Articles Posted in Business Litigation

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With some frequency, we see the first material breach defense raised in cases where a sales representative is owed commissions. After placing the account, the party with whom it was placed desires to keep the revenue, but resents continuing to pay the agreed commissions. So, it alleges that it should not have to pay any more commissions because the party who generated the account and revenue somehow breached the terms of the contract.

A recent Tennessee commissions case illustrates how such an argument as above can fail, as it should. Here are the pertinent facts of the case:

  • Plaintiff was an insurance agent who had built what appears to have been a pretty substantial book of business which was renewing consistently
  • Plaintiff, apparently anticipating health problems, entered into a written contract with an insurance agency (“Defendant Agency”)
  • Pursuant to the terms of the contract, for a four- year period, Plaintiff was to receive 50% of the commissions from her accounts
  • Pursuant to the terms of the contract, after the four- year period, the accounts would be owned by the Defendant Agency, and it would owe no more commissions to Plaintiff
  • Pursuant to the terms of the contract, during the four-year term, Plaintiff was to assist in helping the Defendant Agency retain and produce business
  • The contract expressly contemplated that the Plaintiff might die within the four-year period as it provided that, if she did, any monies owed to her under the contract would be paid to her estate
  • About a year and a half into the four- year period, the Plaintiff died
  • The Defendant Agency continued to pay the Plaintiff’s commissions to her estate until about three months after her death

The Defendant Agency claimed that it was not required to pay any further commissions because, shortly after the contract was signed, the Plaintiff stopped coming into the office and assisting with the accounts; stopped returning phone calls of clients; failed to invite clients to the office of the Defendant Agency to meet its principals; and failed to learn how to use the Defendant Agency’s systems. In the lawsuit filed by the Plaintiff’s estate, the Defendant Agency asserted that it was not required to pay any further commissions due during the agreed four- year term because the Plaintiff had committed a first material breach by the above actions and inactions.

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With some frequency, subcontractors incur extra expense, or lose other opportunities to make money, because another subcontractor did not complete its work within the time by which it was represented it would be completed. There are situations in which it is possible that the general contractor might be responsible for money damages to a subcontractor which incurred a loss because of a delay by another subcontractor.

The starting point to analyze whether, given the facts of the case, the general contractor could be liable for the delay of one subcontractor to another is the written contract. Generally speaking, regardless of what the outcome of a case would be if there was no written contract, the terms of a valid written contract might change the outcome that would otherwise occur under Tennessee common law. That is why a thorough analysis of the terms of the written construction contract, out the outset, is a critical part of any construction case.

If the terms of the written contract do not speak to the issue of the responsibility of the general contractor to a subcontractor for money damages resulting to that subcontractor because of the delay of another subcontractor, the Tennessee case of Foster & Creighton v. Wilson Contracting Company, Inc. (Tenn. Ct. App. 1978) might come into play to assist the subcontractor. Here are the basic facts of that case:

  • The general contractor (the “General Contractor”) contracted for a project which required the resurfacing and repaving of airport runways
  • The General Contractor contracted with a subcontractor to perform earth moving and grading (the “Grading Subcontractor”)
  • The General Contractor also contracted with Foster & Creighton to perform all of the paving, which included: (1) Resurfacing existing runways; and, (2) paving new runways
  • It was possible for Foster & Creighton to perform the resurfacing work without the Grading Subcontractor having finished its work, but it was not possible for Foster & Creighton to pave new runways until the Grading Subcontractor’s work was finished
  • The provisions of subcontract between the Grading Subcontractor and the General Contractor and the provisions of the subcontract between Foster & Creighton and the General Contractor required work to be completed by the same date
  • Foster & Creighton’s work required it to set up, on site, a large concrete mixing plant, which would take three weeks to erect
  • In discussions about when Foster & Creighton should begin its work, the General Contractor expressed that it wanted Foster & Creighton to begin its work significantly sooner than Foster & Creighton wanted to begin based on Foster & Creighton’s opinion that the Grading Subcontractor was moving so slowly that it would not complete its work in time for Foster & Creighton to begin its paving work without having to have its crew and equipment remain idle on the project site
  • In the discussions, a representative of the General Contractor assured Foster & Creighton that, if it set up its plant and started on the resurfacing, by the time it finished the resurfacing, the Grading Subcontractor would have completed its work such that Foster & Creighton could “proceed” with its work
  • Foster & Creighton complied with the requests of the General Contractor, but the Grading Subcontractor’s work was delayed such that Foster & Creighton incurred significant expense while waiting in excess of two extra months for the Grading Subcontractor to finish its work to the point that Foster & Creighton could begin its paving work

