Trade Secrets Laws and the UTSA – A 50 State and Federal Law Survey

Beck Reed Riden LLP is pleased to share its 50 State and Federal Survey of Trade Secrets Laws compared with the Uniform Trade Secrets Act.

The chart is a state-by-state comparison of every state’s trade secrets laws (and the Economic Espionage Act, as amended by the Defend Trade Secrets Act of 2016) to the 1985 version (i.e., the most recent version) of the Uniform Trade Secrets Act.

Screen Shot 2014-04-21 at 7.29.02 PMchart is viewable here. (It was originally prepared on August 14, 2016, and has been updated; it is current as of October 30, 2016.)

In addition, for a comprehensive summary of recent trade secrets and noncompete legislative reforms and efforts at reform around the country, please see Russell Beck’s analysis here: Changing Trade Secrets | Noncompete Laws

2017 U.S. News Best Lawyers BadgeThis 50 State and Federal trade secret law survey is intended both as a stand-alone resource and a companion to Beck Reed Riden LLP’s 50 State Survey Chart of Noncompete Laws. Beck Reed Riden LLP’s nationwide study of noncompete laws has been relied upon by the White House and the United States Department of the Treasury.

For up-to-the-minute analysis of legal issues concerning noncompete agreements in Massachusetts and across the United States, read Russell Beck’s blog, Fair Competition Law.

Beck Reed Riden LLPis among the leading authorities in trade secret, noncompete, and unfair competition law, and our experience handling these matters is backed by our extensive employment law and business litigation experience. Our hand-picked team combines attorneys with complementary expertise and practical experience. The Wall Street Journal and The New York Times have both cited Beck Reed Riden LLP’s noncompete agreement experience.

Russell Beck’s work in this area is well recognized; it includes:

  • Over sixteen years of working on trade secret, noncompete, and unfair competition matters

  • Authoring the book Negotiating, Drafting, and Enforcing Noncompetition Agreements and Related Restrictive Covenants (5th ed., MCLE, Inc. 2015), used by other lawyers to help them with their noncompete cases

  • Drafting and advising on legislation for the Massachusetts Legislature to define, codify, and improve noncompetition law

  • Teaching Trade Secrets and Restrictive Covenants at Boston University School of Law

  • Founding and administrating the award-winning blog, Fair Competition Law

  • Establishing and administrating the Noncompete Lawyers and Trade Secret Protection groups on LinkedIn, with over 750 members around the world

  • Founded and chaired the Trade Secret / Noncompete Practice for an AmLaw 100 firm

In addition, Russell was honored for his work in this area of law in the 2016 Chambers USA Guide, which explained that “Russell Beck of Beck Reed Riden LLP is highly praised by peers, who commend his “impeccable credentials,” in the employment arena, and identify him as an “expert in noncompetition and trade secret laws.”

Beck Reed Riden LLP is Boston’s innovative litigation boutique. Our lawyers have years of experience at large law firms, working with clients ranging from Fortune 500 companies to start-ups and individuals. We focus on business litigation and labor and employment. We are experienced litigators and counselors, helping our clients as business partners to resolve issues and develop strategies that best meet our clients’ legal and business needs – before, during, and after litigation. We’re ready to roll up our sleeves and help you. Read more about us, the types of matters we handle, and what we can do for you here.

50 State Noncompete Chart

Beck Reed Riden LLP is pleased to make available its updated 50 state (plus DC) survey chart of noncompete laws. The chart is a summary of employee noncompetition laws and applicable standards throughout the country.

Both the White House and the United States Department of the Treasury have recently relied upon this nationwide study of noncompete laws.

In addition, recent articles in the New York Times and The Wall Street Journal feature Beck Reed Riden LLP’s expertise in noncompete and trade secret issues.

The chart covers the following:

  • Whether noncompete agreements are permitted in the state

  • Governing statutory authority, if any

  • Identification of the protectable interests (also known as legitimate interests or legitimate business interests)

  • Applicable standards for enforcement

  • Industries or professions exempt from noncompete agreements

  • Whether the state follows the reformation rule (also known as “judicial modification,” the “rule of reasonableness,” the “reasonable alteration approach,” and the “partial-enforcement” rule), the blue pencil doctrine, or the red pencil doctrine (also known as the “all or nothing” rule)

  • Whether noncompete agreements are enforceable against at-will employees whose employment was terminated without cause

The chart is available for download here.

This version was updated as of February 4, 2017.

Check back for periodic updates or email us at info@beckreed.com, and we will automatically send the latest updates as they become available.

