Back view of businessman with umbrella looking at city

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  • A former employee will violate the computer fraud and abuse act only by having unauthorized access to data, not by using data for an unauthorized purpose.

  • Former owners or employees that access computer systems after termination may be liable under the Computer Fraud and Abuse Act.

  • A federal claim based on the unauthorized use of data will likely no longer support a federal claim in a business divorce litigation.

So much impact from such a little word.  The U.S. Supreme Court, resolving a split among the circuit courts, imposed significant limits on the reach of the Computer Fraud and Abuse Act (CFAA), severely restricting its usefulness as a tool to pursue unfaithful former employees and owners.cyberspace-2784907_1920-1024x683

The significance of the decision– which as discussed below turned on the construction of the work “so” in the statute’s definitions – in business divorce cases is that it will limit the ability of litigants to employ the statute as redress for some types of conduct and deprive a plaintiff in some cases of access to federal courts.  (For the linquists and grammarians, the parsing of “so” is in the opinion, here.) Continue reading

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  • A charging lien protects the interest of a lawyer in fee that is to be paid from a contingent-fee recovery.  A statutory lien may be enforced through a petition filed in an underlying action.

  • The amount of a charging lien, and the lawyer’s compensation, is determined using principles of quantum meruit, or “so much as he deserves.  Quantum meruit creates an implied contract to pay an amount based on the contribution of the former lawyer to the ultimate result.

  • A charging lien claim is subject to the general requirements for trial by jury.  Once a jury trial is demanded by either party, it can be waived only with consent.  Whether a party is entitled to trial by jury depends on whether a jury trial is available in the underlying action.

New Jersey’s attorney charging lien statute (N.J.S.A. 2A:13-5) permits a discharged attorney to file a lien petition in a matter makes clear that the trial court has the authority, in the first instance, to establish and enforce the charging lien, but it is silent on the issue of whether a jury trial is required to determine the ultimate outcome.jury-box

When is a Charing Lien Subject to Trial by Jury?

That question – jury trial or not – is likely to turn on where the case was pending at the time the lien was asserted, according to a decision of the Appellate Division of Superior Court in Toscano Law Firm v. Haroldson (opinion here).  The appellate reversed the trial court’s decision in a long-running fee dispute, made without a jury, and remanded the dispute for a new trial.

Thus, although discharged attorneys in  contingent-fee matters are generally compensated under principles of quantum meruit, an implied contractual theory that is equitable in nature, the parties may have a right to trial by jury.  In the Toscano, litigation, the Appellate Division held, the trial court had confused the equitable nature of a quantum meruit claim with the fact that it is a legal remedy.  (The quantum meruit claim is one that results in money damages payable to the successful charging lien petitioner.) Continue reading

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Independent Contractor, or Not …

Divining the difference between the traditional employee and an independent contractor has an inherent level of uncertainty, particularly in this era of gig workers and home offices brought about by the Covid pandemic.

Shortly before the end of the Trump administation, the Department of Labor had announced a new standard under the Fair Labor Standards Act (“FLSA”) that was focused on a pair of core factors — worker control and opportunity for profit.  The Biden administration has reversed course, however, and the Department of Labor has withdrawn the rule change.

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In most lawsuits, there is a presumption that the matter will, in most circumstances, go to trial.  A party involved in a dissolution action involving a closely held New York corporation needs to request a hearing, however, or risk having the matter resolved in a summary fashion.

That is the reminder from this decision of the Fourth Department of the Appellate Division affirming the decision of a trial court granting dissolution and the appointment of a temporary receiver for Brady Farms, Inc. in western New York.  (Opinion in Brady v. Brady)

The record does not include a request from respondents for an evidentiary hearing and, on appeal, respondents concede that they failed to make such a request. Consequently, respondents’ contention that the court abused its discretion in ordering dissolution summarily, without a hearing, is unpreserved.

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  • Key employees of a company may be bound by restrictive covenants that are included in an agreement to sell the entity, but do not reference them individually.

