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The In-House Advisor

Published by Shepard Davidson & Renee Inomata

Beware: Individual Liability for Equityholders Under MA Wage Act

Posted in Wage & Hour

Under the Massachusetts Weekly Payment of Wages Act (“Wage Act”), the President, Treasurer and “any officers or agents having the management of such corporation” are considered to be employers and are subject to individual liability for failing to comply with its requirement. In a previous blog post, Managers of LLCs Can Be Personally Liable Under the Massachusetts Wage Act, I had written about Cook v. Patient Edu, LLC, where the Massachusetts Supreme Judicial Court clarified that managers of limited liability companies (not just the officers of a corporation) could be held individually liable under the Wage Act.  In Cook, the SJC concluded that it did not matter whether the entity was a limited liability company or corporation, and determined that “individuals with the authority to shape the employment and financial policies of an entity [were] liable for the obligations of that entity to its employees.”

In a recent unpublished decision, Segal v. Genitrix, LLC, the Massachusetts Appeals Court, relying on Cook, appears to have expanded the scope of individual liability under the Wage Act to certain equity holders of limited liability companies.

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Post-Wimbledon Fee-Shifting Ideas for In-House Counsel

Posted in Contracts

ATP Tour, Inc. is a Delaware membership corporation that operates as the governing body for the major (and some minor) men’s professional tennis circuits.  (A “membership” corporation does not have stockholders like a traditional corporation and often is the corporate form of choice for non-profits, although for profit companies can be membership corporations, as well.)  In the early 1990’s, ATP adopted a bylaw stating that:

In the event that (i) any [current or prior member or Owner or anyone on their behalf (“Claiming Party”)] initiates or asserts any [claim or counterclaim (“Claim”)] or joins, offers substantial assistance to or has a direct financial interest in any Claim against the League or any member or Owner (including any Claim purportedly filed on behalf of the League or any member), and (ii) the Claiming Party (or the third party that received substantial assistance from the Claiming Party or in whose Claim the Claiming Party had a direct financial interest) does not obtain a judgment on the merits that substantially achieves, in substance and amount, the full remedy sought, then each Claiming Party shall be obligated jointly and severally to reimburse the League and any such member or Owners for all fees, costs and expenses of every kind and description (including, but not limited to, all reasonable attorneys’ fees and other litigation expenses) (collectively, “Litigation Costs”) that the parties may incur in connection with such Claim.

In 2007, “Federations,” an ATP member, brought suit against the corporation in the Federal District Court for the District of Delaware. Ultimately, however, Federations failed to prevail on any of its claims, and ATP moved for an award of fees based on the above bylaw.   Federations challenged the validity of the fee-shifting bylaw, and, because the District Court felt that its ruling turned on unresolved questions of state law, it sent several certified questions to the Supreme Court of Delaware.  That court then responded to one of the certified questions as follows:

Delaware follows the American Rule, under which parties to litigation generally must pay their own attorneys’ fees and costs.  But it is settled that contracting parties may agree to modify the American Rule and obligate the losing party to pay the prevailing party’s fees. Because corporate bylaws are “contracts among a corporation’s shareholders,” a fee-shifting provision contained in a non-stock corporation’s validly-enacted bylaw would fall within the contractual exception to the American Rule. Therefore, a fee-shifting bylaw would not be prohibited under Delaware common law.

While this ruling technically is limited to “non-stock” corporations, nothing in the decision suggests that it would have been any different if ATP were a different type of closely held corporate entity (although if ATP were a public company, a very different analysis probably would apply).  As such, in-house counsel of closely held businesses (particularly those formed under Delaware law), may want to suggest that their internal clients consider enacting a similar fee-shifting provision to limit the potential for frivolous/nuisance suits that sometimes arise when internal disputes amongst insiders erupt.  Doing so could end up converting a near service ace into a return winner.

Tips From the Inside: Neal Winneg, Former General Counsel, Jumptap, Inc.

Posted in Uncategorized

In this installment of The In-House Advisor, we interview Neal Winneg, who was most recently the General Counsel of Jumptap, Inc., a mobile advertising company, until its sale to Millennial Media, Inc.  After starting his legal career at Skadden Arps, Mr. Winneg has been an executive officer and general counsel of numerous public and private companies, including The Learning Company, Upromise and The Princeton Review.  Mr. Winneg also teaches in the Transactional Law program at Boston University School of Law.