Please note that the chart is not legal advice, nor is it a substitute for proper legal research and advice. It is provided for informational purposes only.

is among the leading authorities in trade secret, noncompete, and unfair competition law, and our experience handling these matters is backed by our extensive employment law and business litigation experience. Our hand-picked team combines attorneys with complementary expertise and practical experience. Our hand-picked team combines attorneys with complementary expertise and practical experience

Beck Reed Riden LLP is Boston’s innovative litigation boutique. Our lawyers have years of experience at large law firms, working with clients ranging from Fortune 500 companies to start-ups and individuals. We focus on business litigation and labor and employment. We are experienced litigators and counselors, helping our clients as business partners to resolve issues and develop strategies that best meet our clients’ legal and business needs – before, during, and after litigation. We’re ready to roll up our sleeves and help you. Read more about us, the types of matters we handle, and what we can do for you here.

MA Noncompete Agreement Reform Clears First Major Hurdle

State-house.pngOn June 29, 2016, the Massachusetts legislature moved one step closer to reforming noncompete agreements. With 150 votes for the legislation, and no votes against, the Massachusetts House of Representatives passed “An Act relative to the judicial enforcement of noncompetition agreements.”

If this noncompete bill becomes law (it’s not there yet—it would still need to be passed by the Senate and signed by the Governor by the end of July for that to happen), then there will be a dramatic shift in the way employers are permitted to use noncompete agreements in Massachusetts.

Significantly, the House of Representatives’ noncompete bill would:

  • Cap the noncompete period to 12 months from the date of termination;

  • Restrict employers from enforcing noncompetes against nonexempt (hourly) workers, student interns, and employees under 18; and

  • Prevent enforcement of noncompete agreements against employees who have been terminated without cause or laid off.

The 12-month cap can be extended for up to two years in the event the employee breaches a fiduciary duty to the employer or if the employee unlawfully takes the employer’s information or property.

Screen Shot 2014-10-19 at 11.33.00 AMne controversial aspect of the new bill is the so-called “Garden Leave” clause, which would require employers to pay half the salary of employees for the duration of their noncompete period after they leave. But there’s a major caveat to the Garden Leave provision: The bill gives employers the option of providing some “other mutually-agreed upon consideration . . . provided that such consideration is specified in the noncompetition agreement.”

The bill would not affect nonsolicit agreements that bar employees from transacting business with employers’ customers, clients, or vendors. The bill also maintains the status quo for the courts’ ability to modify noncompete agreements by giving judges discretion to reform or otherwise revise a noncompete agreement so as to render it valid and enforceable.

According to the House’s legislation, in order for a noncompete agreement to be valid, new hires must be given prior notice that they will be bound by such an agreement – either with the delivery of the offer of employment or 10 business days before the employee starts work, whichever is earlier. There is also a 10-day notice provision for current employees who are asked to sign new noncompete agreements.

Separate from the noncompete aspects of the bill, if passed, the bill will adopt the Uniform Trade Secrets Act. The impact of that is, as a practical matter, limited.

Russell Beck recently spoke on a panel at the Boston Bar Association’s symposium about the Massachusetts non-compete agreement reform legislation. For up-to-the-minute analysis of legal issues concerning noncompete agreements and trade secrets in Massachusetts and across the United States, read Russell Beck’s blog, Fair Competition Law.

Beck Reed Riden LLPBLF 2014_Silver_Generalis among the leading authorities in trade secret, noncompete, and unfair competition law, and our experience handling these matters is backed by our extensive employment law andbusiness litigation experience. Our hand-picked team combines attorneys with complementary expertise and practical experience. The Wall Street Journal featured Beck Reed Riden LLP’s noncompete agreement experience. Recently, the White House issued a report entitled, “Non-Compete Agreements: Analysis of the Usage, Potential Issues, and State Responses,” relying in part on Beck Reed Riden LLP’s research and analysis, including its 50 State Noncompete Survey.

Russell Beck’s work in this area is well recognized; it includes:

  • Over sixteen years of working on trade secret, noncompete, and unfair competition matters

  • Authoring the book Negotiating, Drafting, and Enforcing Noncompetition Agreements and Related Restrictive Covenants (5th ed., MCLE, Inc. 2015), used by other lawyers to help them with their noncompete cases

  • Drafting and advising on legislation for the Massachusetts Legislature to define, codify, and improve noncompetition law

  • Teaching Trade Secrets and Restrictive Covenants at Boston University School of Law

  • Founding and administrating the award-winning blog, Fair Competition Law

  • Establishing and administrating the Noncompete Lawyers and Trade Secret Protection groups on LinkedIn, with over 750 members around the world

  • Founded and chaired the Trade Secret / Noncompete Practice for an AmLaw 100 firm

In addition, Russell was honored for his work in this area of law in the 2014 Chambers USA Guide, which explained that “Russell Beck of Beck Reed Riden LLP specializes in noncompete litigation and is a trade secrets expert. He comes highly recommended by his peers for his nationwide practice in this niche. ‘He’s fantastic,’ sources say.”

