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The Board Made a Wrong Decision – Can (Should) it be Held Liable?

The board of directors made the decision to acquire a company for $100 million.  The negotiations and the due diligence process were difficult, but the board finally approved the acquisition and the transaction closed.  After closing, the acquirer determined that the value of the acquired company’s assets were greatly overstated and the acquiring company took a loss on its books.  The shareholders of the acquiring company have met to determine whether to file litigation against the directors.

In Illinois, courts have ruled that the “business judgment rules acts to shield directors who have been diligent and careful in performing their duties from liability for honest errors or mistakes of judgment”.  Absent “bad faith, fraud, illegality or gross overreaching, the courts are not at liberty to interfere with the exercise of business judgment by corporate directors”.  Thus, just because a board made the “wrong” business decision, does not mean that the directors are liable to the shareholders.

While the courts are reluctant to make business judgments for companies, this does not always prevent shareholders from “second guessing” decisions of the board.  Illinois law provides that a corporation may indemnify its directors and officers from any liability if such director or officer “acted in good faith and in a manner he or she believed to be in, or not opposed to, the best interests of the corporation”.  Since the law is permissive, in order for a corporation to attract quality persons to serve as an officer or director, it may wish to agree to indemnify such person in such situations.  It is important from the corporation’s perspective to draft such an agreement, in a manner that, while protecting the “well-intended” officer or director, also protects the company.  If you have any questions about directors’ and officers’ liability to the corporation, or would like to discuss your company’s legal concerns, please feel free to contact the business lawyers at Levin Ginsburg.

For more information, please contact:

Morris R. Saunders at: (312) 368-0100 or msaunders@lgattorneys.com

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CCPA UPDATE

While most businesses are aware, a surprisingly small number report that they will be ready to comply with the California Consumer Privacy Act (“CCPA”), when it officially takes effect on January 1, 2020.

The CCPA was first signed into law in September 2018.  Often touted as “GDPR Lite” or “GDPR 2.0” because of its similarity to the European regulation, CCPA’s key provisions are summarized as follows:

  • Right To Be Forgotten:   Upon a consumer’s request, a business subject to CCPA will be required to delete a consumer’s personal information.
  • Right To Be Informed:  Upon a consumer’s request, a business subject to CCPA that sells consumer personal information will be required to disclose the categories of information it collects and identify third parties to whom the information was disclosed or sold.
  • Right To Opt Out:  Upon a consumer’s request, a business subject to CCPA will be required to provide the consumer with the ability to prevent the business from selling the consumer’s personal information.
  • Right of Non-Discrimination: If a consumer requests that a business not sell his/her personal information, the business is precluded from charging the consumer a higher price for goods or services, or providing the consumer a lower quality good or service, except if the difference is reasonably related to the value provided by the consumer’s data.

Since the CCPA was passed, it has already undergone changes, in September, 2018, and again on February 25, 2019, with the introduction of California Senate Bill 561 (“561”).  While some changes were merely cosmetic, fixing errors, etc., the substantive changes aimed to clarify and strengthen the law.  For example, 561’s amendments:

  • Expand the consumer’s right to bring an action for damages:  Previously, the CCPA allowed a consumer to bring suit for damages against the business if the business failed to maintain reasonable security protocols for non-encrypted, non-redacted personal information that resulted in unauthorized access, identity theft, or other disclosure.  Now, instead of just the narrow, breach situation, consumers may bring a private right of action against a business by merely claiming that his/her rights under the CCPA were violated, in presumably any manner.  Damages in these types of suits are statutory and a Plaintiff may recover up to $750 per incident.  Additionally, since claims may be pursued on a class-action basis, this change is of critical importance.
  • Delete a business’s ability to seek guidance from the Attorney General as to how to comply with the CCPA.  In its place, the amendment adds language that the “Attorney General may publish materials” that may assist a business in compliance.

