Business Services & Litigation

Frequently Asked Questions

• When Do Former Clients Create Conflicts of Interest?

  Lawyers often conclude that once the representation of a client ends, they are free to take on matters adverse to the former client.  However, that is not always the case, due to possible conflicts of interest.  The Indiana Rules of Professional Conduct specifically provide that there are circumstances where a lawyer may not take a representation that is adverse to a former client.  Indiana Rule of Professional Conduct 1.9 provides that a lawyer may not, absent informed consent, represent a client who is adverse to a former client where the matters are “the same or substantially related.”  It’s easy to tell if matters are “the same.”  The trick is to determine what counts as a “substantially related matter.”

  The answer to the question of whether matters are “substantially related” is sometimes counterintuitive.  For example, a lawyer who has generally represented a business owner and obtained information regarding the business owner’s finances likely cannot later represent the business owner’s spouse in a divorce, because the financial information learned from the previous representation may be highly relevant to property settlement issues.

  On the other hand, a lawyer who has repeatedly defended employment matters for a business may not be disqualified from later representing persons making employment claims against the former client, because the facts of each separate employment matter stand on their own.

  There are some cases that fall between those two types of representations.  For example, the Indiana Court of Appeals in XYZ, D.O. v. Sykes, 20 N.E.3d 582 (Ind. Ct. App. 2014) disqualified a law firm because one of its lawyers had previously represented the adverse party doctor in six medical malpractice suits and the current representation involved an additional allegation of malpractice, coupled with a negligent credentialing allegation against a hospital for failure to adequately investigate the circumstances of the six prior malpractice suits.  The Court of Appeals held that the two matters were substantially related and therefore the lawyer and her firm were disqualified.

  The key test to determine whether matters are “substantially related” is whether there is a substantial risk that specific confidential factual information of the kind that would normally have been obtained in the prior representation would materially advance the new client’s position against the former client.  General knowledge of the former client’s policies and practices is ordinarily not enough to result in disqualification, at least for organizational clients.

  Before taking on a representation that is adverse to a former client, an attorney must carefully consider the scope of the prior representation and the kind of information that would normally have been obtained from the former client for that sort of representation.  Then, the lawyer must assess whether information that would normally have been obtained from the former representation could be helpful to the new client.  If it is, the lawyer must decline the new representation.

  Concerned about potential conflicts of interest with another attorney? Contact us with your questions today.

• Will Your Non-Compete or Non-Solicitation Agreement Stand Up in Court?

  Business owners who draft and utilize non-compete and non-solicitation agreements without the advice of an attorney could pay a steep price: the business might not wind up with any enforceable competition restrictions.  Overly broad non-compete and non-solicitation agreements have a potential fate of being deemed unenforceable in their entirety, as shown by a recent Indiana Court of Appeals’ opinion rendering one business owner’s non-compete agreement completely unenforceable.  See Clark’s Sales and Service, Inc. v. Smith, 4 N.E.3d 772 (Ind. Ct. App. 2014).

  As we have previously written about here, non-compete and non-solicitation agreements can restrict a former employee’s ability to use the training, confidential information, and customer relationships obtained during the employee’s prior job against his or her former employer.  These agreements serve as useful tools for business owners to protect their investments in employees even though they have long been regarded by courts to be disfavored in the law. The enforceability of non-compete and non-solicitation agreements hinges on their reasonableness – they must protect a legitimate interest and be reasonable in scope as to time, activities, and geographic area restricted.  For example, restraining a former employee from opening a competing business in California would not be reasonable if the former employer only operates its business and has clientele in Indiana.

  Historically, courts have applied the “blue pencil doctrine” to strike unreasonable restrictions in these agreements, while continuing to enforce reasonable restrictions.  The Court’s ability to utilize the doctrine is premised on the divisibility of the unreasonable restrictions from the reasonable restrictions without changing the terms of the original agreement.   In other words, businesses cannot just draft and implement broad restrictive covenants under the assumption that a court would strike or remove any particular restriction to make the covenant reasonable and enforceable.  Instead, the covenants should be drafted with the purpose of creating reasonable and divisible restrictions from the outset.