Beck Reed Riden LLP is Boston’s innovative litigation boutique. Our lawyers have years of experience at large law firms, working with clients ranging fromFortune 500 companies to start-ups and individuals. We focus on business litigation and labor and employment. We are experienced litigators and counselors, helping our clients as business partners to resolve issues and develop strategies that best meet our clients’ legal and business needs – before, during, and after litigation. We’re ready to roll up our sleeves and help you. Read more about us, the types of matters we handle, and what we can do for you here.

50 State Noncompete Chart

Image of US Map for Website HiResBeck Reed Riden LLP is pleased to make available its updated 50 state (plus DC) survey chart of noncompete laws. The chart is a summary of employee noncompetition laws and applicable standards throughout the country.

Recent articles in the New York Times and The Wall Street Journal feature Beck Reed Riden LLP’s expertise in noncompete and trade secret issues.

The chart covers the following:

  • Whether noncompete agreements are permitted in the state

  • Governing statutory authority, if any

  • Identification of the protectable interests (also known as legitimate interests or legitimate business interests)

  • Applicable standards for enforcement

  • Industries or professions exempt from noncompete agreements

  • Whether continued employment is sufficient consideration to support aBLF 2014_Silver_General noncompete

  • Whether the state follows the reformation rule (also known as “judicial modification,” the “rule of reasonableness,” the “reasonable alteration approach,” and the “partial-enforcement” rule), the blue pencil doctrine, or the red pencil doctrine (also known as the “all or nothing” rule)

  • Whether noncompete agreements are enforceable against at-will employees whose employment was terminated without cause

The chart is available for download here.

[pdfviewer width="600px" height="425px" beta="true/false"]http://www.beckreedriden.com/wp-content/uploads/2016/03/Noncompetes-50-State-Survey-Chart-20160325.pdf[/pdfviewer]

This version was updated as of March 25, 2016.

Check back for periodic updates or email us at info@beckreed.com, and we will automatically send the latest updates as they become available.

Please note that the chart is not legal advice, nor is it a substitute for proper legal research and advice. It is provided for informational purposes only.

Beck Reed Riden LLPis among the leading authorities in trade secret, noncompete, and unfair competition law, and our experience handling these matters is backed by our extensive employment law and business litigation experience. Our hand-picked team combines attorneys with complementary expertise and practical experience.

Beck Reed Riden LLP is Boston’s innovative litigation boutique. Our lawyers have years of experience at large law firms, working with clients ranging from Fortune 500 companies to start-ups and individuals. We focus on business litigation and labor and employment. We are experienced litigators and counselors, helping our clients as business partners to resolve issues and develop strategies that best meet our clients’ legal and business needs – before, during, and after litigation. We’re ready to roll up our sleeves and help you. Read more about us, the types of matters we handle, and what we can do for you here.

SEC Focused on Conflicts Disclosures by Advisors and Broker-Dealers

two recent cases, the SEC ordered JP Morgan Chase to pay over $270 million for what it deemed inadequate disclosures about certain conflicts of interest. When closely examined, these two cases illustrate just how detailed and granular the Commission can be when evaluating and prosecuting conflicts non-disclosure issues.

The Proprietary Funds Case

On December 18, 2015, the SEC announced that two J.P. Morgan wealth management subsidiaries had admitted wrongdoing (though no intentional violations) relating to the firm’s investment advisory business and agreed to pay $267 million. Specifically, J.P. Morgan Securities LLC (JPMS) and JPMorgan Chase Bank, N.A. (JPMCB), preferred to invest clients in the firm’s proprietary mutual funds without properly disclosing this preference to clients. In addition, JPMS breached its fiduciary duty to certain wealthy clients when it did not inform them that they were being invested in a more expensive class of J.P. Morgan mutual funds shares than other available classes, or that JPMS preferred third-party-managed hedge funds that made certain “retrocession” payments to a J.P. Morgan affiliate.

