Matt Stokes – Page 8 – Robson and Robson

February 28, 2018November 2, 2020

Demystifying Individual and Derivative Claims in Closely-Held Company Disputes

Demystifying Individual and Derivative Claims in Closely Held Corporate Disputes

February 28, 2018

By Edward S. Robson

You represent a minority shareholder of a closely-held corporation and the company is having an off year. The majority shareholder is the sole member of the board and serves in every officer position. She draws significant compensation. Without a business justification, she unilaterally decides to double her salary and have the company pay the mortgage on her vacation home. Your client is the only other shareholder and likely the only person hurt by the majority shareholder’s self-declared raise. Although the minority shareholder suffers a clear injury, characterizing the injury as direct or derivative can have a significant impact on the outcome of the litigation.

Until recently, minority shareholders in closely-held companies could assert claims for breach of fiduciary duty and corporate waste directly against the majority owner. If the claimant was successful, a court could order the majority shareholder to disgorge the spoils of her behavior and pay them to the minority shareholder. This type of direct recovery is no longer permissible. Since 2014, Pennsylvania courts have made clear that claims arising from breach of the duties owed to a corporation, even a closely-held one, belong to the corporation and must be asserted on a derivative basis. This requirement creates procedural and substantive complexities when compared to direct claims. Bringing such claims requires strategic and creative analysis and careful attention to detail.

Without a shareholder’s agreement, minority shareholders are largely at the mercy of the majority shareholder. Minority shareholders have no formal ability to direct how the company spends money, compensates employees or hires vendors. Some majority owners use their power to disadvantage the minority shareholder by excessively compensating themselves or causing the corporation to contract with vendors affiliated with the majority on unfair terms. Although the minority shareholder is the party ultimately damaged by this behavior, the Pennsylvania Business Corporation Law (“BCL”) makes clear that “[t]he duty of the board of directors … is solely to the business corporation … and may not be enforced directly by a shareholder.” To obtain redress for the majority shareholder’s misconduct, the minority shareholder is therefore required to assert their claims on a derivative basis on behalf of the corporation.

Notwithstanding the language of the BCL, Pennsylvania courts previously allowed minority shareholders to directly assert claims arising from a majority owner’s breach of the duties owed to the company and without the need for the formality of a derivative action. The impetus for this flexibility was dicta contained in a footnote in a case not involving a closely-held corporation. In Cuker v. Mikalauskas, 692 A.2d 1042, 1049, n. 5 (Pa. 1997), the Supreme Court relied heavily on the American Law Institute’s Principles of Corporate Governance: Analysis and Recommendations (“ALI Principals”) and offered its resounding endorsement of the publication generally. It emphasized the interlocking character of the provisions of the ALI Principals and invited the lower courts to apply them to the extent consistent with Pennsylvania law.

Pennsylvania trial courts accepted the Court’s invitation in the context of closely-held corporations. Section 7.01(d) of the ALI Principals recognizes that the traditional justifications for requiring derivative claims may be less persuasive in the closely-held company setting and gives courts discretion to relax the requirement in certain circumstances:

In the case of a closely held corporation, the court in its discretion may treat an action raising derivative claims as a direct action, exempt it from those restrictions and defenses applicable only to derivative actions, and order an individual recovery, if it finds that to do so will not (i) unfairly expose the corporation or the defendants to a multiplicity of actions, (ii) materially prejudice the interests of creditors of the corporation, or (iii) interfere with a fair distribution of the recovery among all interested persons.

Trial courts, notably the First Judicial District’s Commerce Program, adopted both the substantive and procedural aspects of Section 7.01(d). They allowed individual recovery to plaintiff shareholders, rather than to the corporation. Adoption of Section 7.01(d) also gave the courts discretion to reduce the procedural hurdles attendant to a derivative suit, such as the requirement that the minority shareholder formally demand that the corporation’s board sue the majority shareholder prior to the minority shareholder filing suit.

In 2014, the Superior Court reversed this trend when it expressly rejected application of the substantive aspects 7.01(d) as inconsistent with Pennsylvania law. Hill v. Ofalt, 85 A.3d 540, 556 (Pa. Super. Ct. 2014). Although the Superior Court left open the possibility that the Supreme Court might adopt the procedural aspects of Section 7.01(d), it rejected the notion that trial courts may “simply ignore the corporate form and … treat an action raising derivative claims as a direct action and order an individual recovery.” Id. (internal quotation and ellipsis omitted).

The post-Hill regime requires attorneys representing minority shareholders to look for opportunities to assert direct claims in lieu of derivative claims. The same facts that support a derivative claim may also be the basis of a direct claim. This is particularly common when the minority shareholder is involved in the operation of the business. For example, claims arising from the wrongful termination of a minority shareholder’s employment may form the basis of a direct claim on behalf of the minority shareholder, as well as a derivative claim against the majority shareholder for the breach of duty of care owed to the company.

