Reprinted with permission from the August 19, 2016 issue of The Legal Intelligencer. (c) 2016 ALM Media Properties. Further duplication without permission is prohibited.

The rights of shareholders to dissent to corporate actions are set forth in PA C.S.A. §1571 et seq., the Pennsylvania Business Corporation Law. Dissenters who comply with the formalities of the statute have the right to demand payment for the fair value of their stock interest at the time of the corporate action giving rise to the right to dissent – provided the corporate goes through with that action. Since a shareholder in a publicly traded company can simply sell his shares if he disagrees with a proposed corporate action, dissenters’ rights do not apply to such corporations.

What triggers dissenters’ rights?
The corporate actions giving rise to dissenter’s rights are specified in the BCL and generally involve fundamental changes to the entity, such as a merger or a change in voting rights.   When the corporation proposes to undertake such a change, a specific procedure must be followed by the dissenting shareholder.

Dissenters need not necessarily assert their dissenters’ rights to all of their shares. They must, however, assert those rights as to “all the shares of the same class or series beneficially owned by any one person.” Beneficial owners of shares should have the written consent of the record holder of the shares.  15 PA C.S.A. §1573.

Dissenters must file their dissent with the corporation prior to the vote on the proposed corporate action. The dissent must be in writing and must include a demand for payment of the “fair value for his shares” if the corporation adopts the proposed action.  Merely abstaining or voting against the change is not sufficient to invoke dissenters’ rights. Once invoked, to preserve dissenters’ rights, the shareholder cannot change the beneficial ownership of the shares while the vote is pending, nor can he vote in favor of the proposed action.

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Employers are now using a new strategy in an effort to keep their employees from leaving the company and working in a competitive enterprise. Traditionally, employers used restrictive covenant agreements, almost always built in to the employee’s written employment agreement. These covenants prohibit employees from engaging in competition with a former employer. Courts tend not to favor restrictive covenants because they impinge on the ability of a worker to earn a living – they are a restraint of trade.

To limit the scope of restrictive covenants, courts impose a reasonableness standard. Restrictions for a limited time, such as a year, and a small geographical area, such as a five mile radius, were favored. Long-term and broad covenants were not. The employee’s skill set and knowledge of the original employer’s enterprise are also key factors in assessing the business need for any restrictions. The more skill needed to do the work, the more knowledge an employee has of the employer’s business strategies, the more justifiable the non-compete clause becomes.

Why Employers Like the Employee Choice Doctrine

The strategy that employers are now using in some states, including Pennsylvania, is a little more artful. Employers are offering employees post-employment benefits such as stock options and deferred compensation with a condition – a catch. The catch is that the benefits are only available if the employee who leaves the company does not compete with the employer providing the benefits. The employee is given a choice to either accept the benefits and not compete, or compete, but forfeit the benefits and be subject to repayment, or "clawbacks” of benefits already paid. The choice has become known as the employee choice doctrine.

The employee choice option works better for the employer than the typical restrictive covenant because it enables the employer to shift the burden to the employee. In the classic non-compete case, the employer's remedy was to seek an injunction against the competing former employee ordering him or her to cease the competition. In employee choice cases, the employer can still seek an injunction. Better still, the employer can just terminate the benefits (the stock option or other post-employment benefit) thus shifting the burden to the employee to seek redress in the courts by demanding payment of the benefit.

In some states, like New York, there is no review of the employee choice option to assure that the choice offered to the former employee is reasonable. That is not the case in Pennsylvania. Pennsylvania law currently does allow employees to craft employment benefits that are tied to non-competition, but the tie has to be reasonable. The cases in Pennsylvania are evolving. As with restrictive covenants, the more reasonable, meaning less strict, the choice is - the more likely Pennsylvania courts will uphold it.

Key Drafting Issues in Employee Choice Benefit Contracts

When drafting employee choice benefit provisions, employers should keep in mind the following points:

• The Employee must have a real choice. The choice between competing in the new position and forfeiting the benefit or not competing and keeping the benefit should be clear. In short, the employee should understand that there is a trade-off.

• The Employee has to leave voluntarily. The choice option is likely only valid if the employee controls the decision about leaving the current employer. Some courts reason that the employee choice doctrine is not really a choice if the employer fires the employee without cause. In such a circumstance, the employer has little or no legitimate business interest in enforcing the non-compete obligation.