The level of scrutiny applied in this case is striking. The SEC was initially focused on a possible charge that JPMS was improperly steering clients to house products so that it and its affiliates could make additional fees. JPMS’s Form ADVs, however, disclosed that JPMS “may have a conflict of interest in including affiliated [Mutual] Funds…because [JPMS] and/or its affiliates will receive additional compensation.” Further, in advance of opening an account, JPMS clients were specifically informed how much of their assets were to be allocated between proprietary mutual funds and third-party funds. Because of such disclosures, the SEC pivoted to the theory that there should have been an additional disclosure that JPMS “preferred” to invest client assets in proprietary products.

Holding the bank to this level of scrutiny seems severe; as noted, JPMS disclosed its incentive to put client money into house funds and these were discretionary accounts. Its “preference” for house funds seems axiomatic. All things considered, however, the penalty could have been far worse. Perhaps because of its cooperation and proactive remedial measures, J.P. Morgan was permitted to continue to provide these kinds of investment advisory services and was able to avoid the so-called automatic “bad actor” disqualification, which would have blocked it from the lucrative business of raising money for private companies, including hedge funds and startups. In addition, while the penalties and disgorgement are certainly significant, they amount to roughly one month of JPMS’s operating profits.

The Broker Compensation Case

In the second settlement, JPMS agreed to pay $4 million to resolve charges that it falsely stated on its private banking website and in marketing materials that individual advisors were compensated based on the performance of client investments, not on commission. As it turned out, advisor compensation was not tied to investment performance; it consisted of a salary plus a bonus determined by a number of factors, none of which were performance based. Although it appears that no investor was harmed, the SEC believed that sanctions were warranted: “JPMS misled customers into believing their brokers had skin in the game and were being compensated based upon the success of customer portfolios.”

Bottom Line

Based upon recent developments, it is clear that the SEC intends to look under every rock to see if all conflicts of interest, regardless of their severity, have been disclosed. Accordingly, firms should take a close look at their business practices and make sure their Form ADVs, websites, marketing materials and other disclosure documents accurately reflect those business practices.

For more information, contact William Haddad.

Beck Reed Riden LLPis Boston’s innovative litigation boutique. Our lawyers have years of experience at large law firms, working with clients ranging from Fortune 500 companies to start-ups and individuals. We focus on business litigation and labor and employment. We are experienced litigators and counselors, helping our clients as business partners to resolve issues and develop strategies that best meet our clients’ legal and business needs – before, during, and after litigation. We’re ready to roll up our sleeves and help you. Read more about us, the types of matters we handle, and what we can do for you here.

Judging iPhone Encryption: It’s Law Versus Technology in the Courtroom

 

With the release of the iPhone 6, Apple built new security features into the iOS8 operating system, measures which law enforcement officials have complained will hinder criminal investigations.

PhoneOnce a user sets a passcode for a phone using the new operating system, all of the phone’s data – including texts, e-mails, call records, and photos – is encrypted. This means that the phone’s contents are saved in coded form, and anyone accessing them would see only gibberish unless they had the encryption key that unlocks the code.

In a change from previous operating systems, the iOS8 creates a unique encryption key for each device that is partially based on the user’s self-selected passcode. Thus, Apple can no longer break the code and access the user’s data, even if ordered to turn over such information by a court. The director of the F.B.I., James B. Comey, has objected to Apple marketing a product that puts phone data outside the reach of law enforcement, citing concerns about terrorism and kidnapping cases.

The new technology also has implications for lawsuits outside the law enforcement context. A party in a civil lawsuit is typically subject to the discovery process, in which they must turn over to the opposing side all documents and materials that are relevant to the case. This disclosure increasingly includes material such as text messages, call history, and photos or e-mails stored on phones. A court can impose sanctions on a party who deletes or fails to turn over relevant information.

Screen Shot 2014-10-30 at 11.46.35 AMwon’t the same high level of encryption now available on iPhones — so impenetrable that not even the F.B.I. can gain access — also protect iPhone data during civil proceedings? Yes and no.

The new iPhone encryption ensures that a litigant who produces a password-protected iPhone to the opposing party in a lawsuit is still able to keep the contents unreadable by refusing to disclose the password. However, the absolute security of encryption may be illusory, because courts routinely order parties to disclose passcodes (in addition to electronic devices, like phones and computers) in order to produce information about cases.

LockDepending on the case, a court could order a litigant to turn over their passcode to their own attorney, the opposing attorney, or a neutral third-party for the contents of the phone to be inspected.

