Receiverships in The News

From The Indianapolis Business Journal comes Fair Finance going along with appointment of receiver:

"Attorneys for Tim Durham’s Fair Finance Co. on Wednesday filed court papers saying they don’t object to putting the Akron, Ohio-based company under the control of a receiver."

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In Wednesday’s filing, attorneys with the Indianapolis office of Taft Stettinius & Hollister representing Fair and its parent—a holding company owned by Durham and fellow Indianapolis businessman Jim Cochran—denied any fraud occurred but said putting both firms into receivership nonetheless made sense.

And this from The Indianapolis Star, Receivers named for rental complexes:

Indianapolis -- Court-appointed receivers were named recently to run apartment complexes on the Westside and Southeastside taken over by lenders. Alexandra Jackiw of Buckingham Management was named receiver to run Cedars Apartments, near 34th Street and Lafayette Road. Mark Figg of NAI Olympia Partners was named receiver for Emerson Apartments, 5140 Emerson Village Place. The projects were run by corporations headed by Gustan L. Cho, Hoffman Estates, Ill.

“It is in the best interests of Fair, [its investors] and other creditors that some order and structure replace the wild speculation and reckless accusations that have permeated the environment since Fair’s offices were raided in late November,” Wednesday’s filing said.

What If The Non-Compete Is Too Tough?

LEGAL FORUM from November of 1996 may have an answer in A Too-Tough Noncompete Clause Could Defeat Its Own Purpose:

"Many groups are willing to compromise on their noncompete provisions. When I represent physician employees, I often negotiate such compromises. But I also resist them strongly when representing an established medical group."

Here is my reasoning. The enforceability of a noncompete provision is directly related to its reasonableness. Part of what makes the covenant reasonable is that it is necessary to prevent the departed physician from taking something (the group's market leverage) that would harm the medical group. But if the medical group starts allowing exceptions to the noncompete clause, it effectively has stated that the employee's departure is not harmful to the group, or that the harm is O.K. in certain circumstances. This is dangerous, because it suggests that the noncompete clause may not be an essential protection for the group, increasing the chances that a court may find it inappropriate and thus unenforceable. There certainly are reasons why this vulnerability may not apply in certain circumstances, or why this vulnerability may otherwise be acceptable. But weigh the issues carefully before you agree to compromise.

A medical group that is open to compromise has a number of options to consider. A covenant may only apply if the employee physician is terminated for cause, or departs the group without cause. (Be sure to define "cause" carefully!) Or the covenant may only preclude independent medical practice, so that the departed physician may become a hospital employee. Or the noncompete provision may disappear or change its focus after a certain period of continued employment. There are many permutations. In general, though, an employer should only agree to compromises that can be justified in the contract as both fair and consistent with the premise that underlies the covenant.

Gardening Leave Remedies

I wrote about the uses of gardening leave here. What if an employee decides to breach the gardening leave contract? I thought only injunction relief until I read Protect your firm when staff leave from Microscope in the UK.

Getting an injunction as set out in this paragraph ought to be familiar to anyone filing a suit on a non -compete agreement:

The employer can apply for a court order, an "injunction", to enforce either the employee’s implied duties of honesty, loyalty and faithful service; and/or any express term such as a garden leave clause which will prohibit the employee from having other business interests during the course of employment - which includes employment with another employer.

When does the litigation being? When there is a garden leave agreement in place and the employee quits without giving the notice required under the agreement.

By resigning without notice the employee is breaching the contract. To enforce a garden leave clause, the employer should refuse to accept the attempted termination of the contract, hold the employee to the obligation to give notice and (assuming the contract so empowers you) suspend them for the entire notice period. Where, however, despite these steps, the employee commences work elsewhere, injunction proceedings (see above) may be required.

It is for the client to decide if suit needs filed, but with the remedy being an injunction the time spent on reaching a decision can be injurious to both the business and the suit.

Although framed as a breach of fiduciary duty, Bartholomew v. Alstom Power, Inc., (SD Ohio, Eastern Div. 2005)does involve a garden clause. Violating the garden clause was used by the former employer as one basis for the lawsuit. On the other hand, the jury decided against the employer.

The New South Wales (Australia) courts limited any remedy during garden leave. Mallesons Stephen Jaques noted this in its Can an employer enforce restraints during gardening leave?

