The ConnectU/Facebook legal saga is truly astounding. Imagine a mature Oak tree. Now give the it properties of Kudzu vine (the “vine that ate the South”). Each branch of this tree is another lawsuit involving ConnectU, Facebook, the principals, and their lawyers.
Now, a new branch has burst forth. Wayne Chang has sued ConnectU and its lawyers in Superior Court Business Litigation Session in Suffolk County, Boston, claiming that Chang is entitled to as much as 50% of the value of the ConnectU/Facebook settlement (so called, since ConnectU has challenged the finality of the settlement).
Today’s Boston Globe reports that Governor Deval Patrick will nominate Superior Court Judge Ralph Gants to the seat on the Supreme Judicial Court now vacated by Justice John Greaney. This is a great nomination – Judge Gants is truly a superstar of the Massachusetts Superior Court – without question one of the best, if not the best, minds on the state trial court. He has reportedly been on the “short list” of potential nominees for the last few weeks, and there was little question in my mind that he was the outstanding choice on that list. I expect his nomination to the SJC to be approved by the legislature in a heart beat.
Judge Judith Fabricant has been the number 2 judge in this session (the BLS2 session) since Judge Van Gestel’s retirement, but it’s unclear if she will provide what has become a tradition of leadership and excellence in the relatively short period of time since the BLS was created, or even whether she is interested in taking on the responsibility of leading the BLS. Being the “BLS1 Judge” is a significant commitment, and not every judge is well suited to this responsibility. Most of Judge Fabricant’s experience (before her appointment to the Superior Court in 1996) was as a criminal prosecutor and then an assistant attorney general. Whether she feels that she has the depth of experience appropriate to head the BLS remains to be seen.
It’s also worth observing that the Business Litigation Session is not a “statutory” court – it was formed in 2000 as a pilot project, and exists at the discretion of the Chief Justice of the Superior Court. Without a strong and committed leader (as Judge Van Gestel was), and as Judge Gants was beginning to prove himself to be), the future of the BLS is not certain.
So, the BLS’s loss of Judge Gants leaves the BLS in limbo – will Judge Fabricanttake over BLS1? If so, will she provide the level of quality provided by Allen Van Gestel and Ralph Gants? Who will become the new “number two” at the BLS?
Finally, it’s worth observing that the BLS appears to have emerged as a “feeder court” for the SJC – first Justice Margot Botsford (who was the BLS2 Judge before Gants), and now Judge Gants have gone from the BLS to the SJC. Whether this is coincidence (or whether the BLS attracts the best judges on the Superior Court) is open to debate, but the phenomenon is worth noting.
Judge Allan van Gestel dismisses the buzz that is making its away around Boston’s legal community that he is stepping down from the state’s business court that he shaped so effectively over the last seven years because he ruffled the feathers of his fellow judges and his bosses with his concerns about the future of the court. He is not, however, backing down a bit about those concerns.[click here to continue reading]
To read Judge van Gestel’s letter to the the adminstrative judges (described in the Globe article) click here.
To read the administrative judges’ response, click here.
At a Boston Bar Association lunch program today, Judge Allan Van Gestel informed the audience that he would not put himself on the “recall” list at the end of this year. In other words, at the age of 71 Judge Van Gestel will be retiring from the bench at the close of 2007, after running the session (with the help of some other Superior Court Judges) since its formation in 2000. For some background on the recall issue, click here.
It looks like Judge Gants (who has been the second judge in the BLS (“BLS2”) for the last year or so) has been groomed to take the helm of the BLS after Judge Van Gestel departs, although this is by no means a certainty. If Judge Gants does take over BLS1, it remains to be seen who will take his place in BLS2.
Litigation. Lawyers love to argue about attorney-client privilege. What could be juicier than to find out what your adversary in litigation said to his or her attorney, believing it to be covered by this privilege, a privilege that is so sacrosanct that the Supreme Court has ruled that it extends beyond the grave?
Nevertheless, the attorney-client privilege can easily be lost or waived. For example, if the communication is revealed to a non-attorney third party, it risks waiver.
