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A recent breach of contract case decided by the Court of Appeals of Tennessee drives home two lessons.  One lesson is for sales representatives who earn their living by commissions: The other is for Tennessee lawyers who handle breach of contract cases.  The lesson for sales representatives is that, if they don’t obtain adequate protection for themselves in the written contract they sign before they start to work, they should not be surprised if they are not paid commissions for sales which they generated and should not be surprised if they cannot be helped by a court.  The lesson for lawyers who handle sales commission cases is that the duty of good faith, which is implied in every contract in Tennessee, cannot rescue a sales representative, even one who has been treated unfairly, from a bad bargain which they made on the front end.

In Schwartz v. Diagnostix Network Alliance, LLC (Tenn. Ct. App. 2014), Mr. Schwartz, a sales representative, signed an agreement with Diagnostix Network Alliance (“Diagnostix”) pursuant  to which he was to be paid commissions for each medical test which he sold.  That agreement (“Commission Agreement”) provided for the payment to Schwartz of commissions, but also stated that either party could terminate it “with or without cause” and could do so “immediately” upon providing notice.   Another clause in the Commission Agreement provided that Schwartz, the sales representative, had no rights to commissions once he was terminated.

For eight months after the Commission Agreement was signed, Schwartz traveled extensively and, the opinion seems to indicate, worked pretty hard and diligently to sell the medical tests offered by Diagnostix.   Schwartz made pitches to one particular organization which had a big network and which could potentially result in many sales.  Then, Diagnostix and that organization bypassed Schwartz by entering into an agreement for the purchase of the tests.  Then, Diagnostix terminated the Commission Agreement with Schwartz.  Although Diagnostix claimed that it had to terminate the agreement because the organization in question complained about Schwartz’s aggressive sales tactics, it is reasonable to assume that Diagnostix’s stated reason for terminating the agreement with Schwartz was pretextual and that it terminated him to avoid paying him commissions.

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In many, if not most, of the cases in which I am involved, I end up explaining to clients what a summary judgment motion is and how a summary judgment might affect their case.  The concept of a summary judgment is a pretty simple thing.  If a summary judgment is entered by the judge, then, barring a reversal of that ruling, the case will never go to trial before a judge or jury.  A summary judgment ends the case.

Summary judgments (and summary judgment motions) fall into two broad categories: (1) Summary judgments (which are entered as the result of motions for summary judgment); and (2) partial summary judgments (which are entered as the result of motions for partial summary judgment).  With some frequency, parties to a lawsuit will file motions for partial summary judgments.  A motion for partial summary judgment requests that the judge end the case just as to some of the claims or causes of action by dismissing them, but not as to all of the claims or causes of action.  For example, if a plaintiff has filed a complaint with three causes of action like breach of contract; fraud; and intentional interference with contract, the defendant may file a motion for partial summary judgment asking the judge to dismiss the fraud and intentional interference claims, but not the breach of contract claim.  If the judge grants the motion for partial summary judgment and dismisses the fraud and intentional interference with contract claims, then only the breach of contract claim will proceed to trial.

It happens frequently that a party will file a motion for summary judgment on all claims, and the court will dismiss only some of the claims.  In my practice, which is typical of most Tennessee trial lawyers with whom I have spoken, summary judgment motions are filed most of the time by defendants seeking to dismiss claims filed against them or some of the claims filed against them.  However, plaintiffs (the parties who file lawsuits) may also file motions for summary judgment. I have been involved in quite a few cases where I represented a plaintiff, filed a motion for summary judgment, and the judge ruled that my client should be granted a summary judgment.

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In Tennessee, certain kinds of contracts are not enforceable unless (1) they are in writing and (2) they are signed by the party against whom enforcement is sought (the defendant, typically).  Why? Because the Tennessee Statute of Frauds says so.  (Keep in mind that most contracts in Tennessee are enforceable even if they are not in writing and even if they are not signed.)

For those types of contracts which must be written, such as contracts to buy or to sale real estate, you should not assume that you cannot enforce a contract because of the statute of frauds just because you do not have a formal agreement which has been signed.   You may well be able to satisfy the statute of frauds if you have one or more different kinds of informal writings related to the sale, such as, for example, a signed check combined with an MLS Listing Sheet describing the property.

