Alerts
"Disclaimer of Reliance" Provisions
by Chris Hanslik
December 29, 2011
In recent years there has been an increase in acquisitions of privately held companies. While privately held companies do not always have audited financial records, they are typically valued based on financial performance. Buyers of these companies often request and review financial projections too. But can a buyer justifiably rely on the financial information provided during due diligence? Not if the purchase agreement contains a "disclaimer of reliance" provision.
Contract provisions disclaiming reliance on a party's representation may be enforced in limited circumstances to effectively bar claims of fraudulent inducement. In order to recover on a theory of fraudulent inducement, a plaintiff must prove that he or she justifiably relied on the opposing party's misrepresentations. Parties use waiver of reliance provisions to protect themselves from liability arising from allegations of false statements or representations made during the course of negotiations. A disclaimer of reliance will (1) disclaim all extra contractual representations; and (2) provide that the contracting parties are not relying on any representations made during the course of negotiating the contract. Provisions that clearly and unequivocally waive reliance can negate the reliance element necessary for a successful fraudulent inducement claim.
The Texas Supreme Court has enforced "disclaimer of reliance" provisions on several occasions. In doing so, the court has identified certain elements that it believes are most relevant to evaluating the enforceability of these clauses. They are:
- The terms of the contract were negotiated, rather than boiler plate, and during negotiations the parties specifically discussed the issue which has become the topic of the subsequent dispute;
- The complaining party was represented by counsel;
- The parties dealt with each other in an arm's length transaction;
- The parties were knowledgeable in business matters; and
- The release language was clear.
When these factors are present a "disclaimer of reliance" provision may be enforced to preclude a claim for fraudulent inducement against the seller.
How Final is Arbitration? In Texas, You Decide.
by Chris Hanslik
November 14, 2011
The arbitration process was designed to provide an efficient and economical forum for dispute resolution. One of the important features of arbitration is a very limited right of appeal. The Texas Supreme Court, however, has now taken the position that the Texas General Arbitration Act (TGAA) does not limit judicial review of an arbitration award to the grounds specified in the TGAA. In Nafta Traders, Inc. v. Quinn, the Texas Supreme Court also went one step further and stated that the Federal Arbitration Act (FAA) does not preempt expanded judicial review of an arbitration award under the TGAA.
At issue in Nafta Traders was an arbitration clause contained in an employee handbook which stated that "the arbitrator does not have authority (i) to render a decision which contains a reversible error of state or federal law, or (ii) to apply a cause of action or remedy not expressly provided for under existing state or federal law." After an award in favor of Quinn was issued, Nafta Traders appealed claiming that the parties' agreement placed limits on the arbitrator's authority which expanded the scope of review beyond the provisions in the FAA and TGAA.
While Nafta Traders was pending in the appeals process, the United States Supreme Court issued a ruling in Hall Street Assocs., L.L.C. v. Mattel, Inc. that the grounds specified in the FAA for vacating or modifying an arbitration award are exclusive and can not be expanded by agreement. Breaking ranks with the U.S. Supreme Court, the Texas Supreme Court distinguished the situation in Nafta Traders from Hall Street Associates by finding that the parties in Nafta Traders had not expanded the standard for review, but rather denied the arbitrator certain powers. The court then noted that because one of the statutory grounds for vacating an arbitration award under the TGAA is that it exceeds the arbitrator's powers, the award under the arbitration provision could therefore be reviewed for errors of law and to confirm that any relief granted was based on a cause of action or remedy authorized under existing federal or state law. The court also held that the TGAA is not preempted by the FAA.
The result of the holding in Nafta Traders is that the TGAA does not limit judicial review of an arbitration award to the grounds specifically set forth in the TGAA. Accordingly, parties whose agreement to arbitrate is subject to the TGAA may preserve their right to a traditional appeal by restricting the arbitrator's powers to those typically possessed by a trial court judge or by expressly stating that the arbitration award will be subject to traditional judicial standards of appellate review. Another important aspect to note is that under Nafta Traders the parties must make a verbatim record of the arbitration proceeding.
With this broad power in the hands of contracting parties arbitration under the TGAA may not be so binding after all.
Texas Legislature Expands Scope of Liability for LLCs
by Chris Hanslik
October 21, 2011
During the 2011 Texas Legislative Session several amendments to the Texas Business Organizations Code (TBOC) were passed. One of the more significant changes relates to the personal liability of members and managers of limited liability companies.
