It is not unusual for business owners such as manufacturers and their suppliers and consultants to enter into joint ownership in the pursuit of mutual business goals.  Those pursuing this strategy should consider that such entanglements can lead to costly future litigation should circumstances change and interests of the parties diverge. In a recent case, a dispute arose between owners of a custom manufacturing limited liability company in which AMM’s client (and a supplier to that same LLC) possessed 33 1/3% of the issued and outstanding ownership interests.   The firm’s client also owned 100% of the stock in a separate business entity which supplied materials to the jointly owned custom manufacturer. 

When the owners had a falling out, an issue arose with regard to the payment of outstanding invoices generated by the supplier for materials provided to the jointly owned custom manufacturer.  When a resolution could not be reached, AMM, on behalf of the supplier, commenced litigation.   During the litigation, the majority member of the jointly held custom manufacturer transferred all of the inventory and other assets to a newly formed entity, owned entirely by him, without the payment of consideration, that is to say, without compensating the supplier entity.  The transfer of assets left the jointly held entity with insufficient assets to meet its’ liabilities; including the liabilities to the supplier.   As a matter of strategy, the controlling member of the jointly owned entity allowed default judgment in favor of the supplier and against the jointly held custom manufacturer.  The newly created entity went about doing business utilizing the inventory transferred without regard to the liability to the supplier.

The transfers gave rise to new and additional claims under the recently adopted Uniform Fraudulent Conveyances Act and claims of breach of fiduciary duty; all of which had to be litigated while the newly formed company operated a separate business. Clearly, a small business owner can no longer simply set up shop as a new entity when things go bad and debt accumulates. However, the complexity of ownership structure and relationship between the various entities made judicial intervention very difficult.   In the end, the newly formed entity was forced to file a general assignment for the benefit of creditors; the majority owner lost his interest in all of the respective entities and eventually filed for personal bankruptcy. 

The above is just one of many “war stories” encountered in attempting to unwind jointly owned business enterprises.  Business owners and potential investors should think very carefully before engaging in shared ownership.  What may seem like a mutually beneficial relationship at the outset can be costly and challenging to undo if things go bad in the future.    

The take away for business owners and potential investors is to think very carefully before engaging in shared ownership.  What may seem like a mutually beneficial relationship at the outset can be costly and challenging to undo if things go bad in the future. 

There are many reasons why businesses sell.  Certainly, the lifecycle of a successful business is often longer than the founder or controlling shareholder’s desire to continue working.  In such circumstances, a business owner may wish to extract the reward for years of sweat equity by transitioning to a new ownership group.   In other situations, a strategic combination is necessary to fuel continued growth in scope of services or customer reach.  Sometimes, an entrepreneur must simply choose between a number of different projects such that divestiture of one opportunity becomes necessary. 

Whatever the reason, preparing the business for the sale process can both enhance the value of the transaction and make for a smooth transition.  A sophisticated buyer is loath to take on uncertainties, non-ordinary course liabilities or business practices which may give rise to same.  A potential seller is wise to get their “house” in order before going to market or even considering discussions with a potential buyer. 

Financial Reporting

Financial information is a primary focus of due diligence.  Many businesses do not commission audited financial statements on an annual basis.  For many more, the annual tax return stands alone as an indication of the value of the business.  However, tax returns prepared without an eye on sale often reflect information designed to reflect a reduced tax liability as opposed to demonstrating the value of a going concern.  A business owner is wise to consider the assistance of a qualified accounting firm to prepare corporate financial information in a light more suitable for transactional purposes.  The actual filing of all applicable returns is a must.

Human Relations & Employment Practices and Policies

Human relations matters are a potential land mine.  An employee handbook summarizing policies and procedures is essential.  If benefits plans are in place, compliance with all applicable laws will be required if a deal is to be consummated.  A current employee census and proof of citizenship or immigration status will be required.  Key employees should be subject to employment agreements with assignable restrictive covenants.  An acquiror will desire protection against an exodus of management.  