Shareholder oppression claims are direct claims and may provide a viable method for a minority shareholder to obtain an individual recovery. Pennsylvania has long recognized that a majority shareholder has a quasi-fiduciary duty not to use their power in such a way as to exclude the minority shareholder from the “benefits accruing from the enterprise.” Carefully structured, a shareholder oppression claim can often address the same conduct that a court might otherwise classify as giving rise to a derivative claim. A claim that a majority shareholder increased their compensation to a level that leaves no profits available to be distributed to shareholders is likely a direct shareholder oppression claim. It may also be a derivative claim if the compensation is excessive by objective measure.

Fraud claims against majority shareholders may also be asserted directly if they arise from a misrepresentation made to the minority shareholder. The misrepresentation, however, must not be related to malfeasance in relation to the company. For example, misrepresenting the financial status of the business to induce a minority shareholder to invest additional capital that is subsequently lost is likely a direct claim. Falsely representing the terms of the majority shareholder’s excessive compensation is likely derivative because it is so closely related to the breach of the majority’s duty owed to the company itself.

When developing claims, keep in mind that counsel’s labeling of claims in pleadings as direct or derivative is not dispositive. Courts look to the substance of the allegations to determine the nature of the wrong.

The distinction between direct and derivative claims presents a variety of challenges in the context of closely-held business disputes. Recognizing the issue at that outset of the litigation and developing theories for asserting direct claims is critical to the successful representation of the minority shareholder.

Edward S. Robson is the managing shareholder of Robson & Robson P.C. and focuses his practice on litigation arising from commercial transactions, disputes among business owners, unfair competition and mergers and acquisitions. He has written and taught on a variety of topics affecting closely-held businesses. Mr. Robson can be reached at 610.825.3009 or [email protected].

January 11, 2018November 2, 2020

5 New Year’s Resolutions For Family Businesses

January 11, 2018

“The worst form of inequality is to try to make unequal things equal.” -Aristotle

Aristotle got it right. Some things were not meant to be equal. One quarterback should call the play. One physician should determine the treatment. And one person should steer the ship. Sometimes egalitarianism leads to impasse, confusion and even disaster. Yet, every month enthusiastic clients ask for assistance in setting up new businesses. The conversation goes something like this: “My partner and I have a great idea for a business! We want to form a company! We want to split everything 50/50!”

There is a certain appeal in a 50/50 ownership split. An equal split means “we share the risks, we share the rewards and we’re in this together!” Splitting equity equally suggests obvious analogies to a marriage and – like marriages – creates the expectation that the business arrangement is “until death do us part.” Dividing ownership interests equally also avoids awkward conversations about the value of each partner’s contribution and the compatibility of individual goals.

Unfortunately, as in marriages, some business ventures do not work out. Management styles may clash and the business may outgrow the talents of its founders. Partners may pursue divergent personal and professional goals. One partner may be in search of a “lifestyle” business – a business that is essentially a life time job – while the other may be a “serial entrepreneur” intent on starting-up and selling out. In the most extreme examples, a business owner may find his or herself partnering with an irrational or self-interested owner, who puts his own needs ahead of the demands of the business.

Any Decision is Better than None

When managerial control is evenly divided between owners, there generally must be unanimous agreement before the business can act. In the case of strategic decisions such as entering a new market, hiring a high level executive, or borrowing money, the need for unanimity may result in stalemate. Disagreements over strategic decisions may well reflect good faith differences of opinion in how the business should operate. At worst, however, a disgruntled fifty percent owner can use the veto power to exact concessions from a co-owner that have little to do with business strategy. An owner who is piqued at a partner can refuse to pay employee wages, vendors or company debts unless the other owner accedes to his or her demands. An owner with signing authority at a bank can abscond or move money out of the other partner’s reach. Feuding owners that give conflicting directives to employees makes for a particularly toxic work environment. Employees may be forced to “choose sides” or decide to look for new jobs.

Once the internal dissension becomes public, third parties may decide to take a defensive posture to avoid being “caught in the middle.” Banks, payroll companies and other vendors may refuse to act without the authorization of both owners. The process can be cumbersome, frustrating and damaging to the business. Customers may be reluctant to make further commitments to an entity whose days seem numbered. Over time, the inability to reach any decision might be more damaging than implementing the “wrong” decision.

But Our Operating Agreement Says That…

There are a variety of devices that can be included in operating agreements and other organizational documents to help reduce the perils of 50/50 ownership. While such provisions offer some relief, they are not a panacea.

Many operating agreements contain “shoot out” provisions. Such provisions allow an owner to offer to purchase the other partner’s interests at a formula price or at a price determined by the offeror. In the event the offer is rejected, the situation is reversed: the other partner is required to purchase the offering partner’s interests for the same amount. While such provisions may offer an opportunity for “uncoupling” incompatible partners, there may be practical limits to their efficacy. A purchasing owner must have the financial resources to complete the buyout. Privately-held businesses may be difficult to value and may not be able to attract third-party financing. Borrowing to fund the buy-out may also weaken the company’s financial posture and potentially trigger defaults with existing bank loans.

