How Contracts Help Fight Fraud

From the Supply Excellence blog comes Fraud Risks (and how Contracts can help):

In other words, a head-in-the-sand approach or playing nice will not protect against fraud … it’ll just prevent you from knowing about it until it’s too late. And while communication early and often is key, the contract tweaks Neil highlighted also point to an important step technology can play in reducing risks of fraud.

Having pre-approved clause language and proper process and approvals in an automated contract management system may root out instances where fraud can take place in the first place. And, worse case, it provides improved after-the-fact visibility in the event that it is not caught proactively.

Notice it is just any contract but a well-written contract that helps fight fraud. Here is another point where a good relationship with the business' lawyer can help prevent problems - such as lost proftis.

Employers, Preventive Law and the Employee Leaving the Business

The best advice I found (lately) is this paragraph from Handle departing employees: When the grass is greener:

There are two lessons from the HISL case: first, listen to your employees when they have good ideas. Second, if you wish to prevent departing employees taking preparatory steps prior to leaving employment to ensure their future income, or competing with you after they have moved on, make sure your contracts of employment are properly drafted.

That last sentence nicely sums up what we lawyers call preventive law. As much as I write about litigation, as much as I do like trial work, preventive law is the best bet for business owners. (Actually, for everyone).

Why most people, businesses, institutions prefer waiting for litigation to hit is something that has puzzled me and has puzzled others. After so many years, I think the reasons are a desire to deny any risk and a desire to save on attorney fees until the lawsuit arrives at the door.

If you look over my articles here on non-compete agreements and trade secrets, you will see my emphasis on preventive law. The article I quoted above dealt with both of those subjects.

Notice, Preliminary Injunctions, Employment Contracts, and The Indiana Court of Appeals

Ordinarily, preliminary injunctions come before trial on the substantial issues of the case. Not in Roberts v. Community Hospitals of Indiana, Inc. (PDF format).

If the court consolidates the preliminary injunction with trial, there has to be proper notice given to all the parties. Notice gives the parties time to properly prepare for the hearing. The Indiana Court of Appeals held that there was not enough notice given in this case and sent it back to the trial court.

The case gives us an insight in the preliminary injunction process. I find the case worth reading for that reason alone.

If you are looking for Indiana counsel for business litigation, please remember that I am taking on cases at this time.

Non-lawyer writing on non-compete agreements

Unlike some lawyers, I do not mind when non-lawyers write about legal matters - so long as they do not muff the law. No-Fault Divorce. Is It Time To Tie The Knot With A New Employee? from insurancenews.net does a good job with the legal issues. Besides, how can I object to an article that has the following paragraph:

To create a truly good agreement, start from the basics. It is worth the money to have an attorney involved in the drafting. But that is just the beginning. More important is that you, as the agency owner or manager, must guide the attorney to include the specific contractual elements you need.

I often wonder if my readers think my pronouncements about needing lawyers for a business are not a bit self-serving. Of course, they are self-serving to a point. I am looking for new clients, but I prefer to prevent problems for those clients to cleaning up the avoidable messes.

If you have a business then read all of the article. It applies to more than insurance agents.

Indiana Appellate Cases: Third Party Interfering With Contracts

On March 20th, the Indiana Court of Appeals handed down its opinion in Allison v. Union Hospital (PDF format) that dealt with tortious interference with contractual relationship against Union Hospital and Wabash Valley Anesthesia, P.C. (the other appellee) and constructive fraud and breach of the duty of good faith and fair dealing against Union.

Allison (and Safford, the other appellant) lost on both claims at the trial court level and had a split decision with the Court of Appeals. The Court of Appeals reversed the trial court on the tortious interference claim but upheld the other claims.

The opinion contains a refresher on the tort's elements:

A plaintiff alleging tortious interference with a contractual relationship must establish five elements: (I) the existence of a valid and enforceable contract: (2) the defendant's knowledge of the existence of the contract; (3) the defendant's intentional inducement of the breach of the contract; (4) the absence of justification; and (5) damages resulting from the defendant's wrongful inducement of the breach. (citation omitted).

