Supreme Court Offers Another Reminder on Personal Liability for Corporate Officers

 Can an officer of a corporation face personal liability in a business transaction?  The Connecticut Supreme Court clearly stated that personal liability exists for corporate officers in certain circumstances.  The case is Coppola Construction Company, Inc. v. Hoffman Enterprises Limited Partnership. The sole issue on appeal was "whether a corporate principal or officer may be held personally liable for the tort of negligent misrepresentation in connection with statements made by that principal or officer that, under the apparent authority doctrine, also created binding contractual liabilities for the corporate entity."

 In the Hoffman case, the lower court had stricken a complaint alleging that the Defendant Jeffrey Hoffman was personally liable.  However, the Appellate Court overruled the decision and the Supreme Court affirmed finding that the plaintiff’s complaint properly alleged personal liability against Hoffman.

The decision included significant issues surrounding the doctrine of apparent authority, and pleading matters in the alternative in the complaint. However, for purposes of this post, the focus is confirming once again that officers of a corporation can be found personally liable for torts, such as misrepresentation and fraud.  To properly allege an action for negligent misrepresentation, a plaintiff must allege that:

  • the defendant made a misrepresentation of fact
  • the defendant knew or should have known that is was false
  • the plaintiff reasonably relied on the misrepresentation
  • some pecuniary harm resulted to the plaintiff

The Court in the Hoffman case went on to state that in Connecticut it is "black letter law that an officer of a corporation who commits a tort is personally liable to the victim regardless of whether the corporation itself is liable."  The Court then listed a whole series of other cases where courts have found that the officer could be liable for torts regardless of whether there was a contractual remedy that also existed against the company.

I posted about this case because many people believe that a corporation or limited liability company will shield them from all types of lawsuits.  This is a common misunderstanding of the law.  I have posted about this same issue in the context of limited liability companies.  The bottom line is that a business entity will not always protect an officer or owner in all situations.  Two situations include torts and circumstances where the protective veil afforded by the entity is pierced. The Hoffman case serves as an another example of an officer facing personal liability despite the corporate entity.   

Tips On How To Reduce The Risk Of Intellectual Property Theft

 In my last post, I wrote about the risks facing businesses when there is a departing employee.  It can be fairly argued that in the next 3 years your average business will have to deal with a disgruntled, departing employee.  The employee will have had access to confidential information in digital form.  Studies have shown that greater than 50% of disgruntled employees and 90% of IT employees will take something.  So what can a business do to protect itself from theft of clients, confidential information, and trade secrets?  Here are a few tips:

1.Strong Contracts.  I often say that Legal Zoom = courtroom doom.  Many folks go to online websites to get cheap, low cost non-compete or confidentiality agreements.  There are circumstances where you can get a decent contract that will help your business from these online sites.  However, too many times I have reviewed the low cost, canned contract of a client and found significant problems with the contract.  If you want to have a contract that will have a better chance of standing up in court, you are best served by hiring an attorney well versed in these areas.  Relying on a form contract from a website is not recommended.

2.Strong Policies.  Any workplace policy should include strong electronic monitoring policies prominently posted in break rooms and in the employee handbook.  Ideally, the policy will spell out that the company can and will monitor the company owned computers and all communications and information stored on them.  You also want to have strong password policies, auditing of file access, and guards against deletion. You also should seek to have visibility by your IT department for all activities on work networks.

3. Intake Checklists.  Upon employee intake, your business will want to have a checklist that documents all the necessary items covering confidential information.  You will want to document all the devices issued to the employee, review the details of the contract (non-compete or non disclosure), and review all policies of electronic monitoring.

 4. Internal Procedures.  Essentially, what a business needs to have is an enterprise fraud management plan.  This would include security related technologies for the electronic information and data stored by the company.  You will want to include mobile device management.  Your plan will want to classify data and restrict access based on the classifications.  Your plan will want to include auditing and tracking of data.  

 

5. IT Security Checklist.  This is a checklist designed for the IT department when an employee departs.  This will include shutting down access to the former employee immediately.  The list should also include an inventory of the employee devices, evidence preservation, and possible involvement of a forensics expert.  There should always be a concern about possible spoliation of evidence when attempting to preserve, inspect, or copy electronic data.  Early involvement of an expert in computer forensics is recommended.

6. Strong Exit Interview.  A good exit interview can go a long way towards understanding if the departing employee is a risk for theft or use of confidential information.

