How to Increase the Odds That the Loser “Really Pays”

Posted on January 28, 2013 by coollawblog

Often, a client seeking our advice asks if they can recover their attorney’s fees in a lawsuit. We explain that an award of attorney’s fees to a prevailing party only occurs in a few situations: when a Federal or State law mandates an attorney fee award to the lawsuit’s winner, or when a court, in its discretion, determines that the behavior of the losing party is so egregious that punitive damages and attorney’s fees should be awarded. We explain that the necessary “egregious behavior” needs to almost rise to the level of criminal activity before a court will even consider a request for attorney’s fees. While most clients believe that the wrongs done to them by adverse parties are always “criminal” in the sense of being intentional and outrageous, it is rare when a court will award attorney’s fees purely based on bad business behavior.

However, clients can dramatically improve their chances to recover their attorney’s fees by providing a loser pays requirement in their contracts, agreements, purchase orders, proposals, and even in their standard terms and conditions. These clauses are generally enforceable in court and provide a means for a wronged person to recover attorney’s fees when pursuing the adverse party for damages and compensation.

Critical to enforcement of a loser pays provision is the need to make it part of your contract or agreement. Therefore, care must be taken in the specific language of such clauses as well as how they are disclosed and agreed to by all of the parties in a business relationship to ensure enforceability. This is particularly true, if a loser pays clause is found in your terms and conditions. You should consult your legal advisor as to how best to impose and ensure enforceability of such provisions against other parties with whom you do business.

House Bill 48 Modified Ohio’s LLC Statute. Your company’s rights and obligations may have changed.

Posted on October 15, 2012 by coollawblog

by W. Chip Herin III

Effective May 4, 2012, House Bill 48 significantly restructured Ohio’s LLC statute by codifying Members’ and Managers’ fiduciary duties, delineating the duties a Member-Manager owes depending on how that Member was appointed Manager, and adding statutory restrictions to Operating Agreements. Below is a summary of these changes.

Members Cannot Opt Out of Fiduciary Duties: Departing significantly from Delaware law, Ohio LLC Members can no longer eliminate or opt out of their fiduciary duties through the LLC’s Operating Agreement. However, Members are permitted to carve out certain exceptions from the duty of loyalty, including identifying specific transactions or acts that do not violate the duty of loyalty if not manifestly unreasonable. Further, Members or a number or percentage of Members specified in the Operating Agreement may authorize or ratify, after full disclosure of all material facts, a specific act or transaction that would otherwise violate the duty of loyalty. For example, Members may need to create an exception to the duty of loyalty when the Members’ other business activities may compete with the business of the LLC, as is often the case with LLCs formed to own real estate.
Member-Manager Fiduciary Duties: The new law provides that if a Member was appointed in writing and agrees in writing to be a Manager, then that Member owes the fiduciary duties of a Manager (presumably, in addition to the fiduciary duties of a Member): to act in good faith, in a manner the Manager reasonably believes to be in or not contrary to the best interests of the LLC, and with the care that an ordinary prudent person in a similar position would use under similar circumstances. Otherwise, a Manager who is also a Member of the LLC owes only the fiduciary duties of a Member, which are the duty of loyalty and the duty of care (as well as the obligation of good faith and fair dealing when discharging those duties).
Operating Agreements: Typically, the terms of an Operating Agreement supersede any contrary provisions in the Ohio LLC statute. However, under the new law, there are a number of things an Operating Agreement cannot do, including varying the rights and duties of the LLC, unreasonably restricting the right of access to books and records of the LLC, eliminating the duties of a Manager of the LLC, varying the requirements to wind up the LLC business in certain circumstances, and restricting the rights of third parties.

What does this mean for your LLC? Depending on how your LLC is structured, your Operating Agreement may need revision to comply with these new statutory changes. Additionally, LLC Members and Managers should understand and abide by their respective fiduciary duties. Companies are advised to consider these issues and seek counsel from their attorney to ensure continued compliance with Ohio law.

Protecting Against Unfair Competition: Will Your Company’s Non-Compete Agreements Survive a Merger?

Posted on August 24, 2012 by coollawblog

by Marc Fleischauer

The Ohio Supreme Court recently decided a case about non-competition agreements and the surprising effect of corporate mergers on their enforceability. The decision changes Ohio law significantly and gives rise to urgent and specific drafting recommendations for employers.

