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Thursday, January 20th, 2011
I was recently asked to litigate a breach of contract claim on behalf of a party who was wronged by the breach of another party to a contract. The kind of contract is immaterial for the purpose of this article. It could have been an independent contractor agreement, or employment agreement, or an asset purchase, stock purchase, non-compete, or non-solicitation agreement, or any one of a dozen other types of contracts. Regardless, as I have said previously in these posts, there are certain contractual provisions that should be found in just about every contract. What may be possibly be the single most important provision, from my perspective, happened to have been omitted from this particular contract, that is, a provision addressing the potential recovery of attorney’s fees resulting from litigation.
I say that this may be the single most important provision in a contract not in a substantive sense, as the material terms of the contract must of course be included with specificity. The services to be performed or the products to be sold are obviously vital, since without which there may be no meeting of the minds and thus no contract in the first place. And there are other material provisions related to the deal itself that must be included as well, ie the duration of the agreement, compensation, termination, etc.
But aside from the substantive points of the deal, there is not a more important procedural, boilerplate, provision than a provision addressing attorney’s fees. Why? Because in many cases, the lack of such a provision makes litigating over a contract a financially untenable idea. A party to a contract may have the facts and the law on its side. The case may essentially be a slam dunk, if such things exist. However, if at the end of the day, the damages available to the winning party only barely exceed the amount the party paid to its attorney’s to prosecute the case, then regardless of how great a case it is, the filing of a lawsuit or arbitration makes little sense from a bottom line perspective. None of us, clients or attorneys, litigate in order to achieve moral victories. If maintaining a lawsuit does not make sense from a financial point of view, then regardless of right and wrong and getting even, I always advise my clients to consider the case strictly from a business perspective, leaving aside emotion.
That is why it is such a huge benefit when a contract at issue contains a prevailing party clause with regard to attorney’s fees. This magic language allows a wronged party to sue with the understanding that if the facts and the law support her case, then she will be made whole in regard to not only the actual damages she sustained as a result of the breach of contract, but in addition, all costs, expenses and attorney’s fees she expended in litigating the matter. Please then, I ask you to review EVERY agreement your business has signed, as well as every agreement you sign from here on out, and prior to execution, include a provision similar to the following:
“In the event of litigation [or arbitration] for any matter arising out of or related to this Agreement, the party prevailing in any such action shall be entitled to recover from the losing party its reasonable attorney’s fees and all other legal costs and expenses, including filing fees, expended in the matter.”
The importance of this provision cannot be overstated, since attorney’s fees on even a fairly “routine” matter can easily run into the tens of thousands of dollars, and for more complex cases against defendants with deep pockets, it would not be a surprise to see attorneys’ fees in the hundreds of thousands of dollars.
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Wednesday, January 5th, 2011
In Flynn v. Everything Yogurt, et al., 1993 U.S. Dist. Lexis 15722 (D. Md. 1993), the Maryland Federal District Court granted a motion to dismiss a fraud claim for failure to state a claim under Rule 12(b)(6). The Court held that ““Projections of future earnings are statements of opinion rather than statements of material fact. Projections cannot constitute fraud because they are not susceptible to exact knowledge at the time they are made. Layton v. Aamco Transmissions, Inc., 717 F. Supp. at 371 (D. Md. 1989); See also, Johnson v. Maryland Trust Co., 176 Md 557, 565, 6 A.2d 383 (1939) (statement referring to value of securities representing collateral for the payment of trust notes was a matter of expectation or opinion). Thus, the Defendants’ projections can not constitute statements of material fact under § 14-227(a)(1)(ii).”
The Maryland Federal District Court also held in Payne v. McDonald’s Corporation, 957 F.Supp. 749 (D. Md. 1997) that claims of fraud against McDonald’s must be dismissed: “McDonald’s projections concerning the future building costs of the Broadway restaurant and concerning the impact of new restaurants on future sales of the Broadway facility are just as much predictions of ‘future events’ as are projections of future profits. Accordingly, this Court concludes that it was unreasonable for plaintiff Payne to rely on any of McDonald’s predictive statements as a basis for the assertion of fraud-based claims in this case.”
