Welcome to the AMM Law Blog, a tool to help you keep up to date on current legal developments over the broad spectrum of our practice areas. We welcome your comments and suggestions to create a dynamic forum that will be of interest to readers and participants.
Business partnerships are like marriages; sometimes they work great from the start and before you know it you are celebrating a 25 year anniversary with a big party with all of your clients and customers in attendance. And sometimes; not so much. For reasons unique to business relationships and the personalities involved, business partners sometimes find they can no longer function together, no longer share the same vision, and can no longer tolerate sharing the responsibilities or benefits of common ownership. We refer to the painful and expensive process of separation as “business divorce”.
As in any divorce, emotions run high. The natural instinct is to assess blame and recruit those close to the business to one “side” or the other. Such recruiting efforts implicate disclosure of sensitive, often damaging information with the idea that inflicting pain will induce a desired course of conduct. Rarely is such an ill-conceived plan rewarded with success.
The reality is that preservation of the business as an asset should be the primary concern. Often that means preserving the opportunity for the business venture to continue operations without interruption, modification or additional added pressures attendant to disharmony. Whether the business can be divided according to an acceptable plan among the shareholders, sold as a going concern, or liquidated in an orderly fashion, continued successful operations are essential to return on the shareholders’ investment.
Successful operations are a function of several factors. First and foremost, management, employees, contractors and staff must be confident in the direction of the entity. Public disclosure of disputes among ownership breeds workforce instability, discontent, mass departure and potential competition on the part of key employees with the capacity to do so.
Customer relationships must also be protected. Instability will most certainly cause a client to search for an alternative provider of the same product or service. A client will not risk their own business by not addressing the potential impacts of instability in yours.
The bank can become concerned as well. Lending relationships are complicated. Often businesses obtain term loans or lines of credit which must be “rested” (reduced to zero) from time to time. A borrower’s options upon maturity can be limited and, notwithstanding a long and happy banking relationship, the bank may not be required to extend credit on the same terms and conditions. The bank may even take the position, under certain circumstances and certain loan agreements that the bank is insecure as a result of dissention thus forcing very difficult financial decisions.
Finally, in all likelihood, public disclosure of internal disputes results in the parties becoming entrenched in their respective positions such that a future together is impossible. Even a sale under such circumstances is likely to net less than market as a buyer is quick to assert pressure on one shareholder or the other in an effort to negotiate the best deal.
Really no good can come of a public airing or an internal dispute. Just like a married couple should not publicize their grievances on Facebook, business owners should take care to keep their disputes in house while seeking resolution through any number of mechanisms – at least until it becomes apparent that such resolution is not possible. Even then, the minimum amount of information necessary to effectuate a course of conduct should be disclosed in the least applicable public way.
As family law attorneys and parties to custody orders can attest, shared custody and co-parenting arrangements are often fraught with ongoing tensions, stress and conflict. Using the court system to litigate smaller disagreements in the aftermath of a custody order is inefficient, costly and time-consuming. In addition to the burden it places on the Court system, it is a strain on not only the parents, but most importantly, the children who are subject to the order. Fortunately, a common sense alternative is soon returning which can mitigate some of the strife of custody disputes in the future.
On March 1, 2019, the Parenting Coordination program, which was terminated in May 2013, is being reinstated by the Pennsylvania Supreme Court. The rule allows the Court to appoint a parenting coordinator to resolve parenting issues arising from the final custody order issued in the case. The rule clearly establishes that parenting coordination is not intended for every case. Coordinators will not be appointed where there is a protection from abuse order in effect between the parties to the custody action, a finding by the Court that a party has been a victim of domestic violence by a party to the custody action during the case or within 36 months of the filing of the custody action or where a party has been the victim of a personal injury crime.
A parenting coordinator will be appointed for a period not to exceed 12 months; however, this may be extended. The rule also sets certain qualifications that must be met prior to the coordinator’s appointment. Once appointed, the parenting coordinator will have the authority to recommend resolutions to the court on specific custody related issues including, but not limited to: deciding on locations and conditions for custody exchanges; temporary variations of the custody schedule due to special or unique events and circumstances; and any school-related issues.