In analogous cases involving data stored on Facebook, courts have often ordered parties to turn over their passwords to uncover relevant posts. For example, a Virginia court in James v. Edwards, 85 Va. Cir. 139 (2012), ordered the plaintiff to turn over his Facebook password to his attorney in order to allow the defendant’s counsel to access to the relevant information. In the context of an employment dispute, a defendant in a Massachusetts case was ordered to disclose his password for encrypted files stored on his former employer’s server. Enargy Power Co. v. Xiaolong Wang, 2013 WL 6234625 (D. Mass. 2013).

And what if a litigant refuses to disclose the password to his or her encrypted iPhone despite a court order? Courts have broad authority to enforce their orders, and sanctions can include monetary penalties and even jail. In the case of Keller v. Keller, 2014 WL 4056926 (Conn. Super. Ct. 2014), a litigant was found in contempt for failing to obey an order to provide working passwords to his iPhone that was being forensically examined as part of the proceedings.

So, despite the enhanced encryption available to users of Apple’s mobile operating system, courts retain their power to compel disclosure as needed, and a litigant who elects to ignore a court order does so at his or her own peril.

Beck Reed Riden LLPis Boston’s innovative litigation boutique. Our lawyers have years of experience at large law firms, working with clients ranging from Fortune 500 companies to start-ups and individuals. We focus on business litigation and labor and employment. We are experienced litigators and counselors, helping our clients as business partners to resolve issues and develop strategies that best meet our clients’ legal and business needs – before, during, and after litigation. We’re ready to roll up our sleeves and help you. Read more about us, the types of matters we handle, and what we can do for you here.

Location, Location, Location: The Importance of Venue Selection

World TravelWhen parties are negotiating the terms of a deal, it is easy to overlook the possibility that, somewhere down the road, significant disagreements could emerge. While it may be difficult to discuss future disputes at a time when both parties are getting along, it is best to agree on a method of resolving conflicts before one actually appears.

Screen Shot 2014-10-17 at 11.50.50 AMne aspect of anticipating the resolution of future conflicts is determining where any such resolution will occur. To this end, venue selection clauses allow parties to agree in advance where their disputes will be settled. For example, a contract can state that disputes will be resolved in a particular country, state, or even city.

Although venue and forum selection clauses are closely related, a venue selection clause sets the geographic location for the resolution of any dispute, while a forum selection clause chooses the particular court or arbitrator that will decide the matter.

The Benefits of a Proper Venue Selection Clause

A properly-drafted contract will include a venue selection clause in order to reduce the potential costs and stress of resolving any future disputes between the parties.

Money: Litigating a dispute in a foreign state or country can significantly add to the costs of dispute resolution. As a threshold matter, travel expenses for shuttling necessary parties to and from an out-of-town venue can add up. In addition, litigating a matter in a foreign jurisdiction typically requires the retention of local attorneys, which can be a significant expense.

Time: Traveling takes time and time costs money. Business owners and employees may need to attend hearings, and time spent away from work will cost the company even more money.

Familiarity: Litigating out of state may require the use of local counsel in that jurisdiction. When a party litigates close to home, it can use a law firm that it is already familiar with.

Peace of Mind: It can be difficult to predict how and when a contract dispute may arise. At least knowing where the dispute will be resolved can help alleviate some of the burdens associated with litigation or arbitration.

A venue selection clause is only beneficial if it can be enforced. If such a clause is not properly drafted, then parties might not receive the benefits that they thought they bargained for.

Enforcement of Venue Selection Clauses in Massachusetts

Generally, Massachusetts courts will enforce venue selection clauses, and parties seeking to challenge them must overcome a heavy burden. To overcome this heavy burden, the challenging party must demonstrate any of the following:

(1) The clause was agreed to as a result of fraud or exploitation.

(2) Enforcement would be unreasonable and unjust.

(3) Enforcement will deprive the challenging party of their day in court.

(4) Enforcement is against a strong public policy in that forum.

If none of these situations apply, the clause may still be challenged if it is not drafted with mandatory language. A venue selection clause that merely suggests or permits a dispute to be settled in a certain venue has the potential to be disregarded. However, the use of the words “will” or “shall” typically indicate that the clause is mandatory and that the dispute can only be resolved in the location specified.

For example, in the case Provanzano v. Parker View Farm, Inc., 827 F. Supp. 2d 53, 60 (D. Mass. 2011), the U.S. District Court for Massachusetts explained that this venue selection clause was mandatory, as opposed to merely permissive: “This agreement shall be governed by the laws of the State of Kentucky, and the venue shall be in Woodford County.” By using mandatory terms (like “will” or “shall”), and combining forum and venue selection clauses with one another, the parties in that case negotiated and were bound by an enforceable, mandatory venue selection clause.

