Recent Articles in Corporate & Commercial Litigation from LexMonitor

TortsProf Law Blog

bbass@branhamday.com (Brandon Bass) — Sun, 18 Apr 2010 06:57:58 GMT

Have Pen, Will Travel

Thu, 11 Mar 2010 03:02:14 GMT

We often hear about the most dramatic court cases, or those involving high profile persons or extremely large amounts of money. But a colleague recently blogged about how transactional work from a conventional attorney can be high drama, too. It’s always refreshing to receive this sort of recognition (or redemption).

Those of you who are old enough may remember the popular television show, “Have Gun Will Travel.” The main character, known only as Paladin, was paid a hefty fee to settle problems without violence when possible, but excelled when forced to fight. "Trekkies" may be aware that most (if not all) episodes were written by Gene Roddenberry. the creator of “Star Trek.”

I recall one particular episode of the show about a woman who hired Paladin to represent her. She married a miner after spending only one evening with him. He left all his worldly possessions to her in a will in his own handwriting, and died. He had no other heirs. A partner challenged the will. Paladin, although not a lawyer, got the judge to agree to a jury of only three, who happened to be elderly miners themselves. He presented to them the story of how his client gave a lonely old man one wonderful evening of companionship and respect (no snickering here – this was the 1950’s). The jury agreed the will was valid.

The “attorney as hired gun” can be a pejorative, negative metaphor. It’s important to bear in mind that Paladin, who often exhibited his education and breadth of knowledge, only resorted to combat as a last resort. In that sense I like to think we are modern-day Paladins. We may not carry derringers under our belts, but we do consider ourselves well-read, highly prepared, and ready to take on the bad guys, armed with knowledge and experience – and resorting to ritualized combat (litigation) only as a last resort.

The paladins, sometimes known as the Twelve Peers, were the foremost warriors of Charlemagne's court. photo courtesy Wikipedia

Will Short Sales Be the Trick to Stop the Foreclosure Flood?

Thu, 11 Mar 2010 02:08:10 GMT

Realizing that the "fixes" put in place by the federal Home Affordable Modification Program ("HAMP") have been an abysmal failure, the Obama Administration and the Treasury Department have reached for a new arrow in their quiver. Beginning April 5, 2010 the new Home Affordable Foreclosure Alternative program ("HAFA") will attempt to assist hundreds of thousands of the delinquent homeowners who could not be rescued under the HAMP program by allowing them to shed their homes through the short sale process.

Traditionally, a short sale is when the proceeds from the sale of a home are insufficient to fully pay off all outstanding debts and encumbrances recorded against the property. In these situations, the selling homeowners can either bring funds to the closing to make up the difference, or obtain approval from their mortgage lenders to accept a reduced amount to satisfy their outstanding loans.

Under HAFA, the lender must offer a short sale in writing to the homeowner within 30 days after the homeowner either is found ineligible for mortgage modification under HAMP or has been ruled unable to sustain payments under a trial plan. Under the new plan, a lender will use real estate agents to determine the value of the encumbered home and this figure will be the lender’s minimum to accept for a short sale. This figure will not be shared with the homeowner, but if an offer comes in that is equal to or greater than this amount, the lender must accept it and proceed with the short sale.

Under this new program the primary lender will receive $1000 if the short sale is completed. A lender holding a secondary lien could get up to $3000 of the short sale proceeds, or can attempt a short sale outside the program if it does not agree to share. In addition, the selling homeowner will get $1500 in "relocation assistance".

While HAFA will attempt to make short sales easier and a more likely alternative to foreclosure, short sales require significant time and patience by all parties involved. Luckily, with the seemingly continuous delay of the foreclosure process by the New Jersey courts, one thing that delinquent homeowners seem to have is time.

At the beginning of foreclosure crisis lenders shunned short sales and would regularly refuse to participate in the process. However with the failure of other federal programs to effectively turn the tide of the foreclosure flood, it may now be time for short sales to see their moment in the sun. For condominium and homeowner associations ("Associations"), HAFA may mean fewer empty foreclosed homes waiting to be sold by uninterested and unmotivated lenders. Another direct benefit of the HAFA program for Associations is that the common assessment liens recorded against the homeowners’ units must be paid in full for the short sale to be completed. This will provide Associations significant leverage to ensure that unpaid common assessments are recovered.

California Supreme Court activity for the week of March 8, 2010

thecomplexlitigator@leviant.net (H. Scott Leviant) — Thu, 11 Mar 2010 01:05:19 GMT

The California Supreme Court held its (usually) weekly conference today. Notable results include:

A Petition for Review was denied in Davis v. Ford Motor Credit Co. (November 19, 2009) (adopting FTC-based formulation for "unfair" under the UCL and declining to import two-way attorney fee provision into UCL via predicate statute). See, UCL Practitioner here and here for background
A Petition for Review and Request for Depublication were denied in Keller v. Tuesday Morning, Inc., Inc. (November 4, 2009; pub. ord. December 4, 2009) (appeal of order denying class certification)

Are You Promising Too Much in Your Advertising?

Wed, 10 Mar 2010 23:48:08 GMT

South Carolina Attorney Ad Tests Bounds of Advertising Rule Another in Our Series of Hinshaw Lawyers for the Profession® Alerts In re Anonymous, 385 S.C. 263, 684 S.E.2d 560 (2009) Brief Summary A lawyer advertisement that promised the lawyer would “work to protect” clients’ interests and “we’ll get you the benefits you deserve” did not improperly guarantee results and [...]

