Business Law Counsel

Contracts are about preparing for the worst. Define your obligations, then limit your liability. Disclaim warranties. Require notice and an opportunity to cure. Nobody wants to think about their relationships going bad when they begin, but NOBODY wants to be the person who didn't do just that..

The "forum selection clause" provides important protection in the new-ish global economy. The forum selection clause is an agreement to an exclusive litigation locale. This can be a particular country, state or even municipality.

When disputes arise, litigation locale can be used as a way to harass or otherwise disadvantage the party being sued. Consider the buyer in New York who purchases goods from a company in San Francisco. If the buyer is not happy, where do you think it's going to sue?

Imagine if Germany could have required Russia to fight on its home field in World War Two. The front on which wars are fought can be outcome determinative.

Absent of a forum selection clause, most courts follow the "first-filed" rule, meaning that the first-filed action is where the parties must litigate. Meaning, if you lose the race to the courthouse, you'd better start asking around for lawyers across the country, hope you have plenty of coverage at the office and buy a plane ticket. Several tickets, actually.. For small and medium sized business, the cost of litigating thousands of miles from home can be devastating.

An enforceable forum selection clause, however, can trump the first-filed rule. That's exactly what happened in Ingres Corp. v. CA, Inc., 8 A.3d 1143, 1145 (Del. 2010). In Ingres, the parties had agreed to litigate disputes exclusively in Delaware or New York. One of the parties, a California company, sued in - you guessed it - California. The defendant then filed a second lawsuit in Delaware, the agreed-upon forum. The California Plaintiff sought to stay the Delaware action on the basis of the prior California case.

The court denied the stay request, holding that the parties "agreed in the [contract to] adjudicate all claims in ... a specific forum. By enjoining the [California Plaintiff] from proceeding in a different forum, I simply hold it to the promises it made-promises that remain binding upon it." The Delaware Supreme Court affirmed, concluding simply that lower court "carefully considered the parties' contractual agreements and enforced the forum selection clause included therein."

Litigating far from home is not always avoidable. It will be anything but a comedy the night before you have to fly to wherever on the eve of trial. But including litigation locale among your usual negotiation points can eliminate the funny business associated with forum selection. At the very least, you can better assess the risks associated with and value of doing business with foreign companies if you know where disputes will be litigated. And once you do that, you can raise a glass and toast the new relationship that isn't ever going to sour. Cheers!

Beware of the checks your on-line privacy and security policies write. If your you-know-whats can't cash them, plaintiffs might.

Increasingly, plaintiffs are filing lawsuits after "hackers" access their personal information through undersecured websites or electronic databases. Almost every company holds some type of customer information in electronic form. As companies enhance their web presences, many have posted security and privacy policies. If you're a business owner, you likely have one (if you don't, you should). And if you've ever used the internet (if you haven't, you're not reading this article), you've seen links to these at the bottom of web pages, and you've probably ignored them. I certainly have.

Here's the problem for businesses - hackers are hard to find and are usually judgment proof. If your data security is breached, and if your customers want to sue somebody, they are going to sue you.

Most of these high profile lawsuits have been premised on traditional negligence principles, but courts have come to varied conclusions about a business's duty to protect its customer information from hacking. This initial resistance to the imposition of traditional tort liability has led to two things: (1) some states have created statutory duties in this context; and (2) plaintiffs' lawyers have gotten pretty creative, with some success.

In Baidu, Inc. v. Register.com, Inc., a search-engine operator, Baidu, Inc., sued Register.com, its traffic-routing services provider, after a hacker gained access to Baidu's account and directed its web traffic elsewhere. Imagine the business next door diverting all of your phone calls to it. Baidu sued.

Baidu asserted breach of contract, negligence and gross negligence claims. Register.com moved to dismiss, arguing that its security policy contained a broad limitation of liability provision. And it did. But it also contained statements about how Register.com protected its customers' information and employed security measures to guard against data breaches.

Baidu argued that Register.com's failure to follow its own policies constituted a breach of contract and gross negligence. The Southern Distinct of New York agreed. The court held that the limitation of liability provision barred an ordinary negligence claim, but not the breach of contract and gross negligence claims. The court stated that if Baidu proved what it had alleged, "then Register failed to follow its own security protocols and essentially handed over control of Baidu's account to an unauthorized intruder, who engaged in cyber vandalism. On these facts, a jury surely could find that Register acted in a grossly negligent or reckless manner."

A few months later, the case settled for an undisclosed sum.