Analysis of any particular venue selection clause is done on a case-by-case basis, and it is important for contracting parties to obtain the advice of legal counsel who is attentive to current law in this area.

Beck Reed Riden LLP Excels In Commercial Dispute Resolution

With years of experience handling all stages of complex litigation from injunction proceedings to trials and appeals, Russell Beck, Stephen Riden, and Will Haddad provide thoughtful guidance to companies. Because of our extensive litigation experience, we regularly advise companies and organizations of all sizes in their day-to-day operations, helping them resolve conflicts creatively so they can return to productive business pursuits. Beck Reed Riden LLP can be reached now for a free consultation via email (info@beckreed.com) or telephone (617-500-8660).

Working Out Corporate Conflict

HiResStarting a new business with an old friend is the path to the American Dream for many entrepreneurs. Two famous friends who did just that were Bill Hewlett and Dave Packard, they met in college and worked together to start Hewlett-Packard, one of the most successful technology companies in the world. Legions of startups have followed Hewlett and Packard’s example, with friends getting together to launch countless businesses. Whether it’s launching a food truck or a software app, founders of small businesses face myriad challenges. Sometimes the hardest challenge for co-owners is figuring out how to get along with one another.

Screen Shot 2014-10-15 at 2.30.37 PMrecent Massachusetts Superior Court decision details the rocky road traveled by one group of friends who started a business together. The story begins in 1999, when a group of founders, including two high school friends and roommates named Tony Beninati and Steven Borghi, decided to open a gym. Tony and Steven each brought in one additional investor for their business venture.

The four co-owners eventually opened a string of health clubs in New England under the licensed name Work Out World (“WOW”). The group formed fourteen separate limited liability companies to own each club and a fifteenth to centralize management and administration for all of the clubs.

Unfortunately, significant conflicts arose among the co-owners of WOW New England, leading to a lawsuit in Suffolk County Superior Court named Beninati v. Borghi, and eventually resulting in a multi-million dollar verdict against one of the original founders.

To understand how a court views conflicts among owners in a small business, it is first helpful to understand some basics of Massachusetts law concerning close corporation disputes.

What Is A Close Corporation?

A close corporation is a corporation for which no ready market exists for the trading of its shares. Thus, the shares are neither publicly traded on a stock exchange nor can they be sold to members of the public. The shares of a close corporation are held by a small number of shareholders or investors, who are usually heavily involved in the management and day-to-day operations of the business.

Typically a close corporation is a family business or one that is owned by a small group of investors. It can range from a mom-and-pop restaurant to an IT consulting company.

In the Beninati v. Borghi case, since the business was formed as a set of limited liability companies, the court treated the companies as closely-held business entities.

Shareholders’ Duties In A Close Corporation

As a general matter, stockholders of a close corporation owe each other a duty of utmost good faith and loyalty. They cannot act in self-interest where it will harm the company.

A controlling shareholder cannot pursue any course of conduct if there are alternatives that would be less harmful to minority shareholders. Massachusetts law protects minority shareholders because they cannot sell their stock to avoid oppressive behavior by controlling shareholders.

When Conflict Leads To A Lawsuit

Where a shareholder, director, or officer of a close corporation has violated duties to the corporation itself, any shareholder or director may bring a derivative suit on behalf the corporation. And where the wrongful actions have harmed a shareholder’s interests, the shareholder may bring a direct suit to seek personal relief.

What Went Wrong With WOW New England?

The group’s dynamic changed when Tony passed away and his wife, Elizabeth, took his place. Disagreements arose, most importantly over the issue of expansion. Steven was looking to add more clubs whereas Elizabeth and another owner had misgivings about Steven’s proposals.

Taking matters into his own hands, Steven joined forces with Harold Dixon, an experienced franchisor, to pursue his expansion dreams. Together, Steven and Harold formed Blast Fitness and opened their own string of competing WOW health clubs in New England.

The remaining members of the WOW New England group were not pleased to learn that one of their co-owners was setting up new gyms in competition with WOW New England, so they brought a lawsuit against Steven and Harold in the Superior Court of Massachusetts.

Because Steven took matters into his own hands and started competing health clubs, the court ruled that he violated his fiduciary duties to WOW New England in the following ways.

  • He misappropriated confidential information and used it in direct competition with WOW New England. The information included membership data, revenue information, membership demographic reports, employee training manuals, payroll data, and a list of the clubs’ vendors.