Foster & Creighton filed a lawsuit against the General Contractor for its damages. The trial court awarded it $26,000.  On appeal, the Court of Appeals of Tennessee upheld the decision of the trial court that the General Contractor was liable to Foster & Creighton.

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In a recent opinion in a breach of contract case brought against a Bank by a joint account owner, the Supreme Court of Tennessee overruled two lower courts which had decided in favor of the Bank. For owners of joint bank accounts, often referred to as “joint tenants,” the Court’s opinion lays out some important and basic rules of law related to the rights of joint bank account owners.

Here is a summary of the facts:

  • Mother had three children: Daniel, Paul and Shelby
  • Mother and her Husband owned two accounts at the Bank as joint tenants with rights of survivorship
  • After Husband passed, Mother and Daniel went to the Bank and signed new signature cards for each account
  • The signature cards made Mother and Daniel joint tenants with rights of survivorship as to both accounts
  • After Daniel ceded care of Mother to his two siblings, and without his knowledge or consent, his siblings managed to have a series of new signature cards executed which effectively removed him from ownership of the accounts and from any right to receive the funds in the accounts upon the death of his mother
  • It was undisputed that Daniel did not consent to the signature cards and the resulting removal of him as a co-owner of the accounts
  • As a result of the change of the ownership of the accounts, after Mother passed, the Bank paid the funds in the accounts to Shelby and Paul

Daniel brought suit against the Bank for breach of contract for allowing him to be removed as an owner of the accounts. Both the trial court and the Court of Appeals of Tennessee found in favor of the Bank. Those courts reasoned that, since a joint owner, Mother, during her lifetime, had the right to remove all of the funds from the accounts without the consent of Daniel, the Bank had no liability.

The Supreme Court of Tennessee reversed the appellate court. It did so by applying basic contract law principles. First, the Court pointed out that the Bank had stepped into a contractual relationship with both Mother and Daniel when it allowed them to create accounts as joint tenants with survivorship rights. As it noted, when banks permit parties to open depository accounts, a contractual relationship arises between the banks and account owners.

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Pepper Law, PLC was recently successful in having the Business Court, located in Davidson County, pierce the veil of a limited partnership to hold the limited partner personally liable for a judgment rendered years earlier against the limited partnership. No Tennessee appellate court has yet addressed whether or not the veil of a limited partnership can be pierced, and the decision of the Business Court is believed to be the first time a Tennessee court has ruled on the issue.

Tennessee has long-recognized that the corporate veil of a corporation may be pierced such that an individual may be held liable for the debts of the corporation. As well, in a 2012 opinion, the Court of Appeals of Tennessee ruled that the veil of a limited liability company could be pierced in the case of Edmunds v. Delta Partners, L.L.C., 403 S.W.3d 812.

In arguing that the piercing of the veil of a limited partnership to hold a limited partner individually liable was warranted, we relied upon several non-Tennessee cases. Of particular weight in the Business Court’s decision was the opinion of the bankruptcy court for the Southern District of New York in In re Adelphia Commc’ns Corp., 376 B.R. 87 (2007).  In the case before the Business Court, the limited partnership against whom we had earlier obtained a judgment, and for which we sought to pierce the veil to hold its limited partner liable, was a Delaware limited partnership.  In the Adelphia case, the limited partnership at issue was also a Delaware limited partnership.

