Bennett and Belfort

THE PAINFUL REALITY FOR DENTISTS AND PHYSICIANS WHO VIOLATE THE MASSACHUSETTS EMPLOYEE MISCLASSIFICATION LAW

February 3rd, 2012 by admin

The Massachusetts Independent Contractor/Employee Misclassification Law (M.G.L. c. 149 § 148B) sets out the Commonwealth’s test for determining whether an individual may validly be treated as an “independent contractor,” as opposed to an “employee.” The law and its strict interpretation serve as a trap for unwary business owners who wish to take advantage of the “independent contractor” designation for individuals who work for them. We have seen violations frequently occur in the fields of dentistry and medicine. In counseling various dentists and physicians on business and employment law issues, we have discovered that many dental and medical practices are misclassifying their associate dentists as independent contractors, when in actuality, the law requires them to be classified as employees.

Using a dental practice as an example, a common scenario highlighting the misclassification of associates is as follows: a dental practice hires an associate dentist to work from one to four days per week. The dental associate is asked to form a separate corporate entity, such as an LLC. This way, the dental practice essentially contracts with the LLC (or other corporate entity) for the associate dentist’s services, for reasons that presumably include the (incorrect) belief that there is further insulation from the Massachusetts employee misclassification statute because the LLC is technically the employer of the dental associate. Under this scenario, the dental practice supplies the office, equipment, staffing, booking of appointments, and billing system. The dental associate is not required to work any set hours, he or she may take vacation whenever desired, and the dental associate essentially “eats what he or she kills,” meaning that the more the dental associate bills, the more he or she will make. However, there are no billing requirements or expectations. Frequently, the dental associate will also work for a separate dental practice one or two days per week. The compensation structure of this agreement is as follows: the dental associate will receive a percentage of the fees collected by the dental practice for work performed by the dental associate (the most typical percentage is 35%-40%). Payment is typically made to the dental associate thirty to ninety days after the services are performed. The dental practice will issue a form 1099 to the LLC of the dental associate.

Oftentimes, the dental associate and his or her newly formed LLC (signed by the dental associate on behalf of the LLC), is required to sign an independent contractor agreement, which includes a non-compete agreement, non-solicitation agreement, or other restrictive covenant. While non-compete agreements are unenforceable in Massachusetts as to physicians, the interesting issue about whether or not non-compete agreements are enforceable as to dentists will not be addressed at this time.

Most commonly, a dispute arises between the associate dentist and the dental practice regarding either 1) a violation of one of the restrictive covenants, or 2) a dispute over fees. Frequently, the fee dispute involves monies that must be returned to an insurance company (possibly because of the alleged negligence of the dental associate or because the fees were not approved by the insurance company for one reason or another). In some cases, the dental practice believes that it should be allowed to offset wages owed to the dental associate, against monies that the dental practice may have had to pay or which is owed as a result of a monetary dispute.

While the above scenario relative to classifying the dental associate as an independent contractor seems to be quite common, it also runs afoul of the law on employee misclassification.

Massachusetts General Laws (MGL) chapter149, section 148B sets out the following three-part test to determine if an individual may be classified as an ‘independent contractor’ as opposed to an ‘employee’:

An individual shall be considered to be an employee unless:—

(1) the individual is free from control and direction in connection with the performance of the service, both under his contract for the performance of service and in fact; and

(2) the service is performed outside the usual course of the business of the employer; and,

(3) the individual is customarily engaged in an independently established trade, occupation, profession or business of the same nature as that involved in the service performed.

It is important to keep in mind that Massachusetts presumes that a worker is an employee, and uses a three part test to determine employment status. Only if the answer to all three of the parts of this test is “yes” will a worker be considered an independent contractor. Under Massachusetts law, if the answer to any one of the three parts of the test is “no,” the worker must be classified as an employee.

Under our dental practice scenario, is our dental associate: (1) free from control and direction in connection with the performance of the service, both under his contract for the performance of service and in fact? Essentially, this means that the worker must be carried out with minimal instruction. For example, an independent contractor completes the job using his or her own approach, with little direction and control, and sets his or her own working hours. Given our scenario, the answer is most likely “yes,” the dentist is free from control and direction in connection with the performance of his or her service, both under his or her contract for the performance of service and in fact. Let’s move on to part two of the three part test.

