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?

Hitting Back at The Record Companies

I admit the music downloading cases are not part of my practice but they are so interesting that I cannot ignore them either. (See my earlier posts here and here and here for examples.) lexisONE(R) supplied

Law Professor Fires Back At Song-Swapping Lawsuits:

A Harvard Law School professor has launched a constitutional assault against a federal copyright law at the heart of the industry's aggressive strategy, which has wrung payments from thousands of song-swappers since 2003.

The professor, Charles Nesson, has come to the defense of a Boston University graduate student targeted in one of the music industry's lawsuits. By taking on the case, Nesson hopes to challenge the basis for the suit, and all others like it.

Nesson argues that the Digital Theft Deterrence and Copyright Damages Improvement Act of 1999 is unconstitutional because it effectively lets a private group the Recording Industry Association of America, or RIAA carry out civil enforcement of a criminal law. He also says the music industry group abused the legal process by brandishing the prospects of lengthy and costly lawsuits in an effort to intimidate people into settling cases out of court.

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Entertainment attorney Jay Cooper, who specializes in music and
copyright issues at Los Angeles-based Greenberg Traurig, is convinced that Nesson will not persuade the federal court to strike down the copyright law. He said the statutory damages it awards enable recording companies to get compensation in cases where it is difficult to prove actual damages.

The record companies have echoed that line of defense. In court
filings in Tenenbaum's case, they contend that the damages allowed by the law are "intended not only to compensate the copyright owner, but also to punish the infringer (and) deter other potential infringers."

But are these lawsuits the only way the record industry could
deter piracy? Nesson believes the industry could develop new ways to prevent copyright material from being shared illegally. One idea would be to bundle music with ads and post it for free online, he says.

"There are alternative ways," he said, "of packaging entertainment to return revenue to artists.

Do I think it will be successful? No. But we can be thankful for law school professors who do not need to worry about the costs of litigation for bringing these kind of cases.

Personally, the music industry bewilders me with these kind of law suits. They are in the right on the technicalities of the law but I feel that they may be winning battles while losing the war. Customers will get turned off by the big companies and the companies will lose money. The performers and their customers will find another means of getting what they want which will cut out the companies. There also exists the chance that enough customers will get annoyed enough that Congress will change the copyright law.

Trade Secrets - A Good Article to Read

I could not decide how to digest Musical chairs: brokers and insurers must fight to retain their clients when key employees leave. The article covers a lot of territory - some of it focused upon in my earlier posts on trade secrets. Yes, the article focuses on the insurance industry but the following points apply equally to any type of business:

Companies have a variety of ways to protect themselves when employees leave and try taking business with them, said Steven A. Goldfarb, a partner with the Cleveland-based law firm of Hahn Loeser & Parks.

These legal tactics include pursuing violations of common law, fiduciary duty or the Uniform Trade Secrets Act against the defector and rival company. One common tactic is pursuing violations of restrictive covenants, which are contracts that limit what employees can do after they leave a company.

Such documents can include geographical covenants, which restrict an employee from working for a competitor within a certain area for a certain length of time. Another is the non-solicitation covenant, which restricts an employee from soliciting the company's clients or employees for a certain period of time.

Using Garden Leave for Departing Employees

I started writing about garden leave in Thoughts on Central Indiana Podiatry, Non-Competes, Garden Leave, and Physician Employment Contracts as an alternative to non-compete agreements. I make the following conclusions about garden leave:

1. Garden leave has a use in Indiana employment law and no apparent obstacle stands in the way of using garden leave in Indiana.
2. Garden leave compliments but does not replace a non-competition agreement.
3. Garden leave applies only to salaried employees and has no place in commission-only employment situations.
4. Garden leave requires a written contract but then so do non-competition agreements.
   

I have a definition of garden leave in my earlier article, but let me use here this description from Garden Leave: Helping Employers Control The Prickly Landscape Of Employee Departures:

Garden leave, while evoking images of flower-filled paths and rose gardens, is actually an English legal doctrine in which an employer pays a departing employee to stay at home without performing any duties for a specified notice period. During this time, the individual remains an employee and cannot work for a competitor.

Nor am I the only American who thinks these tools have use here. Anthony Cerminaro published Consider Garden Leave Employment Termination Clauses on his BizzBangBuzz blog. Which provides a link to American employers starting to learn how to garden from PLI. Even earlier is one law review article on this subject: Note: Garden Leave: A Possible Solution to the Uncertain Enforecability of Restrictive Covenants, 102 Col,L.Rev 2291 (2002). Columbia University Law School kindly put this article online. This note reviews the then current English law on the subject. From what I have found elsewhere, I think the writer does a good job of examining the law on the subject. All favor importing garden leave clauses into employment contracts.

