Covenants not to compete and non-solicitation agreements are frequent fixtures of employment agreements. They are also frequently found in operating, shareholder or partnership agreements. Though courts and legislatures across the country have become increasingly hostile to the notion of enforcing non-compete agreements against employees, courts have not displayed a similar reluctance to enforce restrictive covenants in shareholder disputes.

When shareholders have a dispute or desire to sell their interest in a company, restrictive covenants seek to protect the existing company and shareholders by placing limitations on what departing shareholders can and cannot do in terms of competing with the business. Non-compete agreements place limits on where and when and how a departing shareholder may compete against the company. Non-solicitation agreements place limits on who the departing shareholder may solicit for business or employment. Typically, non-solicitation agreements prohibit a departing shareholder from contacting the company’s customers or employees to convince them to leave for the departing shareholder’s new business. In disputes involving a departing shareholder, courts will often side with the existing business against a shareholder who has left the company and now seeks to compete against it.

As in every case involving restrictive covenants, whether a non-compete or non-solicitation agreement is enforceable depends largely on the language of the covenants in the applicable agreement. When deciding whether to enforce a non-compete or non-solicitation provision in a shareholder agreement, court will consider the reasonableness of the restraints. Continue reading ›

Recently, the Delaware Court of Chancery refused to dismiss an action for post-closing damages stemming from alleged breaches of fiduciary duty brought by former stockholders of Authentix Acquisition Company, Inc. In doing so, the Court rejected the defendants’ arguments that a provision in a stockholders agreement entered by the plaintiffs waived such claims for breaches of fiduciary duties.

The dispute arose out of the sale of Authentix to Blue Water Energy in 2017. The plaintiffs in the case were holders of common stock in Authentix. In connection with their investment in the company, the plaintiffs entered into a Stockholders Agreement which provided that they would “consent to and raise no objections against” any sale of the company approved by Authentix’s board and holders of at least 50% of outstanding shares. In 2017, the board approved a sale to Blue Water Energy over the objection of one of the plaintiffs, a director stockholder. The sale was also approved by holders of more than 50% of the company’s outstanding shares.

In response to the sale, the plaintiffs filed suit for post-closing damages, alleging various breaches of fiduciary duties by three former directors and officers of Authentix as well as the preferred stockholders of Authentix who plaintiffs alleged controlled the company. In response, the defendants moved to dismiss the plaintiffs’ claims arguing that the plaintiffs had waived any right to bring such claims. According to the defendants, because the sale was approved by Authentix’s board and at least 50% of the outstanding shares, the Stockholders Agreement precluded plaintiffs from raising any objections related to the sale. Continue reading ›

In a recent decision, the Supreme Court held that a copyright applicant’s inadvertent mistake of law in a copyright registration application does not invalidate the application or corresponding registration. In so holding, the Court erased an earlier victory for fashion retailer H&M in a long running copyright dispute with fabric designer Unicolors, Inc. handed down by an appeals court. Before the Supreme Court’s decision, the Ninth Circuit court of appeals had ruled in favor of H&M nixing a $750,000 win for Unicolors.

To obtain special rights for copyright holders afforded by the Copyright Act of 1976, the creator must apply for a copyright registration by, among other things, submitting a copy of the work and an application for the copyright to the federal Copyright Office’s Register of Copyrights. Under the Copyright Act, the application for registration of a copyright should not contain inaccurate information. However, in the event that an application does contain inaccurate information, the resulting registration is not automatically invalidated. The Copyright Act contains a safe harbor provision that provides that the registration will only be invalidated if the applicant knew that the information in the application was inaccurate and the inaccuracy is such that, if matters were accurately presented, the Register of Copyrights would have denied the application. Continue reading ›

Many people are familiar with insurance companies denying claims for a variety of reasons. Every dollar they use to repair or replace property is a dollar they can’t categorize as a profit or distribute to their executives as a bonus, so it’s common for insurance companies to try to find ways out of paying for claims. What is less common is to hear a claims adjuster say they don’t believe your story because your area is supposedly rife with fraud. That’s exactly what Darryl Williams, a former property owner on the South Side of Chicago, heard when he filed a claim for damage done to one of his apartment buildings when a pipe burst.

Williams is Black and the South Side of Chicago is a predominantly Black neighborhood, so since State Farm had no evidence of fraud, Williams felt he was being discriminated against as a Black man. He sued State Farm in Illinois for racial discrimination in 2019 and his attorney asked for the lawsuit to be tried as a class-action lawsuit, but the judge denied the request, saying the attorney’s analysis was not sufficient evidence that others had had experiences like Williams’s. Then Carla Campbell-Jackson, a former employee of State Farm, reached out to back up Williams’s allegations.

