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Client Q & A

Answers to common client questions.
Posted: March 23, 2015

Client Q&A: Should I sign a non-compete agreement? How will it be enforced?

Should I sign a non-compete agreement? How will it be enforced?

By Niall D. O’Murchadha

Non-compete agreements are a recurring issue faced by both employers and employees. These contractual provisions are often an issue of concern both when contracts are being negotiated and when such a provision may need to be enforced. So how do courts treat non-compete agreements?

Two Distinct Types Of Agreements

The most important thing to know about non-compete agreements is that the New York courts recognize a substantial distinction between employee non-compete agreements and business non-compete agreements. Non-compete agreements signed by employees as a condition of their employment are disfavored by the New York courts, and will only be enforced in limited circumstances. On the other hand, business non-competes—often accompanying the sale of a business in some form—are subject to far fewer restrictions.

Enforcement Of Employer-Employee Non-Compete Agreements Is Very Limited

Employee non-compete agreements are disfavored because by law, everyone has the right to pursue their chosen occupation. For this reason, overreaching employee non-compete agreements will not be enforced, or will only be enforced as limited by the courts.

Employee non-compete agreements must (a) be no greater than is required for the protection of the legitimate interests of the employer, (b) not impose undue hardship on the employee, and (c) not injure the public.

The principal limitation on enforcement arises from the fact that New York courts only recognize a very few “legitimate” employer interests worth of protection. The principal ones are protection against misappropriation of the employer’s trade secrets or confidential customer lists, protection from competition by a former employee whose services are unique or extraordinary, and preventing employees from exploiting client relationships and goodwill they acquired during the course of their employment.

And in practice, these exceptions are further limited. Confidential client lists must actually be confidential, and not known or publicly accessible to others with industry knowledge. Indeed, some courts have held that mere knowledge of employer confidences is insufficient for enforcement of a non-compete—the employer must show that confidential documents were misappropriated by the former employee. The “client goodwill” exception is also narrowly drawn. Although an employer is allowed to prevent a former employee from exploiting client relationships built during the course of his or her employment, that protection does not extend to the employee’s “personal” or pre-existing clients, nor to all of the employer’s clients, only to employer clients directly serviced by the former employee. And the protection only lasts for the time the employer needs to have a new employee build a relationship with the affected clients.

The non-compete must also be reasonable in time and area. This is a highly fact-specific inquiry that depends on the type of business the employer is in, the geographic area it services, and the nature of the services the employee provides. An employer that solicits customers across the country is in a very different position than a storefront—or, say, a doctor’s or accountant’s office—that serves a local or regional clientele.

Business Non-Compete Agreements Are Far More Easily Enforced

Because non-compete agreements between businesses (including agreements between franchisors and franchisees) do not give rise to the same concerns about fairness as employee non-compete agreements—courts presume that they are the product of arms-length negotiation and less likely to be exploitative or oppressive—they are far more readily enforced. A business non-compete must only be reasonable in scope, duration, and geographic area. Some courts also include a general requirement that they protect against unfair competition, others merely require the provisions be fair or reasonable. That inquiry is very fact specific, but in general, courts will uphold prohibitions lasting several years if they are limited by geographic area or reasonably focused on, for example, a business’ former clients.

Non-Compete Agreements Are Often Enforced By Preliminary Injunction

A very common first step in enforcing a non-compete is to move for a preliminary injunction. By forcing the party allegedly in breach to stop some or all competitive activities, a preliminary injunction can put great pressure on the adverse party and often force a favorable settlement. However, a successful preliminary injunction application requires very substantial evidentiary support—to prevail, the moving party must supply evidence to address every element to be proven. Schlam Stone & Dolan has extensive experience in preliminary injunction applications to enforce non-compete agreements, and can advise parties on the proof required.

Non-Compete Agreements Can Be Enforced In A Limited Fashion

Unlike most contract clauses, a non-compete agreement can be enforced as limited by a court—if some or all of the clause is overbroad, a court can reduce the scope of the clause to the extent permitted by law.

Issues To Consider When Negotiating Non-Compete Agreements

Although employee non-competes are hard to enforce, a subsequent employer may well not want to take the chance of violating these contracts. Therefore, if you want to move on and your prospective new employer asks if you are subject to a non-compete agreement, regardless of the overbreadth or enforceability of the agreement, many employers will not want to risk litigation if you fall within its scope as written. (An employer who hires an employee subject to a non-compete can itself be sued for tortious interference with contract.) For that reason, it is important that an employee non-compete is drawn as narrowly as possible when the contract is actually signed. An experienced attorney who is familiar with the restrictions on enforcement can be very helpful at this stage.

For any party that thinks it might want to enforce a non-compete, reasonableness is also important. Especially at the preliminary injunction stage, an attempt to get interim relief in support of a patently overbroad non-compete can backfire. Two very helpful clauses that can and should be included are (a) an irreparable harm clause, in which the parties agree that breach of the clause can irreparably injure the other party and that injunctive relief would be appropriate, and (b) a liquidated damages clause, in which the parties agree that money damages arising from breach of the non-compete would be difficult or impossible to quantify, and therefore the amount of damages can be stipulated in the contract. Both of these provisions are usually enforced, and can make obtaining an effective remedy much easier.

Non-compete agreements should be carefully negotiated, and the specific terms agreed upon can make a very big difference in the event of a future dispute. If you are drafting a non-compete agreement, or being asked to sign one, consult a lawyer. Similarly, and regardless of which side of the dispute you are on, litigations to enforce non-compete agreements are often won or lost at the beginning of the action, and experienced counsel can be vital in protecting your rights.

Posted: March 9, 2015

Client Q&A: Can we throw out our old files?

Can we throw out our old files?

By John M. Lundin

If you’ve been involved in a business-related lawsuit in the past fifteen years, you probably got the lecture about the importance of preserving evidence relating to the lawsuit and the negative consequences of failing to do so. It is not unheard of in big commercial litigations for the parties to spend as much time fighting over what evidence was preserved and disclosed as they spend on the merits of the their claims and defenses. At the same time, it can be both expensive and inconvenient to keep all your old files–whether in paper or electronic form. So what should you do?