561, while a start, does not clarify all ambiguities in the CCPA.  For example, language such as “households” remains vague as to whether it means consumers, or a combination thereof.  Also, while the language of “consumers” and “businesses”, and other evidence seem to suggest that the CCPA was not intended to include “employers” vis-à-vis their “employees”, nowhere in the text does it clarify the same.  If an amendment did indicate that the CCPA applied to employers and their employees, businesses in California would have to implement stringent security safeguards, as data breaches often involve divulgence of employees’ personal information.   Therefore, while 561 provides the initial amendments, the CCPA likely will see further amendments prior to its January 1, 2020 launch

In conclusion, businesses subject to CCPA should begin to take steps toward compliance now.   Data mapping, updating policies, developing teams, increasing security measures and other activities that will be required for compliance take time to implement.  Businesses with questions as to whether it is subject to CCPA, or what steps to take, should contact a privacy attorney.

For further information regarding this topic, please contact:

Natalie A. Remien at nremien@lgattorneys.com or 312-368-0100.

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Have You Looked At Your Buy-Sell Agreement Lately? Business Succession Planning

John, Alexandria, Mary, Martin, and Yvette, formed the Jammy Sleepwear Company over thirty-five (35) years ago.  They were equal partners and formed a corporation.  On the advice of their attorneys, the entered into a shareholders’ agreement that contained buy-sell provisions.  This type of agreement is sometimes referred to as a “buy-sell agreement”.

Their buy-sell agreement contained various provisions, including under what circumstances a departing shareholder’s shares would be purchased, what the purchase price of those shares would be, and the terms of payment.  Since the business was in its infancy, they agreed it would be valued at its “book value”, meaning that the value of the assets on its financial statements, less all obligations, would be the business’s value.  There was no adjustment for good will or other intangible assets.  Also, the increase in value of any assets would not be taken into consideration.  The purchase price to a departing shareholder was to be paid in twelve (12) months, in equal monthly payments.  The business was required to purchase a departing shareholders shares.

Since they formed the business in 1980, they acquired other businesses and purchased real estate through a separate LLC.  They did not think to have a buy-sell for the LLC.

John has announced he would like to retire, but he has objected to the purchase price as being “unfairly” low.  He has advised the other owners that he will keep his interest in the real estate, since it will provide him with a “good stipend” during his retirement.  Shortly thereafter, Mary announced her retirement.

The remaining owners are concerned that the business will not be able to support payments to John and to Mary.  Also, the remaining owners would prefer that John and Mary also sell their interests in the LLC.

Unfortunately, the shareholders (and LLC members) did not regularly review their buy-sell agreement.  As the value of the business grew, the amount of the payments increased and would put a strain on the cash flow of the business.  If more than one owner were to retire, it would cause a bigger strain.  Either the business would have to borrow money, the owners would have to make capital infusions, new investors would be needed, or the business would need to be sold.

Some buy-sell agreements address these types of situations, by limiting the amounts that must be paid out to departing owners on an annual basis.  For example, the payments cannot exceed a specific dollar amount or a percentage of gross profits.  Also, when the owners buy real estate to be used by the business, they might consider including the real estate as a part of the buy-sell process.

Buy-sell agreements should be reviewed periodically to ensure they continue to meet the needs of the business and its owners.  Levin Ginsburg has been advising business owners regarding legal aspects of their businesses, including buy-sell agreements for almost forty  years.

Please contact us with any questions you have regarding your business (including any buy-sell issues) at 312-368-0100 or Morris Saunders at msaunders@lgattorneys.com.

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Are Your Business E-Mail Messages Legally Compliant?

Overview:

You may have heard of The Can-Spam Act (“Can-Spam”), but if your business engages in email marketing, you must understand the requirements and put processes in place for compliance.  Can-Spam is a federal law that establishes requirements for all outbound commercial messages, regardless of whether they are B to B (business to business) or B to C (business to customer) messages.  The Act also provides recipients the right to have you discontinue your emails to them, which is referred to as an “opt-out” provision.   Finally, it instills high penalties for non-compliance.