The In-House Advisor (IHA): The role of in-house counsel has changed a lot over the years.  How do you see that role changing going forward and how can today’s in-house counsel prepare for those changes?

Neal Winneg (NW): It’s not news that advances in technology over the last 20 years have created extraordinary opportunities along with concomitant challenges for virtually everyone, both in business and our personal lives.  So, too, for in-house counsel.  Our businesses are becoming more agile and automated, and they are benefiting from vastly more and better data in virtually all functions.  The challenge for in-house lawyers associated with this trend has been the need to handle substantially more complex and technical legal requirements and tasks on a day-to-day basis.  Fifteen years ago you might have negotiated a pretty simple agreement with a storage facility to store various company records, and the hardest part about it was determining when various documents should be purged.  Today that agreement will be for cloud storage of electronic data, and you have to consider data security issues, EU privacy issues, and a variety of other technical and regulatory issues.  The business makes decisions every day that have legal and regulatory implications, and so it has become increasingly important that knowledgeable in-house counsel are available within the business to make quick decisions, or at least identify when specialized counsel should be consulted.  Similarly, the globalization of commerce has increased the likelihood that the laws of a variety of foreign jurisdictions may be implicated, significantly exacerbating complexity.

Among the implications of this are that in-house counsel need to be prepared to learn new, technical areas of the law in addition to the areas where they are already strong.  In-house managing counsel need to be prepared to hire more specialists (either in-house or outside), and to do so cost-effectively.  The days of one or two law firms handling most of a business’s legal needs are over.

IHA: While in-house counsel routinely save their companies money, Legal Departments generally are viewed as cost centers that add nothing to the bottom line. How can in-house counsel get across to the business people the value that in-house lawyers add to the company?

NW: I tend to focus my clients less on absolute cost, and more on the quality of the legal services.  At least in my experience, the number one factor on which clients focus in evaluating their counsel is responsiveness, and that is an area where in-house counsel have a leg up on outside counsel, in several respects.  First and foremost, we’re physically available.  We’re at the
meeting when an idea is being kicked around and can offer input on the fly.  Or a client with an emergency can bang on our door, so to speak.  That’s a lot harder with outside counsel, who simply aren’t as accessible on a minute-to-minute basis.  Second, we’re familiar with the business.  Most often, we’re in a position to provide advice more quickly, needing less background information about how the business operates, because we already know it.  In those circumstances, it also should be less expensive to use us than outside counsel. Of course, it’s critical to develop metrics relating to responsiveness for the entire legal staff, and to evaluate them on it, to ensure that you really do deliver.

One needs to be careful about client expectations regarding cost savings, though.  I recall interviewing for the general counsel job at an early stage company that had not previously had a general counsel.  As the company had grown, the CEO was becoming concerned about the increased fees it was paying to outside counsel.  He hoped bringing in a general counsel would dramatically reduce the costs.  I had to tell him (at the risk of not getting the job) that while there would likely be areas where outside fees could be reduced, it was equally likely that once in the job I would identify areas of real legal risk that the business had not previously considered, and that certain other legal costs might increase rather than decrease.

IHA: What should in-house attorneys not say or do to try to show their value?

NW: Legal compliance is important, and it’s a critical part of the job.  But in most businesses, it’s not the area that’s generally going to impress the CEO.  It’s very hard to demonstrate all the possible costs you helped avoid by being on top of legal compliance.  In my experience, lawyers who focus clients on those aspects of the job tend to be viewed as the type of lawyers that say “no” a lot.  Focus on those projects that are most aligned with the company’s goals and objectives, particularly on the revenue side of the business:  numbers of contracts negotiated and signed; new products vetted and supported; results of client satisfaction surveys;  specific areas where you can demonstrate true cost savings by moving from outside counsel to in-house counsel, for example.

IHA: What is the best advice you have received that has helped you succeed as an in-house attorney?