South Carolina Attorney Ad Tests Bounds of Advertising Rule

Another in Our Series of Hinshaw Lawyers for the Profession® Alerts

In re Anonymous, 385 S.C. 263, 684 S.E.2d 560 (2009)

Brief Summary
A lawyer advertisement that promised the lawyer would “work to protect” clients’ interests and “we’ll get you the benefits you deserve” did not improperly guarantee results and was not misleading.

Complete Summary
The South Carolina Office of Disciplinary Counsel (ODC) brought charges against an unnamed lawyer (“Respondent”) alleging his television advertisement was actually or inherently misleading and that it created an unjustified expectation regarding results, in violation of Rule of Professional Conduct (RPC) 7.1. The advertisement stated:

It’s not your fault you were hurt on the job, but I know you’re afraid to file a job injury claim. You’re afraid your boss won’t believe you’re really hurt-or worse, that you’ll be fired. We’ll protect you against these threats-these accusations-and work to protect your job. I’m not an actor, I’m a lawyer. I’m [Anonymous]. Call me and we’ll get you the benefits you deserve. The [Law] Firm.

Id. at 265. The ODC argued that this advertisement improperly gave the impression that Respondent could guarantee job protection. A hearing panel found for the lawyer, and the ODC appealed.

The South Carolina Supreme Court dismissed the charges against Respondent. The court held that neither the plain text of the advertisement, nor the evidence submitted to the Hearing Panel warranted finding the advertisement misleading. The parties below had agreed that expert testimony would not be proper with respect to the question of law as to whether the ad was misleading. The ODC relied instead on a “market study” focus group testing five different ads for layperson reactions.

Recognizing the constitutional protections for lawyer advertising and commercial speech more generally, the court noted that an advertisement is misleading and can be prohibited when it contains a material misrepresentation or creates an unjustified expectation. The court held that the phrase “work to protect” did not imply that Respondent could guarantee results and was therefore not actually or inherently misleading.

The court noted that there was no credible evidence that anyone in the public actually was misled by the ad, and that the Bar complaint was filed by an anonymous member of the South Carolina Bar. The court also held that the results of the market survey conducted on behalf of the ODC did not contain clear and convincing evidence that the advertisement was misleading. The participants in the survey had indicated that, out of five advertisements shown, Respondent’s advertisement most strongly conveyed that clients would be protected from getting threatened or fired. Without commenting on whether such a finding could support a conclusion that the ad was misleading, the court found that the survey itself was not reliable because, inter alia, the sample group was too small (30 people), the margin of error was too large (20 percent), the Respondent’s advertisement was the only one that referenced clients’ jobs, and the questions were worded in a way that would elicit the ODC’s desired response.

Significance of Opinion
Courts nationwide arguably have been trending toward less restrictive interpretations of lawyer advertising rules, and this case is no exception. The opinion provides some clear guidance and solid reasoning respecting the statements at issue here, which may well translate to similar statements and in other jurisdictions. This opinion also is notable for the court’s detailed critique of the market survey evidence submitted by the ODC

Law of the Case Did Not Bar Trial Court From Explaining and Reentering Judgment

Wed, 10 Mar 2010 22:45:59 GMT

The Court of Civil Appeals, on the first appeal of this case, held that the circuit court had wrongly considered evidence outside the pleadings in granting a motion to dismiss. On remand, the circuit court explained that, in fact, its decision had depended on nothing outside the pleadings. It then reentered its dismissal. The Court of Civil Appeals held that this was sufficient and that, given the trial court’s explanation, the “law of the case” doctrine did not bar a reentry of the original judgment. Drees v. Turner, No. 2080742 (Ala. Civ. App. Feb. 26, 2010).

The circuit court granted the defendants’ motion to dismiss on grounds of judicial immunity. The plaintiff appealed. The Court of Civil Appeals “did not address the substance of [the immunity] argument but, instead, concluded that the trial court had impermissibly converted the defendants’ motions to dismiss to motions for a summary judgment by considering matters outside the pleadings.” The appellate court reversed the dismissal and remanded the case for proceedings “consistent with” its opinion.

On remand, the trial court entered an order explaining that, in fact, its earlier dismissal had not depended on material outside the pleadings. It had “reviewed material” that the plaintiff had submitted in opposing the motion to dismiss, but only “to determine what was included in [the] Complaint and what was not.” It had quoted part of that material but only, it said, in dicta. It “had not considered the [quoted] language in its decision-making process.” Reasoning that its first decision had therefore not relied on anything outside the pleadings, the trial court reentered its dismissal. The plaintiff again appealed.

The Court of Civil Appeals held that the trial court had acted properly. Specifically, the reviewing court held that the “law of the case” doctrine did not prevent the trial court from reentering its original dismissal.

The first appellate decision — that the trial court had wrongly considered material outside the pleadings — was indeed the law of the case. That, however, did not preclude the trial court’s action here. Under the “law of the case” doctrine,

whatever is once established between the same parties in the same case continues to be the law of that case, whether or not correct on general principles, so long as the facts on which the decision was predicated continue to be the facts of the case. . . .

However, the . . . doctrine does not in all circumstances require rigid adherence to rulings made at an earlier stage of a case. The doctrine directs a court’s discretion; it does not limit a court’s power. The law-of-the-case doctrine is one of practice or court policy, not of inflexible law . . . .

(Emphasis in Drees).