In the Adelphia case, the court pointed out that there was nothing in the Delaware Limited Partnership Act which prohibited the piercing of the veil of a limited partnership.  The Business Court approved of the reasoning in the Adelphia case, noting that Tennessee appellate decisions had approved of Tennessee courts looking to Delaware courts for guidance on corporate law. In addition to the bankruptcy court in the Adelphia case, appellate courts in New Jersey and Virginia have ruled that the veil of a limited partnership may be pierced to hold a limited partner liable.

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Often, in trade secrets cases, a pivotal issue is whether or not what the plaintiff claims is a trade secret is, in fact, a trade secret under the Tennessee Uniform Trade Secrets Act (“TUTSA”). TUTSA’s definition of “trade secrets” includes “information” which is “technical, nontechnical, or financial data, a formula, pattern, compilation, program, device, method, technique, process or plan” that has independent economic value because it is not generally known or readily accessible.  To qualify as a trade secret, the plaintiff must also prove that there were “reasonable efforts” taken to keep the information secret.

Here are some basic rules and guidelines used in Tennessee trade secrets cases for determining whether information constitutes a trade secret:

  • Just because a party calls certain information a trade secret does not mean that it will qualify as a trade secret after the court reviews other facts and applies the TUTSA
  • A former employee’s goodwill with customers or the fact that the former employee was the face of the company are not trade secrets because they are not information (an employer may protect against a former employee’s use of goodwill developed while the employee was employed by a non-competition/non-solicitation agreement)
  • Just because a product or process can be reverse engineered does not necessarily mean that it will not qualify as a trade secret. If the plaintiff can prove that reverse engineering would be time-consuming or very expensive, the product or process may still be entitled to trade secret protection
  • A former employee’s remembered information about customers, pricing, vendors and the like is not a trade secret
  • The degree of the egregiousness of the former employee’s or new employer’s conduct always has some effect on the court’s decision. For example, if a former employee took information improperly and passed it on to her new employer, it is more difficult to argue that the information taken was not a trade secret. After all, if it was not valuable and secret, why take it?
  • The extent that the information is known to the public will affect the decision as to whether the information is a trade secret
  • Whether the owner of the information has taken steps to keep it secret will affect the decision as to whether it is a trade secret
  • The economic value of the information will affect the decision as to whether the information is a trade secret
  • Even if components of the information, standing alone, may not be trade secrets, the aggregation, compilation or formatting of information may be
  • Whether information is, or is not, a trade secret is a question of fact

The below summary of five different trade secret cases is helpful in understanding what might, and what might not, qualify as a trade secret under the Tennessee Uniform Trade Secrets Act.

Eagle Vision, Inc. v. Odyssey Medical, Inc. (Tenn. Ct. App. 2002): The Plaintiff developed and marketed punctul plugs for eyes. For a number of years, it had a contractual relationship with the Defendant, which manufactured the plugs for it. The Plaintiff shared design specifications with the Defendant as well as prototype punctal plugs. The design specifications were marked “confidential.” The relationship between Plaintiff and Defendant ended and Defendant began making and selling punctal plugs. Defendant offered evidence that it could easily reverse engineer the punctal plugs with a certain device it possessed. Plaintiff claimed that it was impossible to reverse engineer the punctal plugs. The court held that the question of whether or not the information which Defendant had allegedly misappropriated was a trade secret was a question of fact for the jury. Continue reading →

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It is not unusual for construction litigation between owners, contractors and subcontractors to involve defenses and claims based on alleged untimely completion. The basics of the law in Tennessee related to project completion is a topic about which it is worthwhile for owners, contractors and subcontractors to have some practical knowledge.  A good place to start to gain that knowledge is an opinion in a construction case involving claims of breach of contract, a mechanics’ and materialmen’s’ lien, and the Tennessee Prompt Pay Act.  That case is Madden Phillips Construction, Inc. v. GGAT Development Corporation, and here are the basic facts of that case:

  • Madden Phillips (“Contractor”) and GGAT (“Owner”) entered into a construction contract for the construction of a residential subdivision
  • In the written construction contract, Contractor agreed to perform several scopes of work including earthwork and construction of infrastructure for utilities and roads
  • The written contract contained neither a date for completion nor a “time is of the essence” clause
  • Contractor began work in May of 2004, but suspended its work in July of 2004 based on Owner’s failure to perform work necessary for Contractor to perform its work
  • After forty-five days, Contractor resumed construction, but continued to have problems completing its work because of the failure of Owner to complete its work
  • After Contractor had performed about ninety five percent (95%) of its work, Owner terminated the contract and refused to pay

As a defense to Contractor’s claims, Owner argued that Contractor had materially breached the construction contract by failing to complete the work in eight months. The trial court rejected this defense based on three findings of fact. First, it found that the parties’ contract did not contain a term that the work had to be completed in eight months. Second, it found that the parties had not agreed to a “time is of the essence” term for completion. Third, any right Owner might have had to terminate Contractor for failing to perform its work on a timely basis was waived by Owner’s actions and inactions, including, failing to provide fill which had to be in place before Contractor could perform its work.

The court of appeals affirmed the aforementioned ruling of the trial court, and, in doing so, it expounded on Tennessee legal principles that are applicable in cases where timeliness of completion is at issue. First, it pointed out that contract clauses which state that “time is of the essence” and contract clauses which set forth a date by which the parties agree that the work will be completed have different legal effects. Here is how:  If a construction contract contains a date by which the work will be completed, but does not contain a “time is of the essence” provision, then a failure to complete the work by the agreed date will not rise to a material breach. A non-material breach does not allow the non-breaching party to terminate a contract and refuse to pay, which is what Owner did.

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A recent Court of Appeals decision involving a claim for breach of contract related to a flat fee promotion agreement illustrates how Tennessee courts are not permitted, except in limited situations involving non-compete agreements, to re-write contracts or to add terms to contracts.  Here are the basic facts:

  • Gregg wanted to pursue a career in country music
  • Cupit was a producer with a studio
  • Gregg and Cupit entered into a “Production Agreement”
  • The Production Agreement provided that Gregg would pay Cupit a “flat fee” of $100,000 per single for three singles which Cupit would “nationally promote”
  • The Production Agreement provided that the $300,000 would be used at the “sole discretion” of Cupit
  • The Production Agreement provided that Cupit made no guarantees of success because the music business was a “speculative business”
  • Cupit undertook to promote Gregg in various ways, including having its principal give him singing lessons; incurring expenses for Gregg’s appearance on a television show; producing a music video; arranging various performances at country music events; employing a publicist; and having a Cupit employee devote time to communicating with radio stations to promote each song Gregg recorded
  • Gregg never had any success with his career

Gregg sued Cupit for breach of contract. He claimed that, because Cupit could only prove that it had expended an amount on promotion which was far less than the money Gregg had paid it, it had breached the contract.

The trial court held for Gregg. In doing so, it invoked the implied duty of good faith and fair dealing that is, by law, part of every Tennessee contract. It held that Gregg was entitled to an award of the difference between what he had paid Cupit and the amount which Cupit could prove it spent on promotion for Gregg. The amount awarded by the trial court was $223,069.

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Many Tennessee Limited Liability Companies (“LLCs”) are set up, for whatever reason, so that their operating agreements do not provide for the buying out or expulsion of a member, whether pursuant to a mandatory buy-sell clause or pursuant to a clause that sets forth conduct which is grounds for expulsion. In fact, quite a few Tennessee LLC’s have members who have never executed an operating agreement.