In addition to the McDonald’s case cited above, see Miller v. Fairchild Industries, Inc., Finch v. Hughes Aircraft Co., and Hardee’s v. Hardee’s Food System, Inc., all of which stand for the proposition that predictions or statements which are merely promissory in nature and expressions as to what will happen in the future are not actionable as fraud.
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Tags: arbitration, arbitration clause, breach of contract lawsuit, business breach of contract, business law, business litigation, Buy a Franchise, corporate litigation, federal franchise law, franchise agreement, franchise arbitration, Franchise Disclosure Document, franchise fraud, franchise law, franchise litigation, franchisee, fraud, fraud in the inducement, fraudulent, fraudulent representation, FTC Franchise Rule, maryland breach of contract, maryland business, maryland business law, maryland fraud law, shareholder dispute, shareholders' agreement, small business attorney, small business lawyer
Wednesday, July 28th, 2010
Start-up companies many times do not know the extent of their legal and other needs after forming a business. The drafting and filing of Articles of Incorporation or Articles of Organization are just the beginning of your company’s service needs. I recommend that each new business owner immediately reach out to establish relationships with the myriad of services providers your business needs, now and in the future. Such service providers include many of the following:
– a corporate law attorney specializing in employment, contracts, intellectual property, litigation and other corporate issues;
– a CPA for your business accounting and tax services;
– an insurance broker for your business liability, E&O, and other insurance needs;
– a banker with whom you have a personal relationship with;
– a financial advisor for your 401K, retirement and other accounts;
– an IT services firm to be on call for your computer networking needs;
– a payroll company to handle weekly payroll and taxes for your employees; and
– a company to develop your website, and then focus on your internet advertising, search engine optimization, and other advertising needs in order to properly publicize your business over the internet.
Please don’t hesitate to contact me should you need referrals in any of the above areas.
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Tags: breach of contract case, breach of contract lawsuit, business breach of contract, business contract review, business formation, business incorporation, business law, business lawsuit, business litigation, business name registration, business start up, corporate bylaws, corporate formation, corporate litigation, corporate start up, limited liablity company, maryland breach of contract, maryland business, maryland business law, new business formation, new business start up, operating agreement, shareholder agreement, small business attorney, small business lawyer, small business needs, start new business
Friday, July 9th, 2010
In representing franchisor clients against defaulting franchisees, it is imperative to give adequate thought to how the franchisor is going to prove its damages that resulted from a franchisee’s breach of the franchise agreement. When confronted with this issue, I most often utilize a financially competent representative of the franchisor to testify with regard to that amount of monetary damage suffered by the franchisor. The franchisor’s representative must be able to prove the damage by evaluating the franchisee’s financial statements, including revenues and/or profits, expenses, and royalties paid to the franchisor, and then determine what sums the franchisor would have earned either during and/or after the franchise term had it not been for the franchisee’s breach.
In order to testify convincingly and thoroughly, the franchisor’s representative must be able to analyze the franchisee’s financial numbers and draw a conclusion from such numbers. Therefore, a chief financial officer of a small franchisor, or an auditor or accountant of a larger franchisor, is an ideal representative in these instances, provided that the representative has been with the company long enough to be able to testify knowledgeably with regard to the details of the franchisor’s system.
Generally, a well-prepared franchisor representative will be permitted to testify as to the value or the projected profits of a franchised business provided the representative has a sufficient foundation for the analysis and opinion, including particular knowledge of the financial issues presented by virtue or his or her position in the franchisor company. This simply means that a franchisor representative may opine on the issue of lost profits where they know the franchisor and franchisee’s business and financial system intimately, and have the professional ability to analyze the franchisee’s financial statements.
To see how a franchisor SHOULD NOT approach the issue of proving its damages against a franchisee, see Lifewise Master Funding v. Telebank, 374 F.3d 917 (10th Cir. 2004), which in essence holds that a company’s witness as to damages must have personal knowledge of all items factored into his opinion in order for the opinion to be admissible. The court concluded that a business owner or executive may give “a straightforward opinion as to lost profits using conventional methods based on [the company’s] actual operating history.” However, because in this case the witness lacked personal knowledge of the factors used in the damages analysis, the opinion was inadmissible.