  Earlier this year, the Indiana Court of Appeals reiterated that overly broad restrictive covenants are not tolerated and clarified what must be done to draft covenants that are divisible so the blue pencil doctrine can be applied.   In Clark’s Sales and Service, Inc. v. Smith, the Court of Appeals decided that it could not apply the blue pencil doctrine without changing the original terms contemplated by the parties, deemed the entire covenant not to compete unenforceable and warned that the consequence for drafting such overreaching agreements is that the agreement cannot be enforced at all.  Specifically, the Court refused to redact sentence fragments citing that it would have resulted in a change to the meaning and import of the original covenant.

  This ruling is a chilling reminder to businesses that non-compete or non-solicitation agreements must be reasonably written in the first place and should be reviewed or drafted by an attorney with experience in that area of law. Otherwise, the entire purpose of the agreement – to protect a business owner’s interests, confidential information, customer relationships, and investment in employees – could be lost.

• Does Your Business Entity Really Protect You from Personal Liability?

  Business owners often form entities such as Corporations, Limited Liability Companies (LLCs), or Limited Liability Partnerships (LLPs). Frequently, such entities are formed at the advice of lawyers, accountants, or other business advisors, to limit the business owner’s liability. But do they?

  The answer, as in so many areas of law and business, is “it depends.”  It depends on both the type of liability and the manner in which the business owner has dealt with corporate matters.

  Direct Personal Liability for Negligence or Other Torts

  The existence of a corporation or other limited liability entity will not protect an individual who personally engages in wrongful conduct.  So, for example, a small business owner will not escape liability for an auto accident in a company vehicle on company business, if the owner was the driver of the vehicle. Both the company and the driver can be liable, even if the driver is the owner of the company. Similarly, a business owner who personally makes misrepresentations while working can be personally liable for those misrepresentations, although the company will also be liable.

  However, if the owner has not personally participated in the wrongful conduct, then the owner will generally not be personally liable, as long as corporate issues and finances have been properly conducted.

  Contractual Liabilities

  A business owner is not ordinarily liable for the day-to-day contractual liabilities of the limited liability entity, such as supplier costs, employee wages, and the like. However, to avoid such liability, the business owner must make clear that the owner is signing contracts related to such liabilities in his capacity as an officer or employee of the company. If the owner does not do so, there may be personal liability for the obligations. Significant creditors, such as banks, landlords, and even some suppliers, may require that the owner sign a personal guaranty before they will extend credit. Business owners should carefully review all agreements to make sure that they aren’t agreeing to personally guarantee the company’s debts unless they are absolutely required to do so.

  “Piercing the Corporate Veil.”

  Even where the business owner would not otherwise have personal liability, there can still be a risk of personal liability if the owner has not acted to maintain a separation between the owner and the business. Under certain circumstances, creditors or other claimants can ask a court to “pierce the corporate veil,” which simply means disregarding the limited liability entity and allowing the claimant to collect directly from the individual owner.

  Steps that a business owner should take to avoid personal liability begin at the formation of the entity and continue throughout its life. In the beginning, the owner should provide capital to the business entity, in the form of an equity contribution that is large enough to allow the entity to carry on its business. Frequently business owners form entities and make either a nominal capital contribution or none at all. That is a serious mistake from the standpoint of avoiding personal liability.

  During the life of the business, the owner should maintain the separate status of the entity in a variety of ways. The entity should have its own bank accounts and taxpayer or employer identification number. A complete set of books should also be kept for the business entity, recording all of its income, expenses, assets, and liabilities, separate from those of the owner or any other business entity that the owner may have.

  Equally importantly, money should never be taken directly from the company to pay the owner’s personal expenses or obligations, and the owner should not use assets belonging to the business for personal use. Ideally, if the business is large enough, it can hire the owner as its President or another employee and pay the owner a regular salary as it would any other employee. If the business cannot afford to pay a regular salary, but can only provide returns to the owner on a sporadic basis, then it should provide those funds as distributions of income. In some circumstances, the business can loan money to an owner, but if that is done, the loans should be carefully documented with promissory notes and book entries, and the loans should bear interest at a market rate. Similarly, if the business later needs additional capital and the owner wants to provide that capital by way of a loan, the loan should be documented with a note and book entry and should bear interest.