Does our dental associate: 2) perform services that are outside the usual course of the business of the employer? In our scenario, the practice of dentistry is the usual course of the business of the practice. The nature of the services provided by the dental associate is also the practice of dentistry. So, the services provided by the dental associate are NOT outside the usual course of the business of the dental practice, and the answer to question number two is “no.”

Once again, if the answer to any one of the three part test is “no,” the worker is an employee; not an independent contractor. Thus, we must conclude that the dental associate should be classified as an employee.

The answer to part three of the three part test is of no consequence, since there is already a “no” response to prong number two of the three part test.

Based upon the above scenario, the dental practice is potentially exposed to some serious legal consequences. The dental practice is exposed to potential criminal penalties, as well as civil enforcement by the Attorney General’s Office, including compensation owed to the dental associate, plus penalties and fines. Additionally, the dental associate has a private right of action to file his or her own lawsuit, including the recovery of triple damages and attorney’s fees for unpaid wages that are due and owing. Importantly, the dental associate may have claims against not only the dental practice entity, but also individual claims against the president, treasurer and any officer or agent who manages the dental practice. Possible recovery by the dental associate may also include the value of retirement benefits that should have been paid, vacation time that should have been provided, and other wages and benefits that the dental practice typically pays its employees, but which it failed to pay our dental associate. Somers v. Converged Access, Inc., 454 Mass. 582 (2009). Clearly, there is no alternative to compliance with the law. In addition to the above monetary exposure, litigation is a huge drain on time, emotions, and other resources. Dental practices, medical practices, and any businesses who hire independent contractors, should seek legal counsel to avoid unintentionally misclassifying employees and subjecting themselves to both corporate and individual liability.

Any business or employment-related issues can be addressed to Todd Bennett at tbennett@bennettandbelfort.com or David Belfort at dbelfort@bennettandbelfort.com.

Posted in Employment, Wage and Hour | No Comments »

UNLIKE BEAUTY, CONTRACT AMBIGUITY DOES NOT LIE “IN THE EYE OF THE BEHOLDER”: READ YOUR REAL ESTATE CONTRACTS CLOSELY

December 13th, 2011 by admin

Anyone who has bought or sold property is aware of the overwhelming amount of paperwork exchanged between the buyer and the seller. Many people gloss over these important real estate contracts and other documents without fully reading them.

While many purchase and sales agreements provide for a fixed amount of damages (liquidated damages) in the event the buyers do not live up to their contractual obligations, not all “standard form” purchase and sales agreements are the same.

The typical liquidated damages deposit clause in the Massachusetts purchase and sale agreement looks like this:

If the BUYER shall fail to fulfill the BUYER’s agreements herein, all deposits made hereunder by the BUYER shall be retained by the SELLER as liquidated damages, which shall be the SELLER’S sole remedy at law or in equity.

Given the downturn of the real estate market, and in order to deter buyers from backing out of a transaction, sellers and attorneys often try to provide for sellers to be able to recover larger amounts of damages, above and beyond what might be otherwise recoverable pursuant to a liquidated damages provision.

In Avery v. Hughes, Docket No. 10-2379, (1st Cir. Nov. 18, 2011), the liquidated damages deposit clause provided for the seller to CHOOSE whether she wants to accept liquidated damages OR pursue actual damages. This provision read as follows:

If BUYER shall default in the performance of their obligation under this Agreement, the amount of the deposit may, at the option of SELLER, become the property of SELLER as reasonable liquidated damages.

Recently, the First Circuit Court of Appeals upheld the real estate contract and found that where (1) defendant failed to close on a real estate purchase and sale agreement, (2) the seller retained its deposit, sold the property to a third party for a lower price and then assigned its claim for the price differential to plaintiff and (3) when the plaintiff sued, plaintiff was entitled to recover the difference between the original real estate contract price and the ultimately received contract price.

This ultimately cost the defendant over $250,000; not just the $25,000 that the buyer thought was contemplated under the purchase and sales agreement.