The General Rule Regarding Preservation

Litigants must preserve evidence relevant to a pending or anticipated litigation. If they do not fulfill that obligation, and a court later finds that the lost evidence might have helped their adversary, they run the risk of being sanctioned by the court, including having their claims or defenses dismissed. It is, to put it mildly, a big deal.

The obligation to preserve evidence often arises before a lawsuit even starts. As soon as you should reasonably anticipate that a dispute will be litigated, you have to preserve evidence regarding it.

Your obligation to preserve evidence is a broad one, extending to information of every kind, including photographs, microfiche, charts, maps, drafts, records, memos, letters, handwritten notes, calendars, diaries, telephone messages (whether they exist in paper form or as electronically recorded or stored data), email, PowerPoint presentations, spreadsheets, data compilations, databases, voicemail or other materials stored on computers, and storage media such as CDs or flash drives.

If you run a business, it is important that you identify all individuals in your organization who might have potentially relevant evidence and make sure that they preserve that evidence as well. Because evidence preservation can become an issue in a lawsuit, it is better if you tell your employees to preserve evidence in writing, so you have proof you did so.

Your obligation to preserve evidence is a continuing one, including not just evidence created in the past but also newly-created evidence. It ends only when the dispute has been finally resolved.

The Importance of a Document Retention Policy

You get some measure of protection for having a document retention policy and following it, allowing you to show that documents were discarded or electronic files deleted as part of a routine, neutral and general file management policy rather than with the intention of destroying evidence. Still, regardless of your document retention policy, once you anticipate litigation, you must retain and preserve all documents relating to the dispute, even if it is not your normal business practice to do so. It is important that you suspend any automatic and routine destruction or alteration of electronically stored documents and related data, including any automatic deletion of emails, defragmentation programs or other software meant to clean up or otherwise modify hard drives or servers.

When in Doubt, Keep the File

One problem for litigants is that it is not always clear until too late that evidence is relevant to the lawsuit. So the best thing is to err on the side of preserving evidence. If you think something is in any way related to a legal dispute, save it. This can be a burden, but it is better than the consequences of a court deciding that you failed to preserve evidence and it hurt your opponent’s ability to prove its case. So, when in doubt about whether to save something, do so. And, when in doubt, ask your lawyer.

There likely are things that you can delete, particularly if you have a good business reason for doing so, such as the cost of storage, so long as there is no reasonable relationship between the evidence and the dispute. Often, there are ways to preserve evidence in cost-effective ways. We can help you with this.

How you preserve the evidence also is important. If the evidence is paper, you can store files you do not otherwise need separately, but keep them in the same file structure as they were kept in the usual course of business. For example, if your office files have a folder called “Invoices,” preserve your old files in a folder called “Invoices.”

If the files you are preserving are electronic, keep them in the same format. You can move them to a different storage location, such as a USB hard-drive or a DVD, but do not change the files in any way. If you have to edit a file as part of your ongoing business, copy the old file and preserve it and make your edits in a new file.

Conclusion

Preserving evidence can feel like one of life’s many thankless tasks. No one gives you credit if you do it and you can get in big trouble if you do not. But you need to do it. Failing to do so is not worth the risk. And it does have upsides. The obligation to preserve evidence exists so that you can meet your legal obligation to provide it to your opponent in discovery. But of course, it also means that the evidence is available to help you prove your case.

Navigating the ins-and-outs of the document preservation rules is part of what we do in every case. We can help you do so, too. One of the messages of this post is the importance of preserving evidence; a point we make strongly because of the potentially serious consequences of failing to do so. At the same time, preserving evidence usually is not that hard and does not take much effort, particularly with our help.

Posted: February 23, 2015

Client Q&A: But if I tell you everything, then you will tell the judge!

But if I tell you everything, then you will tell the judge!

By John M. Lundin

As lawyers, we take seriously our many obligations to our clients. But our clients have a few obligations to us too, and they are just as critical to the success of a representation. One of those obligations is to answer our questions fully and with complete candor. One of the surest roads to defeat in a lawsuit is not giving your attorney the facts.

But, you might reasonably ask, if you tell us your darkest secrets, can’t your opponent make us disclose them to the court? The answer—with a few very narrow exceptions discussed below—is no. What you tell us in confidence, we keep in confidence.

General Rule: What You Tell Us in Confidence is Privileged

Generally speaking, what you tell your attorney in confidence must be kept that way. As the New York Statement of Client Rights puts it: “You have the right to privacy in your communications with your lawyer and to have your confidential information preserved by your lawyer to the extent required by law.” We call those communications privileged communications. As a general rule, privileged communications are protected from disclosure.

Moreover, even if what you tell us is not technically privileged, we have a broader duty to maintain client confidences.

The Communication Must be Confidential

Some important things to remember: for a communication to be privileged, it must be made in confidence. If you include people other than you and us in your communications, or if they are made in a way that is accessible to third parties (such as on a company email system), they may lose their privileged status. Relatedly—and this is something that sometimes trips people up—if the communication is confidential when you make it, but you later disclose it (by, for example, forwarding an e-mail from us to you on to a third party), it again may lose its privileged status. So, to maintain the privilege, keep your communications strictly between us and you.

The Communication Must Relate to Our Legal Representation

Sometimes, lawyers (including us) provide business advice to clients. In particular, it is common for in-house lawyers to be involved in business discussions. There may also be other connections between lawyers and their clients, and the information may be exchanged in various other contexts. You cannot assume that any discussion would be privileged simply because the person you are speaking to is a lawyer, or even your lawyer. If the communication is not related to legal advice, it is not privileged.

What About Other Advisors?