  • A court should consider whether the restrictive covenant of a key employee was a significant element of the transaction and necessary to protect the good will of the business. 

  • Restrictive covenants that are given in connection with the sale of a business may be broader than those given by an employee to an employer, and are more likely to be considered reasonable if they were an aspect of the transaction.

In some circumstances, an executive who received a portion of the proceeds of the sale  of a business may be bound  by the restrictive covenants that were part of the deal, even if he had not negotiated the covenant individually with the purchaser in a decision involving a pharmaceutical rebate company.drugs-2170816_1920-1024x576

The decisions we consider here frame an often relevant distinction between a restrictive covenant that is part of the sale of the business and a restrictive covenant that is part of a purely employment relationship.  Here, the time period applicable to the restriction was three years, which may have been unenforceable against an employee but was reasonable when it was part of a sale of the business in which the defendant benefitted personally.

Executive with ‘Bonus on Sale’ Agreement

The defendant in this decision was James Larweth, an executive in the pharmaceutical rebate business, in which drug companies compete to have their products included on lists of preferred medications.  Insurance companies receive rebates and engage pharmaceutical benefit management companies.  The executive worked in an even narrower area of the business, “carve out” pharmaceutical rebates. Continue reading

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  • A restrictive covenant that is in force during a vesting period for securities granted as part of an employee incentive program may present an issue for enforcement, if not tied to to the protection of an employer’s legitimate interest.

  • A court considering a preliminary injunction request blue-penciled the duration of a covenant not to compete or solicit customers to base the time period on termination, not the vesting period for stocks and options sought by the former employer. 

  • The duration of a restrictive covenant may not be reasonable if the duration is not tied to the former employer’s protection of a legitimate interest.

Restrictive covenants that were tied to the vesting and exercise schedules pf securities awarded through United Healthcare’s employee incentive programs were not reasonable, a federal court held recently.  The court then limited the duration of the time when a former employee would be restricted from competing with or soliciting the company’s customers.binding-contract-948442_1920-1024x683

The case involved a former executive, Jeffrey Corzine, who worked in strategic marketing for United in its program offered as an option in Ohio’s Medicare program. Corzine was terminated by United in a corporate reorganization and then went to work for a competitor, Humana, Inc., during the time that both companies were competing under a Request for Applications (RFA) for contracted Medicare services.  The case was before a federal district judge on United’s application to secure a preliminary injunction. Continue reading

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  • Restrictive covenants that limit the ability of former employees to compete have been the subject of legislative limits in a number of states, including Maine, Maryland, Massachusetts, New Hampshire, Rode Island, Virginia and Washington.

  • Bills that would limit the enforceability of restrictive covenants in New Jersey have been introduced into the legislature since 2017 but have failed to be adopted. 

  • Legislative restrictions on agreements not to compete may require minimum compensation, restrict the geographic scope and time frame of the agreement and prohibit courts from “blue penciling”  unreasonable restrictive covenants rather than refusing to enforce them entirely.

Restrictive covenants continue to be disfavored or limited by legislatures in a number of states.  New Jersey is among the states in which no legislative action has been taken to limit the types of employees that may be subject to restrictive covenants or the scope agreements not to compete.    Bills that would limit the enforceability of restrictive covenants have been introduced in the New Jersey legislature since at least 2017 without gaining adoption.  (See Assembly Bill 1650)time-731110_1920

The Illinois legislature this week advanced legislation that will limit the enforceability of restrictive covenants against many former employees earning $75,000  or less and set limits for enforceability.  These statutory limitations on the enforceability of restrictive covenants are becoming more widespread. Continue reading

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  • An email from the sole owner of a limited liability company announcing that employees had become partners with a profit interest was not sufficient to constitute admission as a member of the LLC.

  • The fact that the party claiming an equity interest in an LLC had refused to execute an operating agreement was a strong indication that the issuance of equity was still the subject of negotiations.

  • A court is likely to consider the completeness of the terms of an alleged oral agreement to admit a new member; without sufficient details the agreement will be deemed incomplete and unenforceable. 