In Acordia of Ohio, L.L.C. v. Fishel, 2012-Ohio-2297 (2012), the Court was faced with a common scenario. “Company A” had required certain employees to sign restrictive covenants (commonly called “non-compete agreements”) prohibiting solicitation of customers and other competition against Company A for two years following termination of employment. Company A later merged with “Company B” to form “Company AB.” The same employees continued working for Company AB for several years after the merger, doing the same jobs with no apparent interruption.

Roughly four years after the merger, the employees quit their jobs at Company AB and joined a competing business. According to the Court, “They soon used their contacts to recruit multiple customer accounts from [Company AB]. Within six months, 19 customers had transferred $1 million in revenue….”

Company AB sued to enforce the employees’ agreements with Company A, based on the merger and the operation of Ohio Revised Statute § 1701.82. That statute says that a newly merged company is “vested” in the contractual rights of the original companies “without further act or deed.” Company AB maintained that it had automatically taken on all the same contract rights originally belonging to Company A.

The Supreme Court decided that indeed Company AB could enforce the agreements as written, but it added a huge caveat that dramatically altered the effect of mergers in Ohio going forward. The employees had only agreed not to compete with Company A; the agreements did not expressly include similar restrictions against competing with Company A’s “successors and assigns,” which would have included Company AB. So while Company AB could technically prevent competition with the now-defunct Company A, it was powerless to prevent competition against Company AB, according to the Court.

Further, the Court held that the same merger that had transformed Company A into Company AB was itself was a “termination of employment” event, starting the clock on the employees’ two-year non-competition requirement. By the time the employees quit Company AB and started competing, any contractual obligations they had owed to Company A had already long expired.

In the current economic climate, corporate mergers and other acquisitions are commonplace as companies seek to consolidate or otherwise change their corporate status. Often these corporate changes have little or no practical effect on employees, who at most might see a new name on their paychecks. But with this new Supreme Court decision, employers may be inadvertently giving away their restrictive covenant rights. To avoid an Acordia outcome, employers should take these steps now:

Ensure that non-compete contracts define “company” to include “successors and assigns,” such that employees will remain contractually obligated regardless of what corporate form the employer takes in the future.
Draft such agreements to make clear that mere mergers or other legal changes in corporate form do not trigger the post-termination commencement of the non-compete period.
If you suspect that the company’s existing agreements are already susceptible to the new Acordia outcome, especially if your company has ever undergone a change in corporate structure, consider amending or rewriting existing agreements with the help of experienced employment counsel.

Asset Protection: Sometimes, being attached to your spouse means that your creditors cannot attach your assets

Posted on July 3, 2012 by coollawblog

by Patricia Friesinger

HISTORY LESSON: Back in days of yore, (2/9/72 – 4/4/85 in Ohio), a form of property ownership known as Tenancy By the Entirety (TBE) was recognized. The TBE form of property ownership harkens back to times when women had much less control over their affairs and needed to be protected from their husband’s debts. It is useful now to protect assets from creditors.

“TBE” EXPLAINED: The general principle behind TBE property is that it is not owned part by husband and part by wife, but entirely by a fictional third-party made of the union of husband and wife. As such, only creditors of husband and wife can attach TBE property.

Although Ohio’s statutes no longer provide for TBE property, some other states still recognize TBE property with interesting wrinkles relating to:

form for invoking TBE ownership (i.e. presumed, “magical” words required to create it, unities of time of ownership, etc.),
extent of protection provided (i.e. full protection (other than against federal tax liens, See Drye v. U.S., 528 U.S. 49 (1999) and U.S. v. Craft, 535 U.S. 274 (2002))), protection akin to a life estate, protection until the non-debtor spouse dies, etc.),
types of property protected (i.e. all property or land only), and
residency requirements (i.e. whether husband and wife must be residents of the state for enforcement).

State Extent of Protection Provided* Types of Property Protected**

Alaska	Limited	Real and Personal
Arkansas	Limited	Real and Personal
Delaware	Full	Real and Personal
District of Columbia	Full	Real and Personal
Florida	Full	Real and Personal
Hawaii	Full	Real and Personal
Illinois — FN1
Indiana	Full	Real ONLY
Kentucky	Limited	Real ONLY
Maryland	Full	Real and Personal
Massachusetts	Limited	Real and Personal
Michigan	Full	Real ONLY
Mississippi	Full	Real and Personal
Missouri	Full	Real and Personal
New Jersey	Limited	Real and Personal
New York	Limited	Real ONLY
North Carolina	Full	Real ONLY
Ohio — FN2
Oklahoma — FN3
Oregon	Limited	Real ONLY
Pennsylvania	Full	Real and Personal
Rhode Island	Full	Real and Personal
Tennessee	Limited	Real and Personal
Vermont	Full	Real and Personal
Virginia	Full	Real and Personal
Wyoming	Full	Real and Personal