This case focuses on the justification element. The Indiana Supreme Court has set out the following factors for judging whether or not the defendant acted with justification:

(a) the nature of the defendant's conduct;
(b) the defendant's motive;
(c) the interests of the plaintiff with which the defendant's conduct interferes;
(d) the interests sought to be advanced by the defendant;
(e) the social interests in protecting the freedom of action of the defendant and the contractual interests of the plaintiff;
(f) the proximate or remoteness of the defendant's conduct to the interference: and
(g) the relations between the parties.

The Indiana Court of Appeals proceeded to evaluate the facts of the case against these guidelines. It then made the following decision:

In weighing all of these factors, we find this to be a very close call. And as noted above, the ultimate question relating to the justification of the defendant's conduct is whether that conduct has been fair and reasonable under the circurnstances. We find this inquiry to he so highly- fact sensitive that we conclude it is best answered by a factfinder. Although it is possible that under certain circumstances this question may lie answered as a matter of law-and, indeed, we make just such a finding with respect to WVA below- we do not find that to be the case with respect to Union, based primarily on its conduct with respect to the without cause termination provision....

I must say this case has some unusual features - Union Hospital admitted entering into a contract it had no intention of honoring - which probably helped lead to the decision for a remand for trial rather a decision as a matter of law.

Having confronted several of these tortious interference cases, my thought is that the lack of justification element is generally the make or break element. If the case is a good tortious interference case, then the other elements ought to be readily apparent with an appropriate support of the evidence. (For example, last week a client wrote me about what would appear a good tortious interference case except there was no interference - the clients were not impressed by the attempted interference.) With this opinion, Indiana has a very a good explanation of when a third party lacks justification for its interference.

News: Trade Secrets Case Settled

As a lawyer this report from MPO Magazine intrigues me while as a consumer it appalls me. Boston Scientific and Consultant Settle a Lawsuit:

"With a Dec. 3 trial date fast approaching, Boston Scientific and the ECRI Institute have settled a potentially controversial lawsuit that could have spotlighted efforts by Boston Scientific and other medical device companies to keep the prices of their major products secret. No terms were disclosed. ECRI, a nonprofit consulting and market research firm based in Plymouth Meeting, Pa., collects data on medical device prices from more than 400 hospital clients and, in return, discloses to them the average and lowest-selling prices for each product. The hospitals use the information as a tool in negotiations with the companies. Boston Scientific had said that ECRI illegally disclosed its trade secrets. It also argued that ECRI interfered with its business relationships by inducing hospitals to violate sales contracts that require the hospitals not to disclose the prices they pay for Boston Scientific’s heart defibrillators and other devices. The lawsuit had drawn attention to arguments that the secrecy in device pricing has contributed to rising costs."

Having had some experience with third party interference with contract suits, I find mixing that kind of case with trade secrets very interesting. I wonder just what the hospitals were thinking and what their attorney are thinking now.

Interesting Tennessee case on third party interference with contracts

Thanks to the Tennessee Business Litigation Law Blog and Day on Torts for the lead to this case on third party interference with contractual rights. I am unaware of any similar reported case in Indiana. However, I think think the reasoning ought to be persuasive here.

First, the Tennessee court established that a difference existed between a parent corporation and a subsidiary:

In a tortious interference claim, a parent corporation and its subsidiary will usually not share an identity of interests when the subsidiary is not wholly-owned because the interests of the majority shareholder are often different from and antagonistic to the interests of the minority shareholders. Because of the competing nature of their interests, Tennessee law protects minority shareholders from majority shareholders. Under Tennessee law, a majority shareholder owes a fiduciary duty to minority shareholders.

Second, the Tennessee court noted that one cannot be liable for interfering with one's own contract.

Then, the court examined the policy underlying that rule:

But when the parent is not the sole shareholder, the interests of the parent and the subsidiary will not always be identical. This distinction is crucial because the whole issue of extending the qualified privilege depends on a complete identity of interest, such that two separate entities are treated as one. When the interests of a parent and subsidiary are not identical, the reason for treating them as the same entity disappears. In that case, the parent should not be considered a
party to the contract so as to protect it from liability for interference with contract.