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Tags: arbitration, arbitration clause, breach of contract case, breach of contract lawsuit, business breach of contract, business contract review, business law, business lawsuit, business litigation, corporate litigation, federal franchise law, franchise agreement, franchise arbitration, Franchise Disclosure Document, franchise dispute, franchise future royalties, franchise law, franchise litigation, franchise royalties, franchisee, franchisor dispute, FTC Franchise Rule, maryland breach of contract, maryland business, maryland business law
Monday, April 12th, 2010
In TEKsystems, Inc. v. Bolton, (2010), the Maryland Federal District Court recently reinforced Maryland law on the point that the enforcement of a covenant not to compete is not dependent on whether the competing former employee solicits his former employer’s clients or uses its confidential information, but rather on whether or not the scope of the restrictive covenant is reasonable. The only factors that will determine whether the non-compete is valid are its temporal and geographical limits, the employer’s legitimate business interests, the employee’s unique and specialized skills, any undue hardship on the employee, and the public interest served by enforcing the restrictive covenant.
The non-compete found in the former employee’s employment agreement contained standard language prohibiting the former employee from engaging “in the business of recruiting or providing on a temporary or permanent basis technical service personnel, industrial personnel, or office support personnel” for a period of 18 months after termination of employment, and within a geographical limitation of a 50-mile radius of the employee’s former office. Both the period of time of 18 months and the geographical scope of 50 miles have been held as reasonable on numerous occasions by Maryland courts.
The Court also found that the employer had legitimate business interests in enforcing the covenant, the employee possessed unique and specialized skills, and the employee would not suffer undue hardship by enforcing the covenant. The enforcement of the non-compete was upheld against the former employee.
To read a comprehensive blog of all of the issues address by the Court in this case, visit the blog of the Business Law Section of the Maryland State Bar Association at http://marylandbusinesslawdevelopments.blogspot.com/search/label/Injunctive%20Relief.
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Tags: breach of contract case, breach of contract lawsuit, business breach of contract, business contract review, business lawsuit, business litigation, confidentiality agreement, confidentiality clause, corporate litigation, covenant not to compete, employment agreement, injunctive relief, maryland breach of contract, maryland business, maryland business law, NDA, non compete covenant, non disclosure agreement, non solicitation agreement, preliminary injunction, restrictive covenant
Tuesday, March 2nd, 2010
Your business did what it was supposed to do when faced with a customer or client that owed money for goods or services your company provided under an agreement signed by both parties: You retained an attorney, who then filed a complaint in Maryland state court, or if the agreement called for it, filed an arbitration demand with the appropriate arbitration forum, against the other side on your company’s behalf.
Your business paid the attorney out of its own pocket and did things by the book. The other side may or may not have hired an attorney, and maybe did not take part in the case at all. Your attorney propounded discovery, the other side may or may not have complied with your requests. Your attorney attempted to depose a representative of the other side. You and your attorney showed up in court or at the arbitration on the day of the hearing, the other side may or may not have, and if they did show up, maybe with or without an attorney representing them.
The judge or arbitrator sided with your company after a trial or arbitration hearing on the merits, or your company was simply awarded a judgment by default when the other side failed to appear. In any event, your company was awarded damages, and maybe even attorney’s fees depending on what the agreement at issue said.
But when you left the hearing room that day, unfortunately you did not leave with a check from the other side. Instead, you left with a court’s order, or an arbitrator’s award, merely stating that you won and how much.
So the question now is, how do you actually get paid what the court or arbitrator awarded? Often times, the trial or arbitration is not the end, but rather only the mid-way point, of the collection process.
The first thing you must do in this situation is identify the debtor’s assets, as well as determine the value of each, by following Md. Rule 2-633, titled “Discovery in aid of enforcement.” Rule 2-633 states that you may conduct discovery in writing by mailing to the other side no more than 15 questions and requests for documents regarding the assets and other financial information of the debtor. These are known as Interrogatories in Aid of Execution. The debtor has 15 days from receipt to respond to these Interrogatories.
In addition to Interrogatories, Md. Rule 2-633(b) states that you may also petition the court to order the debtor to appear before a judge and answer under oath your questions related to the identity of the debtor’s assets. This is called requesting an Oral Examination in Aid of Enforcement of Judgment. Both of the above options may take place no earlier than 30 days after entry of the judgment.
Should the debtor ignore your Interrogatories or Request for Oral Exam, there are additional measures you may take, including filing to hold the debtor in contempt of court.