If there is no mandatory buy-sell provision in an operating agreement for an LLC pursuant to which a member can be forced to sell his or her interest (or to buy out someone else’s), members looking to get rid of another member must look to the provisions of the Tennessee Revised Limited Liability Company Act (the “Act”). The Act, T.C.A. §48-249-503(6), provides the limited circumstances which permit a court to expel involuntarily an LLC member.  They are:

  • Where the member has engaged in wrongful conduct that has adversely and materially affected the LLC’s business
  • Where the member has willfully and persistently committed a material breach of the LLC documents
  • Where the member has willfully and persistently committed a material breach of the duties owed by the member to the LLC or to the other members, as set forth in T.C.A. §48-249-403
  • Where the member has engaged in conduct relating to the LLC’s business that makes it not reasonably practicable to carry on business with the member

As of this blog, there is no opinion from any Tennessee appellate court which applies, or further explains, the above statute. Some conduct would obviously warrant expulsion under the above statute, e.g. stealing from other members, a criminal conviction for a felony involving dishonest conduct, or repeated and intentional usurpation of opportunities available to the LLC.  There is, however, quite a bit of gray area when it comes to what a Tennessee court could determine amounts to circumstances justifying an expulsion under the above statute.  The case law from other states which interprets the above statute (which has been adopted uniformly by many other states) is also rather limited.

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When a Tennessee company attempts to enforce a non-compete or non-solicitation agreement against a former employee or independent contractor who served in a sales or marketing capacity, it is almost certain that the company will allege that the former representative had become the “face of the company” to that company’s customers. If the company can prove that argument, it is highly likely that its non-compete or non-solicitation agreement will be upheld.

Not all non-competition and non-solicitation agreements are enforceable in Tennessee, and many have been held to be unenforceable. In order to be able to enforce such agreements, a company must be able to show that it has a “protectable interest.”  To have a protectable interest, a company must show that the former employee’s or contractor’s relationship and work with the company puts the person in the position to do more than just engage in ordinary competition against the company.  The company for whom the former salesperson worked must prove that the relationship put the former salesperson in a position that gives that person an unfair competitive advantage over the company.

Under Tennessee law, a court must look to several factors to determine whether the former employer has a protectable interest such that a non-compete or non-solicitation agreement is enforceable. One of those factors is whether the former employee, by virtue of the goodwill of the former employer, had developed “special relationships” with the former employer’s customers such that the former salesperson was so closely associated with the former employer that he or she had become the “face of the company” to those customers.

To understand how Tennessee courts analyze the “face of the company” factor, it is helpful to look at a few Tennessee non-compete cases.

CASES WHERE FORMER EMPLOYEE FOUND TO BE THE “FACE OF THE COMPANY” Continue reading →

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Sales representatives, whether they are employees or independent contractors, are too frequently faced with situations where the businesses which owe them commissions refuse to pay them or refuse to pay them the full amounts owed. While, unfortunately, sales representatives do sometimes get beaten out of commissions which they are rightfully owed, sales representatives should take a hard look at their situations before giving up on receiving payment for sales commissions.

Here are some legal points for sales reps to consider when faced with a refusal to pay:

A VERBAL CONTRACT TO PAY COMMISSIONS IS ENFORCEABLE

We have had several cases over the years where a sales representative was not paid and where the refusal to pay was on the basis that there was no written agreement to pay or to pay the percentage which was claimed to be owed. In such cases, sales reps should bear in mind that an agreement to pay commissions does not have to be in writing. Under Tennessee law, oral or verbal agreements to pay commissions are just as enforceable as written ones.  The problem with oral contracts is that people lie or, to be more euphemistic, they remember things differently.

The problem of the party who owes the commission remembering the parties’ agreement differently can sometimes be overcome by evidence of the parties’ course of conduct. For example, we had a case where a manufacturer claimed that it did not have a written agreement to pay its manufacturer’s representative commissions on pre-fabricated metal building materials. The manufacturer’s defense fell apart because our client had information on the total value of each sale he had made and he had copies of checks from the manufacturer which showed that, for over two years, he had been paid the percentage he claimed he was owed on all of the projects he sold. While most defenses don’t fall apart that easily, that case demonstrates how a course of conduct can make it difficult for a manufacturer, employer or other business to renege on the payment of sales commissions.

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