NW: “You can’t know it all, and don’t try to convince your clients that you do.”  The legal landscape is becoming more technical and increasing in complexity.  Despite this, there is a tendency for the business clients to expect you to know it all.  It’s common for the CFO to believe that the reason you were hired was to avoid calling outside counsel, and to put pressure on you to figure it out yourself.  Obviously, in-house counsel need to consistently increase the depth and breadth of their legal knowledge relevant to the business they represent.  But while many judgments can and should be made by in-house counsel, we also have to know when to get advice.  Doing so in the face of a disapproving CFO demonstrates strength, not weakness.

If Someone Has a Right to Match Your Offer, Put Your Best Foot Forward Right Away

Posted in Contracts

In A Right to Match Can Provide Multiple Benefits, I discussed some subtle ways to create value through the use of a right to match or a right of first refusal.  A recent decision by Justice Robert Ullmann of the Massachusetts Superior Court highlights some additional features of rights to match that are far from intuitive and could either be used to your benefit or be a trap for the unwary.

In Serrano v. Serrano, Dennis Serrano had the right of first refusal to purchase property owned by the Marina Trust.  In March of 2014, the trustee of that Trust offered the property for sale, and Bremis Realty, Inc. offered to purchase the property for $2.2 million and agreed to put up a $5,000 deposit.  After Serrano was notified of the offer, he timely informed the trustee that he was exercising his right of first refusal, and tendered a check in the amount of $5,000, confirming that he genuinely was matching the Bremis Realty offer.  When Bremis Realty learned that Serranno had exercised his right to match, it made an enhanced offer that included, among other things, an expedited closing date and additional pre-payments.

When the Trust sought to accept the enhanced Bremis Realty offer, Serrano sued, claiming that he had matched Bremis Realty’s offer and had a right to buy the Trust property.  The Trust argued that because Serrano did not match Bremis Realty’s enhanced offer, Serrano waived any tentative right he might previously have had to buy the property.  Ultimately, Judge Ullmann ruled that:

It does not matter if Bremis Realty, Inc.… is now willing to make advance payments and expedite the closing.  Plaintiff has demonstrated a reasonable likelihood of success by timely exercising his right to first refusal and matching the terms of the third-party offer that was communicated to him.

While Judge Ullmann does not say so expressly, it appears that his underlying reasoning was that when Serrano matched Bremis Realty’s initial offer, a contract was formed for the purchase and sale of the real estate.  As such, Bremis Realty’s enhanced offer was irrelevant because, by then, the Trust was bound to sell the property to Serrano.

This case provides two takeaways for in-house counsel.  First, if you are in the position of trying to make a deal where another party has a right of right refusal, you should consider making your best offer initially, as opposed to starting low in the hope of negotiating a better price.  If you don’t, you risk losing the deal to the holder of the right to match without ever being able to make your best offer.  Second, if you are the seller, you want to make sure that potential buyers know that if they try to lowball you and you accept, they still may lose out because the third party holding the right to match may exercise that right.  In either case, understanding how rights to match work can have a big impact on getting a deal done at the best price.

Until They Are Banned, Non-Competition Agreements Are Still Valuable

Posted in Noncompetition & Other Restrictive Covenants

As the debate continues in Massachusetts as to whether or not to ban noncompetition agreements, a related question remains: Is there really any value in having employees sign noncompetition provisions?  As a recent decision by U.S. District Court Judge Denise Casper in Boston Scientific Corp. v. Dongchul Lee confirms, if an employer has valuable trade secrets and wishes to prevent employees from potentially sharing them with a competitor, the answer is a resounding “yes!”

In Boston Scientific, the defendant, Dongchul Lee, was a former Boston Scientific employee who had worked on a number of its projects, including Mechanism of Action (“MOA”) research related to spinal cord stimulation (“SCS”).  While Dr. Lee had signed an employment agreement containing a non-disclosure provision and requiring him to return all Boston Scientific property upon termination of his employment, the agreement did not include a noncompetition provision (presumably because Dr. Lee worked in Boston Scientific’s Valencia, California office and noncompetition provisions are unlawful in California).