As you can see, the changes in contract language between the standard form purchase and sales agreement and the one used in Avery are minimal; however, as is clear from the Avery decision, the effects of these minimal changes are huge. In fact, the Court of Appeals found that defendants’ deposit was not liquidated damages at all, and instead was merely consideration for the commitment to extend purchase money financing. Moreover, the Court found that in absence of the “sole remedy at law” language, defendant was on the hook for the entire difference between what he offered to buy the house for, and what the house ultimately sold for.

These effects of minor changes in contract language exhibit the importance of having binding contracts carefully reviewed for both form and substance. As the First Circuit Court of Appeals noted, contract interpretation is not as open ended as many think, and certainly is not based on what one party believes the agreement to mean. Instead, the agreement must be looked at rationally, and analyzed by an independent party who can offer a fair interpretation of contract terms and make suggestions for clarity. This is especially true in contracts where one party has altered the form of a pre-existing, “form” real estate contract.

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Bennett & Belfort, PC Welcomes Two New Attorneys

December 12th, 2011 by admin

The firm is proud to announce two additions to our business and employment team.

Eric LeBlanc joins us after previous stints at Morrison Mahoney, LLP, and Peabody & Arnold, LLP. Eric grew up in Melrose, attended Boston College, and received his law degree from Suffolk University Law School. Eric practices in the area of civil litigation, with an emphasis on commercial, construction, and employment matters. Eric has also authored or co-authored publications on topics such as the Patriot Act and the Federal Rules of Evidence.

Craig Levey was recently admitted to practice in Massachusetts. Craig graduated from the New England School of Law and, prior to joining our firm, interned with the Massachusetts Attorney General’s Office in the Non-Profit Organizations/Public Charities Division. Craig has significant commercial experience having worked for his family’s business prior to law school. Craig’s practice will focus on business and employment litigation.

Please join us in welcoming Eric and Craig – we are thrilled they joined us.

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DIRE ECONOMIC TIMES NOT A FACTOR IN ENFORCEMENT OF NON-COMPETE AGREEMENTS

August 12th, 2011 by admin

Courts historically enforce non-compete agreements in personal service contracts provided they are reasonably related to a legitimate business purpose, and are otherwise fair, based on all the circumstances. Under Massachusetts law, factors to consider in determining whether a non-compete agreement is reasonable are whether the covenant: (1) is supported by consideration; (2) serves a legitimate business interest; (3) is reasonably limited in time, geography and scope; and (4) adequately serves the interests of the public. All Stainless, Inc. v. Colby, 364 Mass. 773 (1974).

Courts are reluctant to enforce non-compete agreements which they view as impermissible restraints on employment. Furthermore, restrictive covenants cases usually first present themselves when one party runs to court to seek to enforce a covenant through injunctive relief. The moving party is asking the court to order the suspension of alleged misconduct that is the perceived violation of a non-competition agreement, which is an equitable, non-financial, remedy. When parties seek equitable relief, courts are permitted to consider notions of fundamental fairness and the equities involved in making their enforcement determination. Accordingly, one might expect that courts would consider the depressed job market and great difficulty employees currently face in finding suitable successor work outside their fields of expertise when deciding whether or not to enforce non-competition agreements. However, a recent decision suggests that the trend is otherwise – and that the ability to find alternative employment is not a significant influence on judges when deciding whether or not to prevent employees from working in their chosen fields when a non-compete agreement is in place.

In Aspect Software, Inc. v. Barnett, a federal district judge granted the employer’s request for a preliminary injunction to prevent Mr. Barnett, their former Executive Vice President and Chief Technology Officer, from continuing his employment with a rival company. Mr. Barnett’s primary responsibilities with Aspect included managing software development, improving technology standards, and overseeing employee recruitment. Judge Casper opined that it is “reasonably likely” that Barnett’s knowledge of Aspect’s trade secrets and understanding of the inner workings of Aspect’s software design would result in some form of disclosure to his new employer. Furthermore, Judge Casper found that despite strong efforts by Barnett to protect Aspect from such disclosures—including Barnett’s monthly confirmations to Aspect that he has not violated his non-compete agreement—the threat of irreparable injury to Aspect was great.