Even if an owner is successful in selling his fifty percent interest to the other owner, there may still be continuing obligations to the business. The sale of his or her interest will not extinguish an owner’s obligations under a personal guarantee. Third party creditors may have no incentive to release a departing owner from his guarantee obligations to the business.

When amicable negotiation fails to resolve 50/50 disputes, the parties frequently litigate. Unfortunately many county courts are unfamiliar with shareholder disputes. Some courts deal with fewer than a dozen commercial cases each year. As a result, the tendency of the court is to act slowly and cautiously, which can prolong the often daily combat between owners and frustrate normal business operations.

The Takeaway

When considering a 50/50 split, understand that a dispute between the owners can have a crippling effect on the business that cannot be wholly mitigated by dispute resolution techniques. While there are many ways of starting the discussion about equity distribution, one approach is to identify and weight key attributes necessary for business success and then evaluate each partner against such attributes. While such percentage weightings are not necessarily dispositive of equity ownership, they offer an objective approach to discussing roles and responsibilities. Such an exercise may also highlight talent “gaps” which must be filled for the venture to be successful. Allocating a percentage of ownership for future managers and deciding how that will affect the existing owners may make recruiting of high level talent easier and more efficient.

Frank, honest conversations at the beginning of a venture can build trust and lay the foundation for effective collaboration. Recognizing differences in talents, resources, management styles and commitment can lead to proportionate – and appropriate – equity distribution. In a business venture, the greatest inequality really is the effort to make unequal things equal.

November 3, 2017November 2, 2020

Good Deeds Punished? The Legal Risks of Employee Community Service

November 3, 2017

With the holidays just around the corner, employers are busy planning their company-wide charitable initiatives. To support their employees’ commitment to community welfare, many employers match employee donations to charitable or educational institutions and publicize volunteer opportunities. Some organizations, however, are making a shift to a new way of corporate giving that percolates from the bottom up: encouraging employees to “get involved” through contributions of time and talent.

More companies are creating Employee Volunteer Programs (EVP), continuous, managed efforts that allow employees the opportunity for hands-on service to the community. Employer programs are varied and innovative. Companies frequently contribute by getting the word out through community outreach that pairs organizations with employee volunteers who have particular skill sets and interests. While some employers provide paid time off for employees who volunteer, others simply permit employees to volunteer during working hours or facilitate participation in charitable enterprises during non-working hours. This kind of volunteerism has many proven benefits including increasing employee satisfaction, enhancing community perceptions of the employer and providing tangible benefits to the larger community.

Despite good intentions, these “good deeds” come with the risk of liability under the Fair Labor Standards Act (“FLSA”) if not properly managed. The FLSA is the federal law that governs the calculation and payment of wages. In some instances, time spent by employees in charitable activities may be considered as compensable time under the FLSA, requiring the employer to pay wages and even overtime to employees for time spent volunteering.

The FLSA does not require employers to pay employees for time spent volunteering for religious, charitable, civic, humanitarian, or similar non-profit organizations when such participation is truly voluntary. However, when charitable events or participation becomes intertwined with company activities, questions arise as to whether an employee may really decline to participate. Because of disparities in bargaining power, employees may feel pressure by employers to engage in charitable activities. Such pressure may even be overt. For example, a directive to all employees to participate in a “community day of service” – without any opportunity for an employee to opt out – suggests that participation is not voluntary. Subtle employer pressure – such as reassignment to undesirable tasks for non-participants during the time when others are volunteering – also raises issues.

Time spent working at the employer’s request, or under its direction or control, or for a charity related to the company or the company’s owner, is considered work time. The Department of Labor takes the position that when, at the behest of the employer, employees volunteer to do the same type of work that they perform as part of their normal work duties, the volunteer work must be included in the employees’ hours worked calculations.

Awards for FLSA violations generally include fee shifting. Consequently, an employer who runs afoul of the FLSA will be required to pay the employee’s legal fees. Even if the unpaid wages are small, the imposition of attorneys’ fees could result in a significant liability for an employer.

The Takeaway

The key to avoiding FLSA liability is to ensure that employee participation is voluntary and to avoid any perception that an employee will be penalized if he or she fails to participate. It should be clear that the employees are volunteering their time to the third-party organization directly, not to the company itself. Employees volunteering in a capacity similar to their paid work—for example, an accounting firm encouraging its accountants to provide accounting services for a charity—is particularly problematic.

Observing the following guidelines may reduce risk of an FLSA violation:

The charitable organization must be separate from the business and unrelated in a significant way to the business owners
The charitable event does not result in direct economic benefit to the business
The time spent at the organization or event is outside of regular working hours
The company notices about a volunteer event or opportunity include a statement that the employees are not required to attend or participate
Supervisors are not allowed to direct or control their employees’ participation
Employees who choose not to participate in the event are not treated differently than employees who choose to participate

Utilizing these approaches may help to avoid FLSA liability or minimize liability if a claim does arise. We all want to start the holiday season on the right foot, and a methodical, cautious approach may be the only way that the good deeds of the employees do not result in repercussions for the employer.