In November 2013, Dr. Lee resigned from Boston Scientific and went to work for Nevro, a competitor of Boston Scientific.  Further, Dr. Lee’s work for Nevro included engaging in MOA research related to SCS that was extremely similar to that which he had undertaken for Boston Scientific.  In addition, it later was discovered that Dr. Lee failed to return over 300,000 pages of Boston Scientific documents, some of which were expressly marked “Confidential.”

Boston Scientific sued, and the Court agreed to grant an injunction with respect to Dr. Lee’s use and disclosure of Boston Scientific’s trade secrets and proprietary information.  The Court also ordered Dr. Lee to return all Boston Scientific property.  While Boston Scientific also asked that Dr. Lee be enjoined from working for Nevro because it was inevitable that he would disclose to it the confidential and trade secret information that he possessed, the Court refused, stating that:

Although Boston Scientific has asked the Court to enjoin Dr. Lee’s employment at Nevro, the real harm that Boston Scientific faces absent injunctive relief is not bargained-for competition…, but rather the disclosure of information that could provide Nevro with an unfair competitive advantage.

As such, Boston Scientific is left to speculate whether Dr. Lee is using its trade secrets and proprietary information which may have been retained by Dr. Lee in intangible form, in his memory, for the benefit of Nevro.  Interestingly, if Dr. Lee had been located in a state where non-competition agreements are enforceable, his employment agreement could have included a non-competition provision, which may have deterred Dr. Lee from seeking employment with Nevro.

In sum, unless and until non-competition agreements are banned in Massachusetts, employers should use non-competition agreements, where they are permitted by law to better protect trade secrets and confidential information and certainly business goodwill.

Proposal to Eliminate Noncompetes Is Not Warranted

Posted in Contracts, Noncompetition & Other Restrictive Covenants

Earlier this month Gov. Deval Patrick called for the elimination of noncompete agreements and formally proposed this as part of a bill called An Act to Promote Growth and Opportunity.  The Governor’s proposal, and the rallying cry of its various supporters, are firmly based on the premise that noncompete agreements have a negative impact on Massachusetts workers and the Commonwealth’s economy.  However, the notion that outlawing noncompete agreements is likely to have any appreciable, positive impact on the Massachusetts economy, as a whole, simply is not justified.  In fact, changing the law could well have a negative effect on the Commonwealth. Continue Reading

Three Reasons to Bring Your Next Lawsuit in Massachusetts

Posted in Jurisdiction, Venue and Choice of Law, Pre-Litigation Considerations

It is not unusual for a plaintiff to have the ability to choose from at least two states when deciding the venue of a litigation. In such situations, many automatically choose to file suit in their home state, without giving much thought to potential advantages or disadvantages beyond having a home field advantage and/or forcing their adversary to travel long-distance.  While the substantive law applicable to an underlying dispute often is the same no matter where suit is brought (although even this is far from a hard and fast rule), below are three reasons why Massachusetts might be an attractive choice for your next lawsuit. Continue Reading

Tips From the Inside: Keith Wexelblatt, Associate General Counsel, Reebok International Ltd.

Posted in Uncategorized

In this installment of The In-House Advisor, we interview Keith Wexelblatt, Associate General Counsel at Reebok International Ltd. After being in private practice for 5 years, Keith joined Reebok as in-house counsel in 1998. In his present role, Keith manages the litigation and employment work for Reebok and various of its affiliates. In addition, he oversees all the legal work for, and leads the HR department of, Montreal based Reebok-CCM Hockey.

The In-House Advisor (IHA): The role of in-house counsel has changed a lot since you first went in-house. How do you see that role changing going forward and how can today’s in-house counsel prepare for those changes?

Keith Wexelblatt (KW): In-house practice has changed dramatically in my 16 years while at Reebok. Attorneys must now manage issues with less internal resources and follow directives to utilize outside firms to a lesser degree as cost concerns play an even bigger role in the decision-making process. You must assume even greater risks, but still maintain an ability to distinguish between knowledgeable risk-taking actions and recklessness. Also, the amount of change in technology, social media and legislation insures rapid and constant change, which places extra burdens on keeping abreast of these developments.

IHA: While in-house counsel routinely save their companies money, legal departments generally are viewed as cost centers that add nothing to the bottom line. How can in-house counsel get across to the business people the value that in-house lawyers add to the company?

