Jonathan Cooper’s Blog

The answer to this question is not always clear-cut. Some of the more critical questions - which you should ask your attorney - are as follows:

(1)    What is the cost to me if I sue? 

(2)    What is the cost to me if I DON’T sue?  

(3)    What is the likely outcome if I sue?

For more information on this topic, please feel free to read an article of mine that was recently published on this subject at http://www.articlesbase.com/business-articles/can-you-afford-not-to-sue–675423.html

 

Today’s New York Law Journal cites a decision from Supreme Court, New York County Justice Eileen Bransten that found the defendants were not liable to the plaintiff company as a matter of law, despite dismissed the fact that the defendants expressly or implicitly threatened a third party vendor that if the vendor elected to do business with the plaintiff, the defendant would: (i) delay payment or refuse to pay its $10 - 15 million indebtedness to the vendor, and (ii) cancel its existing orders. In her Order dismissing the action, Justice Bransten stated as follows:

“A cause of action for tortious interference with prospective business relations requires satisfaction of the following elements: (1) business relations with a third party; (2) the defendant’s interference with those business relations; (3) the defendant acting with the sole purpose of harming the plaintiff or using wrongful means; and (4) injury to the business relationship …

“Wrongful means” pursuant to the third element constitutes conduct that: (1) amounts to “an independent crime or tort;” (2) has “been taken solely out of malice;” or (3) amounts to “extreme and unfair economic pressure” …

Ultimately, Justice Bransten held that the mere fact that the defendant had a legitimate economic interest in discouraging its main distributer from entering into a business relationship with the plaintiff, a competitor, the defendants’ behavior could not be deemed egregious, extreme, or unfair as a matter of law.

Although several of the small business owners I have encountered in the past few years thought they were immune from being sued for unpaid commissions by their salespeople, they learned — too late — that New York’s Labor laws dictated otherwise. As part of their Monday morning quarterbacking, these business owners came to realize that had they invested a modest amount of additional time and resources into drafting a comprehensive and clear commission agreement in the first place, they certainly would not face exposure to paying commissions at a salesman’s wished upon (rather than agreed upon) terms, and perhaps could have prevented litigation altogether. After some further analysis, it seems that these business owners’ surprise (and Achilles’ heel) was the product of their belief in one or more of the following myths:

Myth #1 - Signing bonuses are inherently discretionary - New York’s courts have held that where a signing bonus is guaranteed as a term of employment that is tied to the salesperson’s job performance (such as the sale of a new account), and further, is not expressly made subject to management’s discretion, the bonus is deemed wages under the Labor Law, and thus, cannot be forfeited if earned prior to termination and/or resignation.

Myth #2 - “If it Isn’t Written, It Doesn’t Exist - contrary to popular belief, just because a commission agreement is oral doesn’t necessarily mean it is unenforceable.  In that regard, while an employer can change the terms of an at-will employee’s agreement prospectively, it cannot change the terms of the agreement retrospectively. Simply put, once the salesperson has already earned commissions at an agreed upon rate, the employer cannot go back and refuse to pay those commissions.

Myth #3 - Termination for Cause Is Cause for Forfeiture of Commissions - New York’s Labor Law clearly states that commissions which are earned during employment (i.e., vested), cannot be forfeited as a matter of public policy.

Myth #4 - If It Isn’t Clear from the Contract that a Commission is Owed, the Salesperson Can’t Collect - a fundamental, and nearly uniform rule of law is that any ambiguity in a contract is construed against the drafter of the contract. As a practical matter, this means that the courts are obliged to side with the salesperson with regard to any provision in the agreement that does not make it patently clear as to whether, and if so, how much, commissions are owed for a particular sale.

As the foregoing makes clear, it certainly pays to have well-crafted and clear agreements with commission salespeople. The short-term cost in time and money will not only help avert misunderstandings, and thus safeguard company morale, but will likely save you untold sums of money by either minimizing, or preventing entirely, the costs of litigation.

In our prior article entitled “5 Rules to Succeed in Filing an Insurance Claim,” we provided tips to avoid some of the insurance industry’s favorite gambits for denying rightful claims, including the insurer’s receiving late notice of the claim. But let’s say you made a mistake, and failed to timely notify your insurer about the claim. Should you meekly accept defeat, and walk away with your tail held squarely between your legs? Assuming that the claim is of significant value, the answer to this question should be a resounding “NO — NOT WITHOUT A FIGHT!”