Section 101.114 of the TBOC provides that a member or manager is not liable for the debts, obligations or liabilities of a limited liability company, except as and to the extent the company agreement or regulations specifically provide otherwise. As stated, this language prohibits a court from holding the members or managers liable for the debts, obligations and liabilities of the limited liability company. Courts in Texas, however, have applied corporate veil piercing principles – alter ego, sham corporation, perpetrating an actual fraud – to limited liability companies, creating a conflict between the limited liability company statutes and common law. Applying the corporate veil piercing standards to limited liability companies these courts followed the provisions in Article 2.21 of the Texas Business Corporations Act which is now found in the TBOC in Sections 21.223 - 21.226.
In an effort to harmonize the TBOC with the state and federal courts that have addressed this issue, the Texas Legislature adopted the same standards used in the corporate statutory provisions. This amendment can be found in Section 101.002 of the TBOC which provides that Sections 21.223, 21.224, 21.225 and 21.226 apply to a limited liability company and its members, owners, assignees and subscribers, subject to the limitations contained in Section 101.114.
The result is that member and managers of Texas LLCs can no longer hide behind what was once thought of as an impenetrable liability shield.
EEOC Scrutinizes Criminal Background Checks
by Chris Hanslik & Joseph "Trey" L. Wood, III
August 30, 2011
In the past few years, the Equal Employment Opportunity Commission (EEOC) has renewed its focus on the hiring process, including Title VII protections for ex-convicts. For years, the EEOC's guidelines have disapproved of an employer's absolute ban on hiring anyone with a criminal conviction. Rather, they direct that if an employer's conviction-based screening policy causes a disparate impact against a protected class of individuals, the employer must show that it considered: (1) the "nature and gravity" of the applicant's offense; (2) the "time that has passed since the conviction and/or completion of sentence;" and (3) the "nature of the job held or sought."
EEOC guidelines do not have the force of the law. In fact, one federal court of appeals found that the EEOC guideline pertaining to criminal conviction bans "are not entitled to great deference."1 The court went on to complain that the guideline does not explain how employers are supposed to consider the nature and gravity of the offense in crafting any bright-line policy on criminal convictions, nor do they address whether an employer can decide that certain offenses are serious enough to warrant a lifetime ban on not being hired.
In response to this criticism, the EEOC held a meeting in Washington D.C. on July 26 focusing on how the use of background checks, and in particular criminal background checks, adversely affect minorities. During the meeting the EEOC hinted that they plan to revise their 20-year-old background check guidelines. Given the fact that the EEOC has also held fairly recent meetings on the use of credit checks in the hiring process, to examine the treatment of unemployed job seekers, and regarding disparate treatment in 21st century hiring decisions, it is likely that revisions to these guidelines will be forthcoming.
What this Means for Employers
Given this recent flurry of EEOC activity, employers who conduct criminal background checks should continue to monitor further developments, not only on the federal level, but the state level as well. Many states have passed "ban the box" laws, which refers to removing check boxes on employment applications that ask if the applicant has ever been arrested or convicted of a crime.2 In addition, employers who have concerns about their hiring practices may want to consider conducting a privileged review of their screening methods to help identify any areas of potential concern. Finally, and most importantly, consider whether the information that you are obtaining during the hiring process is job-related. In the end, if the information that you are asking for is not directly related to the job in question, it may be best not to ask for that information.
1El v. South Eastern Pennsylvania Transportation Authority, 479 F.3d 232 (3rd Cir. 2007).
2California, Connecticut, Hawaii, Massachusetts, Minnesota, and New Mexico all have versions of "ban the box" laws.
The Hazard of Dukes
by Chris Hanslik & Joseph "Trey" L. Wood, III
April 6, 2011
On March 29 the United States Supreme Court heard oral arguments in Dukes v. Wal-Mart Stores, Inc. The class action lawsuit involves, potentially, 1.5 million female Wal-Mart employees and ex-employees claiming gender discrimination in terms of pay and promotions. The potential liability Wal-Mart faces is in the billions of dollars. However, the case is more significant for class action procedural issues than for any substantive employment-related issues.
The lawsuit has been certified as a class action under two different procedural rules. First, the suit was certified under Federal Rule of Civil Procedure 23(b), which relates only to class action claims for injunctive or declaratory relief. Wal-Mart has argued that the plaintiffs are seeking monetary damages which are clearly more important than any injunctive or declaratory relief which they are seeking. The Ninth Circuit Court of Appeals, which affirmed the class action, indicated that the plaintiffs' claims for monetary damages did not "predominate" over their request for other relief.
