Statutes

January 30, 2023

Prior Disclosure Kills Trade Secrets Claim

To enforce a claim for misappropriation of a trade secret, the plaintiff must prove that the information was secret and valuable. Plaintiffs in New Jersey can rely on either the common law or the New Jersey Trade Secrets Act.
Secrets that have been publicly disclosed lose their their protection as trade secrets. Thus, the failure to secure a non-disclosure agreement with vendors or potential vendors could make it impossible to protect sensitive information in the future.
Once a trade secret has been publicly disclosed, even restrictive covenants and non-disclosure agreements executed by employees may lose their effectiveness as a means of protecting sensitive information.

One of the first obstacles that a company will encounter when trying to enforce its rights to protect confidential or proprietary information is whether the information is a trade secret. This is a threshold issue that is determined by the conduct of the party claiming the secret, sometimes as much by the sensitivity of the information.

If the information is in the public domain, or if the owner the information has not taken steps to protect the information from disclosure, under New Jersey law there is no trade secret to protect. That was the result in this case from New Jersey’s Superior Court.

Court Dismisses Trade Secret Misappropriation Claim

In a lawsuit brought against a New Jersey beauty supplier, a trial judge of the Superior Court dismissed claims asserting that a competitor had misappropriated its trade secrets and that its former employees were in breach of the confidentiality and non-solicitation provisions of restrictive covenants that they had executed.

The case, Ebin New York, Inc. v. Beauty Plus Trading Co., Inc., involved the formula for an adhesive hair spray that the plaintiff claimed was a trade secret. The plaintiff sued its manufacturer and Beauty Plus, along with individual defendants that the plaintiff alleged were bound by the agreements they had made as employees.

February 5, 2021

Estate Plan Sows Father and Son Business Divorce

by Jay R. McDaniel, Esq.

Managers of a limited liability company owe to the company fiduciary duties of loyalty and care, must act in good faith, and refrain from reckless or unlawful conduct.
A member who seeks information about a manager-managed limited liability company must state the purpose for the request under the Uniform Limited Liability Act.
In a dispute involving a family farm, the trial court exercises equity to look through the details of disputed loan payments and find that they were to benefit of the limited liability company and its members.

Some cases make you wince when you think about the underlying relationship. This case in which a son sued his father over the repayment of a mortgage is one of them. It comes from the Iowa Court of Appeals and is interesting from my perspective because the underlying statute is the same as applies here in New Jersey and because it demonstrates the scope of equity to reframe disputed issues into a more manageable solution. field-213364_1920-e1612533257149-1024x379

The dispute in Erwin v. Erwin (opinion here) addressed the dispute between Michael Irwin and his son, Richard, that grew out of the father’s attempt to pass the family farm without incurring tax liability. The father and Richard’s mother, who owned the farm individually, formed a limited liability company, Erwin Farms II, LLC, in 2012 and passed the land to the company. At the time of the transfer, the land was subject to a mortgage. Richard received a block of non-voting membership units. The remaining membership units, including all of the voting units, were owned by the parents.

The operating agreement of the company named Michael Erwin as manager. In addition to the existing mortgage, after the land was transferred to the LLC, the Erwin parents took two loans for improvements. By the time of the trial, those loans had all been paid. Continue reading

January 18, 2021

Surrender of Membership Certificates Was Dissociation from LLC

by Jay R. McDaniel, Esq.

A limited liability company member withdraws by voluntary dissociation, which occurs when the company has notice of his ‘express will” to withdraw. Voluntary dissociation terminates management rights, but not economic rights.
A court may refuse relief on a claim when the plaintiff has acted with unclean hands with regard to the subject matter of the action. The doctrine applies to an evil practice or wrong conduct in the particular matter for which the court has been asked to provide a remedy.
A member in a manager-managed limited liability company owes no statutory duty of loyalty to the company, but will owe a statutory duty of loyalty under the common law if he or she is also an employee.

A sales representative who held a non-equity percentage interest in a New Jersey limited liability company effectively withdrew as a member of the company by leaving his “share certificates’ with the company’s lawyer, a trial and appellate court have agreed. building-lot-3391379_1920-e1610995346583-1024x402

This withdrawal, known under New Jersey’s version of the Revised Uniform Limited Liability Company Act (RULLCA) as a voluntary dissociation occurred even though the circumstances surrounding that act – leaving a certificate with a lawyer – was disputed. Dissociation in limited liability and partnership law is an act by which an individual owner’s association with the business is severed, voluntarily or involuntarily. It may apply in either a resignation or an expulsion.

The Appellate Division case at issue, Decandia v. Anthony T. Rinaldi, LLC (see opinion here) involved a dispute between a sales representative who received a commission styled as a membership interest in a construction company, but which was actually a non-equity profit interest in his own originations. The sole equity owner of the firm, Rinaldi, retained all of the management rights in the business. Continue reading

August 27, 2018

LLC Member Denied Judicial Dissolution

by Jay R. McDaniel, Esq.

New York does not recognize a cause of action for minority oppression of a member of a limited liability company.
Judicial dissolution is a remedy available to the minority LLC member when the majority is unwilling or unable to promote the purpose of the company or continuing the business has become financially not feasible.

The dismissal of a judicial dissolution claim brought by an LLC member seeking to dissolve the family business demonstrates the difficulty that an oppressed minority LLC member faces under New York law.