  If the business is a corporation, its board of directors should have at least some members who are independent of the owner and have meaningful decision-making authority. Regardless of the form of the entity, it should hold regular owner/shareholder meetings and regular meetings of its officers, managers, and/or board of directors. Those meetings should be documented in minutes maintained in an official minute book of the entity. Such “meetings” should be held and documented even if there is only one shareholder or owner of the entity.

  Finally, the owner and the entity should make sure that third parties clearly understand that they are entering into transactions with the business entity, rather than directly with the owner.

  While the steps above do not guarantee that a court will not hold an owner individually liable, they greatly reduce that risk. In addition, they are sound business practices that are routinely followed by larger companies.

  A potential business owner can benefit from hiring an attorney prior to the formation of the business. An experienced attorney can consult with the potential business owner to learn how the business will operate and offer recommendations for entity formation that can best protect the individual from personal liabilities in the future. Contact us for a free consultation.

• So You’ve Been Sued, Now What?

  Receiving lawsuit papers can be a small business person’s worst nightmare. What do you do, and what can you expect in the process? Here are a few tips, derived from my 25-plus years of helping businesses deal with suits against them.

  Hire the Right Lawyer

  It may seem obvious that the first thing you should do is hire a good lawyer. What’s less obvious is who is the right lawyer for the job. That decision depends on what sort of suit has been brought against you because not all lawyers are created equal. Just because your neighbor or brother-in-law is a lawyer does not mean they have the experience necessary to deal with your particular issue. If they are trusted advisors, you may be able to count on them for a referral but don’t insist that they handle something that is outside their area of practice. When you get a referral, ask the person referring them whether the lawyer has handled similar cases in the past, and if so, how often. Ask those questions about the lawyer you’re considering hiring, whether you heard of the lawyer through word-of-mouth, found the lawyer online, or found the lawyer some other way. You wouldn’t ask your cardiologist to perform brain surgery on you, and you wouldn’t want to pay what those specialists charge if all you needed was stitches. The same principles apply.

  Don’t Wait

  In most court systems, you have twenty days to respond to a lawsuit. That isn’t much time, and it will take you at least a week to decide on the right lawyer, and for the lawyer to decide whether to take your case. At that point, a third of your time is gone. It may take another week for you and the lawyer to agree to fees. At that point, two-thirds of the time is gone. That doesn’t leave much time for the lawyer to file the basic papers to begin your defense. Fortunately, most courts will give the lawyer another 30 days, just for asking.

  Don’t Throw Anything Away

  Once you’ve been sued, and even if you have a dispute that you just think will result in a lawsuit, you have a duty to “preserve evidence.” Cases have been won or lost because a party failed to satisfy that duty. The “evidence” you will need to preserve is almost certainly broader than you would expect. To be safe, don’t throw away, or delete, anything that has anything to do with the party who has sued you, or that has anything to do with the general subject of the complaint. For example, if you’ve been sued in an employment case, don’t throw away anyone’s personnel files, or any versions of your employment policies, even if you’ve adopted new ones and payroll records. You get the picture.

  Stop Deleting Emails and Other Electronic Data

  Deleted emails, reused backup tapes, and wiped hard drives are the biggest reasons parties get in trouble with their preservation obligations. Deleted social networking posts and web pages can create problems, too. For people you know or suspect will be witnesses, have someone make an “image backup” of their computers right away.

  Don’t Talk to or Email Anyone But Your Lawyer About the Suit

  As they say in the warnings cops give suspects when they make an arrest, “Anything you say can and will be used against you in a court of law. Don’t talk to your best friend, your fiancé, your kids, your mom or dad, or anyone about the suit except your lawyer. You can talk to your spouse about it, but you probably should keep that to a minimum, too. Within your business, keep discussions to a minimum and limit them to the core management group that needs to know about the suit, and your board of directors, in board meetings. Avoid having even those discussions in email, if possible. Even if there’s nothing bad in those emails, your lawyer still has to look through them and may have to list them, and time is money.