The Supreme Court also ordered the parties to brief and argue whether certification is consistent under Federal Rule of Civil Procedure 23(a), which sets forth the class action requirements of numerosity, commonality, typicality and adequacy of representation. It is difficult to conceive of a set of circumstances under which 1.5 million females, located in stores across the country and supervised by thousands of different managers, can meet the rule's requirement that their claims of gender bias all arose from some common plan or scheme stemming from Wal-Mart's corporate headquarters.
According to those who were present at the oral argument, the questions posed by the Justices to the attorneys for both sides seemed to be more sympathetic to Wal-Mart. Several justices sharply questioned whether such a large number of women could be discriminated against without a showing of an "unlawful" policy coming from corporate headquarters. The court is likely to issues a decision in the case prior to the end of its term in late June. We will be sure to update you as soon as the ruling is announced.
Update: Employers' Regulation of Employees' Social Media Use
by Joseph "Trey" L. Wood, III and Chris Hanslik
March 1, 2011
Our November 17, 2010 blog entry titled "NLRB's After Us and We're Not Even Unionized" indicated:
In a recent, somewhat frightening development, the NLRB has recently filed a complaint alleging that American Medical Response of Connecticut, Inc. (AMR) violated Section 7 of the act by terminating an employee for posting negative comments about her supervisor on her Facebook page. AMR has a social media policy that prohibits employees from disparaging the company and its supervisors in social media posts, even when posting while off-duty and using a personal computer. Apparently, the policy did not include a disclaimer that the policy would not be construed or applied in a manner that interferes with employees' rights under the NLRA. The Board's complaint is also noteworthy because of the fact that it appears to allege that merely having an anti-disparagement social networking policy violates Section 7 even if the employer does not actually apply the policy and impose discipline.
As an update to this, the NLRB and the employer, AMR have settled the matter prior to it being heard by an administrative law judge. Therefore, we will not know which direction the ALJ would have ruled.
In another recent case, the Eleventh Circuit Court of Appeals has upheld an employer's right to regulate the type of material that an employee posts on her Myspace page. In Marshall v. City of Savannah, the female firefighter employee posted some questionable photos of herself on the internet. Her employer, being informed of this by a co-worker, was able to view the photos because her status on the site was not "private," allowing anyone to see them. The employer decided to issue the employee an oral reprimand, the lowest form of punishment available, based on the photos' bringing "discredit to the City and Savannah Fire Department." During the counseling session, the employee became very abusive and hostile and was, accordingly, terminated. She sued her employer claiming sex and race discrimination. While the Court sided with the employer, it did so only because the female employee was unable to show that men were treated more favorably than she was.
While this case is less about an employer's right to regulate an employee's social media content and more about the individual's inability to prove any discrimination, it is a helpful ruling for employers. However, we can be certain that the NLRB, which will not be bound by the 11th Circuit' ruling, will continue to push the boundaries of the National Labor Relations Act, especially Section 7 of the Act which protects employees' concerted protected activities. Given the fact that the Board now enjoys a Democratic majority along with an Administration that is pro-labor, employers, both unionized and non-union, would be wise to pay careful attention to which way the wind is blowing.
Set Your Business Up Right and Avoid Bitter “Business Divorce” Down the Road
by Chris Hanslik
February 9, 2011
As an entrepreneur, you believe your new business venture will succeed. Why wouldn't you? You and your business partners have an idea for a product or service that the public wants and needs. Hours of careful deliberation have gone into the business plan and personal finances are the source of your initial capital.
During a business start up, funds are often limited and it's common for founders to avoid unnecessary expenses until the business is up and running. Don't, however, neglect the need for solid corporate formation documents when you start your business. Small- to mid-sized companies often fail to fully consider the implications of proper documentation on the affairs of the company and the potential problems that can arise down the road should animosity develop between the owners.
When owners cannot agree on the direction of the business it can lead to what some call a "Business Divorce" - which is essentially a "break up" of business partners.
Business Divorces come in all shapes and sizes and for countless reasons. The one universal truth is, that if not handled properly, the business itself can be the victim of the fight - and fighting among owners can put a drain on the company's resources and distract from running the business. The good news is that most Business Divorces can be avoided by following these tips:
- Execute the proper formation documents at the beginning of the venture to include: By-Laws, Shareholder Agreement, Company Agreement, Employment Agreement, etc.
- Document each partner's expectations related to owning and operating the business in the formation documents to include job titles and descriptions as well as compensation
- Ensure the formation documents contain an easy to follow Buy-Sell provision
- Ensure the formation documents contain an easy to follow "dead-lock" provision so that the business is not unnecessarily interrupted because the owners cannot agree on something
- Ensure that any owner compensation changes are done on a proportionate basis
- Don't terminate an owner who is also an employee unless good cause exists
It's important to remember that without these safeguards, when a dispute occurs the time and money spent fighting over who is entitled to what usually destroys the very thing the parties are fighting over - the company. With prudent planning on the front-end, a framework can be established to allow for a peaceful separation if needed.