Requirements:

The main requirements of Can-Spam are as follows:

  1. Header or subject line information must NOT be misleading.
  2. The subject line must be an accurate descriptor of the content of the message.
  3. Clear and Conspicuous identification that the message is an ad.
  4. Recipients must be provided your address.
  5. You must include an Opt-Out mechanism to avoid future messages.
  6. Opt-out requests must be honored promptly (i.e. within 10 business days).
  7. If you hire another company to handle your e-mail marketing, you are responsible for their compliance with Can-Spam.

Penalties for Non-Compliance:

Each separate email message that does not comply with Can-Spam may be the subject of up to $40,000 or more in penalties, and multiple people may be responsible for violations.  Therefore, both the company whose product or service is being advertised and the marketing company who originated the message may be legally responsible for violations.  In addition to the requirements of Can-Spam, commercial email messages must comply with other laws as well.  For example, if the content is deceptive or misleading information about a product, then the sender may be in violation of the FTC Act and/or other state laws regarding false and deceptive business practices.  Further, impersonation or the unauthorized use of the sender’s computer or system or other such acts are subject to criminal penalties.

Not all commercial messages require compliance with Can-Spam.  Only those messages whose primary purpose is commercial in nature.   For instance, emails to customers concerning their order, or other already agreed-to transaction with your company will avoid the necessity to comply with Can-Spam as they are viewed as relationship or transactional messages.  However, oftentimes a business will send a message that combines elements of transactional or relationship content with commercial content.  At that time, it is important to consult with an attorney for guidance as to whether such a message must comply with Can-Spam or if the message would not fall under the purview of Can-Spam.

If you have any further questions or wish to inquire about our fixed-fee advertising clearance services, please contact:

Natalie A. Remien at:

(312) 368-0100 or nremien@lgattorneys.com.

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A Baseless Lawsuit Was Filed Against My Business. Can I Recover My Attorneys’ Fees?

Defending lawsuits is sometimes an unfortunate but necessary part of doing business. Whether the case was quickly dismissed by the court, or whether you won the case after a trial, you and your attorneys knew the case was unfounded from the beginning and yet you had to spend substantial time and money that you could have devoted to your business in order to successfully defeat the case.

Depending on the facts and circumstances and whether the suit was pending in state or federal court, your fees may be recoverable from other side as a sanction for filing a “frivolous” claim against you. However, absent a contract or statute providing otherwise, you will most likely be unable to recover your attorneys’ fees simply because you won your case.

Assuming the suit was filed in Illinois, sanctions may be available. Generally, to recover fees against a party or his or her attorney under either rule, it must be shown that the party and/or his attorney either: (1) failed to reasonably investigate the facts or the law before filing the offending complaint, (2) filed the complaint for the purpose of harassment, delay, or to increase the cost of litigation for the opposing party.  One principal difference between the federal rule and the Illinois rule is that under the federal rule, only an attorney can be monetarily sanctioned based on unwarranted legal contentions. Thus, if the complaint was filed in federal court, while both the attorney and client are responsible for ensuring that the facts contained in the complaints are accurate and complete, only the attorney may be sanctioned for a complaint based on a claim or argument that is not warranted by existing law.  By contrast, under certain circumstances, the Illinois rule permits the court to sanction both the party and his attorney—even if the complaint is found to have been legally (as opposed to factually) unwarranted.

It is important to note that not every meritless case is considered “frivolous” for purposes of recovering attorneys’ fees. The United States Supreme Court has held that an action or claim is frivolous if “it lacks an arguable basis either in law or in fact.” Similarly, the Seventh Circuit Court of Appeals has characterized a filing that is incoherent and lacks a legal basis as “frivolous.” Thus, “frivolous” does not necessarily mean “meritless,” but rather, a frivolous suit lacks a factual or legal basis, and as such, has very little chance of being won.  For this reason, it is recommended that a party wishing to seek sanctions do so at the end of the case, i.e., after the court makes a determination that the claim lacks legal and/or factual merit.

In addition, as the Seventh Circuit Court of Appeals recently determined, whether a case or claim is “frivolous” is not the end of the inquiry. A request for attorneys’ fees may nonetheless be denied where fees that were incurred were “self-inflicted” by, for example, pursuing one strategy over another, or briefing an appeal on the merits rather than filing a motion to dismiss for lack of jurisdiction.

