construction contracts.

 Many times, when a contractor goes bankrupt or has no assets, the HIGF and NHGF are the only source of recovery for consumers that were victim of defective or negligent construction for new construction and home improvements.  When a consumer decides to bring a lawsuit against a contractor, the first questions asked should be whether the contractor has assets to pay any judgment.  If not, the funds may be the only realistic option for recovery

Of course, the goal is for homeowners to find their way to the many reputable contractors in Connecticut to avoid this type of problem.  Reputable contractors will urge consumers to look up a contractor’s history of complaints with the Department of Consumer Protection before signing a contract.  Consumers should also ask for references and follow up on them before signing any contract.  A reputable contractor will have no problem providing several references and examples of work product. 

It is also critical that a consumer check to see if a contractor is properly registered before signing the contract.  Although failing to properly register may be criminal, the lack of registration could prevent a consumer from recovering even the limited amounts under the guaranty funds.

Health Net’s Data Loss In Connecticut Was Theft

Attorney General Richard Blumenthal issued a scathing press release related to Health Net’s recent data loss and security breach.  Blumenthal called Health Net’s story on it "sanitized" and its six month delay in reporting "unconscionable."  Blumenthal called for a federal investigation and intensified state efforts because of the sensitive financial and health information at risk for exposure.

Health Net is based in Shelton, Connecticut and is one of the largest health plans in the Northeast serving approximately 580,000 members.  A report by Lucas Mearian of Computerworld stated that the information stolen was a portable hard drive that had not been encrypted.  Proper encryption could have prevented access of the information.

Connecticut consumers have been affected by the data loss and more than a million people had social security numbers and financial and medical information exposed. Consumers in Arizona, New Jersey, and New York also had sensitive information exposed.  Thus far, there has been no report of identity theft or misuse of the information.

 

Breach of Fiduciary Duty In Connecticut

Here is a quick summary of another of the so called "business torts" in Connecticut known as breach of fiduciary duty.  A fiduciary duty can arise in a number of contexts in business including relationships with partners, lawyers, accountants, trustees, investment advisers, brokers and employees.  When one party in a relationship is a fiduciary, it requires the party to act with the utmost good faith, fair dealing and loyalty. 

Many times, breach of fiduciary lawsuits are filed in Connecticut when the relationship breaks down over lost or mismanaged money.  Frequently, business partners are also found to be fiduciaries with respect to each other.  A fiduciary relationship may be formed when the following factors exist:

  • unique degree of trust and confidence between the parties
  • one party has superior knowledge and skill
  • the party with superior knowledge has a duty to represent the interests of the other part

Connecticut’s common law on breach of fiduciary duty law is flexible in that it will not exclude new situations, but is also clear that not all business relationships are fiduciary relationships. For example, courts will not recognize a fiduciary relationship for parties that are dealing at arm’s length for transactions.  This is because the relationship lacks a dominance by one party or dependence by the other, or the lack of a special relationship.

The legal recognition of a fiduciary relationship is very significant in a lawsuit in Connecticut.  If a plaintiff proves that a fiduciary relationship exists, the standard and burden of proof changes.  A plaintiff has to prove that a fiduciary duty exists by a preponderance of the evidence. Once established, the burden shifts to the fiduciary as a defendant to prove good faith and fair dealing.  Further, the fiduciary must prove good faith by clear and convincing evidence.

Because of the burden shifting and higher standard, fiduciary cases are often won or lost on the legal characterization of the relationship. 

Auto Body Association Wins 15 Million Dollar Verdict For Unfair Trade Practices

On November 17, a superior court jury in Stamford returned a 15 million dollar verdict in favor of the Auto Body Association of Connecticut (and three other auto body repair shops) arising out of claims againt the Hartford for unfair trade practices. The case docket goes back to 2003 and was filed based on claims that the Hartford was supressing auto body labor rates by steering customers to preferred appraisers and auto body shops.