  • He used WOW New England’s assets to open and operate the competing clubs, including having WOW New England employees work for Blast while on WOW New England’s payroll.

  • He violated his noncompete agreement with WOW New England forbidding him from opening a competing venture.

In 2014, the court found Steven liable and awarded damages to his co-owners, including $1.5 million for use of WOW New England’s advertising and $2.5 million in royalty payments.

Whether or not an act breaches one’s fiduciary duty often depends on the specific facts of each case, and it is therefore advisable to seek legal advice early on in the decision-making process.

Beck Reed Riden LLP Excels In Close Corporation Dispute Resolution

With years of experience representing partners, owners, and family members in a variety of corporate disputes, Russell Beck, Stephen Riden, and Will Haddad provide thoughtful guidance to business owners involved in shareholder disputes. Beck Reed Riden LLP is committed to developing custom-fit, appropriate solutions for the complex relationships that are inherent in these types of conflicts. Beck Reed Riden LLP can be reached now for a free consultation via email (info@beckreed.com) or telephone (617-500-8660).

Stuck in the Middle of a Close Corporation Dispute

Screen Shot 2014-10-15 at 1.25.29 PMyou happened to pick up a comic book from the 1950s, you may have come across an advertisement for the Junior Sales Club of America. The Junior Sales Club of America (JSCA) was a family-owned greeting card company that promoted its products by incentivizing kids to sell boxed assortments of cards in exchange for money and prizes. A young entrepreneur who sold enough cards could win exciting prizes, like a compass, a camp stove, or Screen Shot 2014-01-07 at 11.27.27 AMeven an air rifle. With a business model that embodied the American dream, JSCA became a symbol of bygone era. However, behind the scenes of Junior Sales Club of America’s cheerful ads, there was conflict, division, and a bitter legal battle. The story of this closely held, family business unfolds in a 1982 Massachusetts Appeals Court case named O’Hara v. Robbins.

In The Company Of Family And Friends 

In 1953, the Robbins family started Sunshine Art Studios, Inc., a company that manufactured and sold greeting cards. Willard S. Robbins held 50% of the shares. His wife, Grace B. Robbins, held 10% and their son, Ryland E. Robbins, held the remaining 40%. Ryland’s college classmate and friend, Arthur P. O’Hara, worked for Sunshine in charge of promotions and sales. In 1954, Arthur proposed a novel business model by which the company would give prize and money incentives to young people to sell Sunshine greeting cards. The model was implemented under the name of Junior Sales Club of America. After JSCA was Screen Shot 2014-01-07 at 10.49.58 AMincorporated, Arthur was given a certificate for 20% of the shares, and Ryland and Willard each kept 40% ownership of the company. Although he never invested in JSCA, or negotiated for the shares, Arthur’s salary reflected 20% of JSCA’s profits.

A Shareholder Left Out In The Cold

Two years after proposing the novel sales incentive program, Arthur proposed another program that would operate essentially the same as JSCA but offer better incentives for sellers and sponsors. Arthur’s new business idea became a reality when he and his business partners started a new company: Sales Leadership Club, Inc. (Sales Leadership). Unfortunately for Arthur, however, a partnership tax return filed in 1958 named only Willard, the father, and Ryland, the son, as Screen Shot 2014-01-07 at 2.37.05 PMpartners. Then, in 1959, Arthur was told that he did not own interest in Sales Leadership. Nevertheless, Arthur was paid a percentage of the profits for the next three years. Further, money from JSCA was used in part to fund the expenses of Sales Leadership. Arthur continued to work for Sunshine until 1965, when he resigned from the Robbins companies over an unrelated dispute. Arthur asked for shares in Sales Leadership after he resigned from the company, but the Robbins family refused.Screen Shot 2014-01-07 at 10.46.45 AM

Arthur sued his business partners seeking injunctive relief and damages. The trial judge found that the Sales Leadership model was a “corporate opportunity” that should have been reserved for JSCA. By diverting business to a competing operation (i.e., Sales Leadership), the Robbins failed to honor their fiduciary obligations to JSCA and to Arthur as a minority shareholder. The trial court ruled in Arthur’s favor and ordered the Robbins to transfer 20% of the shares of Sales Leadership directly to Arthur. The trial court’s decision was upheld on appeal.

