Connecticut Business Litigation Blog : Connecticut Business Lawyer & Attorney : N. Kane Bennett : Aeton Law Partners LLP : Hartford, Middletown, Glastonbury

In any case involving theft by a business partner or business dispute, it is very important to have an understanding of the basic issues and legal framework. Although these cases often involve complex problems, you cannot determine a good course of action without starting with the basics.

Here are 5 of the basic issues and what to do if you anticipate a business dispute with a partner or small business in Connecticut.

1. Figure out the type of entity you formed for your business

Principals of small or closely held companies or partnerships typically start off their businesses by choosing an entity such as a Limited Liability Company (LLC), Limited Liability Partnership (LLP), or Corporation (C Corp. or S Corp.). This may seem like a "no brainer" but you might be surprised that many partial business owners (typically minority owners) do not know the exact type of business entity they own.  

To determine what type of entity you formed look for documents such as Articles of Organization, Articles of Amendment, Certificate of Incorporation, Organization and First Report, Certificate of Amendment, Certificate of Limited Liability Partnership, or Statement of Partnership Authority. These are the so called "incorporating" documents or "originating" documents filed with the Secretary of State. These documents clarify the type of entity chosen and the original incorporators or members of the entity. These documents are available to the public and are available for searching at the Secretary of State website www.concord-sots.ct.gov . If you cannot find your documents, try searching the Connecticut Commercial Recording Division website.

2. Figure out the structure and control of your entity.

The structure and operations of an entity often are governed by formal documents in most cases, or by default rules in others. Formal documents may include bylaws, resolutions, shareholder agreements, stockholder agreements, voting agreements, or operating agreements. These documents likely detail your ownership and management rights.

Of course, we see many cases where these agreements do not exist or were never finalized. It remains important to find what you have to show any agreement, even if informal. Maybe you exchanged some emails or you drafted a memorandum of understanding or informal partnership agreement. However, if you do not have a formal or informal agreement, Connecticut General Statutes can operate as a fall back or default to govern the operation and management of corporate entities. You can review the basic statutory laws of Corporations on the Connecticut General Assembly Website www.cga.ct.gov/current/pub/titles.htm . For example, Connecticut statutory laws for Corporations are found in Title 33.

3. Get access to the books and records of the business.

Many times, clients come to us after the business partnership has fallen apart, become insolvent, or dissolved. In many of these instances, one of the partners has access to all the records, and the other partner does not. Your rights to obtain company records may be spelled out in the agreements or documents mentioned in # 2 above. Alternatively, inspection rights for books and records are provided by statutory law. For example, Connecticut General Statutes § 33-946 - 950 permits inspections of books and records by shareholders and directors. However, many times feuding business owners end up having to file a so called "books and records" lawsuit in Connecticut state court to get access to the corporate books and records.

Getting access to the company financials is important. At minimum, you should seek to obtain summary financials, such as income statements, profit and loss statements, or trial balances. However, the ideal is to have access to the actual raw data. This means getting access to bank account(s) (including web access), loan accounts, credit accounts, and the company accounting journals. Getting access to this data may depend on whether the accounting software is server based, such as Peachtree, or cloud based such as QuickBooks online.

4. Identify all sources where records might be stored

Businesses generate all kinds of data and records. Increasingly, this data is completely digital and electronically stored on a computer, server, or at third party sites such as Rackspace or Boxnet. Additionally, emails seemingly become critical in every case that ends up in litigation. You need to identify where emails and other electronic means of communication (text or instant message) might exist such as the company email servers or third party sites (i.e. Google, Microsoft, Comcast, or Verizon).

Once you identify the locations of the records, you may need to try to preserve this information so you have it in usable form in the event of a dispute. Correctly copying digital records may require an expert in computer forensics. You also may want to involve an attorney so that you understand the full extent of your obligations to preserve evidence and gain protections from discovery.

If your dispute requires a lawsuit to resolve, you many need to act quickly to subpoena records from third party providers before records become lost, destroyed or deleted. If you suspect key evidence exists in emails, you may need to subpoena Internet service providers or third parties that provide applications over the Internet such as Google. Generally, to get the authority to issue a subpoena, an attorney will need to bring a lawsuit concerning the dispute or a lawsuit seeking permission to seek "discovery" of these documents to help build a case.  This is known as a bill of discovery. 

5. Seek help from professionals.

Various professionals, such as forensic accountants, computer forensic experts, fraud investigators, and attorneys can assist in most business disputes. It is a good idea to consider a conference with a professional to review your concerns. Also, you should always consider having your attorney lead the investigation as the involvement of an attorney can add a layer of protection when your opponent later seeks to obtain the results of your investigation.

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Many Connecticut business owners have agreements (so called "non-compete agreements") in place with their employees concerning competition or solicitation. When an employee leaves a company, business owners have to decide if they should try to enforce the non-compete agreement by filing a lawsuit or engaging an attorney. Here are 5 factors to consider:

1. Is the contract reasonable? I have reviewed hundreds of these agreements, and they are all different (even the agreements I draft). There are various legal and factual requirements that you will need to satisfy for enforcement of non-compete or non-solicitation contracts. However, in general, the first question you have to ask is whether the contract is reasonable in light of the business you are in and purpose behind the specific contractual terms.

For this reason, it is always a good idea to have an attorney draft your agreement specifically tailored for your legitimate business concerns. Getting a form template online and applying it to your business may seem like a cost effective approach, but what happens when you really need to enforce your agreement?