Customers and Business Partnerships

Customer relationships and key business agreements should be locked down.  An analysis of such agreements in advance with special attention to assignability or change in control provisions is necessary due diligence in any sale.  Disclosure to a client or customer may make for a difficult discussion, however, a buyer will want to ensure the continuation of the business relationships prior to commitment. Indemnification obligations and intellectual property rights are certain to be addressed to the extent integral to any customer relationships.

A well-constructed house sells more readily and for greater value than a leaky one on an unstable foundation.   Further, a buyer will often require representations and warranties as to the material issues summarized above such that, even after closing, a deficiency can be costly to a seller who thought the transaction was over and the profits safely secured. monetarily impactful. A seller is wise to identify and address deficiencies in advance of sale discussions both to maximize value and make for a smooth, efficient and cost effective transaction.       

The words “I’m calling my lawyer” as famously spoken on the big screen are intended to inspire fear and trepidation.  They often do; particularly where one side in litigation has a disproportionally strong legal position on a critical issue.  The threat of litigation is certainly a motivating factor in pre-suit settlement discussion.  Even before lawyers get involved in a dispute, the parties have often drawn their respective battle lines and prepared for the standoff.     

Sometimes litigation is absolutely necessary.  Where one party to a dispute unreasonably believes a legal position is infallible or is deluded by the grandeur of potential recovery, a third party, arbitrator, judge or jury may be necessary to convince that party otherwise.  An inability to assess risk often results in a failure to completely evaluate ramifications. In such cases, litigation is inevitable and the best available alternative.      

Under any circumstances, the parties must consider the impact of litigation.  In business, that impact is not only the expenditure associated with legal fees, but also the distraction litigation brings to the business.  Instead of pursuing the next lead, deal or development, the business can be dedicated to the completion of discovery, attendance at deposition or preparation for trial. 

A couple of practical considerations:

First, involvement in litigation invites intrusion into a business’s management, internal affairs and financial information.  Selecting appropriate individuals within your company who will be involved on a day to day basis and who have knowledge of the facts of the dispute can be a massive undertaking in and of itself, as the demands of producing needed information, data and research will inevitably interfere with that person or persons performing their normal duties and responsibilities for the business.   More importantly, in some cases, litigation results in exposure or threatened exposure of otherwise secret information.  Customer relationships can be impacted, particularly if those customers are forced to respond to subpoenas.  It is critical under such circumstances that business owners and managers make sure a plan is in place to manage internal and external communication.  

Other sensitive information may also be revealed.  In a classic case of “I did not realize that was important”, clients often omit material facts which may not bear directly on their claim but which may be implicitly revealed.  Tax issues are a prime example of such material facts.  Any time money changes hands, the manner in which such proceeds are recorded will be addressed in litigation and to the extent either party has sought an unsupportable tax advantage, that act or omission will be revealed.    

Undoubtedly, the party sued will seek retaliation and file counterclaims.  For example, a contractor performs work for a homeowner which the homeowner fails to pay for.  Contractor sues, only to have the homeowner raise counterclaims based on the Unfair Trade Practices and Consumer Protection law which provides for triple damages and attorney fees which can potentially dwarf the original claim. Now the contractor spends more defending the claim for treble damages than in pursuit of the recovery.    

Finally, there is the issue of cost.  Litigation is expensive.  At the end of the day, the parties must consider the cost of a particular course of action and whether the potential for recovery is simply outweighed by that cost. 

So before embarking down the road of litigation, be certain it is a path you wish to follow.  Be sure to consider the impacts, both intended and incidental, to ongoing business operations.  Be sure your house is in order and that the skeletons in the closets are not subject to reanimation.  Finally, be confident in the analysis that money spent in litigation is a good investment. 

According to the National Center for Charitable Statistics (NCCS), more than 1.5 million nonprofit organizations are registered in the U.S.   We are proud to represent many such nonprofit organizations operating in the greater Delaware Valley.
These organizations serve the communities in which we live with steadfast passion and dedication.  The focus on community improvement, volunteerism and charity is remarkable.  We are pleased to play our small part in furtherance of their lofty goals.

Unfortunately, not everyone involved in the nonprofit industry shares the same altruistic philosophy.  Invariably, we read newspaper stories about the nonprofit treasurer who diverted funds destined for an ambulance squad or the director that diverted hundreds of thousands from youth athletics programs.  The question becomes, what is a nonprofit to do when defalcation is discovered? 