The Supreme Court of New South Wales has held that an employer could enforce restraints against an employee on extended gardening leave only to the extent that the restraints were reasonable.

The employee, a broker, was on a fixed term contract which included a restraint on taking up employment with a competitor or soliciting clients or employees. The restraint purported to apply during the term and for three months afterwards. The employee resigned more than a year before the end of the term to take up a position with a competitor. The employer continued to treat the contract as on foot. It placed the employee on gardening leave (that is, continued to pay him but did not require him to attend for work), and sought an injunction preventing him from working for the competitor for the balance of the contract term.

The Court held that while the contract had not been terminated by the employee’s resignation (because it was for a fixed term, and the employer had not agreed to termination), the employment relationship had come to an end. While non-compete and non-solicit restraints are generally enforceable during employment, after employment they are only enforceable to the extent they are reasonable and not contrary to public policy. Based on the nature of the employment and the employer’s business, the Court held that in this case a reasonable period was six months. This meant the employee was prevented from competing or soliciting clients or employees for only six months after he resigned (despite the fact that the fixed term contract continued for a longer period, and the employee would have been paid for the time he was out of the workforce).

Tullett Prebon (Australia) Pty Ltd v Purcell [2008] NSWSC 852

Trust Litigation - Indiana,The Simon Trust

Here is some news from Indianapolis. Deborah Simon says other potential trustees have conflicts

Deborah Simon, who’s seeking to remove her stepmother from overseeing a trust that holds her late father Melvin’s fortune, is asking a court to pass over the two Indianapolis businessmen who normally would be next in line for the job.

Language in the trust stipulates that if the stepmother, Bren Simon, is unable to serve as trustee because of incapacitation, resignation or death, Deborah’s brother, David, Simon Property Group’s chairman and CEO, would step into the role. And if he couldn’t serve, retired Katz Sapper & Miller partner Bruce Jacobson would become trustee.

But in a filing Monday seeking Bren’s ouster, Deborah instead favors appointment of a disinterested corporate trustee. The filing, first reported by IBJ, says that neither David Simon nor Jacobson should fill the role because both will be witnesses in the lawsuit she filed Jan. 7 contesting changes in the will that Melvin executed in February 2009—seven months before he died at age 82.

The changes boosted the portion of Melvin’s estate going directly to Bren, 66, from one-third to one-half. They also wiped out the portion that was to go to Deborah, David and their sister, Cynthia Simon-Skjodt.

The point to take from all this? Regardless of how much planning there is in preventing litigation, there is just no way to prevent all litigation. But as I learned in Boy Scouts, being prepared helps more a whole lot more than no preparation.

Without any business succession planning, this kind of fight would have no boundaries. As it stands now, the fight has boundaries.

What planning have you done to prevent the business from being swallowed whole by litigation? If you have not done any, why not?

Litigation as War 2 - More Thinking About Stategy

In Litigation as War 1 - Thinking About Stategy, I wrote: "These questions are to find out your goals and what we have to do to reach those goals and how much you money and effort you want to put into getting to your goals." Today, I am borrowing from Deception and Settlement: The Application of Sun Tzu's Ancient Strategies of War to the Law to expand on these themes.

"A lawsuit, like any competition, is essentially a form of warfare. The strategies of prosecuting or defending a suit are much the same as those mustered on the battlefield. Victory often goes not to the party with the stronger case, but to the party that makes the best use of the process, understanding tactics and strategy."

Goals, got to know what you want from the lawsuit - settlement or trial depend on knowing this point:

Settlement driven by common sense and efficiency will achieve the best results for the client. This is best seen in personal injury litigation, where the more time invested in a case often means a lower recovery for the attorney, with little additional benefit for the client.

Many business litigators forget this point, in part, because in business lawsuits the parties do not limit themselves to the pursuit of compensation. Businesses also seek justice, punishment and a leg-up over their competitor. Generally speaking, business litigators also do not depend on settlement for compensation. They are paid hourly, often at premium rates. The motivation of some attorneys might be to keep the case going and avoid settlement.

While that is a good argument against the hourly fees paradigm, the client drives the litigation, too. Some clients think settlement is a sign of weakness. I say that depends on the terms of the settlement. Keep reading as both the original author's statement and mine are explained below.