Although you could theoretically appeal the insurer’s denial of claim to your State’s Insurance Department, I have found this step to be a waste of time, money and effort.  Your resources will be far better spent in court.  That being said, your likelihood of success in contesting the insurer’s denial of coverage in court will be largely dependent on the particular facts of your case, and naturally, some of these defenses are more difficult to prove than others.  To help you make a more intelligent assessment of your chances, following is a list of possible challenges to the denial:

1) No prejudice, no denial - At the end of July, New York State Governor David Paterson signed into law new legislation that will bar insurers from disclaiming coverage for late claims unless they can demonstrate they were “materially prejudiced” by the delay. (Until the new law takes effect in mid-January, 2009, the rule remains that an insurer may deny claims on the grounds of late notice regardless of whether or not the insurer suffered harm by the delay.)

2) Lack of Knowledge of Injury - One justification for providing late notice of the claim is that was no reasonable basis to conclude that anyone was injured in the accident.  Bear in mind that this is not an easy burden of proof to satisfy, because the courts have held that in an accident where the property damage totaled just over $700, the insured was obligated to notify his insurer about the potential for a personal injury claim.

3) Lack of Knowledge of Accident - although somewhat self-evident, if you had no reason to know that an accident occurred, you are not obligated to report it to your insurance carrier.  Stated differently, you can’t report what you don’t know.

4) “They Would Never Sue Me — Would They?” - New York’s highest court has held that where it does not appear that any permanent injury has been sustained, and the nature of the relationship between the injured party and the insured (such as a close familial relationship) was such that the insured had reasonably believed that they would have been apprised if the injured party had been contemplating a lawsuit, late notice of the claim may be excused.

5) Lack of Knowledge of Coverage - New York’s courts have found justifiable an insured’s late notice of claim where the delay was caused by the insurance broker’s faulty advice that the policy had been cancelled. Similarly, the courts have deemed reasonable an insured’s untimely notice where the insured belatedly discovered that the defects in the workmanship of its products were caused by industrial sabotage, and there was substantial confusion as to which insurance policy was implicated.

6) Incapacity of the Insured - Finally, although infancy or illness do not, standing alone, toll the time within which the insured must provide notice of the claim, the courts have excused the timely notice requirement where the insured, a person of “limited personal and vocational backgrounds,” was misinformed by the agent of the insurer that coverage was provided under a policy issued by another company. Likewise, the courts exempted an insured from the timely notice requirement where her physical condition rendered her completely dependent on others, and she had relied upon what the driver, her nephew, told her about the accident.

In sum, your insurer’s denial of coverage for your late notice of claim need not be the final word on the matter. Under the right conditions, you retain the power to contest the denial - and win.

Over the last few years, e-mail has largely replaced “snail mail” as the standard means of communication, as its speed and ease of use are vastly superior (not to mention more cost-effective and environmentally friendly). This revolution is not without its drawbacks, however.

First, almost everyone I know has, at one time or another, mistakenly hit the wrong button, and sent a sensitive e-mail to the wrong person.

Second, as New York’s courts have increasingly made clear, many small business owners remain unaware that their seemingly innocuous e-mails can have far-reaching legal consequences for their businesses. Indeed, New York’s highest court has ruled that a foreign business can be sued in New York if its e-mails seek to engage in a “sustained and substantial transaction of business” in the State. And that remains true even if the business never entered New York State.

In a parallel vein, although many states still require a “subscribed writing” before a contract may be deemed valid, it bears mention that the legislatures and courts are recognizing with increasing frequency the validity of electronic documents, i.e., those that do not bear a handwritten signature (See, e.g., the Electronic Signatures in Global and National Commerce Act, 15 U.S.C. §§7001-7006, and the New York State Electronic Signatures and Records Act). That being said, here are three (3) more traps to avoid when negotiating a business deal:

(1) Never Do Business on a “Handshake”

Ironically, the handshake deal did not begin with a show of trust in the other side to a deal; it originated from each party trying to assure the other that neither was carrying a weapon.  The same holds true today:  If the other side is not willing to reduce a fair agreement to writing, you should not be willing to do business with them. Simply put, it is unreasonable to ask you to risk the financial security of your family and employees on a relative stranger’s “good will.”

Moreover, notwithstanding the courts’ growing recognition of unsigned electronic documents, oral contracts are still not binding under many circumstances and in many jurisdictions.  Consequently, absent a signed agreement, you may be left without any recourse if a dispute arises later about the other side’s performance (or failure to perform) under the agreement. Stated plainly, there is little to no justification for failing to assure that you have a signed agreement.