Campbell-Jackson had worked for State Farm for almost 30 years and loved her job until she was promoted to the special investigations unit (SIU), where claims adjusters sent potentially fraudulent claims to be more closely reviewed. Shortly after her promotion, Campbell-Jackson realized State Farm executives wanted SIU employees to meet with claims adjusters to encourage them to send more claims to be investigated by the SIU. The goal, according to Campbell-Jackson, was to deny as many claims as possible. She alleges investigators were told at weekly meetings to focus on claims from urban areas that were supposedly at a high risk for fraud, which would allegedly make those claims easier to deny. Campbell-Jackson alleges they would even circulate lists of supposedly “high-risk” areas. In her testimony, she said it was a way to deny millions of dollars in payments to African Americans and other minorities. Continue reading ›

Preemption is familiar battleground for class-action litigants prosecuting or defending product mislabeling claims concerning the labels of federally regulated products. Plaintiffs asserting state law mislabeling claims must contend with the fact that federal laws often expressly preempt state law claims out of a desire to prevent states from imposing requirements different from or stricter than those found in federal statutes or regulations.

Recently, the Ninth Circuit Court of Appeals analyzed the issue of federal preemption in a case involving the labeling of poultry products. In the case of Cohen v. ConAgra Brands, the plaintiff filed a putative class-action lawsuit alleging that that ConAgra’s “natural” and “preservative-free” claims on its frozen chicken product labels and website advertising were false and misleading under California state law.

In his complaint, the plaintiff alleged that ConAgra had been using synthetic ingredients in its products, despite claims to the contrary on its labels and website. This practice, the complaint alleged, ran afoul of California state law. A federal district court judge dismissed the case, holding that the plaintiff’s claims were preempted by the Poultry Products Inspection Act, which preempts state law claims challenging the Department of Agriculture’s application of federal labeling standards for poultry products. Specifically, the court held that the DOA’s Food Safety and Inspection Service had approved the very statements being challenged on ConAgra’s poultry labels and advertising. The plaintiff appealed the ruling to the Ninth Circuit Court of Appeals.

On appeal, the Ninth Circuit agreed with ConAgra that if the “evidence shows that ConAgra’s label was approved by [the Food Safety and Inspection Service], then plaintiff’s claims are preempted.” However, the Court noted that the record lacked any evidence regarding whether the ConAgra label at issue was actually reviewed and approved by the Food Safety and Inspection Service. Consequently, it remanded the claim for further development of the record on this point. Continue reading ›

People who want to be entrepreneurs are often told to find a problem in the world that they can solve, then build their business (and their marketing efforts) around solving that problem for their customers. That’s exactly what Melissa Nelson and Jeremy O’Sullivan thought they were doing for McDonald’s and its customers before McDonald’s started telling its franchisees that the technology Nelson and O’Sullivan had created could lead to worker injuries.

The problem Nelson and O’Sullivan sought to solve is the prevalence of ice cream machines at McDonald’s constantly breaking down. It’s such a common occurrence that it has inspired memes (and even some conspiracy theories) that pop up all over the internet. You’d think McDonald’s would be eager for a solution to the problem, but Nelson and O’Sullivan were surprised to find that was not the case.

The two would-be problem solvers met as freshmen at Bucknell University in 2005 and started a business together, FroBot, in 2011. FroBot sold frozen desserts from automated soft-serve machines made by the same company that supplies McDonald’s ice cream machines, Taylor Company. The only problem was the machines kept breaking down and the only way to get them up and running again was to call one of the company’s technicians. But according to Nelson, the technicians were more likely to blame a lack of electrical power, if they found any problem at all. Continue reading ›

Earlier this month, former governor of Alaska and vice presidential candidate Sarah Palin lost her defamation suit against the New York Times when a federal jury found in favor of the newspaper. Palin’s lawsuit had alleged that the New York Times and its former editor, James Bennet, defamed the former governor when it published an opinion column that incorrectly linked Palin to the 2011 Tucson, Arizona mass shooting, in which a federal judge was killed and Democratic House of Representatives member Gabrielle Giffords was wounded.

As many legal commentators and defamation law practitioners had noted, Palin faced an uphill battle going into the trial given the protections afforded to media defendants under current First Amendment case law. Most, however, could not have predicted the chain of events that unfolded in the case. First, as we previously wrote about, the trial itself was delayed when Palin tested positive for COVID-19 on the eve of jury selection. Then following the trial itself, the trial judge announced that he would dismiss the case while the jury was still deliberating. In an unusual move, the judge stated that he would allow the jury to continue deliberations but would ultimately dismiss the case no matter how the jury ruled. In total, the jury deliberated for a little over two days.