Here, the relevant facts had changed since the first appeal: namely, the circuit court had “explained” that it had not considered evidence outside the pleadings. The Court of Civil Appeals also suggested that applying the doctrine in this case would not accomplish anything useful:

The whole purpose of the reversal was to assure [sic] that the court had followed proper procedures before [the plainitff’s] case was summarily disposed of. That purpose could have been served by allowing [the plaintiff] an opportunity to present additional evidence had the motions to dismiss been converted to motions for a summary judgment; however, that purpose has now been equally served by the trial court’s ruling on the motions to dismiss without its considering any material outside the pleadings.

“Accordingly,” the Court of Civil Appeals held that “the law-of-the-case doctrine did not prevent the trial court from reentering a judgment dismissing the case.” The court then proceeded to address the case’s merits.

NC Court of Appeals Interprets the "Purchase on Death" Provisions of a Shareholders Agreement

Wed, 10 Mar 2010 19:40:00 GMT

[Ed. note: The following article was written by Mack Sperling before his unplanned leave. Although releasing it today is less timely than is Mack's custom, the issues involved in the case are still of interest to businesses and business lawyers. Any errors or shortcomings in the article are attributable to your substitute bloggers.]

On February 16, in Lynn v. Lynn, the Court of Appeals interpreted provisions of a Shareholders Agreement requiring the corporation to repurchase a shareholder's "restricted shares" upon his death, with the purchase to be funded by the proceeds of a life insurance policy on the shareholder.

The trial court had found the Agreement to be ambiguous, and had considered a variety of extrinsic evidence in determining the ownership of the shares in question. The Court of Appeals found no ambiguity, ruled that it had been error to consider the extrinsic evidence, but it nevertheless reached the same result as to ownership.

Background

A father (James) and his two sons (Greg and Kenneth) formed a corporation, James Lynn & Sons, Inc. Eventually, the father owned 51% and the sons each owned 24.5% of the company's stock.

In 1993, the shareholders and their wives entered into a shareholders' agreement requiring that upon death, each shareholder would sell his "restricted" shares back to the corporation for an amount equivalent to the face amount of a life insurance policy on his life, with the face amount to be adjusted annually. The corporation was to own the policies.

The sons kept life insurance in place, paid for by the company, which increased over time from $75,000 to $375,000. The corporation paid the premiums, though the brothers had the policies issued in their names as opposed to them being owned by the corporation. They named their wives as beneficiaries of the policies. The father didn't maintain insurance, due to expense, but upon his death in 1997 his executor sold his shares to the sons in a transaction referencing the Shareholders Agreement.

Later, the sons adjusted their ownership interests with Kenneth becoming the 55% majority owner and Greg holding a 45% interest.

Then it got interesting. Greg and his wife got divorced, and were involved in heated litigation over the equitable distribution of their property. Greg's wife sued Kenneth, as majority shareholder, to establish that the shares of the company were subject to equitable distribution.

Kenneth then died unexpectedly. His shares went to his estate. The insurance proceeds went to his wife. Greg's ex-wife said that 100% of the shares were now subject to her equitable distribution claim. Greg pretty much agreed with his ex-wife, and said that upon the payment of the life insurance proceeds to Kenneth's wife, he held 100% of the shares.

Kenneth's widow had a different point of view. She said that the Shareholders Agreement only applied to "restricted shares," and that the shares held by her late husband did not fit that definition. She also said that the corporation hadn't complied with the life insurance provision given that it did not own the policies. She said she was entitled to both the insurance proceeds and the shares.

The Trial Court Ruling

The trial court ruled that the Agreement was ambiguous, because sometimes it referenced "restricted shares," sometimes it referenced plain 'ol "shares," and no shares had been denominated as being "restricted."

The trial court considered a wealth of extrinsic evidence on the meaning of "restricted shares," including testimony from the attorney who had drafted the Agreement, who testified that all of the corporation's shares were restricted notwithstanding the lack of any notation to that effect on the face of the shares. The trial court further considered evidence from the insurance company showing that the purchase of the insurance was to "fund a "Partnership Buy/Sell Agreement,'" along with testimony from the insurance agent and the company's accountant.

The trial court ruled that Greg was the owner of 100% of the stock. Kenneth's widow argued on appeal that the agreement wasn't ambiguous, that it applied only to "restricted shares," and that the trial court should not have considered extrinsic evidence.

The Court of Appeals Ruling

The Court of Appeals agreed with Greg's widow on the plain terms of the Agreement, ruling that "there is no ambiguity in the Agreement, and, more specifically, we find no ambiguity in the term 'restricted shares.' Accordingly, extrinsic evidence admitted solely for the purpose of defining 'restricted shares' under the Shareholders’ Agreement was improper."

The appellate court nevertheless reached the same result. It held that all of the corporation's shares fell within the meaning of "restricted shares." One factor in its decision was that there were extensive restrictions on the alienation of shares contained throughout the Shareholders Agreement designed to prevent shares from passing to outsiders. It said that restrictions of this type are "common in closely held corporations," and that all of the shares were in effect "restricted." It also observed that the provision requiring the use of the life insurance proceeds referred to the purchase of a shareholder's "interest." It said that "this evidences the intent that all shares owned by the decedent be covered."

The lack of any marking on the share certificates that the shares were restricted did not give the Court much pause. It said that this might have made a difference if the buyer had been a good faith purchaser without notice of the restriction; but that in this case the wives had both signed off on the Shareholders Agreement.