Generally, the law imposes no duty upon an individual or organization that discovers a financial defalcation to report the facts discovered to the authorities.  Only with respect to certain crimes, mostly involving abuse or child pornography, does a duty to report criminal activity arise.  Under current statutory law, no such duty exists upon the discovery of a theft or diversion of nonprofit funds.    

Many nonprofits are reluctant to report the defalcation.  The negative publicity which follows a public disclosure can be devastating to the credibility of an organization that is already competing for donor dollars.  Based on such pressures, for-profit organizations often choose to forego even the private exercise of confronting the accused in an effort to seek recovery preferring instead to simply take steps to ensure the same kind of breach of trust could not be repeated.  In the nonprofit world, such private decision making is in sharp contrast to fiduciary duties owed to the organization and the moral, if not legal, duties which are founded in the donor/donee relationship.   Moreover, the public nature of nonprofit tax filings may render disclosure inevitable,  such that the desired privacy cannot be maintained. 

Large nonprofits must file an Internal Revenue Service Form 990 each year.  The form summarizes the financial performance of the nonprofit.  In turn, every Form 990 that is filed is publicly available with just a few key strokes.  The Form 990 requires that the organization report to the IRS whether the organization “became aware of a significant diversion of the organization’s assets” in the current year.  Thus, the IRS requires the organization disclose defalcations which amount to a “significant diversion”. 

Despite potential negative publicity associated with disclosure of malfeasance in nonprofit administration, the inevitability of disclosure weighs in favor of a more transparent approach.  Best practices suggest that the entity’s Form 990 be reviewed by the board of directors prior to submission to the IRS, in fact,  the redesigned form asks whether the tax return was furnished  to the board for review prior to filing.  An astute donor – particularly a business savvy donor - is likely to read the 990 with a critical eye.  The worst scenario is that a director or donor becomes aware of the defalcation and subsequently questions the adequacy of management response, potentially a death knell to contributions, and the tenure of the secretive executive director. 

In addition, the nonprofit’s auditor, while not required to disclose every fraud in a footnote to the financials, would need to consider whether the theft had a financial impact on the statements.  If the dollar amount warranted it, it might have to be reported directly on the statements – either as a line item-loss from fraud or a receivable for repayment of stolen funds. 

Further, the question of the directors’ fiduciary duties to the organization in such circumstances has not yet been addressed.  Certainly, the directors of a nonprofit, having been placed in a position of trust by the organization, and bear some responsibility for effective management and control.   To date, no court has imposed liability upon the directors of a nonprofit for failing to investigate potential recovery, failing to report defalcation, or failing to seek recovery of proceeds unlawfully diverted.   While that is certainly not what the volunteer directors sign up for, we can see that case coming. 

Navigating the potential exposure requires a complete understanding of financial controls and information, reporting requirements and the composition of the board of directors.  Generally, the best advice is to conduct a complete investigation, proactively adopt whatever policies are necessary to prevent a re-occurrence, and report the bad actor to the relevant authorities.  Such actions would certainly satisfy any duty to the organization. 

In the many years I have been working as outside counsel to closely held businesses, one of the frequent pitfalls leading to costly litigation and operational conflicts is the failure of shareholders to adequately document and formalize their expectations, especially as it relates to minority shareholders.  The first question I ask when contacted by a business owner who is dealing with shareholder conflicts is “What does your shareholders’ agreement say?”  Unfortunately, too often, the answer is “What shareholders’ agreement?”   

Many small businesses are formed by a group of people who share a collective belief at the time of formation.  There are often unwritten understandings as to the division of roles within the business.  Almost universally, the expectation is that all of these founding shareholders will devote ongoing resources to the business.  Conflicts arise when those expectations diverge, when one shareholder fails to perform within the business, or even when a shareholder exits the company.   
 