August 16, 2017April 17, 2019

Location, Location, Location: Mr. Nutterbutter loses home court advantage!

August 16, 2017

Mr. Nutterbutter, of course, is a giant, talking squirrel, and sidekick of acerbic late night comedian, John Oliver. Mr. Nutterbutter and friends, John Oliver, HBO and Time Warner, Inc., were recently handed a legal defeat when a federal court in West Virginia refused a request to allow a lawsuit, based in part on Mr. Nutterbutter’s comments, to proceed in federal court.

The kerfuffle began when Bob Murray, CEO of Ohio based Murray Energy Corporation, was upset – very upset – with his portrayal in the June 18 segment of John Oliver’s Last Week Tonight. During the show, political comedian John Oliver took aim at Murray and other coal company executives for their opposition to coal safety regulations and for their treatment of coal miners.

Oliver’s criticism was not limited to the Murray Energy Company. He criticized Murray personally, referring to him as a “geriatric Dr. Evil.” He also took Murray to task for claiming that an accident at Murray Energy’s Utah mine which resulted in nine fatalities, was the result of an earthquake. Oliver disputed Murray’s explanation, citing a Congressional investigation that had no evidence of a geological event.

Mr. Murray’s ire was increased when Oliver recounted the actions of two Murray Energy employees who returned bonus checks. One employee returned a check for $11.58 after signing it “Kiss my ass, Bob” while another returned a check for $3.22 after signing it “Eat shit, Bob.” Mr. Nutterbutter, the human size squirrel, endorsed the employees’ actions by offering Mr. Murray a check for “3 acorns and 18 cents…made out to Eat Shit, Bob, memo Kiss My Ass.”

Apparently Mr. Murray had anticipated his harsh treatment at the hands of Mr. Nutterbutter and John Oliver. Prior to air, Murray’s attorneys sent a cease and desist letter to Last Week Tonight, threatening legal action. The communication was not an idle threat. Over the past fifteen years, Mr. Murray was not shy about asserting his legal rights, suing local reporters, environmental activists and media outlets.

Undeterred by Mr. Murray’s letter or willingness to litigate, the show aired, with both John Oliver and Mr. Nutterbutter acknowledging the risk of a lawsuit.

Murray made good on his threat: he filed an action in state court in West Virginia against Oliver, HBO, and Time Warner, claiming defamation, invasion of privacy and intentional infliction of emotional distress. Describing the nature of his distress, Murray’s complaint states that the broadcast upset him more than anything else ever had (which presumably includes the deaths of the nine employees killed in one of his mines).

The case attracted the attention of the American Civil Liberties Union (“ACLU”) which filed an amicus brief – which was almost as entertaining as the original on behalf of Mr. Nutterbutter.

Unfortunately for Mr. Nutterbutter and his friends, the plaintiffs seem to have won the first round by defeating a motion by the defendants to remove the action to federal court. This means that the action will be tried in West Virginia state court. Mr. Murray further demonstrated his willingness to play hardball by filing an unusual motion seeking to disqualify the ACLU’s amicus brief. Mr. Murray’s lawyers argued that that Oliver’s previous on-air support of the ACLU and his fundraising, biased the ACLU on Oliver’s behalf and created a potential financial interest of the ACLU in the outcome.

While the foregoing may seem like pointless procedural wrangling, with little to do with whether Mr. Murray has suffered any injury, knowledgeable litigators know that such actions represent strategic decisions which can have an enormous impact on the outcome of the case.

As in real estate, the “location” where a law suit is filed is important. There is significant variation among states and between the federal and state courts. These differences can be an advantage for one party or an additional hurdle for the other. Each state has its own laws of civil procedure and evidence which determine how a case will proceed and how it will be decided. For example, a twelve person jury is not always required in state civil trials. States allow juries of as few as six members and do not always require a unanimous decision in non-criminal proceedings.

State court dockets may impact how long it takes to bring a case to trial while state rules of evidence determine what evidence is presented to a jury. Many states, including Pennsylvania, elect judges who may potentially be subject to real or imagined political pressure from one of the parties. And, as in sports, there is also a real “home-team advantage” in litigation. Juries and judges may be unconsciously biased in favor of a person or company that is or has been a significant benefactor of a community, or who is simply more “relatable” than an anonymous, out-of-state party.

In addition to procedural laws, each state has it own substantive version of torts such as defamation, intentional infliction of emotional distress and invasion of privacy. While the core elements of each of these claims are similar from state to state, there are differences which can be significant. For example, the interpretation of some state versions of these torts may make it extremely difficult to secure an award of punitive damages, while other states are more willing to impose damages unrelated to any economic detriment.