• Consideration.  For the employee to be forced to make a choice between forfeiting assets and working with a competitor, the employer has to give the employee additional consideration over and above that which the employee would have been entitled to receive in the normal course of working for the employer, including severance or other payments normally paid upon termination.

Why Legal Counsel Can Help

Experienced business counsel understand the evolving nature of the employee choice doctrine.  In particular, they keep current with the Pennsylvania and federal court decisions so they can craft documents which have the best chance of surviving attack by employees who seek to avoid them by claiming that the choice is invalid as a restraint of trade.

Before drafting, and certainly before presenting an employee benefit with a forfeiture provision – employers should seek to have their business counsel review the language of the benefit contract.

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By William T. MacMinn, Esquire Reprinted with permission from the February 25, 2016 issue of The Legal Intelligencer. (c) 2016 ALM Media Properties. Further duplication without permission is prohibited.

Can organization attorneys represent their agents in an individual capacity? A recent Pennsylvania Superior Court decision said no.

The confidentiality of attorney-client communications is a long-standing privilege across the United States. The U.S. Supreme Court, in Swidler & Berlin v. United States, 524 U.S. 399, 403 (1998), reasoned that full and frank disclosure is a prerequisite that attorneys need in order to give their clients the best legal advice available. "It is the most revered of the common law privileges," according to Commonwealth v. Chmiel, 738 A.2d 406, 414 (Pa. 1999).

There are exceptions to lawyer-client communications. Lawyers cannot hide knowledge that a future crime is going to be committed. The right to assert the privilege can be voided if the communication to the lawyer was also made to nonlawyers. Of current interest is a third exception¬—the client's right to waive the privilege.

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Thursday, 10 September 2015 14:59

Google AdWords Trump Trademarks

By Bill MacMinn

A client Googled the name of his own retail store. When he saw the results he was alarmed to learn that the result returned his store name with the name and telephone number of his biggest competitor, and a link to the competitor’s website, appeared in the top three search results and before the link to his own site. My client’s business name included a trademarked national brand. Surely, this must be unlawful?

Google searches return a natural or organic list of results produced by the keywords entered by the user. In addition, Google’s search engine also displays paid advertisements known as “Sponsored Links”. Google’s AdWords advertising platform permits a sponsor to purchase keywords that trigger the appearance of the sponsor’s advertisement and link when the keyword is entered as a search term. My client’s crafty competitor purchased the name of my client’s business as a “keyword” so that when a user searched on my client’s business name his competitor’s name was displayed as a “Sponsored Link” within the top three results and before the information and link to my client’s website. Google, which earns significant revenue from the AdWords platform, permits the use of trademarks as keywords.

There have been a multitude of lawsuits alleging trademark infringement over this practice. Few result in published decisions and of these; nearly all were losses for the trademark owner. Typical of these is 1–800 CONTACTS, INC. vs. LENS.COM, INC., a 2013 case from the Tenth Circuit, involving two internet sellers of contact lenses and related merchandise. At the time the case was filed, 1–800 Contacts, Inc. was the world’s leading retailer of replacement contact lenses, selling them by telephone, by mail order, and over the Internet. It was the owner of the service mark “1800CONTACTS”.  Lens.com is one of 1–800’s competitors in the replacement-lens retail market, selling its products almost exclusively on line. Lens.com purchased the keyword 1800 CONTACTS which caused its “Sponsored Links” to appear when a Google user searched for that phrase. The Court ruled that Lens.com did not violate trademark laws. As with most such cases, the legal analysis turned on whether the alleged infringer’s use of the mark was likely to cause confusion to consumers. In ruling that such confusion was unlikely, the Court examined several factors, including the relatively few users who used the Lens.com link generated by the keyword “1800CONTACTS” to click through to the Lens.com site and the dissimilarity between the two companies websites which the Court concluded would minimize the likelihood of confusion. In other cases Courts have held that such factors as the sophistication of the Google users and the fact that the sponsored links generated by the keyword search appeared in boxes and were visually dissimilar from the organic links were sufficient to avoid user confusion.