There are, however, specific areas into which the coordinator is explicitly prohibited from making any decisions such as: changing legal or primary physical custody; changing the custody schedule (a permanent change, rather than a “temporary” one); changing the child’s residence or their relocation; financial issues; major decisions affecting the health, education or religion of the child; and any issues limited by the appointing judge.
Under the new rule, after giving the parties or their counsel the appropriate notice and the opportunity to be heard on the issue(s), the coordinator submits to the court, and serves copies on the parties or their counsel, a written summary and recommendation within two days after hearing from the parties on the issues. An objecting party has five days from the service of the summary and recommendation to file a petition appealing the coordinator’s recommendations on all or specific issues. If neither party appeals the recommendation, the court undertakes one of the following options: approve the recommendation and make it an order of court; approve the recommendation in part and hold a hearing on the remaining issue(s); remand the recommendation back to the coordinator for more specific information; decline to enter the recommendation as an order and conduct a hearing on the issues. If a timely objection is made and a hearing is required, the recommendation will become an interim order pending the hearing and issuance of a further order by the court.
Custody matters are typically the most high-conflict and costly type of family law cases. By reintroducing the amended parenting coordination rule, the Supreme Court has returned a functional tool to the courts, attorneys and litigants to expedite custody disputes and reduce stress and costs for all parties involved. The hope is that this additional tool will assist all parties involved in achieving the best interests of the children in custody cases.
Unmarried people in relationships cohabitate all the time. The stigma our parents warned us would follow really no longer applies. That being said, societal acceptance of cohabitation does not mean that co-ownership of real property by unmarried people is not fraught with peril. It is. As the number of couples deciding to delay or forego marriage rises, the number of clients we see who have elected to purchase real estate in joint names without the protection of the divorce code is also on the rise. By the time the client sees us for professional guidance, the damage is often done, the relationship has ended and the real estate becomes an instrument of torment or the method by which one party seeks to extract an emotional toll.
Before I go any further, let’s clear one thing up, I am not a divorce attorney - I am a litigator. So why, you ask, am I writing a blog to warn against the purchase of property in joint names with anyone other than a spouse? The answer gets at the very point of this blog, if you buy property without the benefits of marriage, you will not enjoy the protections afforded by the divorce code, and you will need to hire a litigator to untangle the complications which follow if the relationship goes south. .
Unmarried individuals as co-owners of real property enjoy the absolute right of “partition” under Pennsylvania law – meaning that the law will not require co-owners of real property to remain co-owners of that property. An entire section of the Pennsylvania Rules of Civil Procedure is devoted to the mechanism by which ownership is consolidated whether by agreement, division, consolidation of title or, in certain circumstances, private or public sale. At minimum, the co-owners are set to expend significant sums which can be taxed to the real property.
Partition is an equitable proceeding. The Court is empowered to appoint a Master to review, investigate and report on a number of equitable issues such as possession, respective contributions, credit for improvements and value. The Court receives the Master‘s report but is not bound to the Master’s findings and can conduct its’ own evidentiary hearing at its’ discretion. Every step of the way is an argument and evidence gathering endeavor, the impact of which is never fully in either party’s control.
The best way to avoid the potential for a partition action is to maintain title in a single name unless and until married. The parties can agree on shared expenses, application of mortgage payments and any other number of factors in a Co-Habitation Agreement. That Agreement can provide for reimbursement in the event the relationship fails, a lien against the property for contributions or even an option to purchase if the parties so choose. The point is, co-habitating parties, without the complicating factor of title, can decide in advance how to procced and avoid the costs, time and uncertainties of a partition action. The time to do so is in advance and not after a transfer of title into joint names.
