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By Patricia C. Collins, Esquire, Reprinted with permission from the March 23, 2015 issue of The Legal Intelligencer. (c) 2015 ALM Media Properties. Further duplication without permission is prohibited.
Recently, the United States District Court for the Eastern District of Pennsylvania, in Mathis v. Christian Heating and Air Conditioning, Inc., 13-3747 (March 12, 2015), examined the effect of factual findings in unemployment compensation proceedings in Pennsylvania on discrimination claims filed in federal court. The conclusion? The discrimination case is a “do over,” and nothing determined by the tribunal (including the Unemployment Compensation Board of Review and the Commonwealth Court) will collaterally estop either party, presumably, from taking a contrary position in the subsequent wrongful termination suit.
The facts are these: Mr. Mathis was employed at Christian Heating and Air Conditioning (“Christian Heating”) for nearly two years. During that time, Mr. Mathis had placed black tape over part of his identification badge. The objectionable part of the card professed the company’s mission statement to, inter alia, run the business in a way that was “pleasing to the lord [sic]….” Mr. Mathis’s supervisor and the owner of the business required him to remove the tape from the back of his badge. Mr. Mathis refused to do so, and contended that he was terminated as a result.
By Thomas P. Donnelly, Esquire, Reprinted with permission from the November 24, 2014 issue of The Legal Intelligencer. (c) 2014 ALM Media Properties. Further duplication without permission is prohibited.
I do not generally characterize myself as a fan of arbitration. While proponents argue arbitration is a superior form of dispute resolution and more efficient than litigation, my personal experience in the representation of privately held businesses and individuals is otherwise. In many situations, the sheer cost to initiate an arbitration proceeding may be prohibitive. For a claimant, even if that initial cost is not an effective deterrent, the budget of ongoing hourly fees required of a qualified arbitrator in addition to the parties’ own anticipated legal fees, can quickly impair the potential recovery. For a Respondent, many times the cost of proceeding was not considered at the time of execution of an agreement which compels arbitration; thus the obligation to make payment for a service technically rendered by the courts without cost comes as a surprise. In either case, the parties must realize that at arbitration each is compensating not only its own lawyer, but, at least partially, another lawyer and a private dispute resolution industry as well. While arguably profitable for the legal profession, the realities of proceeding can result in difficult client discussions.
The above being said, there are situations where arbitration clauses can be of substantive, procedural and, consequently, financial benefit. In such cases, even a skeptic of arbitration must recognize the benefits of the bargained for exchange which is an arbitration agreement. Under the current state of the law, and given the trends in the enforcement of the right to contract, a carefully considered and artfully drafted arbitration agreement can be an essential aspect to certain business relationships and an important term of negotiation.
Employers should almost always include the broadest possible arbitration clause in any employment agreement and, generally, as a term of employment. In most cases, an action arising in an employment situation concerns a claim raised by an employee, or worse, a class of employees against the employer. The employer is generally a defendant. In such cases, arbitration clauses can serve several functions. First, an employee initiating the action must satisfy the initial fee if mandated by the prevailing agreement. As such fees are often determined by the amount at issue, the larger the claim, the higher the fee, and the greater deterrent toward commencement of the action. As of November 1, 2014, the filing fee for the commencement of an American Arbitration Association claim involving more than one million but less than ten million dollars was $7,000.00. Note there is no refund of the filing fee should the matter resolve. Certainly, the requisite fee is a deterrent to the filing of a border line claim, but could also be a deterrent to a claimant’s joinder of additional even less viable claims which include different damage components. Under any circumstances, the employee faces an early branch to the decision tree.
The flexibility of arbitration clauses within employment agreements may prove even more critical. With careful drafting, an employer can effectively insulate itself from certain employment related class actions. In Quillion v. Tenet HealthSystem Philadelphia, Inc. the United States Court of Appeals for the Third Circuit compelled arbitration of a Fair Labor Standards Act claim and, more importantly, declined to strike down a provision of an employment agreement requiring such claims be brought on an individual basis precluding proceedings as a class. The Quillion Court indicated that such a class action waiver was consistent with the Federal Arbitration Act and suggested in the strongest of terms that Pennsylvania’s preclusion of class action waiver in the employment context was preempted by Federal Law. Certainly, the equities of any such situation, including preservation of remedies and additional recovery of fees and costs are important to the court’s inquiry, but the current trend is to support the rights of the parties to contract, even to their own peril.