Judge Caspar’s opinion pointed to the language of the non-compete agreement, where Mr. Barnett conceded that the contract did not impose an undue burden on him “due to the fact that he…has general business skills which may be used in industries other than those in which [Aspect] and its affiliates conduct their business and do not deprive [Barnett] of his livelihood.” Judge Caspar then addressed the court’s “balance of hardships” between Mr. Barnett’s employment and the non-compete agreement, writing, “[e]ven setting this acknowledgement to one side, and taking seriously the disruption a preliminary injunction temporarily precluding Barnett from working for Avaya would cause to Barnett, his family, and (to a lesser extent) Avaya, the Court nonetheless finds that the harm a preliminary injunction would cause to Barnett is outweighed by the significant risk of irreparable harm to Aspect absent an injunction.” Id. Although Judge Caspar recognized that enforcement of the non-compete could potentially cause Mr. Barnett and his family financial harm, it did not justify the court in disregarding the enforceability of the non-competition agreement Mr. Barnett and Aspect willfully entered into.

The decision in Aspect Software provides a glimpse into the mindset of a judge during this woeful economic period. It appears that the court’s desire to enforce non-compete agreements based on evidence of an employee’s possessing sensitive knowledge or information, continues to outweigh economic factors and the prevention of an employee’s gainful employment. There appears to be little evidence that courts will permit employees to breach non-compete agreements even though alternative, non-violative positions are exceptionally hard to come by in these difficult economic times.

Posted in Employment, Restrictive Covenants, non competition agreements | No Comments »

WAL-MART PREVAILS IN U.S. SUPREME COURT DECISION DECERTIFYING DISCRIMINATION CLASS ACTION

July 18th, 2011 by admin

A recent United States Supreme Court decision, WAL-MART STORES, INC. v. DUKES ET AL. dealt a significant blow to plaintiffs in a nationwide class action gender discrimination case by denying class action status to Wal-Mart employees. Even though this Supreme Court decision has given Wal-Mart and other employers a leg up against future class actions alleging wide-spread discrimination, the decision does not prevent these particular (formally putative class member) plaintiffs from pursuing their own individual claims against Wal-Mart.

In his opinion, Justice Scalia, joined by the conservative wing of the Court – Justices Roberts, Kennedy, Thomas and Alito, focused on the issue of whether this was a proper class action consistent with the Federal Rules of Civil Procedure, rules 23(a) and (b)(2);

Federal Rule of Civil Procedure 23(a) (Rule 23(a)) sets out four requirements for certification of a class of plaintiffs:

[T]he class is so numerous that joinder of all members is impracticable,
there are questions of law or fact common to the class,
the claims or defenses of the representative parties are typical of the claims or defenses of the class, and
the representative parties will fairly and adequately protect the interests of the class.

Once qualifying for the above threshold inquiry, the proposed class must then satisfy at least one of the three requirements listed in Rule 23(b). Here, the plaintiffs relied on Rule 23(b)(2), which is applied when “the party opposing the class has acted or refused to act on grounds that apply generally to the class, so that final injunctive relief or corresponding declaratory relief is appropriate respecting the class as whole.”

The plaintiffs asserted that an award in the form of backpay constituted a proper form of monetary relief under the rule. However, the Scalia opinion suggested that Rule 23(b)(2) excludes claims for individualized relief, such as back pay.

The Ninth Circuit Court of Appeals had previously affirmed the California District Court’s decision to certify a plaintiff class consisting of “all women employed at any Wal-Mart domestic retail store at any time since December 26, 1998, who have been or may be subjected to Wal-Mart’s challenged pay and management track promotions policies and practices.” The three key pieces of evidence relied on by the plaintiffs as proof of a common question of law or fact included: statistical evidence about pay and promotion disparities between men and women, anecdotal reports of discrimination from 120 of Wal-Mart’s female employees, and the testimony of a sociologist who conducted a “social framework analysis” of Wal-Mart’s company culture and concluded that it was susceptible to gender discrimination. The majority concluded that the plaintiffs’ evidence of commonality was insufficient to raise common questions of law or fact.

In the majority’s view it appeared important to them to stop what they believed was a lowering of the standard of commonality of Rule 23(a), by barring possible class actions filed based on a limited common element. Rather, the Court states that “[t]heir claims must depend upon a common contention – for example, the assertion of discriminatory bias on the part of the same supervisor. That common contention…must be of such a nature that it is capable of classwide resolution.” This decision is controversial and strikes a serious blow to collective actions of this nature making class action certification far more difficult in the discrimination context.