2. What are you trying to protect? Generally speaking, it is easier to convince a court to stop a departing employee from taking your customers or manufacturing process than it is to stop the employee from working for a competitor. For example, the chances of successful enforcement increases if your contract was drafted to protect customers the employee was working with as opposed to trying to stop the employee from working in any type of role for a competitor. Additionally, courts are much more likely to entertain an injunction for protection of legitimate confidential information.

3. Are you worried about creating a standard for other employees? Employees that leave always talk to the employees that stay behind. It is a fact of life. In addition, word gets around about the details of any settlement involving non-competes. Why? Well, for one, everyone wants to know whether a business will actually seek to enforce their contracts. If a company continually declines to enforce their non-compete agreements, other employees may get the idea that the same rule will apply. 

4. What are the risks involved?  It may be difficult to know the full extent of the risk posed by a departing employee. However, it is important not to underestimate the risks. I have seen circumstances where a business loses only one small client at first, but suffering major loses many months down the road. Some questions to consider: (1) have you lost clients or are you in danger of losing clients; (2) is there a danger of the employee disclosing or using legitimate confidential information; (3) what did the employee have access to while at work (i.e. client lists, trade secrets, and financial information); and (4) was there an exit interview conducted and return of confidential information verified.

5. Litigation costs v benefits. I ask clients to make a business decision by weighing the risks (see # 4) versus the costs involved. Litigation costs are dependent on a number of factors. Some examples of factors that impact litigation costs include (1) the nature of the dispute; (2) the strength of the contract; (3) the ability of the departing employee to defend the case; (4) the lawyer defending the case; and (5) the type of action you decide to bring.

These are only some of the many factors a business should consider when confronting a decision on enforcement of a non-compete.

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The New York Times this past Sunday had an article detailing how many times the Roberts court ruled in favor of business interests (61%).  Debra Weiss of the ABA Journal writes about the article and some other findings noting that the Roberts court ruled in favor of the same side supported by the U.S. Chamber of Commerce in 13 out 16 cases last term.  The Chamber's interest is advocated by the National Chamber Litigation Center. 

The Times article also cited to a new study prepared for the Times by Northwestern University and the University of Chicago. The study allegedly supports a conclusion that the rate of success for business interests is increasing on the current Supreme Court.  For a different view of things, read Ted Frank on the PointofLaw blog calling it a "myth" that Supreme Court is pro business. Chris Lehmann at The Awl has another take and provides a good history of some of Roberts' own cases before the Supreme Court when he was in private practice.

There are good points on both sides of the debate on this issue. Both sides have advocacy groups citing to data to support one view or another.  I think it is too simplistic to call a court pro-business or anti-business.  Although plenty of information is available to debate the issue, the cases before the Supreme Court are too varied in facts and law to draw a simple conclusion that a court is pro-business.     

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In business litigation in Connecticut, attorneys many times seek to impose a constructive trust over assets or income connected to wrong doing, breach of fiduciary duty, or fraud by business partners or agents.  In a decision to be officially released on November 23, 2010, the Appellate Court upheld a trial court's  imposition of a constructive trust over certain assets of a business.  The case is Trevorrow v. Marcuccio, and you can download it here.

A constructive trust is not a real trust.  Rather, it is a judicially created trust and thus the term "constructive."  It arises when one party unjustly holds title or rights to property, such as assets or profits of a business partnership or corporation.  The wrongdoing may involve simply retaining property, misappropriating property, or converting the property into another form.  The trust is imposed against the wrongdoer who will be deemed to hold title of the property for the benefit of the innocent party.  In Trevorrow, the Appellate Court stated:

the issue raised by a claim for a constructive trust is, in essence, whether a party has committed actual or constructive fraud or whether he or she has been unjustly enriched

Typically, you see attorneys seeking constructive trusts in cases involving fraud, duress, breach of fiduciary duty, or some type of commission of a wrong.  However, the Trevorrow court clarified that the equitable remedy of a constructive trust is not only available in cases of actual or constructive fraud, but it is also available in cases where one party has been unjustly enriched at the expense of another even without a finding of wrong doing. 

In short, in Trevorrow, there was no finding of fraud or unethical conduct.  Rather, the court simply found that one person in the business relationship would have been unjustly enriched if permitted to keep the property. The Trevorrow case also serves as reminder that the trial court's enjoy discretionary equitable powers to impose constructive trusts if proper facts are present.

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You might be surprised how many times I am asked this question.  Of course, the circumstances of every case warrant separate consideration, but here are the basic facts concerning recording of phone conversations in Connecticut as it relates to civil litigation and lawsuits: 

Civil Liability.  You are subject to liability in a civil lawsuit if you violate Connecticut General Statutes 52-570d entitled "Action for illegal recording of private telephonic communications."  The full text of the statute is here, but the basic summary is that an aggrieved person may bring a civil lawsuit for the recovery of damages and attorney's fees if someone uses a device to record "an oral private telephonic communication" unless the use of the recording device involves:

• the consent of all parties (some states only require one party consent), and such consent is obtained prior to the recording
• the consent documented in writing or part of the recording
• verbal notification given at the start of the recording
• an automatic tone warning device producing a signal every 15 seconds

There are various exceptions to this rule, including for law enforcement and FCC officials.  In addition, one of the more relevant exceptions is for "any person who, [is] the recipient of a telephonic communication which conveys threats of extortion, bodily harm or other unlawful requests or demands."  For example,if your Mel Gibson's girlfriend, and you are in Connecticut, its probably safe to record his phone calls. To recover in Connecticut, however, you have to prove actual damages related to the recording.

Many people that want to record phone conversations are trying to document conversations as evidence for potential use in a lawsuit.   However, if the recording is done unlawfully, Connecticut law prohibits the use of the recording in "any court of this state." As such, although an improperly recorded phone call might be available for use in a deposition, it will not be permitted as evidence in any court.  