Some attorney (or more likely some firm) has already begun to implement garden leave provisions in employment contracts. I found the following example of an American garden leave clause in Bear, Stearns & Co. Inc. v. Sharon (Dist. MA, April 4, 2008) (PDF format)

A notice provision of not less than 90 days - which means that although you remain an employee at will, if you decide to leave Bear Stearns you must give prior written notice of your intention to leave. Once notice is given, for the ensuing 90 days ... Bear Stearns will pay your base salary, during which time you may be asked to perform all, some or none of your work duties in Bear Stearns’s sole discretion. The notice period is enforceable by a temporary restraining order which Bear Stearns can enforce in court.

I plan on a bit more discussion of this case in another post, but the plaintiff lost obtaining a preliminary injunction because of the at-will employee language. Which goes directly to a most important point: these clauses must be drafted carefully. I plan another post on drafting issues.

(A somewhat longer, Swiss contract that discusses garden leave is located here but which adds nothing to the discussion in this post).

Because of the Bear Stearns case, one American writer has less enthusiasm for garden leave clauses. Practicng Law Institutes's In Brief Blog published Garden Leave with the following conclusion:

So, while employers may want to send certain employees to the garden, as they do in the U.K., unless the employees are to the manor born, good luck trying to enforce the deal. The employee may just be gardening for someone else.

OneCle has a proposed form including this garden leave clause:

Each SMD shall be placed on garden leave status for a period commencing on the day following the conclusion of the ninety-day Notice Period and continuing for ninety days thereafter (the “Garden Leave Period”). During the Garden Leave Period, each SMD shall continue to receive his or her base draw and benefits, subject to the payment of related premiums, but shall not receive or participate in any profit sharing or bonus arrangements (including participation in the carried interest program). During the Garden Leave Period, each SMD shall not be required to carry out any duties for or on behalf of Blackstone. Each SMD agrees that he or she will not enter into any employment or other business relationship with any other employer or otherwise prior to the conclusion of the Garden Leave Period.

I read the British materials as the issues raised in the Bear Stearns case have already been considered. See Garden leave and JaneE Mulchay's GARDEN LEAVE (PDF format). Let us remember that Indiana's law on non-competition was ultimately derived from English sources.

Looking at this other garden clause, I do not understand why the Bear Stearns' clause contains the at will employment phrase. I see the problem raised by the Bear Stearn's case as going more to the issue of drafting the contract and little to do with the availability of garden leave.

Indiana businesses using non-competition agreements need to consider adding a garden leave clause to their contracts. My next article on garden leave discusses what businesses ought to use garden leave and why.

Trade Secrets - News

The song goes on as before: employees moving between competitors means litigation.

Clean Technology Intellectual-Property Claims On The Rise

Employees moving among these companies will cause more trade-secret lawsuits, said Bob O'Connor, co-head of Wilson Sonsini Goodrich & Rosati's clean- technology practice and a partner with the firm.

"Presently there is a tremendous amount of employee mobility, and with that comes the potential that information employees gain from a prior employer would be the kind of information that prior employer would not want to see in the hands of a new employer," O'Connor said.

The question remains: what has the first employer done to protect itself? Non-compete agreements, garden leave provisions, and the like are a must, but even more importantly are the security measures taken by the first employer.

Read Picture This for an interesting slant on those security measures:

The same urge is felt at businesses such as Samsung Electronics, where the desire to protect trade secrets has led to a ban on camera-phones inside some company facilities. U.S. federal courts also ban the devices, and sports teams are telling fans they can't use them to take videos at games.

Such efforts are, at best, fingers in the dike and, at worst, may fool corporate executives and government officials into believing they've actually accomplished something. Here's why: It takes very little effort to find a "spy shop"—a store selling all kinds of cloak-and-dagger stuff. The proprietor will be happy to sell you a camera that replaces the top button on your shirt, or one that fits nicely into your briefcase, giving you the same hidden-camera abilities that local television news programs so cheerfully demonstrate when they're looking for a ratings boost.

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Companies also need to recognize that insiders, not outsiders, are the more serious threats. Then they need to work on policies that protect the information that simply must be kept secret without discouraging everyday business.