While we're well settled into the internet age, the age of data security litigation is in its infancy. One way to protect your company is to give considerable thought to your security and privacy policies, and then to abide by them. You can't guarantee elimination of all data breach exposure, but you can put your company in a position to refute the simple, but powerful argument that carried the day in Baidu - that you didn't do what you said you were going to do.

Just as when you're writing actual checks, you've made certain there is money in the bank (I hope), ensure that your operations are consistent with your security and privacy policies. Or you might need more money in the bank.

A company that wants to lower corporate risks and boost the overall value of a company by nearly 10 percent, that's who.

A recently published article on Law.com discusses a relatively "new" trend among companies regarding lawyers serving on boards of directors, as well as lawyers holding executive positions. In fact, the number of lawyers serving on boards nearly doubled over a ten-year span.

"A lawyer-director increases firm value by 9.5 percent, and when the lawyer is also a company executive, the increase in firm value rises to 10.2 percent," according to the Cornell Law School research paper, Lawyers and Fools: Lawyer-Directors in Public Corporations.

Having a lawyer on the board typically results in a change of management style - one that focuses on taking less risks - reducing the risk of litigation involving the company. The company becomes more financially stable thus increasing its value.

So, it seems, what you get by having a lawyer/director or lawyer/executive is better judgment and management of the company. More often than not, better judgment results in lower risks and higher company valuation.

For further information or assistance, please contact Matthew Azoulay, Esquire: 856.675.1957; mazoulay@dilworthlaw.com.

The NJ Governor's announced the upcoming deadlines for homeowners, renters, and businesses looking to apply for FEMA assistance and SBA loans in the wake of Superstorm Sandy have been extended to April 1, 2013. Those seeking for FEMA individual assistance or SBA physical damage disaster assistance should act quickly. The deadline for application to the SBA's economic injury disaster loan program remains July 31, 2013.

People or businesses with storm losses can register online at www.disasterassistance.gov.

For further information or assistance, please contact Matthew Azoulay, Esquire: 856.675.1957; mazoulay@dilworthlaw.com.

It wasn't an excuse. Employees throughout the Northeast missed work due to Hurricane Sandy. Some missed work because they could not get there. Others had no choice, with employers closing their doors. In either case, many employers and employees wondered, 'who gets paid, how much and who doesn't?' It depends.

The Fair Labor Standards Act, the statute setting forth minimum wage (29 U.S.C. § 206), maximum hours and overtime compensation (29 U.S.C. § 207) and a multitude of other important labor standards, separates employees into two categories, exempt and non-exempt. Exempt employees are identified in 29 U.S.C. § 213. If an employee does not fall within one of the categories in Section 213, he or she is non-exempt.

Compensation rules are different depending on an employee's classification as exempt or non-exempt. Most importantly, exempt employees are not subject to the standards set forth in Sections 206 and 207, meaning that the rules regarding minimum wage, maximum hours and overtime pay, among others, do not generally apply to them.

This distinction also has ramifications in the wake of Sandy. While it would be impossible to cover every variation in which the FLSA was implicated by the Hurricane, here are five important points to consider in evaluating post-Sandy compensation decisions:

1. If an employer was closed for only one day, it likely has to pay its exempt employees but not its non-exempt employees.

2. If an employer was closed for a whole week, exempt and non-exempt employees need not be paid.

3. Employers must pay both exempt and non-exempt employees who worked from home during the storm.

4. While exempt employees working from home should be paid regardless of the hours they spent working (so long as it was more than de minimis), non-exempt employees must track their time and should be paid for time worked.

5. The overtime rules still apply even if Hurricane Sandy caused the need for overtime hours.

Keep in mind that the FLSA is not the only set of rules impacting post-Sandy compensation. Employer-specific policies and procedures or state laws may also affect compensation requirements. Be sure to refer to these other bodies of rules. No excuses.

In the aftermath of Superstorm Sandy, the State of New Jersey recently adopted amendments to New Jersey's Flood Hazard Area Control Act rules that set minimum elevation standards for the reconstruction of houses and buildings in areas that are in danger of flooding.

Application of the Rule: The rule applies to new construction and properties which were substantially damaged - i.e., those structures for which the cost of repair/restoration equals or exceeds 50% of the market value of the structures prior to the damage.

Effect of the Rule: The rule requires new and reconstructed buildings to be elevated in accordance with the best available flood mapping. Additionally, a new permit-by-rule was adopted so that those reconstructing and elevating buildings under the state's elevation standard will not need to secure a permit from the Department of Environmental Protection (DEP), nor pay the fee typically charged for a Flood Hazard Area permit. Recognizing the cost of construction will increase as a result of the new standards, one can expect significantly lower flood insurance premiums. In theory, time and money will be saved - but we shall see . . .