(2) Remember That Silence Does Not Equal Assent

Although this should be self-evident, unless it is established in concrete terms what the other side is willing to do for you in return for your services or payment, you cannot have a “meeting of the minds” between the parties. And without a meeting of the minds, there is no agreement.

(3) A Well-Detailed Agreement Will Save You Both Time and Money

A detailed agreement that “dots each ‘I’” and “crosses each ‘T’” may prove somewhat tedious, and will cost you a modest sum of money in the short term. But the better-crafted agreement which specifies each party’s obligations will not only afford greater protection for your assets and reduce your potential liabilities, it will diminish, if not eliminate, uncertainty and misunderstandings between the parties, and therefore, help prevent litigation, which almost certainly would prove far more costly.

Many small business owners that I’ve encountered are surprised to learn that under New York law, anyone in a product’s chain of distribution can be held liable for injury that results from the foreseeable use of the product. This law includes a retailer, who may have just put that product on his shelf without ever opening the box, and a distributor, who merely transported the product from one destination to the other. Under this scenario, neither the retailer nor the distributor was actively at fault for the product’s defect or the plaintiff’s accident – and they can still be held liable. Does that sound scary from the retailer or distributor’s perspective? It sure is.The Plaintiff’s Burden of Proof in a Products Liability ActionIn very basic terms, in order to prevail in a products liability action, a plaintiff needs to prove two things: first, that the product is defective, i.e., the product is so likely to be harmful to persons or property that a reasonable person who had actual knowledge of its potential for producing injury would conclude that it should not have been marketed in that condition, and, second, that the defect was a substantial factor in causing plaintiff’s injuries.  The plaintiff can meet this burden of proof by demonstrating one of the following: (1) this specific product was defectively manufactured; (2) the product was defectively designed; or, (3) the safety warnings accompanying the product were inadequate. At first blush, this law seems particularly tough on middlemen like the retailer and distributor, which presumably have little to no input in either the manufacture or design of the product, or the warnings that are placed on the product. However, it bears mention that these entities reap the financial rewards from selling the product. Consequently, the courts have opined that in the interests of assuring that a plaintiff with a legitimate defective products claim has a viable and readily available party from whom he or she can be compensated (as opposed to a foreign manufacturer with no connection to the plaintiff or place of occurrence), it is fair to hold the middlemen liable for the product’s failures. This law does not leave retailers or distributors without recourse; to the contrary, they are still entitled to seek indemnity and/or contribution from the responsible party (generally, the manufacturer).  On the other hand, clearing the technical and procedural hurdles necessary to get indemnity from the manufacturer is often far from simple, particularly where the manufacturer is foreign.Assumption #1: The manufacturer has the requisite minimum contacts with the forum of the claim. In order to obtain personal jurisdiction over the foreign manufacturer, you must demonstrate that the manufacturer either transacts business or has some other tangible nexus with the forum state (see, e.g., New York Civil Practice Law and Rules §302).  Assumption #2: The manufacturer’s host country is a signatory to the Hague Convention’s Service of Process Rules. If Assumption #1 can be satisfied (which is uncertain at best), you will still need to assure that your legal papers are personally served on the manufacturer. This in turn requires that the manufacturer is not only readily located, but can be served under the Hague Convention’s rules.Assumption #3: The manufacturer is a viable entity with collectible assets. It goes without saying that a paper judgment against a defunct corporation is utterly worthless.So how can a domestic retailer or distributor protect itself against products liability claims?  Here are a few suggestions:3         Easy Steps to Protect Your Retail Business Against Defective Products Claims Step #1: Make sure that those entities above you in the chain of distribution carry adequate products liability insurance from a domestic, well-reputed and established insurer that specifically names your company as an additional insured on the policy. Do not rely on the manufacturer’s claim that you are named on the policy; get confirmation directly from the insurer (I have seen instances where the declaration sheet provided by the other party to the agreement was a complete fabrication).Step #2: Make sure that you have an agreement that indemnifies you against any claim of a product defect that is not of your own doing.  Stated otherwise, if you are a retailer or distributor, you should be indemnified against any claims of manufacturing or design defect and/or inadequate warnings.Step #3: Try to assure that those companies directly above you in the chain of distribution have a domestic presence, such as an office or agent for service of process.

While following these rules may cost some time and money in the short run, these safeguards are indispensable, for they may ultimately save your company from needless exposure to financial ruin.