*See http://www.fredfranke.com/asset-a-estate-planning/36?task=view
** See http://www.usatoday.com/money/perfi/columnist/block/2003-09-16-block_x.htm
FN1 Only available for personal residence
FN2 Available from 2/9/72 – 4/4/85 (deeds between those dates are still recognized)
FN3 The asset protection value of TBE ownership was abrogated by statute on 5/7/45 (60 Oklahoma Statutes 1991 § 74

As such, Ohioans can take advantage of TBE protections of states without residency requirements.

WARNING: The methods for using TBE protections are complex and should not be used for asset protection or estate planning without investigating the state’s laws regarding effectiveness of TBE protection in each instance. The laws of the state where real estate is located is generally used when issues arise relating to that real estate, but that is not always the case when it comes to personal property. See e.g. Reif v. Reif, 86 Ohio App.3d 804 (2^nd Dist Ohio 1993). So while a court in Florida (for example) should recognize and protect personal property held as TBE property by Ohio residents, a court in Ohio may not recognize the protections of TBE ownership for personal property attachable in Ohio – such as a bank account held at a bank with branches in Florida and Ohio.

BOTTOM LINE: Since some situations and state laws will allow Ohioans to protect property using TBE ownership, it might be worth “tying the knot” or avoiding “untying the knot” to protect property interests from creditors.

Stay away from my friends: When is a business’s social media friend list a trade secret?

Posted on June 8, 2012 by coollawblog

by Sasha VanDeGrift

The general rule in Ohio is that for a customer list to be a trade secret, it has to be… a secret. Usually this means that the customer list is stored in a locked drawer or a password-protected server that only a few trusted people can access.

But with the emergence of social media, a friend list may be as or more important than a traditional customer list. But can a business’s friend list be a trade secret just like a customer list?

Christou v. Beatport, L.L.C., No. 10-cv-02912-RBJ-KMT, 2012 U.S. Dist. LEXIS 34307 (D. Colo. 2012) has raised this very issue. Christou owned several nightclubs in Denver that featured electronic house music. Christou employed Bradley Roulier as his talent scout and performance coordinator. Roulier had access to the friend lists.

The relationship between Christou and Roulier soured and Roulier left Christou’s nightclub empire to form a competing music business called Beatport. As former employees sometimes do, Roulier left with information that Christou believed to be trade secrets, including the friend lists.

Christou sued Roulier and Beatport, claiming the friend lists were trade secrets. Beatport moved to dismiss, arguing that the friend lists could not be trade secrets as anyone who accessed Christou’s social media pages could see who Christou’s friend are.

But the court found that the names themselves, readily available to the public, were not the important factor. Rather, by friending a business, the business gained access to the friend’s interests and preferences, contact information, and a built-in means of contact. This information cannot be obtained from outside sources. The court found that Christou could continue the lawsuit against Beatport because the friend lists could plausibly be trade secrets.

The court did not address whether the individual user’s profile is private or public. Facebook in particular has made headlines when privacy settings changed automatically and made formerly private content public. If a user made his/her content public, including the interests and preferences that could be valuable to a business, would that negate the court’s conclusion that the information requires protection because it cannot be obtained elsewhere? Can something be a trade secret when the business cannot control whether the very thing it desires to protect is actually a secret.

On the other hand, a friend list is greater than the sum of its parts. Having lists of thousands of people who have self-identified themselves as potential customers is immensely valuable. In Christou, the friend lists contained thousands of people, some of whom identified favorite DJs, songs, artists, etc., which would help Christou or Beatport learn what music was trending with their primary audience. Even if the customers all made their profiles public, which would make their contact and preference information just as available to Beatport as to Christou, Beatport would have to use its resources to find the profiles. Having a list of those people would save time and money, a fact that might persuade a judge that regardless of whether the profiles are public or private, the information is a trade secret.

Few, if any, courts have resolved these questions. As the court in Christou stated, whether a friend list is a protectable trade secret is an issue of first impression in federal court. Likewise, Ohio courts have not decided this issue. But we are likely to see more litigation on this issue, including the final decision in Christou.