Whether an improper phone recording is criminal will depend on the circumstances.  For example, it is a Class D Felony in Connecticut to engage in wiretapping or "mechanical overhearing" of a conversation.  Wiretapping and mechanical overhearing are defined to include "intentional overhearing or recording" of telephonic communication or conversations without the consent of at least one person involved.  This is more likely to apply to a situation like the allegations against Shaq O'Neal for intercepting cellular phone conversations he was not a part of as opposed to private two way conversations. However, the possibility of criminal penalty should be factored into any decision to record a phone call.

Keep in mind also that this post is only a summary as it pertains to Connecticut state law. If phone calls involve an out-of-state caller, different laws might apply.  For a good example of the intersection of various state recording laws, visit the website for the Reporters Committee for Freedom of the Press.  In addition to state law, there are federal wiretapping laws that might come into play. For an example of some federal laws, see this post on the Citizen Media Law Project.

The takeaway here is that if you improperly record phone conversations in Connecticut you could: (1) face criminal penalties; (2) face a civil lawsuit for damages and attorney's fees; and (3) be precluded from using the recordings in court in any civil lawsuit.  As such, if you are planning on recording phone conversations of any kind, you would be well served to contact an attorney and get advice on whether to proceed.

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Not always.  An individual member of an LLC or an officer of a corporation may be individually liable for their own torts.  This rule is well settled and the Connecticut Supreme Court reaffirmed it in Strum v. Harb Development, which will be officially released on August 31, 2010.  

Business owners often chose to a form a business entity to operate under, such as a limited liability company (LLC), limited liability partnership, or professional corporation.  In basic terms, the entity operates as an individual for legal purposes. There are many reasons to form a business entity. One of the more common reasons is to limit your personal liability and protect your assets.  The idea is, if you make a mistake in business, the entity is responsible, not you personally.  

Many times, a properly formed and maintained business entity, like an LLC or corporation, can provide a shield or "veil" of protection for an individual member or officer.  However, the protection is not absolute, and there are many instances where you can be personally liable in business despite the formation and operation of a business entity.    Two of the most common methods of establishing personal liability are "piercing the corporate veil" and individual responsibility for torts, such as breach of fiduciary duty, negligence, fraud, and misrepresentation. 

In the Strum case, the Connecticut Supreme Court addressed the later situation involving personal liability for torts (I will do a post on veil piercing soon). The Strum case involved a homeowner alleging poor workmanship and breach of a construction contract for new home construction.  The plaintiff homeowners in the case brought a lawsuit against not only the entity, Harb Development, LLC, but also its principal member, John Harb.   The plaintiffs alleged, among other claims, that Mr. Harb was personally liable for negligence.  Mr. Harb moved the trial court to strike the allegations against him personally seeking protections of his LLC, Harb Development.   His attorney argued that absent facts sufficient to pierce the veil of protection of the LLC, Mr. Harb personally was immune from liability.

At the lower level, the trial court granted the motion to strike primarily on the grounds that there were no facts in the complaint to pierce the veil of the LLC.  Although the Supreme Court ultimately found that there were insufficient facts alleged in the complaint to establish the negligence claim against Mr. Harb personally, the Court rejected the argument that Mr. Harb could not be personally liable for negligence merely because he was a member of an LLC. 

The Supreme Court noted that Connecticut's common law provides for personal liability of officers of a corporation for torts personally committed (such as negligence) that injure third parties provided  the injured party can show a legal duty, breach of that duty, causation, and damages.   As such, if an officer of a corporation commits a tort in business, the officer may be personally liable even if the corporation is also responsible.  The Strum case makes clear that this common law rule applies even in the absence of facts sufficient to pierce the corporate veil.  This same common law rule also applies to members of an LLC. 

The Strum case serves as a reminder to business owners that formation of a business entity will not protect you from personal liability in all circumstances.  Liability for individual torts and piercing the veil of a business entity are two common scenarios where business owners may face personal liability despite the shield that a business entity may provide.  Whether a business owner can face personal liability for negligence, fraud, or misrepresentation involving the business will often depend on the facts of the case. 

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In Connecticut, a person commits a computer crime if there is any violation of the provisions in Connecticut General Statutes 53a-251.  This is Connecticut's computer crime statute.   The statute defines criminal conduct under the following categories:

• Unauthorized access to a computer system
• Theft of computer services
• Interruption of computer services
• Misuse of computer system information
• Destruction of computer equipment

The computer crime statute itself does not provide for a civil cause of action.  Instead, a victim of a computer crime may rely on Connecticut General Statutes 52-570b, which permits a civil lawsuit for computer-related offenses. The statute provides a basis for a lawsuit for "an aggrieved person who has reason to believe that any other person has been engaged, is engaged or is about to engage in" conduct that violates the computer crime statute. 

As part of a computer crime lawsuit, a business may seek a temporary or permanent injunction, restitution, actual damages, unjust enrichment, an order to appoint a receiver who may take property into his possession, or any other equitable relief.  Punitive damages may be available if there is a showing of malicious or willful conduct. Further, a victim of computer crime may obtain an award of attorney's fees and costs.

One of the more common types of computer crime or cyber attack is an insider attack with unauthorized access to a computer network.  A common example is a disgruntled employee or vendor with some level of access to the computer network of a business that turns into unauthorized use or damaging conduct. The cyber attack might involve theft of confidential or proprietary information, installing a virus or malicious code to infect the system, or theft and disclosure of information to third parties. 