When conflict does arise, mechanisms for resolution can be limited, complex and expensive.  Certainly a transfer of a non-performing shareholder’s stock seems like a simple straightforward course of action.  However,   in the absence of an agreement providing for transfer upon specified events, the business has no absolute right to remove a shareholder or force a transfer of the share ownership interest.  Even a shareholder who has ceased to be actively involved in the business continues to enjoy all of the rights attendant to the ownership of the shares: the shareholder need not come to work, need not contribute capital, need not pursue business opportunity in the name of the company.  Employment may end, but the right to enjoy distribution of profits does not, as long as share ownership persists.  As most small businesses are organized as subchapter “s” corporations, profits must be distributed in accordance with share percentage. 

Ownership of stock gives rise to all of the rights provided by statute.  Minority shareholders enjoy the right to obtain information about the performance of the company, attend and vote at shareholders’ meetings, and receive distributions of profits derived from corporate operations.  Minority shareholders can be an impediment to stock transfers, anchors against change and obstacles to capital expenditures. Such situations are a constant bone of contention among owners of small businesses. 
 
Of course, the best solution is an agreement that accurately reflects the understandings of the shareholders at the time the shares are assigned, or the company is formed.  Such agreements can provide clearly defined roles within the business, mandatory transfer upon termination of employment, death or disability, valuation mechanisms and provisions restricting transfer.  Adopting an agreement, at minimum, provides a foundation for the business relationship, and may provide a roadmap in the event of disagreement.    

In the absence of an agreement, a dispute with a minority shareholder requires careful management. The majority must take care to avoid vesting a minority shareholder with breach of fiduciary duty claims or shareholder oppression.   Compliance with corporate formalities is imperative. While there is no guaranty of continuing employment for a minority shareholder (with exceptions), distributions or profits in accordance with ownership percentages is required if the company has elected “s” corporation treatment.  Certainly, majority and employed shareholders may receive compensation for services rendered, but an artificial manipulation of corporate profits would certainly be relevant to a minority shareholder oppression claim.  

Pennsylvania Business Corporations Law provides little relief to a majority shareholder who continues to run a profitable business without the assistance of his or her minority shareholders. The statute provides no right to extract a non-performing shareholder against his/her will at any price, and provides no absolute right of liquidation. Even the nuclear option of judicial corporate liquidation requires that the complaining shareholder allege irreparable harm to the company; an allegation which may be impossible if the business is successful as a result of the majority’s efforts.

Formation of an appropriate and workable shareholders’ agreement requires legal representation; as does management of divergent goals between shareholders.  Owners of s corporations with minority shareholders would be wise to review their governing documents and take proactive steps to safeguard the future value of their shares, and avoid crippling and costly litigation. Antheil Maslow and MacMinn business attorneys are highly experienced in such matters and leverage a team of professionals in differing disciplines to navigate these complex waters.       

Reprinted with permission from the June 27th edition of the The Legal Intelligencer © 2017 ALM Media Properties, LLC. All rights reserved.Further duplication without permission is prohibited.

Earn out clauses in business acquisitions are notoriously fertile ground for disputes.  Complicated post-closing performance metrics, access to information, modifications to accounting methodologies after closing, tracking and collection of revenue information all present opportunities for buyer and seller to disagree.  The classic struggle of seller’s effort to maximize sale return juxtaposed against buyer’s focus on transforming the operations of the acquired enterprise for long term success necessarily create friction.  Both sides bring their unique perspectives to the interpretation of the exhaustively negotiated purchase agreement with the new benefit of hindsight. 

Certainly, arbitration pursuant to the Commercial Rules of the American Arbitration Association is common in any number of business contracts.  When the parties elect that process, they accept the applicable Rules and agree to adopt the procedures which have been developed by AAA.  In the earn out or deferred consideration context, however, acknowledging the sheer number of potential conflicts surrounding inherent accounting practices, scriveners often  incorporate a unique mechanism for dispute resolution in their  transactional documents.   When the issue is theoretically limited to a calculation, the parties go to great pains to define the applicable accounting terms and may design a system of dispute resolution which does not contemplate many of the applicable provisions of the Commercial Rules or empower any judicial or quasi-judicial third party to control the process. 