New York does not recognize a cause of action for minority oppression under its limited liability company statute, and so a trial judge in New York County made quick dismissal of a claim for involuntary judicial dissolution based on the allegations of a minority member that he was being treated unfairly. The plaintiff’s attorneys missed the mark and failed to assert other significant claims suggested by the facts alleged in the complaint.

August 20, 2018

Member-Managed Limited Liability Company Similar to Partnership

by Jay R. McDaniel, Esq.

A trial court reasons that because a member-managed limited liability company is similar in management to a partnership, the court may reason from partnership law in fashioning a remedy for an expelled member.
The majority members of the LLC, who voted under the Operating Agreement, to compel the withdrawal of the member are jointly and severally liable to pay the ousted member the fair value of his equity interest.
When no other provision of the limited liability company statute applies, in many states a court may turn to recognized “rules of law and equity” to fashion a remedy.

Limited Liability Company Disputes Attorney A Delaware chancery judge drew a liberal comparison between a venture capital fund organized as a limited liability company and a limited partnership in holding that a member that had been forced out was entitled to fair value rather than the value of his capital account. The result was that his buyout increased by some fivefold, but not for the reasons advanced by the departing member.

Compelled Withdrawal of Member Requires Payment of Fair Value

The case, Domain Associates, LLC v. Shah, is significant for two principal holdings. First, it represents a relatively rare occurrence when a trial court falls back on the equitable catch-all provision that one finds in a number of limited liability company and partnership statutes. Second, the trial judge considered the management structure – the LLC at issue was member-managed similar to a partnership – as good reason to follow a decision construing the equitable catch-all provision found in Delaware’s partnership statute. Continue reading

February 5, 2013

NJ Limited Liability Company Law Effective March 18

by Jay R. McDaniel, Esq.

Revised Uniform Limited Liability Company Act Changes Legal Landscape

The effective date of New Jersey’s Revised Uniform Limited Liability Company Act is approaching. The law will be effective on March 18, 2013 for newly formed LLCs and will be applied to all LLCs effective March 1, 2014.

There is a laundry list of changes in the new statute. Our view in the firm is that it’s a significant improvement over New Jersey’s current statute, modeled under Delaware law with some fairly significant additions. But the statute is also more complicated, and for those accustomed to drafting under the old law, it’s time get started revising those model clauses.

It’s also time to start warning the owners of existing LLCs about the impending change. The differences are significant enough that some LLCs may have problems with Operating Agreements drafted under the old statute that will have significant problems under the new act.

Although the law does not apply to a new LLC until March 18, we are incorporating the new statute in the LLCs that we are forming. It will apply in just over a year anyway so it makes sense to include a clear choice of law selection, at least until next month.

October 5, 2012

New Jersey Limited Liability Company Laws Undergo Major Revision

by Jay R. McDaniel, Esq.

Limited Liability Company Act Transforms Principles of LLCs

A new set of laws governing New Jersey limited liability companies will become effective in March. The changes are profound. The Limited Liability Company Act fundamentally changes a number of bedrock principles about the manner in which limited liability companies are organized and managed.

Limited Liability Company Becomes Entity Type of Choice for New Businesses

To enforce a claim for misappropriation of a trade secret, the plaintiff must prove that the information was secret and valuable. Plaintiffs in New Jersey can rely on either the common law or the New Jersey Trade Secrets Act.

Secrets that have been publicly disclosed lose their their protection as trade secrets. Thus, the failure to secure a non-disclosure agreement with vendors or potential vendors could make it impossible to protect sensitive information in the future.

Once a trade secret has been publicly disclosed, even restrictive covenants and non-disclosure agreements executed by employees may lose their effectiveness as a means of protecting sensitive information.

Court Dismisses Trade Secret Misappropriation Claim

Managers of a limited liability company owe to the company fiduciary duties of loyalty and care, must act in good faith, and refrain from reckless or unlawful conduct.

A member who seeks information about a manager-managed limited liability company must state the purpose for the request under the Uniform Limited Liability Act.

In a dispute involving a family farm, the trial court exercises equity to look through the details of disputed loan payments and find that they were to benefit of the limited liability company and its members.

A limited liability company member withdraws by voluntary dissociation, which occurs when the company has notice of his ‘express will” to withdraw. Voluntary dissociation terminates management rights, but not economic rights.

A court may refuse relief on a claim when the plaintiff has acted with unclean hands with regard to the subject matter of the action. The doctrine applies to an evil practice or wrong conduct in the particular matter for which the court has been asked to provide a remedy.

A member in a manager-managed limited liability company owes no statutory duty of loyalty to the company, but will owe a statutory duty of loyalty under the common law if he or she is also an employee.

New York does not recognize a cause of action for minority oppression of a member of a limited liability company.

Judicial dissolution is a remedy available to the minority LLC member when the majority is unwilling or unable to promote the purpose of the company or continuing the business has become financially not feasible.

A trial court reasons that because a member-managed limited liability company is similar in management to a partnership, the court may reason from partnership law in fashioning a remedy for an expelled member.

The majority members of the LLC, who voted under the Operating Agreement, to compel the withdrawal of the member are jointly and severally liable to pay the ousted member the fair value of his equity interest.

When no other provision of the limited liability company statute applies, in many states a court may turn to recognized “rules of law and equity” to fashion a remedy.

Compelled Withdrawal of Member Requires Payment of Fair Value

Revised Uniform Limited Liability Company Act Changes Legal Landscape

Limited Liability Company Act Transforms Principles of LLCs

Limited Liability Company Becomes Entity Type of Choice for New Businesses