Shareholders’ Duties In A Close Corporation

Shareholder disputes in close corporations can take many forms. And the type of dispute that landed the co-owners of the Junior Sales Club of America in a courtroom is quite common. Tensions often develop between majority and minority ownership interests. The specific conflict in this case that drove a wedge between business partners was the father and son’s breach of the corporate opportunity doctrine. The corporate opportunity doctrine stands for the legal principle that directors, officers, and majority shareholders may not usurp a beneficial business opportunity without first presenting it to the corporation.Screen Shot 2014-01-07 at 10.55.06 AM

To determine whether a corporate opportunity exists, the courts will often ask (1) whether the opportunity was within the company’s line of business; (2) whether the company was financially able to take advantage of the opportunity at the time of appropriation; (3) whether the company had an interest or expectancy in the opportunity; and (4) whether taking a the opportunity would create a conflict of interest or breach of other fiduciary duties.

The corporate opportunity doctrine stems from the fiduciary duty of loyalty, which generally prohibits directors, officers, and shareholders from stealing assets, self-dealing, engaging in insider trading, and otherwise advancing personal interests to the detriment of the corporation. Owners, officers, and directors also have the duty of care, the obligation to exercise reasonable care when making decisions on behalf of the corporation. Although some instances of misconduct (e.g., embezzlement) are obvious, other situations are not as clear. This may be the case, for example, when the opportunity involves business that is related but not identical to the business of the corporation.

When Conflict Leads To A Lawsuit

Where a shareholder, director, or officer of a close corporation has violated duties to the corporation itself, any shareholder or director may bring a derivative suit on behalf the corporation. And where the wrongful actions have harmed a shareholder’s interests, the shareholder may bring a direct suit to seek personal relief. Here, Arthur was able to sue his business partners directly because his personal interests as minority shareholder of JSCA were harmed when the Robbins—who were both directors, officers, and majority shareholders of JSCA—diverted business to a competing enterprise: Sales Leadership. Whether or not an act breaches one’s fiduciary duty often depends on the specific facts of each case, and it is therefore advisable to seek legal advice early on in the decision-making process.

Beck Reed Riden LLP Excels In Close Corporation Dispute Resolution

With years of experience representing partners, owners, and family members in a variety of corporate disputes, Russell Beck, Stephen Riden, and Will Haddad provide thoughtful guidance to business owners involved in shareholder disputes. Beck Reed Riden LLP is committed to developing custom-fit, appropriate solutions for the complex relationships that are inherent in these types of conflicts. Beck Reed Riden LLP can be reached now for a free consultation via email (info@beckreed.com) or telephone (617-500-8660).

50 State Noncompete Survey

Beck Reed Riden LLP is pleased to make available its updated 50 state (plus DC) survey chart of noncompete laws. The chart is a summary of employee noncompetition laws and applicable standards throughout the country.

Recent articles in The Wall Street Journal feature Beck Reed Riden LLP’s expertise in noncompete and trade secret issues.

The chart covers the following:

  • Whether noncompete agreements are permitted in the state

  • Governing statutory authority, if any

  • Identification of the protectable interests (also known as legitimate interests or legitimate business interests)

  • Applicable standards for enforcement

  • Industries or professions exempt from noncompete agreements2015_BLF_Silver_Standard

  • Whether continued employment is sufficient consideration to support a noncompete

  • Whether the state follows the reformation rule (also known as “judicial modification,” the “rule of reasonableness,” the “reasonable alteration approach,” and the “partial-enforcement” rule), the blue pencil doctrine, or the red pencil doctrine (also known as the “all or nothing” rule)

  • Whether non-compete agreements are enforceable against at-will employees whose employment was terminated without cause

The chart is available for download here.

This version was updated as of August 14, 2013.

Check back for periodic updates or email us at info@beckreed.com, and we will automatically send the latest updates as they become available.

Please note that the chart is not legal advice, nor is it a substitute for proper legal research and advice. It is provided for informational purposes only.

Beck Reed Riden LLPis among the leading authorities in trade secret, noncompete, and unfair competition law, and our experience handling these matters is backed by our extensive employment law and business litigation experience. Our hand-picked team combines attorneys with complementary expertise and practical experience.

Beck Reed Riden LLP is Boston’s innovative litigation boutique. Our lawyers have years of experience at large law firms, working with clients ranging from Fortune 500 companies to start-ups and individuals. We focus on business litigation and labor and employment. We are experienced litigators and counselors, helping our clients as business partners to resolve issues and develop strategies that best meet our clients’ legal and business needs – before, during, and after litigation. We’re ready to roll up our sleeves and help you. Read more about us, the types of matters we handle, and what we can do for you here.

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