  • The issue of whether an individual is a member of a limited liability company is properly tried by a judge rather than a jury.

What does it take to make someone a member of a limited liability company?  The Revised Uniform Limited Liability Company Act (RULLCA) as adopted in New Jersey and most operating agreements contain some requirement for unanimous consent.  The requirement on unanimous consent reflects the policy underlying the “pick your partner rule” in smalll business organizations: no one should be forced to share ownership of a closely held business against their will.mail-1454731_1920-1024x1024

Unanimous Consent Required for Admission of New LLC Members

The contours of what is unanimous consent is often not clear, however.  Does a promise of admission as a member or partner constitute consent?  What about the formality of signing an operating agreement?  These are facts that vary by the case and the circumstances.

The line between equity owner and a highly compensated senior employee – sometimes with the title of partner – is often blurred, particularly in certain professions such as lawyers in which the non-equity or contract partner is a common occurrence.  In a case recently before the Appellate Division in New Jersey, the business at hand was a private equity fund and a senior employee. Continue reading

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  • Accounting firm is compelled to repurchase the equity of departing shareholder who moved practice to competitor firm.

  • A shareholder agreement that is integrated and intended to be the parties’ complete agreement may preclude a claim for breach of corporate by-laws.

  • A shareholder in an accounting firm organized as a professional corporation did not breach any fiduciary duties by negotiating with a competitor and disclosing general information about his and the firm’s practice, even if he was to be compensated based on the clients who followed him to his new employer.

For 22 years Robert Dick worked in a growing accounting firm before  he left for a competitor, taking with him a number of clients.  Before giving his resignation, however, Dick put together an estimate of his billings and a description of his client base, although apparently not providing any details on client identify.  This discussion – common in a professional move – was one of the principal defenses to a lawsuit that Dick brought to compel his former employer to repurchase hisAcountant share repurchase shares.

Resignation of Account from Professional Corporation

Dick was a 30 percent shareholder in Koski Professional Group, P.C. who had built a following among health care clients, having purchased shares in the professional corporation on multiple occasions since 2005. In 2015 he moved his practice to a competitor, Bland and Associates under an arrangement in which he received base compensation plus a percentage commission on his client’s billings. At the time of his departure, Dick was one of four owners.  He was followed by a number of clients, leading to the litigation and ultimately an appeal to the Nebraska Supreme Court. (Opinion here) Continue reading

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  • Although a former executive was bound by a restrictive covenant, the fact that his duties after joining a competitor were directed to a different market made the scope of the restrictions unreasonable.

  • A restrictive covenant that is not narrowly tailored to protecting specific interests of the former employer at stake in a lawsuit is less likely to be enforced with a preliminary injunction. 

  • A company that relies on the inevitable disclosure doctrine faces a high hurdle to show the certain use of a trade secret in a competitive manner.

An attempt by United Health Care to block an executive from joining a competitor failed when a federal judge found the medical insurance and services company had failed to establish it was likely to succeed when the case goes to trial.  The dispute identifies some of the steps that a new employer take to prevent its just-hired employee from running afoul of a restrictive covenant.united-Logo

The defendant Carlos Louro in this this case, United Health Care v. Louro, was an executive supervising the underwriting of national accounts at United.  He had recently been promoted to vice president and served on a high-level, national accounts strategy group.  He had also received stock options and restricted stock awards, which contained restrictive covenants and non-disclosure provisions..

Anthem-logoThe trial court construed Louros agreements with United that and restricted him from:“[e]ngag[ing] in or participat[ing] in any activity that competes, directly or indirectly, with any Company activity, product, or service that [Louro] engaged in, participated in, or had Confidential Information about during [Louro’s] last 36 months of employment with the Company” or assist anyone in any of those activities for one year after Louro’s termination of employment.” Continue reading

Contact Information
Jay R. McDaniel, Esq.
(973) 602-3915
Weiner Law Group LLP
New Jersey Office
629 Parsippany Road
Parsippany, NJ 07054
New York City Office
90 Broad Street
New York, NY 10004
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