BUSINESS FORMATION & SALES BLOG

In Most Cases, Restrictive Covenants Are Only Enforceable By the Entity that Signed the Agreement Granting them

by Gary Nissenbaum | Jul 31, 2010

A restrictive covenant is generally defined as an agreement restricting the practice of a person’s profession or business after they leave their current employer. But can it be enforced by an entity that was not the original employer? That issue was addressed by the Appellate Division of the Superior Court of New Jersey in a June 3, 2010 case called, Woodbridge Medical Associates, P.A. v. Berkley, WL 2195760 (N.J.Super.App.Div. 2010).

The Underlying Facts

In that case, “Richard A. Goldstein, M.D., joined [Woodbridge Internal Medical Associates, P .A.’s] (“WIMA”) medical practice in July 1997 as an employee. Goldstein was required to sign an employment agreement, which barred him, for a two-year period following his departure, from competing with WIMA within ten miles of WIMA’s offices or within five miles of the hospitals where WIMA’s physicians maintained admitting privileges. In 2004, when he became a WIMA shareholder, Goldstein signed a shareholders agreement, which contained his promise not to compete, for two years following his departure, with WIMA or its successors by engaging in the practice of medicine within five miles of WIMA’s offices or within three miles of the hospitals serviced by WIMA’s physicians.” Id at 1.

Ultimately, there was a business downturn and “the business ended up owing $200,000 in back rent. At that point, the WIMA shareholders formed a new corporate entity to insulate themselves. On October 27, 2004, counsel filed a certificate of incorporation of Woodbridge Medical Associates, P.A. (WMA) … Importantly, “WIMA did not, however … assign its employment agreements or shareholder agreements to WMA.” Id. at 2

Ultimately, “Goldstein [and other’s] left WMA. On September 29, 2005, WMA filed suit in the Chancery Division against Goldstein [and the others] alleging, among other things, that [they] breached the restrictive covenants contained in their agreements with WIMA.” Id at 2

The Court Rules Against Enforcement of the Restrictive Covenants

“At the conclusion of plaintiff’s case, the judge involuntarily dismissed WMA’s action seeking enforcement of the restrictive covenants” Id at 3. The matter was appealed, and the Appellate Division affirmed this ruling on the basis that “the evidence failed to demonstrate the restrictive covenants WIMA extracted from Goldstein and Murray were actually transferred or assigned to WMA.”

Id.

In essence, by forming a new entity for the business, but failing to transfer the restrictive covenants to that new entity, the owners had precluded themselves from enforcing the covenants. In other words, you can’t insulate yourself from the liabilities of your old entity (the $200,000.00 debt for back rent) and at the same time take the position that you are not insulated from your old entity for purposes of enforcing its rights. The two arguments are inconsistent and will preclude enforcement.

Comments/Questions: ljm@gdnlaw.com

New Jersey Appellate Division Confirms that the Consumer Fraud Act Does Not Apply to the Sale of Business

by Gary Nissenbaum | Jul 30, 2009

Caselaw: New Jersey: The New Jersey Appellate Division recently evaluated a claim arising from allegations of fraud in connection with the sale of business and associated real estate. In 539 Absecon Boulevard, LLC. v. Shan Enterprises, et. al., 2009 WL 774474, the defendants had sold the plaintiff a motel business; the real estate upon which the motel resided; and adjacent property. The plaintiff, the purchaser in the transaction, claimed that the seller had falsified its income figures and therefore, defrauded the purchaser in the sale transaction. Among its other claims, the plaintiff-purchaser sued the seller for fraud and a violation of the New Jersey Consumer Fraud Act (“CFA”).

The CFA is a broad, remedial statute aimed at protecting New Jersey consumers from a seller’s wrongdoing in connection with the sale of merchandise and other services. However, while the CFA specifically applies to sales of real estate, it has previously been construed not to apply to sales of businesses. Nevertheless, the lower Court made the determination that the CFA applied to this sale transaction. Its analysis was based upon its conclusion that “a distinction could be made when, as here, the transaction involved both the sale of a business and the sale of real estate.” The Court viewed the transaction as primarily being real estate driven with the business operating thereon to simply be an “improvement” attached to the property. The Court awarded treble damages and attorney’s fees to the plaintiff accordingly.

However, the Appellate Division reversed the decision, specifically finding that the CFA was not aimed at transactions involving the sale of a business. The Appellate Division specifically noted that the New Jersey legislature determined that it wanted to extend the CFA’s reach to real estate, but had specifically not addressed the sale of business. The Appellate Division concluded that had the legislature wanted such a transaction addressed, they would have included it within the statutory language.