The world of computer technology and email has given rise to new grist for the waiver doctrine. Most companies inform their employees (in employee manuals, for example) that communications utilizing the company’s internal email system are open to review and examination by the employer. According, it is established law that an employee who uses her employer’s email system to communicate with an attorney has waived the privilege. Most lawyers, aware of this, instruct their clients who wish to communicate from work to use an Internet-based email system, such as Google’s Gmail or Yahoo Mail. The theory is that since the employer doesn’t have access to these emails and the emails are protected by a user name and password, they retain their privilege.
This assumption was challenged in a recent case before Judge Gants, sitting in the Massachusetts Business Litigation Session. In this case, NERA v. Evans, the former employer argued that since, unbeknownst to the former employee, the computer used by the employee (who was now suing the company) stored screen shots of the emails, which were then technically accessible to the employer, the privilege had been waived. Judge Gants rejected this argument, but he did posit a “test” that, until something better comes along, should be viewed as highly persuasive precedent, at least in Massachusetts. Judge Gants stated:
The bottom line is that if an employer wishes to read an employee’s attorney-client communications unintentionally stored in a temporary file on a company-owned computer that were made via a private, password-protected e-mail account accessed through the Internet, not the company’s Intranet, the employer must plainly communicate to the employee that:
1. All such emails are stored on the hard disk of the company’s computer in a “screen shot” temporary file; and
2. the company expressly reserves the right to retrieve those temporary files and read them.
Frankly, I don’t expect many companies to adopt such a policy, but at least there is some guidance on this issue from a well-respected Massachusetts Superior Court judge.
It’s a bad day when your client wants you to enforce a noncompete agreement against a $10/hour Russian immigrant with “a very limited command of English,” who sends most of her earnings back to her son and elderly parents in Russia, and who, after a year of at-will employment and with no further payment of consideration, was told that unless she signed the noncompete agreement she’d be fired the next day.
Nevertheless, that’s what the plaintiff’s lawyer faced in Zabota Community Center, Inc. v. Frolova.
Not surprisingly, Judge Allan van Gestel of the Suffolk County Business Litigation Session threw the book at the plaintiff in this case, denying the motion for every reason conceivable.
Business Litigation Session. The July 17, 2006 issue of Massachusetts Lawyers Weekly has an article suggesting that some attorneys are agreeing in contracts that claims arising from those contracts must be filed in the Suffolk County Business Litigation Session (BLS). The article reports that Judge Allan Van Gestel, the presiding judge of the session, recently made public comments that, assuming the conditions and requirements of the session are satisfied, such clauses are likely to be enforced.
This certainly adds a new option to the forum selection issue, and, given some of the difficulties and hazards of litigating outside of the BLS, should be seriously considered by lawyers negotiating business agreements that fall within the rules permitting cases to be heard in that venue. For more details on those requirements, see here and here.
Trade Secrets, Procedure. Warning: if you’re seeking discovery in a trade secret case in the Suffolk Business Litigation Session make sure that you have (a) provided the court with a detailed description of your trade secrets, and (b) filed a protective order that strictly complies with the Uniform Rules of of Impoundment.
For a recent decision making these points, written by Judge Allan Van Gestel in the Suffolk Business Litigation Session, click [here]. The decision, Tourtellotte Solutions, Inc. v. Tradestone Software, Inc., was featured on the front page of Massachusetts Lawyers Weekly last October. In a nutshell, the plaintiff asked for expedited discovery (in other words, the right to take discovery on a schedule faster than allowed in the ordinary course by the rules of civil procedure), so that the plaintiff could obtain evidence necessary to bring a preliminary injunction against the defendant. The plaintiff’s basic claim was that the defendant had engaged in “software misappropriation,” a term that Judge Van Gestel stated “sounds very much like trade secret misappropriation.”
The judge denied the motion, stating: “a detailed description of what is claimed to be a trade secret must be provided and a protective order of some sort needs to be worked out.”