KW: In-house attorneys can get this point across to the business by actually adding value. This can be done through creating strong business partnerships, delivering positive results in offensive litigation matters, presenting realistic exposure scenarios along with budgeted costs in litigation defense, and taking actions that achieve demonstrable cost savings to the business. Also, the sharing of misfortune suffered by others’ actions, and the proactive steps taken by your department on the company’s behalf, should highlight the value added.

IHA: What should in-house attorneys not say or do to try to show their value?

KW: An over-the-top presentation of cost metrics, budgets and inflated results often do not strengthen your case, especially when it is often hard to quantify the savings or value added. Be truthful and realistic. When they start coming to you voluntarily for advice and appreciate your input, rather than coming to you because you or someone else has mandated that they come to you and check off the compliance box, then you know you have succeeded on this goal.

IHA: What is the best advice you have received that has helped you succeed as an in-house attorney?

KW: Don’t act as a technical lawyer or be perceived as the internal police. Be an advisor, advocate, and trusted business partner aligned with meeting the business goals.

From Up-Skirting to Up-Kilting and Beyond

Posted in Miscellaneous Employment

Just a few weeks ago, the Massachusetts legislature enacted a statute to close a loophole in the law in order to make “upskirting” a crime. While the law appeared to have universal support, one man apparently does not think the law goes far enough.

Angus MacPhool of Leicester, Massachusetts works as a general laborer at a farm owned by Ewan MacDonald, Sr. One day while MacPhool was climbing a ladder to bale hay from a loft in the barn, 5 year-old Ewan MacDonald, Jr., who was playing in the barn with his father’s smartphone, apparently took a picture of MacPhool. MacDonald, Jr., who plainly is quite the child prodigy, then apparently uploaded the photo to the Internet and inserted the phrase “hee-hee” in various places. While this might not seem like a big deal, MacPhool wears a kilt and is a “True Scotsman.”

After MacPhool learned of the photo, he was able to trace the uplink back to the elder MacDonald’s smartphone and brought suit against MacDonald. In his complaint, MacPhool alleged:

12.   Defendant Ewan MacDonald, Sr. (“Old MacDonald”), had a farm, and on that farm he had a barn.
13.   Old MacDonald had a son, Ewan MacDonald, Jr. (“Young MacDonald”), and Young MacDonald was in that barn. Young MacDonald took a photo of Plaintiff in violation of M.G.L. c. 105(b) [the “up-skirting” statute].
14.   [In this paragraph a redacted copy of the picture is shown] Young MacDonald posted the photo to the Internet, with a “hee-hee” here and a “hee-hee” there.
15.   Old MacDonald is liable for Young MacDonald’s conduct.

MacPhool’s complaint was dismissed, however, because he was wearing a kilt and not a skirt. (Does this remind any of the burrito vs. sandwich litigation?) Rather than fight the matter all the way through the court system, MacPhool is going right to the legislature, and he appears to have some momentum. MacPhool started a local branch of the national organization, Kilt Revelers and Promoters (KRAP), which has been lobbying heavily to have kilt-wearers declared as a protected class. While some believe the group is having an impact on the legislators, others question their heavy-handed tactics. Indeed, one staffer who wished to remain anonymous simply said, “I think KRAP stinks.”

What does this mean for in-house counsel? Well if KRAP gets its way, companies all around Massachusetts are going to have to make special accommodations for kilt wearers, some of which will include installing special low-flow floor heaters, and the elimination of vinyl or burlap fabric chair cushions. The legislature is set to vote on the new regulations tomorrow, and the In-House Advisor will let you know the outcome as soon as the vote is tallied.

Exercising Contractual Rights Can be Risky if it is for an Ulterior Purpose

Posted in Contracts

As I discussed in “Be Cautions When Tempted to Leverage Another into an Agreement,” exerting leverage to force a business partner into settling a dispute could constitute deceptive or unfair acts or practices in violation of M.G.L. c. 93A – which allows for awards of multiple damages and attorneys’ fees. But can validly exercising one’s contractual rights also expose a company to Chapter 93A liability? According to the Massachusetts Supreme Judicial Court, it can. Continue Reading