This also brings me to my third theme: how much you money and effort you want to put into getting to your goals.

Sun Tzu advises against this purposeless destruction. Each of the steps taken in a lawsuit should have a goal of encouraging settlement, albeit on your terms. This goal should be at the forefront whenever discovery is taken, motions are filed, and meetings with the opposition are held. This may not assure that fees and costs will be limited. Rather, it means that when money must be spent, it should be to encourage resolution of the matter. If it does not, then one should consider choosing a more effective course.

This strategy should be pursued even when it appears that your opponent has failed to appreciate the benefits of settlement. If your opponent is bent on the destruction of your business at any cost, the skillful course is to encourage the opponent to spend frivolously. But even this is with the goal of exhausting the opponent and encouraging settlement. The important lesson to be learned from Sun Tzu, is that a mindless push for victory at any cost can destroy not only your opponent, but your business as well. (My emphasis.)

If you do not have much knowledge of history, you will probably not have heard of Pyrrhus or of a Pyrrhic victory. The phrase wining every battle and losing the war may mean something then. That is what we are talking about here - putting so much into a case that after trial the company has no profit in its success. Put more drastically, the "successful" litigation drives the plaintiff into bankruptcy. I cannot accept that a litigation client wants me to pursue a case to the point that my client becomes bankrupt.

Downside of Trade Secrets

As a lawyer, I should be able to see both sides of this story from The Manchester Democrat Examiner, A trade secret no one wants but it is not so easy:

FairPoint Communications has presented a plan to address a long list of customer complaints. But pieces of that plan are being kept from the public because, according to the company, they are trade secrets.

Which begs the question:

Why would anyone want a trade secret from a company that, so far, has performed so poorly? It's not like they're doing so well that any of their practices would be copied anytime soon.

Spurious claims of trade secrets undermines legitimate business interests.

Electronic Discovery & Computer Records - A Canadian Opinion

I clipped Slaw's Well worth a read – George Paul’s “Foundations of Digital Evidence” quite a while back but never got around to publishing. I think the following probably lies outside mainstream thinking but it is a provocative piece. Since the Christmas bomber managed to show how screwed up software can be, the last paragraph resonates even stronger.

Paul starts with evidence law’s preference for original records and argues it is both irrelevant and dangerous. It is irrelevant because digital records are comprised of “pure information” and can be modified without creating any evidence of change (metadata aside). It is dangerous because it invites inflated assumptions about a document’s authenticity, a problem aggravated because we often proffer digital information after it has been recorded on paper. That is, we proffer a physical rendition of digital information that appears to have integrity. Paul argues “trivial showings” based on inspection of paper documents should not support admissibility:

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Paul also argues that the hearsay doctrine ought to bar the admission of computer-generated records – the output of computer processing – without special assurance of trustworthiness. He demonstrates, with case citations, that American courts have largely failed to recognize the risk posed by admitting out of court “statements” made by computers, often by utilizing the business records exception in a manner treats computer-generated as far more reliable than they deserve to be treated given the commonplace challenges in processing data: “Just because businesses rely on faulty computer programs does not necessarily mean that courts should follow suit.”

Now let us consider these points:

Applied Discovery

The court held that “name” terms should be used with particular technological references because searches of names alone would result in positive hits on virtually every document held by defendants’ relatively small business in which most employees were “key” employees. However, terms relating to the licensing of source code should not be used in conjunction with other terms, according to the court, because licensing activity of defendants’ company was “relatively small” and the result of a search of license terms only when found with other terms could be “excessively narrow.” The court invited the parties to return if results from the first search suggested some other search protocol might be needed.

e-Discovery Team

Clearone Communications v. Chiang, 2008 WL 704228 (D. Utah Mar. 10, 2008). Plaintiff filed a motion for sanctions in this case involving claims of misappropriation of trade secrets, breach of contract, and conversion. Plaintiff argued that sanctions were warranted because of Defendant’s misrepresentations concerning the late source code production and Defendant’s failure to produce “smoking gun” email, which was produced by another party to the litigation. The other party was the recipient of the “smoking gun” email. Defendant argued that its computer system did not retain copies of any sent emails.

With our increasing dependence on digital technology, these problems will come down to businesses of all sizes. Be ready fo rit.