Neither conclusion is surprising in the least. Many decisions in trade secret cases have held that the plaintiff must identify its trade secrets with particularity. The courts recognize that to permit the plaintiff to launch a “fishing expedition” into the defendant’s technology before identifying its trade secrets is fundamentally unfair. California has even codified this rule by state statute. What is surprising is when (as we have seen from time-to-time), a court does not compel a plaintiff to describe its trade secrets with particularity before commencing discovery.
On the subject of an acceptable protective order, Judge Van Gestel was offended that the protective order proposed by the plaintiff did not comply with the Uniform Rules of Impoundment, which require that a “sealed” filing (in other words, a filing in a sealed envelope that is segregated from the case file that is available to the public) be preceded by a motion and an affidavit explaining why the court should deviate from the standard procedure of making all documents filed with the courts available to the public. Because filing documents “under seal” requires the clerk’s office to go to the inconvenience of identifying and segregating these filings (with the concomitant risks of lost documents and inadvertent disclosure), the party seeking this exception must obtain the court’s permission before putting the court to this inconvenience. Lawyers requesting protective orders in the Business Litigation Session (which are standard in trade secret cases and many other types of business litigation) should keep Judge Van Gestel’s warning in mind. An example of a protective order referencing the Uniform Rules of Impoundment can be found here: [link]
Noncompete Agreements. If I had a dollar for every time a client who had been sued asked me if they could recover attorney’s fees or damages if they won, I’d have, well, probably hundreds of dollars. Even when a lawsuit proves to be frivolous the Massachusetts courts have traditionally been extremely reluctant to turn the tables on a plaintiff and make it pay damages for the harm its suit has caused to the defendant.
Every once in a while, however, a judge shows some courage and punishes a company the judge concludes has brought a frivolous case. In January 2006 Judge Gants, in the Suffolk Business Litigation Session, turned the tables on Brooks Automation, a Massachusetts company with a billion dollar-plus market valuation, ordering it to pay over $600,000 in damages for bringing a frvolous lawsuit against a former employee. After a trial Judge Gants concluded that the suit was devoid of both any reasonable factual support or any arguable basis in law. A link to the decision is [here].
Judge Gants found that the suit, which Brooks brought against a former employee and a new company he had formed to compete with Brooks (but which was not, as yet, actually competing), had been filed with “reckless disregard” for its merits and to disrupt a potential relationship between the former employee and one of Brooks’ customers (Brooks actually emailed the complaint to the customer, Applied Materials, immediately after filing it, and before even serving it on the former employee).
After an expedited discovery and trial schedule (trial took place only two months after Brooks filed suit), the jury held that the employee had not stolen Brooks’ trade secrets and had not violated his noncompete agreement. The jury did, however, find that Brooks had intentionally interfered with the employee’s relationship with Applied Materials, and awarded the employee $200,000 in damages. Talk about your case backfiring.
The Judge then found that this interference was a violation of Mass. Gen. Laws. c. 93A (which makes illegal “unfair and deceptive acts or practices”), and trebled the $200,000 award. While not mentioned in the decision, the judge is almost certain to also award the former employee his attorney’s fees.
Importantly, the Judge made it clear that he intended to send a message: Judge Gants wrote that his decision was –
necessary to send a loud and clear message to Brooks and to any other corporation that seeks to abuse the right to sue in order to interfere with a competitor’s efforts to develop a contractual relationship with a coveted customer. A start-up company is especially vulnerable to such an abuse of process, since time, effort, and money are needed to defend even a frivolous lawsuit and all are generally in short supply in a start-up company. It is important to make clear to any corporation that contemplates crushing a vulnerable competitor by conjuring a frivolous lawsuit that it will pay dearly for its misuse of the judicial process.
One case does not make a trend, and cases like this do appear occassionally in the decisions of the Superior Court. However, because this decision originated with the Massachusetts Business Litigation Session it carries more weight, and sends a stronger message to the business community and the bar, than if it it had been decided by one of the non-Business Litigation Session judges. Massachusetts lawyers who are defending former employees (and their new employers) will be well served by studying this decision carefully and keeping its teachings (which have been greatly abbreviated here) in mind in defending cases of this sort. Of course, Brooks still has the right to appeal this decision. If it does, I’ll report the outcome.
