Assume that your business is sued for multiple claims including negligence, defamation, and fraud arising out of the same event. Most likely, your business has a commercial general liability policy of insurance that provides coverage for negligence claims, but not intentional torts. What protections does that policy actually provide?
Although intentional acts are typically excluded from insurance policies, your business’s insurer would have a “duty to defend” your business from the negligent and intentional acts in this hypothetical. This means that the insurance company must appoint an attorney for your business at the insurer’s expense (less any applicable deductible) to defend the suit. Although a duty to defend may exist, the insurer ultimately might not be required to pay (indemnify) your business if the plaintiff were to recover a money judgment against the business for those claims based on the intentional acts. This is because Illinois law is clear that an insurer’s duty to defend its insured is broader than the duty to indemnify the insured.
As for the duty to defend, if the facts alleged in the underlying complaint fall within, or potentially within, the policy’s coverage, the insurer’s duty to defend is triggered. The insurer’s duty to defend is triggered even if the allegations in the complaint are groundless, false, or fraudulent, and even if only one of several of the plaintiff’s theories is within the potential coverage of the policy. In the hypothetical lawsuit, even if some of the claims alleged against your business ultimately are not covered, the insurer likely has a duty to defend against both the covered and uncovered claims. However, the duty to indemnify only arises if the insured has a judgment against it on an underlying claim and that the insured’s activity is covered by the policy. Thus, if judgment is entered against the business on an uncovered claim, the insurer will not have a duty to pay that judgment entered against your business even though its appointed attorney defended the claim.
Having an experienced attorney evaluate your business’s insurance policy for coverage is critical. For more information regarding these or similar issues, please contact Roenan Patt at email@example.com or (312) 368-0100.
You, the business owners, have just signed a “Letter of Intent” to sell your business for $10,000,000, “subject to buyer’s due diligence”. Before you start making retirement plans, let’s determine what that means.
The buyer will require copies of all your accounting and financial records, as well as all agreements and written contracts with your vendors, customers, employees and others with whom you do business. The buyer will forward you a rather lengthy list of items they require. Then, if something does not meet with their satisfaction, they may either terminate the potential transaction, or demand a reduction in the purchase price.
How can you, as the seller, prepare the business so that there are no “surprises”?
Many business owners may come to the point where they feel it is time to sell their business and “take it easy”. Having built and operated a successful business for decades, most owners are very knowledgeable about all aspects of their business. However, most owners have never before acquired or sold a business.
Selling a business is a process. Prior to finding a buyer, the seller should conduct its own due diligence. The seller, together with its legal, accounting, and other advisers, considers the following:
• Whether all organization documents are up to date, such as Articles of Organization, Bylaws (or operating agreement), minutes, and ownership records;
• Whether “key employees” are bound by appropriate confidentiality and non-compete agreements;
• What agreements are in place with key suppliers and key customers;
• Whether employee records are up to date;
• Whether there is a union;
• Whether there are any existing or potential claims against the business;
• Whether the lease for the business premises is satisfactory, and the condition of the business premises;
• Whether there are any environmental issues;
• What obligations the business will have after it is sold;
• Whether there are any issues with accounts receivable or accounts payable; and
• Whether there are any licensing or permit issues.
The foregoing items are just examples of some of the things a seller should be examining before entertaining offers to purchase a business. It is better that the seller recognizes any issues affecting the business before a buyer points them out (and asks for a reduction in the price).
Levin Ginsburg regularly represents both sellers and buyers of businesses. We have developed detailed “due diligence” checklists to help sellers and buyers navigate the sale process. If you would like to discuss a sale or purchase of a business, please contact Morris Saunders or any of our partners in our mergers and acquisitions practice.
Every business with employees should have an employee handbook. An employee handbook is essential because it helps employees to understand what their rights are, what the company’s human resource processes and policies are, standardizes company policies and reduces human resource’s time resolving issues. Handbooks and policies are also often required if an employer wants to take advantage of certain defenses or protections. One very common provision in an employee handbook is a statement advising the employee that nothing contained in the handbook creates a contract between the parties, and the handbook does not alter the “at will” nature of the employment. Recently in Bradley v. Wolf Retail Solutions I, Inc., the United States District Court for the Northern District of Illinois held that because a company’s handbook disclaimed all contract rights, the company could not require its employees to arbitrate their claims, despite the fact that the handbook provided that employees’ claims were to be arbitrated.
In Bradley, the plaintiff filed a class action lawsuit alleging that the employer did not pay overtime under the Fair Labor Standards Act and the Illinois Minimum Wage Law. The handbook contained a dispute resolution provision stating that the employee agreed to mediate any dispute with the company and if not successful, the company and employee agreed to submit the dispute to arbitration. The plaintiff received a digital version of the handbook and signed it by clicking a box next the statement: “I have read, understood and accept the terms and conditions stated in this handbook.” The company filed a motion to compel the plaintiff to arbitrate her claims. The court refused to compel arbitration.
In denying the company’s motion to compel, the court stated that because arbitration is a matter of contract, i.e., the parties must first agree to arbitrate in order to be required to go to arbitration, and a party cannot be compelled to arbitrate a dispute when there’s no valid contract to do so. It was, therefore, incumbent upon the employer to prove the existence of a valid contract to arbitrate. The employer pointed to the dispute resolution provision in the handbook, arguing that the employee acknowledged receipt of the handbook and agreed to the policies therein. The court reasoned, however, that the employer could only rely on the dispute resolution clause in the handbook if the handbook is, in fact, a contract. The court found that because the handbook stated “in no uncertain terms” that it is not an employment contract, the company could not require the employee to arbitrate the dispute.