Both the federal rule and the Illinois rule are discretionary and are strictly applied by the courts. As such, sanctions are infrequently granted. Regardless of how and when your litigation was resolved, you and your attorneys should evaluate whether it would be appropriate to seek sanctions, and if so, whether it would be worthwhile from a cost perspective.

If you have any questions regarding a litigation matter you find yourself involved in, please contact:

Katherine A. Grosh at:

(312) 368-0100 or kgrosh@lgattorneys.com


[1]  This article is the first of a three-part series: Part II will address the recovery of attorneys’ fees pursuant to various Illinois statutes, and Part III will address the recovery of attorneys’ fees pursuant to a contract where the dispute is resolved outside of the litigation context.

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Keeping your Trade Secrets Safe: The Runaway Employee

How can a business protect its critical information when an employee goes to work for a competitor? Many employers simply assume that if it deems information “confidential,” the law automatically protects it when an employee leaves and goes to work for a competitor.  That’s not necessarily the case.  In order to protect its confidential information, such as intellectual property, information, systems, customer lists, pricing information and the like, an employer must take affirmative steps long before the rogue employee leaves to ensure that its information is protected.  Such information can be protected from disclosure both under Illinois common law and pursuant to the Illinois Trade Secrets Act (“ITSA”).

An employer’s trade secrets, such as its customer lists, are a protectable interest. An employer has a clear and ascertainable right in protecting its trade secrets. To show information is a trade secret under ITSA, an employer must meet two threshold requirements. First, it must show the information was sufficiently secret to provide the employer with a competitive advantage. Second, the employer must show that it took affirmative measures to stop others from acquiring or using the information. Examples of steps employers typically take to keep information confidential include keeping the information under lock and key, limiting computer access, requiring confidentiality agreements, and other employer efforts to advise employees that the information imparted to them must be kept secret. Establishing this second prong is where employers typically fall short.

Where employers have invested substantial time, money, and effort to obtain a secret advantage, the secret should be protected from an employee who obtains it through improper means. Although employees may take general knowledge or information with them that they developed during their employment, they may not take confidential information, including trade secrets. The taking does not have to be a physical taking by actually copying the names. A trade secret can be misappropriated by physical copying or by memorization. Using memorization to rebuild a trade secret does not transform the trade secret from confidential information into non-confidential information. A trade secret can also be obtained through reverse engineering

Whether and how an employer keeps information secret is one of the most important factors when determining whether information is a trade secret. When information is generally known or understood in an industry, even if it is unknown to the public at large, it does not constitute a trade secret. If a business fully discloses information throughout an industry through a catalog or other literature, it is not considered a trade secret. If the information can be readily duplicated without considerable time, effort, or expense, it is not considered a trade secret. If a customer list, for example, is generally available to all employees and the employees are not required to sign confidentiality agreements, the list is likely not considered a trade secret.

By far the most litigation in this area is over whether an employer’s customer list is a confidential trade secret.  Whether customer lists constitute trade secrets largely depends on the facts of each case.  Customer lists and other customer information can be considered a protectable trade secret if the information has been developed by the employer over a number of years at great expense and kept under tight security. However, the same type of information is not protectable where it has not been treated as confidential and secret by the employer, was generally available to other employees and known by persons in the trade, could be easily duplicated by reference to telephone directories or industry publications, and where the customers on such lists did business with more than one company or otherwise changed businesses frequently so that their identities were known to the employer’s competitors.

Illinois courts have found that customer lists do not constitute protectable trade secrets where, for example: a) the particular industry was competitive and customers often dealt with multiple companies; b) the employer had failed to produce sufficient evidence to demonstrate that the customer list was subject to reasonable efforts to protect its secrecy; and c) sufficient efforts had not been taken to maintain the list’s secrecy. To be a protectable trade secret, the employer must demonstrate the information it seeks to protect was sufficiently secret to provide it with a competitive advantage. However, for steps to be deemed sufficient to protect a trade secret, extensive steps must be taken to protect both the electronic and hard copies of the purported trade secret.