The attorney-client privilege can extend to non-attorneys who help us provide you with legal advice. So your communications with our paralegals or secretaries related to our representation would be covered in the same way as your communications with us. Likewise, if we talk to your accountant or bookkeeper to gather information that we need to represent you, those communications typically are considered privileged as well. However, the work of an accountant and bookkeeper generally is not privileged, even if they are providing you (as opposed to us) advice relating to a lawsuit.
Further, the work that accountants, bookkeepers, consultants or other advisers create at our request in anticipation of litigation is subject to a different kind of protection—the “work product” protection.

Evidence Sent to an Attorney

Information or documents do not become privileged simply because they were transmitted to a lawyer. For instance, if your accountant sends us a document reflecting a financial transaction, your accountant’s related comments to us may be privileged, but the document itself would not acquire privileged status if it was not privileged to begin with.

Narrow Exceptions to the Rule

The few and narrow situations in which we may be required to divulge confidential communications are specified by law. They are when necessary:

  • to prevent reasonably certain death or substantial bodily harm;
  • to prevent the client from committing a crime;
  • to withdraw a written or oral opinion or representation previously given by the lawyer and reasonably believed by the lawyer still to be relied upon by a third person, where the lawyer has discovered that the opinion or representation was based on materially inaccurate information or is being used to further a crime or fraud;
  • to secure legal advice about compliance with the Rules of Professional Conduct or other law;
  • to defend the lawyer or the lawyer’s employees and associates against an accusation of wrongful conduct; or to establish or collect a fee.

Conclusion

There are many fine points and distinctions to the general rules discussed above, so when it comes to privilege issues, it is important to discuss the issue with us. That said, the general rule almost always applies: what you tell us in confidence, stays in confidence.

Posted: February 10, 2015

Client Q&A: I’m a shareholder in a small company and the other shareholders are not being fair to me. What can I do?

I’m a shareholder in a small company and the other shareholders are not being fair to me. What can I do?

By Bradley J. Nash

Introduction

It is a familiar scenario: Three friends start a small business, each contributing capital and/or sweat equity to get the enterprise off the ground. They organize themselves as a corporation, but for the most part they operate informally. At first, everyone gets along, and the venture is a success. But with time, disputes arise. Maybe there are disagreements about the direction of the business. Or maybe personal or family conflicts spill over into the business relationship. The informal consensus that originally governed the business gives way to factions. Two of the original business partners align against the other – and because they hold a majority of the corporation’s shares, the two can impose their will on third, minority shareholder. As tensions worsen, the majority owners might start to abuse their control over corporate decision making to harm the minority owner – e.g., firing him as an employee or officer of the business, refusing to declare dividends to him, or even denying him access to information about the business. Although the beleaguered minority shareholder lacks the power on his own to stop these abuses, there may be a legal remedy.

Minority Shareholder Oppression

Minority shareholder oppression can take many forms. As commonly defined by the New York courts, shareholder oppression encompasses actions by those in control of a corporation that “substantially defeat shareholder expectations that, objectively viewed, were both reasonable under the circumstances and were central to the [shareholder’s] decision[] to join the venture.” Specific examples of oppressive conduct might include:

  • Firing the minority shareholder as an officer or employee of the company.
  • Removing the minority shareholder from the board of directors.
  • Refusing to declare dividends to the minority shareholder when the company is profitable.
  • Siphoning earnings to the majority shareholders – e.g., through excessive compensation, or entering into self-interested contracts with affiliates or family members.
  • Mergers or other transactions designed to dilute the minority shareholder’s ownership interest.
  • Cutting off the minority shareholder’s access to information about the business.

A pattern of conduct including any of the above (or similar unfair treatment) can be referred to as a “freeze out” (i.e., denying the minority owner the benefits of share ownership) or a “squeeze out” (i.e., attempting to force the minority owner out of the business altogether).

Available Remedies

In a minority shareholder oppression case, the court has broad power to fashion a remedy. By statute in New York, a minority owner who holds at least 20% of the voting stock of a non-public corporation can seek a court order dissolving the corporation, and distributing its assets to its creditors and owners. To obtain such a statutory dissolution, the minority shareholder must show either (1) that the controlling owners “have been guilty of illegal, fraudulent or oppressive actions” or (2) that “[t]he property or assets of the corporation are being looted, wasted, or diverted for non-corporate purposes.” If the majority owners willfully or recklessly dissipated the corporation’s assets, the court can remedy any prejudice to the minority by adjusting the owners’ stock valuations or imposing a “surcharge” on the wrongdoers. The court can also issue an injunction to stop the looting or dissipation of assets.

Holders of smaller interests, or of non-voting stock, who cannot bring a dissolution proceeding under the statute, may be able to seek dissolution under a judge-made (or, common law) rule. This common law dissolution claim, which is less well-defined, requires “egregious conduct” by the majority that “disqualifies” them from exercising control over the corporation and its shareholders.

Dissolution is considered a drastic remedy, and often the courts will order other relief short of dissolving the company. Most commonly, the majority owners can be directed to buy-out the minority shareholder’s interest at a fair value determined by the Court. In fact, in a statutory dissolution proceeding, the majority owners have the right, within 90-days of the filing of the proceeding, to elect to buy out the minority shareholder’s interest for the fair value (as determined by the Court) as of the day before the proceeding was commenced.

Different rules govern other business entities, such as limited liability companies and partnerships, which will be the subject of a separate post.

Conclusion

We have significant experience handling minority shareholder oppression claims and other disputes of all kinds among the owners of closely-held business entities. If you are an owner of a company that appears headed for a “business divorce,” we would be happy to advise you on a cost-effective strategy to preserve your rights.

Posted: January 26, 2015

Client Q&A: The contract I signed has an arbitration clause, does that mean I cannot file a lawsuit?

The contract I signed has an arbitration clause, does that mean I cannot file a lawsuit?

By John M. Lundin

In the past several decades, it has become increasingly common that business- and consumer-related contracts provide that a dispute over the contract has to be decided by one or more arbitrators–private persons chosen by the parties–rather than a court. Arbitration, when all goes well, can provide a way for parties to a contract to resolve their disputes quickly and relatively inexpensively.