Efforts to curtail this practice using state trademark common law and laws regulating unfair competition have also failed as these legal theories rely heavily on Federal trademark law requiring plaintiffs to meet the same likelihood of confusion requirement.

One commentator has observed that in many of the cases the sponsored links generated very few visits to the competitors’ site from users “clicking through” on keyword generated links. The economic value of those visits was small. For example, in the 1 800 Contacts case, the most optimistic estimate of damages was in the range of $40,000, much less than the cost of prosecuting the case.

Although the advice was counter-intuitive, I had to inform my client that any action based on his competitor’s use of his trademarked name as a keyword was not likely to succeed. The silver lining, if there is one, is that the strategy doesn’t appear to result in significant loss of revenue.

 

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By William T. MacMinn, Esquire Reprinted with permission from the July 27, 2015 issue of The Legal Intelligencer. (c) 2015 ALM Media Properties. Further duplication without permission is prohibited.

The Superior Court confirmed in the recent decision of Drake Manufacturing Company, Inc. v. Polyflow, Inc., 109 A.3d 250 (Pa. Super. 2015), that a foreign corporation doing business in Pennsylvania must be registered pursuant to 15 Pa.C.S.A. §4141(a) in order to maintain any litigation or recover any damages in the Commonwealth (15 Pa.C.S.A. §4141(a) is now enacted at 15 Pa.C.S.A. §411(a)).  The Drake case is an instructive and cautionary tale because the Defendant in that case admitted contractual liability for non-payment, but defended the case solely on the lack of capacity issue. There was no doubt that the Plaintiff was a foreign corporation doing business in Pennsylvania and had not registered as required by Pennsylvania’s Business Corporation Law.  Nevertheless, even after many years and several opportunities to obtain the Certificate of Registration, Plaintiff failed to do so until three weeks after winning a verdict in the case.

Defendant properly pled the lack of capacity defense in its Answer, renewed the argument in a motion for non-suit at the close of Plaintiff’s case, and filed post-trial motions requesting judgment n.o.v.  Three and a half years passed from the time of Plaintiff’s complaint until verdict, during which time Plaintiff did not make any effort to obtain the required Certificate.  Plaintiff presented no evidence on the capacity issue at trial, nor could it since it did not comply with the statute until three weeks later. Further, at the conclusion of the trial Plaintiff allowed the record to close instead of requesting that it be kept open to allow time to obtain and offer into evidence its Certificate of Registration.  Plaintiff only submitted its registration as a part of its rebuttal to Defendant’s Motion for Judgment N.O.V.   The trial court denied Defendant’s Motion finding that submitting the certificate during post-trial proceedings was permissible. It entered judgment against Defendant in the amount of nearly $300,000.00.

On appeal, the Superior Court reversed the lower court and remanded for entry of Judgment N.O.V. in favor of the Defendant. Holding that registration is an absolute pre-requisite for a foreign Plaintiff doing business in Pennsylvania to maintain a suit and recover damages, the Court further reasoned that the after-acquired certificate could not be accepted during post-trial proceedings, nor could the record be re-opened to accept it because it was evidence that could and should have been presented during trial.  The Court further noted that the issue of lack of capacity to sue may be raised either by Preliminary Objection or, as was done here, by Answer and New Matter and cautioned that failure to do either waives the defense. 

However, the question remains, is there an earlier time period at which waiver may attach? Notwithstanding Pa.R.C.P. 1028, there may be. In International Inventors Incorporated, East v. Berger, 363 A.2d 1262 (Pa. Super. 1976) the Plaintiff sought a preliminary injunction and damages. There the Defendant properly raised the issue of Plaintiff’s incapacity at the preliminary injunction hearing but the preliminary injunction was nevertheless granted.  On appeal, the Superior Court held this was error.  The Court explained that the trial court should have denied Plaintiff’s request for an injunction, but should also have stayed the proceedings to give Plaintiff an opportunity to register and thereby cure its lack of capacity.  Instead, the Court granted the injunction and is so doing decided “an issue” (i.e. injunctive relief) in the case and thereby allowed Plaintiff to “maintain a suit” in violation of the statute. The Court reversed the grant of the injunction.  Although Berger analyzed the issue of timeliness in the context of the Plaintiff’s compliance with registration requirements, the Court’s reasoning also supports the argument that a Defendant, who does not raise the capacity issue prior to preliminary injunctive relief being granted, similarly may have waived the issue for the life of the suit even though the time for responsive pleadings under the Rules of Civil Procedure had not expired. Thus, while the question of the Plaintiff’s capacity may not be at the forefront of case strategy analysis, Berger and Drake are a caution to counsel that the issue cannot be ignored.