For more information regarding the protection of a company’s confidential information, please contact:

Howard L. Teplinsky at:

(312) 368-0100 or hteplinsky@lgattorneys.com

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Is Your Business BIPA Compliant?

In order to increase productivity and efficiency, businesses are increasingly using biometric data to identify employees, customers and other individuals.  For example, some employers use biometric data to identify their employees and track work hours for purposes of compensation.   Biometric information includes fingerprints, retina scans, facial scans, hand scans, or other identifiers that are biologically unique to a particular person.   While convenient, and seemingly secure, such biometric identification methods raise serious privacy concerns.  The Illinois Biometric Information Privacy Act, 740 ILCS 14, et seq. (“BIPA”), imposes many requirements concerning the collection, use, storage, and destruction of biometric information with which businesses, including employers, must comply, or risk liability.

Under BIPA, before an Illinois business collects, stores, or uses biometric identifiers, it must develop a written policy and make the policy available to the public.  The policy must include a retention schedule describing how long such data will be stored, and provide guidelines for its destruction when the reason for the original collection of the data no longer exists, such as when an employee resigns.  Additionally, Illinois businesses must describe and adhere to a destruction schedule for biometric information that it is no longer using.  If no schedule is provided, then BIPA requires that a business destroy such information within three years of the individual’s last interaction with the business.

In addition to the required written policy, Illinois businesses must obtain consent and a written release from an individual prior to collecting biometric information.  BIPA is currently one of the strictest state statutes regarding the collection, retention, storage and use of biometric information.  Before biometric information may be collected, all Illinois private entities must (1) inform the individual in writing that a biometric identifier is being collected or stored, (2) inform the individual in writing of the specific purpose and length of time for which the biometric identifier is being collected, stored and used, and (3) receive a written release executed by the individual assenting to the collection, storage and use of a biometric identifier.  Absent a court order or law enforcement directive, businesses may not share biometric information without express consent from the individual.

Illinois businesses that utilize biometric identifiers but do not comply with BIPA may face severe consequences. BIPA provides that individuals may bring an action against a business that negligently or intentionally violates a provision of BIPA.  If the claim is for negligence, the business may be liable for damages up to $1,000 per violation, and if the claim is for an intentional violation of BIPA, the business may be liable for damages up to $5,000 per violation.  Damages in either category may be higher if actual damages exceed these numbers.  An aggrieved party may also receive attorneys’ fees and costs, an injunction, and other relief.

Recently, privacy-related claims are on the rise as a result of BIPA.  Since mid-2017, over 25 lawsuits have been filed in Illinois alleging violations of BIPA.  The majority of the cases are class action lawsuits by employees claiming violations of BIPA relating to employee time clock technology that uses an employee’s fingerprint as a means of identification.  Time will only tell whether employers will spend the additional resources necessary to comply with BIPA, or choose to avoid the use of biometric identifiers and information altogether.

For more information regarding BIPA compliance and other privacy issues, please contact:

Natalie A. Remien at:

(312) 368-0100 or nremien@lgattorneys.com.

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Selling Your Business?

John Smith owned a small manufacturing business.  One day he received a call from one of his competitors who said he was interested in buying John’s business.  John was now 75 and this seemed like the perfect opportunity for him to retire and have that “nest egg” for him live comfortably in retirement.

John met with the buyer and they discussed, in general, John’s business.  After the meeting, the buyer presented a letter of intent to John, which proposed a purchase price of $10,000,000, subject to the buyer’s due diligence investigation of John’s business.  John felt pleased with the letter of intent and signed and returned it to the buyer.

During a long and protracted (and quite thorough) due diligence, the buyer and his accountants and lawyers examined the business and its books and records.  Based upon their examination, they advised the buyer of various legal and financial risks that John’s business was exposed to and which could become issues that the buyer would have to face.

