Displaying items by tag: Litigation
Wednesday, 20 August 2014 19:08

Restrictive Covenants: A Cautionary Tale

A recurring issue employers must address is the enforceability of restrictive covenants entered into with an employee. These restrictive covenants are typically non-disclosure (confidentiality), non-solicitation, and/or non-competition agreements.   The timing, form, and substance of these agreements will determine whether a court will find them valid. From a former employee’s perspective, the issue is basically the same but reversed: can the employee disregard a previously signed restrictive covenant without being liable for monetary damages to his former employer (and if newly employed at another company, keeping the second company out of litigation)?

Two cases recently decided by the Pennsylvania Superior Court provide guidance for employers and employees:

Fleisher v. Bergman, concerned an employee who was hired as a full-time employee. At the time of his hire, employee signed a restrictive covenant which was a confidentiality and non-competition agreement. The restrictive covenant provided that employee would not divulge any “Confidential Information” (e.g., customer lists, pricing policies, names of vendors) to other parties without the consent of employer; the Agreement further mandated that for a period of five years after termination of his employment, employee would not “. . . solicit or do business with any . . . entity . . . that was, within the three year period preceding the Employee’s termination, a Client or Prospect of Employer... ”

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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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     Deciding on an auto insurance plan, particularly after the rush of purchasing a new car, can be a deflating experience.  There are many confusing choices to sort through the most significant of which is the option to select either full-tort or limited-tort coverage.  While it’s certainly tempting to purchase the least costly option, savings at the front end can end up costing substantially more if you’re ever in an accident and hoping to recover more than your out-of-pocket medical costs.

    The Pennsylvania Motor Vehicle Financial Responsibility Law (“MVFRL”) is the statute that defines both full-tort and limited-tort coverage. Under the MVFRL, limited-tort coverage limits the rights of an insured to recover damages in a lawsuit. Unless a limited tort claimant suffers a “serious injury”, his or her recovery is quite limited and certainly not fully compensable for all of the consequences of an accident. “Serious injury” is as ambiguous as it sounds, and defined by the act as “death, serious impairment of bodily function, or permanent serious disfigurement.”  75 Pa.C.S. § 1702. While death and permanent serious disfigurement are relatively self-explanatory, whether the insured has suffered a “serious impairment of bodily function” is more often than not a question for the jury which is asked to evaluate the injuries suffered in terms of “the extent of the impairment, the length of time the impairment lasted, the treatment required to correct the impairment, and any other relevant factors.” Washington v. Baxter, 719 A.2d 733, 740 (Pa. 1988), Cadena v. Latch, 78 A.3d 636, 640 (Pa. Super. 2013).  Unless the jury decides that the injuries sustained, using these criteria, are “a serious injury”, a limited tort claimant can only recover his or her unreimbursed out of pocket costs (referred to as “economic loss” in the statute). He or she will receive no compensation for pain and suffering, loss of life’s pleasures, or the “non-economic loss” which so often has the most significant impact on an accident victim.

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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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Tuesday, 22 April 2014 20:24

TITLE ISSUES IN ORPHANS’ COURT

Lis pendens is a powerful tool which can be utilized in civil litigation pertaining to a claim against title to real estate.  The filing of a lis pendens and recording that lis pendens against a parcel of property puts the world on notice that the owner may not have clear title, and thus, may be unable to convey same.  A lis pendens effectively precludes transfer of the real property as any buyer must take subject to the cloud on title.  Of course, a lis pendens must be supported by a writ of summons or a civil action complaint relating to real property.

Curiously, a lis pendens is not an available tool in an Orphans’ Court proceeding.  Accordingly, a lis pendens cannot be utilized to place the world on notice of a claim against an administrator or executor where a transfer of property is made in connection with estate administration.  Nor can it be used to place the world on notice of the claim relating to that transfer or a defect in their authority to effectuate same.  Thus, the lis pendens is not an effective tool to  preclude further transfer or encumbrance by mortgage or other debt instrument. 

Although lis pendens is not available, the same purpose can be accomplished under the Orphans’ Court rules, provided a Petition for Citation has been filed with respect to the administrator’s activity.  Pursuant to 20 Pa. Cons. Stat. §3359, any pleading in Orphans’ Court may be recorded in the Recorder of Deeds Office with reference to the property in question.  While little case law is available to address the impact of such filing, the practical effect of providing notice of any existing claim to title may be satisfied.

Antheil Maslow and MacMinn is experienced in matters of estate administration and litigation pertaining to estate matters. 

 

 

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By Thomas P. Donnelly, Esquire, Reprinted with permission from the March 27, 2014 issue of The Legal Intelligencer. (c)
2014 ALM Media Properties. Further duplication without permission is prohibited.