General Rule: If You Agree to Arbitrate, You Have to Arbitrate

Generally speaking, if you have agreed to arbitrate a dispute, you give up the right to have a court decide it in a lawsuit. There are limits to this rule. If, for example, the parties to a contract with an arbitration provision nonetheless go ahead and litigate their dispute in court, a party may not be able later to demand that it be arbitrated instead.

Who Decides if You Have Agreed to Arbitrate?

In general, if the parties disagree whether a dispute should be arbitrated, they can ask a court to decide whether the contract requires them to arbitrate. Similarly, if a party brings a lawsuit on a contract with an arbitration clause, the other party can ask the court to stay the lawsuit and order the parties to arbitrate. It is not uncommon for arbitrations to start with either a lawsuit seeking to compel a party who has refused to arbitrate to do so or a motion to stay a pending lawsuit and direct the parties to arbitrate.

Do the Rules of Procedure Used By Courts Apply to Arbitrations?

Most commercial arbitrations are covered by federal law–the Federal Arbitration Act–because the act covers any dispute affecting interstate commerce. Decades of court decisions have interpreted “interstate commerce” very broadly to include most business transactions. For arbitrations not covered by the Federal Arbitration Act, there are state laws governing arbitration. While there are differences between federal law and the laws of the states, they tend to be very similar.

In general, there is no legal requirement that arbitrators follow federal or state rules of court procedure or evidence. However, many organizations that host arbitrations, such as the American Arbitration Association, have their own basic procedural rules that their arbitrators agree to follow. In addition, in practice, because arbitrators usually are lawyers, they and the parties’ lawyers often decide to follow basic court procedural and evidentiary rules in commercial arbitrations. However, they are not usually required to do so, and it does not normally invalidate the arbitration if they do not.

Still, arbitrations usually include a pre-hearing exchange of documents and a hearing at which the parties can present testimony and other evidence on their behalf. After considering the evidence and the parties’ arguments, the arbitrator (or arbitrators, because complex commercial cases often use more than one arbitrator) will issue a decision, called an award. Sometimes the award has a written explanation of the arbitrator’s factual findings and legal conclusions, just like a court’s decision. Sometimes, however, the award simply identifies the claims, who prevailed on them, and the amount of the damages awarded (if applicable). It is not unusual for the parties to agree to such a bare-bones award because it makes it harder to challenge the award, as discussed below.

Will a Court Review the Arbitrator’s Decision?

Under federal and New York law, you generally cannot appeal an arbitral award to a court the way you can appeal a trial court decision to an appellate court. Still, if you are unhappy with an arbitral award, you can ask a court to vacate it, which means that it is rendered without legal effect, as if it had never been rendered.

The standard for vacating an arbitral award is a high one, and most attempts to vacate awards fail. For awards covered by the Federal Arbitration Act (which, as discussed above, most business-related arbitrations are), courts generally will vacate an award only if you can show that (1) the award was “procured by corruption, fraud, or undue means”;(2) there was “evident partiality or corruption in” one of “the arbitrators”; (3) the arbitrators were “guilty of misconduct in refusing to postpone the hearing, upon sufficient cause shown, or in refusing to hear evidence pertinent and material to the controversy; or of any other misbehavior by which the rights of any party have been prejudiced”; (4) the arbitrators “exceeded their powers, or so imperfectly executed them that a mutual, final, and definite award upon the subject matter submitted was not made”; or that (5) the arbitrators exhibited a “manifest disregard” of the law. (Note that some courts do not recognize “manifest disregard” as a basis for vacating an award).

What should be apparent from this list is that it is not enough to show that the arbitrators got the law wrong or misconstrued a piece of evidence. Except for the “manifest disregard” basis, the grounds for vacating an award focus on improprieties in the arbitral process, not disputes over the law or interpretation of evidence.

If the Federal Arbitration Act does not govern the arbitration, you have to look to state law to determine what rules govern whether you can vacate an award. In general, state laws also set a high burden for vacating an award. For example, under New York law, an award can be vacated for (1) “corruption, fraud or misconduct in procuring the award”; (2) arbitrator “partiality” (3) the arbitrator “exceed[ing] his power or so imperfectly execut[ing] it that a final and definite award upon the subject matter submitted was not made”; or (4) the arbitrator’s failure to follow New York arbitral procedure. The New York standard is thus very similar to the federal standard.

Does that mean that there is no point in trying to get an arbitral award you think is wrong vacated? No. Judges sometimes find that one of these high standards has been met. But you have to be realistic about what constitutes grounds to vacate an award and should go into an arbitration assuming that you most likely will be stuck with the decision. In theory, this is one of the advantages of arbitration: eliminating the time, expense and uncertainty of appeals. (This theoretical advantage does not necessarily exist in practice when it comes to complex commercial disputes, which are commonly challenged notwithstanding the high threshold for overturning an arbitral award.)

How Do I Enforce an Arbitrator’s Decision

In New York, if you want an award to have the same legal effect as a court’s judgment–allowing you to use all of the judgment collection devices provided by New York law–you have to ask a court to “confirm” the award. Getting an award confirmed is supposed to be all but automatic once you make the application to have it confirmed.  However, as a practical matter, it is very common that when the winning party seeks to confirm the award, the losing party reflexively cross-moves to vacate the award on one of the grounds discussed above, resulting in at least some litigation.

Once a court confirms the award, you can enforce it just as if it were a court judgment, including garnishing the judgment debtor’s wages and attaching the judgment debtor’s property.

Conclusion

As you can see from even this general and high level discussion, there are a lot of issues to consider before deciding to agree to an arbitration clause in a contract or if you are required to arbitrate a dispute. We have extensive experience both in representing parties in arbitrations and in court proceedings relating to arbitrations. If you have questions regarding any of these issues, give us a call and we can go over your specific situation with you.

Posted: January 12, 2015

Client Q&A: We had an agreement, but . . .

