Articles Posted in Business Litigation

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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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Anecdotally, the defense of novation to a breach of contract claim under Tennessee law seems to do about as well as the multitude of other defenses which are often pled, but much less frequently successful. In a nutshell, a novation occurs when a prior contract between the same parties is replaced and extinguished by a new contract. The defense is often used by defendants who claim that, because of a novation, they were let off the hook and are no longer responsible for the obligations to which they agreed.

In a recent breach of contract case before the Court of Appeals of Tennessee, Premier Imaging/Medical Systems, Inc. v. Coffey Family Medical Clinic, P.C., that court affirmed the decision of the trial court that the defendant had failed to prove the defense of novation.  Here are the key facts:

  • The defendant, CFMC, was a medical practice
  • CFMC entered into a contract (the “Contract”) with Premier whereby Premier was to service a medical scanner used by CFMC
  • The Contract had a five-year term and required CFMC to pay about $4,500 per month
  • The effective date of the Contract was January 1, 2011
  • In 2013, the principal of CFMC, Dr. Coffey, entered into a separate contract with a company called Pioneer (the “Pioneer Contract”)
  • Under the Pioneer Contract, Pioneer assumed contractual obligations of CFMC including CFMC’s contractual obligations to Premier under the Contract
  • Premier was not a party to the Pioneer Contract and did not agree that CFMC was no longer obligated pursuant to the Contract
  • CFMC requested that Premier begin sending its monthly invoices to Pioneer
  • Premier, thereafter, did send the monthly invoices to Pioneer
  • Pioneer made monthly payments to Premier for only four months after which its relationship with Dr. Coffey and CFMC deteriorated

Since the Court of Appeals affirmed the decision and reasoning of the trial court, the appellate court’s reasoning will be discussed here. The court started its analysis by laying out the four elements that have to be proven for a novation: (1) a prior valid obligation; (2) an agreement supported by evidence of intention; (3) the extinguishment of the old contract; and (4) a valid new contract. It also noted a couple of other key points about the defense of novation. First, the party asserting it has the burden of proving it. Second, while a novation may be implied and does not have to be established by evidence that it was expressed, it is never presumed and must be established by a clear and definite intention.

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Sometimes in a breach of contract case, or other commercial litigation matter, a party will be met with the defense that it is not entitled to recover because a condition precedent to the parties’ contract was not fulfilled. Under Tennessee law, a party is not required to perform under a contract unless and until a condition precedent agreed upon by both parties has been satisfied.  However, and very importantly, to rely successfully on the defense that a condition precedent was not satisfied, a party must first prove that there was a condition precedent.

Because conditions precedent have a tendency to result in harsh and unfair outcomes, Tennessee courts disfavor finding the existence of conditions precedent. Sometimes, even when they do find a condition precedent which was indisputably not satisfied, nevertheless, they do not allow that fact to permit a party to avoid performance.

A leading case on conditions precedent in Tennessee was decided by the Supreme Court of Tennessee in 1996. In that case, Koch v. Construction Technology, Inc., a subcontractor filed a breach of contract case alleging that the general contractor had failed to pay it for the entire amount due for work done on a project owned by the Memphis Housing Authority (“MHA”).  In defense, the general contractor claimed that it was not required to pay the entire balance it owed to the subcontractor because a condition precedent to its performance had not been fulfilled.

The written contract between the contractor and subcontractor in the Koch case contained a provision referred to as a “pay when paid” clause.  It stated: “Partial payments subject to all applicable provisions of the Contract shall be made when and as payments are received by the Contractor.”  The general contractor argued that the only amount for which it had not paid the subcontractor was the amount MHA had not paid it.  It also argued that the above language created a condition precedent.

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Under Tennessee law (T.C.A. §48-25-102), a foreign business entity which is transacting, or has transacted, business in Tennessee without obtaining a certificate of authority from the Secretary of State of Tennessee cannot maintain an action in a Tennessee court. This rule applies to lawsuits filed in Tennessee state courts, as well as to those filed in federal district courts located in Tennessee. See, e.g., In Re Meyer & Judd, 1 F. 2d 513, 526 (W.D. Tenn. 1924); G.M.L., Inc. v. Mayhew, 188 F. Supp. 2d 891, 893-94 (M.D. Tenn. 2002).

The process of obtaining a certificate of authority is also referred to as registering to do business in Tennessee. When a business entity registers to do business in Tennessee, it may be referred to as having been “domesticated” in Tennessee.

Any action filed in a Tennessee state court or a federal court located in Tennessee by a business entity transacting business in Tennessee without registering to do business in the state is subject to dismissal. Importantly, it is never too late to register to do business in Tennessee, and Tennessee law expressly allows an entity to register to do business and, thereafter, to continue its lawsuit. However, registering, after having failed to register for a number of years, can become expensive.

What does it mean to “transact business” in Tennessee such that a business must register to do business in Tennessee? The general rule is that a foreign business entity is transacting business in Tennessee when it transacts some substantial part of its ordinary business in Tennessee and its operations in Tennessee do not consist of mere casual or occasional transactions.  There is a Tennessee statute (T.C.A. §48-25-101) which delineates a number of things that do not constitute the transaction of business in Tennessee.  Perhaps a few of the most relevant are:

  • Holding meetings related to internal governance
  • Owning real estate
  • Maintaining bank accounts
  • Selling through independent contractors
  • Soliciting orders by mail which require acceptance outside of Tennessee
  • Creating or acquiring loans, security interests and deeds of trust
  • Conducting isolated transactions that are completed in one month
  • Transacting business in interstate commerce

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