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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.

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On April 29, 2014 an evenly divided Supreme Court let stand a Superior Court opinion which effectively creates a blanket prohibition on discovery of communications between an attorney and his or her expert. On November 23, 2011 the Superior Court handed down its opinion in Barrick vs. Holy Spirit Hospital, (32 A.3d 800). In that case, Carl Barrick brought suit against the hospital and its catering company, Sodexho, for injuries suffered when chair on which he was sitting collapsed beneath him in hospital cafeteria. Sodexho sought discovery directly from one of Mr. Barrick’s treating physicians, Dr. Greene, who was also designated as an expert witness to testify at trial. The medial records were produced, but Dr. Greene refused to produce “Certain records of this office that pertain to Mr. Barrick but were not created for treatment purposes….” These records included communication between Dr. Greene and Mr. Barrick’s attorney.  Sodexho moved to enforce the subpoena which was granted by the trial court. An interlocutory appeal followed.

The Superior Court reversed. Its analysis focused on Pa.R.C.P. 4003.3 which protects from discovery counsel’s work product and 4003.5 which limits expert discovery.  Discussing Rule 4003.5, the Superior Court reiterated the Supreme Courts’ interpretation of the rule in a prior case  which held that, in Pennsylvania, expert discovery absent cause shown, is limited to the interrogatories described in Pa.R.C.P. 4003.5(a)(1) .
The Superior Court went on to hold that written communication between counsel and an expert witness retained by counsel is not discoverable as it is protected under the work-product doctrine of Pa.R.C.P. 4003.3. The only exception to this blanket prohibition arises where the party propounding the discovery can show that the communication itself is relevant.

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By William T. MacMinn, Esquire Reprinted with permission from the January 25, 2014 issue of The Legal Intelligencer. (c)
2014 ALM Media Properties. Further duplication without permission is prohibited.

Of all the steps involved in litigating an action, one of the most important is correctly identifying the opposing party. While this step may seem to be the most obvious part of the process, misidentifying the defendant can prove fatal to the underlying cause of action—and this particularly is true where the defendant, unbeknownst to a lawyer and his or her client, dies before legal proceedings begin.  Even though the Pennsylvania Rules of Civil Procedure permit a party “at any time [to] change the form of action, correct the name of a party or amend his pleading,” the door to this liberal right to amend  slams closed once the statute of limitations on the underlying claim expires.

These principals create a trap for the unwary in situations where the opposing party dies before a plaintiff could, or should have, filed the original cause of action.  The Supreme Court of Pennsylvania long has held that “the death of an individual renders suit against him or her impossible where an action is not commenced prior to death.” Myers v. Estate of Wilks, 655 A.2d 176, 178 (Pa. Super. 1995) (citing Erhardt v. Costello, 264 A.2d 620, 623 (Pa. 1970)). Practically speaking, then, any complaint filed against someone after that person has died is a legal nullity rendering any attempt to amend such a pleading void.

Published in AMM Blog
Friday, 15 March 2013 19:53

Simple Subpoenas 1.0

Why does it seem to take so long to solve simple problems?  For years litigators have had to resort to the use of the cumbersome and needlessly expensive procedures to compel the attendance of a witness in interstate litigation pending in state court.  The problem arises, of course, where the testimony of a witness located in Pennsylvania is needed in connection with litigation pending in another state, or when the witness is located out of state and his testimony is needed in connection with a Pennsylvania case. 

In 2007, the National Conference of Commissioners on Uniform State Laws promulgated the Interstate Depositions and Discovery Act (the “Act”) which simplified the entire process.  In October 2012 the Act was adopted in Pennsylvania and became effective December 24. It is codified at 42 Pa.C.S. § 5331.

The Act requires the Prothonotary to issue a Pennsylvania subpoena, upon the submission of a foreign subpoena.  The Pennsylvania subpoena must incorporate the terms used in the foreign subpoena and provide the names and contact information for all counsel of record and unrepresented parties in the foreign proceeding.  Service and enforcement of the subpoena are governed by the Pennsylvania Rules of Civil Procedure. 