I'd urge people in authority to consider the possibility that some of the most closely guarded information would be better off in the public sphere. This is unquestionably true for government-held information, where the penchant for secrecy is frequently a tactic to keep taxpayers and political opponents from learning the details of mismanagement, or worse. It's likely true in companies as well, where information that might be used by competitors could well prove more valuable if made available to assist customers and investors in making better decisions. It might even help the company improve its products and services.

NDA's

Start Up Lawyer Blog's What is important in a confidentiality agreement or non-disclosure agreement (NDA)? should be read by a business owner, employer or lawyer looking at a confidentiality agreement. Here are two examples.

Need for an agreement. Entering into an NDA increases the risk that the recipient may face charges of trade secret misappropriation if it develops similar information in the future or inadvertently discloses or uses the information. This is the primary reason that VCs will not enter into NDAs.

Mutual versus one-way. Some agreements only cover disclosure of confidential information by one party. Other agreements are mutual and cover disclosures by both parties. Generally speaking, mutual agreements are less likely to have provisions that are one-sided.

Be sure to read all of this post.

For those Indiana business wanting a NDA, feel to give me a call. I will also review NDA's for employees.

Speaking of Defamation - A Georgia Case and Indiana Law

I wrote a bit about Indiana defamation law in Business Defamation/Trade Secrets. Reading the following from Quick Takes -- April 15, 2008 from Workforce.com made me think I should repeat myself:

"You Can’t Say That: Slander allegations made by an ex-employee of Amerisave Mortgage Corp. will be heard in court after all, following a decision by the Supreme Court of Georgia that overturns a lower court’s ruling to dismiss the lawsuit. The case stems from allegations made by Stephen Scouten that Amerisave and its business associates allegedly “defamed him by disseminating false information” to employees that he was terminated for theft, according to court transcripts and published reports."

This certainly sounds like the defenses of May v. Frauhiger (WP format) and Dietz v. Finlay Fine Jewelry Corp. (html format) would not apply. Without knowing more , I would say the best defense would be on the issues of damages and malice. Remember the elements for defamation are a defamatory communication; made with malice; publication of the communication; and damages.

Business Defamation/Trade Secrets

Someone asked me an interesting question about a customer contact/relationship database. With customer relations management (CRM) being touted as so important for businesses of all sorts, could there be action against a company for content of its CRM database?

While CRM might contain or be a trade secret of a company, any content from its clients ought not be trade secrets of any sort. (More on why only "ought not" in a moment).

Could the company be liable for defamation? Only if the information contained in the CRM database satisfies the following elements: a defamatory communication; made with malice; publication of the communication; and damages. See Schrader v. Eli Lilly & Co., 639 N.E.2d 258, 261 (Ind. 1994). A more recent cases having interest here are May v. Frauhiger (WP format) from 1999 and Dietz v. Finlay Fine Jewelry Corp. (html format) from 2001.

In general, if the company keeps information in its CRM database private there is no liability for the company even if the information is false.

I see a couple of interesting trade secret scenarios. First, if an employee leaks the content of a
CRM database does not seem likely to be a defamation case against the company but might give the company's clients a cause of action against the employee. My second scenario involves a client giving trade secrets to the company under a non-disclosure agreement and this information goes into the CRM database (or any other database) and that gets leaked to the world - there I see a free-for-all of litigation.

Wage and Hour Litigation by Way of Iowa

Up early this morning trying to catch up on some reading and a little writing here. So what has Iowa got to do with Indiana? Both states share the federal Fair Labor Standards Act (FLSA). Rush on Business has three good articles on the FLSA. Start with the latest - Tips on How to Avoid Wage & Hour Lawsuits.

Since I left my in-house position, I have not kept as close an eye on the FLSA and these articles contain some very good reminders. For businesses I cannot think of any better advice than this:

Update: SMBTime blog had a great point in a follow up to this blog post regarding the fact that businesses should consider hiring an attorney to conduct the wage and hour audit so as the maintain the attorney-client privilege.

Thinking more about restaurants and intellectual property #1

Does a restaurant need trademarks? Do most businesses need trademarks?

The New York Times' coverage of the Pearl Oyster Bar litigation got me thinking about how its points would apply here. I made some comments within the original post and others have occurred to me since then.

First, I want to be clear that I am not addressing all restaurants. Franchise restaurants have franchisors eager to protect their trademarks and trade secrets. Nor am I addressing those restaurateurs who do want to expend the money to protect their intellectual property. I specifically exclude them on the assumption that they have made the decision that any infringement has not or will not cost them any money. A civil suit requires damages and that will be measured in dollars. No damages means no lawsuit.