We had an agreement, but . . .

By Vitali S. Rosenfeld

If lawyers had their way, every business transaction would be documented by a comprehensive written contract signed by everyone involved. But the reality is often different. Sometimes the parties discuss additional terms that are not included in the written agreement. Sometimes the parties exchange multiple emails and it is difficult to pinpoint what the final agreement is. And sometimes there is only an oral agreement. Is it legally binding? And if so, what are the terms?

When Must An Agreement Be In Writing?

There is no universal requirement that agreements be in writing to be legally enforceable. But there are numerous specific categories of agreements for which such a strict rule exists. The legislation prescribing such categories is commonly referred to as the Statute of Frauds.

Historically, the types of agreements covered by the Statute of Frauds were included on a piecemeal basis, so there is little consistency. For instance, New York law generally requires the following kinds of agreements to be in writing: real estate transactions; guarantees to pay another person’s debt; assignments of certain insurance policies; contracts to pay a commission or finder’s fee; and long-term contracts that, by their terms, cannot be performed within one year. These are just a few common examples, but by no means an exhaustive list. Some of these categories have exceptions: for instance, leases for less than six months are exempt from the general rule concerning real estate transactions, and some professionals (such as auctioneers, attorneys and real estate brokers) are exempt from the general rule concerning commissions and finder’s fees.

How Much of a Writing is Enough?

If an agreement falls within the Statute of Frauds, it has to be in writing – but that does not necessarily mean a formal contract drafted by lawyers. A letter, a memorandum, an email, even a note scribbled on a restaurant napkin may be enough – as long as it adequately states all the essential terms of the parties’ agreement and clearly expresses the parties’ intent to be bound. But the Statute of Frauds will not be satisfied if a material term of the agreement is missing – in other words, if the document reflects only the parties’ “agreement to agree” at a future time, rather than their consent to be bound as of the writing.

Do You Have an Alternative if a Contract is Unenforceable Under the Statute of Frauds?

If there is nothing at all to document a deal covered by the Statute of Frauds, then the agreement will likely be unenforceable. But that may not be the end of the story; sometimes, there is other recourse. For instance, the party providing goods or services in reliance upon a contract that fails under the Statute of Frauds may be able to recover the fair market value of such goods or services by making a claim for unjust enrichment or under another equitable theory. Of course, such recovery may be very different from the terms of the parties’ oral agreement, but that is the price of neglecting the Statute of Frauds.

Oral Agreements

On the other hand, agreements not covered by the Statute of Frauds may be oral. But is this a good idea? The terms of an oral argument are often difficult to prove, because the other side’s understanding or recollection of the agreed-upon terms may be significantly different from your own, and this problem will only get worse as time passes and the business relationship sours. (Remember that, by definition, the only agreements that need to be enforced in court are ones where the contracting parties are in conflict). You may need witnesses or other extrinsic evidence to compensate for that missing piece of paper. So, if an agreement is important to you, it is better to put it in writing.

What if a writing exists but you also have a separate oral agreement? That can be a problem, especially if the two are in some way inconsistent. Even where the transaction does not fall within the Statute of Frauds, the so-called parol evidence rule will preclude introduction of witness testimony concerning oral discussions to contradict the express terms of a written contract. Many contracts also contain some boilerplate variety of an “integration clause,” stating that the contract represents the entire agreement between the parties and that any oral agreements concerning the same subject matter are void. Another common clause would say that the contract cannot be changed orally and that any amendment must be in writing and signed by all parties (or at least by the party against whom it is being enforced). Such clauses make it more difficult to argue that the written contract was orally modified. Although common in day-to-day business, oral promises that certain contractual provisions will not be relied upon are usually unenforceable.

The Parol Evidence Rule

In any event, New York law requires that a written contract that is clear and unambiguous on its face must be construed in accordance with its plain language and express terms. To the extent the contractual language is ambiguous, however, the parties can use extrinsic evidence to clarify its meaning – and that is where contract negotiations and other oral communications will likely be considered.

Contracts Induced By Fraud

Of course, for these rules to apply, the written contract has to be valid to begin with. One way to challenge the validity of a contract is to assert fraudulent inducement – i.e. that you only entered into the contract because you were deceived by the other party’s intentional false statements (which could have been made orally). Again, the language of some contracts is designed to preclude that possibility by stating that, in entering into the agreement, the parties did not rely on any representations except those explicitly stated in the agreement. But again, for such clauses to apply, the contract needs to be valid – and if the whole contract was induced by fraud, it may be a nullity. This is where it gets tricky . . .

Course of conduct

Finally, it is important to remember that sometimes a contract may be modified by something more powerful than words – conduct. Courts have recognized that performance of contractual duties, or lack thereof, may be powerful indicators of the parties’ understanding and interpretation of the agreement, as well as of their intentions to abide by it, change it, or repudiate it.

Conclusion

While based on simple principles, contract law gets nuanced and quite complicated. If you have a contractual issue, be sure to consult with competent counsel. We have extensive experience in preparing and negotiating contracts for our clients as well as in resolving contractual disputes in litigation and arbitration.

Posted: December 29, 2014

Client Q&A: When is it Too Late to Sue?

When is it Too Late to Sue?

By John M. Lundin

If you wait too long to bring a lawsuit, you may lose the right to bring it. And if someone has waited too long to bring a lawsuit against you, you might be able to get the lawsuit dismissed.

How long is too long? It depends on the type of claim. Here are the basic rules.

Limitations Period

The law setting the time you have to bring a lawsuit is called the statute of limitations. Different statutes of limitation apply to different types of claims—personal injury, breach of contract, malpractice, discrimination—and the amount of time you can wait before bringing a particular claim varies a great deal. For example, you have:

  • One year to bring a claim for defamation;
  • Two years to bring a claim for wrongful death;
  • Two-and-a-half years to bring a claim for medical malpractice;
  • Three years to bring a claim for negligence, personal injury, legal malpractice, or injury to property;
  • Six years to bring a claim for breach of contract or fraud (the time to sue for fraud can change depending on when you discovered the fraud);
  • Twenty years to collect a judgment.