Additionally, the Court of Appeals affirmed the trial court's conclusion that the corporation complied with the requirement that life insurance be purchased to fund the Agreement. Although the policies were owned by Kenneth individually at the time of his death, not by the corporation, the corporation paid the premiums. There also was testimony from an insurance agent that the brothers purchased the policy in order to fund the buy-sell provision of the Agreement. (According to the Court of Appeals, this was not improper extrinsic evidence regarding the interpretation of the Agreement, but rather was evidence necessary to determine whether the corporation complied with the requirement that life insurance be purchased).

The Court held that the parties' course of dealing established their clear intent that the policies in question be used to fund the buy-sell portion of the Agreement. Kenneth's widow argued that the technicality of policy ownership entitled her to both the policy proceeds and the shares in the corporation; instead, the trial court and the Court of Appeals held she was entitled to neither.

Appellants' Brief

Plaintiff-Appellee's Brief

Third Party Plaintiff-Appellee's Brief

When March Madness Visits the Workplace

Wed, 10 Mar 2010 18:17:11 GMT

In Shakespeare’s Julius Caesar, a soothsayer warned Caesar to “beware the ides of March,” which he didn’t, and we all know what happened. In modern times, while the ides of March hopefully won’t augur such tragedy, it does kick off two annual events that employers should cautiously beware: The NCAA basketball tournament a/k/a March Madness and St. Patrick’s Day.

The advertising leading up to these events leave no doubt that alcohol consumption often becomes a major component of the festivities. Indeed, the NCAA has been under pressure to bar alcohol advertisements during its widely televised national tournament. And we know that, for some people, beers and pubs tend to be associated with St. Patrick’s Day like turkey and stuffing on Thanksgiving. It should therefore come as no surprise to the modern employer that mid-March means many of their workforce will be imbibing more than usual.

Drug/Alcohol & Business Conduct Policies

In this regard, it is an appropriate time for employers to review their drug/alcohol and business conduct policies. Clearly, bringing or using alcoholic beverages on company property or using alcoholic beverages while engaged in company business, consuming alcohol in the workplace or reporting to work under the influence of alcohol is forbidden and/or deemed inappropriate conduct. Most employers expect their employees to accept certain responsibilities, adhere to acceptable business principles in matters of personal conduct, and exhibit a high degree of personal integrity. This would include the expectation that employees, in their business and personal life, refrain from behavior that might be harmful to the employee, his or her coworkers, and/or the company, or that might be viewed unfavorably by current or potential customers or the public at large. Many employers include policy language that whether the employee is on or off duty, his or her conduct reflects on the company and should therefore observe high standards of integrity at all times. Inherent in these policies is the expectation that employees exercise good judgment.

Impairment by drug or alcohol use can constitute an avoidable workplace hazard under the Occupational Safety & Health Act. Additional guidance is provided by OSHA and the Department of Labor’s Working Partners for an Alcohol-and-Drug-Free Workplace program. While employers are entitled to expect reliable attendance and productivity, when enforcing their drug/alcohol and business conduct policies they should give due consideration to laws such as the Americans With Disabilities Act (ADA), The Family and Medical Leave Act (FMLA), Health Insurance Portability and Accountability Act (HIPAA), and state drug and alcohol testing laws where applicable. When dealing with employee drug/alcohol testing in the private sector, there is neither a constitutional nor statutory prohibition against the activity. In fact, in certain circumstances, such as pre-employment testing and testing based on reasonable suspicion, drug/alcohol testing by private employers is both permissible and common. However, testing should be administered in a non-discriminatory manner and be consistent with any statutory protocol applicable to your state.

The NCAA Brackets

Betting on sports (e.g., the NCAA brackets) for money is illegal in most states except Nevada. See, e.g., New York Penal Law Art. 225 et seq., and New York General Obligations Law § 5-401 et seq. While the likelihood of criminal enforcement of a casual office betting pool is slim, it would nevertheless be wise to avoid promoting or encouraging such conduct. The company should have a no-gambling policy, but be careful to enforce it in a non-discriminatory and consistent fashion. For example, if the company disallows office betting pools, it should not distinguish whether the betting is on a sporting event or American Idol. While much has been written about drops in productivity because of employees following their March Madness brackets at work on the web, the adverse effects on employee morale and camaraderie should be considered before deciding to enforce an outright ban on brackets and following the games on the web.

Erin Go Bragh

If prepared properly, March Madness and St. Patrick’s Day should be a spirited time of year for all, without causing disruption on the job.

Mexico's President Felipe Calderon

Wed, 10 Mar 2010 18:16:42 GMT

Mexico's President Felipe Calderon announced on February 9, 2010 that he had approved a decree establishing new incentives for the film industry in Mexico. The highlight of the new incentive program is a proposed refund of up to 7.5% of amounts spent by filmmakers in Mexico for movie productions with expenditure of at least $70,000,000.00 Pesos in Mexico. When added to available state incentives and the refund of value added tax upon "export" of a movie, the total value of an incentive package could be approximately 28% of the amount spent in Mexico for production(Note: state incentives vary on a state by state basis.). In addition, President Calderon announced that ProMexico (the government's agency in charge of promoting foreign investment) would be charged with responsibility to provide special assistance to the movie industry to expedite the paper work involved in the production of movies in Mexico. This assistance would include expediting the import of goods and the prompt processing of the the refunds under the incentive program. Mr. Calderon made his announcement at a special ceremony held at Baja Studios in Rosarito, Mexico (

www.bajastudios.com ), where major motion pictures like Titanic and Master and Commander were filmed. (Readers should note that Baja Studios is a client of Sheppard Mullin.) The President stated that the new incentives should serve to put Mexico back on the map of the world of film. Mexico hopes to use its proximity to Hollywood, relatively low labor costs, and new tax incentives to lure major productions back to the country.