I remain convinced that trademarks are the most cost effective intellectual property for any small business. The name must be unique and used in connection with the business. This could include the business' name or items on the menu or both. Trademarking the business' name provides protection against the competitor with the same or a similar name moving into the same area. While bringing menu items under a trademark provides protection from a competitor using your business' success with a menu item for their own purposes. You can see the government's fees for trademarking here.

You have the ultimate decision as to trademark or not. Remember enforcement costs do exist. I suggest thinking of trademarks as a form of insurance. Like all insurance, you need to think about what will be your costs if you do not have the insurance.

4/26/08 update: Follow Up on "Restaurants and intellectual property" about settlement of this case.

Restaurants and intellectual property

From last week's New York Times about a New York restaurateur filing suit for against a knock off of her restaurant. Since the original article might not be available for long, I am quoting at some length.

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The suit, which seeks unspecified financial damages from Mr. McFarland and the restaurant itself, charges that Ed’s Lobster Bar copies “each and every element” of Pearl Oyster Bar, including the white marble bar, the gray paint on the wainscoting, the chairs and bar stools with their wheat-straw backs, the packets of oyster crackers placed at each table setting and the dressing on the Caesar salad.

Lawyers for Ms. Charles, 53, said that what Ed’s Lobster Bar had done amounted to theft of her intellectual property — the kind of claim more often seen in publishing and entertainment, or among giant restaurant chains protecting their brand.

In recent years, a handful of chefs and restaurateurs have invoked intellectual property concepts, including trademarks, patents and trade dress — the distinctive look and feel of a business — to defend their restaurants, their techniques and even their recipes, but most have stopped short of a courtroom. The Pearl Oyster Bar suit may be the most aggressive use of those concepts by the owner of a small restaurant. Some legal experts believe the number of cases will grow as chefs begin to think more like chief executives.

Charles Valauskas, a lawyer in Chicago who represents a number of restaurants and chefs in intellectual property matters, called their discovery of intellectual property law “long overdue” and attributed it to greater competition as well as the high cost of opening a restaurant.

“Now the stakes are so high,” he said. “The average restaurant can be millions of dollars. If I were an investor I’d want to do something to make sure my investment is protected.”

Business means money and at the bottom of most businesses is some sort of intellectual property - service/trademarks, patents, copyrights, trade secrets. Protecting the business means protecting that same intellectual property. The businesses failing to protect their most basic intellectual property is probably surprising to many - including the business' owners! That most basic intellectual property being the business' name in the form of a servicemark or a trademark. Restaurants are particularly lax at protecting their names.

The article brushes against two areas where restaurants face a bit more difficulty than other businesses.

But the detail that seems to gnaw at her most is a $7 appetizer on Mr. McFarland’s menu: “Ed’s Caesar.”

She has never eaten it, but she and her lawyers claim it is made from her own Caesar salad recipe, which calls for a coddled egg and English muffin croutons.

She learned it from her mother, who extracted it decades ago from the chef at a long-gone Los Angeles restaurant. It became a kind of signature at Pearl. And although she taught Mr. McFarland how to make it, she said she had guarded the recipe more closely than some restaurateurs watch their wine cellars.

“When I taught him, I said, ‘You will never make this anywhere else,’ ” she insisted. According to lawyers for Ms. Charles, the Caesar salad recipe is a trade secret and Mr. McFarland had no more business taking it with him after he left than a Coca-Cola employee entrusted with the formula for Diet Coke.

Mr. McFarland called the allegation that he was a Caesar salad thief “a pretty ridiculous claim.”

“I have my own recipes for my items,” he said.

I see both trade secrets and copyrights implicated in the preceding section. Recipes made public can be copyrighted but if not made public ought to be treated as a trade secret. The Times touched on patents and trade secrets:

One of Mr. Valauskas’s clients, Homaro Cantu, has applied for patents on a number of his culinary inventions, like a method for printing pictures of food on flavored, edible paper. Mr. Cantu also makes his cooks sign a nondisclosure agreement before they so much as boil water at Moto, his restaurant in Chicago.

Tim Wu, a professor at Columbia Law School, said that this almost seemed an inevitable result of bringing lawyers into the kitchen. “The first thing a lawyer would say is have all your people sign nondisclosure agreements,” he said. “It’s a classic American marriage between food and law.”

Abstractly these all sound like great ideas but I must make an assumption that patents and copyrights are justified by the potential for loss of income to the business. The time captured the practical value of patents and copyrights:

Few chefs have followed Mr. Cantu’s footsteps all the way to the Patent and Trademark Office. One who did is David Burke, the chef at David Burke & Donatella, on the Upper East Side and other restaurants. He said he had trademarked a “swordfish chop” but no longer tried to defend that term from copycats.