7. Severance.  To give or not to give?  A fair severance agreement can be used to create ongoing and continuing obligations for the departing employee with respect to confidential information or intellectual property.  Also, if you failed to have a good contract in place during employment, a severance agreement is a good way to correct previous mistakes in the employment contract.  Further, in some circumstances, a fair severance agreement can reduce the level of hostilities and thereby reduce post employment risks.

Confidential Information and the Departing Employee

I recently ran a seminar for the Human Resources Association of Central CT on "Effectively Managing Your Departing Employees."  The issues concerned  how attorneys can help to eliminate, prevent, or mitigate the risks of intellectual property theft.  In this post, I will define the basics of the problem.  In the next post, I will cover how to address the problem.  

  • Employees will Leave (Millennials average job tenure is 2.5 years)
  • Employees will be disgruntled (Wall Street Journal: 75% of departing employees are disgruntled)
  • Employees will have access to electronically stored data (UC Berkeley study shows 90% of critical business data is digital)
  • Digital is portable, easy to copy, saved in seconds, and transferred to multiple locations
  • Employees do take confidential information, even if by mistake. (Ponemon Institute says 59% of departing employees take information, and 90% of IT professionals)

Based on the these numbers, you could fairly argue that in a three year time frame an average business will likely have to deal with an unhappy, departing employee that will copy accessible confidential information.   This paints a pretty grim picture.  Nevertheless, it is a fair way to think about the problem to manage risks appropriately. 

One of the biggest risks is financial loss from theft of intellectual property and confidential information.  This might cover any of the following:

  • Trade secrets (confidential client lists, formulas, data)
  • Patents (fully or partially disclosed inventions)
  • Copyrights (original works such as software code)
  • Trademarks (counterfeit goods, brand damage) 
  • Proprietary information (anything you do not want in hands of a competitor)

How does employee or insider theft typically happen?  Here are a few examples:

  • Email (with or without attachments)
  • Portable drives (thumb or flash drives)
  • Smartphone 
  • File Transfers (FTP sites)
  • Remote access programs (GoToMyPC)
  • File Synching programs (Dropbox)
  • Old fashion printing and copying

In the next post, I will cover what you can do to help stop or reduce the risks of intellectual property theft. 

What To Do If You Suspect Your Business Partner Is Stealing – Some Basics

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.

New John Doe Copyright Infringement Suit Filed in Connecticut

A lawsuit relating to online copyright infringement of synthesizer software using “peer-to-peer” networks was filed recently in Connecticut District Court.  The case is captioned reFX Audio Software, Inc. v. Does 1-89.  The complaint alleges that certain individuals and Connecticut residents committed acts of copyright infringement through the use of a common “peer-to-peer” (“P2P”) file transfer protocol known as BitTorrent.  

A common tactic in mass copyright infringement lawsuits is the use by plaintiffs of “tracking software” which identifies the internet protocol addresses (“IP Addresses”) that were allegedly used to commit acts of software piracy. 

By way of background, Internet service providers, (i.e., Comcast, Cox, etc.) provide the account holders with specific IP addresses from which users can access the Internet.  In these lawsuits, attorneys bringing the lawsuits allege that each IP address is unique and is therefore linked to a specific user account. In order to identify the allegedly infringing users, reFX hired a Connecticut attorney to file a motion with the court, asking to conduct discovery in order to learn the identities of the account holders.  If granted by the court, the attorney for reFx will issue a subpoena to each of the Internet providers requesting that they turn over information (typically name, address, telephone number) for the account holder.  

On March 20th  Judge Janet Hall granted Plaintiff’s motion for leave to take discovery in the reFX Audio case.  As a result, certain Internet providers have now sent letters to cable customers and account holders notifying them of the pending lawsuit.  Typically, Internet providers will wait 60 days to allow  the account holders to seek legal counsel prior to providing the court-ordered personal information.

If you have received a letter from your Internet provider identifying your IP address as having participated in the alleged copyright infringement of reFX software, read here from our earlier post on the issue for next steps and to consider if you need to hire an attorney to represent you. 