The implication from the court’s decision is that under the right circumstances, a friend list might be a trade secret. Friend lists have business value and have to be treated that way. Make it clear that you do not want anyone other than your people talking to your friends. If your actions do not tell your competition to stay away from your friends, the competition will try to replace you as your friends’ BFF in the industry

Ohio Supreme Court Says Noncompete Clock Begins to Run Upon Merger

Posted on May 29, 2012 by coollawblog

by David Pierce

In a recent decision, the Ohio Supreme Court determined that the clock begins to run on the noncompetition prohibition in employees’ agreements at the time their employer merges with another entity, not at the time the employees ultimately separate their employment with the surviving entity, years later.

The Court’s 4-3 decision in Acordia of Ohio v. Fishel is significant and controversial. Counsel for Acordia had argued that such a finding would displace over 150 years of well established Ohio corporate law governing the surviving company’s rights to all of the assets and property (in this case employee agreements) of each constituent entity to the merger. Additionally, at oral argument, one of the dissenting justices asked how the employee agreements at issue differed from any other contract that a constituent company may have had with its customers or suppliers that survived following a merger.

In its decision, the Court was careful to find that the agreements were in fact transferred to the surviving entity in accordance with Ohio law. However, these agreements only prohibited the employees from competing for a period of two years following their employment with their named employer, Frederick Raugh & Company, not with any successor entity. Moreover, the Court stated that it was significant that the agreements did not state that they would apply to the company’s “successors and assigns.” Therefore, the Court narrowly construed the noncompete language at issue and found the noncompetition restriction had expired years before the employees left Acordia and took over a million dollars of business to a competitor less than six months after terminating their employment with Acordia.

The Acordia decision points out the importance of having well drafted employee agreements which cover all the bases and provide for contingencies such as assignment or corporate restructuring. Additionally, in the event of a merger, the surviving entity would do well to make sure that new employment agreements and restrictive covenants are signed by its employees to protect against the result reached by the lead opinion in Acordia.

The L. A. Dodgers are Claiming it was an Error

Posted on January 5, 2012 by coollawblog

by Merle Wilberding

Like the players in the baseball world, the players in the legal world want the Golden Glove Award – - going through their careers with no errors. Now it is alleged that the L.A. law firm of Bingham McCutchen LLP is being charged with an error for how it fielded the post-nuptial agreement between Frank McCourt and Jamie McCourt on the ownership of the Los Angeles Dodgers.

The evidence suggests that when the law firm partner prepared the six signed execution copies of the post-nuptial agreement, three of the copies had one set of exhibits that named Frank McCourt as the sole owner of the Dodgers, while the other three copies had a different set of exhibits that were silent on that point.

My first thought when I read this in the Wall Street Journal was, “Who would think that it was okay to delineate the ownership of a multi-million dollar asset (the Dodgers) on an exhibit, and not have it clearly described in the main body of the agreement?”

Then, even with that, how could there be two different sets of exhibits attached to the agreement?

Although post-nuptial property settlements are generally not considered a solution in Ohio, the lesson of the McCourt case would apply equally well in Ohio if it were a pre-nuptial agreement. If in doubt, legal counsel should be consulted.

Here are the discussion points:

• Should Frank McCourt pursue litigation against his law firm and thereby waive the attorney-client privilege?
• Are there evidentiary suggestions to reconcile the inconsistent exhibits?
• Could a post-nuptial agreement be valid in Ohio?
• Is this just another strike against the once-wonderful image of the Dodgers?
• Shouldn’t Gil Hodges be admitted into the Hall of Fame?

Your T&C’s (Terms & Conditions) can limit your liability, improve your chances in litigation and even save money on attorney fees

Posted on January 4, 2012 by coollawblog

by Richard A. Talda

There has been a dramatic rise in legal disputes where a company’s terms and conditions (T&C’s) have been found to control its business relationships with clients, customers and vendors. A review of and appropriate revisions made to T&C’s provide an opportunity to improve your position in disputes in a variety of ways. Depending on your State’s laws, provision can be made to limit your liability, better define (and limit) warranties, require the arbitration of disputes vs. court lawsuits, allocate who pays attorney fees, set up liens in combination with UCC compliance, require that disputes be held in your backyard vs. a far flung customer’s or vendor’s location, limit remedies in the event that you are found to be at fault, etc… I encourage anyone who uses T&C’s in daily business to evaluate them and seek advice as to how an update can better protect your business.

— coollawblog

Thoughts from the attorneys at Coolidge Wall Co., L.P.A.

Category Archives: General Business