Category Archives: Business Law

Improving Privacy Protections on the Internet

Congress is currently poised to create a number of restrictions on the ability of the government to search email and other digital content. While it is unclear what form such legislation would take, there is a bipartisan consensus that something needs to be done for two reasons: (a) United States citizens need to have more definable privacy protections in their electronic communications and (b) American companies are finding it difficult to compete globally because foreign companies are reluctant to buy American software and other applications that may provide a means for the government to spy on them.

Much of this debate was spurred by a 2010 case brought down by the Sixth Circuit Court of Appeals. That case U.S. v. Warshak, 631 F.3d 266 (6th Cir. 2010). That case dealt with the issue of whether the government’s review of private email could constitute an unconstitutional search and seizure. The Sixth Circuit found that it did. As the court wrote,

Warshak argues that the government’s warrantless, ex parte seizure of approximately 27,000 of his private emails constituted a violation of the Fourth Amendment’s prohibition on unreasonable searches and seizures.12 The government counters that, even if government agents violated the Fourth Amendment in obtaining the emails, they relied in good faith on the Stored Communications Act (“SCA”), 18 U.S.C. §§ 2701 et seq., a statute that allows the government to obtain certain electronic communications without procuring a warrant. The government also argues that any hypothetical Fourth Amendment violation was harmless. We find that the government did violate Warshak’s Fourth Amendment rights by compelling his Internet Service Provider (“ISP”) to turn over the contents of his emails. However, we agree that agents relied on the SCA in good faith, and therefore hold that reversal is unwarranted.

This case is notable because after it was decided, a number of internet service providers began to require search warrants for email.  It is entirely possible that the standard for obtaining emails may be further refined once the current legislation reaches the president’s desk.

© 2014 Nissenbaum Law Group, LLC

If the Seller of a Business Does Not Comply with Legal Requirements for the Sale, May that Seller Use That Fact to its Advantage by Voiding the Sale Altogether?

May a Seller seek to void a contract for sale of his business by taking the position that the sale contract was violated and therefore unenforceable, when the seller itself is the one that did not comply? That issue was raised in Meadowbrook Industries, LLC v. Walker Management Systems, Superior Court of New Jersey, Appellate Division, Docket No. A-3568-11T4 (March 5, 2013).

In that case, the seller violated a contract for sale of a waste disposal business by failing to obtain the approval of the New Jersey Department of Environmental Protection before entering the agreement. NJSA 48:3-7(c).  As it turned out, the seller was the one who wanted to scuttle the deal.  It tried to argue that because the requirement had not been complied with, the contract was unenforceable.

The Appellate Division of the Superior Court of New Jersey rejected that argument.  It held that the seller’s legal theory was barred by the doctrine of unclean hands. What this meant was that the party asserting the breach could not have caused that breach. The law protects those who did not cause their own harm.

© 2014 Nissenbaum Law Group, LLC

How can a Business Owner Use a Prenuptial Agreement to Protect his or her Business From Being Subject to Equitable Distribution in a Divorce?

On June 28, 2013, Governor Chris Christie signed a law (Bill S-2151) which requires judges in New Jersey to evaluate prenuptial agreements as of the date of their signing and not as of the date of their enforcement.  This was a major change in the law.

It is of particular concern to business owners considering marriage. Typically, an owner will want to protect the business from being mandatorily sold in the event of a divorce. This law strengthens the enforceability of prenuptial agreements; therefore, it makes the protection afforded business owners that much more predictable.

The import of the law is that it prevents judges from considering the changes in circumstances between the time of signature and the time they are to be enforced. Prior to its enactment, N.J.S.A. 37:2-32 required judges to interpret premarital contracts as of the date of their enforcement. Therefore, if a contract was fair when it was signed, but when it was enforced would leave one spouse without financial support, it would be subject to attack. 

Will the New Jersey Law Against Discrimination Protect People Who Voice Complaints About Behavior That They Cannot Prove is Discriminatory?

