From time to time, a client asks about when and why a corporate seal is necessary. Even some attorneys (particularly from out of state) question during contract negotiations whether the phrase “executed under seal” should be removed from a contract as an archaic concept. Historically, seals were affixed to a document as a formality to attest to the parties’ intention to be legally bound by the promises contained in the document. In several states, however, the execution of an agreement under seal continues to have specific legal significance that is not always understood or intended by the parties.

As a general rule, the Pennsylvania Judicial Code provides that the statute of limitations for actions based on a contract is four years. For instruments that are executed under seal, however, the statute of limitations is twenty years. The guarantor of a commercial loan recently learned the hard way that his guaranty was subject to the extended statute of limitations. In Osprey Portfolio, LLC v. Izett, the lender confessed judgment under Mr. Izett’s guaranty nearly five years after the loan went into default. Mr. Izett argued that the action was precluded because it was filed after the four-year limitation period. While acknowledging that the document was executed “under seal”, Mr. Izett maintained that the twenty-year limitation period did not apply because the guaranty agreement was not an “instrument”, which he defined as instruments under Article 3 of the Uniform Commercial Code. Article 3 defines “instrument” as a “negotiable instrument”, namely “an unconditional promise to pay a fixed amount of money.” Because his guaranty related to a line of credit (not a loan for a fixed sum) and was conditional upon the default of the borrower under the note, he reasoned that it did not meet this definition of “instrument.” The Pennsylvania Supreme Court disagreed and affirmed the lower courts’ rulings. It held that the term “instrument”, as used in the Judicial Code,  should be interpreted using its ordinary meaning: a written document that defines the rights and obligations of the parties, such as a contract, will, promissory note, etc. Using this broader definition, the guaranty in question clearly qualifies as an instrument. Since the instrument was executed under seal, the twenty-year statute of limitations applied and the action was allowed to go forward.

It should be noted that the Judicial Code section providing for the twenty-year statute of limitations is due to expire on June 27, 2018. Of course, the sunset date for this provision has been extended in the past, so only time will tell whether the execution of contracts and other writings “under seal” will continue to have special legal significance in Pennsylvania.

Four years ago, the Home Improvement Consumer Protection Act (HICPA) went into effect, forcing home improvement contractors to register with the Commonwealth and to comply with various contracting requirements (for more information, see our Client Alerts on the subject https://www.ammlaw.com/general/articles.html). We have found that unfortunately many contractors remain unaware of this law. Failure to comply with HICPA could result in civil and criminal penalties. But does non-compliance also mean that a contractor is prevented from receiving payment from its customer for completed work? Not necessarily, held the Pennsylvania Superior Court, which recently gave hope to contractors when it concluded that a contractor who does not comply with HICPA may nevertheless recover the value of its services from the customer.

In Shafer Electric & Construction v. Mantia, an out-of-state contractor entered into a written contract with a Pennsylvania homeowner (who also happened to be a contractor) to build an addition to the homeowner’s garage and provided services valued at over $37,000. The contractor did not register with the Commonwealth under HICPA. After the homeowner failed to pay the amount due, the contractor sued to recover its fees. The homeowner asserted that the complaint was legally insufficient because the underlying contract was not enforceable under HICPA. The contractor countered that even if the contract were unenforceable, the contractor should be able to recover its fees under the equitable doctrine of quantum meruit, a theory which allows a party to recover the reasonable value of its services so as to avoid unjust enrichment of the other party. Unfortunately, although HICPA preserves a contractor’s right to recover its fees under a quantum meruit theory, the language of the statute appears to require compliance with HICPA as a prerequisite to recovery. The lower court, strictly interpreting the statute’s plain language, ruled in favor of the homeowner. The Superior Court reversed, holding that the plain language of the statute impermissibly limits the purpose of the provision allowing recovery under quantum meruit. It reasoned that to require the contractor to comply with HICPA before recovering under a quantum meruit theory made no sense because a compliant contractor can recover its fees under a breach of contract theory and does not need an equitable remedy such as quantum meruit.

While Shafer Electric provides reassurance for home improvement contractors doing work in Pennsylvania, the prudent contractor will not rely on it to ensure collection of its fees. Because of the hefty fines and possible criminal penalties that may be imposed for violations, we strongly encourage contractors to register and comply with the other requirements set forth in HICPA.

With summer just around the corner, employers are inundated with requests by students for summer internships. If your company offers such opportunities, taking a few moments to review the applicable regulations will help assure that the program complies with the law.