Specific Standards: The new rule is now based on the Advisory Base Flood Elevation maps prepared by the Federal Emergency Management Agency. Property owners who are rebuilding because their property was substantially damaged must build (in most cases) in accordance with the ABFE elevation level and, additionally, Flood Hazard Area Act rules, in effect since 2007, require the lowest floor of each building in flood hazard areas to be constructed at least one foot (1') above this elevation. Further, the rule now allows "wet floodproofing" for non-residential buildings, allowing a building to flood as long as it structurally withstands the water, but prohibits certain building foundations with only three (3) walls.

Financial Assistance Available: FEMA may provide up to $30,000 to cover the "Increased Cost of Compliance" with federal, state and local regulations if you have federal flood insurance. In addition, the Christie Administration intends to provide grants to homeowners with substantially damaged homes to help them offset some of the costs of elevation, mitigation and renovation, and intends to announce in the Spring the mechanism for such grants. It is important to carefully document any repair or reconstruction project to ensure you have a record of all reconstruction activities. Doing so will help document the history of the project should you need to do so for FEMA assistance or insurance reimbursement.

A rose by another name may still smell as sweet, but an employee going by the designation of independent contractor could be a big problem for a small businesses. Employers, particularly small and mid-size businesses, have increasingly favored the use of independent contractors for three primary reasons.

First, employers are generally not liable for independent contractors' negligence. Second, employers are not responsible for withholding taxes for independent contractors. Third, employers are generally not required to carry workers compensation insurance or to pay workers compensation benefits for independent contractors. In all three respects, the use of independent contractors can lower costs for businesses.
The misuse, however, of the independent contractor designation can lead to unexpected liabilities, retroactive insurance premiums and governmental and/or civil, or even criminal, penalties.

It is therefore important to carefully consider the nature of the employment relationship in light of the factors to which courts in your jurisdiction look to determine whether an individual is truly an employee or an independent contractor. Here are some of the more common factors:

1. Control - this is often viewed as the most important factor. The greater control an employer has over an individual, the more likely that person is an employee.

2. Nature of Payment - Hourly, weekly or monthly compensation is generally characteristic of an employee, whereas independent contractors are more frequently paid on a per-project or commission basis. Keep in mind, the issuance of 1099's is almost never dispositive.

3. Supplies - Independent contractors are more likely to supply their own tools, transportation and other instruments required for their work.

4. Right to work for competitor - Independent contractors generally may work for whomever they want, including simultaneously working for competitors.

5. The Agreement - Courts generally give significant, but not dispositive, consideration to an independent contractor agreement. The more carefully drafted the agreement, the more likely it is to impact a court's determination as intended.

While it is important to control the cost of doing business, the risks of misusing the independent contractor designation are substantial. A rose may always smell sweet, but a mis-designated independent contractor smells like trouble.

Pennsylvania's Rules of Civil Procedure 403, 404, and 424 provide unique problems for foreign corporations doing business in Pennsylvania. Specifically, these three rules, as they have been interpreted by state and Federal Court's located in the Commonwealth, allow foreign corporations to be served with process outside of the Commonwealth by any form of traceable mail.

Rule 403 provides: "If a rule of civil procedure authorizes original process to be served by mail, a copy of the process shall be mailed to the defendant by any form of mail requiring a receipt signed by the defendant or his authorized agent. Service is complete upon delivery."

Not surprisingly, Rule 404 permits original process to be served by mail. With respect to Rule 424, the plain language of the Rule appears to limit service upon foreign corporations by in-hand service only. But Pennsylvania courts have interpreted it otherwise. In fact, the Courts have construed this Rule to merely delineate those individuals who may be served by hand delivery should that particular method of service be chosen. Thus, corporations outside of Pennsylvania that do business within the Commonwealth are subject to service of process by mail.

Allowing service of process in this manner expands the possibility that a complaint or court notice will not reach a corporate decision-maker in a timely manner. Therefore, foreign corporations doing business in the Commonwealth need to implement internal policies to insure the prompt processing of all legal documents, regardless of the manner in which same was transmitted.

As you may (or may not) have heard, Governor Chris Christie has signed into law the New Jersey Revised Uniform Limited Liability Company Act. The Act will affect every (existing or newly created) New Jersey limited liability company (LLC). The Act applies to new LLCs formed after March 20, 2013, and then to all LLCs in March 2014. Prior to the effective date, one can elect to be governed by the Act.