If an employee “voices a complaint about behavior or activities in the workplace that he or she thinks are discriminatory,” but it turns out they are not, is the employee still protected under the N.J. Law Against Discrimination? That issue was addressed by the Court in Battaglia v. UPS, 214 N.J. 518 (2013).
In that case, an employee of UPS was demoted after he complained that managers had made derogatory comments about women and certain other activities. However, he was unable to prove that the discrimination actually took place.
The Supreme Court determined that it would not matter if the activity was actually contrary to law, so long as the person complaining about it had a good faith basis to believe it was. As the Court noted “we do not demand…that he or she be able to prove that there was an identifiable discriminatory impact upon someone of the requisite protected class.”
The basis for the Court’s ruling was that the N.J. Law Against Discrimination is a remedial statute. That means that it is meant to address a social ill, in this case, discrimination. Therefore, it will be read expansively so as not to discourage people from making reasonable complaints that might happen to turn out later to be unprovable.

Comments/Questions: gdn@gdnlaw.com
© 2014 Nissenbaum Law Group, LLC

Do you Need to Occupy a Residential Development in Order for the Residential Consumer Fraud Act Regulations to Apply?

Are residential structures that are not occupied, nor intended to be, protected under the home improvement regulations of the Consumer Fraud Act? This question was addressed in the recent case of Luma Enterprises, L.L.C. v Hunter Homes & Remodeling, L.L.C., Superior Court of New Jersey, Appellate Division, Docket No. A-6094-11T3. (July 1, 2013) [READ CASE HERE]

In that case, plaintiff contracted with defendant to renovate a structure into a daycare facility. Plaintiff agreed to pay the contract price in installments. Both parties agreed that failure to make an installment payment within ten days of its due date would result in a material breach. During renovation, plaintiff made two untimely payments, but defendant continued to work on the project without protest. After receipt of a third late payment, defendant stopped working on the project. Plaintiff filed a complaint and alleged

·         Consumer fraud; and
·         Breach of contract.

The Court dismissed the consumer fraud complaint. It found that the Consumer Fraud Act (“CFA”) did not apply due to the building was not occupied as a residence. Plaintiff appealed.

Plaintiff argued that the property’s residential zoning gave it an inherent residential use and thus was considered a “home improvement” under CFA regulations. The Court, however, held that plaintiff never intended the structure to be used as a home or place of residence – and indeed, no residents were living there – therefore the CFA was not applicable.

This holding meant that the Contractor was not held liable under the Consumer Fraud Act.

Comments/Questions: gdn@gdnlaw.com
© 2014 Nissenbaum Law Group, LLC

What Will Square’s Partnership With Starbucks Mean For New Jersey Businesses?

On August 8, 2012, Square, the mobile payment device start-up, announced its decision to join forces with Starbucks.  The two entities will unite at thousands of Starbucks locations across the United States to allow customers the option of paying for their purchases through the Square mobile phone application.  The joint venture has left many asking what this will mean for the retail payment industry.

Customers will have the option of making on-site payment through the mobile payment application. The venture will also process debit and credit card transactions. The aim is to streamline the payment process and strengthen the industry-wide initiative to eliminate money.

Starbucks will process customers’ orders through Square software installed on Starbucks’ existing registers. In the alternative, customers can instead use the Square-created “dongle.”  The dongle attaches to a mobile phone or iPad and transforms that product into a debit or credit card processor. 

The mobile payment sector is becoming a very significant part of how customers transact business, and Square’s may have just put itself at the forefront of this booming enterprise. Square’s product is so attractive to merchants because of its ease of use. If mobile payment continues to make such an immense impact on how we make purchases, the plan to eradicate cash just might materialize.

While Square has designed its own products and patented some of its technology, its model is not completely novel.  Square has managed to combine and make use of existing products, such as the iPad, with existing ideas that other mobile payment operators make use of, and throw a twist on it to make an innovative product.  It will be interesting to see if any intellectual property disputes arise from Square’s use of an old but revised idea.

Comments/Questions: gdn@gdnlaw.com

© 2012 Nissenbaum Law Group, LLC

May a Party be Bound to an Executed Operating Agreement That Was Not Intended to be Final?

In Fabrau, L.L.C. v. Prashant Shah, et. al., No. A-4464-10T3 (N.J. Super. Ct. App. Div. July 11, 2012), the Appellate Division of the Superior Court of New Jersey was presented with the following question: Should parties be bound by an executed operating agreement that was not intended by all the parties to be final when there is evidence that a subsequent operating agreement was created but was not signed?