The website search-autoparts.com provided some insights into the case stating that the claims were supported by "extensive documentation including internal memoranda detailing company policies, as well as several depositions by company employees."  In addition to the 15 million dollar verdict, the Association is now looking to obtain injunctive relief, and potentially punitive damages according to a article in the Hartford Courant by Kenneth Gosselin.  According to an article by Rob Varnon on newstimes.com  the problem started when the Association believed that customers with damaged cars were being steered to preferred shops with lower rates according to terms of the insurance company, not the customer.

The Auto Body Association of Connecticut has taken issue with the practices of appraisals and auto body repair rates for years now.  At one time, even before this current case, I represented one of several independent appraisal companies sued by the Association seeking discovery of documents related to the same set of issues.  Our group of defendants was successful in defending the discovery lawsuit, but it was clear then that the Association intended to bring additional claims.  The Attorney General is also getting into the dispute now seeking federal intervention after having sided with the Association in the past

The Hartford intends to continue defending its appraisal and repair program on appeal and with post trial motions.  The Hartford stated "we are disappointed with the verdict and plan to appeal.  We remain confident that our auto-body repair program is fully consistent with Connecticut law . . ." 

This litigation seems far from over.   Only time will which side will eventually prevail.

New Study Shows Small Businesses Vulnerable to Cyber Attacks

The National Cyber Security Alliance recently released a new study with some startling numbers concerning small businesses and the threat of data loss, security breach, or cyber attack.  Some of the key numbers obtained from polling small business owners include:

  • 65% store customer information on computer systems
  • 43% store financial records
  • 33% store credit card information
  • 86% do not have anyone focused on system security
  • 11% of owners never check their computer security systems.
  • 75% use the internet to communicate with customers
  • 28% have formal internet security policies

What do these numbers suggest? Deborah Cohen, who covers small business for Reuters.com, published an article following release of the study and “confirmed that small businesses are among the most vulnerable to Internet crime. . .” She quoted Michael Kaiser, executive director of the National Cyber Security Alliance, who noted that “small businesses are pretty robust targets” for cyber attacks citing the lack of Internet protocol and employee training. Cohen’s article also offers some tips from Kaiser for small businesses to help confront cyber attacks.  

If you are looking for some guidance or help with cyber security, read here for some of my earlier posts.  If you are looking for a do-it-yourself placer to start, try the U.S. Chamber of Commerce.  The Chamber offers a great resource entitled“Common Sense Guide to Cyber Security for Small Businesses.” It’s a 12 step plan to increase cyber security. Here are some highlights:

·         Use strong passwords and change them regularly

·         Watch for strange email attachments

·         Install computer security software and network security

·         Keep software updated

·         Limit access to sensitive and confidential data

·         Establish and follow security plan

·         Maintain insurance coverage

The threat of data loss or security breach is not going away, but will only increase. Lawsuits concerning data loss and security breach are more frequent. Business owners need to stay on top of the threat by implementing a sound data loss and privacy plan. There is no one size fits all approach and every business will have its own risk exposures. If you are a business owner, consider having your business evaluated for risks of cyber attack or data loss. 

 

Do You Need A Contract To Stop A Former Employee From Competing?

The short answer is yes, a business does need a contract, also known as a "non-compete agreement," to prevent a former employee from fairly competing in business once the employee resigns.  Even with a written agreement, there are limitations on non-compete agreements because they are viewed as a restraint of trade.  To be enforceable, the restrictions in the agreement must be reasonable in time, scope, and geography. The restrictions also must be reasonable in relation to legitimate business interests you are seeking to protect.   

A poorly drafted agreement, or no agreement at all, can leave a business with little legal recourse to stop a former employee from fair competition once the employee resigns.  Simply put, the law in Connecticut permits fair competition upon resignation.  However, the lack of a written agreement does not give free license to employees to unfairly compete in all circumstances. 