The flexibility of the arbitration agreement also allows for exclusions from the scope and reservation of certain matters for litigation. Matters of equity such as enforcement of restrictions against competition or solicitation can be reserved for the courts, thereby preserving immediate access to judicial process for enforcement of employer remedies. Interestingly, the reverse may not necessarily be true. The Montgomery County Court of Common Pleas recently dismissed a complaint for declaratory judgment seeking a judicial determination voiding certain restrictions against competition determining that such equity claim was within the scope of the arbitration agreement and, therefore, for the arbitrator to decide.
Arbitration also plays a vital role in the ever broadening world economy. In 2014, international business is the norm rather than the exception. The courts of the United States and the signatories to the New York Convention on Arbitration have routinely enforced arbitration clauses establishing the parameters of dispute resolution as consistent with the parties’ right to contract. Critically, the arbitration clause can protect a company operating in this country from the many pitfalls, incremental expenses and inconsistencies of litigating in a foreign country or even against a sovereign nation in its own judicial system by selecting a choice of law and a situs of the arbitration proceeding. Such forum selection also provides a certain substantive component not only as to applicable law, but also in the qualification of fact finders as the roles of qualified arbitrators available for commercial disputes continue to grow. Finally, arbitration may be preferable to litigation in the United States District Courts as the parties may be granted greater flexibility and input to the development of the schedule of proceedings rather than subject to the rule of the federal judge, who may or may not be familiar with often complex substantive issues. Finally, arbitration may also be preferable in any relationship where confidentiality is key. In some cases, the simple fact of a public filing is of concern. In many others, the factual allegations of a complaint, even if eventually proven unfounded, can be damaging. While an arbitration clause cannot prevent a claimant from filing an initial public complaint in court, an enforceable arbitration clause can bring an abrupt end to the public aspect of the dispute.
The courts remain the preferred forum for dispute resolution in many circumstances. However, with the growing trend of contract enforcement to the terms of arbitration agreements even a skeptic must admit that the inclusion of an arbitration clause in certain circumstances can provide a substantive advantage and dramatically impact the landscape of dispute resolution to your client’s benefit.
My wife doesn’t eat fish. Chicken is the staple of the diet in our house. Despite careful consideration, sometimes she gets tricked into consuming what looks like a tasty morsel only to be disappointed by the taste and texture of what comes from the sea. She promptly, but of course gracefully, extracts the fishy culprit from her mouth thereby rescinding the transaction and restoring her being to non-seafood status. Of course, a fishy business transaction cannot be so easily unwound.
Business transactions come in all shapes and sizes. From multi-million dollar mergers involving teams of lawyers and accountants to small asset purchases effectuated by only a bill of sale scribbled on a napkin. Most fall somewhere in between. Almost all involve disclosure of financial and business information in advance of closing in a “due diligence” period of evaluation and investigation. Due diligence is the means by which a buyer attempts to verify what the seller has to sell; the ongoing revenue stream and the customer pipeline. Sometimes the performance of the business after closing sharply contrasts the results of operations depicted in financial information exchanged in due diligence. The new owners are left without a roadmap to ascertain the disparities in performance. The investigation can be all consuming and require substantial attention and money at a time when the business is already in a period of transition. The new owners must balance examination of the transaction and results of operations against the focus required to conduct the daily activities of the business which, of course, remain pressing and are likely made more complex by the unexpected performance levels.
