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Beyond The Legalese

Selling Your Business?  Be Mindful of Protecting Privileged Information

7/31/2015

 
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Selling your business?  Make sure you are not selling your attorney-client privileged communications.  A recent decision highlights the problem.  In Great Hill Equity Partners IV LP v. SIG Growth Equity Fund I LLLP, 80 A.3d 155 (Del. Ch. 2013), the buyer of a business sued the former owners of the company claiming that the owners had fraudulently induced the plaintiff into purchasing the business.  After the complaint was filed, the buyer realized that it had access to the seller’s pre-transaction communications with the company’s then-lawyers because they were stored on the company’s computers.  The seller claimed the documents were privileged and therefore needed to be returned to the seller.

The Delaware Chancery court ruled that based on the “plain operation of clear Delaware statutory law,” the seller’s pre-merger communications now belonged to the buyer.  The Chancery Court’s opinion relied on a Delaware corporate statute which provides that, post-merger, “all property, rights, privileges, powers and franchises, and all and every other interest shall be thereafter as effectually the property of the surviving or resulting corporation ....”  The Court held that the broad language of the statute was intended to apply to all property and interests and even “all privileges, including the attorney-client privilege.”

The Court was well aware that its decision would prejudice sellers by disclosing pre-merger privileged communications to the buyer.  However, to prevent such disclosures, the Court explained that “the answer to any parties worried about facing this predicament in the future is to use their contractual freedom ... to exclude from the transferred assets the attorney-client communications they wish to retain as their own.”

New York leading court has a very different take on this issue.  In Tekni–Plex, Inc. v. Meyner & Landis, 89 N.Y.2d 123, 130, 136–38 (1996), the Court of Appeals squarely held that while the buyer is the holder of the company’s attorney-client privileged communications, that does not apply to attorney-client communications concerning the subject of the acquisition itself.  The Court reasoned that to grant [the acquiror] control over the attorney-client privilege as to communications concerning the merger transaction would thwart, rather than promote, the purposes underlying the privilege.  Therefore, the seller still controls the pre-merger attorney-client communications of the sold company.

Just because New York courts protect the seller’s privileged communications does not necessarily mean that New York businesses need not be concerned about the Delaware precedent.  Many transactions in New York involve the sale of companies that are incorporated in Delaware or contain contract provisions applying Delaware law.  Consequently, sellers of businesses should insist on a contractual provision that excludes privileged communications from being included among the assets passing to the acquiring company in the merger.

US Courts Can Provide a Powerful Tool in Obtaining Evidence for Foreign Disputes (28 U.S.C. § 1782)

4/30/2015

 
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An international legal practitioner seeking to obtain discovery in the United States for use in a foreign legal proceeding has a powerful tool available: 28 U.S.C. § 1782, which allows parties involved in a dispute outside the United States to obtain evidence by bringing a proceeding in the US that they would not necessarily be able to obtain in the jurisdiction of the dispute.  Under Section 1782, federal courts frequently grant petitions for judicial assistance—ordering the production of documents, as well as depositions of witnesses—provided that three statutory requirements are met: (1) the request for discovery is made "by a foreign or international tribunal" or "any interested person"; (2) the discovery requested is "for use in a proceeding in a foreign or international tribunal"; and (3) the person from whom the discovery is sought resides, or is found, in the district of the federal district court where the request has been made.  If these statutory requirements are met, the district court may exercise its discretion and grant the petition.

There are a number of issues to be aware of in seeking discovery via Section 1782.  One issue debated by federal courts is whether Section 1782 permits discovery of documents that are located outside the United States where the party from whom discovery is sought is located in the United States.  Additionally, U.S. courts have rejected the notion that a party must first try to obtain the discovery in question from the foreign tribunal before resorting to § 1782.  In fact, even if the foreign tribunal declined to compel discovery, a party may still obtain discovery in the U.S.  However, a U.S. court will deny discovery if it concludes that the foreign tribunal will not consider or will be offended by the discovery obtained in the U.S.