Assuming the debtor complies with your written requests or your oral exam, and you have successfully determined what assets the debtor owns and the value of each asset, now it is time to turn your attention to actually collecting on the judgment. One option you have is to garnish an individual debtor’s wages, done by filing a Request for Garnishment of Wages form with the court. You will then receive the garnished wages within 15 days of each of the debtor’s pay periods.
A second collection option is garnishing an individual or corporate debtor’s bank account. This is accomplished by filing a Request for Garnishment of Property Other Than Wages form with the court, using the financial information you gathered in your Interrogatories or Oral Exam. After 30 days, you must file an additional form, a Request for Judgment Garnishment.
Yet another collection option is seizing a debtor’s property or real estate, then selling it to help satisfy your judgment. Doing so requires the recording of your judgment in the circuit court for the county where the property is located, complete and file a Notice of Lien, and then file a Writ of Execution. This process if more complicated and time consuming than either garnishing wages or a bank account. Retaining a competent business attorney to help you in your collection efforts is a smart move.
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Tags: arbitration, arbitration award, breach of contract case, breach of contract lawsuit, business breach of contract, business law, business lawsuit, business litigation, corporate litigation, maryland breach of contract, maryland business, maryland business law
Monday, February 22nd, 2010
Last week I wrote Part 1 of this blog on the problems I have encountered with arbitration. Please see that post if you have not read it. What follows is Part 2 of the reasons that I advise my franchise and business clients why they should be wary of automatically including an arbitration clause in any franchise agreement or other contract that they execute:
4. Judges are generally more experienced, more versed in the law, and otherwise more qualified to hear disputes than most arbitrators. While not every judge is equally qualified, most judges have been vetted by their local and state bar organizations, and either elected by voters or appointed by politicians. Judges have a track record that can be reviewed and relied on. Judges in most courts serve on a rotational basis, hearing different types of cases and thereby gaining differing experiences. Judges have resources like law clerks to research the law for them. So while judges may lack technical expertise in a certain area, they make up for that my relying heavily on the attorneys and evidence presented in a given matter. Whatsmore, judges must construe existing law to base their rulings on, or else risk being overturned on appeal. Arbitrators, on the other hand, are in most cases practicing or retired attorneys with a specific area of expertise who have asked to be appointed to serve. Many times, an arbitrator will have only a peripheral knowledge of the subject of the arbitration, yet without the experience, knowledge of the law, or resources to ensure that his or her ruling is correct on the law. This set of circumstances can often times lead to inconsistent or downright baseless arbitrator’s decisions.
5. Judges produce formal opinions reciting the law relied on and applying the law to the facts to reach a decision. Many arbitrators, meanwhile, can issue awards without including their specific legal reasoning for an award. For purposes of appeal, judges are required to produce formal opinions citing the issues, facts, law and conclusion in an orderly fashion. This allows parties to focus many times on a distinct area for appeal, and allows appeals courts to easily review the court’s basis for a decision. Conversely, many arbitrators are required to issue only a narrowly written award unless otherwise agreed to by the parties. Even then, an arbitrator issuing a “reasoned award” may not satisfactorily explain the evidence relied on, the law used and how the arbitrator’s conclusion was arrived at. This not only makes it difficult for the parties to decipher how a particular arbitration award was arrived at, but more importantly, makes the record for appeal nearly impossible.
6. Even if an arbitrator issues a reasoned award, the right to appeal an arbitration award is extremely narrow when compared to a party’s ability to appeal a court ruling. In most instances, losers at trial have the right to appeal the merits of a court’s decision to a higher court “de novo”, using almost any substantive or procedural issue available to them. The basis of an appeal of an arbitration award however is severely limited, and many times requires the appealing party to clear such high hurdles as proving fraud, corruption of the arbitrator, or the arbitrator exceeding his or her powers. The difficulty of appeal, when combined with the erratic decisions of some arbitrators, is another reason to forego arbitration in favor of litigation, except in a specific set of circumstances discussed with and approved by my client.