Damages from the BP Spill
by Chris Hanslik
July 23, 2010
The BP oil spill has adversely impacted the lives and businesses along the Gulf Coast and beyond. People have lost jobs and certain ways of life are gone for years if not generations. One of the first questions asked is who will be responsible for the harm caused by this disaster. While there are several companies who may end up being help accountable, the more appropriate question is will those affected be able to recover for the monetary damages they have suffered. The subject of damage caps has received a lot of attention recently because of the size and scope of the oil spill. While there are caps on damages under certain statutes they will not work to limit the ultimate liability of certain companies.
The primary statute at issue is the Oil Pollution Act of 1990 (OPA). The OPA was enacted in 1990 in response to the Exxon Valdez oil spill in Alaska. The principal purpose of the OPA is to compensate any party suffering damages from discharges of oil or hazardous substances. The OPA is designed to provide protection for the environment as well as to aid the victims of oil spills.
To establish liability under the OPA only two elements must be proven: (1) that there is a discharge of oil or covered oil-related substances, and (2) that the discharge either went into navigable waters or poses a substantial threat to navigable waters of the United States. If a plaintiff proves these elements, he will recover all damages covered by the OPA that result from the discharge.
The OPA provides four classes of damages:
1. removal costs;
2. damage to real or personal property owned or leased by the claimant;
3. damages to natural resources that the claimant used for subsistence; and
4. economic damages because of damage to property or resources even if the claimant did not own or lease the damage property (this covers damage to or impairment of earning capacity).
The OPA provides a cap on the damages against a responsible party relating to an offshore facility. The general rule is that the total liability of a responsible party is capped at the total of all removal costs plus $75,000,000.00. However, the OPA provides two exceptions to the cap on damages: (1) gross negligence or willful misconduct; or (2) the violation of an applicable Federal safety, construction, or operating regulation by the responsible party or someone acting on behalf of the responsible party.
In addition, the OPA does not preempt state law and the damages that flow from state law claims. Therefore, claims to recover damages resulting from the spill will not necessarily be limited to the caps set forth in the OPA.
Texas Supreme Court Clarifies Post-Arbitration Appeal Rights
by Chris Hanslik
April 18, 2010
On March 12, the Texas Supreme Court overruled two previous court of appeal's decisions to settle a debate over the State's arbitration statute.
At issue in East Texas Salt Water Disposal Co. Inc. v Werline was whether a party could appeal a trial court decision to deny confirmation, vacate the award and direct a new arbitration to be conducted.
Werline won the underlying arbitration, but the company petitioned the district court to vacate, modify or correct the award while Werline counterclaimed for confirmation of the award. The trial court denied confirmation and vacated the award. However, the trial court did not stop there — it went on to make certain fact findings and ordered a new arbitration consistent with its findings. Werline then appealed. The company's position on appeal was that the appellate courts lacked jurisdiction because the trial court had vacated the award and ordered a rehearing.The specific statute at issue was Section 171.098(a) subsections (3) and (5).
The Texas Supreme Court found that the trial court's judgment was appealable because it fit under subsection (3). The court recognized that the right to appeal under Section 171.098(a) assures that a trial court does not exceed its authority in reviewing an arbitration award. It further noted that that purpose would be circumvented if a trial court's order for rehearing could not be appealed immediately. This opinion will help keep trial court's review of arbitration awards in check while protecting the parties' right to contract when they have agreed to "final and binding" arbitration of their disputes.
ADA Amendments Act Expand Scope of Protected Disabilities
by Chris Hanslik
January 20, 2010
In 2009, Congress drafted the Americans With Disabilities (ADA) Amendments Act to address the increasingly narrow definition of "disability" that courts, including the U.S. Supreme Court, have applied in interpreting the original act for more than a decade. The Amendments Act took effect on January 1, 2010 (a similar amendment to the Texas Commission on Human Rights Act took effect on September 1, 2009).
The ADA Act's original definition of "disability" was "a physical or mental impairment that substantially limits one or more major life activities." Subsequently, the Supreme Court held that courts must take into account the effects of mitigating measures such as medication, hearing aids and prosthetic devices when determining if an individual has a substantially limiting impairment protected by the ADA. In the event such mitigating measures ameliorated the condition the individual was not considered disabled under the act. The Supreme Court also narrowed what could be considered a "major life activity" to something that was of "central importance to most people's daily lives."