Need to subpoena a witness in another state for a Pennsylvania case?  If the witness is located in any of the thirty two states and territories that have adopted the Act, the procedure is just as simple.  Issue a Pennsylvania subpoena; send it to your local counsel on the ground in the discovery state and off you go.  The Act is the law in Alabama, Arizona, California, Colorado, Delaware, District of Columbia, Georgia, Hawaii, Idaho, Indiana, Iowa, Kansas, Kentucky, Maryland, Michigan, Mississippi, Montana, Nevada, New Mexico, New York, North Carolina, North Dakota, Oregon, Pennsylvania, South Carolina, South Dakota, Tennessee, U.S. Virgin Islands, Utah, Vermont, Virginia, Washington.  It is on the legislative agenda in New Jersey.

That’s all there is to it! In the words of the Commission:

The Act requires minimal judicial oversight and eliminates the need for obtaining a commission or local counsel in the discovery state, letters rogatory, or the filing of a miscellaneous action during the discovery phase of litigation.  Discovery authorized by the subpoena is to comply with the rules of state in which it occurs.  Furthermore, motions to quash, enforce, or modify a subpoena issued pursuant to the Act shall be brought in and governed by the rules the discovery state.

The solution is so simple one wonders why it took so long to come up with it and, once the Act became available, why it took five years to enact it in Pennsylvania?  Enact it we have and litigators, their clients and the Courts will benefit from its simplicity.  

Published in AMM Blog
Friday, 27 July 2012 14:40

Top Eight Elements of a Non-Compete

Employment agreements, especially those for key employees which include non-competition terms, must be carefully drafted.  What should they include?  Here are eight (what’s magic about ten?) musts: 

1. Define the Restrictions. The non-compete should, first and foremost, clearly define the prohibited zone by industry segment, by geography and by time. Because these covenants are disfavored in the law (certainly by every trial court which I’ve ever asked to enforce one of these agreements) employers must leave no doubt about the restrictions and be able to tie each to an identifiable protectable interest.  The covenants are not enforceable unless they are required to protect such interests, and then only to the extent the restrictions are reasonable. 
  
2. Protectable interest?  Courts will not enforce these covenants unless the employer has an interest which can only be protected by the restriction.  Eliminating competition is not a protectable interest but, for example, protecting customer relationships is. Consider how the particular employee could hurt your business and tailor the restrictions to provide protection in those areas.

3. Reasonable?  A covenant prohibiting competition anywhere in the country is not likely to be enforced where the employee’s relationships were confined to one state or region of the country.  Such a broad restriction would likely be found to be unreasonable.  Similarly, temporal restriction should be limited to the time required to give the employer’s new representative time to meet and solidify relationships with the customers. 

4. Don’t forget to protect your people.  A well drafted employment agreement will include provisions which prohibit the employee from inducing your employees to move to the new employer. Losing one key employee is bad enough; losing three or four may be catastrophic. 
 
5. What happens if the employer sells the business?  Unless the covenant can be assigned, it is lost and the employee is free to compete.  Restrictive covenants are important assets of the business.  Absent assignability, the value of those assets is lost if the business is sold.

6. A tolling provision?  It may take some time for an employer to learn that a former employee has violated the covenant.  Litigation to stop that violation takes more time.  A well drafted document will include a tolling provision which stops the clock from running while the employee is in breach. 
 
7. Protect confidential information.  The employment agreement should protect confidential information and trade secrets.  Employees are often privy to sensitive information which is necessary to do their job.  When they leave employment, that information should stay behind.  Make sure that the employment agreement provides that confidential information and trade secrets will not be “used or disclosed” after the sale.  Define confidential information as broadly as possible, but keep in mind that it does not include information known to the public or easily discoverable.

8. Make violation risky.  The former employee must know that if he chooses to violate, it will cost him.  The tolling language, mentioned above is one way to get that point across.  Another is to provide for recovery of attorney’s fees if the restrictive covenants are violated and enforcement litigation results.

There is a large body of state specific law surrounding the interpretation and enforcement of these agreements.  Make sure the attorney who you engage is experienced in this area of the law.

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