Indeed, transactional practitioners have developed language which seeks to avoid the intricacies of AAA arbitration in preference for what should be a predictable accounting calculation based on verified numerical results of operations.  In such cases, parties most commonly agree to submit any dispute related to the earn out to an informal resolution process using mutually agreed upon accountants to serve as “expert consultants and not as arbitrators.” The sole purpose of the accountants’ participation is the review of financial information relating to post closing operations and the calculation of deferred consideration; which calculation would be “final and binding”. 

Reprinted with permission from the December 30, 2016 issue of The Legal Intelligencer. (c) 2016 ALM Media Properties. Further duplication without permission is prohibited.

Historically, the courts of the Commonwealth of Pennsylvania have been loathe to blur the distinction between tort and contract.  The gist of the action doctrine, well formed and frequently litigated, precludes  recasting contract claims as tort claims or claims of negligent performance of contractual duties.  The courts have specifically held that parties to business agreements such as partnership, shareholder or LLC operating agreements may contract away or severely limit fiduciary duties owed by partners, directors and managers.  Notwithstanding these long standing and often contested principles of law, the Pennsylvania Supreme Court is set to address an emergent trend toward the expansion of duties imposed by contract through the implication of the duty of good faith and fair dealing in the context of business relationships.  Specifically, the Court has granted allocator on the issue of whether “the implied covenant of good faith and fair dealing” applies to “all limited partnership agreements under Pennsylvania law.”  Assuming the Court answers the question in the affirmative, as have the Courts in neighboring Delaware in a similar cases involving business governance agreements, the bright line between tort and contract will dim.

The case of Hanaway v. Parkersburg Group, L.P. 132 A.3d. 461 (Pa. Super. 2015) arises out of a limited partnership agreement for the development and sale of real estate.  The complaint alleges various breaches of fiduciary duty, conversion and contract based on the general partner’s sale of real estate at below market value to a separate entity also controlled by the general partner and involving many of the same limited partners as had invested in the original limited partnership – to the exclusion of the plaintiffs.  All tort claims based on breach of fiduciary duty were found to be time barred.   Further, the trial court granted summary judgment on the contract claims.  On appeal to the Superior Court, plaintiffs argued that the trial court erred in granting summary judgment on breach of contract claims by finding that the provisions of the limited partnership agreement granting the general partner exclusive right to manage the business affairs of the partnership negated the duty of good faith and fair dealing.  Plaintiffs argued the covenant is implied in every contract and imposes on each party a duty of good faith and fair dealing in its performance and enforcement, notwithstanding the grant of exclusive management rights.  

The Superior Court held that the implied covenant of good faith and fair dealing imposed the duty to exercise a contractual obligation, even a contractual obligation expressly conferring the exercise of discretion, must be exercised in good faith.  “Good faith” was interpreted to mean “faithfulness to an agreed common purpose and consistency with the justified expectations of the other party; it excludes a variety of types of conduct characterized as involving bad faith because they violate community standards of decency, fairness or reasonableness”.  The Court went on to describe the implied duty as requiring “honesty in fact in the conduct of the transaction concerned”.   Thus, the Court concluded that the general partner’s sale of partnership assets at below market rate for its own benefit and the benefit of its like minded limited partners to the detriment of others may constitute a breach of the implied duty and an issue for trial which should not have been dismissed on summary judgment.   

The Pennsylvania Supreme Court’s impending decision will undoubtedly be guided by precedent from the Delaware Supreme Court and the statutory preservation of the duty of good faith and fair dealing even in the face of the right to contract including the right to limit other duties- even fiduciary duties.   Delaware has adopted both a Revised Uniform Limited Partnership Act and a Limited Liability Company Act which permit parties to business agreements within the scope of those Acts to limit fiduciary duties owed to each other and the business. The Limited Liability Company Act goes so far as to confirm the premise that managers in an LLC owe fiduciary duties to each other under law by default, but allows for modification of such duties in the  operating agreement. The Revised Uniform Partnership Act, while allowing for a contractual waiver of fiduciary duties, specifically rejects waiver of the covenant of good faith and fair dealing.  Accordingly, while the parties are free to modify the fiduciary relationship with regard to management of business entities traditionally governed by contract, the implied covenant of good faith and fair dealing remains.  That premise was confirmed by the Delaware Supreme Court in Gerber v. Enterprise Products Holdings, LLC 67 A.3d 400 (Del. 2013).    In Gerber, the Supreme Court explained that the implied covenant “seeks to enforce the parties’ contractual bargain by implying only those terms the parties would have agreed to during their original negotiations had they thought to address them”. Gerber, at 418.  