Justice Scalia rebukes the two lower courts’ findings: “[plaintiffs] have not identified a common mode of exercising discretion that pervades the entire company…In a company of Wal-Mart’s size and geographical scope, it is quite unbelievable that all managers would exercise their discretion in a common way without some common direction.”

In the decision’s vociferous dissent, Justice Ginsberg expresses her grave concern that this harsh decision could mean plaintiffs would be burdened with establishing proof that their individual claims are sufficiently similar to others to join in a class action under an unfair, higher standard prior to discovery. Furthermore, critics have raised a serious concern that many discrimination claims of a similar nature are of insufficient value to proceed on their own given the expense of prosecuting such individual claims.

What does this mean for the plaintiffs named in the case and the approximately 1.5 million other women alleging that they experienced sex discrimination during their employment at Wal-Mart? Since the decision only addresses the issue of proper class certification, any of individual employees alleging discrimination in the putative class can still pursue an individual claim against the company.

Many important questions remain unanswered. Will the narrow scope of this decision as to class certification be expanded or stretched to cover other type collective claims? Will the Wal-Mart plaintiffs file separate, individual, suits en mass against the company in each state or will many of those claims evaporate due to the high cost of litigation? Time will tell if the impact of Wal-Mart’s victory in the Supreme Court is as significant as many pundits initially believe. Stay Tuned!

Bennett & Belfort would like to thank our law school intern Reina Tschoe for her work on this Blog entry.

Posted in Class or Collective Actions, Employment, Employment Discrimination, Wage and Hour | No Comments »

MISCLASSIFICATION OF EMPLOYEES LEADS TO LARGE FINES AND CIVIL REMEDIES

June 27th, 2011 by admin

As the economy continues to sputter along, both federal and state taxing agencies have been aggressive in pursuing businesses that misclassify workers as ‘independent contractors’ rather than ‘employees.’ Taxing authorities and government coffers are deprived of valuable revenue when businesses misclassify employees as independent contractors. For employees, businesses are required to pay payroll taxes, workers compensation insurance coverage, social security, and unemployment assistance contributions.

With mandatory triple damages and attorney’s fees for state law violations (these are in addition to any potential violations of federal laws), Massachusetts has one of the most powerful wage and hour laws in the country. This law provides the Attorney General’s Office with plenty of ammunition to pursue rigorous enforcement. In fact, last July, the Massachusetts Attorney General’s Office reached a $3 million settlement with FEDEX Ground over the alleged misclassification of delivery drivers as independent contractors.

M.G.L. c. 149, s. 148B, establishes a three-part test that presumes an individual who provides services is an employee unless:

The individual is free from control and direction in connection with the performance of the service, both under his contract for the performance of service and in fact.
The service is performed outside the usual course of the business of the employer.
The individual is customarily engaged in an independently established trade, occupation, profession or business of the same nature as that involved in the service performed.

Oftentimes, interpreting whether a worker meets one or more parts of this three part test is tricky, and in many industries, there is a longstanding practice of classifying workers as independent contractors which must now be reevaluated.

Traditionally, part-time or seasonal delivery drivers were treated as independent contractors: a position that the Massachusetts Attorney General disagreed with, and which was the impetus for the action against FEDEX Ground. The Attorney General, Martha Coakley, was quoted as saying,

“We have made enforcement against employer misclassification a priority because employers who misclassify workers are gaining an unfair advantage over their competitors and unfairly depriving the Commonwealth of tax and other revenues.”

The Attorney General’s Office cited FEDEX Ground for violation of the Independent Contractor Law; misclassifying its drivers; failing to provide a proper paystubs to employees; failing to provide workers’ compensation; failing to pay overtime to certain drivers; and neglecting to deduct and withhold state income taxes.

The Attorney General’s Office coordinated a joint investigation of FEDEX Ground with the Executive Office of Labor and Workforce Development and the Massachusetts Department of Revenue. According to the Attorney General’s Office, this joint investigation revealed that FEDEX Ground’s misclassification of employees had resulted in significant underpayments to the Department of Revenue (Massachusetts taxation authority), Division of Industrial Accidents (MA agency governing worker’s compensation insurance and claims) and Department of Unemployment Assistance (MA agency governing unemployment claims).