The Pennsylvania Supreme Court has recently held that an employer may be liable to its employees for a data breach involving the employees’ “personal and financial information including names, birth dates, social security numbers, addresses, tax forms and bank account information…”
The case, Dittman v. UPMC d/b/a The University of Pittsburgh Medical Center and UPMC McKeesport (“UPMC”), involved a class action complaint on behalf of 62,000 current and former employees of UPMC. The employees asserted that their personal and financial information (described above) was stolen from UPMC’s computer systems and “used to file fraudulent tax returns on behalf of the victimized [e]mployees, resulting in actual damages”. Significantly, the employees also asserted that the information accessed and stolen was information they were required to provide their employer as a condition of employment.
The employees’ claims against UPMC were based on their employer’s alleged negligence in failing to properly maintain and protect the employees’ personal and financial information. Two lower courts had ruled against the employees, resulting in a dismissal of their claims.
On appeal, the Pennsylvania Supreme Court reversed the lower courts and concluded that an employer has a legal duty to exercise reasonable care in collecting, storing and safeguarding its employees’ personal and financial information where the employer chooses to store such information on an “internet accessible computer system” and the employees are required to provide such information as a condition of employment.
Based on the Court’s recognition of this duty, the issue in the case then turned on the question as to whether the UPMC could be said to have been negligent in the performance of its duty to its employees. As with any matter, where one party is claiming injury because of another party’s negligence, the ultimate outcome is fact- specific. In this case, the Court held that the employees had stated a potential claim where they asserted that their information was negligently “collected and stored on its [employer’s] internet-accessible computer system without the use of adequate security measures, including proper encryption, adequate firewalls and an adequate authentication protocol.”
The Court did not accept UPMC’s defense that the data breach occurred as result of criminal activity rather that UPMC’s own negligence: the criminal activity would be “ ’within the scope of risk created’ “ by UPMC and thus something against which it would have to provide protection.
Also rejected by the Supreme Court, was the lower courts’ application of the economic loss doctrine. This doctrine, as interpreted by the lower courts, would have barred the employees’ claims because they alleged no physical injury or property damage-only an economic loss. The Supreme Court held that this doctrine was not applicable to the claims in this case because the employees’ claims were not based on a contract claim but based on a tort, namely the alleged negligence of the UPMC in undertaking its duty to protect the employees’ information.
The Supreme Court, having set forth the employer’s duty to its employees, sent the case back to the trial court for new proceedings consistent with the Supreme Court’s ruling. (The Supreme Court did not actually make a factual determination by this case that the employer was negligent).
The decision in this case should cause an employer to triple-check the safeguards attached to the data it maintains and to further consider what personal data and financial data(if any) of its employees the employer actually needs to retain. Any data breach may be litigated and analyzed against what protections were in place, what protections could have been in place and whether the employer used reasonable care to protect the information.
Now that the hustle of the holiday season is over, everyone is looking forward to the new year. January tends to be the month where people look for a fresh start and catch up on the tasks that were pushed off during the holiday season. For many people, that involves making new year’s resolutions. While some resolutions are harder to keep than others, a very simple resolution to make and keep is to review and update your estate plan.
Here are factors to keep in mind when considering updating your estate plan:
1. Life changes in your family: An estate plan is not one-size-fits-all; it is customized to meet your family’s unique circumstances and needs. Perhaps you had an estate plan prepared when your children were very young, but now they are older and capable of managing their own financial resources. In contrast, perhaps you have concerns about a child’s ability to make prudent financial choices, and would like to know your options for protecting any inheritance they might receive. Maybe you have a child or other family member with disabilities, and you are concerned about how the receipt of an inheritance will affect their public benefits. Perhaps you now have grandchildren that you would like to provide for as part of your estate plan. An estate plan can take all of these areas into consideration and be drafted to best fit your needs.
2. Your personal financial profile: Everyone’s financial profile changes over time. You may have accumulated significant assets since the last time you reviewed your estate plan, or you may be retiring and drawing down on your hard-earned assets. An estate plan created when you had a very different financial profile may not provide the best treatment of your estate based on its current and projected status.