It happens all the time.  A potential or existing client calls and advises they have been stiffed by a customer on a commercial contract.  Often times, your client has provided goods or services to a client business only to be advised their client, the other named party to agreements in place, has ceased business operations.  [As filing under Chapter 7 of the Bankruptcy Code does not result in a discharge of corporate obligations, a bankruptcy filing is generally not forthcoming.]  There is no event which gives the client finality as to their loss.  The client is left with only their suspicions that operations have commenced under a new corporate umbrella and whatever assets remained have simply been transferred out of the client’s reach.   

While certainly not in an advantageous position, your client’s claims may not be dead.  Under the right factual circumstance, recovery may still be had.  Claims against successors, affiliated business entities, and corporate principals are fact specific and often necessitate pre complaint development through available public information or, potentially, through the issuance of a writ of summons.  If sufficient information can be mined, causes of action for violation of the Uniform Fraudulent Transfers Act, successor liability under the de facto merger doctrine, unjust enrichment, and claims for piercing the corporate veil may have merit and be successfully pursued.

Published in AMM Blog

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.

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Thursday, 12 December 2013 20:15

Plan B: Litigating Non-Solicitation Agreements

Plan B:  Litigating Non-Solicitation Provisions

By Patricia C. Collins, Esquire
Reprinted with permission from December 12, 2013 issue of The Legal Intelligencer. (c)
2013 ALM Media Propeties. Further duplication without permission is prohibited.

Increasingly, employers and their attorneys meet resistance when seeking to enforce covenants not to compete.  States such as Georgia and California continue to refuse to honor those restrictions. Even in states that recognize the validity of such agreements, Courts can restrict the geographic or temporal scope of the agreement, refuse to find sufficient irreparable harm to permit the entry of a temporary or preliminary injunction, or find other equitable grounds to refuse to enforce the covenant not to compete.  Employers do have a back-up plan, however.  Recent cases illustrate that the court will enforce agreements not to solicit customers and clients after termination.  These cases also illustrate that courts will look to the nature of the contacts with clients or employees to determine if there is a breach of a non-solicitation provision.

In Corporate Technologies Inc. v. Harnett, the United States Court of Appeals for the First Circuit affirmed the district court’s grant of a preliminary injunction against a former employee of Corporate Technologies Inc. and his new employer.  The preliminary injunction restricted the employee from doing business with certain customers of Corporate Technologies with whom he worked during his employment, and required the new employer to withdraw bids which the employee prepared during his employment with the new employer.  The First Circuit court noted that the district court was specifically applying the non-solicitation and not the non-compete provisions of the agreement.  Accordingly, both courts engaged in a discussion of the applicable requirements for the entry of a preliminary injunction (which are the same under Massachusetts and Pennsylvania law).  Notably, the First Circuit did not engage in a discussion of the reasonableness of the geographic or temporal scope of the agreement, or whether the employer had a “protectable interest” served by the non-solicitation provision.  The district court found that the employee breached the non-solicitation provisions of the agreement, and the First Circuit affirmed the grant of the preliminary injunction.

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By Thomas P. Donnelly, Esquire, Reprinted with permission from October 11, 2013 issue of The Legal Intelligencer. (c)
2013 ALM Media Properties. Further duplication without permission is prohibited.

Senior Judge Anita Brody of the United States District Court for the Eastern District of Pennsylvania recently presided over a non- jury trial in the matter of Lehman Brothers Holdings, Inc. v. Gateway Funding Diversified Mortgage Services, L.P. Judge Brody is expected to render a decision in the coming weeks.  Lehman Brothers represents the first occasion for the District Court to consider the legal principal of de facto merger under Pennsylvania law following the Pennsylvania Supreme Court’s landmark decision in Fizzano Brothers Concrete Products, Inc. v. XLN, Inc., 42 A.3d 951 (Pa. 2012).  In Fizzano Brothers, the Supreme Court substantially modified the application of the de facto merger doctrine allowing trial courts far greater flexibility in the application of the doctrine to a broader set of facts.

Before Fizzano Brothers, Pennsylvania courts were constrained to a mechanical application of four elements: (1) continuation of the enterprise of the seller corporation; (2) continuity of shareholders; (3) cessation of ordinary business operations on the part of the selling entity; and  (4) assumption of those obligations of the seller ordinarily necessary for the uninterrupted continuation of normal business operations.  In practical application, the “continuity of shareholders” requirement was nearly impossible to satisfy where sophisticated business people with legal representation structured the transaction as a sale of assets to a new entity.  Consequently, mechanical application of the continuity of shareholders element was the stumbling block in the de facto merger analysis.