It goes without saying that a paid intern is an employee and subject to all applicable state and federal employment laws including those pertaining to minimum wage and overtime. Even if the internship is unpaid, failure to follow Department of Labor guidelines could lead to legal liability under the Fair Labor Standards Act.

Department of Labor Guidelines

The Fair Labor Standards Act (the FLSA) provides, of course, that individuals in an employment relationship must be paid for services performed. When is an unpaid intern an employee? According to guidelines published by the Department of Labor, if the following factors are met, there is no employment relationship and the intern need not be paid:

The internship, even though it includes actual operation of the facilities of the employer, is similar to training which would be given in an educational environment;

The internship experience is for the benefit of the intern;

The intern does not displace regular employees, but works under close supervision of existing staff;

The employer that provides the training derives no immediate advantage from the activities of this intern;

The intern is not necessarily entitled to a job at the conclusion of the internship; and

The employer and the intern understand that the intern is not entitled to wages for the time spent in the internship.

If all of these factors are met, the Department of Labor will conclude that an employment relationship does not exist under the FLSA. In such circumstances, minimum wage and overtime provisions do not apply to the intern.

Different rules apply for governmental agencies and non-profit organizations. Internships offered by governmental agencies, private non-profit food banks and non-profit organizations providing religious, charitable, civic, or humanitarian services are generally permissible so long as the intern volunteers his or her time freely and without anticipation of compensation.

A permissible unpaid internship will include some or all of these features:

1. It is structured around a classroom experience as opposed to the employer’s actual operations;
2. Academic credit is offered by a sponsoring institution;
3. The internship provides the intern with skills that can be used in multiple employment settings as opposed to specific training in the employer’s operations;
4. The intern does not perform the routine work of the employer;
5. The employer is not dependent upon the work of the intern;
6. Job shadowing opportunities that allow an intern to learn certain functions under the close and constant supervision of regular employees, but the intern performs no or minimal work.
7. The internship is of a fixed duration established at the outset of the internship.

Factors which indicate an employment relationship (and trigger the requirement to pay wages) include:

1. The intern is engaged in the operations of the employer;
2. The intern is performing productive work such as, for example, filing, clerical work or assisting customers;
3. The employer uses interns in lieu of hiring additional employees or offering more hours to existing employees;
4. The intern receives the same level of supervision as other employees;
5. The intern is offered employment to begin immediately upon the conclusion of the internship, effectively transforming the “internship” into a trial period of employment.

Summer internships, paid or unpaid, provide valuable experience to students. Employers need only exercise some caution is structuring the internship to avoid running afoul of DOL regulations. The DOL Fact Sheet on summer internships is available at http://www.dol.gov/whd/regs/compliance/whdfs71.htm

Restrictions against competition are frequently included in employment agreements and agreements for the sale of business assets or stock.  The restriction against competition is designed to secure a time period for the employer or buyer of business assets, as the case may be, during which the employer/buyer is free from competition for a departed employee or seller so as to facilitate the transition and better protect their own business assets and customer relationships.  If properly drafted and implemented, restrictions against competition are enforceable under Pennsylvania law.

The primary method of enforcement in the event of breach is a preliminary injunction in equity.  In order to prevail on a petition for preliminary injunction, a petitioner must demonstrate several factors including (1) the need to prevent irreparable harm which cannot be compensated by money damages, (2) that more harm will result from the denial of the preliminary injunction than from granting same, (3) that the injunction will restore the parties to the status quo, (4) the likelihood of success on the merits, (5) that the injunction is designed to abate the offending activity, and (6) that the injunction will not negatively impact public policy.   In most cases the issues of likelihood of success on the merits and irreparable harm incapable of compensation with money damages represent the contested issues.

In Bucks County, the petition for preliminary injunction must be accompanied by a verified complaint and an order for hearing.  The petition is often, though not always, heard by the initial pre-trial judge assigned to the case at the time of filing.  Court administration reviews all petitions for preliminary injunction and assigns the presiding judge, courtroom and date for evidence to be taken.  The order for hearing is an essential aspect of the petition; without it, no hearing will be scheduled.

The petitioner in any injunction matter bears a heavy burden.  Adequate evidence as to the need for enforcement of the covenant, the potential irreparable harm and right to relief must be presented.  Because the entry of injunctive relief is an extraordinary remedy, the evidence must be clear and persuasive.  In employment and business asset transfer cases, the language of the restriction in the applicable agreements must be constrained to those aspects of competition which are reasonably necessary for the protection of the employer/buyer.  For example, a covenant which is overbroad in terms of geography, time or scope will not be enforced.

Preliminary injunctive relief may be acquired in the Bucks County Court of Common Pleas if supported by the underlying agreement and if properly perfected under the practices and procedures employed in the County.