3. Fiduciary roles in your estate plan: Creating an estate plan involves selecting various individuals (or entities) as fiduciaries, such as the Executor of your estate, Trustee of any trusts created under your estate plan, Guardian of your minor children, Agent during your life under your Power of Attorney, and Surrogate to make end-of-life decisions in your Living Will. Each of these roles is very important, so you should consider if the individuals who are named in these roles in your current estate planning documents are still the people you would want to serve. Your documents may name individuals who have gotten older and may be unable to serve in these roles due to health concerns, or individuals who have moved away and may not be able to effectively serve due to geographical distance. You may have created documents when your children were younger, but may now feel that your children are mature enough to take on these responsibilities. While anyone named in an estate planning document may resign or renounce if they are unable to serve in a fiduciary role, updating your documents now will avoid the time and delay involved in appointing the appropriate individuals to these roles in the future.
4. Changes in the tax laws: There is a saying that the only two constants in life are death and taxes, and your estate involves both. Your estate may be subject to various estate, inheritance, and/or generation-skipping taxes, and the law in these areas is constantly evolving. Depending on the law and your personal financial profile, your estate plan can be crafted to reduce your estate’s exposure to these taxes. Documents designed to account for one set of tax laws may not be as effective once those laws change, so it is important to update your documents to ensure they stay current.
Part 2 of our Noncompete Series will focus on employers. Noncompetes, when well drafted, are a powerful tool to protect customer relationships, confidential information, trade and training secrets, and key employee relationships. But, the law does not favor these agreements, so drafting requires care, and, as a practical matter, timing is everything.
While noncompetes are disfavored and maligned, they do serve useful purposes for certain employers. There are two types of restrictions that such agreements can impose: general prohibits on certain kinds of competition; or, prohibitions on soliciting customers, vendors, employees, contractors, or other valuable relationships. For the most part, restrictions on soliciting customers, employees and other key relationships are easier to enforce. They allow the employee to continue to work, and protect those relationships for the employer. For some employers, these restrictions, tailored to their business and in place for a sufficient period of time, are enough. Generally, these restrictions tend to last a year or perhaps two. Employers will need to weigh the dangers of making the restriction too long, and thus unenforceable, as against the time it takes for those relationships to go stale.
Restrictions on competition generally are another matter. The general principle applied by the court is this: a court will not enforce the restriction if it is not designed to protect a legally recognized protectable interest, renders an employee unable to pursue his chosen profession, or appears designed to eliminate fair competition. The court will only act to protect the following interests: trade secrets or confidential information, specialized training the employee received from the employer, or customer good will developed using the employer’s resources. Given these competing factors, it is best to narrowly tailor the restriction to the employer’s business. An employee is more likely to comply with such a restriction (thus avoiding court), and a court is more likely to enforce it as written.
Employers next must consider when to ask employees to sign noncompetes. These agreements are enforceable when signed at the beginning of the employment relationship. A noncompete executed by an employee after the employee has worked for the employer for a period of time is not enforceable unless accompanied by a raise or promotion, or some other benefit. This creates a practice problem for employers. Often, a noncompete is not required at the beginning of employment, but circumstances change: employees are promoted, the nature of the business changes, the employer becomes more sophisticated about its internal procedures, for example. A skilled employee with options in the marketplace may very well refuse to sign such a restriction where the new consideration offered is simply not worth it. So, for example, while a bonus of $500 is enough to make the agreement legally enforceable, it may also not be enough to cause the employee to sign. This creates a difficult situation for the employer – should the employer terminate and lose the key employee, or allow the employee to stay without a noncompete?
Creating a noncompete program for employees is complex, and many of the issue are interrelated. In addition to the legal concerns, employers must consider what concerns and relationships truly require protection, as well as retention and morale issues. We have helped many employers sort through these issues and are uniquely equipped to help businesses navigate difficult noncompete issues.
The third installment of my Navigating Noncompetes series will look at noncompetes from the employee's perspective, outlining potential issues which should be considered before signing such an agreement.