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Tags: arbitration, arbitration clause, breach of contract case, breach of contract lawsuit, business breach of contract, business contract review, business law, business lawsuit, business litigation, corporate litigation, franchise agreement, franchise law, maryland breach of contract, maryland business, maryland business law
Saturday, February 20th, 2010
I frequently tell my franchise and business clients to be wary of automatically including an arbitration clause in a franchise agreement or other contract they execute. Several years ago it was savvy for a business owner or franchisor to include mandatory arbitration in their agreements. Now, many of the reasons that supported the inclusion of arbitration clauses have been diminished, making the inclusion of mandatory arbitration in many contracts a questionable strategy at best. I now advise my business and franchise clients against arbitrating disputes for the following reasons:
1. Arbitrations are not “cost-savers” like they used to be thanks to the multiple fees associated with the process. Unlike judges, arbitrators are paid by the parties on an hourly basis. It is therefore in an arbitrator’s financial interest for the case to reach a hearing, regardless of the claim’s merits. In addition, many hearings go on much longer than necessary, allowing witnesses and testimony with questionable relevance to be heard. As a result, arbitrator’s fees can be quite significant for even routine business disputes. The arbitrator’s fees are of course in addition to the fees that business clients pay to their own attorneys for handling the matter, plus the hefty filing fees that many arbitration forums charge as well. For example, the American Arbitration Association, the preeminent arbitration forum in the U.S., charges filing fees ranging from $300 to $2,500.00 for commercial arbitration disputes. Contrast these expenses with trials and other court hearings, where judges have no financial interest in prolonging a case, and filing fees are minimal.
2. The distribution of who pays the arbitrator’s and other fees can disfavor the party bringing the action. The filing party, known as the Claimant, will be responsible for paying not only the arbitration filing fees, but also its portion AND the other party’s portion of the arbitrator’s fees mentioned above should the defending party, called the Respondent, refuse to pay its share of such fees. In such a case, the Claimant must pay all fees in order for the matter to go on, yet the Respondent remains entitled to participate in the arbitration process. If the Claimant fails to pay all of the fees owed to the arbitrator, the arbitrator will likely suspend or dismiss the action entirely. Because there is no incentive for a Respondent to pay its share of an arbitrator’s compensation or other fees, the absurd ersult of the Claimant paying all fees happens more than one would think. Combined with the fees a Claimant must pay to its own attorney, it is easy to see why a business owner would question the use of arbitration in the first place.
3. Arbitrators have far more discretion to rule than judges, sometimes in spite of the evidence presented. The arbitration process is much less formal than a trial. While some informality saves the parties time and expense and speeds up the process, the biggest informality can alter the entire outcome, namely, the fact that the rules of evidence do not apply to arbitration. As a result, arbitrators are free to allow documents and testimony that is questionable as to veracity and authenticity into evidence, even though such evidence would not be permitted in a court of law. In plain terms, an arbitration hearing can literally turn into a free for all, with the arbitrator allowing all kinds of testimony and documents to be factored into an award. This sort of setting can severely hurt a business client who is relying strictly on the language of documents and the actions of the parties, while in turn favoring a party hoping for chaos, basing its case on hearsay and unsupported and unreliable accusations. [Tune in to PART 2 next week]
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Tags: arbitrate business disputes, arbitration, arbitration clause, breach of contract case, breach of contract lawsuit, business breach of contract, business contract review, business law, business lawsuit, business litigation, commercial arbitration, corporate litigation, franchise agreement, franchise arbitration, franchise law, litigate or arbitrate?, maryland breach of contract, maryland business, maryland business law, operating agreement, shareholder agreement, shareholder dispute
Thursday, January 21st, 2010
When looking to hire new personnel, my small business clients often ask me to draft the contract between the business and the new hire. It is oftentimes not until this point that the business has examined whether the new hire is an independent contractor or employee. An agreement used for an employee will be different in many key respects than an agreement drafted for use with an independent contractor. With that in mind, the following is a summary of the key differences between an employee and an independent contractor.
Much of this information has been taken from the IRS website at www.irs.gov, which contains a wealth of information on the subject and which I highly recommend every business reads when facing this issue. Just recently, the IRS published IRS Summertime Tax Tip 2009-20, which is summarized below.
-Hiring a worker as an independent contractor instead of as an employee will generally lessen the amount of taxes a business pays, because when a worker is an employee, employers must pay state and federal unemployment tax, social security tax and workers compensation/disability premiums to a State Insurance Fund. When a worker is an independent contractor, the business is not required to withhold these taxes or make these payments. That responsibility falls on the worker.