Moreover, the Appellate Division noted that the real estate was not the main draw of the transaction but instead was “incidental to the motel business” that had been sold. Accordingly, it dismissed the lower Court’s rationale for applying the CFA. The Appellate Division specifically noted that the CFA is aimed at sellers of merchandise that are offered to the public as a whole, and that a one-time business sale transaction was of a nature not covered by the Act.

Accordingly, the Appellate Division specifically concluded that the CFA does not apply to the sale of a business, even if that sale includes a sale of real estate. The New Jersey Supreme Court denied certification in June, so the ruling stands.

Comments/Questions: ljm@gdnlaw.com

The Importance of Attending to Corporate Formalities

by Gary Nissenbaum | Jul 22, 2009

Business Law: Corporate Formations: On this blog, we have previously discussed the fact that registering a business name with the State may be insufficient to adequately protect the corporate owners from individual liability. (Please see Simply Registering a Company Name is Insufficient to Avail Business Owners of the Protections of the Corporate Shield). The logical next step for a business owner would be to move beyond the sole proprietorship model and register the business with the State.

However, it is important to keep in mind that this too may not be sufficient. Establishing a corporate presence, whether in the form of a limited liability company, limited partnership or a corporation, is important in order to create a liability shield that will help insulate the business owners’ individual assets. There are various ways of piercing this veil and creditors may nevertheless be able to try to access those individual assets.

One way of doing this is for a creditor to argue that the corporation is really a sham, and not operating as a true organization. Rather, the argument would be that the individual owner of the company is really acting in his individual capacity, rather than through a separate legal entity. One of the ways in which this attack is made would be by showing that the requisite corporate formalities were not attended to.

In this regard, simply forming the company with the state and obtaining a tax identification number may be insufficient. Instead, a business owner should do everything possible to bolster the corporate shield and to prove that the corporation has an operation and existence that is separate and apart from the individual owner(s). This is particularly important for small businesses and entrepreneurs.

The best way to start this is to have all of the appropriate corporate documents put in place. If the company is a limited liability company, it should have, at a minimum, a signed operating agreement, meeting minutes, organizational resolutions and a ledger of its members. Similarly, a corporation should have, at a minimum, bylaws, a shareholder’s agreement, meeting minutes, organizational resolutions, issued stock certificates and maintain a ledger of those distributions. All of these documents need to be signed and issued, and not just exist in blank form.

In addition, both types of organizations should have annual and special meetings and should have those meetings memorialized in the corporate form. This may sound silly if the business is owned by just one person, but that is precisely the situation in which it is even more important to attend to these formalities. This is because where there is just one or two owners, the argument can be more easily made that they are really acting in their individual capacities. Thus, even a sole-owner should ensure that he is, from a legal perspective, operating the business in accordance with corporate formalities to help enhance the valuable corporate shield.

Comments/Questions: ljm@gdnlaw.com

New Jersey Appellate Court Holds that Statute of Limitations for Hostile Work Environment Claim Commences Upon the Employee’s Leave

by Gary Nissenbaum | Feb 11, 2009

Employment Law: The New Jersey Appellate Division recently handed down an important decision interpreting the statute of limitations in work discrimination claims. In Toto v. Princeton Township, 2009 WL 88499 (N.J. Super.A.D. 2009), the Court held that the statute of limitations for the plaintiff’s hostile work environment claim ran from the time that he commenced his medical leave, rather than from his date of termination. Toto, the plaintiff, alleged that he suffered from disabilities such as a speech impediment and Attention Deficit Hyperactivity Disorder. He brought suit against his former employer, Princeton Township, based on allegations that he was “verbally taunted and teased” by co-workers; subjected to sexual harassment; that the Township failed to remedy such conduct; and that the Township failed to make reasonable accommodations for him, pursuant to New Jersey’s Law Against Discrimination.

Mr. Toto allegedly was involved in a confrontation with two co-workers January 9, 2002 and left his work for medical leave on January 11, 2002, and never returned. In July, 2002, the Township issued correspondence to Mr. Toto inquiring as to whether he was going to return to work and indicating to him that if he did not, he would be terminated upon the expiration of his medical leave. As a result, Mr. Toto was terminated on July 19, 2002.