In that case, Fabrau, L.L.C. (“Fabrau”) filed a complaint against two of its alleged members, Prashant Shah (“Shah”) and Srinivisa Nallamotu (“Nallamotu”) (collectively “Parties”) for breach of the confidentiality and non-competition provisions of an operating agreement. Id. at 2.

Fabrau sought to develop low-cost, transparent software to assist in setting prices for pharmaceuticals sold by smaller pharmaceutical companies to government entities.  Chester Schwartz (“Schwartz”) was approached to help with sales and marketing, Nallamotu was approached because he was also interested in a more affordable alternative to a government pricing system and Shah was approached to help develop the product.  A draft amended operating agreement was created naming the members as Fabriczi (one of the creators of Fabrau), Rau (the other creator of Fabrau) (collectively “The Creators”), Nallamotu, Schwartz and Shah.  However, Shah sent an email explaining that there was changes he wished to discuss as per his lawyer’s suggestion.  At some point either before or after this e-mail, an undated draft operating agreement was executed by everyone except Nallamotu in a parking lot.

Fabrau argued that the signed agreement was final and binding on both Shah and Nallamotu because, although Nallamotu did not sign it Nallamotu had written an e-mail to a customer announcing that he had formed a company with a few people from the industry.  See Id. at 5.  Fabrau contended that this evidenced Nallamotu’s intention to be bound by the operating agreement. See Id. 

In contrast, Shah asserted that he was induced to sign the agreement by The Creators’ representation that Schwartz would not do his part of the work unless an agreement were signed; Shah also claimed that all who signed in the parking lot acknowledged that the agreement was not binding. See Id.  Nallamotu asserted that the fact that he never executed the agreement at issue should have been enough to show that he was not bound by its terms. 

The Appellate Division pointed to evidence that showed that sometime after the execution of the initial agreement, another member was recruited to the company.  The operating agreement was amended to reflect Christopher Biddle’s (“Biddle”) name, however, it was never executed.  A subsequent email was sent to all of the members asking that the document be executed and a few days after that another email listed the execution of the agreement as one of the “Company Action Items.” Id. at 7.  The Parties contended that the unexecuted document further evidenced that no agreement was ever reached.

After months of struggling to make sales of the pricing system, and after months of no communication between the members, The Creators decided to contact an outside vendor to see about converting the Shah-designed government pricing system to a web-based application.  Then they contacted a venture capital company (“Company”) to promote the product. Unbeknownst to The Creators, Shah and Nallamotu had also contacted the Company for help with the same product.  As a result of intellectual property concerns, the Company made inquiries that led to The Creators and Shah and Nallamotu finding out that each group was trying to promote the product. The Creators consequently filed a lawsuit against Shah and Nallamotu.

At trial, the Superior Court of New Jersey, Law Division, found that because Shah was admittedly the sole creator of the product, he had an ownership interest in the software.  Further, they found that no certificate of formation of Fabrau named Shah and Nallamotu as members of the company.  The Law Division concluded that a viable partnership agreement had never been reached by the parties.

On appeal, the Appellate Division agreed with the Law Division and also found that there was no meeting of the minds with respect to the operating agreement. It remained unexecuted in the Parties’ eyes at the time it was presented to Biddle and thereafter (as evidenced by the e-mail asserting that execution of the agreement was on the “Company Action Items” list). See Id. at 15. Ultimately, the Appellate Division found that the agreement that was executed in the parking lot was a sham designed to mislead Schwartz into believing that his expectations would be protected if he proceeded.  The parties’ conduct failed to manifest intent to be bound by their initial agreement.  See Id. at 17.  The Appellate Division affirmed the Law Division’s holding that no contract existed, and Shah and Nallamotu could not be bound.  See Id.

Proof of execution of an agreement is not the only thing that courts use to determine the rights and obligations of parties.  As shown in Fabrau, a court might consider the intent of the parties in conjunction with electronic communication that evince a contrary intention than what is displayed in the agreement.  The parties should have a common understanding of their expectations and responsibilities under the agreement.  Most importantly, it is vital that any correspondence or documentation between the parties reflect what they intend. This will serve to increase the agreements enforceability in court.