Just when minority owners of Delaware LLCs thought that the Delaware Limited Liability Company Act (the “Act”) protected them from overreaching managers, along comes the Delaware Supreme Court to say “better get it in writing.” It appears that practitioners longing for certainty will have to wait until the Delaware legislature steps in and revises the statute.

The Delaware Supreme Court recently published an opinion in a case involving a Delaware LLC (Gatz Properties, LLC) that was the manager of another LLC (Peconic Bay, LLC). Gatz Properties is managed and controlled by William Gatz, and the Gatz family and their affiliates owned controlling equity interests in Peconic Bay. They also owned real estate that was leased to Peconic Bay, which in turn subleased the property to a national golf course operator. The golf course proved to be unprofitable because it was poorly managed, and Mr. Katz anticipated that the sublease would be terminated. He decided to acquire the sublease and Peconic Bay’s other assets for himself. Consequently, he foiled the efforts of a third party to buy the sublease rights. He then engaged a valuation expert to appraise the property but did not provide the expert with information about the prior third party offers or tell the expert that the golf course’s unattractive financials were the result of its being mismanaged. Not surprisingly, the resulting appraisal showed that Peconic Bay had no net positive value. Next, Mr. Katz hired an auctioneer with no experience in the golf course industry to sell the golf course business. After lackluster advertising for the auction, Mr. Katz was the sole bidder and acquired the property for $50,000 plus the assumption of debt. Peconic Bay’s minority members brought suit in the Delaware Court of Chancery, alleging that Mr. Katz had breached his fiduciary duties to them. The Court of Chancery held that Gatz had breached both his contractual and statutory duties to the minority members, and Gatz appealed to the Delaware Supreme Court.

The Delaware Supreme Court agreed with the Court of Chancery that the LLC agreement’s clear language prohibited self-dealing without the consent of 2/3 of the minority owners, and Mr. Gatz testified on several occasions that he understood that Gatz Properties owned fiduciary duties to the minority members. The Court also upheld the lower court’s finding that Gatz breached this duty.

Moving on to whether Gatz breached a statutory duty under the Act, the Court noted that it was “improvident and unnecessary” for the Court of Chancery to decide that the Act imposed “default” fiduciary duties on managers where the LLC agreement is silent because, in the case at bar, the issue could be decided by interpreting the text of the LLC agreement. Additionally, no litigant asked that the lower court resolve the issue by interpreting the Act. Another concern for the Court was the lower court’s suggestion that its statutory interpretation should withstand scrutiny because practitioners rely on its rulings. The Court remarked that, as the highest court in Delaware, it was not bound to follow the lower court’s decisions. The Court rebuked the lower court for using the case at hand as a “platform to propagate [its] world views on issues not presented.” The Court concluded its reprimand by stating that because the issue of whether the Act imposes default fiduciary duties is one on which reasonable minds can differ, the matter should be left to the legislature to clarify.

Following the decision in Gatz Properties, equity holders in Delaware manager-managed LLCs would be prudent to clearly identify in the LLC agreement which fiduciary duties are intended to apply to their managers. Given the Court’s position that the issue is a matter for the legislature (not the courts) to decide, practitioners will be monitoring the activities of the legislature to see if it takes up the gauntlet.

Actually, this blog post is not really about binders full of women – the title is pure, unadulterated pandering.  But it is about the conversation that generated that Tweet-worthy sound bite.  In case your computer, smartphone, television and ears were down this week, let’s recap.  At the October 16, 2012 town hall Presidential Debate, an undecided voter asked how the candidates would address pay inequality for women.  President Obama answered by referencing his support of the Lilly Ledbetter Act.  Governor Romney answered with a story about binders full of women searching for female candidates, and providing flexibility for female employees.  An employment lawyer drooled.  Please note that this is not a political discussion, but a legal one, and the analysis that follows is about whether the law would permit the approaches recommended by the candidates.

 President Obama had the easy path.  The Lilly Ledbetter Act is now the law.  Under the civil rights laws, employees have 180 days from the alleged discriminatory act to file a complaint with state or federal equal employment commissions.  If the employee fails to file the claim in the time required, the employee’s claim is forever barred.  Poor Ms. Ledbetter discovered, too late, that she was paid less than a male employee for the same work.  The court dismissed her claim because she filed it more than 180 days after the first discriminatory paycheck.  The Lilly Ledbetter Act states that the statute of limitations for an equal pay claim resets with each paycheck.  It was the first statute that President Obama signed into law. 