The plaintiff’s claims consisted of (1) a failure to accommodate and (2) hostile work environment. The plaintiff’s “failure to accommodate” claim allegedly arose in the time during his medical leave. However, the Court determined that the hostile work environment only could arise out of acts that Mr. Toto was subjected to while he was at work. A hostile work environment claim is subject to a two year statute of limitations in New Jersey. In other words, to assert a claim, a plaintiff must commence legal action within two years from the date that the claim arose.

The Toto Court specifically held that for hostile work environment claims, the “statute of limitations began to run when plaintiff left the workplace because this is the date the last act of harassment could have occurred. . . . Because plaintiff was last physically at the work site more than two years before this action was commenced, the claim is barred by the statute of limitations.”

As a result, Mr. Toto’s claim for hostile work environment was dismissed in whole. The Toto case emphasizes the non-waning application of the Courts of the statute of limitations. Regardless of how sympathetic a claim might be, if the time has run, the claim will be barred. Accordingly, it is critical that potential plaintiffs consult counsel immediately to ensure that they have evaluated all potential claims that might be sought and have accounted for the statute of limitations that apply to each.

Comments/Questions: ljm@gdnlaw.com

New Jersey Legislature Permits Treble Damages for Failing to Pay Sales Commissions within 30 Days of Termination

by Gary Nissenbaum | Feb 2, 2009

Employment Law: As part of the 2008 Legislative Session, the New Jersey legislature passed, and Governor Corzine signed, a law which provides treble damages (triple the amount of actual damages) for sales representatives who are not paid earned sales commissions within thirty (30) days of termination of their services.

Under the law, a “sales representative” is defined as “an independent sales company or other person, other than an employee, who contracts with a principal to solicit orders and who is compensated, in whole or in part, by commission.” Thus, the penalties imposed by the bill do not apply to individual sales representatives providing services pursuant to an employment contract, but rather apply to those representatives providing services on an independent contractor basis. Moreover, a person who places orders or purchases goods exclusively for his own account for resale will not be deemed to be a “sales representative” for purposes of the bill.

In light of the obligations imposed by this law, individuals and business entities should be aware that they may be subject to increased damages if they retain sales representatives on an independent contractor basis and fail to timely pay those individuals’ commissions. In addition to timely payments during the course of the agreement, the principal would be required to pay all commissions earned by the representative within thirty (30) days of the termination of the agreement for any reason.

Comments/Questions: ljm@gdnlaw.com

Employees’ Information on Work Computers Not Protected

by Gary Nissenbaum | Dec 3, 2008

Employment Law: Under New Jersey law, an employee does not have a reasonable expectation of privacy in the content stored on his work computer. This is true notwithstanding the fact that the employee may have created confidential passwords to preclude third parties from accessing the computer. This was the ruling of the New Jersey Appellate Division in the August 2008 decision in State v. M.A., 402 N.J. Super 353 (App. Div. 2008).

In State v. M.A., during the course of working as a bookkeeper, the defendant employee stole money from his employer company. Upon the employer discovering the employee’s theft, the employee was terminated. Subsequently, the employer reported the theft to the police and consented to the search of the employee’s work computers to obtain evidence of the employee’s theft. The employee was subsequently prosecuted. At trial, the employee sought to suppress the information obtained from the computers on the basis that the search of the computers without his permission was impermissible. Specifically, the employee asserted that he had a reasonable expectation of privacy in this information because he had, among other things, created confidential passwords precluding access from third parties.

The Appellate Division, however, found that the search of the employee’s work computers was valid because the employer, in its capacity as owner of the computers, consented to the search. The Court noted that the employee never requested that the computers be provided to him. Therefore, even if he had tried to claim an ownership interest in them, the Court determined that the employee had abandoned them. Accordingly, he no longer retained any reasonable expectation of privacy in them. Again, this was despite the fact that the employee had tried to block third party access. In other words, setting up passwords and other obstacles may be insufficient to establish a privacy invasion.

So employees beware of what you store on your workplace computers. Regardless of what passwords and other security initiatives you take to preclude access of any information stored on the computers, the consent of the employer may be all that is necessary for a search to be conducted with respect to these computers.

Moreover, employers should also take this as a reminder to clearly articulate employee’s privacy expectations. It is strongly recommended the company’s adopt an employee manual or other policy document that clearly states that employees should not expect to have any privacy rights in their workplace computers, other company equipment or otherwise. While these Court here did not require such a policy statement required to allow the “invasion,” it would certainly be a useful weapon in an employer’s arsenal. In other words, such a policy would help to make it clear that any purported employee expectation of privacy was unreasonable because of the employer’s clear statements to the contrary.

Comments/Questions: ljm@gdnlaw.com

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