The Fizzano Brothers court substantially modified the analysis by discarding the mechanical application of continuity of shareholders.  Citing public policy and recognizing the sophistication of business transactions in the current climate, the court ruled that “where the underlying cause of action is rooted in a cause of action that invokes important public policy goals, the continuity of ownership prong may be relaxed.”  Fizzano Brothers, 42 A.3d at 966.  The question of successor liability should first be viewed in light of “whether, for all intents and purposes, a merger has or has not occurred between two or more corporations, although not accomplished under the statutory procedure.”  Id. at 969.

The Supreme Court went on to hold that the shareholders of the predecessor company were no longer required to become shareholders of the successor to meet the requirements of de facto merger. The court concluded such a holding would be “incongruous” with provisions of the Pennsylvania Business Corporation Law stating; “because a de facto merger analysis tasks a court with determining whether, for all intents and purposes, a merger or consolidation of corporations has occurred, even though the statutory procedure had not been used, the continuity of ownership prong of the de facto merger analysis certainly may not be more restrictive than the relevant elements of a statutory merger as contemplated by our legislature.”  Id. at 968.

The court then adopted a more flexible approach. After Fizzano Brothers, cases rooted in breach of contract and express warranty no longer require strict transfer of ownership.  Rather, the de facto merger doctrine now requires “’some sort of’ proof of continuity of ownership or stockholder interest. . . . However, such proof is not restricted to mere evidence of an exchange of assets from one corporation for shares in a successor corporation.” Id. at 969 (internal citations omitted).

The Fizzano Brothers factors are at issue in Lehman Brothers Holdings, Inc. v. Gateway Funding where Lehman Brothers raised claims of successor liability relating to indemnification agreements with Gateway’s alleged predecessor.  At trial, evidence was admitted indicating that  Gateway had specifically and intentionally purchased all assets that were necessary to the continuation of the mortgage origination business formerly conducted by the predecessor.  Such evidence included direct testimony on the part of Gateway’s management team that the acquisition was designed to acquire not only the current “pipeline” of loans in progress, but also the potential for continued loan origination.  Contemporaneously, Gateway also undertook to acquire debt obligations owed by the predecessor which were necessary to loan origination including securing warehouse lines of credit utilized to temporarily fund mortgage loans until sold on the secondary market.  Finally, documents related to the transaction reflected the intention that the business operations of the predecessor entity were to be “wound down”.  In that regard, restrictions against competition imposed upon the former principals of the predecessor, now Gateway employees, were permitted to “compete” only for the purpose of effectuating that wind-down.

While evidence was admitted as to each element of the de facto merger doctrine, continuity of ownership was specifically contested.  The transaction at issue was characterized by the buyer and seller as an asset transaction with no stock transfers. However, the four shareholders of the predecessor entity were provided compensation in a variety of ways which Lehman Brothers argued were illustrative of ownership.  The four shareholders received employment agreements with Gateway which included substantial severance benefits, a right to share in the profits of the same operations as had been conducted by the predecessor, and cash considerations.  One former shareholder indicated the cash component was paid, at least in part, as a result of his equity position in the predecessor.

In contrast, Gateway argued that the four shareholders were valuable and experienced revenue generating employees with corresponding compensation arrangements following the acquisition.  Objectively, the four shareholders of the predecessor were not granted stock in the acquiring entity.  Further, although certain of the agreements between the four shareholders and Gateway referenced the shareholder’s equity stake in the predecessor, no provision for consideration set forth in the language of the agreements was expressly tied to that equity position. 

The Lehman Brothers trial is the first test of the new more relaxed application of the continuity of ownership prong of the de facto merger analysis.  Judge Brody’s decision will provide guidance to both transactional practitioners in structuring transactions where liabilities may remain post-closing, and to litigators when faced with claims against a defunct entity where assets were transferred leaving a hollow shell.

The author served as local trial counsel to Lehman Brothers Holdings, Inc.

Published in AMM Blog
Wednesday, 14 August 2013 14:37

But He Asked Me First!

By William T. MacMinn, Esquire Reprinted with permission from August 13, 2013 issue of The Legal Intelligencer. (c)
2013 ALM Media Properties. Further duplication without permission is prohibited.

But He Asked Me First!

Is that a good defense to an alleged breach of a non-solicitation agreement?  In a recent decision a Pennsylvania trial court said that it was.