Hopefully, any agreements reached between the parties contain representations and warranties which could benefit the purchaser. The terms of the agreement are the best place to start the analysis of potential legal action. Generally, such agreements will represent and warrant the financial information exchanged in due diligence was accurate and adequately described the performance of the business. For example, often tax returns, profit and loss statements and balance sheets will be exchanged in due diligence and subject to specific representations and warranties. Examination of what documents were specifically referenced as included in the representations and warranties is critical. Where the prevailing agreements contain integration clauses, the representations and warranties are of paramount importance as integration clauses can prohibit reliance upon statements and information not specifically incorporated into the four corners of the documents and bar claims such as negligent misrepresentation and, potentially, fraud.
Determining whether the profit and loss statements and balance sheets contain material mis-statements of operations can be complicated. The investigation must begin with securing all documents subject to due diligence and the verification that those documents were the same documents that were prepared in the ordinary course of business. Ensure that any financial records or tax returns produced by the seller match financial records available from a different source such as a broker, accountant or internal revenue service. Of course, information becomes more available after the commencement of litigation by virtue of the discovery process.
The forensic analysis involves testing the information set forth in summary form in the financial statements against whatever other information is available. Quickbooks reports can reveal adjustments made to performance results. The reality however, is that most business owners, and for that matter attorneys, lack the requisite expertise to effectively conduct the necessary investigation. Accordingly, a forensic accountant skilled in fraud examination and detection is a valuable member of the analytical team. Certainly, there is a cost associated with that service, which cost must be incurred before the results are clear, but the expertise of the investigation will often control the outcome. The forensic accountant is trained to identify inconsistencies such as whether payroll was accurately stated, whether inventory and costs of goods sold were appropriately booked and whether income as stated on the financial records is impacted by other unspecified factors. A preliminary forensic investigation is essential to the decision to pursue costly litigation.
A buyer must also consider the potential parties, their financial positions, and the types of claims that can be raised. In seller financed transactions, as opposed to bank financed transactions, the buyer’s leverage is significantly enhanced. In the former, the buyer may apply pressure to a seller by discontinuing payments. In the latter the bank generally has no regard for any claims the buyer may possess against the seller and simply demands its’ payment each month. Generally, no court will interfere with the bank’s rights to security and payment as same are not dependent on the result of any claims possessed by the buyer as against the seller. The ability to recover in litigation must also be considered. The distribution of purchase price, whether distributed to creditors or held in joint accounts in a tenancy by the entireties state can impose additional obstacles to recovery and necessarily impacts litigation strategy. Identification of potential defendants and causes of action is also essential. Pennsylvania recognizes the torts of negligent misrepresentation in certain circumstances including preparation of financial information for the reliance of others, aiding and abetting breach of fiduciary duty and conspiracy. Accordingly, to the extent a seller was assisted in the preparation of false financial information, those who assisted may also be appropriately identified as defendants when the facts are supportive of liability. Potential claims against a seller include breach of warranty, fraud, misrepresentation, conversion, unjust enrichment and, under the right set of fact, claims for punitive damages. Breach of warranty claims are often the best chance of success as the issue of intent (or lack thereof) has no bearing on proof of a breach of warranty claim.
Finally, consider the measure of damages. Under the right circumstances, lost profits can be claimed. However, post-closing failure (or alternatively, success), management issues and other factors can complicate the damages analysis. In the absence of a lost profits claim, the difference between the valuation of the company in accordance with the financial information presented and the financial information eventually uncovered may result is a simpler damage calculation. Of course, any such analysis also requires the assistance of a business valuation expert in addition to the forensic accountant referenced above. A buyer must also be wary of any damage limitations internal to the agreements between the parties as well as any internal statutes of limitations which may be set by agreement.
In contrast to the ease by which my wife can expel inadvertently consumed sea food, rescission in a business transaction is unlikely. The very idea of rescission, placing the parties back in their respective conditions, may be impossible based on post-sale performance. Claims for money damages are far more often the claims that proceed to conclusion.
Certainly, pursuit of litigation concerning the purchase of a business can be expensive and complicated. Any such decision must weigh the likelihood of success and the cost of that success, against the distraction such litigation may cause and potential impact of that distraction on business operations. That being said, sometimes a buyer simply has no choice and sometimes what smells rotten really is just that; rotten.