1.  Make sure you have insurance that covers this type of claim - before the claim occurs. Although this may sound overly simplistic and obvious, it is probably worthwhile to spend an hour or two going through your insurance to determine what is actually covered by those policies, and perhaps more importantly, what is NOT covered by those policies.

2.  Make Sure You Follow the Policy’s Claims Reporting Guidelines.  Having taken your hard-earned money in insurance premiums, you would think that the insurers would step up and pay your claim promptly. Although that could happen, don’t bank on it.  A favorite insurance company gambit is to deny claims that do not strictly comply with their reporting requirements.  That brings us to our next rule …

3.  Report Your Claim Promptly. New York’s insurance laws and regulations generally allow insurers to disclaim coverage for claims that are not reported “as soon as practicable” after the claim arose.  Although a definitive time period has not been etched in stone, this has been often interpreted as being no more than 30 days post-incident.

4.  Photograph the Evidence. If your claim is for damage to your property or car, make sure to get your own photographs of the damage before these items are removed from your sight - forever.

5.  Document All Damage. Spending one extra hour now will save you a lot more time and heartache 6 months or a year from now when you can’t remember what happened to that favorite throw pillow you got from Aunt Phyllis. Perhaps one of the best (and easiest) ways to catalog your losses would be to download the free software at www.knowyourstuff.org.

One final thought:  although many articles on these topics, particularly regarding the insurance industry suggest that even mentioning the word “lawyer” may hurt your relationship with the insurer, and hurt your chances to resolve your claim, consider this: if that were true, why aren’t there much fewer trial lawyers?

The truth is, the insurers will likely pay an insured more money after they’ve “lawyered up” than before, if for no other reason than to avoid defending costly litigation.

Last year, Donald Trump has sued his former attorneys for legal malpractice, and claims that the firm performed unnecessary work to generate higher fees. In particular,  Mr. Trump maintains that the firm should have advised against pursuing the one of the claims in the underlying contract case because it was foreseeable the legal costs incurred would far outstrip any recovery.

 While Mr. Trump’s downplaying of his attorneys’ role in securing the successful result (”We won the case because I’m a great witness,” he said) should certainly be taken with a large grain of salt, this case does bring to light a serious issue that small businesses should strongly consider when choosing and working with their attorneys - streamlining the litigation process to maximize results at a reasonable cost. Practically, that means having frank discussions about the viability and likelihood of success of the potential claims, and weeding out those claims that are unlikely to warrant the time and expense necessary to pursue them.

 Indeed, a number of years ago I defended a doctor in an action to collect legal fees arising out of a trusts and estate matter. He contended that this large law firm billed him with reckless abandon, and never took the time to assess whether it was worthwhile to pursue certain claims. For example, he correctly pointed out that this firm billed him roughly $5,000 to collect scuba equipment whose total value was maybe $2,500.

Bottom line: When selecting a lawyer, make sure the lawyer sets out clearly - at the outset - what your anticipated outcome is, and the costs that are likely to accrue in getting there.   It is also a good idea to periodically revisit this conversation with your lawyer throughout the course of the case, as different facts and circumstances may arise that alter this initial picture.  While this does not guarantee the results that you may want, it will certainly help prevent your getting an unexpected result - or legal bill.

In a decision rendered on February 14, the Appellate Division, First Department upheld the dismissal of an action for misappropriation of a business idea because although “an idea may be a property right, when one submits an idea to another, no promise to pay for its use may be implied, and no asserted agreement enforced, if the elements of novelty and originality are absent.”

Since the factual scenario in this case sounds remarkably similar to those that I have encountered over the last few years, I think it is worthwhile to relate them here, as a cautionary tale for businesses and individuals who fail to take appropriate steps to protect their ideas.

In American Business Training, Inc. v. American Management Association, the plaintiff claimed, with the support of documentation, that the defendant misappropriated from plaintiff’s principal her idea for a seminar, as well as supporting materials that plaintiff had provided to defendant in order to permit exploration of the possibility of a joint venture. 

By way of background, Plaintiff American Business Training, Inc. (ABT), a New York corporation founded in 1992 by its president, Judith Segal, is in the business of developing and marketing seminars for the business community. Defendant American Management Association (AMA) is a not-for-profit association that for approximately 80 years has offered instructional seminars in areas of business and management. Prior to founding ABT, Judith Segal worked for AMA from 1976 through 1991; included among her responsibilities were the development and promotion of seminars.