The settlement obtained by the Attorney General’s Office included payment to the 13 drivers named in the Attorney General’s citation. Not surprisingly, FEDEX Ground drivers in Massachusetts brought their own individual lawsuits against FEDEX Ground seeking enhanced damages under the statutory provisions that permit a private right of action.

With the stringent wage and hour laws here in Massachusetts, employees and businesses alike must carefully evaluate how workers are classified. Businesses must implement immediate remedial measures if they have misclassified their workers in order to mitigate continuing violations. Enforcement authorities and employee advocates continue to scrutinize employers’ classification decisions making self-assessment an important part of every businesses evaluation relative to the classification of their workers.

Posted in Employment, Uncategorized, Wage and Hour | No Comments »

When Personal or Financial Data Is Compromised – Act Fast! Data Breach Enforcement Action Leads To $110K Fine By The AG

May 19th, 2011 by admin

The Massachusetts Attorney General’s office (“AG”) recently announced that it had entered a consent judgment with Briar Group, LLC, a restaurant operator, due to Briar’s 2009 release of patron credit card information at the hands of computer hackers.

Briar was notified of its data breach on October 29, 2009, but did not remove the ‘malware’ from its network until December 10, 2009, all the while continuing to accept credit and debit cards from its customers. Over 125,000 transactions were impacted by the breach. The AG specified a number of grounds for its action including Briar’s failure to regularly change passwords, its failure to limit administrative access to its networks and its delay in notifying consumers of the breach while continuing to accept credit and debit cards.

The AG alleged that Briar failed to properly secure the personal information of its customers and therefore violated consumer protection laws, including M.G.L. c.93A, the Massachusetts Consumer Protection Act. Interestingly, the AG relied upon the charge card security standards erected by the Payment Card Industry trade association in arguing Briar’s deviation from acceptable industry protocol. Briar was fined $110,000, even through its claimed violations preceded Massachusetts’ new Data Privacy Act (201 CMR 17.00), which went into effect on March 1, 2010 and effectively codifies many of the standards underlying this enforcement action. In addition to the financial penalty, Briar was required to agree to expressly comply with this new privacy regulation.

As technology advances, companies and consumers must remain vigilant in protecting personal and financial information. Ongoing evaluations of systemic vulnerabilities and immediate action to resolve security lapses in advance of a breach are critical. Furthermore, the AG has made it clear that it will not tolerate delays in investigating, reporting, or resolving data breaches, and that such violations will result in significant penalties and fines. Stay tuned for updates as cases premised upon the Massachusetts Data Security Regulation make their way through the system.

Posted in Business, Privacy | No Comments »

No Fiduciary Duty Owed By Minority Shareholders When Selling Stock

April 26th, 2011 by admin

The Demoulas saga continues in Massachusetts. This ugly family feud has kept dozens of lawyers, the courts and even the bar licensing authorities busy for many years. In this newest skirmish, a superior court judge has ruled that minority shareholders do not owe a fiduciary duty to the corporation when selling their stock even though by selling their shares the minority shareholders would cause the Company to lose valuable tax protections.

In Merriam, et. al. v. Demoulas Supermarkets, Inc., et. al., the plaintiff shareholders had given written notice to the defendant corporation of their intent to sell their stock in the supermarket. The notice was required by the stock transfer provision set forth in the articles of organization of the corporation. The board of directors for the corporation rejected the plaintiff shareholders’ stock purchase proposal and sought to obtain its own valuation of the stock. In the lawsuit that was commenced by the selling shareholders, the corporation filed counterclaims seeking a declaration from the court that these shareholders would violate their fiduciary duties of utmost good faith and loyalty owed to the corporation. The company suggested that because the sale of these shares would result in the corporation losing its tax-saving status as a Subchapter S corporation the sale was improper as it would hurt both the company and the remaining shareholders. In reply to the corporation’s position, the minority shareholders argued that they did not owe any fiduciary duties to the majority shareholders in connection with the proposed sale since the articles of organization alone governed the sale of stock and thus any obligations owed by the minority to the majority shareholders are determined exclusively by the terms of the stock transfer restrictions of the articles of organization. The plaintiff shareholders persuasively claimed that, in Massachusetts, “when rights of stockholders arise under a contract [such as the corporation’s articles of organization] . . . the obligations of the parties are determined by reference to contract law, and not by the fiduciary principles that would otherwise govern.” Chokel v. Genzyme Corp., 449 Mass. 272, 278 (2007). Observing that the articles of organization did not contain an explicit restriction designed to ensure the survival of the corporation’s Subchapter S status, the court agreed with the plaintiffs that the shareholders “do not owe [Demoulas] a fiduciary duty to refrain from selling their shares in a manner that terminates [Demoulas’] Subchapter S status . . .” Merriam, Middlesex Superior Court Civil Action No. 2010-02681, Consolidated Memorandum of Decision and Order on Cross-Motions for Judgment on the Pleadings, March 30, 2011 (Haggarty, J).