Here are some noteworthy changes to the law governing LLCs:

• Duration: The Act provides that LLCs will have perpetual duration unless a shorter life is specified in the Certificate of Formation.

• Operating Agreements: The Act allows oral and implied operating agreements. Based on the extensive changes to the law governing LLCs, there is no justification for not having a written Operating Agreement in that if an issue is not covered by a written instrument, the default provisions of the Act will apply, which may lead to long and costly disputes over the intent of the members.

• Distributions: Each member is entitled to an equal share of the profits or losses absent a different allocation under the Operating Agreement. Under existing law, each member is entitled to share profits or losses based on the agreed value of each member's capital contribution to the LLC.

• Voting: Day-to-day matters will be decided by a majority of the members, with each member having one vote, and extraordinary matters will be decided unanimously by the members, unless otherwise specified in the Operating Agreement.

• Resignation/Withdrawal: A resigning/withdrawing member will now continue to own his equity interest (and continue to be entitled to receive distributions, if any, made by the LLC), but will be considered a dissociated member. Such member will have no management or voting rights. Previously, a member was entitled to resign and have his interest purchased by the LLC for fair market value.

• Oppression: The Act allows a member to seek a court order dissolving the LLC if those controlling it oppress the rights of another member and such oppressive acts are directly harmful to the member.

While the Act's implementation for existing LLC's does not take effect until March 2014, members of existing LLCs should familiarize themselves with the changes to ensure that their members fully comprehend the differences in advance.

While the internet provides countless businesses the opportunity to reach customers by marketing products to anyone with internet access, these opportunities are not without risks. The proliferation of businesses utilizing social media and online advertising websites such as www.facebook.com, www.twitter.com, www.linked-in.com, is proof positive that such use results in greater online exposure, which in turn can generate new business opportunities. However, not all experiences are positive.

For example, some websites, including the ones noted above, have features which allow users to post comments about businesses. In many instances, the information provided is helpful, accurate, and based on an actual user's experiences. Unfortunately, given the perceived anonymity afforded by the internet, a review feature is ripe for abuse.

On certain websites, an email address alone, without any confirmation, is all that is required to create a profile or account, thus allowing a user to post information about the business. Such perceived anonymity can be a welcome invitation for competitors, disgruntled ex-employees, customers, or internet trolls to spew vitriolic reviews about a given company.

But can't anaggrieved company recover for such statements if they are untrue and cause harm? While the legal answer may be yes, the practical answer is that the time, expense and practical difficulties involved in merely identifying posters of comments likely make recovery unlikely.

Many businesses have looked to the website where the information was posted as a possible avenue of redress. In those instances, businesses have quickly learned about 47 U.S.C. § 230(c) of the Communications Decency Act, which specifically exempts "providers or users of an interactive computer service," from liability for publishing statements made by a third party.

In light of the risks of social media use and the barriers to recovery, it is important to understand the policies and terms of use maintained by the various social media websites. Before deciding to list your business, it would be prudent to inquire whether a particular social media website has a policy regarding the reporting and removal of user-generated comments, whether a business can opt out of comment features, and whether the site has privacy policies regarding the disclosure of the identity of its users.

You can. But it's long, and in small print. It may be a form, and you may think to yourself that if everyone else is signing the same thing, it probably is fine for me to sign it too. If all of your friends jumped off of a bridge...

There are two contractual issues typically arising for small and medium sized businesses. First, businesses looking to avoid legal costs often draft their own contracts or pull forms off of the internet. The wisdom of this practice is not the subject of this post.
Second, business owners and managers presented with contracts from those with whom they do business often opt not to have the agreement reviewed by an attorney. While this decision is often made with an eye towards limiting costs, it could prove an expensive proposition in the longer run. Many form contracts take away important rights and impose significant non-obvious obligations.

For example, many form contracts for the sale of goods include warranty disclaimers. If you are going to buy something subject to warranty disclaimers, you should understand exactly what happens if the product does not work. It may be that the product will be replaced. It may be that money will be refunded. Or it may be nothing. Alternatively, you may have very good warranty protection, but taking advantage of it may require strict adherence to certain procedures, including those related to timing. And if you don't correctly use it, you lose it.

A less familiar example is the confession of judgment clause. Most common in loan agreements, but also sometimes present in commercial leases and other contracts, the confession of judgment clause is extremely powerful. It allows the non-breaching party to go into court and obtain a judgment against the breaching party without having to makes its case at all. It is essentially a waiver of the opportunity to defend yourself. This is a provision that should not be unknowingly agreed to.

A doctor knows what his trained eye sees. So does a lawyer. The question is, do you?