The most common defense raised to computer crime charges is "authorized access."  The statute exempts conduct that might qualify as improper, but was undertaken with a reasonable belief that it was authorized.  As such, the issue of authorization becomes a critical element in these cases.  Courts might look to the policies and practices of a business with respect to access and security to determine if a reasonable belief defense exists.  Courts will also look to the nature of the conduct to determine if a reasonable belief defense is legitimate under the circumstances of the case.

Responding quickly to a computer crime or cyber attack is important.  A business that is the victim of a computer crime or cyber attack should consider involving an attorney as part of the response team depending on the severity of the incident.  The attorney can assess whether a business that is victim of a computer crime can bring a lawsuit to recover damages or possibly make a claim for losses to an insurance company.  An attorney can  also assist with critical decision making regarding notification to outside parties in the case of a security breach or data loss.  An attorney can further assist with determining the need for involvement of an appropriate forensic expert to preserve and develop critical electronic evidence of the cyber attack. 

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Is it David v. Goliath or a patent troll case?  Connecticut based XPRT Ventures, LLC has filed a lawsuit in the U.S. District Court in Delaware (download lawsuit here) against eBay for $3.8 billion dollars over the technology for automating and securing online payment portals. The suit was also filed against eBay's PayPal, Bill Me Later, Shopping.com, and StubHub.

In the suit, XPRT alleges that PayPal and others have used its systems and methods for electronic auction and e-commerce transactions subject to XPRT's six U.S. patents since at least 2002.  XPRT also alleges that eBay received confidential information in 2001 from the inventors and misappropriated information from patent applications assigned to XPRT. XPRT alleges a loss to date of $600 million with expected future losses of $3.2 billion.

The suit is for willful patent infringement, but at its heart is XPRT's allegation that eBay stole XPRT's trade secrets obtained from patent applications to use in eBay's own patent applications and for use by eBay in multiple platforms for PayPal and others.  The complaint states that XPRT passed on confidential information related to its patents to eBay in 2001 with the expectation of compensation should eBay be interested in the technology. The complaint alleges that the confidential information included how eBay could benefit from acquiring PayPal's payment platform.  Instead, eBay allegedly used the information provided in support of its own patent applications and online uses for PayPal and others.

The suit has been summarized and covered by various online media with some support and others criticizing the suit. Read here for the Reuters report on eBay suit and PCWorld's story.  Another good summary is the post today from Rajeev Saxena of Trends Updates. The post includes the following statement from XPRT's Connecticut based counsel, Steven Moore: 

This involves a trade secret theft, along with sheer patent infringement.  It is bad enough to take someone's technology, but it is a bit much to use it in your own patent application. 

Attorney Moore's firm also issued a press release that states, in part:

 In a nutshell, XPRT asserts eBay unfairly stole the idea and method of payment used in eBay's PayPal and similar electronic payment systems.

Techdirt, a technology blog, came out swinging and criticized the suit as "another patent lawsuit against a big company for doing something obvious, filed by a company that appears to exist solely for the purpose of suing a company that actually does stuff."   Mike also includes in his post some additional details about the history of XPRT's trail of patent rejections.  His take is basically that the case is a patent troll stick up suit.    For a good and balanced definition of "troll patent" or "patent troll" read this post form PatentlyO, the nations leading patent law blog.

Erik Sherman, a freelance writer, had a somewhat different take in his blog post.  After a providing a detailed summary of his own investigation and fact finding, Erik wrote that "this is not a simple case of a troll finding an obscure patent that could be stretched to cover an intended target."  He also focused on another case where eBay was alleged to have engaged in similar unethical behavior and the complications potentially created for Meg Whitman (eBay CEO at the time) currently running for California governor.

Thus far, eBay only issued a short statement denying that there is any merit to the suit. What's your take, Patent Trolling or David v. Goliath?

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Previously, I have posted about non-compete agreements and the duty of loyalty for employees.  Many times, businesses do not have written contracts to protect confidential and proprietary information from not only competitors and vendors, but also their own employees.  Without a contract, the common law of Connecticut concerning breach of fiduciary duty is one of the ways attorneys can seek to protect business clients against improper use of confidential information.

Another method for attorneys to seek to protect their clients' confidential information stored on a computer system or network is through the federal Computer Fraud and Abuse Act (CFAA).  The CFAA is largely a criminal statute, but is being used more frequently in civil cases on behalf of businesses faced with loss or theft of confidential and proprietary information and trade secrets.   The CFAA, 18 U.S.C. 1030, essentially provides for civil liability for unauthorized access to protected computers with intent to defraud or cause damage.  There are civil enforcement provisions that allow private actions for recoverable loss related to prohibited conduct if a series of factors can be proved in court.

Recently, Peter J. Toren wrote an excellent article in the New York Law Journal  where he detailed methods in which the CFAA might be useful for attorneys to protect client trade secrets and other confidential information.   Peter listed the six factors necessary for proof of damages.  Peter also noted some of the limitations of the CFAA when it comes to employee theft of trade secrets and described the narrow and broad views taken by different courts when interpreting improper access of a protected computer without authorization. Peter further provides some useful tips for businesses on how to construct a policy in light of the different court interpretations of improper access. 

Lee Berlik, publisher of the Virginia Business Litigation Blog, also has a recent post about the series of hurdles necessary for attorneys to prove loss or damages under the CFAA.  Lee's post describes a threshold of $5,000 in value that must fit into the categories of potential loss defined in the CFAA.  Similar to Peter's article, Lee also describes how a case was unsuccessful in court because of insufficient facts to show loss under the CFAA.