-The IRS uses three characteristics to determine the relationship between businesses and workers: Behavioral Control, Financial Control, and the Type of Relationship.
-Behavioral Control looks at whether the business has a right to direct or control how the work is done. The more control a business can exert over the work to be performed, the more likely the worker is an employee. Conversely, the more freedom and discretion the worker has in performing the work, the more likely the worker is an independent contractor. Do not confuse this with the business’s ability to control the result of the work done, a business is always permitted to exert control over results, and such control has no bearing on the contractor/employee discussion. Rather, the IRS examines the means by which the worker does the work.
-Financial Control looks at whether the business has the right to direct or control the financial and business aspects of the worker’s job. In other words, if the worker is on an employer’s payroll and receives a steady paycheck, the likelihood increases that the worker will be deemed an employee.
-The Type of Relationship factor relates to how the workers and the business owner perceive their relationship. It should be noted that the IRS will make its determination using substance over form, meaning that while it is interested in how the relationship between the parties is perceived by the parties, the IRS will make its determination ultimately regardless of how the parties paper their relationship.
In addition to the above points, the IRS has made clear in earlier publications that the following factors will also play a role in its determination:
-Who supplies the equipment, material, tools, workstations, and other items in order for the worker to perform the job. The more materials that the business supplies, the more likely the worker is an employee.
-Who controls the worker’s hours of employment.
Many times the characterization of the relationship between a worker and a business will be easy to determine. Sometimes, however, the line between employee and independent contractor will be blurred. It is in such a situation that the above factors must be analyzed carefully so that at the outset, a well written agreement hat accurately captures the parties’ relationship can be drafted and executed by the parties.
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Tags: breach of contract case, breach of contract lawsuit, business breach of contract, business contract review, business law, business lawsuit, business litigation, confidentiality agreement, covenant not to compete, employment agreement, employment contract, independent contractor, independent contractor agreement, maryland breach of contract, maryland business, maryland business law, non disclosure agreement, non solicitation agreement
Tuesday, December 8th, 2009
Maryland law is well settled that a non-compete must be reasonable in geographic scope and duration in order to be held enforceable. However, Maryland courts will enforce a covenant not-to-compete that does not contain a geographic limitation in certain narrow and limited circumstances. The U. S. District Court for the District of Maryland stated in Intelus v. Barton and Medplus, Inc., 7 F. Supp. 2d 635 (1998) that every non-compete must be examined to determine reasonableness based on the specific facts at hand, even non-competes that fail to contain a finite geographic limitation. The Intelus court stated:
“Competition unlimited by geography can be expected where the nature of the business concerns computer software and the ability to process information. . . Because of the broad nature of the market in which Intelus operates, a restrictive covenant limited to a narrow geographic area would render the restriction meaningless.”
In determining the reasonableness of a non-compete that does not contain a geographic limitation, Maryland courts will consider the nature of the industry and the national and perhaps global nature of the competition. In Intelus, the court concluded that the restriction was reasonably related and limited to Intelus’s need to protect its good will and client base, and therefore upheld the enforceability of the non-compete.
In Hekimian Labs, a Florida federal court, interpreting Maryland law, found that where “testimony indicated that competition within the business of remote access testing is such that the whole world is its stage” and “that there are only about 20 companies that compete in this business, and they do so on a worldwide basis,” then “to confine the restrictive covenant to a specified geographical area would render the Agreement meaningless.”
The Florida Court concluded that if the agreement did contain a geographical restriction, the offending party would only need to move outside of this restricted area and the damage to the harmed party would be the same. Because of the national and international scope of the competition between the parties, the absence of a specified geographic limitation was reasonably necessary for the protection of the party attempting to enforce the non-compete, and the covenant was upheld.
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Tags: breach of contract case, breach of contract lawsuit, business breach of contract, business contract review, business law, business lawsuit, business litigation, confidentiality agreement, corporate litigation, covenant not to compete, franchise agreement, maryland breach of contract, maryland business law, NDA, non disclosure agreement, non solicitation agreement, non-compete, restrictive covenant
Raymond McKenzie is a corporate and franchise attorney in the Washington, D.C. metropolitan area.
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