The posture of the parties may also make a difference. Media defendants claiming First Amendment protections have not fared as well in state courts as in the federal court system. In a recent case, Hulk Hogan sued Gawker,[1] an on-line entertainment news outlet, for invasion of privacy. Despite Gawker’s status as a member of the media, a Florida jury awarded Hogan $115 million in compensatory damages and $25 million in punitive damages. Contrast this with the famous Hustler case of 1988,[2] in which evangelical and political leader Jerry Falwell, was parodied in a satiric article. The Supreme Court ruled in favor of Hustler, and limited the ability of a public figure to recover against a media outlet for a comic portrayal. While every case, particularly those involving defamation, depend on the exact words utilized, the accuracy of the comment, and the manner in which a reasonable person might interpret such language, it is undeniable that the forum for litigation can have a significant impact on the outcome.

While basketball teams – and squirrels – can certainly overcome the challenges of not having a home court advantage, it is not without effort and the assistance of able counsel. But all is not lost. Mr. Nutterbutter may have other friends willing to file amicus briefs on his behalf. It is rumored that noted commentator, Triumph, the insult dog, is considering a brief in support of Mr. Nutterbutter. Whatever the outcome, the litigation promises to be at least as entertaining as the segment that gave rise to it all. Nuts to you, Mr. Nutterbutter!

June 13, 2017November 2, 2020

Saving Face: How to Protect Your Online Reputation

June 13, 2017

"It takes 20 years to build a reputation...and 5 minutes to ruin it."
Warren Buffet

Reputation – a difficult term to define. It is an amalgamation of social perceptions, subliminal impressions, skills, branding, word-of-mouth and first hand experiences. For businesses, reputation is an essential and irreplaceable asset. It is among the first considerations in trust building. It is frequently the basis of customer decisions and it can attract – or repel – talented employees. Once damaged, reputations can be difficult to repair. Second chances can be rare, if they come at all.

Reputational damage is always painful but it is especially so when the injury is the result of false or unfounded statements by customers, disgruntled employees, unethical competitors or persons with a grievance against the owners. The proliferation of social media, review sites and blogs magnifies the impact of any negative comments: there is little likelihood of criticism going unnoticed.

Compounding the problem is the tendency of people to remember negative events more than positive ones and to use stronger words to describe them. The title of one article on the subject says it all, “Bad is Stronger than Good.”[1] In practical terms, it takes many more positive reviews or interactions to mitigate negative ones. Warren Buffet was right.

When reputational injury does occur, reputational marketing experts have an extensive toolkit, ranging from establishing or enhancing a positive on-line presence to a total re-branding including changes to the company name and intellectual property. Such repairs are costly. Moreover, they do nothing to deter or temper the behavior of vicious and vindictive posters. Such bad actors are free to post and repost, generally diluting the impact of marketing dollars spent to repair the damage. Such cases may require more than reputational repair; they may require legal action to recover the funds necessary to undo the damage and to ensure that the poster does not continue a campaign of vilification.

Actions against the Poster

Laws protecting business and personal reputations originated in an era of print media. Nonetheless claims for defamation continue to be among the most common claims brought by plaintiffs against internet detractors. Defamation occurs when a person or business publishes a false, derogatory statement about another person or business that causes injury. When such statements are in writing or posted to the internet, they are termed “libel.”

While defamation law varies somewhat from state to state, plaintiffs seeking to establish a claim must prove that (i) a defendant made a statement about the plaintiff; (ii) the statement was false; (iii) the defendant knew the statement was false or was negligent in ascertaining the truth of the statement at the time that it was posted; (iv) the statement was “published” – i.e. was disseminated to others besides the defendant and the plaintiff; and (v) the plaintiff suffered an injury because of the false statement. In those cases where a plaintiff is a “public official” or a “public figure,” he must be able to prove that defendant made the statement with reckless disregard for whether or not it was true.

In addition to defamation, plaintiffs seeking damages for injury to their reputation caused by on-line posts have brought successful claims based on the tort of “false light.” Although similar to defamation, there are several differences that make false light a distinctive tort. Unlike defamation in which the requirement of publication can be established if the falsehood is disseminated to even a single party – as for example a customer – false light requires wider dissemination to be actionable. While both defamation and false light require the posted statement be false, false light also requires that the statement be “highly offensive to a reasonable person.”[2] Innocent misstatements are not generally actionable. Plaintiff must be able to demonstrate that the defendant was at fault when he caused the false impression, either because the poster knew the statement was false or acted with “reckless disregard” for its truth or falsity.

Action Against Subsequent Posters

The practice of “re-tweeting” information and of citing web sources and blogs can compound the reputational damage of the original post. The regurgitation of defamatory material creates a virtual “whack a mole” where the injured party successfully requires the poster to remove offensive material – only to have it to “pop-up” at another site.

Individuals who disseminate information that proves to be false are not protected from liability simply because they did not generate the original post. A plaintiff must prove all of the same elements required to establish defamation or false light in order to successfully make a claim against subsequent posters. Frequently, however, the threat of tort litigation can be sufficient to encourage such posters to take down offending material, thereby reducing reputational damage to the plaintiff.