In Connecticut federal courts, the reported cases under CFAA, largely have been unsuccessful for a variety of reasons, many of which Peter's article details.  Some cases were dismissed for failing to meet damages thresholds (Register.com v. Verio, 356 F.3d 393 (2004)) , while another case was dismissed because the facts were insufficient for unauthorized access (Cenveo, Inc. v. Rao, 659 F. Supp. 2d 312 2009)).   However, in a recent case, in the federal district court, Judge Vanessa Bryant issued an order of sanctions and for production of electronic devices for forensic inspection in a case based, in part, and the CFAA. (Genworth Financial Wealth Mngmt. Inc., v. McMullan). 

The takeaway here is that the CFAA provides another potential basis for a business to protect its confidential and proprietary information when the information resides on a computer system or network.  Of course, there are a series of factors that must be met before liability can be established.  Some of these factors may not apply and eliminate the CFAA as a method of recovery as we have seen in several reported cases.  However, the CFAA should be considered and evaluated in any case involving unauthorized access of confidential information through a computer system as it provides an additional basis for potential recovery.  Also, advanced planning with sound internal policies might provide a business with a better chance of success under the CFAA.

I will do a post soon on another statute, Connecticut's Computer Crime Act, that may provide additional remedies for improper access of a computer system or network.

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In Stuart v. Stuart, to be officially released on June 22, 2010, the Connecticut Supreme Court clarified the standard of proof for civil theft cases in Connecticut (download decision here).  Prior to this ruling, there was some confusion amongst attorneys and trial courts as to the appropriate standard of proof for a civil theft claim under Connecticut General Statutes section 52-564.  

Connecticut's civil theft statute states, in pertinent part:

Treble damages for theft. Any person who steals any property of another, or knowingly receives and conceals stolen property, shall pay the owner treble his damages.
 

To successfully allege civil theft, an attorney must plead and prove the elements of larceny under Connecticut General Statutes section 53a-119.  The key element that must be established is the taking or withholding of property with the intent  to deprive another person of the property.  Some examples of successful use of Connecticut's civil theft statute:

• Overdrawing on bank accounts
• Theft of business or corporate property
• Accepting insurance premium payments in excess of required amounts
• Defrauding another of bank funds
• Refusal to return deposit on purchase and sale agreement
• Wrongful seizure of personal or business property
• Stealing utilities
• Depleting business accounts
• Diverting account receivables

The takeaway from the Stuart case is that the cause of action for civil theft remains the same.  However, the Connecticut Supreme Court has clarified that an attorney only needs to establish proof of civil theft by a preponderance of the evidence.

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After an eight week jury trial in Waterbury Superior Court, an East Hartford based flooring solutions company,Dur-A-Flex, has been awarded 50.5 million dollars in damages for the misuse of its trade secrets by Laticrete International, a Bethany based multinational corporation.  Laticrete was a former purchaser of Dur-A-Flex's colored sand products.  The jury found that the Laticrete misappropriated Dur-A-Flex's trade secrets for the colored sand and awarded 43.7  million dollars in damages.  After the jury verdict, Judge Dennis Eveleigh awarded Dur-A-Flex more than 5 million dollars for attorney's fees in a written decision (download here).   He also conditioned Laticrete's future use of Dur-A-Flex's technology on payment of royalty fees.

The case was brought back in 2006 on the Complex Litigation Docket in Waterbury  (Access court docket here). Dur-A-Flex was represented by Lawrence Rosenthal and Fletcher Thomson from Rogin Nassau's Hartford office.  Laticrete was represented by Elizabeth Stewart from Murtha Cullina's New Haven office.  

Dur-A-Flex supplied color sand to Laticrete for use in Laticrete's grout products.  Laticrete was the only customer of Dur-A-Flex for the sand product.  Laticrete at some point stopped buying the colored sand from Dur-A-Flex and started making an identical sand product.  Dur-A-Flex claimed that Laticrete was, if fact, using Dur-A-Flex's manufacturing process to make the sand.    The jury agreed with Dur-A-Flex and found that Laticrete violated Connecticut's Uniform Trade Secrets Act. 

Attorney Rosenthal commented on the verdict and stated he was "certain that Dur-A-Flex had been significantly damaged by Laticrete's improper and unauthorized use of its technology."  He believed the verdict was the largest ever for a trade secret case in Connecticut. 

I also believe this is the largest jury verdict in Connecticut history for a trade secret case.  Additionally, Connecticut case law is fairly sparse when it comes to significant trade secret cases.  I expect that the Dur-A-Flex case will impact trade secret law in Connecticut for years to come.  In particular, not only the amount of the award, but Judge Eveleigh's written decision on awarding future royalties and attorney's fees, which included a 10% contingency success fee.   Judge Eveleigh also issued a post-judgment order permitting Dur-A-Flex to attach the assets of Laticrete. It should be noted that Judge Eveleigh will become a justice of the Connecticut Supreme Court on June 1, 2010.   As such, I expect that his decision will carry more weight on these issues.

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When I started this blog, I decided I would keep an eye on lawsuits related to social networking websites as it seems this type of evidence will soon take the place of the smoking gun email of the last ten years.  The impact of social networking evidence in Connecticut business litigation will continue to grow.

My interest in social networking cases started with a Facebook lawsuit so I made a Facebook category on this blog and discussed some concerns for individuals and Connecticut businesses.  Then Twitter exploded to growth of 1000% last year, so I added a Twitter defamation case and a new category.  And now, its finally here ... I need a  LinkedIn category for LinkedIn lawsuits. 

I do not claim to know about all of the social networking lawsuits out there.  There are also some social networking sites that I ignore, like the dying MySpace.  Nevertheless, I do track cases of interest in this area.  You might also check out Megan Erickson's Social Networking blog as a resource to check on these type of claims or visit Dan Schwartz's Connecticut Employment Law Blog for resources and tips on policies for employers related to social networking.  

