Jonathan Cooper’s Blog

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.

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.

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 general, there are four (4) reasons why you may want to hire a big law firm to represent your small business: (1)   Resources.   You need sufficient support staff to manage an antitrust matter, a complex merger and acquisition, or a litigation matter with documentary discovery that would fill a large conference room or two. (2)   Interdisciplinary Expertise.    You require the in-depth knowledge of counsel on a broad range of legal services to collaborate on matters requiring expertise spanning several disciplines, such as corporate and securities, mergers and acquisitions, securitization, intellectual property, funds and other pooled investments, bankruptcy and corporate reorganization, bank and commercial lending, public finance, real estate, tax and employee benefits, as well as trusts and estates.(3)   Global Presence.   You need a global network of law offices to provide integrated multi-jurisdictional and cross-jurisdictional legal services. (4)   Big Firm Stature.   You need the prestige of a big firm’s name on an opinion letter to support the actions your company intends to take.

(1)  Client Satisfaction is Critical to a Small Firm’s Survival. Since, by definition, small law firms lack the “big name” distinction of a large law firm, the distinguishing characteristic for any small firm is its reputation for excellence in its particular areas of practice, and the personal attention the firm offers each client. Since each attorney’s performance is judged on client satisfaction and results obtained rather than on the attorneys’ annual billable hours that are charged to the firm’s clients (including you), the small firms have a vested interest in assuring that the resolution of your litigation or other assignment is as expeditious and inexpensive as possible. (2)  Seeing the “Big Picture.” The day-to-day handling of your case is carried out by the partner in charge of the case, and therefore will always remain mindful and positioned to recognize the most cost-effective manner to achieve your goals. (3)   No Duplication of Work Effort.You will never be billed for meetings between the partners and associates on your case, will rarely, if ever, be billed for more than one attorney appearing at a Court conference or deposition. Why should you pay to assure that the “head” knows what each “hand” is doing, or pay for two or more attorneys appearing when often only one of the attorneys will be allowed to speak on your behalf? (4)   Learning on your Nickel.Since your case is being handled directly by the partner in charge, you will only pay your lawyer to complete the requested task; you will not incur the additional time and expense for educating a new attorney.