A recurring issue employers must address is the enforceability of restrictive covenants entered into with an employee. These restrictive covenants are typically non-disclosure (confidentiality), non-solicitation, and/or non-competition agreements. The timing, form, and substance of these agreements will determine whether a court will find them valid. From a former employee’s perspective, the issue is basically the same but reversed: can the employee disregard a previously signed restrictive covenant without being liable for monetary damages to his former employer (and if newly employed at another company, keeping the second company out of litigation)?
Two cases recently decided by the Pennsylvania Superior Court provide guidance for employers and employees:
Fleisher v. Bergman, concerned an employee who was hired as a full-time employee. At the time of his hire, employee signed a restrictive covenant which was a confidentiality and non-competition agreement. The restrictive covenant provided that employee would not divulge any “Confidential Information” (e.g., customer lists, pricing policies, names of vendors) to other parties without the consent of employer; the Agreement further mandated that for a period of five years after termination of his employment, employee would not “. . . solicit or do business with any . . . entity . . . that was, within the three year period preceding the Employee’s termination, a Client or Prospect of Employer... ”
Reprinted by permission of Catalyst Center for Nonprofit Management. Further duplication without permission is prohibited.
Childhood victimization and other abuses of our most vulnerable citizens unfortunately remain a much too prevalent and tragic issue of our times. Particularly offensive is the possibility of physical or emotional abuse of those susceptible because of age, disability or circumstance while receiving services of a nonprofit. Safety efforts to protect the very people being served by a nonprofit, regardless of size, must be constantly monitored.
Even the smallest nonprofit should adopt safety-related policies based on nationally recommended guidelines developed by experts. Such policies and guidelines help protect both the recipients of the nonprofit’s services and the integrity of the nonprofit’s programs. Every nonprofit that serves children and youth has the obligation to exercise “reasonable due diligence” with regards to screening as part of its hiring and vetting programs for members of the nonprofit’s Board, staff and volunteers. Without such screening or gate-keeping vigilance, the very people the nonprofit is trying to serve are more likely to be unprotected and the reputation of the nonprofit (not to mention its fiscal health) are at unnecessary risk.
By William T. MacMinn, Esquire Reprinted with permission from the July 28, 2014 issue of The Legal Intelligencer. (c) 2014 ALM Media Properties. Further duplication without permission is prohibited.
As the world becomes increasingly globalized, lawyers are more than ever involved in litigating matters for or against people and organizations that are involved in disputes within the United States, but are located in foreign jurisdictions. In these circumstances, domestic practitioners likely will need to obtain evidence from sources located in foreign nations with which they have little prior professional experience. For those attorneys who seldom encounter an international issue, conducting discovery abroad can be both confusing and overwhelming, but a brief review of some of the sources governing the process can help alleviate any anxiety associated with pursuing an international claim.
Several methods exist to conduct discovery outside of the United States. In Pennsylvania the options include the following: 1) a deposition on notice before a person authorized to administer oaths in the place where a deposition is to be held either by local law or United States law (Pa.R.C.P. 4015(b)(1)); 2) a deposition before a person commissioned by the Pennsylvania Court to administer oaths (Pa.R.C.P. 4-15(b)(2)); or 3) a deposition after application to the Pennsylvania Court presiding over the litigation, pursuant to a letter rogatory under Pa.R.C.P. 4015(b)(3) and 42 Pa. C.S. § 5325, or a letter of request, in accordance with the Hague Convention on the Taking of Evidence Abroad in Civil or Commercial Matters. If a witness will appear voluntarily the simplest way to conduct discovery, and specifically to depose a witness who is located abroad, is the notice or commission procedure outlined above. Where a party or witness refuses to participate, however, an attorney will need to resort to either a letter rogatory, where the Pennsylvania Court in which a matter is pending makes a formal request to the foreign country’s judicial authority, or a “letter of request” under the Hague Convention. This article focuses on this latter method of international discovery, which liberalizes and streamlines the international discovery process.