The question is obvious. How can you force an employee to arbitrate claims, thereby eliminating a public record of the proceedings and keeping the case from a jury, when your handbook does not create any contractual right to do so? Similar to your ability to enforce a non-compete with an at-will employee, a separate arbitration agreement will likely be enforceable if the agreement is a stand-alone contract and where consideration is given for the agreement. The consideration may be in the form of a payment, the right to continued employment, or even the agreement to arbitrate a claim itself can be sufficient consideration. In any event, do not assume that your employees will be compelled to arbitrate, rather than litigate, their class action lawsuits if the “agreement” is contained in the employee handbook where no contract is created. Employers have run into similar problems when an employee uses confidential information, but the only confidentiality provision is within the handbook (which by its nature is not a contract). It is also important to ensure that any arbitration agreement with an employee be carefully crafted to eliminate any class or collective claims.
For more information, please contact:
Howard Teplinsky at: firstname.lastname@example.org or 312-368-0100.
As the owner of a corporation, when you set up your business, you and your lawyer believed that you had taken all necessary steps to protect your personal assets. After all, the primary reason you set up a corporation was to shield your own assets from your business’s creditors. In order to ensure that your assets are safe from the corporation’s creditors, you need to do more than just fill out the Secretary of State’s paperwork. The corporation must conduct itself as an entity separate and apart from you as the owner.
A recent decision provides a “textbook” example of how an owner of a corporation can put his own assets at risk simply by the way he conducted his company’s business. In Puntillo v. Dave Knecht Homes, the plaintiffs were a married couple who entered into a contract with a home builder, a corporation. The defendants, David and Karen Knecht, were the beneficiaries of a trust that held the home builder’s shares of stock. They were, in essence, the owners of the home-builder corporation. After the home was completed, it was riddled with defects and the couple obtained a judgment against the corporation. Thereafter, the corporation dissolved and the couple was unable to enforce their judgment. In the midst of all of it, a new corporation, Dave Knecht Homes, was created with similar ownership, management, staff, purpose and resources as the now asset-less builder. The defunct builder and the new company used the same line of credit. Beginning in 2006, Dave Knecht’s personal line of credit began funding the now defunct builder’s operations. After the new corporation, Dave Knecht Homes, came along, it also used the same credit line. After being unable to collect on its judgment against the out-of-business builder, the plaintiffs sued Dave Knecht Homes and its owners Dave and Karen Hecht personally. The plaintiffs claimed the new company was merely a successor to the defunct corporation and the corporate veil between the individuals and the successor, Dave Knecht Homes, should be “pierced,” allowing the plaintiffs to go after the individual owners for a corporation’s debt.
Generally, a corporation that purchases the assets of another corporation is not liable for the debts or liabilities of the selling corporation. There are, however, four exceptions to this general rule of successor corporate nonliability: (1) where an express or implied agreement of assumption of the liability exists; (2) where the transaction amounts to a consolidation or merger of the purchaser or seller corporation; (3) where the purchaser is merely a continuation of the seller; or (4) where the transaction is for the fraudulent purpose of escaping liability for the seller’s obligations. In this case, the plaintiffs successfully argued that Dave Knecht Homes is a “mere continuation” of the former company and the court agreed. The continuation exception applies when the purchasing corporation is “merely a continuation or reincarnation of the selling corporation.” In other words, the purchasing corporation maintains the same or similar management and ownership, but merely wears different clothes. The Illinois Supreme Court has made it clear that “[t]he exception is designed to prevent a situation whereby the specific purpose of acquiring assets is to place those assets out of the reach of the predecessor’s creditors.” To determine whether one corporate entity is a continuation of another, courts consider “whether there is a continuation of the corporate entity of the seller—not whether there is a continuation of the seller’s business operation.” Thus, the plaintiffs were permitted to look to the assets of the new company to satisfy their judgment. Unfortunately for the Knechts, it didn’t end there.
The plaintiffs also argued that the out-of-business corporation served as the Knecht’s “alter ego” and that the court should pierce the defunct builder’s corporate veil and impose individual liability against the Knechts. A court may disregard a corporate entity and pierce the veil of limited liability where the corporation is merely the alter ego or business conduit of another person or entity.” This doctrine imposes liability on the individual or entity that “uses a corporation merely as an instrumentality to conduct that person’s or entity’s business.” In Illinois, courts use a two-prong test to determine whether to pierce the corporate veil: “(1) there must be such unity of interest and ownership that the separate personalities of the corporation and the individual no longer exist; and (2) circumstances must exist such that adherence to the fiction of a separate corporate existence would sanction a fraud, promote injustice, or promote inequitable consequences.
The court found that the Knechts exercised control over the new builder and treated the company’s assets as their own, causing the company to pay significant sums of money for their own personal expenses including federal and state income tax payments, landscaping for their personal residences; personal life insurance premiums and attorney’s fees. Moreover, the Knechts caused the failed company to pay their personal expenses using David Knecht’s credit line. By causing Knecht’s former company to pay their significant personal expenses, the Knechts treated the company’s assets as their own. The court pierced the corporate veil of Dave Knecht Homes (who it imposed successor liability upon) and allowed the plaintiffs to enforce their judgment against David Hecht Homes and the individual defendants.
In order to insulate yourself from personal liability, as a business owner, the way that you run the business is as important as setting up the corporation in the first place.
For more information, please contact:
Howard Teplinsky at: email@example.com or 312-368-0100.
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 firstname.lastname@example.org
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 email@example.com or 312-368-0100.
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 firstname.lastname@example.org.
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:
(312) 368-0100 or email@example.com
 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.
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:
(312) 368-0100 or firstname.lastname@example.org