  Be Honest, Come What May

  Some television depictions of the legal system might lead you to believe that it’s common for people to lie in court proceedings and that it’s expected, and on some level “ok.” It is not expected and it is not ok. People go to jail for it. Don’t do it.

  Listen to Your Lawyer

  Even if the lawyer is telling you something you don’t want to hear (like you’re likely to lose), you should listen. In fact, you should listen especially if your lawyer is telling you something you don’t want to hear. We, lawyers, want our clients to be happy, so they’ll keep coming back, so when we’re delivering what we know is bad news, it’s because we know that it’s best for you. If your lawyer tells you something you want to do in the case is a bad idea, it is. Remember, your lawyer, assuming you’ve hired the right one, has been through this process many times. You haven’t. You wouldn’t tell your brain surgeon how to operate, would you?

  Have Realistic Expectations

  Everyone wants to win a lawsuit, the party that brought it, and the party that has been sued. But the reality is that a very large percentage of civil cases settle because there is just too much cost and risk in taking cases all the way to trial. Most lawyers handling litigation are still paid by the hour, and a complex case can take hundreds of hours. The fact that your lawyer might talk to you about settlement doesn’t mean the lawyer isn’t on your side. It means the lawyer is looking out for your pocketbook.

  You will no doubt want your lawyer to get the case against you dismissed quickly, but the reality is that the rules are designed to make sure that parties who sue get their day in court, or at least get a chance to gather evidence to show that they could win if there is a trial. While the civil rules call for a “just, speedy, and inexpensive determination,” in the legal system this doesn’t mean a month or even six months. Two to three years is closer to the norm, and that’s if there’s no appeal.

  You may also want your lawyer to “counter-sue,” but unless you have a claim against the other party for something other than the fact the party sued you, that’s probably not a good idea.

  Stages of a Civil Case

  There are several stages in a civil case. In the first stage, the party suing files a “complaint,” and the party who has been sued files an “answer.” While the party who has been sued might file a motion to dismiss, a dismissal is not appropriate simply because what the plaintiff said in the complaint isn’t true. The Court will assume that everything in the complaint is true in deciding a motion to dismiss. Only if the plaintiff still doesn’t have a case, even with that assumption, will the Court dismiss the case.

  If the case isn’t dismissed at the first stage, it will (probably) proceed to a second stage called “discovery.” In this stage, the parties get to ask each other questions, both in writing (interrogatories) and in person (depositions). They also get to see each other’s documents, emails, and other electronic information. Just because it’s the other side’s “burden of proof” doesn’t mean that the other side doesn’t get to see what evidence you have. You may not think it’s fair that the other side gets to prove its case with your information, but that’s the way the system works.

  Once discovery is done, you’ll get another chance to tell the judge that the case should be thrown out without a trial in what is called “summary judgment.” At that stage, the judge will look at evidence that the parties have gathered or exchanged during discovery. He’ll then decide if there’s enough evidence that a jury could decide in the other party’s favor. Understand that the other party’s “evidence” includes simply the other party’s say-so, as long as the other party is willing to say it under oath. The Court will not decide who’s telling the truth at the summary judgment stage. That happens at trial, possibly with a jury.

  Somewhere in the process, there’s likely to be something called “mediation.” This is just a facilitated settlement conference, where some neutral party tries to get both sides to see the weaknesses in their cases, and the strength in the other side’s cases, and come to a resolution. The mediator can’t decide the case at mediation, only the parties can do that.
  If the case isn’t resolved at any of the stages above, there will be a trial, at which both sides get to present their evidence. It’s this stage, and only this stage, where a judge or jury will decide who’s telling the truth.

  Litigation is a long, slow, expensive, and frustrating process, whether you’ve been sued or are doing the suing. And it’s not something you can just “turn over” to your lawyer. You will have to be actively involved, gathering evidence, giving testimony, and making decisions. It won’t be painless, but with an understanding of the process and the right representation, you’ll get through it.