The Business Divorce Law Report

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.

January 24, 2023

FTC Ban on Non-Competes Would Have Major Impact on Closely Held Businesses

by Jay R. McDaniel, Esq.

The Federal Trade Commission is considering an administrative rule that would enact a broad ban on non-compete agreements that would prohibit contracts that restrict the employee from working for a competitor or starting a competing business.
The rule would also apply to ‘de facto’ non-competes, such as non-solicitation agreements, that have the effect of limiting a worker’s activities after employment.
The proposed rule will likely have a negative impact on the competitiveness and value of closely held businesses. Non-competes in equity transactions would be prohibited unless the equity stake involved is at least 25 percent.

A proposed rule pending before the Federal Trade Commission would bar noncompete agreements across-the-board, and in a way that could bring some very profound changes to the business climate in this country. If it is adopted in its present form, it likely will have a direct effect on the value of the investments of business owners in their own businesses and make the smaller, privately held business less competitive.

This proposed rule is a big shift in resources from business owners to the employees. It is something to watch and understand because of the effect it is likely to have if the proposed rule is adopted in its present form. It’s controversial and has already run into opposition from the U.S. Chamber of Commerce.

November 4, 2022

Attorney Agreement Barring Solicitation of Clients Enforceable

by Jay R. McDaniel, Esq.

An agreement that barred a lawyer from soliciting clients within a geographic area was unenforceable after the lawyer left the firm under the rules governing the professional conduct of attorneys.
An agreement prohibiting a former associate attorney from soliciting clients of the firm after his resignation may be enforceable in New York, thus a case alleging a breach of that agreement could proceed to trial.
Attorney Rule of Professional Conduct 5.1 that prohibits restrictions on the practice of law is unlikely to shield non-attorneys who act on behalf of a lawyer from liability.

Can a lawyer be prohibited from soliciting the clients of his former firm? The general rule is that restrictions on the practice of law, including any non-competition agreements, are void and unenforceable.

It came as a surprise to me, therefore, that the appellate division in the first department in New York had affirmed the trial court’s decision that let a case go to trial alleging the breach of a non-solicitation agreement signed by a former lawyer.

The case is Feiner & Lavy v. Zohar. Here are the three most important holdings in the decision. First, an agreement prohibiting a former associate of a law firm from competing with his former employer within 90 miles of New York City was void and unenforceable. Continue reading

October 26, 2022

Shotgun Buy-Sell Agreements – Solution to Deadlock

by Jay R. McDaniel, Esq.

Well-drafted business governance documents include buy-sell agreements to address deadlock among the owners.
A shotgun buy-sell is an offer that sets only the price. It can be accepted as either an offer to buy out the other side or to sell to the other side at the price in the offer.
Shotgun buy-sells are an efficient means to set the price of a transaction, but may be flawed when the owners have unequal knowledge of the business or inadequate financial resources.

What happens when the owners of a business can’t come to an agreement on an issue that is critical to the business? This happens when neither side has a majority. For example, when there are two 50-50 owners or when unanimous agreement is required and there are holdouts. Our discussion today concerns how the owners of a small business may use contractual arrangements to address this problem.

These contracts are known generally as buy-sell agreements, and that is that they require one party to sell and the other to buy. Now, buy-sell agreements can also include shotgun sales, which is a buy-sell agreement that’s triggered by a deadlock. And we’re going to focus today on the shotgun sale. That refers to the type of agreement that allows one party to set the price and then allows the other the party to decide whether, based on that price, they’re going to buy or sell.

Continue reading

October 4, 2022

When Can a LLC Member Be Expelled?

by Jay R. McDaniel, Esq.

How to Expel a Member from a Limited Liability Company

The removal of a member from a limited liability company, known as involuntary dissociation, is permitted by statute in most states and may also be permitted in an operating agreement.
Removal is permitted when a member has engaged in wrongful conduct that has or will materially affect the company or when the member has repeatedly breached the operating agreement.
Removal may also be permitted when a member files for bankruptcy or if it is not reasonably practicable for the LLC to continue with them as a member.

There are plenty of choices that we make in our lives that we would like to undo. Some we can and some we can’t. Breaking up with a business partner is the topic of this discussion. More particularly, how a member of a limited liability company can be expelled from the business. We’ll cover the circumstances in which members can be expelled, when it’s easy and when it’s not.

October 1, 2022

Anatomy of a Business Divorce Lawsuit

by Jay R. McDaniel, Esq.

- A business divorce is the process by which the owners of a business separate their business interests. The process involves negotiation and may also require litigation.
- These cases can be divided into four phases: the emergent phase, the examination phase, the valuation phase and the resolution phase.
- Most owner lawsuits end in a negotiated transaction because it gives the parties more flexibility over the manner in which the case is resolved.

We’re going to look at business divorce in terms of the four phases that the typical case goes through from its start to the time that is resolved, either through settlement or trial.We should start with the most basic definition of what is a business divorce. I use the term to describe the process by which people who were in a business together disentangle themselves. Continue reading

September 4, 2022

Minority Veto Rights Lead to Deadlocked LLCs

by Jay R. McDaniel, Esq.

Limited liability company statutes often require the unanimous approval of the members before actions may be taken outside the ordinary course of business or for any amendment of the Operating Agreement.
The requirement for unanimous action creates a minority veto – any member can veto the actions of the majority – often leading to deadlock.
States that have adopted the Uniform Limited Liability Company Act, including New Jersey, Pennsylvania and Connecticiut, require unanimous actions. Other states, including Delaware and New York, permit major actions to be taken by simple majority vote.