John could not produce all of his current contracts with his customers.  The contracts which he had contained provisions which could cause the contracts to be terminated upon a sale of the business or a transfer of the ownership of the business.  Their key employees had no employment agreements and could compete with the business once they terminated employment.  The leases for the business’s facilities could not be assigned.

Despite the issues with the business, the buyer was still interested in purchasing the business.  The bad news was that the revised purchase price was to be $8,500,000 with a significant portion to be held in escrow pending resolution of various legal issues.

The above scenario is very common with small business owners.  Bigger companies who regularly acquire smaller companies are “professionals” in the acquisition business.  They know exactly what to look for and they know how to “string the seller along” until they present a reduced offer which most sellers feel they have to accept.

If you are thinking of selling your business, make sure that your business is ready to be sold and that you have copies of all contracts and leases and that you understand what they provide and how they will be affected upon a sale.  Have written employment agreements with all your “key employees.”  Pay attention to your inventory, your accounts receivable and other assets which “drive the sales price.”  Protect your intellectual property by obtaining patents, to the extent applicable, and trademarks.

If you are considering selling your business and would like a “legal check-up,” please do not hesitate to contact:

Morris Saunders at:
msaunders@lgattorneys.com or 312-368-0100.

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Is Your Business Litigation Proof?

The heading of this blog is a misnomer. There is no such thing as being litigation proof. Anyone can sue your business for any reason and meritorious or not, you will still have to defend the claim.

Still, there are many important steps a business can and should take to reduce its exposure and put itself in an advantageous position in the event a lawsuit is filed. Here are two simple actions that every business, large and small, should take in order to be a little bit more secure in today’s volatile world.

1. An Updated Employee Handbook

Employee handbooks set forth company policy for all employees to follow. Handbooks are useful reference materials that employees can rely upon to guide their day to day activities. They are also evidence of a company’s practices that can be introduced in the event of a lawsuit.

As a business grows, it should be mindful that different laws will apply to it. For example, once a business employs 15 employees, that business is now subject to the provisions of the Americans with Disabilities Act (“ADA”). Once that happens, an employee handbook should be modified to include language related to the reasonable accommodations that the business will make to comply with the ADA. If an employee with a disability were to file a claim under the ADA, a company with a handbook containing reasonable accommodation language would have a stronger argument that its practice is to comply with the ADA, than a company without such a policy in its handbook.

Also, business owners must be mindful that the law is constantly changing. For example, Illinois just enacted a law that requires an employee’s existing sick leave be granted to employees not only while they are sick, but also to care for sick family members (read more about that law here – https://lgattorneys.com/illinois-employee-sick-leave-act). Illinois businesses should amend their handbooks to reflect the change or discuss the pros and cons of moving away from sick leave/vacation time to paid time off that does not differentiate between sick leave and vacation time.

2. Record Retention Policy

If a company becomes involved in litigation, regardless of the issue, there is going to be a records request for all relevant documents in anyway related to the underlying lawsuit. This often involves emails and other electronic communications.

Having a records retention policy is important for several reasons. First, it ensures that all documents are kept for the optimal amount of time to conduct business without clogging servers or storage spaces. Second, it ensures that a company isn’t holding any documents for longer than legally required. Should a business be subject to a records request, a business is required to produce the documents in its possession. A plaintiff in a suit cannot use a document against you if you do not have it (and are not legally required to have kept it). Third, there are many record retention laws specific to different areas of business. A record retention policy can make sure a business does not violate the law by getting rid of documents too soon.

It is important that the business in question follow its policy universally and not on an ad hoc basis. As long as there is not a litigation hold in place requiring a company to keep all related records, then the company is free to follow its record retention policy without inadvertently destroying evidence and leading to a claim of evidence spoliation.

By consulting with an attorney and preparing an employee handbook and records retention policy, a business can take important first steps toward avoiding litigation, or at least being better placed to withstand a lawsuit if one comes its way.

For more information about developing an employee handbook or record retention policy appropriate for your business, please contact:

Robert Cooper at:

rcooper@lgattorneys.com or 312-368-0100.

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