Noncompete Agreements. Our firm used to write “year in review” articles [link], and I decided it was time for a reprise. Here is a year-in-review summary of the most significant Massachsetts state court cases from late 2004 through calender year 2005 involving the attempted enforcement of noncompete or nonsolicitation contracts. Rather than getting bogged down in the detailed facts of the cases I’ll provide a quick summary of the key facts and legal issues that led to the outcome in each case. The goal is to get a feel for how judges are approaching these kinds of cases – what works and doesn’t work in the state courts when employers are attempting to enforce noncompete/nonsolicitation agreements against former employees.
L-3 Communications v. Reveal Imaging[link] involved a complex series of corporate sales, the result of which was that the defendant-employees were several corporate acquisitions down the road from the companies with whom they had signed their agreements years earlier. Their new employer, who had “acquired” the employees via acquisitions, had failed to require the employees to enter into new agreements. Tough luck for the plaintiffs, as Judge Van Gestel concluded in the Suffolk Business Litigation Session in a decision issued on December 2, 2004. One of the employees had signed a noncompete agreement with a company that wasn’t even a predecessor-in-interest with the plaintiff. Another group of employees had signed noncompetes with a predecessor-in-interest, but unfortunately for the plaintiff they had signed a weaker intervening agreement which provided that it superceded the first agreement. Again, the plaintiff was out of luck, since the superceding agreement didn’t contain a post-employment noncompete provision (it contained a noncompete that only applied during the period of employment). Another noncompete agreement signed by this group of employees was not assigned as part of a sale to the current employer, and therefore was not enforceable.
The corporate purchases and sales in this case, and all of the agreements involved, are quite complex. But, the lesson of this case (and a number of other unreported Superior Court cases) is straightforward: if you buy a company make sure that you don’t expect employees who come with the acquisition to be bound by a pre-existing noncompete unless the employee agrees to assignment of the noncompete. Even better, have the employee sign a new noncompete agreement that states the terms you want enforced, rather than relying on the old agreement.
Accordia v. Academic Risk Resources resulted in two decisions. The first decision [link], on a motion for temporary restraining order, was decided by Judge Margot Botsford in Suffolk Superior Court on January 5, 2005. The second decision [link], on a motion for preliminary injunction, was decided a week later by Judge Nonnie S. Burnes.
This case involved the mass defection of an insurance department of 14 employees, who formed a competing company, followed immediately by a swift, targeted appropriation the former employer’s major clients. All of the employees had agreed in writing not to solicit their employer’s clients.
This was the kind of case that puts smiles on the faces of lawyers trying to enforce noncompete/nonsolicitation agreements, and makes the blood of defense lawyers run cold.
Not only did the department resign en masse, but the employees took Accordia client files with them, and even unilaterally moved one client’s business to the new company. These facts made Judge Botsford see red. Her decision is sprinkled with references to breach of fiduciary duty, “arrogation” of Accordia’s business and unfairness in the defendants’ behavior. Judge Botsford gave the former employes 24 hours to return all of Accordia’s property to it, and enjoined them from providing services to their former clients at Accordia. In other words, she shut them down cold.
However, the former employees got a break a week later when, in a second hearing, Judge Burnes took some of the sting out of the ruling by permitting the former employees to service the clients, but ordered them to put all fees from these services into an escrow account. Not surprisingly, that growing pot of money, which couldn’t be touched by either side, led to a quick settlement.
This case has a least two lessons, both of which are as old as the law itself. First, this is a case study in what not to do when leaving an employer – don’t take the employer’s property; don’t solicit your co-employees while you’re still employed if you’re an officer or executive; don’t resign en mass; and don’t move clients to your new company without written prior permission. The second lesson is that even in a case with facts this extreme what may be abhorrent to one judge may leave the next judge cold. However, Judge Burnes may have had the wisdom of Solomon – by permitting the former employees to service their former customers at Accordia (who may have gone to a third party provider and been lost to both parties, had she maintained the injunction), but ordering fees to be paid into escrow, she created a financial incentive for both sides to settle which, after all, is every judge’s primary goal.