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Last month, I was in the hallway of the Wilson County Courthouse when I was told that the jury had reached a verdict in the will contest case which I and Jeremy Oliver, another lawyer in our firm, had been trying for four days.  During the trial, the jury had heard from eighteen witnesses, including: two treating doctors of the deceased; a caseworker from Adult Protective Services; and, the lawyer who had drafted the Will that my client and I were contesting.

The jury only had to make two decisions: (1) Was the Will the result of undue influence? and (2) was the Will the result of fraud?  If the jury determined that the Will was either the result of undue influence or fraud, it would be set aside (which is what we wanted and for what we had fought for a year and a half).

The trial, I thought, had gone very well for us, but I still wondered if the jury would get it —- that, as I had told the jury in my opening statement, this was a case about two greedy people who had isolated, lied to and manipulated a dying 87 year old woman in order to get her to change her Will to leave all of her assets to them.  The jury did get. The jurors found that the Will in question was the result of both undue influence and fraud.

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The Tennessee Prompt Pay Act allows a contractor or subcontractor who has not been paid to recover, in addition to the amount owed under its contract, an award of attorneys’ fees (and interest).  The recovery of attorneys’ fees is not automatic, but depends on convincing the judge or jury that the other party, whether it was the owner, general contractor or another subcontractor, acted in bad faith.  The Act only allows a court to award attorneys’ fees where the party who failed to pay acted in bad faith.

Before we take a look at what Tennessee courts require to prove bad faith, let’s consider some other requirements of the Tennessee Prompt Pay Act.  Even if you can prove that an owner, contractor or another subcontractor has acted in bad faith,  if your case does not fall within the protections of the Prompt Pay Act, you will not be able to use that Act to recover your attorney’s fees.  For the most part, only in construction contract cases covered by the Prompt Pay Act does Tennessee law allow the prevailing party to recover attorneys’ fees by statute. There is an exception to that rule which occurs frequently: If parties to a construction contract have contractually agreed between themselves that, in the event of litigation or arbitration, the prevailing party is entitled to an award of attorneys’ fees, then they can be recovered even where no Tennessee statute permits their recovery.

The Prompt Pay Act does not apply to residential construction unless the construction involves more than four single-family units.  To recover attorneys’ fees under the Prompt Pay Act, a contractor or subcontractor, as the case may be, must provide written notice to the party who has not paid by registered or certified mail, return receipt requested.  The notice must state the provisions of the Act on which the unpaid party intends to rely and of that party’s intent to pursue remedies provided by the Act if payment is not made within the time designated in the Act.

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In a recent case, the Court of Appeals of Tennessee was asked by a terminated employee (“Employee”) to rule that an agreement to arbitrate in his employment contract (Employment Agreement”) was not enforceable because arbitration would be too expensive.  The court disagreed with the Employee, and affirmed the order of the trial court which mandated that the Employee’s claims be submitted to arbitration in conformance with the rules of the American Arbitration Association (“AAA”).

In the case, Trigg v. Little Six Corporation, the Employee was a well-educated, highly paid, top level employee.  In exchange for signing the Employment Agreement and releasing Employer from any claims he had against it under a previous employment agreement, the Employer had paid Employee over one and a half million dollars.  As well, although the Employee was defined as an “at will” employee in the Employment Agreement, it also provided that Employee would receive a payment of $50,000 in the event his employment was terminated without cause.

The Employment Agreement mandated that any dispute be resolved by a three member arbitration panel.  It also provided that the expenses of arbitration be paid equally by the parties.

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In the recent case of Ram Tool & Supply Company, Inc. v. HD Supply, the Court of Appeals of Tennessee adopted a rule which sets forth the circumstances under which a common law breach of fiduciary duty claim will be preempted by the Tennessee Uniform Trade Secrets Act (“TUTSA”).  Before going into the facts of the case, let’s review what TUTSA protects and why it was enacted in 2000 by the Tennessee legislature.

TUTSA allows a business (or an individual) to file a lawsuit and to recover damages where its trade secrets have been misappropriated.  To be considered a trade secret: (1) the information must be valuable because it is not known and is kept secret; (2) the information must have economic value to others if they were to have it; and (3) efforts must have been made to keep the information secret.   One reason Tennessee adopted the Uniform Trade Secrets Act was to prevent a plaintiff from recovering twice for the same act of trade secret misappropriation.  This was possible where a plaintiff could set up separate causes of action such as, for example, conversion and breach of fiduciary duty, and base them both on the same facts related to trade secret misappropriation.