“You’ve got to chase people down if they use it. I got tired of it,” he said. But he said he still applied for trademarks on more recent innovations, like his bacon-flavored spray.

Many chefs are skeptical that intellectual property law conforms to their line of work. Tom Colicchio said that he had decided not to do anything about a sandwich shop that he considers a clone of his sandwich chain, ’Wichcraft. “There’s nothing you can do,” he said. “You can’t protect recipes, you can’t protect what a place looks like, it’s impossible.”

Got a recipe or a process upon which the business depends? If it fits within the definition of a trade secret, then a non-disclosure agreements seems a small enough cost to me. I have a greater problem with patents or copyrights, but particularly patents. That depends on a cost-benefit analysis based upon facts of which I have no idea at this time. However, I would suggest a patent in a situation where the item being patented could be licensed to other businesses. Think about that one.

Since writing the above, The New York Times' Diner's Journal Blog posted a bit of a follow up (and photographs of the restaurant) in the post: Pearl Oyster Bar. The blog post notes that the plaintiff's complaint includes an allegation for breach of fiduciary duty. The New York Times' writer actually does a great job defining fiduciary duty:

Ms. Charles accuses Mr. McFarland of “breach of fiduciary duty and misappropriation of corporate opportunity.” In legalese, a “fiduciary duty” is like a kind of loyalty that you owe somebody who places their trust in you. You’re not supposed to put your own interests above theirs. The term is sometimes applied to executives or directors of a corporation, but there are also times when a doctor owes a fiduciary duty to a patient, or a lawyer to a client. Ms. Charles’s lawyers are arguing that as sous chef of Pearl Oyster Bar, Mr. McFarland had a fiduciary duty to the restaurant.

The blog post also mentions allegations of the defendant poaching (the same verb used by the Times' blogger and I assume no pun was intended) employees from the plaintiff. Which makes me think that in a restaurant of this sort needs non-competition agreements for its employees. Any sort of business having a key person who can bring down a business needs a non-competition agreement for that employee.

I do suggest reading the comments to the blog. Some very preceptive comments about business generally, and the restaurant business specifically.

4/26/08 update: Follow Up on "Restaurants and intellectual property" about settlement of this case.

Five Ways to Legally Hurt Your Business

A list of things that a business can do to hurt itself by not taking the proper precautions under the law.

1. Fly Solo.

Business has enough risks, so why risk both your business and your personal assets? Operating as a corporation or a limited liability company protects your persons assets from your business creditors. Setting up a corporation or a limited liability company is relatively inexpensive - far more inexpensive than finding your home and personal bank accounts attached by your business creditors.

2. Not Setting Up a Corporation or Limited Liability Company Properly.

Paying an attorney to set up a corporation or a limited liability company looked like an avoidable expense when you saw that online or computerized program. If you cannot afford an attorney for an incorporation or a limited liability company, then you need to seriously consider whether you have the capital to run your business. Incorporating a business involves more than sending the Indiana Secretary of State Articles of Incorporation and a check. You do not want to wake up on day and find out that your incorporation incorporated nothing. Why not? See #1. An LLC operating agreement is a true retail product and you can find yourself with even more problems than with a stillborn corporation. These kinds of problems lead two kinds of attorney fees: big ones or just one to a bankruptcy attorney.

3. Fail to Protect Your Intellectual Property.

What is intellectual property? Trademarks, copyrights, patents, and trade secrets. The first three require filings with the federal government for full protection. Trade secrets require self-help. More importantly: these are the things that you actually make you money. If someone uses your business name or your business product, this steals from the work you did. Don’t protect it and it is gone and so goes your business. You need an attorney for the work on trademarks and copyrights and patents (you actually need a patent lawyer for patents), and you should have an attorney to review your trade secret protections. If you cannot afford these services, then you better ask yourself if you can afford to stay in business.

4. Fail to Protect Against Employees.

You know to keep an eye on the cash register even if your business no longer has a cash register. What about the other assets of your business? The trade secrets, the company goodwill, the company client list? Ask this about your employees: if any left, which ones could truly harm the business? Now ask yourself about those particular employees: do I have a non-compete agreement? If not, why not?

5. Never Establish a Working Relationship with your attorney.

Here is the best tip I can give any business owner on saving money: get your attorney involved at the start of the process and not at the end. Litigation costs more than a year’s consultation.