The LinkedIn lawsuit involves a non-compete agreement and solicitation of employees by a former employee. Molly DiBianca with The Delaware Employment Law Blog detailed the case in a post about the lawsuit filed by TEKSystems against its former employees.  Nothing strange about this type of lawsuit, only in this case, TEKSystems claims it has evidence of breach of the employment contract arising from post-termination solicitation of its employees through the LinkedIn connections of one of the defendants.  Here is a copy of the lawsuit (go to paragraph 37). 

Molly DiBianca states it is the first lawsuit she is aware of using an employee's LinkedIn account.  She may be right, as I am not aware of another case like it.  Nevertheless, I certainly expect this type of social networking evidence to be the focus of more lawsuits and it was only a matter of time for LinkedIn to be involved in a case with media attention.  In Connecticut, we had our own social networking evidence case with Facebook.  In a bullying case involving Miss Porter's School, Judge Arterton ruled that the plaintiff's postings in an expired account were relevant.   

The way I see it, this is only the beginning.  Soon enough, social networking evidence will be as significant and commonplace as email evidence.  At that point, I'll have to find something else to blog about ....

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Each state generally has some type of consumer protection or trade protection law that seeks to prohibit and punish unfair conduct and deceptive acts in trade or commerce.   Most states, including Connecticut, model their laws after section 5 of the Federal Trade Commission Act.  Section 5 of the FTC Act prohibits unfair or deceptive acts and unfair competition in the marketplace. 

Connecticut's Unfair Trade Practices Act (commonly referred to as CUTPA by attorneys and judges), is codified at Connecticut General Statutes section 42-110b.  CUTPA states, in relevant part, that:

(a) No person shall engage in unfair methods of competition and unfair or deceptive acts or practices in the conduct of any trade or commerce.

(b) It is the intent of the legislature that . . . the courts of this state shall be guided by interpretations given by the Federal Trade Commission and the federal courts to Section 5 . . . .

(c) The commissioner may . . .establish by regulation acts, practices or methods which shall be deemed to be unfair or deceptive. . . Such regulations shall not be inconsistent with the rules, regulations and decisions of the federal trade commission and the federal courts . . .

(d) It is the intention of the legislature that this chapter be remedial and be so construed.

CUTPA's provisions can be far reaching for businesses and consumers.  For example, under section 42-110g, attorneys who successfully prove a CUTPA violation in Connecticut business litigation may be able to recover attorneys fees, punitive damages, and costs for their clients.  CUTPA's provisions also provide for the ability of attorneys to bring class action lawsuits in Connecticut for unfair or deceptive acts. Additionally, courts can order injunctive relief or other equitable remedies for CUTPA violations.

CUTPA's provisions may be enforced by the various State's Attorneys and the Attorney General, such as the AG's recent lawsuit against Net Health over its loss or exposure of personal identifiers (date of birth, social security number) of Connecticut residents.  Private citizens and businesses may also bring actions for unfair competition or deceptive acts under CUTPA, including class action lawsuits such as the recent case against AT&T over Internet access.

To establish a violation of CUTPA, attorneys in Connecticut have to prove that their clients suffered "any ascertainable loss of money or property, real or personal, as a result of the use or employment of a method, act or practice prohibited by section 42-110g. . ." Generally speaking, this requirement means Connecticut attorneys have to show that their clients sustained damages as a result of an unfair or deceptive act in trade or commerce. 

To determine what constitutes an unfair or deceptive act, Connecticut courts specifically refer back to the Federal Trade Commission and what is commonly referred to as the "cigarette rule."  The cigarette rule defines what type of conduct may qualify as unfair and deceptive justifying an award of compensatory or punitive damages.   This rule dates back to 1964 and comes from legislative policy making by the Federal Trade Commission concerning requirements for warning labels on cigarette packages. 

 The three prongs of the cigarette rule are as follows:

1. whether the practice, without necessarily having been previously considered unlawful, offends public policy as it has been established by statutes, the common law, or otherwise-in other words, it is within at least the penumbra of some common law, statutory, or other established concept of unfairness;
2. whether it is immoral, unethical, oppressive, or unscrupulous;
3. whether it causes substantial injury to consumers, [competitors or other business persons]. . . .

All three criteria do not need to be satisfied to support a finding of unfairness. A practice may be unfair because of the degree to which it meets one of the criteria or because to a lesser extent it meets all three.

It is important to note that not every act or conduct that might seem to fit the criteria will be a violation of CUTPA. For example, generally speaking, mere negligent acts or simple breaches of a contract do not constitute unfair or deceptive acts under CUTPA. It is also important to note that some conduct automatically violates CUTPA or is considered a per se violation, such as failure to follow the Home Improvement Act or to register a trade name.

There are many nuances to CUTPA and the above is only a brief summary. Any business or consumer trying to determine whether they were damaged by conduct constituting a violation of CUTPA should contact a business litigation attorney or the Attorney General's office.

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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. 

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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. 

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In the Business Torts category of this blog, I recently covered the basic law in Connecticut concerning interference with business relationships.  Today's post concerns another business tort known as "defamation" and how it intersects with the growing use of social networking sites.

There already have been several lawsuits for defamation arising out of use of social networking sites, such as Twitter and Facebook. For example,  The California Defamation Blog lists several celebrities involved in defamation cases, including Courtney Love who was sued by a fashion designer for defamation after a series of derogatory Twitter posts by Love.  Craig Kanalley of Chicagonow.com reported that a property owner sued a tenant for disparaging Twitter comments. The Chicago Tribune recently reported on a defamation lawsuit brought by a mother and her son after a phony Facebook profile was created showing the son was a racist.   