Although the defendants have filed a motion for reconsideration of the decision in Merriam, it is unknown whether Demoulas intends to appeal that decision. However, if past practice gives any indication, this battle is not over yet. Even if an appellate court finds that the shareholders owed a fiduciary duty to the corporation in this sale of stock, it is questionable whether the appeals court would reverse the lower court’s decision. It appears unlikely that the appeals court would hold that the proposed sale of stock by these shareholders would constitute a breach of their fiduciary duties given that the trial court determined that the shareholders had a legitimate business reason to sell the stock and that there was not a less harmful alternative to the contemplated sale of stock since the corporation’s board of directors had rejected the shareholders’ proposed sale.

While the trial court ruled that minority shareholders do not owe a fiduciary duty to a corporation in the sale of stock where the sale is governed by the corporation’s articles of organization, the court indicated that shareholders are still bound by the covenant of good faith and fair dealing which is implied in the corporation’s articles of organization. As the court pointed out, Massachusetts law provides that a corporation’s articles of organization form a contract between the corporation and its shareholders, and the shareholders are bound to exercise their contractual rights in accordance with the covenant of good faith and fair dealing implied in the articles of organization. Chokel v. Genzyme Corp., 449 Mass. 272, 275-276 (2007). However, the court declined to opine on whether the proposed sale of stock would constitute a breach of the implied covenant of good faith and fair dealing because that issue was not before it. Therefore, if the trial court’s decision in Merriam is upheld on appeal, future litigation between these parties might conceivably involve the question of whether the shareholders’ contemplated sale that would destroy the corporation’s Subchapter S status constitutes a breach of the implied covenant of good faith and fair dealing. Stay tuned for further updates in this ever developing court and family drama.

Posted in Business, Shareholder Dispute | No Comments »

Hairdresser’s New Job Cut Short by Non-Compete

April 12th, 2011 by admin

We discussed the general standards for enforcing non-compete agreements in a prior blog post. A recent decision from the Plymouth Superior Court highlights the fact-specific nature of the analysis in evaluating the enforceability of a non-compete agreement, and reinforces the risk to employees who carelessly enter such agreements with an employer.

The Defendant, Daniel McKinnon, took a hair stylist position with the Plaintiff, Zona Salon straight out of cosmetology school. At the time of his hiring, McKinnon signed an agreement that, for twelve months following the end of his employment, he would not directly or indirectly compete with Zona in its ‘market area’ of Norwell, Hingham, Hanover, Cohasset, Scituate, Rockland, and Pembroke. He also agreed, among other things, not to solicit business from any client of Zona.

After about four years of employment, Zona terminated McKinnon. Approximately one month after McKinnon’s termination, Zona discovered that McKinnon had accepted a hair stylist position in Hingham and that he had solicited one of Zona’s customers. Zona sued to enforce the non-compete agreement and asked the Court to grant a preliminary injunction barring McKinnon from competing with Zona and from soliciting any present or former customer. McKinnon argued that he should not be bound by the non-compete because he had not read all of the papers he signed when he was hired, he was in need of a job at the time and in no position to negotiate the terms, and he was involuntarily terminated.

The Court granted Zona’s motion for a preliminary injunction and precluded McKinnon from continued work in violation of the restrictive covenants. In doing so, the Court emphasized several factors, including the limited nature of the restrictions- which were tailored to specific towns and the restrictions lasted only one year- as well as the irreparable nature of any harm to Zona’s good will that would result from McKinnon’s continued breach of the agreement.