These days we’re seeing a political world in which we have a national politics that is very, very closely divided, and one or two people have tremendous control over the rest of the country. It’s not just the Congress, but over everyone. And they’re basically, even though they only have one vote, they’re able to stop things, able to derail a process. They have a minority veto. Continue reading

June 24, 2021

Court Vacates Arbitration Award in Ownership Dispute

by Jay R. McDaniel, Esq.

An arbitration award entered in a dispute between two parties over the alleged issuance of shares in a financing transaction was vacated by a court because of the arbitrator’s failure to issue the written award on time.

In the Matter of the Application to Confirm an Arbitration Award of Theodore Papakonstadinou and AKTOR CORPORATION, Petitioners, against Nikolaos Sparakis, LIZBETH GOZZER and GOZZER CORPORATION, Respondents.

Petitioner Theodore Papakonstadinou is a director and owner of 95% of the voting shares of respondent Gozzer Corporation (“Gozzer Corp.” or “Corporation”), a domestic corporation with its principal place of business at 1043 Broadway, Albany, New York. The remaining 5% of the shares are owned by respondent Lizbeth Gozzer (“Gozzer”).

June 23, 2021

Plaintiff Released Claims of Fraud in Purchase of Interest

by Jay R. McDaniel, Esq.

In a business divorce case alleging the fraudulent acquisition of shares, once the defendant established the existence of a release, plaintiff must prove it is invalid.
A claim of a fiduciary relationship does not relieve plaintiff of proving that he did not release a claim that he was the victim of fraud in the purchase of shares of a closely held business.

Nilish Chadha, Individually, and Derivatively on Behalf of Wahed Inc. f/k/a Wahed Invest Inc., Plaintiff, against Junaid Wahedna, and Wahed Inc. f/k/a Wahed Invest Inc., Defendants.

June 21, 2021

Threats Against Partner’s Ex Not Intentional Infliction of Emotional Distress

by Jay R. McDaniel, Esq.

In a dispute among general partners, a single verbal threat against spouse of one of the partners does not create a claim for intentional infliction of emotional distress.

CHERYL E. CHAMBERS, J.P. SYLVIA O. HINDS-RADIX COLLEEN D. DUFFY ANGELA G. IANNACCI, JJ.

In August 2007, the plaintiff and the defendant allegedly entered into an oral agreement establishing a general partnership to own, manage, and maintain real estate and, in [*2]furtherance of that agreement, jointly held title to two properties in Port Chester.

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

The Federal Trade Commission is considering an administrative rule that would enact a broad ban on non-compete agreements that would prohibit contracts that restrict the employee from working for a competitor or starting a competing business.

The rule would also apply to ‘de facto’ non-competes, such as non-solicitation agreements, that have the effect of limiting a worker’s activities after employment.

The proposed rule will likely have a negative impact on the competitiveness and value of closely held businesses. Non-competes in equity transactions would be prohibited unless the equity stake involved is at least 25 percent.

An agreement that barred a lawyer from soliciting clients within a geographic area was unenforceable after the lawyer left the firm under the rules governing the professional conduct of attorneys.

An agreement prohibiting a former associate attorney from soliciting clients of the firm after his resignation may be enforceable in New York, thus a case alleging a breach of that agreement could proceed to trial.

Attorney Rule of Professional Conduct 5.1 that prohibits restrictions on the practice of law is unlikely to shield non-attorneys who act on behalf of a lawyer from liability.

Well-drafted business governance documents include buy-sell agreements to address deadlock among the owners.

A shotgun buy-sell is an offer that sets only the price. It can be accepted as either an offer to buy out the other side or to sell to the other side at the price in the offer.

Shotgun buy-sells are an efficient means to set the price of a transaction, but may be flawed when the owners have unequal knowledge of the business or inadequate financial resources.

The removal of a member from a limited liability company, known as involuntary dissociation, is permitted by statute in most states and may also be permitted in an operating agreement.

Removal is permitted when a member has engaged in wrongful conduct that has or will materially affect the company or when the member has repeatedly breached the operating agreement.

Removal may also be permitted when a member files for bankruptcy or if it is not reasonably practicable for the LLC to continue with them as a member.

A business divorce is the process by which the owners of a business separate their business interests. The process involves negotiation and may also require litigation.

These cases can be divided into four phases: the emergent phase, the examination phase, the valuation phase and the resolution phase.

Most owner lawsuits end in a negotiated transaction because it gives the parties more flexibility over the manner in which the case is resolved.

Limited liability company statutes often require the unanimous approval of the members before actions may be taken outside the ordinary course of business or for any amendment of the Operating Agreement.

The requirement for unanimous action creates a minority veto – any member can veto the actions of the majority – often leading to deadlock.

States that have adopted the Uniform Limited Liability Company Act, including New Jersey, Pennsylvania and Connecticiut, require unanimous actions. Other states, including Delaware and New York, permit major actions to be taken by simple majority vote.

An arbitration award entered in a dispute between two parties over the alleged issuance of shares in a financing transaction was vacated by a court because of the arbitrator’s failure to issue the written award on time.

In a business divorce case alleging the fraudulent acquisition of shares, once the defendant established the existence of a release, plaintiff must prove it is invalid.

A claim of a fiduciary relationship does not relieve plaintiff of proving that he did not release a claim that he was the victim of fraud in the purchase of shares of a closely held business.

In a dispute among general partners, a single verbal threat against spouse of one of the partners does not create a claim for intentional infliction of emotional distress.