Action Against Internet Service Providers (ISP)

Internet service providers enjoy broad protection against claims for libel and false light under provisions of the Communications Decency Act (CDA)[3] Unlike other media sources, an ISP is not liable for the defamatory materials that may be posted on its site by third parties. Section 230 of the CDA is clear: “No provider or user of an interactive computer service shall be treated as the publisher or speaker of any information provided by another information content provider.”[4]

Section 230 grants immunity to the ISP so long as the posted content has been created primarily by third parties.[5] Internet service providers lose their immunity when the ISP is itself a content provider. Whether an internet service provider is also a content developer is a particularized inquiry, depending on the structure of the website and the manner in which the website allows access. [6]

For an ISP, the operative rule appears to be “ignorance is bliss.” Although internet service providers are not responsible for the libelous statements of third party posters, they can be held liable as distributors of libelous information if they know, or have reason to know, of its defamatory content.[7] To avoid such potential liabilities, internet service providers are frequently willing to take down material from their sites once they have been advised by a plaintiff of the libelous nature of such material.

Act Quickly To Seek Professional Advice

Legal options to reduce or repair reputational damage are multi-layered, complex – and require quick responses. Most states, including Pennsylvania and New Jersey – have a one year statute of limitations on defamation and libel actions. Absent extraordinary circumstances, this requires plaintiffs to file an action within twelve months of the posting of the material – no matter when it was discovered. Individuals or businesses that have been injured by false, disparaging claims should contact counsel as quickly as possible to determine their legal options. The first step toward repairing a reputation may be defending it.

[1] Roy F. Baumeister & Ellen Bratslavsky et al., Bad is Stronger than Good, 5 Rev. Gen’l Psych. 323 (2001).

[2] See e.g. Larsen v. Philadelphia Newspapers, Inc., 543 A. 2d 1181, 1188 (Pa. Super. Ct., 1988).

[3] 47 U.S. C. §230(c)(1), (f)(3).

[4] 47 U.S.C. §230(c)(1).

[5] Courts have held, however, that the act of selecting third party materials or minor editing of such information was not sufficient to lose the immunity of the DCA. See e.g., Batzel v. Smith, 333 F.3d 1018 (2003) (act of selecting material for internet site insufficient to void the immunity of the CDA); Donato v. Moldow, 865 (A.2d 711 (N. J. Super. Ct. 2005)(minor editing of comments and providing tips on posting insufficient to void the immunity of the CDA).

[6] See e.g., Fair Hous. Council of San Fernando Valley v. Roomates.Com LLC, 521 F.3e 1157 (9th Cir. 2008)(holding that pre-populated drop down menu was sufficient to make made defendant a content provider for purposes of the CDA).

[7] Cubby, Inc. v. CompuServe, Inc., 776 F. Suppl. 135 (1995).

May 9, 2017November 2, 2020

A Practical Guide to the ‘Nastygram’ — Best Practices for ‘Conflict’ Emails

A Practical Guide to the "Nastygram": Best Practices for "Conflict" Emails

May 9, 2017

We spend hours each week writing letters accusing people of breaching their obligations, defending our clients against the accusations of others and telling other lawyers to “pound sand” when they are not being reasonable. We affectionately refer to these communications as “nastygrams.”

You have probably written a few yourself. There are often several volleys of emails exchanged in a typical business dispute before any lawyer is ever involved. Since these emails can affect the trajectory of a dispute and its eventual resolution, we encourage our clients to contact us early when a dispute crops up. But the ideal is not always feasible. Here are a few of our best practices for your “conflict” communications:

Include Context

No one wants their emails taken out of context; so include the context. It can be tedious but it’s important. For example, you sell 10,000 widgets to a customer but 5,000 are broken. You call the furious customer and agree that if the customer does not sue you, you will give them a significant discount on their next order. After the call, you write a brief email: “I am sorry about the broken widgets and I am looking forward to putting this behind us.” Although you give the discount on the next order, the customer sues you anyway and claims that your email admits liability. A better email would have been: “This will confirm our agreement that you agree to forego taking any action against us because of the broken widgets and we will give you a 50% discount on your next order. I am looking forward to putting this behind us and hope to have a mutually beneficial relationship going forward.”

Write Your Emails To The Judge.

If a small dispute turns into a large one, a number of people are going to look at and make decisions based on your conflict emails. Opposing counsel will review them. You may be questioned about them during a deposition. A judge may make decisions based on their content.

When you write conflict emails, pretend you are writing them to a judge. Stick to the facts and leave out emotional invective. Absolutely no profanity or personal attacks. Try to stay away from technical jargon, use plain language instead. Why? Because these things make you look horrible in front of a judge!

Don’t Admit Things If They Are Not True.

Some people treat the resolution of a business dispute-particularly one involving a customer-like making up with a boyfriend or girlfriend after a fight. There is a tendency for both sides to say, “I was wrong to.” It allows the other person to avoid the full blame for the dispute and can smooth the way to reconciliation.

Resolving a business dispute is different. Do not admit wrongdoing unless you are sure you have done something wrong. Your admission can haunt you. You do not have to be cantankerous with the other party by blaming them for the dispute but if you do not believe you are at fault say so. Something like “I disagree that our company is at fault but we value this relationship and want to move forward amicably” will usually do the trick.