New FTC Commissioners Confirmed

Tue, 09 Mar 2010 20:58:38 GMT

It has been quiet on the FCC front as all hands seem to be focused on the upcoming National Broadband Plan. In the meantime, I didn't want this development at the FTC to go unnoticed. Our firm's sister blog, Adlawaccess, provided this report on the confirmation of two new Commissioners. A statement by the FTC Chairman is available here.

With the FTC active in enforcement on prepaid card and mobile marketing matters, and with the FTC seeking an end to the "common carrier exception" to its jurisdiction, it is worth monitoring activities at the FTC.

China M&A Tax Issues - Installment 3: Mergers and Special Purpose Vehicles

Tue, 09 Mar 2010 17:26:12 GMT

Mergers

A merger involves two or more enterprises forming a single legal entity through combining their assets and liabilities. In China, the absorption of an existing company or the creation of a new entity are the two methods through which a merger can be transacted. Though the former resembles an acquisition, different tax rules apply if the transaction is recognized as a merger.

For a merger that is considered an ordinary reorganization, tax on assets and liabilities being transferred will be based on the fair market value. Tax losses of the enterprise whose assets and liabilities were transferred (merged enterprise) cannot be carried over to the enterprise to which assets and liabilities were transferred (merging enterprise). The assets of the merged enterprise are taxed based on the transaction price.

If a merger is considered a special reorganization, assets transferred will have the same tax basis as the original tax basis of the merged enterprise’s assets and liabilities. As in an acquisition that is considered a special reorganization, taxable gain will not arise and the original purchase price will be the tax basis for future sales of the transferred assets in the current merger. The merged enterprise’s losses can also be carried forward, though the amount that can be used must be equal to the net operating loss (which is equal to the fair market value of the transferred assets multiplied by the bond yield of the government bond with the longest maturity term at the end of the year that the merger occurred). If the merger occurs through the absorption of an existing enterprise, then the tax incentives of the merging enterprise can be carried over if the merger is considered a special reorganization.

If a transaction can satisfy the requirements of a special reorganization, it might be more tax-efficient to structure it as a merger rather than an asset acquisition, since the losses of the merged enterprise can be carried forward in a merger that is considered a special reorganization while they cannot be carried forward in an asset acquisition that is a special reorganization.

Special Purpose Vehicles

A Special Purpose Vehicle (SPV) is a subsidiary entity of an enterprise established to achieve specific objectives such as isolating the parent company from risk or accumulating tax benefits as a result of treaties between China, in this case, and the SPV’s jurisdiction of incorporation.

In China, no tax liabilities result from the sale of an SPV by its foreign parent; however, the General Anti-avoidance rule in the EITL enables the SAT to remove these tax benefits if it considers a transaction as having no reasonable business purpose. Thus, recent changes in the Chinese tax regulations may cause SPVs to lose their attractiveness as a tax-efficient instrument for equity transfers.

Authored By:

Jennifer Ding
jding@sheppardmullin.com

Can You Unintentionally Contract Away Your Right to Good Faith and Fair Dealing?

gavin@gavincraiglaw.com (Gavin Craig) — Tue, 09 Mar 2010 16:48:11 GMT

Apparently you can. This is undoubtedly an example of all parties believing nothing will ever go wrong and that the parties will always work well together. The following matter was reported in the New York Times, and the case comes to us from California. Also see the Contracts Professor.

For Background, Clive Cussler is a noted fiction writer of adventures, usually involving sunken ships or buried trains, etc. Mr. Cussler entered into a contract with Crusader Entertainment, LLC., giving Crusader the option to produce a movie based on one of Cussler's novels. The dispute involved claims of breach of this contract.

Before the movie was even produced, both parties sued each other, each alleging the other breached their contract. This is not the way to begin a fruitful business relationship.

In summary, Crusader was suppose to begin production within 24 months of exercising the option. However, the film was delayed because the parties argued over the screen play. Reportedly, Cussler consider the screen play, "crap." Cussler insisted that he should write the screen play - Crusader refused to allow him to do so because the actors didn't like his screen play, and he was not a member of the writers guild.

The trial court found in favor of Crusader, and awarded damages of several million dollars based on a finding that Cussler breached the implied contract covenant of good faith and fair dealing.

However, the Court of Appeals found that as a mater of law, the implied covenant of good faith and fair dealing did not apply. The contract provided that Cussler had the right to review and approve the screen play. The Court of Appeals found that Cussler had the contractual right to:

"[R]eject proposed changes to the original Approved Screenplay, "for unreasonable reasons. . . or for no reason at all." (The report is not clear whether this language is in the contract, or it is the courts interpretation of Cussler's contractual rights.) It is hard to believe that Crusader would sign a contract with this specific language, since it invites the very problems they encountered with Cussler.

Crusade argues that the appellate court's interpretation of the contract made the contract illusory, and I think that to some extent that is a good argument. However, the court said that since the contract did not require Cussler to act reasonably, or in good faith, he had no obligation to do so.

The problem with this reasoning is that either there is an implied covenant of good faith and fair dealing, or there isn't. If there isn't, then the courts decision appears logical. If there is, the decision doesn't make sense. Why would parties need to specifically address in a contract an implied obligation that is already deemed part of the contract, unless the parties wanted to specifically exclude the covenant? And who would sign that agreement?

These are the type of cases that make you scratch you head and wonder what people were thinking?