The Ram Tool case involved two competing construction supply companies.  Ram Tool, the plaintiff, was based in Nashville and employed a Mr. Pruitt.  Although the parties disputed Mr. Pruitt’s position at Ram Tool, it is apparent that he was employed at the managerial level. White Cap, which operated in Alabama, desired to start a branch in Nashville. To that end, it recruited Pruitt to help it which he did all the while being employed by Ram Tool.

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In Tennessee, contracts may be modified after they are made and after the parties have begun performing.  In fact, it happens all of the time. Tennessee law allows the modification of contracts, and a modified contract is as effective as the original contract.  Many Tennessee breach of contract cases result from the alleged breach of a term that was not a part of the parties’ original written contract, but which was allegedly agreed upon after the original contract was made.

A modification of a contract is defined as a change to one or more terms of the contract which adds something to the contract or which nullifies some part of the contract.  When a contract is modified, its general purpose and intent are left intact.  Technically, under Tennessee law, a modification creates a new contract, but the original terms which were not changed or nullified remain in effect.

To prove a modification, there has to be evidence sufficient to establish that both parties assented to the modification.  Under Tennessee law, a contract may be modified by verbal agreement or by written agreement.  Moreover, and very significantly, a contract may be modified by a course of conduct on the part of the parties. In other words, mutual assent can be found in the conduct of the parties alone.  Even more significantly, under Tennessee law, a contract may be orally modified or modified by a course of conduct even where the parties have agreed, in writing no less, to a clause that specifically says that the contract may only be modified by a writing signed by both parties.

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Members of Tennessee Limited Liability Companies (“LLCs”) have the right to file lawsuits to recover losses resulting from breaches of fiduciary duty committed by other LLC members or committed by officers or managers of the LLC.  In Tennessee, if the breach of fiduciary duty caused a loss to the LLC, as opposed to a loss directly to the LLC member, then the LLC member has the right to bring a derivative lawsuit on behalf of the LLC.  If, on the other hand, the breach of fiduciary duty caused a loss directly to the member and not to the LLC, the member cannot bring a derivative lawsuit.  In such a case, the member should file suit individually against the other member, officer or manager.

The Tennessee Limited Liability Company Act specifically provides the right to an LLC member to bring a claim for breach of fiduciary duty on behalf of the LLC.  Such actions are referred to as “derivative actions” or “derivative lawsuits.”   Derivative actions are simply actions brought by an individual member or members on behalf of the LLC.  Any recovery for breach of fiduciary duty resulting from a derivative action goes to the LLC, not to the LLC member who brought the lawsuit.

A Tennessee court may, under the provisions of the Tennessee Limited Liability Company Act, permit a successful plaintiff in a derivative action to be reimbursed from any recovery from the lawsuit for attorney’s fees and expenses paid by that plaintiff from his or her own funds.  The court may permit such reimbursement for fees and expenses even if the plaintiff member does not recover a monetary judgment, but obtains injunctive or other equitable relief.  Furthermore, the court may require the LLC to reimburse the plaintiff for attorney’s fees and expenses paid for by the plaintiff if the amount of the recovery is not sufficient to reimburse the plaintiff for such expenses.

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What if the person who made a will misunderstood facts that existed at the time the will was made?  What if the person had been lied to at the time he or she made the will?  In Tennessee, a will may be set aside for mistake or for fraud.  There is limited case law in Tennessee dealing with the subjects of mistake and fraud in the making of wills, but what we do have is enough to provide lawyers who handle will contest cases with the basic rules that will apply in will contest cases involving fraud and mistake.

It is very difficult to set aside a will in Tennessee on the grounds that the maker of the will was mistaken about some fact when he or she made the will.  Two Tennessee will contest cases illustrate that point well.

In Anderson v. Anderson, a 1967 decision of the Supreme Court of Tennessee, the father and the maker of the will (the “testator”) had a wife and two sons.  In the will, the father left a 35 acre farm to one of his sons.  It was not disputed that, at the time he made the will, the father mistakenly believed that he could leave the farm to his son.  The father, however, owned the farm as tenants by the entireties with his wife.  That being the case, when the father died, the 35 acre farm passed to his wife and could not be inherited by the son to whom he had bequeathed it in his will.

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