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© 2012 Nissenbaum Law Group, LLC

Will a Court Enforce a “Put” Offering Buy Out Clause in a LLC Operating Agreement

In Martin Heller v. Lauren Gardner Trust, No. A-0914-11T2 (N.J. Super. Ct. App. Div. June 27, 2012), the court considered the enforceability of a “put offering notice, by which one or more members could require the other members to buyout their shares.”  The mechanism was straightforward.  It involved the following:

Under the terms of the Agreement, ‘upon receipt of the Put Offering Notice, the responding member shall be obligated to purchase the Membership Interest of the Initiating Member at the purchase price set forth in subsection (b) of this Section 6.03.’

Id. at 3.

In that case, the issue was whether an April 27, 2010 letter from one of the members to the other was enough to invoke the put option.  The letter stated, in part, “as per page 19 paragraph 6.03-Put Option, this letter should be construed as a put offering notice.”  The court determined that the letter was clearly sufficient to invoke the Put.

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© 2012 Nissenbaum Law Group, LLC

May a Party be Forced to Arbitrate Issues That are not Clearly Covered by an Arbitration Clause?

In Merrill Lynch v. Cantone Research, Inc.,___ N.J. Super. ____ (N.J. Super. Ct. App. Div. 2012), the Appellate Division of the Superior Court of New Jersey was presented with the issue of whether a party may be forced to arbitrate in a situation in which they did not sign a contract that included an arbitration clause about the subject matter of their arbitration. The court determined that a party could not be forced to arbitrate under such circumstances.

That case involved an arbitration relating to a transaction involving securities fraud.  The question was whether the arbitrations should take place under the Financial Industry Regulatory Authority, Inc. (“FINRA”), given the fact that the parties had not explicitly agreed to do so.

The court found that the arbitration clause did not apply since there was no “exchange-related dispute.”  This was because the dispute arose out of an unusual set of circumstances.  The investors were victims of a Ponzi scheme perpetrated by Maxwell Baldwin Smith.  “Smith induced the investors to invest, in the aggregate, approximately $8 million in a non-existent investment product . . . instead of investing their money, Smith deposited the funds into Merrill Lynch account held in his and his wife’s name.  The account was opened, maintained, and utilized by Smith for the sole purpose of facilitating the fraudulent scheme.”  Id. at 3-4.

For that reason, the court concluded that because there was no “exchange-related dispute,” the arbitration agreement that related to such disputes did not apply.

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© 2012 Nissenbaum Law Group, LLC

What is a Commercially Reasonable Way for a Creditor to Sell Collateral?

In The Provident Bank v. Charles Bonnici, No. A-1586-11T1 (N.J. Super. Ct. App. Div. 2012), the Appellate Division of the Superior Court of New Jersey considered the issue of what is a reasonable manner to sell collateral to satisfy a debt.

In that case, the debtor had purchased a boat and taken out a loan to fund the purchase price. He defaulted on the loan, and the creditor decided to sell the boat to offset what was owed. The issue was whether the creditor had done so in a commercially reasonable way.

The Court started its analysis “with the premise that, upon default, a secured party may sell collateral pursuant to the terms and conditions of N.J.S.A. 12A:9-610(b). The disposition may be public or private. N.J.S.A. 12A:9-610(b). ‘Every aspect of a disposition of collateral, including the method, manner, time, place, and other terms, must be commercially reasonable.” Id .  at 4.

Commercial reasonableness is determined if the sale is made:

(1)   in the usual manner on any recognized market;

(2)   at the price current in any recognized market at the time of the disposition; or

(3)   otherwise in conformity with reasonable commercial practices among dealers in the type of property that was the subject of the disposition.

N.J.S.A. 12A:9-627(b).

In the Bonnici case, the Court determined that the sale had been conducted reasonably. The plaintiff used a “business dedicated to that service” to sell it; valued the boat by using the NADA authoritative guide; and took into account the condition of the boat.

Comments/Questions: gdn@gdnlaw.com

© 2012 Nissenbaum Law Group, LLC