We already have received calls in response to this lawsuit.  Many callers have read or been told to ignore these letters.   Each circumstance is typically unique in these cases, and there is no one size fits all defense.  Do not assume that ignoring the letter will result in the problem going away.  While it is true that in some cases ignoring the letter is an appropriate response, it many other cases the risks are too high to simply ignore the problem.  Once you are fully informed of all of your options such as, filing motions to quash, settling or compromising the claim, defending the action, or ignoring it,  you can then decide the proper cost/benefit for your case.

Deciding to Enforce A Non-Compete Agreement in Connecticut – 5 Tips

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.

Damages for Breach of Non-Compete Agreement In Connecticut

When deciding whether to hire an attorney to seek enforcement of a non-compete agreement in Connecticut, a business should consider the available remedies or damages.  The following are the basic remedies or damages for breach of a typical non-compete agreement in Connecticut.

1. Injunctive relief.  Injunctive relief basically means a court ordered act or prohibition against an act.  For example, when seeking to enforce a non-compete or non-solicitation agreement, your attorney will request that the court issue an order preventing the employee from working for a competitor.  If there is a non-solicitation clause in the contract, the attorney will ask the court to issue an order to prevent the departing employee from soliciting or "stealing" clients.  The court will only issue such an order if the agreement meets a series of factual requirements.   Essentially, the restrictions in the agreement must be reasonable in relation to protecting legitimate business interests.  

2. Actual losses.  In some situations, a business will have no measurable losses and will need to resort to injunctive relief only.  However, in other instances, a business will have provable loss of business from breach of an agreement.  The traditional rule for breach of contract is to measure the damages or losses to the business and not the gains of the departing employee or competing business.  A typical example would be the loss of incremental profits from losing a customer arising from the improper conduct of the departing employee.  In Connecticut, a business must prove these damages with reasonable certainty and not guesswork.  

3. Disgorgement of profits.  In certain circumstances, a business could win an award that disgorges (or takes away) the ill gotten gains or profits of the departing employee.  For this type of damages, the focus is on the profits of the departing employee.  

4. Attorney’s fees.  The traditional rule requires each party to pay their own attorney’s fees. However, if the employment contract has a provision that covers an award of attorney’s fees, a court may award attorney’s fees incurred in enforcement of the non-compete.

5. Punitive or multiple damages.  In a standard breach of contract case, punitive, exemplary, or multiple damages are not available.  However, if the conduct involved provides the basis for a violation of some other statutory or common law, a business may recover some type of extra contractual damages.  An example would be if the breaching conduct also provided the basis to prove a willful violation of Connecticut’s Uniform Trade Secrets Act.

 

Time Does Not Run Against The King Or The State of Connecticut

Imagine you are a subcontractor hired to work on a project for the State of Connecticut in 1994.  You did not deal with the State at all in your contractual dealings.  You were hired by a general contractor to do a small part of a large building project.  Next, you priced your work, completed it, and got paid.

KING GEORGE(2)

Now, fast forward 12 years.  Without any notice to you (some defendants claimed they had no notice of issues) of any problems for 12 years, the State of Connecticut knocks on your door with a lawsuit seeking over 15 million dollars from more than 20 defendants, including your company.

When you receive this lawsuit, you might immediately conclude that the lawsuit is time barred by the statute of limitations for breach of contract and negligence.  You might even ask your attorney, and your attorney probably would agree that the statute of limitations for your work has long expired. Nothing to worry about, right?  WRONG.

Here is the case:  Lombardo Case Nullum Tempus Lives!State of Connecticut v. Lombardo Brothers Mason Contractors, et al.  In this case, the Supreme Court of Connecticut upheld the ancient doctrine of nullum tempus occurrit regi, or "no time runs against the king."  The king is the State of Connecticut.  The court noted that nullum tempus is "a common-law rule that exempts the state from the operation" of time based statutes, such as statutes of limitation and repose. In short, the 12 year passage of time does not matter because the state is like the king.        

The state filed its lawsuit against more than 20 contractors in 2008 for over 15 million dollars in alleged damages caused by faulty construction and water leakage at the University of Connecticut law library.   The work was completed in 1996.  The state immediately began to notice problems with water leakage.  This was not a hidden defect case.  The State knew right away, and did not bring a lawsuit for damages for 12 years.  The state sought recovery for breach of contract, negligence, and product liability.  

None of this mattered as the Supreme Court found that nullum tempus has been alive and well in Connecticut since at least 1879 and traceable all the way back to English common law.  The court deemed it "well established and clear-cut."  Maybe so, but clarity to the court does not make it any less shocking to contractors and their attorneys.  The court also noted that if someone wants the common law of Connecticut changed, that is the job of the legislature.  