Do You Really Want To Put That In An Email?

Before firing off scathing emails, consider whether an email is the right way to communicate. We like email because it builds a permanent record of communication, including the exact time it was sent. Also, taking the time to write a thoughtful email can allow the sender to cool down and carefully consider the communication.

When improperly used however, emails can alienate the recipient, seeming more like an unrelieved monologue than a valuable interchange. Emails also lack the information that body language or tone of voice conveys. Language printed in an email may seem harsher than in a spoken conversation. Moreover, the “permanence” of email, which makes it a valuable recordkeeping device, also allows them to be easily forwarded to a wider audience or posted on social media.

Think carefully about how you choose to communicate. A phone call or an in person meeting can often de-escalate a situation and lead to a quicker resolution in a way that emails cannot.

What Do You Want To Happen?

Have a clear picture of what you want to accomplish with the communication. There are a variety of legitimate reasons for conflict emails but they usually fit into a few categories. You may be trying to build a record of what happened. You may need to correct someone else’s misstatement of events so that it does not appear you agree with them. You may want the other person to do or not do something.

If you do not have an easily articulated reason for writing an email or the reason is to punish someone, “vent” or generally “get something off your chest”, do not send it. Remember that not sending a communication can be a very effective strategy. Silence has its advantages. It conceals your position and your knowledge of the facts, possibly making it more difficult for the other party to interfere with your strategy. But be careful not to let silence look like acquiescence.

May 17, 2016October 4, 2019

A Good Reason to be Looking for a Fight

A Good reason to be looking for a fight

May 17, 2016

The mantra of many defendants is “I don’t have any money,” “you can’t squeeze blood from a stone” or “I’m judgment proof.” Sometimes they are right but sometimes they are just not looking hard enough.

Many defendants have fallen on hard times because of the actions of a third party. Someone refuses to pay the defendant and now the defendant can’t pay you. “Not my problem,” you say. The defendant should sue the third-party so he can pay me my money. But defendant doesn’t have any money to sue the third-party.

A depressing reality in litigation? Bad luck stacked on bad luck? Maybe not. We encourage our clients to view legal claim as assets. And just like any other asset, a claim can be bought, sold or traded. If a defendant cannot pay but has a lawsuit against a third party, the defendant can offer the claim in lieu of or in addition to a cash payment to the plaintiff.

Defendant transfers claim against third-party to plaintiff as settlement of plaintiff’s claim against defendant.

After a defendant conveys the claim against the third-party to the plaintiff, plaintiff steps into the shoes of defendant for the purposes of asserting the claim against the third party. This may be very appealing if the third party has the financial wherewithal to pay a judgment.

Before accepting a claim against a third-party to satisfy a judgment, there are some big questions to answer. How strong a claim does defendant have? Am I going to need defendant to cooperate in the litigation on an ongoing basis? Does the third party have any money to pay? Getting the answers to these questions requires detailed legal analysis and due diligence on the financial status of the target company.

“Oh that’s cool, I could build an entire business around buying and selling litigation” you say. Probably not. Champerty (pronounced CHampərtē) – scrabble players, your welcome – is the common law doctrine that prohibits a person with no previous interest in litigation from financing it and sharing in the proceeds. For a transaction to be champertous – scrabble players, again, your welcome – and, therefore, illegal, the party taking assignment of the claim must have no previous interest in the claim, must expend its own money to prosecute the claim and must be entitled to the proceeds of the claim. Courts have held a plaintiff in the position described above has an interest in a claim and does not present a champerty problem.

What’s the take away? Legal claims, whether for breach of contract, fraud, civil RICO or anything else, are assets that may have value. They are often overlooked and may present opportunities for you to exchange claims against judgment-proof defendants for claims against “deep pocket” parties.

October 21, 2015April 17, 2019

So we are becoming a Benefit Corporation…

So we are becoming a Benefit Corporation...

October 21, 2015

We have had a number of inquiries from clients and friends about becoming a benefit corporation or “B-Corp.” Can we do it? Does it make any sense to convert? Should we convert to benefit corporation or just try to get certified by B-Labs?

Our colleague Regina Robson is an expert in benefit corporation law and has published a number of articles on the subject. But talk is cheap. There is no better way to advise clients than to make ourselves the proverbial guinea pig and become a benefit corporation ourselves.

Becoming is benefit corporation is relatively simple as a legal matter but successfully integrating the sustainability and community value generating goals into an organization is a more holistic endeavor. Enter our friends at the Erivan K. Haub School of Business at Saint Joseph’s University, in particular, friend of the firm and all around good guy Professor Ron Dufresne, Ph.D. Dr. Dufresne focuses his teaching and research on applied sustainable leadership and has been generous enough to use our firm as the subject of his capstone Applied Leadership and Sustainability course. As part of the course, a group SJU business students will evaluate the firm’s practices and advise us on what we need to do to make the successful transition to B-Corporation land.