In Marino, Robinson & Associates, Inc. v. Robinson, 2013 Pa. Dist. & Cnty. Dec LEXIS 18 (Jan 2013) Judge Wettick of the Allegheny County Court of Common Pleas entered summary judgment dismissing the case against Defendant who allegedly violated a non-solicitation clause.  Plaintiff acquired Defendant’s accounting practice.  The contract signed by the parties included clauses prohibiting Defendant from competing with the Plaintiff or soliciting any of her former clients.  The non-compete was not implicated in the case because, while the Defendant provided competing accounting services, she did so outside of the geographic limits imposed by the covenant.  However, she provided those services to several of her former clients, each of whom unilaterally approached her and asked her to continue on as their accountant. Plaintiff alleged that by providing services to these former clients, the Defendant violated the non-solicitation clause of the contract which prohibited Defendant from “Solicit(ing) in any manner any past clients … for a period of ten (10) years from closing”.  The Court, following cases decided in other states, agreed with the Defendant that she was not required to turn away former clients who, unsolicited, approached her to request that she provide services. The Court held that solicitation required conduct on the part of the Defendant designed to awaken or incite the desired action in the former client. Where, as in this case, the former client approached the Defendant unilaterally, the Defendant did not violate the non-solicitation clause.

A similar result obtained in Meyer-Chatfield v. Century Bus. Servicing, Inc., 732 F. Supp. 2d 514, 517-518 (E.D. Pa. 2010)  where the Court decided that the meaning of the word “solicit” was not ambiguous and applied the parole evidence rule to bar evidence regarding the meaning of the term.  In Meyer-Chatfield, Plaintiff’s Vice-President of Sales and Marketing left his employment with Plaintiff and accepted a similar position with Defendant.  An agreement, which included non-solicitation provisions, was negotiated between the parties.  Shortly thereafter the parties engaged in negotiations for the acquisition of Plaintiff by Defendant.  Those negotiations failed.  Subsequently (and after he was terminated by Plaintiff) one of Plaintiff’s sales persons accepted employment with Defendant and took with him other employees (who were part of his sales team) with the result that several significant customers of the Plaintiff eventually began doing business with Defendant. Plaintiff brought suit alleging violation of the non-solicit provisions in the solicitation of both the employees and the customers.

The language at issue prohibited the direct or indirect “…solicit(ation) of any of Plaintiff's employees, agents, representatives, strategic partnerships, [or] affiliations.” The contract did not define the word “solicit.”  The Court looked to the common meaning of the term, citing the Black's Law Dictionary definition:

"To appeal for something; to apply to for obtaining something; to ask earnestly; to ask for the purpose of receiving; to endeavor to obtain by asking or pleading; to entreat, implore, or importune; to make  petition to; to plead for; to try to obtain; and though the word implies a serious request, it requires no particular degree of importunity, entreaty, imploration, or supplication. To awake or incite to action by acts or conduct intended to and calculated to incite the act of giving. The term implies personal petition and importunity addressed to a particular individual to do some particular thing."

The Court also cited the Webster’s definition of the word: “to entreat, importune . . . to endeavor to obtain by asking or pleading . . . to urge.”

The issue before the Court was whether the word “solicit” was ambiguous permitting parole evidence of its meaning.  In holding that it was not, the Court reviewed Akron Pest Control v. Radar Exterminating Co., Inc. 216 Ga. App. 495, 455 S.E.2d 601 (Ga. App. 1995), in which the Court held that an agreement “not to solicit, either directly or indirectly, any current or past customers” requires more than “[m]erely accepting business [to] constitute a solicitation of that business.” A party is not required to turn away uninvited contacts of former customers. The Court also cited Maintenance Co. v. West, 39 Cal. 2d 198, 246 P.2d 11 (Cal. 1952) in which it was held that neither the act of informing former customers of one’s change of employment, nor the discussion of business upon the invitation of the former customer constitutes solicitation.  Finding no ambiguity, the Court prohibited testimony regarding the parties’ understanding of the term. 

It seems clear that the Court will apply the ordinary meaning of the word “solicit” which has been repeatedly found to require some overt act of entreaty on the part of the former employee designed to induce the former customer to action.  Responding to an uninvited inquiry from a former customer, even where that inquiry is for the purpose of discussing business, and where that inquiry ultimately results in doing business with that former customer, will not be sufficient to support a finding of a breach of a non-solicitation agreement. Of course, doing business with a former customer may well violate the provisions of a non-compete clause and, in such cases, the Courts have not been reluctant to enforce such provisions.  Although research has found no cases directly on point, the reasoning of the cases suggests that advertisements or social media posts informing the general public or one’s social media circle of new employment circumstances would also not constitute the type of targeted action required to support a finding that a non-solicitation agreement has been breached.

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