There is also a split among federal courts as to whether Section 1782 is available where the foreign proceeding is an arbitration.  In Intel Corp. v. Advanced Micro Devices, 542 U.S. 241 (2004), the Supreme Court’s only decision addressing Section 1782, Justice Ginsburg opened the door by quoting the positive view of Columbia Law School professor Hans Smit, but did not decide the issue.  Since Intel, federal courts have split over the issue.  Compare In re Application of Oxus Gold, 2006 WL 2927615 (D.N.J. 2006) (granting petition) with In re Operadora DB Mexico, 2009 WL 2423138 (M.D. Fla. Aug. 4, 2009) (denying petition).  The issue appears to hinge on the definition of the word “tribunal” within the meaning of the statute.  Few Circuit Courts have considered the issue.  However, the Third Circuit has held that a “bilateral investment treaty arbitration” “unquestionably” constitutes “use in a proceeding in a foreign or international tribunal.”  In re Chevron, 633 F.3d 153 (3d Cir 2011).  It is unclear whether the Court’s decision would apply to a private commercial arbitration.

Because of these and other distinctions among federal courts, it is critical that a petitioner’s counsel become familiar with local precedent before deciding on the commencement of a Section 1782 proceeding in connection with a foreign proceeding.  Given the fractured nature of the precedent, parties seeking discovery should consider whether they will be making an application in a favorable jurisdiction. The benefits of § 1782 discovery can be significant, and parties engaged in foreign proceedings should consider its use to obtain evidence that would otherwise be unavailable.

Highway Robbery?  FedEx Ground Drivers [Take the] Stand and Deliver

10/31/2014

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The independent contractor business model has been around for quite some time, and has recently been moving beyond the construction and technology spheres (where it was most commonly utilized), into industries such as janitorial services, home health care, and even the restaurant business.  An Intuit trend report published in 2010 projected that by the end of this decade, 40% of the American workforce will be comprised of contingent workers—a class that includes temps and independent contractors.  While many companies stand by this hiring practice, others criticize the model as a way for businesses to penny-pinch when it comes to taxes, insurance, and Social Security contributions.  Independent contractors’ salaries are not dictated by wage and hour rules, so they are not entitled to overtime pay, either (nor may they unionize).  Their non-employee status also excludes them from the protection afforded by other labor laws such as those enforced by the U.S. Equal Employment Opportunity Commission.

According to current secretary of the U.S. Department of Labor, Tom Perez, not an insignificant percentage of employers are actually misclassifying their workers as independent contractors.  In his March 2008 testimony before the House Economic Matters Committee, Perez declared this to be a “pervasive practice that cheats the state out of revenue, creates an unlevel playing field for businesses and deprives workers of their basic rights in the workplace.”  This very concern is the basis of a slew of class-action suits that have been brought by hundreds of current and former FedEx Ground delivery drivers in dozens of states, who claim that the shipping subsidiary has been taking advantage of them ever since the company acquired Roadway Package System in 1998 and adopted the policy of treating drivers as independent contractors and not as employees.  The plaintiffs are demanding back-pay for overtime and reimbursement for paycheck deductions for items such as professional uniforms and equipment, and vehicle cleaning and maintenance.  They contend that they should be considered full employees in light of the extent to which FedEx Ground strictly dictated their hours and routes, personal appearance on the job, and other work-related expectations, as laid out in their carefully-worded contracts.

FedEx Ground has been facing these suits since 2009 and, for a few years, they were largely successful in convincing the judges of the legality of their policies; appeals courts in numerous states decided in their favor.  This past August, however, the U.S. Ninth Circuit Court of Appeals in San Francisco revisited and overturned an earlier decision and ultimately declared Oregon and California drivers to be actual employees, deserving of the rights and benefits associated with such a status.  This opened the door for other similar cases to be reviewed, and it appears as though the pendulum is swinging more consistently towards the rights of the workers, and away from the company employing them.  Earlier this month in Kansas, the Supreme Court issued a ruling that validated the employee status of FedEx Ground drivers.  That same week, the National Labor Relations Board came to the same conclusion.  Yet, despite these losses (and the fact that they’re repeatedly being accused of playing dirty pool), the industry leader still maintains that the independent contractor arrangement benefits their workers as well as the company’s own bottom line.  The shipper’s position is that the practice encourages entrepreneurship and offers more freedom and flexibility than the traditional workforce model, thus empowering the small business owners who work for them—and who were required to officially incorporate as such in order to keep their jobs, according to one plaintiff counselor Beth Ross.  Workers’ rights groups, as well as the drivers, themselves, are adamant that the flexibility and advantages primarily benefit the employer, leaving the independent contractors with only a fraction of their earned income after having to bear the financial burdens that would (and should) have fallen squarely on the shoulders of FedEx Ground, had their employee status been honored from the outset.  If all of the class actions in progress resolve in favor of the workers, their employer may have to deliver hundreds of millions of dollars in potential damages.  The prospect of similar consequences—along with various state bills enforcing the proper classification of employees—just might encourage other businesses to take a closer look at their personnel policies.