The blending of tort and contract in the Pennsylvania Superior Court’s analysis in Hanaway is clearly evident by the Court’s summary conclusion that the breach of contract claims should have been preserved for the jury.  Although directly addressing the breach of contract claim, the Court applied tort principles by finding that the evidence, if credited, could support a finding that the Defendant orchestrated the sale of partnership assets at a price below market value for its own benefit.  The Court then concluded  such sale could have constituted a breach of the contractual duty to exercise management of the limited partnership in “good faith”.  Hanaway, 132 A.3d at 476.

A Supreme Court opinion which imposes the duty of good faith and fair dealing to all agreements governing business relationships will have far reaching implications.  Clearly, if breach of contract can be successfully alleged in a business setting under circumstances described in Hanaway, the statute of limitations analysis is substantially modified.  Owners of a minority business interest may no longer be limited to a two year statute.  Business practitioners and drafters of organizational documents who once believed a disclaimer of fiduciary duty was sufficient must now reconsider the inclusion of a “good faith” definition.  For litigators, the permissible theories of damage claims in business disputes concerning internal governance documents are expanded.

Although the Hanaway Superior Court decision is at odds with many traditional notions of separation between tort and contract, any Supreme Court determination that excludes the principal of good faith and fair dealing from business agreements would be at odds with the overarching and recognized principle that the duty is “implied in every contract”.  Further, any such ruling would be at odds with recent precedent from the Supreme Court of Delaware. 

Tom Donnelly is a Partner of the firm. His practice focuses primarily on commercial litigation and transactions, employment disputes and personal injury.  To learn more about the firm or Tom Donnelly, visit www.ammlaw.com.
   
 

Admittedly, insurance is an important part of any business plan.  Protecting against a catastrophic loss occasioned from outside factors renders the premium cost a reasonable and justifiable expense. But it is important to understand that commercial general liability insurance is not a substitute for performance, nor will insurance provide any benefit with regard to a myriad of potential claims which commonly arise in the ordinary course of business.  It is important to understand what protections are acquired and the scope of the coverage.

For example, commercial general liability insurance provides no coverage for any breach of contract claim.  Generally, the insurance benefit applies only to an “occurrence”; which, under Pennsylvania law is defined as an “accident”.  If your business fails to perform on a contract, or deliver on a promise, there has been no occurrence, and therefore no coverage will generally apply. 

Further, most basic commercial general liability policies provide no coverage for “your work” meaning no coverage is provided with respect to the products you manufacture or the things you build.  For example, if your business is engaged in the design and construction of a manufacturing line and that manufacturing line malfunctions causing damage only to itself, no coverage will apply.  In contrast, if the manufacturing line were to malfunction causing damage to the property where it was installed, those damages may be covered.  Similarly, if the manufacturing line were to malfunction causing a loss of product, those damages may likewise be covered.     

As with any contract, the scope of commercial general liability coverage and exclusion is defined by the terms of the policy.  Under Pennsylvania law, as the policies of insurance are drafted by the insurers and offered to policy holders without modification, the provisions of those policies are interpreted in a light most favorable to the insured.  Traditional common law precedent relating to contract interpretation are also applicable.  

Many particular risks which may be excluded from coverage under a basic commercial general liability policy may be subject to additional coverages available by endorsement.  Although tedious, review of the often complicated and lengthy provisions of the policy of insurance with the issuing agent is the only way to gain even a rudimentary understanding of coverages.  Even then, a professional review is often worth the investment.   There is simply no substitute for an understanding of the relationship between the business risks and the provisions of the commercial general liability policy and an analysis of additional risk that may be insured by endorsement to the policy.     