You’re a businessman with a successful company. You meet someone that wants to go into business with you in a related area. You start a new company, making sure that you hold a majority interest (52.5%). Your new “partner” gets 37.5%, and the rest of the stock goes to a couple of employees. Although your partner is a minority shareholder he’s running the business, so you make him president of the company.
Almost ten years go by, and although the company is making money you’re unhappy with your partner. He’s bad at finances, and tensions arise over bookkeeping and other business issues.
Eventually you reach your boiling point, and one morning you fire your minority partner.
Simple enough you think. After all, you own a majority of the company, what’s stopping you from doing this?
In O’Connor v. U. S. Art Co., a recent case decided by Judge Allen Van Gestel in the Suffolk County Business Law Session, the minority shareholder was awarded $218,000 in damages based on these facts. The judgment was against the other three shareholders, personally.
Here’s the rub: in Massachusetts, shareholders in “close” corporations (nonpublic companies with a small number of shareholders) owe each other a fiduciary duty. You can’t fire a minority shareholder unless you have a “legitimate business purpose,” and there is no “less harmful alternative.” Harmful to the minority shareholder, that is.
In the U.S. Art case Judge Van Gestel found that the majority shareholders could have hired a bookkeeper, among other possible solutions. In other words, even assuming there was a problem, they could have solved the problem without firing the guy.
What’s interesting about this case? Nowhere in the 11 page decision did Judge Van Gestel indicate that the minority shareholder had invested any money when U.S. Art was formed. Usually, the rationale behind cases like this is that the minority shareholder invested in the company, expecting to earn a living from the company, only to find him or herself fired, and out both the investment and the job. That appears not to have been the case here.
What could the majority shareholder have done to avoid this outcome? Easy: enter into an agreement when the business was formed, permitting termination, either at will or for cause. If that wasn’t feasible, take proper steps before terminating the minority shareholder. In the U.S. Art case the Judge described the majority’s actions as “ham- handed.” It doesn’t take a Supreme Court Justice to see that the Judge thought the majority shareholders behaved offensively, and that this contributed to the result.
If you’re interested in further details on this case you can read the full decision here.
Minority Shareholders/Fiduciary Duty.Massmanian v. Duboise, decided in September by Judge Ralph Gants in the Suffolk County Business Litigation Session, proves once again that when a party to litigation angers a judge, they can be forced to pay a high price.
In this case the plaintiff Massmanian was a 30% minority shareholder and employee in North/Win. After he filed suit accusing the majority shareholders of diverting North/Win’s profits and assets to another company (a serious breach of fiduciary duty, if true), North/Win terminated Massmanian for insubordination and neglecting his duties. Massmanian then asked the court to issue a preliminary injunction reinstating him. In opposing this motion, North/Win, and its lawyers made some serious strategic errors:
First, they demanded that all North/Win employees sign a Confidentiality Agreement which (among other things) barred employees from disclosing “matters related to the lawsuit Massmanian has filed against the company, even in a legal proceeding.” This Agreement was demanded upon pain of termination, and one employee was terminated for failing to sign it. The court characterized this as “heavy-handed overreaching” and an improper attempt to prevent employees from testifying in the case.
Second, when asked about the Confidentiality Agreement North/Win’s lawyers made false statements to the Court.
The upshot of all this was one very angry judge, who lambasted North/Win and its lawyers, and went on to describe North/Win’s actions as a “triple freeze-out,” (1) denying Massmanian lifetime employment, (2) giving North/Win the right to trigger its option to purchase Massmanian’s shares and (3) denying him access to information relevant to his status as a minority shareholder. The judge took the highly unusual step of ordering North/Win to reinstate Massmanian and enjoining North/Win from terminating his employment.
This case illustrates extremely bad judgment by North/Win (and possibly its lawyers, if they approved the Confidentiality Agreement), and North/Win is paying the price for it.