After Segal was laid off by AMA and founded ABT, the complaint alleged, she “began to create a novel and unique concept for a course for business executives,” and ABT allegedly expended $700,000 in the development of the program, a seminar known variously as “The 5-Day MBA” and “Essentials of an MBA.” ABT’s publicity materials describe the course as designed for managers, executives, and other business professionals who do not have an MBA degree but who need to learn basic business concepts and techniques in order to acquire a broader overall understanding of the processes of operating a business. These materials stated that the course provides practical skills and knowledge in such areas as management, accounting, finance, sales, marketing, pricing, strategic planning, research and development, and human resources. 

Plaintiff claimed that the course was well received, but that it struggled with profitability because of “daunting overhead and economies of scale issues.” Therefore, in November 2000, Segal telephoned an AMA employee, William Fexas, to inquire if AMA would be interested in entering into a joint venture to market the program. It was alleged that Fexas told her that AMA “could be interested,” and directed her to Edward Selig, an AMA employee in charge of new course offerings. After Segal called Selig and gave him an overview, Segal asked her to forward the course brochure, which she did “with the understanding that AMA could only make use of the materials in a joint enterprise with ABT.” Two weeks later, plaintiff says, Selig advised Segal that AMA would not run such a course because it was competitive with other courses being offered by AMA.

Yet, in June 2001, AMA began offering a course entitled “AMA’s Five Day MBA . . . Essential Elements.” Like the ABT course, the AMA “Five-Day MBA” course was billed as providing a grounding in the essential elements of an MBA program, covering the basic principles of business economics, accounting, finance, marketing and management, so that attendees would learn how all the components of running a business fit together. AMA’s course quickly became highly successful. 

As a result, the plaintiff sued under seven different legal theories, claiming fraud, misappropriation of ideas, breach of a joint venture agreement, unjust enrichment, breach of an implied-in-fact contract, breach of a quasi-contract, and conversion.

In its decision on February 14 affirming the trial court’s decision dismissing the action, however, the Appellate Division, First Department  that

“the question here is not whether AMA might have used Segal’s idea and brochure, or even whether it may have dissassembled in order to avoid acknowledging any debt to Segal and ABT. The primary issue is whether plaintiff had an enforceable property right in the idea Segal disclosed to defendant. The basic, and still applicable, rule was stated by the Court of Appeals in Downey v. General Foods Corp. (31 NY2d 56, 61 [1972]):

“An idea may be a property right. But, when one submits an idea to another, no promise to pay for its use may be implied, and no asserted agreement enforced, if the elements of novelty and originality are absent, since the property right in an idea is based upon these two elements.”

Since there was no such contract, the Court continued, ”ABT may only prevail by establishing that a condensed management or “MBA” program is so novel and original a concept that ABT is entitled to compensation merely for bringing the idea to AMA.”

ABT proposed two theories as to the idea’s novelty: that ABT’S idea of a five-day MBA seminar was novel to the world generally and that it was in any event novel to AMA. 

Ulitmately, both of these theories were rejected, and the dismissal of the complaint was upheld.

At the end of last December, FedEx was given a tax bill for $319 million following the Internal Revenue Service’s ruling that the company had misclassified about 13,000 drivers as independent contractors when, according to the IRS, they really were employees.

It appears that the dispute, in essence, centers around FedEx’s claim that the drivers were contractors who operate their delivery routes as independent businesses, even though the drivers use FedEx equipment, wear FedEx uniforms and work under explicit FedEx rules.

This case will be closely watched, because it will have far-reaching ramifications for employers and employees alike.  Briefly, from the employers’ perspective, the difference between classifying a worker as an independent contractor, as opposed to an employee, is as follows: with regard to the independent contractor, the employer is not only exempt from paying workers compensation or federal unemployment and disability taxes, it is released from matching 7.65% Social Security and Medicare taxes; moreover, the employer is saved the burden and cost of income-tax withholding.

Independent contractors don’t qualify under minimum-wage laws and have no government rights to a safe work environment. Finally, and perhaps most importantly, independent contractors do not qualify for employee benefits.

For employers who are caught misclassifying, they can not only be subject to monetary penalties, they can also be criminally charged with evasion of payments, filing of false tax returns and conspiracy.

In order to help clarify their thinking as to whether a worker is more properly classified as an employee or as an independent contractor, the IRS has published Form SS–8, which sets forth a multi-factorial test. 

There is also new legislation on the horizonThe Independent Contractor Proper Classification Act.

In short, employer beware.