The law requires drivers in the Commonwealth of Pennsylvania and New Jersey to maintain a certain minimum level of liability coverage with regard to any automobile.  That coverage serves the important function of providing a fund from which an injured person may recover for injuries caused by the negligence of the person securing the coverage known as the “insured”.  Liability coverage also serves the equally important role of protecting the insured’s personal assets by providing a monetary barrier between the claims of an injured person and the personal assets of the insured  

Some other provisions of an automobile policy which get far less attention, however, are also designed to protect the insured as opposed to someone injured by the insured’s negligence.  Policy provisions such as “stacking”, the limited tort option (known in New Jersey as the “verbal threshold”) and uninsured/underinsured protections are critically important to the insuring relationship and may be the difference between a successful recovery and a recovery which is not enough to satisfy your own medical bills, even if you are involved in an accident caused by the negligence of someone else.  “Penny wise and pound foolish” is a dangerous proposition when it comes to automobile coverage.

We recently and successfully tried a week long jury trial in the Bucks County Court of Common Pleas where the predominant issue in the case was the clients’ election of the limited tort option in his auto insurance policy. By choosing the limited tort option, the client had relinquished his right to bring suit against anyone whose negligence may have caused him to be injured,  unless the accident resulted in a “serious impairment of a bodily function”.  In our case, the client had suffered a mild traumatic brain injury – a concussion.  Unlike the majority of individuals who suffer such injuries, our client did not recover as expected, and continued to suffer mild neuropsychological deficits such as difficulty in word finding and rapid processing of information. Notwithstanding those deficits, the client was able to return to his normal occupation.  Because our client had chosen the limited tort option, the tortfeasor’s insurer refused to make any offer of settlement whatsoever based on his neuropsychological deficits, offering only to satisfy the client’s lost wages.  Our negotiating position on behalf of our client in settlement discussions was clearly disadvantaged since the insurance company knew there was substantial potential that the very specific and nuanced nature of the injury would be difficult for a jury to grasp, and might lead a jury to conclude the client had not suffered a “serious impairment of a bodily function”.  While we were successful at trial, the matter is one which should and would have been resolved in settlement but for the election of limited tort coverage by the client.  Had our client invested in full tort coverage, he would have been spared an emotionally taxing and all-consuming trial on merits and damages.

Reprinted with permission from the June 24, 2016 issue of The Legal Intelligencer. (c) 2016 ALM Media Properties. Further duplication without permission is prohibited.

The digital age and pervasive use of email communication gives rise to an entirely new and complex set of issues pertaining to the application of the attorney client privilege and the potential claim for waiver of that privilege.  Many commentators have addressed the use of commercial email servers and the implications of the terms and conditions applicable to such email accounts citing the potential that emails transmitted through such accounts may not be secure or protected.  The commercial provider’s right to use, retain or review the information communicated may impact on the privilege.   Even more complex are the issues that arise when email communications pass between a lawyer and a client utilizing an email account provided to the employee by the employee’s employer, or using an employer provided computer. While the law on an employer’s right to review information passing through its computer systems is continuing to develop, the application of that law to potentially attorney client privileged communications is in its infancy.   Research regarding the application of attorney client privilege to email communications exchanged through an employer’s email server reveals no case directly on point where the advice of counsel is sought regarding matters involving the employer.   

Litigants seeking discovery of attorney client communications through an employer sponsored email account cite the principles developed in cases of inadvertent disclosure and the requirements for invoking the attorney client privilege.  Pennsylvania law permits the invocation of the privilege if the communication relates to a fact of which the attorney was informed by his client, without the presence of strangers, for the purpose of securing either an opinion of law, legal services or assistance in a legal matter.   Nationwide Mutual Ins. Co. v. Fleming, 924 A.2d 1259 (Pa.Super. 2007).  In Carbis Walker, LLPv. Hill Barth and King, LLP, 930 A.2d 573 (Pa.Super.2007), the Superior Court adopted the five factor test to determine whether inadvertent disclosure amounted to a waiver of the attorney client privilege; (1) the reasonableness of the precautions taken to prevent inadvertent disclosure in view of the extent of the document production; (2) the number of inadvertent disclosures;(3) the extent of the disclosure;(4) the delay and measures taken to rectify the disclosure; and (5) whether the overriding interests of justice would or would not be served by relieving the party of its errors.