No matter the lack of sophistication, nature of the position or the lack of bargaining power of the employee, Courts may very well enforce reasonably-tailored non-compete agreements, provided that they serve a legitimate business interest. The Zona case demonstrates both the need for employers to draft appropriate, narrowly tailored, agreements and the importance for employees to actively review and negotiate these contracts in advance of signing them.

Posted in Uncategorized | No Comments »

Season Ticket Holder Sacked by Patriots’ Enforcement of Contractual Obligation in Ticket License Agreement

March 23rd, 2011 by admin

If you sign a contract in Massachusetts, the New England Patriots may be largely responsible for the enforceability of certain damages provisions set forth in the agreement, known as a “liquidated damages clause.”

Liquidated damages clauses are designed to represent a reasonable forecast of damages expected to occur in the event of a breach, particularly where actual damages are difficult to ascertain. For example, in nearly every real estate purchase and sales agreement, there is a liquidated damages provision, providing that in the event the buyer backs out of the deal, the seller’s remedy is to retain the deposit as “liquidated damages.” These types of liquidated damages clauses are also commonly found in commercial lease contracts and… yes, even in contracts for the purchase of professional football tickets, including New England Patriots’ season ticket license agreements.

In the Massachusetts Supreme Judicial Court case entitled NPS, LLC v. Minihane, 451 Mass. 417, 886 N.E.2d 670 (2008), the developer of Gillette Stadium entered into an agreement with the Defendant, Paul Minihane, for the purchase of a 10 year license for two luxury Club level seats. The agreement included a liquidated damages provision, which provided that in the event of a default, including failure to pay any amount due under the license agreement, all payments due throughout the contract term would be “accelerated,” so that the defendant would be required to immediately pay the entire balance for all years remaining on the contract.

Mr. Minihane paid a security deposit and paid for the first year’s worth of tickets, but made no further payments. The Patriots sought to enforce the liquidated damages provision in the ticket license agreement, which required Mr. Minihane to pay for the remainder of the 9 years that he initially promised to pay.

A liquidated damages provision in a contract will usually be enforced provided two criteria are satisfied: 1) at the time of contracting, the actual damages flowing from a breach were difficult to ascertain, and 2) the sum agreed on as liquidated damages represents a reasonable forecast of damages expected to occur in the event of a breach. NPS, LLC v. Minihane, 451 Mass. 417, 886 N.E.2d 670 (2008); Cummings Properties, LLC v. National Communications Corp., 449 Mass 490 (2007). However, where damages are easily ascertainable or calculable, and the liquidated damages amount is grossly disproportionate to the actual damages or unconscionably excessive, a court will award the aggrieved party no more than its actual damages.

Although Mr. Minihane argued that the liquidated damages clause in the agreement with the Patriots was overly harsh and excessive, and that the Patriots could simply re-sell Mr. Minihane’s tickets to someone else, the Court disagreed and held that the Patriots’ damages were difficult to ascertain. In its holding, the Court found that the Patriots’ damages would vary depending on the consumer demand for tickets at the time of breach. The Court also found that consumer demand was dependent upon on a variety of factors such as current performance of the team; popularity of the team’s players; and relative popularity of other sports. Consequently, the Court held that it was difficult to predict, at time the contract was entered into, how long it would take the Patriots to re-sell Mr. Minihane’s seat license and at what cost it would potentially be re-sold.

While the Court focused on the sophistication of both of the parties in enforcing the terms of the contract (Mr. Minihane was a licensed real estate broker, had experience as a general contractor and real estate developer, and had entered into numerous commercial contracts, including institutional loan agreements), this case seems to apply to a wide array of contracts.

Interestingly, while liquidated damages provisions like the one used by the Patriots have been applied in commercial contracts (most notably in commercial lease agreements), the case involving the Patriots was a consumer contract. Accordingly, the importance of carefully considering the terms of every contract one signs-including what damages may result in the event a breach or breakdown in the agreement- cannot be understated.

So, whether you are a football fan or not, next time you see a liquidated damages clause, you might consider how the New England Patriots have impacted contract law in Massachusetts.

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