For example, what about an employee that starts competing against your business without your knowledge while continuing to work for you?  Is this fair competition that should be freely permitted?  Depending on the circumstances, this type of conduct can be actionable in a civil case for damages.  The actionable conduct is breach of the employee’s common law duty of loyalty, which exists without a written agreement in certain circumstances.  There are also statutes in Connecticut that can protect businesses in certain situations that do not require contracts such as unauthorized computer access or misappropriation of trade secrets.   

I just read a story about a recent case that demonstrated some of the legal issues involved when there are no contracts in place with former employees.  According to the small business report by Carlye Adler of CNN, Charter Oak Lending, located in in Danbury Connecticut, lost a trial against several former employees who allegedly left to work for a larger company, CTX Mortgage.  Charter Oak alleged it lost more than a third of its business and a million dollars in fees after a sudden departure of 10 employees to CTX. The litigation lasted four years and ended with a defense verdict for the former employees. Charter Oak is appealing the decision. 

It appears that the decision against Charter Oak was based in part on the lack of contracts and the categorization of the defendants as independent contractors rather than employees.   The Trade Secrets Blog by Womble Carlyle picked up the story and had an interesting take focused on pure versus unfair competition.  The blog post supports the legal concept that a line can be crossed turning pure competition into unfair business. 

Charter Oak’s appeal of this case will be interesting to follow.  The outcome will likely depend on what evidence existed at trial to demonstrate unfair competition prior to the employees’ departure along with consideration of the duty of loyalty.  The takeaway is that it is always better to have written agreements to protect your business’ customers, client lists, and confidential information.  However, the lack of such an agreement will not always give free license to former employees to unfairly compete in all circumstances.   A close examination of the facts of each case must be undertaken to consider common law and statutory remedies that do not necessarily require agreements. 

Did A Secretary Cause A Billion Dollar Default Judgment Against PepsiCo?

Imagine your company is so busy preparing for a board meeting that a secretary sets aside paperwork from a recently served lawsuit for a billion dollars over trade secrets.  Imagine further that your company bureaucracy fails to put it together that a lawsuit has been filed until such a time that your company becomes defaulted in the case, to the tune of $1.26 billion dollars.  Ouch. 

Well, that is exactly what happened at PepsiCo according to a report by Lynne Marek in the National Law Journal.  According to the story, PepsiCo for various reasons, failed to realize a lawsuit had been filed or a motion for default until it was too late.  The case involved allegations that PepsiCo stole trade secrets and ideas for Aqaufina from two Wisconsin men.  When the suit went unnoticed,  a Wisconsin state court judge granted a motion for default against PepsiCo.

Marek writes that PepsiCo is trying to undo the damage and vacate the default.  Perhaps PepsiCo can vacate the default, but if not, it is a devastating blow in litigation to lose your liability defenses. By all accounts PepsiCo indicates the lawsuit is questionable suggesting numerous defenses exist.  Unfortunately, it appears there is a chance they may never get to assert the defenses.

In Connecticut, if you are defaulted for failing to respond to a lawsuit and a default judgment enters against you, you also can lose the ability to defend against the allegations in the complaint.  If you further fail to appear in the case before the court determines the amount of damages (usually at a hearing), then you may also lose your ability to defend against damages claims. Of course, there are various ways to avoid a default judgment (such as filing an appearance before judgment enters), but if a lawsuit is ignored too long, you could face a similar fate as PepsiCo.

To avoid the PepsiCo disaster, Connecticut businesses should have a policy in place to handle all matters related to litigation or lawsuits.  A business should designate one person that all staff can refer litigation issues, lawsuit papers or any other documents.  Lawsuits should be given immediate attention so as to not miss any deadlines. 

In state court, deadlines can determined from civil summons or cover page of the lawsuit. 

  • A defendant has to file an appearance within 2 days of the return date listed on the civil summons
  • A defendant also has 30 days from the return date to file a responsive pleading to the complaint . 

These deadlines should not be ignored.  Although there are methods for vacating a default, even a frivolous lawsuit can end in a judgment if ignored for too long.