Should Connecticut businesses be concerned?  Clearly, the type and variety of these suits are on the rise. In legal circles, these type of claims have a category of their own called "cyber slander" or "internet defamation."  Given the popularity in use of social networking sites, and the ease in which statements can be broadcast to millions, it is safe to  predict that more defamation cases will be filed in the future. 

Connecticut businesses can be affected by defamation suits involving social networking sites and the internet in a number of ways, such as:

• Employees making comments about a competitor
• Employees making comments about supervisors or co-employees
• Employees making comments about the company's products
• Competitors making derogatory comments about the company
• Phony Facebook or Twitter profiles
• Derogatory comments about the company 

In Connecticut, defamation encompasses defamation by spoken (slander) and written (libel) words. In general, to raise a proper claim for basic defamation, a plaintiff must show that:

1. A defamatory statement was made
2. The statement identified the plaintiff to a third person
3. The statement was published to a third person
4. The plaintiff's reputation suffered injury as a result of the defamatory statement

In regards to businesses, there is also a defamation claim sometimes referred to as "commercial disparagement" or "trade libel."  For this type of claim, a plaintiff must prove disparagement of a business' goods or services by falsehoods published or communicated to a third person.

With the ease of publication to millions over the internet, it is easy to see how someone might publish a defamatory comment whether it be on a blog, social networking site, or website.   Chances are, if you are in business, either you, someone who works for you, or a competitor has commented about the business in cyberspace.

For a business, the best way to avoid a lawsuit for defamation as a result of employee use of sites such as Twitter and Facebook is to have a written policy that governs employee use.  The details of each policy will differ depending on your business, but clearly the policy should prohibit any defamatory or derogatory comments about the business, employees, or competitors.

In situations where a competitor or customer disparaged your business' products or services, a business may want to consider legal action and determine if grounds exist to issue a cease and desist letter, a take down letter, or initiate a lawsuit.  Internet defamation can ruin a business' reputation overnight and should be addressed immediately regardless of whether the business pursues legal action.   

For a business, whether legal action is taken may depend on the severity of the disparagement and the damage done.  In some cases, a cease and desist or retraction is a practical solution especially when a defamation suit would bring added attention to the matter.  In other cases, legal action, such as a defamation lawsuit, may be required to stop ongoing damage or serious problems.

Regardless of the situation, Connecticut businesses should, at a minimum, monitor cyberspace for defamatory comments.  Comments that might lead to a lawsuit could come from your own employees, a competitor, or a disgruntled customer.  A written policy is a good way to minimize risks of employee comments.  As for competitors and customers, Google alerts is a good way to monitor use of a business' name on the Internet. The alert will send you an email every time your business name is found on the internet. 

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Connecticut has taken center stage as lead plaintiff in round two against six power companies for public nuisance over global warming.  In Connecticut v. American Electrical Power Co., eight States brought a lawsuit to stop ongoing contributions to global warming.  The States brought the suit under a theory of common law nuisance.  Although the case was dismissed at the trial level, the Second Circuit Court of Appeals overturned the decision and held that the States can pursue their claims for federal common law nuisance.

This case has been watched closely ever since it was filed in 2004 and argued in 2006.  The court of appeals decision allowing the case to proceed now has caused some very different reactions amongst attorneys, environmentalists and business leaders.   

The Global Climate Law Blog offered its comments on the decision noting that the case is long from over and future battles in the case will likely involve causation.  Hannah McCrea of The Grist noted  in a very detailed review of the case that it was a historic ruling to "be celebrated and utilized by environmentalists."  

Lisa Rickard, president of the U.S. Chamber Institute for Legal Reform (representing 3 million businesses) issued this statement claiming the decision will "further line the pockets of trial lawyers."  She opined that the decision to permit public nuisance claims to go forward could lead to mass tort claims against businesses for contributions to global warming.  Seth Jaffe an environmental attorney with Foley Hoag offered a good legal review concluding that a number of defenses remain in the case for the power companies but environmental plaintiffs relying on nuisance claims may get new life from the decision.

My own take is that the case represents a fascinating intersection of law, politics, and activism surrounding the global climate change debate.   The case is being dissected all over the country with predictions of mass tort actions against businesses, congressional legislation, and new EPA regulations.  My own prediction is that the litigation appears far from over and an appeal to the United States Supreme Court is likely.  Any adverse impact to Connecticut businesses for nuisance claims is not at all clear at this point.  

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Here is a round up of a few interesting business lawsuits making news in Connecticut this past week: 

Smoking Gun "Crap" Email In Case Watched by Wall Street

In Pursuit Partners, LLC v. UBS AG, et al., a 35 million dollar prejudgment remedy was awarded in favor of a Connecticut hedge fund against UBS.  Judge Blawie issued the order in Stamford Superior Court after finding the bank was in possession of material non-public information regarding downgrades to financial products that UBS continued to sell.  This case is getting a lot of attention on Wall Street and reported on by Matthew Goldstein  at seekingalpha.com and Serena NG and Carrick Mollenkamp on WSJ.com. 

The UBS case will be interesting to watch and is another example of the increasing importance of discovering smoking gun emails.  Preliminary discovery in the case turned up internal emails calling some of the financial products "crap."   Here is a docket report on the case. (download).

Fairfield Company Uncovers Fraud and Ejects Board Member

Competitive Technologies (CTT), won a contested default judgment for more than $4 million dollars after discovering a former board member took company money and invested it in a fictitious South American company that did not exist.  Read the report on the case by Michael Juliano of the Connecticut Post.  You can also download here a copy of the judgment from Judge Dorsey who found that the defendants willfully disregarded court orders.  