This will be the first in a series of posts mapping out the experience from beginning to end. Our goal is to set out a soup to nuts road map for other small and mid-sized organizations to make the transition to a benefit corporation.

Do we really need a warning to “consider the environment before printing this email” in our signature lines to become a B-corp? We will find out.

September 1, 2015April 18, 2019

“You have no idea how expensive it is to look this cheap” – Pennsylvania Uniform Fraudulent Transfer Act

September 1, 2015

Everyone loves a bargain and businesses and individuals that deal in distressed assets really love cheap stuff. But if it looks too good to be true, it might turn out to be very expensive. If you are considering purchasing the assets of a distressed business, you need to consider the implications of the Pennsylvania Uniform Fraudulent Transfer Act.

The typical situation involves a business with significant debts. Some creditors have initiated collection actions, others have threatened. The owners have decided to throw in the towel and want to salvage what value they can by selling the assets at “fire sale” prices to third parties. The purchaser completes the purchase only to be sued by creditors of the defunct company. The creditors claim that sale violated the Pennsylvania Uniform Fraudulent Transfer Act and want the purchaser to pay them the full value of the assets.

The Pennsylvania Uniform Fraudulent Transfer Act prohibits three types of transfers. First, it prohibits debtor from transferring assets “with actual intent to hinder, delay or defraud any creditor of the debtor.” In determining whether a debtor had such “actual intent,” courts look to a variety of factors and there is no bright line test for making such a determination. The factors include: (1) whether the transfer was made to an insider; (2) whether the debtor retained possession or control of the possession property after the transfer; (3) whether the transfer was concealed; (4) whether the debtor had been sued or threatened with a lawsuit at the time the transfer was made; (5) whether the transfer was of substantially all of the debtors assets; (6) whether the debtor absconded; (7) whether the debtor removed or concealed assets; (8) whether the value received for the assets was reasonably equivalent to the value of the assets; (9) whether the debtor was insolvent; (10) whether the transfer occurred shortly before or after a substantial debt was incurred; and (11) whether the purchaser of the assets subsequently transferred the assets to an insider of the debtor.

Second, the act prohibits a debtor from transferring assets [when] “without receiving a reasonably equivalent value in exchange for the transfer or obligation, and the debtor: (1) was engaged or was about to engage in a business or transaction for which the remaining assets of the debtor were unreasonably small in relation to the business or transaction; or (2) intended to incur, or believed or reasonably should have believed the debtor would have incurred, debts beyond the debtors ability to pay as they became due.” This provision, known as the “constructive fraud” prohibition, is somewhat better defined then the actual “actual intent” provision, in that receipt of “reasonably equivalent value” renders the debtor in compliance with the provision.

Third, “a transfer made [] by a debtor is fraudulent to a creditor whose claim arose before the transfer was made [] if the debtor made the transfer or incurred the obligation without receiving a reasonably equivalent value in exchange for the transfer [] and the debtor was insolvent at the time or the debtor became insolvent as a result of the transfer.”

Notice that a purchaser need not know that the seller is insolvent or engaging in duplicitous behavior to be liable for the seller’s debts. So what is a purchaser to do? If a deal seems too good to be true, some due diligence is in order. Why are the assets being sold? Do the public records indicate that the seller has judgments against it? Are all or substantially all of the assets of a company for sale? Are the assets encumbered by security interests?

If a transaction raises red flags, there are a number of strategies to reduce the risk but you cannot address unknown risk.

July 22, 2015April 18, 2019

Emergency Relief and Preliminary Injunctions

July 22, 2015

Some matters may require emergency action by a Court to prevent immediate harm. This is generally sought in the form of an injunction.

What is a preliminary injunction?

A preliminary injunction is a court order to do or not do something issued at the outset of litigation to prevent irreparable harm. It can take a number of forms and courts have broad discretion as to their scope. A party that violates a preliminary injunction may be subject to contempt of court and subject to the criminal and civil penalties that go along with it.

How do we obtain a preliminary injunction?

A request for a preliminary injunction will only be granted to prevent immediate and irreparable harm to a party. It is available when a party would be seriously harmed by waiting for the conclusion of litigation. For example, a party seeking to stop a company from dumping toxic waste in a river, would be likely to receive a preliminary injunction ordering the company to stop discharging waste during the pendency of litigation. If harm can be reversed by paying money, a preliminary injunction is not appropriate.

Although the party seeking an injunction must show a probability of success that they will prevail on their claims, the purpose of a preliminary injunction is not to determine who will ultimately win. It is meant to maintain the status quo during the pendency of litigation.

The party seeing an injunction is sometimes required to deposit money into the court or post a bond to cover any damage that may arise from the wrongful imposition of the injunction.

When can we get a preliminary injunction?

As the name suggests, a preliminary injunction can be obtained early in the litigation. Depending upon the nature of the injunction, a motion for an injunction may be made simultaneously with the filing of the claim and the court will often hold a hearing within several days. In some rare circumstances, a court may grant a preliminary injunction before the opposing party has any opportunity to respond.