DOL Proposes Revamped Rule on Investment Advice

Tue, 09 Mar 2010 14:34:05 GMT

By: Catherine S. Bardsley, Mark J. Duggan, John J. Nestico, David Pickle, William A. Schmidt, William P. Wade, Kristina M. Zanotti.

The U.S. Department of Labor (“DOL”) has issued a new proposed regulation (the “Proposal”) in the most recent installment of its ongoing efforts to implement the statutory exemption for participant advice added to ERISA and the Internal Revenue Code as part of the Pension Protection Act of 2006 (“PPA”). The Proposal, which deals solely with advice to plan participants (as opposed to plan sponsors), would replace the final regulation and related class exemption regarding participant advice that was issued in January 2009. Notably, the Proposal would cut back significantly on what would have been permitted under that regulation and class exemption, particularly as it would have applied to advice to IRAs.

To view the complete alert online, click here.

The Problem With HR 4364, The Proposed Federal Anti-SLAPP Law

Tue, 09 Mar 2010 13:30:56 GMT

Via Overlawyered, Eric Goldman and others favor HR 4364, the “Citizen Participation Act of 2009,” which would establish a federal anti-SLAPP law.

Around half the States have anti-SLAPP (i.e., Anti-"Strategic Lawsuit Against Public Participation") statutes which make it easier to dismiss suits allegedly filed to chill freedom of speech. If the lawsuit arises from the Defendants' exercise of their rights to free speech — which in the post-Citizens United era means virtually every time a corporation advances an agenda — then the Defendant can file, at the very beginning of the lawsuit, a "special motion" that requires the Plaintiff show concrete evidence proving each element of their claims.

The laws make sense, in theory. “The hallmark of a SLAPP suit is that it lacks merit, and is brought with the goals of obtaining an economic advantage over a citizen party by increasing the cost of litigation to the point that the citizen party’s case will be weakened or abandoned, and of deterring future litigation.” United States ex rel. Newsham v. Lockheed Missiles & Space Co., 190 F.3d 963, 972-73 (9th Cir.1999). The purpose of anti-SLAPP laws is to ensure the prompt dismissal of “legally meritless suits filed in order to obtain a political or economic advantage over the defendant, not to vindicate a legally cognizable right of the plaintiff.” Condit v. Nat’l Enquirer, Inc., 248 F. Supp. 2d 945, 952 (E.D. Cal. 2002)(internal quotation omitted). “The paradigm SLAPP suit is an action filed by a land developer against environmental activists or objecting neighbors of the proposed development.” Id.

All well and good. Indeed, anti-SLAPP Acts are sometimes used to dismiss bogus suits in which one side really was trying "to obtain a political or economic advantage" over someone with inadequate resources to defend themselves. See Melius v. Keiffer, 980 So. 2d 167, 170 (La. Ct. App. 2008)(granting motion to strike complaint brought by owners of a bar against area resident who had opposed an expansion of the bar); Lamz v. Wells, 938 So. 2d 792, 794 (La. Ct. App. 2006)(dismissing case filed one week before election by one judicial candidate against another); Darden v. Smith, 879 So. 2d 390, 393 (La. Ct. App. 2004)(dismissing case filed by public official against individual who filed a complaint with the Louisiana Board of Ethics).

Goldman gives his own example where an anti-SLAPP motion allowed a party with limited legal resources to avoid the cost and burden of full-fledged litigation:

All too often, vendors use actual or threatened litigation to take down content that criticizes their offerings. The proposed federal anti-SLAPP law applies to those lawsuits. Thus, if enacted, the federal anti-SLAPP law will help consumers share their true feeling about marketplace offerings with less fear of meritless lawsuits from vendors who would rather fight in court than compete.

BoingBoing’s recent resolution of a lawsuit brought by MagicJack nicely illustrates the virtues of anti-SLAPP laws. BoingBoing blogged some criticisms of MagicJack’s offerings, and MagicJack unwisely responded to that post with a lawsuit. Fortunately for BoingBoing, MagicJack sued it in California, which has a robust anti-SLAPP law. As a result, BoingBoing was able to end the lawsuit early (BoingBoing won its anti-SLAPP motion less than 3 months from complaint filing) and get the court to order MagicJack to pay its attorneys’ fees of over $50k.

But it's not always David using anti-SLAPP laws against Goliath; it's often the other way around.

Consider the BoingBoing case. Let's assume that, instead of suing BoingBoing, MagicJack retaliated by secretly hiring a spam company to inundate BoingBoing and other widely-read blogs with hostile comments questioning BoingBoing's motives and favorably referring to MagicJack.

BoingBoing, having no other options, sues MagicJack.

Would those allegations show MagicJack's "acts" were "in furtherance of the right of free speech?" Sure; MagicJack has just as much a right as BoingBoing to talk about other companies. So the anti-SLAPP Act would be available.*

At the beginning of the case, then, BoingBoing would be required to prove — prior to conducting any discovery, since HR 4364 automatically stays all discovery — that MagicJack was behind the posts, that the posts were false, that the posts were capable of a defamatory meaning, and that MagicJack was at "fault" in publishing the comments (defined in many states as "acting with malice or reckless intent").

How could BoingBoing prove all that immediately after filing suit? Most of that information would be in MagicJack's possession.

Odds are, BoingBoing wouldn't be able to do it. Their case would be dismissed, and MagicJack could continue to harass BoingBoing at will.

The law of unintended consequences, as they say.