The fraud was uncovered in part by the work of Breen & Associates.  I have worked with Bill Breen before on several cases.  He is an exceptional fraud investigator and expert.  Looks like he successfully uncovered another financial fraud for a business client.   

Civil Rights Violations Alleged Against Litchfield In Refusing Jewish Temple

Rabbi Joseph Eisenbach has filed a lawsuit in federal court against the Town of Litchfield over the Town's refusal to permit modification of his property for religious purposes.  The complaint (download here) states that the Rabbi is seeking declaratory relief, permanent injunction, and damages for violations of civil rights and the Religious Land Use and Institutionalized Persons Act of 2000.  This case was reported on by Christine Stuart, editor of  CTNews Junkie where a reader left some disturbing comments about anti-semitic statements at the commission hearings on the matter. 

An attorney for the Town has not yet appeared in the case and no answer has been filed. Given the allegations in this Complaint, this is a case that is likely to stay in the news. 

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Unfortunately, all too often business competitors resort to unfair and improper tactics to gain an advantage in business.  A common example occurs when a competitor maliciously or intentionally interferes with a company's contracts or business relationships.   When this occurs, businesses have to consider whether a legal remedy is available.

In Connecticut, courts have long recognized the business litigation claim of tortious interference with contractual relations as an available remedy for this type of conduct.  To be successful against a competitor in a lawsuit for this claim, a business must prove three essential elements:

• Existence of a contract or beneficial business relationship
• Knowledge of the relationship
• Intentional interference with the contract or business relationship
• Actual loss or damage 

Upon first consideration, tortious interference with a contract might seem to apply to many business competitors.  However, Connecticut courts require more than mere interference for a successful lawsuit.  In particular, not every act of interference is actionable in court. 

In Connecticut, a business must also prove that the interference was "improper" or with an "improper motive."   A business can prove that interference with a contract was improper by demonstrating any of the following:

• Fraud or misrepresentation
• Intimidation
• Malice
• Other improper motive or means

Although the improper motive element is harder to prove, a successful claim could also result in an award of punitive damages.  Additionally, a business does not have to prove that the interference actually resulted in a breach of the contract or business relationship.

As such, if your business is dealing with a competitor that has crossed the line and resorted to fraud or unfair practices to harm your business, a lawsuit for tortious interference with contractual relationship is one of the available remedies in Connecticut.   

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 A recent decision by the United States Court of Appeals for the Ninth Circuit serves as reminder of the types of litigation that can arise from simply maintaining a website. Although the decision involved a dispute between two law firms, the facts could easily be related to competing businesses. 

The case involved Brayton Purcell, LLP, a California law firm that successfully sued another law firm for copyright infringement based on website content.   Brayton Purcell had copyright protection for its substantial website content on elder law.  According to the decision, a competitor law firm must have liked the content because the competitor copied the content verbatim for its own website.  This resulted in an undisclosed arbitration ruling in favor of Brayton Purcell.

Any business with a website should consider having a legal review done to determine if potential problems exist with the website's content.  Facing a lawsuit over a website is one the problems I discussed in a recent lecture on 5 Technology Bombs That Can  Sink Your Business.

There are many ways that a website can lead to litigation.  Stanley Jaskiewicz authored an excellent article for E-Commerce Law & Strategy featured on Law.com related to "clearing" rights to publish content on websites.  He cited a simple example of how a business website can infringe a copyright by merely copying and pasting a photograph from one website to the business' website.  In the process, the business might infringe the rights of the original photographer and the website owner.

A basic legal compliance review for a website can avoid this type of problem.  It starts with a risk assessment of the website and its content, including a review for potential claims involving: 

• Copyright & Trademark infringement.  Copying from the the look and feel, content, and slogans from another website are some of the ways you can run afoul of copyright and trademark laws.
• Defamation & Disparagement.  Posting content that is defamatory or disparaging of a competitor could result in litigation because the statements could be viewed by millions.
• Unfair Trade Practices.  This type of claim is usually a tag along to some other actionable conduct.  This claim is often used to obtain an injunction or to recover greater damages and attorney's fees.
• False Advertising and Misrepresentation.  A website should be viewed no differently than traditional advertising.  False claims can bring lawsuits from consumers who make decisions based on website content.
• Domain Name Disputes.  These disputes often occur when two companies want a similar domain name.  Depending on a variety of facts, one company may have greater rights to use the name regardless of who registers the name first.

Here are some tips to avoid a lawsuit concerning website content: 

• Conduct a risk assessment.   This includes an audit and inventory of the website content.
• Obtain "clearance" rights. If any of your content might violate copyright or trademark laws, you should seek to obtain clearance to use the material.  This involves the concept of searching out property right holders or authors and seeking permission or paying for use of the content.  
• Avoid use of protected materials.  For example, do not copy another website verbatim as the law firm did in the California case.  This might seem like a no brainer but many people believe that anything posted on the Internet somehow loses its copyright and trademark protection. 
• Protect your content.  In the California case, it was noted that the law firm had copyrighted its online content.     The law firm also monitored for any other website copying its content by use of Copyscape website.  Copyscape allows a user to input a website address or specific page to search the web for plagiarism. 
• Cooperation or settlement.  Lawsuits involving property rights for website content usually begin with one website owner sending another a "cease and desist letter."  This is a demand that an owner take down infringing material.  One way to avoid a lawsuit is to simply agree and take down the material.  Alternatively, you might be able to reach an agreement for use of the material. 

The bottom line is that your business does not need the headache of a lawsuit over a website.  Taking caution from the beginning with website content can help eliminate the risk.

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