The trial was also unique in that it is unusual for defamation lawsuits with public figure plaintiffs to reach trial. In the landmark 1964 decision in New York Times v. Sullivan, the Supreme Court established a heightened “actual malice” standard for public officials to prevail in defamation cases. Under the actual malice standard, public officials must establish that the defendant either knew that the statement was false or had “reckless disregard” of the falsity of the statement in order to prevail on a claim of libel or slander. Absent actual malice, media defendants are protected by the First Amendment from defamation liability.

As the trial judge explained when announcing his ruling, Palin is expected to appeal the loss. It has been speculated that Palin is ultimately hoping to bring her case to the Supreme Court where Justices Clarence Thomas and Neil Gorsuch have expressed a willingness to reexamine the more than half century-old New York Times standard. Continue reading ›

Melissa McGurren, former co-host of the popular radio show, “Eric in the Morning,” recently sued Hubbard Radio Chicago for allegedly defaming her in an internal email in which an executive of the radio station said they did not agree with McGurren’s statements about workplace harassment at the station. McGurren alleges the email defamed her to her former coworkers because it implied she was a liar, but according to a federal judge, defendants need to do more than imply in order to be found guilty of defamation.

McGurren spent more than two decades working at WTMX-101.9-FM, the radio station that hosts “Eric in the Morning,” but she left the station in 2020, saying her years of complaining about Eric Ferguson’s behavior, both on and off the air, were ignored by station executives. Among other things, McGurren described her fear of working in the same room as Ferguson during the COVID-19 pandemic. Initially, she said she worked in a space where she was separated from Ferguson by a window because her asthma and other medical issues put her at high risk for COVID-19. According to McGurren, Ferguson harassed her about the setup until she agreed to get back in the studio with him in June of 2020, even though she said she still felt very uncomfortable doing so.

According to her lawsuit, Jeff England, the vice president of the station, allegedly defamed her when he said in an email to the station’s staff that the station did not agree with the way she had characterized events with Ferguson. In her defamation lawsuit, McGurren alleged the email amounted to telling her former coworkers she was a liar, but a federal judge disagrees. Continue reading ›

The Supreme Court has stayed the OSHA’s vaccine-or-test mandate for large private employers, while litigation over its legality continues in the lower courts. Over a dissent from the Court’s three liberal justices, the court ruled that OSHA exceeded its congressionally granted authority in issuing such a sweeping mandate. In a separately issued decision, the Court by a 5-4 vote permitted a vaccination mandate covering health care workers at facilities receiving federal funding through Medicare or Medicaid programs to go into effect.

Six Justices agreed that OSHA exceeded its statutory authority to impose universal COVID-19 safety standards under its power to issue emergency temporary standards. The Court described the vaccine-or-test rule as a “blunt instrument,” that draws no distinctions based on specific industry or actual risk of exposure. Taking the opportunity to articulate its view of OSHA’s role, the Court explained that OSHA’s authority is limited to regulating workplace hazards and Congress “has not given that agency the power to regulate public health more broadly.” Because COVID-19 is not a uniquely occupational hazard (i.e. people can catch it anywhere), the vaccine mandate exceeded OSHA’s authority, the Court reasoned.

OSHA issued the vaccine mandate at the center of the case back in November 2021. Under the mandate, all employers with 100 or more employees were required to compel their employees to either get fully vaccinated against COVID-19 or to be tested weekly and mask up while at work. The mandate covered approximately 84 million workers. Continue reading ›

Sarah Palin’s libel lawsuit against The New York Times was already unusual in that it made it all the way to trial, whereas most libel lawsuits settle outside of court. The lawsuit recently became even more noteworthy when the defense attorneys asked the court to rule in their favor, even if the jury ruled in Palin’s favor, and Judge Rakoff said he would. The decision effectively nullified the jury’s decision before the jury had a chance to reach a decision.

The jury did rule in favor of The New York Times, but there is no longer any way to tell whether their decision was influenced by the judge expressing his willingness to overrule their decision if they ruled in Palin’s favor. The judge’s announcement certainly put the jury in an awkward position, since they were instructed to stay away from news about the case to avoid swaying their decision, but they were most likely able to read reports of the judge’s decision prior to making their own.

Nevertheless, Judge Rakoff’s ruling is not surprising. He had dismissed the case back in 2017, but in 2019 an appellate court reversed his decision and sent the case back to his court.

Palin and her legal team viewed this lawsuit as an opportunity to weaken the protections the First Amendment extends to news outlets so they can report without fear of a lawsuit like this one making it to trial. The lawsuit is one of many filed by right-wing figureheads against various news outlets in an attempt to silence those outlets. Continue reading ›

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