Nothing like a 15 million dollar lawsuit to remind you that our law is largely based on English common law….

 

You Should Not Ignore Choice of Law or Forum Selection Provisions In Business Contracts

In a typical business deal, the parties negotiate over essential terms such as price, payment, deliverables, indemnification, warranties, etc. Once you work out all the important details, the parties put together a written contract with the essential terms in it. If a lawyer is involved, the contract also will include a bunch of so called boiler plate clauses. The boiler plate clauses are the 10 or 12 clauses that appear at the end of a contract.

Many times the boiler plate clauses get overlooked because the parties typically say “these clauses are in every contract.” Ignoring these provisions can be a costly mistake if the relationship breaks down and a lawsuit becomes necessary. In fact, when parties finalize a business deal they do not anticipate how these clauses might impact litigation down the road.

Two of these clauses that frequently get overlooked are known as “choice of law” and “forum selection” clauses. This post will focus on forum selection. I will address choice of law in the next post.

Forum selection clauses typically govern the location and venue where the parties can file a lawsuit arising out of any dispute subject to the contract. The provisions vary. Parties usually negotiate over the location, but often times the exclusivity of the location gets overlooked. Some examples might require the parties to file a lawsuit:

in only one location, such as Connecticut or Massachusetts (exclusive)
in only one court, such as Hartford Superior Court in Connecticut (exclusive)
in multiple locations or courts (non-exclusive)
The forum selection clause might also include a waiver of any defenses to personal jurisdiction and consent to the chosen location. The laws in each state vary on enforcement of forum selection clauses. However, for the most part, if a party cannot avoid enforcement of the contract based on other defenses (such as fraud, durress, coercion, etc), courts tend to enforce these clauses.

Every business deal raises different concerns, but it is important to analyze these clauses with the potential scenarios that might occur. For example, sometimes, these clauses carry no particular concern, such as in a dispute between two companies in the same state. However, there are many scenarios where this simple boiler plate clause becomes problematic to one side, and very favorable to the other. This is especially so in the case of an exclusive forum.

Take for example a clause that requires all lawsuits to be filed in Connecticut state court . If you are a Connecticut business, and you expect that you might have to file a lawsuit, this could be an important advantage to you. It might eliminate the possibility and expense of an out-of-state opponent filing a motion to dismiss based on jurisdiction. You might also avoid the need to hire an out-of-state law firm.

On the other hand, in some circumstances, a Connecticut business might want to file a lawsuit in another location where the out-of-state defendant resides. This may become important to more easily enforce a judgment or attach assets. Additionally, in some circumstances, you might want to get an injunction enforced by a court where the defendant resides.

This post only touches upon some of the possible concerns with forum selection clauses. The take away here is that you should never ignore these clauses. You might not be able to solve all your concerns by negotiation of these terms, but forum selection should always be factored into decision making.

Otter Products Ratchets Up Its Enforcement of Counterfeit Otterbox Phone Cases

 Recently, Otter Products LLC, the maker of specialty mobile phone cases including their DEFENDER®, COMMUTER® and IMPACT SERIES® line of products, has stepped up its enforcement actions against buyers and sellers of alleged counterfeit goods bearing their federally registered trademarks.   To date, approximately 30 trademark infringement lawsuits have been filed against John Does and named individuals in the Central District of California, the Eastern District of New York and District of Colorado alleging the sale of counterfeit phone cases sold online including by Amazon marketplace, eBay and Craigslist sellers and retailers. 

Additionally, law firms retained by Otter Products have sent hundreds, if not thousands, of letters to suspected counterfeit sellers alleging multiple intellectual property violations including violation of the Lanham Act, federal trademark infringement, false designation of origin, unfair competition, false or misleading advertising, unfair business practices and unjust enrichment.  Many of these letters allege illegal dealings in counterfeit Otterbox products as confirmed by the inspection of phone cases by an investigator who purchased a case online from the seller.  Moreover, these letters often make an offer of settlement should the seller wish to resolve the matter in lieu of being sued in a state that is typically not their home state.

 

 If you’ve received a letter from a law firm retained by Otter Products, it is best to consider hiring an attorney that has experience representing sellers of alleged counterfeit goods so that you can better understand your options and determine if settlement is the best course of action.