Put simply, the problem with HR 4364 is that it's an extraordinarily powerful device — one that substantially increases the costs of bringing meritorious cases and will undoubtedly result in the inadvertent dismissal of many meritorious cases — with few limitations on its use.

Often the only means that "David" has to challenge "Goliath" is through a lawsuit, like when ordinary individuals are powerless to repair the damage caused by sloppy or sensationalized journalism. Yet, if Goliath wants to use the Act to dismiss David's lawsuit, he can and will.

- - -

* Don't think that the "commercial speech" clause in HR 4364 would help remove the case from the Anti-SLAPP law. As a defendant in one of my cases argued, and as MagicJack would argue:

There is no authority for [plaintiff's] allegation at paragraph 81 of his complaint that “The defendants’ motives in writing and propagating the false allegations [...] are economic; therefore, this commercial speech does not qualify for the heightened protections of the First Amendment.” See Compl. ¶ 81. To the contrary, the Supreme Court has squarely rejected it. See Bolger v. Youngs Drug Products Corp., 463 U.S. 60, 67 (1983) (“an economic motivation ... would clearly be insufficient by itself to turn the materials [in question] into commercial speech”); Joseph Burstyn, Inc. v. Wilson, 343 U.S. 495, 501-02 (1952) (“That books, newspapers, and magazines are published and sold for profit does not prevent them from being a form of expression whose liberty is safeguarded by the First Amendment.”); see also New Kids on the Block v. News America Publishing, Inc., 745 F.Supp. 1540, 1544 (C.D.Cal. 1990) (“A profit motive ... is irrelevant to the inquiry of whether the content of ... speech ... is ... commercial [or otherwise]”). In sum, there is no support for [plaintiff's] suggestion that the article is not entitled the fullest protections afforded by the First Amendment.

I don't agree with the above analysis, but that's just my opinion. A judge could just as easily agree with every word.

Live Interview from the Franchise Expo South - How to Fund Your Franchise

Tue, 09 Mar 2010 13:17:34 GMT

This installment of the New Jersey Legal Update podcast is an interview with Adam J. Siegelheim, member of Stark & Stark's Franchise group, and Larry Carnell, Vice President of Business Development for BeneTrends, Inc., at the International Franchise Association's 2010 Franchise Expo South in Miami, Florida.

Mr. Siegelheim and Mr. Carnell how to access capital in order to fund your franchise. Mr. Siegelheim and Mr. Carnell discuss the benefits of using your retirement fund as a way to fund your franchise.

You can download the full podcast here.

Antitrust Class Actions: Overdeterrence and Superority

Tue, 09 Mar 2010 12:32:29 GMT

Antitrust class actions can be tough cases for defendants. By their nature, cases against alleged monopolists lend themselves well to David-versus-Goliath rhetoric. But, just as difficult, a number of the fundamental questions in antitrust class actions can only be decided after a “battle of the experts” that costs a great deal of money and may alienate judges who – like many lawyers – went to law school because they didn’t like math. So how can defendants rein in meritless antitrust class actions?

Kelly Bozanic, a fellow at Penn State’s Dickinson School of Law, has written a working paper that offers one solution. Her main argument, which is not of much help to practitioners, is that the court should “rigorously consider” antitrust standing at the class-certification stage. Of course, a court already must rigorously consider all Rule 23(a) requirements before certifying a class. And it would seem clear that a plaintiff who lacks antitrust standing would be either an atypical or inadequate class representative. At minimum, she will be subject to the “unique defense” of lack of antitrust standing. (In fact, one would expect to see a number of pre-certification summary judgment motions on the issue of antitrust standing.)

But Bozanic’s argument suggests a more interesting point: a wrongful certification of an antitrust class (or even just certification of an overbroad class) could lead to overenforcement, which would chill otherwise competitive conduct. To the extent that is true (and demonstrable), a defendant may argue that the class action against it is not superior because it would chill legitimately competitive conduct. (There’s a related argument also worth making – where a government agency like the Department of Justice Antitrust Division or Federal Trade Commission has investigated possible antitrust violations, certifying a class on top of that enforcement may also be considered overdeterrence.) Of course, to make that argument clearly to the court, the defendant may need the help of one of those high-priced experts.

What Thomas' English Muffins Can Teach You About Non-Compete Agreements

Tue, 09 Mar 2010 12:24:03 GMT

A week or so ago, I came across a story in the legal press that reminded me of something I wish more of my clients would focus on: Non-Compete Agreements. The story was about a lawsuit filed against Chris Botticella, a former Senior VP of the company that owns Thomas’ English Muffins. It seems that Mr. Botticella had accepted a new position as a senior executive at Hostess, one of Thomas’ competitors in the baked goods space. Thomas’ sued to prevent him from taking the job, and won.

Why? Well, it seems that Botticella is one of only 7 people on the planet – yes, the planet – who knows the secret to how Thomas’ English Muffins are made. And Thomas’ certainly didn’t want him taking that knowledge to one of its biggest competitors. As a result of the court’s decision, my guess is that Botticella is going to have a tough time finding work as counter help at the corner bakery, much less as a senior executive at a large, national baked goods company.

How does a lawsuit over English Muffins relate to YOUR business? Simple: your people are your greatest asset, and, when they leave, potentially your greatest liability. They literally have the power to make or break your business. Every business guru will tell you this, but then you’re left to your own devices to figure out what it all means, and how to protect your business’ reliance on this sometimes unpredictable asset.

Perhaps the most important way you can protect your business’ customer accounts, secrets, processes, plans, and the like from traveling to a competitor after the defection of a key employee is to require key employees to sign a well-crafted Non-Compete or Non-Solicitation Agreement.

