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.

In the corporate setting, it has long been the case that a shareholder can assert a claim on behalf of the corporation when management of the entity refuses to do so – a so called derivative action. Under Pennsylvania’s limited partner statute, a partner (general or limited) can now do the same. A derivative action is one brought by a partner to assert a claim on behalf of the partnership where the general partner refuses to do so.
To bring a derivative action, unless the requirement to do so is excused, the limited partner must first make a demand that the general partner take steps to assert the partnership’s right. The demand must be in “record form” and “give notice with reasonable specificity of the essential facts relied upon to support each of the claims made in the demand.” As will be seen, it is important to carefully craft the demand, since the scope of the derivative claims that can be asserted is limited to those claims identified in the demand and because making the demand also temporarily tolls the statute of limitations on such claims.
After receipt of the demand, the general partner may choose to appoint a special litigation committee (SLC) to investigate the claims asserted in the demand and determine whether pursuing any of them is in the best interests of the partnership. The statute gives the general partner wide discretion to appoint members of the committee, so long as they are not interested in the claims and can exercise objective judgment. Indeed, other limited or general partners may be committee members.
The SLC is then charged with conducting an investigation. The scope of that investigation is limited by the claims set forth in the demand letter and is subject to the good faith requirements of the statute. Within these limitations, the investigation conducted is left to the committee.
Upon conclusion of the investigation, the SLC can make one of several recommendations authorized by the statute. These range from recommending that the claims not be brought (and if brought, discontinued) to recommending that the limited partnership itself assert them. The SLC has ultimate power over the claims as Court is bound to enforce its decision with judicial review limited to whether the members of the committee met the qualifications required under the statute  and whether the committee “conducted its investigation and made its recommendation in good faith, independently and with reasonable care.”
I recently used the SLC procedure in a case involving a limited partner who owed a large sum of money to the limited partnership. The general partner authorized a claim against the limited partner to collect the balance due.  The limited partner defended the case by asserting that the general partner was improperly appointed and therefore did not have authority to commence the collection action. The limited partner issued a demand for removal of the general partner under the act. I suggested that a special litigation committee be appointed. In this instance, I suggested that one committee member be a retired judge from the county in which the action was pending to defuse any argument that the SLC was not qualified or that it did not act in good faith and independently. As I represented the limited partnership, separate counsel was engaged to represent the general partner before the SLC.
In proceedings before the SLC, the limited partner’s counsel sought to expand the claims to include mismanagement and breaches of fiduciary duty alleged to have been committed by the general partner. Illustrating the importance of properly crafting the demand, the SLC refused to consider any of these expanded claims, holding that its review was limited to the issue raised in the demand – whether the general partner was validly appointed. .
Ultimately the SLC found that the general partner was validly appointed and directed that no claim be brought on this issue. As this claim had already been asserted, the limited partnership was preparing a motion to be filed with the Court to enforce the SLC’s determination when settlement negotiations, which had stalled over a year before, resumed, leading to a prompt settlement. The entire SLC process, from demand letter to decision, took four and one half months – a much quicker resolution, and at less cost, than fully litigating the issue.
The SLC procedure allows an independent review of the merits of derivative claims. If appropriate, such claims can be asserted on the partnership’s behalf or by the partnership itself. However, where such claims are found to be without merit, they can be summarily dismissed. The SLC is a powerful tool to address the merits of derivative claims on an expedited and reduced cost basis.

It seems that Labor Day has just come and gone, but the snow is already moving in and the holiday season will be here before we know it.  You have already transitioned the children from summer vacation into another school year, hopefully without too much stress.  While it can be hard to focus on the details of the season, if you have minor children and a custody agreement or order, it is time to take a look at your custody documents  and give some thought to what lies ahead in the next month and a half.   Prior to scheduling family dinners, holiday celebrations and travel, it is important to see what the holiday schedule is for this year.  Which days of the holidays are your children with you, what times are they with you, and who is responsible for transporting the children?  It is important that you know the answers to all of these questions.  Take out your custody agreement or order now and look through the schedule for Thanksgiving through New Year’s.  If you have questions, now is the time to ask your attorney, not on Thanksgiving morning.  We all know that a lot of advance planning occurs for the holidays, and family gatherings are scheduled.  If it is important to you that your children celebrate with you and your extended family, you want to be sure to make your plans around when you have physical custody of the children.  The last thing that you want to do is put your children in the middle of a dispute and have them miss plans with either parent that they were looking forward to.  Knowing the details of the holiday schedule now will enable you to make plans based upon the custody schedule and keep everyone happy, which should result in a more peaceful holiday for you.    

Many of our previous posts delve into the benefits of resolution of a commercial or shareholder dispute without litigation.  Cost, uncertainty and business distraction are factors which often weigh in favor of settlement even at a price which seems unfair.  But making a deal necessitates a desire to do so from both sides.  As they say, it takes two to tango.  If one party is simply not so inclined or the final best offer is simply unacceptable, litigation may be inevitable, and the only mechanism available to bring about resolution.   

In a corporate setting, that litigation may take several forms.  Choosing the right path is fact intensive and dependent on the relative positions of the parties.  Of course, the terms of agreement between business owners may either provide mechanisms for resolution or limit potential alternatives.  Regardless, every course of action comes with significant consequences which must be carefully considered prior to embarking on what can be both emotionally taxing and expensive.

Minority Shareholder Strategies

A minority shareholder who is not actively involved in the business has limited options.  Unless a shareholders’ agreement provide a mechanism for redemption or transfer, it may be difficult for a minority shareholder to compel a purchase.  That minority shareholder would be left to argue that he or she has been “frozen out” from the business, i.e. excluded from information relating to management, oppressed or treated inequitably in terms of distributions of profits so as to trigger an obligation that the company redeem their shares at “fair value”.  An action for the appointment of a custodian or receiver is the minority shareholders weapon of choice in that instance.  Majority and controlling shareholders are loathe to lose control of what is often their economic life blood. 

Majority Shareholder Strategies

A majority shareholder desirous of consolidation of ownership faced with a minority owner not interested in selling also has limited options to compel a sale.  In the absence of an agreement which provides for same, there is no provision at law relating to corporations to simply expel a shareholder.  With regard to llc’s, the Pennsylvania Limited Liability Company Act provides a limited number of circumstances where the right of expulsion may apply.  In either case, involuntary expulsion of a minority interest is no easy task. 

The Nuclear Option

The above being said, the nuclear option available to a controlling interest is dissolution.  Blow it up, resign all positions which impose fiduciary obligations at law, liquidate the assets and start something new.  While the process may be incredibly disruptive to the continuity of business and the personal finances of all the parties, if the separation of the minority interest holder is imperative dissolution may be the only option.  The minority may scream breach of fiduciary duty, but in the absence of an agreement among shareholders that the shareholders would not move to dissolve, the success of such a claim at law is speculative at best. 

In the end, the decision of whether to engage in such explosive tactics involves a financial analysis but also other factors such as whether the long term interests of the parties require same.  In some cases, such as in professional settings, potential irreparable damage to reputation may demand action regardless of the short term pain such action may cause.