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Out of 221B Baker Street and Into the Public Domain?  The Supreme Court May Decide

9/28/2014

 
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Believe it or not, many of the characteristics stereotypically associated with Sherlock Holmes were not actually significant elements in most—or even any—of the 60 stories written by Sir Arthur Conan Doyle about the now-iconic fictional detective.  Holmes’ magnifying glass, for example, appeared occasionally in the novels and short stories, while the distinctive, curved calabash pipe did not feature at all, but became a part of the Holmes persona over time, as people interpreted the character on stage, in films, and in illustrations.  The instantly-recognizable double-brimmed deerstalker hat, while not mentioned by name in the Sherlock Holmes canon, was represented in the original commissioned illustrations that accompanied the first publications of Conan Doyle’s stories in The Strand Magazine in the late 19th century.  Since then, there have been numerous adaptations and reinterpretations of the famous sleuth and his adventures with trusted sidekick, Dr. Watson.  Many of these adaptations, however, were produced only with the blessing of (and payment of licensing fees to) the late British author’s estate, even though only a handful of the stories from the Sherlock Holmes catalog of work were still under copyright. 

California-based lawyer and author Leslie Klinger—who, according to his website, is “one of the world's foremost authorities on Sherlock Holmes”—agreed to the Conan Doyle estate’s demand of purchasing a $5,000 copyright license before publishing his 2011 anthology entitled “Study in Sherlock: Stories Inspired by the Sherlock Holmes Canon.”  When the estate learned that Klinger was working on a sequel a few years later, they demanded his publisher halt publication until he would agree to obtain another license.  Instead of capitulating, Klinger sued the estate on the grounds that his work was only drawing from stories that were already in the public domain under copyright law, and thus, did not require a license for use.  Under US law, works published before 1923 are now considered to be in the public domain; this includes the 50 Sherlock Holmes stories published between 1887 and 1922.  But the 10 most recently-published stories are still under copyright protection, since they were published after 1923.  The Conan Doyle estate argued that the dynamic development of the two main characters was not fully complete until those final 10 stories were published, and hence, Holmes and Watson should not yet be freely used in the public domain, as elements of the characters themselves were still copyrighted.

A federal appeals court in Chicago disagreed with the Conan Doyle estate and the Conan Doyle estate has petitioned the Supreme Court to review this case.  If this court decision stands, the enigmatic residents of the fictitious 221B Baker Street will finally enter the public domain in their entirety and may be used freely in new creative works without having to seek permission from the author’s descendants.

The Latest on "Bad Boy" Guaranties

8/27/2014

 
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Many commercial loan packages involve the signing of non-recourse, otherwise known as “bad boy,” guaranties.  Since the guarantor is often the principal of the borrower, the guarantor typically signs the “bad boy” guaranty assuming that the guarantors assets are not really at risk if the loan goes into default.  However, this assumption is far from the case because the “bad boy” events that trigger guarantor liability are usually not limited to fraudulent conduct, but other less pernicious conduct such as the borrower’s filing of bankruptcy, failure to pay taxes or maintain insurance.  Because the guarantor’s personal assets are potentially on the hook in these circumstances, it is critical that loan participants carefully negotiate the recourse provisions of the loan agreement.  Ambiguities often lead to contentious litigation . . . and more often than not, courts have sided with lenders.
 
Judge Deborah A. Batts of the Southern District of New York recently disrupted that cycle earlier this year when she decided that the defendant guarantor was not liable for payment of a loan balance after the property had gone into foreclosure.  See CP III Rincon Towers Inc. v. Cohen, 2014 WL 1357323 (S.D.N.Y. Apr. 7, 2014).  The Court held, inter alia, that various mechanic’s and judgment liens that encumbered the property were not “voluntary” and therefore did not trigger the guarantor’s full recourse liability under a “bad boy” provision that applied to “voluntary” liens.  By contrast, for a decision in which a lender successfully recovered against a guarantor on summary judgment, see Greenwich Capital Financial Products, Inc. v. Negrin, 74 A.D.3d 413 (1st Dep’t 2010), which was litigated by, among others, a member of our office while at his prior law firm.


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