 Governor Romney’s answer invites employment lawyer criticism.  To be clear, this is not political criticism, but legal criticism.  The answer essentially had two parts:  first, his search for female candidates and second, his willingness to provide flexibility to female employers who needed to get home to make dinner.  Let’s start with the search for female candidates.  The civil rights laws prohibit discrimination on the basis of gender.   It was not clear from Governor Romney’s answer whether or not he was referring to an affirmative action program, or whether there was a written diversity plan at issue.  But, certainly, the goal of employing an underrepresented group in the office of the governor is a laudable one. 

 Nevertheless, an employment lawyer worries. Imagine two candidates, both with comparable education and experience, both interviewed well, and, in all respects were both qualified candidates.  One is male, one is female.  Could the governor decide to hire the female candidate solely because she was female?  Put another way, would it be discrimination on the basis of gender for an employer to deny employment to the equally qualified male candidate solely on the basis of his gender?  The legal answer is yes.  An interesting defense to such a claim is that the governor had made a policy decision that his cabinet must reflect the views of qualified women.   Employers should always base their decisions on qualifications for the job.  Where an employer has decided that gender, for example, is part of the qualifications for the job, they must also articulate a legitimate business reason for such a qualification. 

 Governor Romney also talked about the need for flexibility for female employees.  Tsk tsk, Governor Romney, tsk tsk.  The law requires that Governor Romney provide the same level of flexibly for all of his employees, regardless of gender.  The law also requires that Governor Romney avoid making employment decisions based on gender stereotypes (i.e., the woman needs to get home to make dinner).  An employment lawyer loses a few hours of sleep. 

 Interestingly, this is the place where the candidates intersect.  The law requires equal pay for equal work, and the Lilly Ledbetter Act keeps that claim alive with each new paycheck. But employees, male and female, do ask for flexible work schedules, and many employers are happy to oblige to keep good candidates. Our advice:  don’t be like Governor Romney!  Make sure flexibility is available to all employees, and that the pay is commensurate with the work provided. 

 The candidates’ discussion does highlight the challenges for employers:  sometimes, an employer’s good intentions, the realities of the workplace, and the requirements of the law seem  at odds with one another.  Even presidential candidates struggle with these competing concerns.  It is our experience that employers can work through these complex issues and strike a balance with good legal and human resources advice. 

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.

It is not uncommon for a minority shareholder to cry foul when the corporation is sold and the shareholder believes he received less than fair value for his shares. Such claims often result in shareholder oppression suits, with the majority shareholder accused of having breached a fiduciary duty to the minority owner. Now it seems that controlling shareholders of even privately held corporations have another potential adversary: the Securities Exchange Commission. The SEC recently sued Stiefel Laboratories and its then-controlling shareholder and CEO Charles Stiefel, alleging that they defrauded current and former employee shareholders out of more than $110 million by buying back shares in the company at undervalued prices prior to the sale of the company to GlaxoSmithKline PLC.

The complaint alleges that the defendants misled the employee shareholders, who had acquired the shares as part of a stock bonus plan, by concealing material information about the potential acquisition of the company by GlaxoSmithKline. Information regarding several offers from private equity firms to acquire stock in the company at a higher price than the valuation provided to employees was also allegedly withheld from employees. The complaint further asserts that the valuation that the company provided to employees was prepared by an unqualified accountant who used flawed methodology. Adding insult to injury, a 35% discount incorporated into the valuation was not disclosed to the employees.

The complaint cites, among other things, the company's repurchase of 800 shares from employees at a price equal to $16,469 per share in the months leading up to the sale to GlaxoSmithKline, which acquired the company for $68,000 per share. As a result of the reduced number of outstanding shares, the remaining shareholders (consisting mostly of Stiefel family members) received a windfall.

The SEC warns that privately held companies and their officers should be aware that federal securities laws are intended to protect all shareholders, regardless of whether they acquire their shares in a private transaction such as a stock bonus plan or on a public market. Corporate officers in corporations with stock bonus plans should take care to obtain appropriate valuations to support stock repurchases from accredited professionals using commonly accepted valuation methodologies. Stock option plans and corresponding summary plan descriptions should be carefully reviewed, with a particular focus on their stock repurchase provisions. All material facts must be fully disclosed to plan participants in a timely manner.

To avoid post-transaction cries of foul play from former shareholders, we often include “tail” provisions that allow the former shareholders to enjoy the same economic benefit of a major company transaction such as a sale or merger that follows the sale of their shares. Such provisions are usually of limited duration (e.g., twelve months). This protects the company and senior management from claims like those raised by Stiefel Laboratories employees after the expiration of the tail period.