A Non-Compete or Non-Solicitation Agreement will prevent your best sales executive (you know, the one whose accounts resulted in 68% of your gross income last year) from leaving your company for a competitor, and taking her business with her to boot. Additionally, if you’ve got any proprietary systems or technologies, it’s imperative that you protect them. Your competitors will likely pay top dollar to lure away your key sales executive, information systems guy, CEO, or key manufacturing process employee. The loss of such an employee (and your competitor’s gain of that employee) will be felt where it hurts the most: your bottom line. Equally as important, they are enforceable. As recently as 5 weeks ago, Judge Richard D. Bennett of the United States District Court for the District of Maryland reaffirmed in TEKSystems, Inc. v. Bolton not only that a Non-Compete is enforceable if reasonable in scope, but also that it will be automatically extended for the period the employee is found to have been in breach.

Do you have employees whose loss would or could have a devastating effect on your revenues or your business? If you do, or even if you’re not sure, feel free to give me a call or shoot me an email and we’ll discuss it. I’ll be happy to answer your questions and point you in the right direction. Free of charge. And with no obligation. You can also read more about Non-Competition Agreements in our recently released Business Owner's Pocket Guide.

In the next entry, I’ll be writing about some of the important provisions a Non-Compete or Non-Solicitation Agreement should contain, and the real effects of these agreements. Stay tuned.

Other coverage of Coito v. Superior Court

thecomplexlitigator@leviant.net (H. Scott Leviant) — Tue, 09 Mar 2010 01:18:45 GMT

Coito v. Superior Court (March 4, 2010) is apparently generating a fair bit of interest, based upon the search engine traffic viewing this blog's post about this new opinion. Other articles that may be of interest include:

Witness Interviews Aren't Privileged Work Product, Says Calif. Court (National Law Journal
Court: Witness Statements Taken By Counsel Not Work Product (Metropolitan News-Enterprise)
Blog: California Appellate Report on Coito
Blog: The California Wage And Hour Blog For Employees on Coito
Blog: Cal Biz Lit on Coito
Blog: Legal Ethics Forum on Coito

More commentary will likely follow; this decision seems to have hit a nerve.

The IRS Again Loses In Attempt to Limit the Deductibility of LLC Losses

Tue, 09 Mar 2010 00:36:57 GMT

The Tax Court has again ruled against the Internal Revenue Service in a case on the deductibility of a member’s LLC losses. Newell v. Commissioner, T.C.M. 2010-23 (February 16, 2010). Last year I wrote about the three prior cases, here.

In these cases the IRS has taken the position that its regulations require a presumption that LLC losses are “passive activity losses” (passive losses). Under the regulations this presumption is difficult to overturn, so in many cases LLC losses are treated as passive losses. And for most taxpayers, passive losses are far less useful than active losses (losses not resulting from passive activities.) Taxpayers generally prefer to use losses to offset taxable income, but passive losses can only be used to offset income from other passive activities, and not against income such as wages, interest, and dividends.

This latest Tax Court ruling in Newell is consistent with the prior cases in its interpretation of the IRS’s regulations. The regulations create a presumption that losses incurred by a limited partner in a limited partnership are passive losses, and make it difficult to overcome the presumption. The IRS has taken the position that a member of an LLC should be treated like a limited partner of a limited partnership for purposes of the regulation. The courts, including the Tax Court last month in Newell, have rejected the IRS’s argument.

This latest case should give additional comfort to LLC members, that they should be able to use LLC losses to offset “active” income such as wages. LLC members will still need to demonstrate that they materially participate in the LLC’s management, but they will be able to use the more flexible rules of the IRS’s regulations, without the need to overcome the presumption against material participation.

The IRS could of course change these regulations to explicitly treat LLCs in the same way that limited partnerships are treated. Since LLCs are relatively new, the IRS may still be trying to figure out how to deal with them while limiting the potential for abuse.

TechWildcatters Applications Due March 19

info@ryanrobertslaw.com (Ryan Roberts) — Mon, 08 Mar 2010 22:45:06 GMT

TechWildcatters is a mentorship-driven microseed fund and startup accelerator in Dallas, Texas. Applications for the first 12-week accelerator “bootcamp” are due March 19. The selected startups will get up to $25,000 in seed funding, intensive top-notch mentorship, and the opportunity to pitch to angel investors, venture capitalists and corporate dev teams at their biannual “Demo [...]

TechWildcatters is a mentorship-driven microseed fund and startup accelerator in Dallas, Texas. Applications for the first 12-week accelerator “bootcamp” are due March 19.

The selected startups will get up to $25,000 in seed funding, intensive top-notch mentorship, and the opportunity to pitch to angel investors, venture capitalists and corporate dev teams at their biannual “Demo Day”.

Here’s the type of startups TechWildcatters is looking for:

-Applications: B2B Web/Enterprise 2.0, BI/data/analytics, gaming/simulation, etc.

-Technology: Web, SaaS, open source, data integration, middleware, etc.

-Customers: SMB through Fortune 500 (no consumer apps)

-Location: Come from anywhere, willing to locate to Dallas for the program

-Founders: Well-rounded founder teams >1 person, demonstrated understanding of entrepreneurship, relevant technical and business knowledge

-Capital: Needing seed capital to support living expenses while bootstrapping, can make efficient use of limited capital, would generally be planning on self/angel/customer financing as a next step coming out of the program

Apply to TechWildcatters here.