The ADA Amendments Act broadens the ADA's coverage by specifically disapproving the Supreme Court's interpretation of "disability." As amended, the new law requires the term to be "construed in favor of broad coverage of individuals ... to the maximum extent permitted by the terms of this Act." But Congress did not stop there. The amended act also states that an impairment that is episodic or in remission qualifies as a disability if it would substantially limit a major life activity when active. In fact, courts are not to consider mitigating measures as a factor when determining whether an impairment substantially limits a major life activity.
Finally, the ADA Amendments Act expands the definition of "major life activities" by including a non-exhaustive list for courts to consider, including: seeing, hearing, eating, sleeping, walking, standing, lifting, bending, speaking, breathing, reading, communicating and working. These amendments make it more likely that courts will find impairments qualify as a "disability" under the law.
Creating a Social Media Policy
by Chris Hanslik
December 28, 2009
In today's world of social media, every company with more than two employees should develop a social media policy. These policies serve several purposes, including, but not limited to: (1) educating your workforce on the various types of social media outlets; (2) determining how social media can be used to further your company's business interests; and (3) establishing guidelines for using social media consistent with your company's core values and/or code of conduct.
With this in mind, the best way to start is by not trying to recreate the wheel — several large institutions have social media policies in place that provide a good template for any company to draw from. You can find some of these policies at www.socialmediagovernance.com/policies.php
Armed with this information, you should form a small committee from different constituent groups within your company to evaluate the various policies. Establish a system to determine what portions of each policy will work for your company given the industry you serve as well as how your company operates. Part of the process should include interviewing your employees to determine which social media outlets they regularly use and how they think using social media can help or hurt the company's ability to accomplish its goals.
Obviously, before any policy is finalized you should make sure that the legal implications are addressed. For example, you want to make sure your employees avoid violating any advertising laws your company may be bound by, guard against employees making defamatory statements or infringing upon intellectual property rights of others, and address privacy concerns. The one legal issue all policies should cover is consequences for violating the policy. This will become an issue if an employee should be terminated because of their conduct on a social media outlet.
Finally, an important aspect of any policy is regularly evaluating whether it is still appropriate for your business. As fast as social media is evolving you will need to make sure your social media policy keeps up with the technology.
Court Broadens Geographic Scope of Agreement
by Chris Hanslik
September 15, 2009
In Vaughn v. Intrepid Directional Drilling Specialists, Ltd. a Texas court of appeals considered whether an employee violated a covenant not to compete by arranging for his own newly-formed company to provide services on a project outside the geographic zone covered by the covenant. The covenant stated that the employee could not interfere "directly or indirectly, in any manner with any relationship between [the employer and] customers within the Restricted Territory." In upholding the injunction against the employee, the court ruled the provision could reasonably be interpreted to prohibit the employee from serving a customer located in the restricted territory even if the work in question was outside the protected territory.
This ruling provides employers with an advantage when trying to enforce non-compete clauses against former employees by expanding the geographic scope beyond the written terms of the agreement.
Supreme Court Finds Implied Promise Sufficient
by Chris Hanslik
September 9, 2009
In Mann Frankfort v. Fielding, the Texas Supreme Court has held that an employer does not have to make an express promise to provide confidential information for a covenant not to compete to be enforceable. The Court held that if the nature of the employment for which an employee is hired will reasonably require the employer to provide confidential information to the employee to accomplish their job duties, then the employer has impliedly promised to provide confidential information making the covenant enforceable as long as the other requirements of the Covenant Not to Compete Act are satisfied.
This ruling strongly favors employers seeking to enforce non-compete clauses against former employees.
Trade Secret Protection
by Chris Hanslik
September 2, 2009
Companies with trade secrets should adopt a policy prohibiting and/or limiting the copying, disclosure, or dissemination of the confidential information. Recommended steps to protect the trade secrets are:
- Mark your trade secret information as "confidential" or a similar label. Provide access to trade secret information only to people within the company who reasonably "need to know".
- Ensure all employees or third-parties (such as consultants, independent contractors, clients or potential clients, or financial institutions) with access to trade secrets sign a non-disclosure agreement. Adopt as many security measures as possible (i.e. cameras, fences, use of visitor badges, "restricted area" signs . . .), including computer security precautions.
- Make an inventory of your trade secrets and document any measures taken to protect its confidentiality (including location, security measures, and persons with access).
Going through this exercise will help a company accurately assess whether it truly has a trade secret that is capable of being protected in the event litigation arises in the future.
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