If you file your lawsuit after the statute of limitations has run—meaning that the specified time has elapsed—the claim may be time-barred and can be dismissed.

Accrual and Tolling

In New York, a lawsuit usually has to be filed before the statute of limitations runs out. However, this rule applies only if the defendant is timely served—generally, within 120 days of filing—and is served in accordance with law.

The more complicated question is when does the limitations period begin to run (or accrue). Just as the limitations period varies by type of claim, so do the rules on accrual. For example, a claim for breach of contract accrues when the contract is breached, even if the plaintiff does not suffer damages until later. On the other hand, certain personal injury claims do not accrue until the injury was, or should have been, discovered.

There also are several rules that stay the running of the limitations period—called tolling. Such rules cover situations where the plaintiff is unable to serve the defendant in New York, or where the plaintiff is not an adult or has died, or where the case was previously submitted to arbitration. In addition, courts can toll the statute of limitations if the defendant had a special duty to the plaintiff—like the duty a lawyer owes a client or a trustee owes the beneficiary of a trust—or takes action to hide the facts relating to the claim from the plaintiff. The limitations period can also be tolled by agreement of the parties.

Other Jurisdictions

Each state sets the statute of limitations for its own laws. And sometimes—but not always—federal law claims have statutes of limitations set by federal law. For that reason, statute of limitations concerns may affect where a lawsuit is brought.

Sometimes out-of-state plaintiffs try to take advantage of the differences in limitations periods by bringing claims arising under another state’s (or country’s) laws in New York. This usually does not work, because New York courts generally apply the shorter of the two statutes of limitations.

Conclusion

Whether a claim has been barred by the statute of limitations can be a very complicated. For each claim, you have to assess how long the limitations period is, when it accrued, and whether it was tolled. As experienced business litigators, a regular part of our practice is determining the answers to those questions. If you have questions regarding whether it is too late to bring a claim you think you may have against someone, give us a call.

Posted: December 13, 2014

Client Q&A: Should my lawsuit be in state or federal court?

Should my lawsuit be in state or federal court?

By Niall D. O’Murchadha

New York—like every state—has two parallel court systems, so if you want to file a lawsuit, one of the first questions to consider is whether the case should be brought in state or federal court. Similarly, if you have been sued, you should consider whether the case against you is in the right court, and whether you would get an advantage by moving the case from one system to the other. Each choice has its own advantages and disadvantages. Below, we summarize, at a simplified level, what those advantages and disadvantages are.

The State and Federal Court Systems

In the New York state court system, almost all cases are brought in the Supreme Court, which is the general trial court. Each county has its own Supreme Court—New York (i.e. Manhattan), Queens, Bronx, and so on. Appeals from Supreme Court decisions are brought to the Appellate Division, of which there are two in New York City: the First Department, sitting in Manhattan, which hears appeals from New York and Bronx counties, and the Second Department, sitting in Brooklyn, which hears appeals from Brooklyn, Queens, and Staten Island, as well as the Long Island counties and suburban counties up to Poughkeepsie. Appellate Division rulings can in turn be appealed to the New York Court of Appeals, New York’s highest court, sitting in Albany, although it is usually up to the Court of Appeals to decide whether it wants to hear the appeal or not.

In the federal system, the United States District Courts are the general trial courts, of which there are two in New York City: the United States District Court for the Southern District of New York, which covers New York and Bronx counties, as well as the suburbs up to Poughkeepsie, and the United States District Court for the Eastern District of New York, which covers the rest of New York City and Long Island. Appeals from the District Courts are heard by the United States Court of Appeals for the Second Circuit in Manhattan, and further appeals go to the United States Supreme Court in Washington, D.C., which decides in its discretion whether to take the case.

The New York state and federal courts systems have different judges, rules, and procedures, and often follow different legal precedents and standards.

Jurisdiction of the Federal Courts

A threshold question is whether your case can be brought in federal court at all. The federal courts have limited jurisdiction, and can only hear cases that reach beyond one particular state. This means that any case filed in federal court must either concern federal laws or the constitution (federal question jurisdiction), or involve a dispute between citizens of different states (diversity jurisdiction).

Federal question jurisdiction exists whenever the plaintiff alleges a claim arising under federal law, such as bankruptcy law, securities law, patent and other intellectual property law, federal anti-trust law, federal anti-discrimination law or civil rights law, constitutional law, immigration and citizenship law, or admiralty law. The initial complaint must allege claims under federal law—a defendant subsequently asserting federal counterclaims usually does not create federal question jurisdiction. Federal question jurisdiction also encompasses state law claims asserted along with federal law claims, so a plaintiff asserting both state and federal claims can file in federal court.

Some federal questions, such as bankruptcy, patent, admiralty, and federal securities cases, must be brought in federal court. Others can be heard in state court or in federal court.
Diversity jurisdiction exists when a lawsuit is between citizens of different states. Diversity jurisdiction requires complete diversity, so every defendant must be a citizen of a different state from every plaintiff. Corporations are citizens of both the state where they are incorporated and the state of their principal place of business, and partnerships and LLCs are citizens of every state of which their partners or members are citizens. (There are special rules for U.S. citizens living abroad, foreigners, and non-citizen permanent residents.) Diversity jurisdiction also requires that a minimum amount of money (the amount-in-controversy requirement) be in dispute, which is currently $75,000.

Even if a case is not filed in federal court, but could have been brought in federal court, the defendant can remove the case from state court to federal court (removal jurisdiction). So if the complaint alleges a federal law issue, or if there is complete diversity and the amount-in-controversy is satisfied, a defendant has 30 days from first receipt of the complaint to file papers and remove the case to federal court. All defendants must agree to remove the case, and a diversity jurisdiction case may not be removed if any defendant is a citizen of the state where the action is filed.

Considerations when Deciding Between Courts

If a plaintiff can choose between the state and federal system, or if a defendant can assert removal jurisdiction, many different considerations come into play, of which the following are only a few:

  1. Status of the parties. Over the years, the federal system has become increasingly pro-defendant, with District Court judges being required to follow precedents set by the conservative majority on the Supreme Court. For this reason, individual plaintiffs should consider staying in state court. For example, someone who wants to bring an employment discrimination claim or a consumer action or a personal injury case in New York City might well be better off in state court. Conversely, federal courts are more efficient at weeding out frivolous lawsuits, so a defendant facing a meritless claim, especially an outlandish one, should consider removing the case to federal court. Similar considerations would apply to an out-of-state business being sued by an individual New Yorker in state court.
  2. Availability of Commercial Division adjudication. Many of the New York Supreme Courts have set up specialized parts—known as the Commercial Divisions—to hear complex commercial cases. In our area, Commercial Divisions have been set up in Manhattan, Brooklyn, Queens, Westchester, and the Long Island counties. Just like federal court, Commercial Divisions have eligibility requirements; cases must either meet an amount-in-controversy requirement, which varies by county ($500,000 in Manhattan; $200,000 in Nassau County; $150,000 in Brooklyn; and $100,000 in Queens, Suffolk, and Westchester counties), or involve specific subject matters and also seek injunctive relief. Unlike federal judges, who are often former prosecutors rather than civil lawyers, and who hear all kinds of cases, including many criminal cases and other specialized federal-law cases, Commercial Division judges only hear commercial cases. For a large commercial dispute focused on state-law questions, the Commercial Division might be a better option than the federal courts.
  3. Favorable interpretation of state law questions. Federal courts can hear both federal law and New York state law claims, but federal courts and state courts often apply state law differently. A party considering whether to bring state-law claims in federal court should research whether state or federal courts apply the applicable legal doctrines in the same way, and if they do not, decide which court would be more favorable to that party’s position.
  4. Procedural efficiency. Many commentators—including many state court judges—complain that the state court system is underfunded compared to the federal system, that state court judges have fewer staff members but more cases, and that the state court system is slower to implement procedural improvements, such as electronic filing of documents. Efforts at reform spearheaded by successive Chief Judges of the Court of Appeals have led to some improvements—such as the creation of the more up-to-date Commercial Division—but many of their other proposed reforms have not been implemented. State court litigants who are not in the Commercial Division may face inefficiencies such as judges without access to email or electronic filing, unnecessary court appearances, and different parts of the same case being supervised by different judges. These problems can increase expenses and frustrate clients, especially those who are litigating on a limited budget.
  5. Availability of immediate appeals. A big difference between state court procedure and federal procedure is the availability of immediate appeals, known as interlocutory appeals. In federal court, an appeal can generally only be taken from a ruling which disposes of the entire action, but in state court most rulings can be appealed to the Appellate Division immediately. This means that, in federal court, an erroneous ruling denying a motion to dismiss or a motion for summary judgment, or erroneously dismissing some claims but not others, may be unappealable for years, until the rest of the case has been decided. This is a double-edged sword; a state-court party can use interlocutory appeal to fix mistakes quickly, allowing the case to move forward steadily and decreasing the likelihood that an early mistake will force large parts of the case to be re-litigated, but a well-financed party can also delay any final judgment and increase costs by appealing every interim order.
  6. Change of venue. Because the federal system covers the entire country, it is much easier to move a federal case out of New York to another part of the country. New York state courts cannot transfer a case out of state, they must instead dismiss the case so that the plaintiff can re-file elsewhere, and a defendant seeking such an outcome must meet a far higher burden, as well as facing uncertainty as to where, exactly, the plaintiff will eventually recommence the action. A non-New York defendant who believes that a case would be better heard in another state—if, say, the principal witnesses or documents are located outside New York—should consider removing the case to federal court and then moving for a change of venue.

Conclusion

The decision whether to proceed in state or federal court is a complicated one—in most cases, several of the factors listed above will have to be considered and weighed against one another—and can influence the outcome of the entire case. We have substantial experience in both the New York State courts and in the United States District Courts and can help you decide if you are in the right court—and, if you have a choice, which court is best for you and your case.

Posted: December 1, 2014

Client Q & A: How do I make sure my confidential information is protected during litigation?

How do I make sure my confidential information is protected during litigation?

By Erik S. Groothuis

The discovery process in modern litigation is very broad—all documents potentially relevant to the disputed issues are in play. That means that in almost every commercial case it is possible that sensitive, proprietary, or otherwise confidential information will have to be turned over to your adversary. Often, that adversary is also a competitor. In those situations, you can usually obtain a court order, called a “protective order,” that protects against the unauthorized disclosure of such information. Litigants often agree that a protective order should be in place and ask the court to issue one. But if your opponent will not agree, you can still make a motion to the court to ask for one. Because a protective order is an order signed by a judge, it is binding on the parties and a party that breaches it can be held in contempt.

Protective orders are very common in commercial litigation. Typically, they prohibit disclosure of confidential information, whether produced in written (documentary) or oral (testimony) form, to anyone other than:

  • The parties to the action
  • Counsel to the parties, including paralegals and staff
  • The court
  • Vendors assisting counsel (copying, graphics, electronic document hosting, etc.)
  • Experts (consulting and testifying)
  • Stenographers
  • Witnesses who must be shown confidential information while testifying

If your litigation adversary is a business competitor, and the information disclosed could be used by your adversary to compete against you, protective orders can also have a heightened “attorneys’ eyes only” level of protection. “Attorneys’ eyes only” documents or testimony cannot be shown to anyone working for the adverse party who might be able to make use of the information for ongoing business.

Of course, a party is free to make whatever use it chooses of its own confidential information—protective orders restrict what your adversary does with your information, and what you do with theirs, not what anyone does with their own information.

When documents are covered by a protective order, they should be labeled “Confidential” (or a similar designation) in case they fall into the wrong hands. If such documents are filed publicly, they are typically filed under seal so that only the court can access them. Where feasible, documents that contain snippets of confidential information can be redacted and then filed with the clerk for public access so that only the confidential information is removed. Caution should be taken when deciding what information to designate as “Confidential” because some judges will scrutinize designations and do not look favorably on the practice of designating everything that is turned over to the other side as confidential. Also, the legal standard for filing documents under seal is different in New York state courts than it is in federal courts. So, the court you are in may make a difference in how easy it is to protect confidential business information. (And note that there are specific rules that apply in New York state court to the protection of confidential personal information, such as social security numbers, even if there is not a protective order in place.)

Protective orders typically have provisions whereby third parties who are called upon to produce evidence (see our prior Client Q&A on this topic) may designate their information as confidential. This mechanism can anticipate and overcome a common objection from subpoena recipients.

Care should be taken to lay out the consequences of a violation of a protective order in advance. It can be difficult, if not impossible, to quantify the damages associated with the improper disclosure of confidential information, so protective orders should specify the remedies for breach. Such remedies can include injunctive (non-monetary) relief.

At the end of a litigation, whether by settlement or judgment, a protective order should provide that all protected information must either be returned to the producing party or destroyed. Because litigants and attorneys can forget, proper follow-up is important to make sure all protected documents in the adversary’s files have been disposed of.
* * *
While protective orders are commonplace, there are a number of pitfalls for the unwary. The last thing you want is to have satellite litigation over the improper use or disclosure of sensitive commercial data turned over in discovery, whether you are on the prosecuting or receiving end of the claim. We have extensive experience litigating and negotiating protective orders. Please reach out with questions.

Posted: November 17, 2014

Client Q & A: Why am I in a Lawsuit in New York?

Why am I in a lawsuit in New York?

By Vitali Rosenfeld.

If you get sued, one of the first questions to ask yourself is whether you are being sued in the right place. A lot of commercial lawsuits involving out-of-state parties are filed in New York for various reasons – but not always are there legitimate grounds for a New York court to exercise judicial authority over all defendants. Such authority, referred to as “personal jurisdiction,” is a prerequisite for any civil lawsuit. Does the court have personal jurisdiction over you or your business?

General Jurisdiction

Where a party’s contacts with New York are so strong that it may be considered essentially at home in this state, New York courts (both state and federal) may exercise so-called “general jurisdiction,” i.e. jurisdiction that covers any and all claims against that party. That will normally be the case with an individual who lives in New York, or a company that has its primary place of business in New York.

General jurisdiction can also be based on more attenuated contacts: for instance, a company may be incorporated in Delaware and have its main office in New Jersey, but nevertheless do continuous and systematic business in New York. The general jurisdiction analysis may include such inquiries as whether the party has an office or employees in the state, whether it solicits or conducts business in the state, and whether it has bank accounts, real estate or other property in the state.

Specific Jurisdiction

Where a party’s contacts with New York are insufficient to establish general jurisdiction, it may still be subject to “specific jurisdiction” – which means that the court may exercise its authority over such defendant only with regard to the subject matter of a specific dispute. By definition, the defendant’s contacts with New York that give rise to specific jurisdiction must be related to the events giving rise to the plaintiff’s claim.

For instance, if a foreigner comes to New York and commits some wrongdoing here, he may be sued in New York for the damages caused by that specific wrongful conduct. Likewise, a foreign business may be sued in New York for damages arising from its ownership of real property in this state. But in both examples, the court’s jurisdiction will be limited to the particular claims with a New York nexus, and the non-resident defendant should be able to resist a plaintiff’s attempt to include other claims, for which such a nexus is lacking. There are particular rules for establishing specific jurisdiction depending on the type of claims involved; for some claims, the inquiries are more nuanced and complex than for others.

Forum Selection Clauses

One of the most common grounds for specific personal jurisdiction in commercial matters is a contractual provision in which the parties consented in advance to jurisdiction of a particular court or courts of a particular state. Such a provision is commonly referred to as a forum selection clause. New York courts usually give effect to such provisions, under the principles that the parties are in the best position to determine where they would want to litigate a potential dispute and that enforcement of forum selection clauses provides certainty and predictability, especially in international cases. Indeed, there is a statute precluding a New York court from declining jurisdiction in high-stakes commercial disputes even where the parties’ only connection to New York is the forum selection clause in their agreement.

There are exceptions, however. As any other contractual provision, a forum selection clause may be invalidated if it is found to have been procured by fraud, contrary of public policy, or otherwise unreasonable or unjust.

It is also important to distinguish between exclusive and non-exclusive forum selection. In the first scenario, the parties agree that any dispute arising from their contract may be litigated only in a particular forum; in the second, they consent to a certain forum’s jurisdiction without ruling out the possibility of litigating elsewhere. Suppose that a plaintiff files his contractual claims in New York, even though the agreement contemplates jurisdiction of foreign courts. If the forum selection clause is exclusive, the defendant will have a much better argument for dismissal of the New York action than with a non-exclusive forum selection clause.

But where the forum selection clause is found to govern, there are further questions. Does it cover all of plaintiff’s claims, and does it apply to all defendants? A plaintiff who wants to sue in New York will rely on a forum selection clause in favor of New York courts, but may try to include claims that are extraneous to the contract and to name defendants who did not sign it, such as the contracting party’s affiliates or executives. A lot of care should be exercised in interpreting forum selection clauses and determining their proper scope. Of course, it is better to pay careful attention to such clauses when signing a contract, to ensure that there are no jurisdictional surprises down the road – in other words, that you do not suddenly find yourself required to litigate in a state or country with which you have no connection.

What to Do if You are Sued in New York

Once you are sued in New York, however, the important thing is to determine whether you have a jurisdictional defense before you make any court appearance or filing – because such a defense may be easily waived if it is not timely and properly raised. For that reason, you should consult with competent counsel as soon as you are served. We have extensive experience in analyzing jurisdictional issues and effectively asserting jurisdictional defenses on behalf of individual and corporate clients.