Sunday, November 28, 2010

Non-Compete/Confidentiality Agreement Between Independent Contractor And Mistakenly Unincorporated Corporation Held To Be Valid And Enforceable By Ohio's Tenth Appellate District


Starting a business or making fundamental changes to the structure of a growing business can be an exciting, fast paced, and a potentially confusing experience for small business owners and entrepreneurs. Finding the time to deal with customers, manage employees, market products and services, and complete other daily tasks necessary to maintain and grow a business can be challenging enough. The added requirement of keeping a business legal can be time consuming and overwhelming.  When fundamental changes are undertaken without proper legal advice and support, mistakes can happen that lead to unnecessary risk and liability. 

A mistake that sometimes occurs, is a new or growing company forgets to file paperwork necessary to convert or register its business with the Ohio Secretary of State. This is what happened in Americare Healthcare Servs. v. Akabuaku, 2010 Ohio 5631, No. 10AP-777 (10th Dist., Franklin Co., November 18, 2010), when America Healthcare Services, LLC ("Americare"), a home health care agency, attempted to convert its business from a Limited Liability Company to a Corporation, but forgot to file the necessary paperwork to complete the conversion. When Americare subsequently filed a lawsuit against former employees who had violated non-competition agreements in their employment contracts, the former employees argued that since the non-compete agreements were with "Americare Healthcare Services, Inc.," (not Americare LLC) a corporation that did not exist when the agreements were signed,  the agreements were invalid and unenforceable.     

Under Ohio Law, a business that fails to properly incorporate may still be treated as registered corporation, if it meets the requirements of a de facto corporation or corporation by estoppel doctrine. 

To achieve the status of a de facto corporation, a business entity must make a good-faith attempt to comply with statutory provision governing incorporation.  Jade Sterling Sttel Co. v. Stacey, 8th Dist. No. 88283, 2007 Ohio 532.  In Americare Healthcare Servs., the court found that Americare did not qualify as a de facto corporation because, although Americare believed it had taken appropriate steps to incorporate by notifying all the entities that it worked with of the change and revising all of its forms to reflect a new corporate structure, it failed to file articles of incorporation with the Ohio Secretary of State, as required by O.R.C. 1701.04. See Jade Sterling (rejecting de facto corporation argument where business entity sent articles of incorporation to the Secretary of State, but failed to show any good-faith effort to verify or complete the incorporation); Quality Interiors, Inc. v. Am. Mgt. & Dev. Corp. (Dec. 7, 1990), 11th Dist. No. 89-T-4303 (no de facto corporation formed where articles of incorporation were not filed with the state).

However, the court did find that Americare qualified as a corporation by estoppel.  Under the corporation by estoppel doctrine, a person who enters into a transaction and treats an organization as a corporation will be estopped (disallowed) from later denying the existence of the corporation.  Society Perun v. Cleveland (1885), 43 Ohio St. 481, 490; Lowe v. Tire Clearing House Co. (Nov. 3, 1924), 8th Dist. No. 5253 (affirming judgment where the trial court found that the defendant was estopped from denying the plaintiff's corporate existence, having contracted with the plaintiff; "[w]hen a contract has been made from which a party has derived benefits, estoppel applies").  The court found that Americare qualified as a corporation by estoppel because  the former employees contracted with Americare, Inc., without objection, treated Americare as a corporation, and because it would not have been unfair to hold the defendants to there non-compete agreements. The court subsequently found the non-competition agreements to be otherwise valid and enforceable and affirmed the an injunction that was granted for Americare by the trial court.     

Although the court treated Americare as a corporation by estoppel and upheld the non-compete agreements made with the former employees, the case serves as an example of the unnecessary risks that a business can face when mistakes are made and basic legal requirements are not met.  Under different facts, the non-competition agreements may have not been found enforceable and Americare could have exposed itself unnecessary liability.  If you are in the process of launching or making fundamental changes to a business, you should contact an attorney in your area to make sure that you receive proper legal counsel for the process. 

Wednesday, November 17, 2010

Eighth District Rules that Facts Supporting Affirmative Defenses are Discoverable as Long as Parties ask for "Letters, Memorandum, and Other Documents"

Scenario:  Party A sues Party B alleging wrongful termination, pay discrimination, hostile work environment, unsafe work environment, and witness intimidation. Party B denies everything and asserts 27 Affirmative Defenses.   Party A's lawyer is pissed. Party B is a bullshitter and playing games. They get into a "heated  debate," call each other names, and make threats.  Finally, Party A files a motion to compel to get Party B to divulge the "exact factual defense[s]", of the 27, that Party B will actually prove in its case and to provide "specific reference to facts, exhibits, dates, witnesses, and transactions between parties."  Party B objects and claims that the facts and materials underlying its affirmative defenses are protected under the work-product doctrine. The trial court tells Party B to put up or shut up and grants Party A's motion to compel. Party B appeals.

This is what happened in Decuzzi v. City of Westlake, 2010 Ohio 5365, 2010 Ohio App. LEXIS 4518 (8th Dist. Cuyahoga Co., November 4, 2010). And the 8th District Appellate Court, reversed.  

The court found that the work-product doctrine applied and Party B did not have to produce any information.  Under Ohio Rule of Civil Procedure 26(B)(3), (the work-product doctrine) documents and other informations prepared in anticipation of litigation or for trial by a party or its representative do not have to be produced, unless good cause is shown.

The court found that Party A's request were too broadly worded. That its discovery requests asked Party B to divulge how it intended to defend its case and that this information was protectable work-product.  The court surmised that it didn't want to "rewrite [Party A's] interrogatories for them", but suggested that a more "proper discovery requests ask for letters, memoranda, and other documents that contain facts that support the [Party B's] affirmative defenses."  The court also scolded Party B stating that Party B knew "full well what type of information [was] sought and should not feign such sensitivity to opposing counsel's broad discovery." 

This sounds like a scenario that happens all to often. This case provides a nice guide on what type of things its okay to request from opposing counsel to test a dubious affirmative defense, and what type of requests are over-broad.  

Sunday, November 7, 2010

Amendments To Federal Rule Of Civil Procedure 26 To Take Effect Soon - New Rules Regarding Work Product Protections For Communications Between Expert Witnesses And Lawyers

A recent blog post by the North Carolina Business Litigation Report provides an important reminder that on December 1, significant changes to the rules governing civil practice in the federal courts will take effect. (the post incorrectly states that the rules change occurs Dec. 10.)  Most significant among the changes are revisions to Federal Rule of Civil Procedure 26, which governs the discovery of information from expert witnesses retained to testify at trial. 

Under the current and soon to be the old version of FRCP 26, when a lawyer retains an expert witness for trial, any communications a lawyer makes with the expert, or any draft reports prepared by the expert, are considered discoverable information.  As described by the revisers of the rule, the old rule tends to inhibit robust communications between lawyers and experts and has had the effect of leading attorneys to "take elaborate steps to avoid creating any discoverable record and at the same time take elaborate steps to attempt to discover the other side's drafts and communications [with its experts]." Committee on Rules of Practice and Procedure.  The new rules are supposed to better protect the work product of testifying experts and help reduce the costs of litigation

Under the revisions to FRCP 26, draft reports prepared by expert witnesses and any other communications between expert witnesses and a party's attorney are given the same protection already provided to other types of communication under the Work-Product Doctrine.  Specifically, the new rule provides that the Work-Product Doctrine applies to "drafts of any report or disclosure required under Rule 26(a), regardless of the form in which the draft is recorded."  The rule also applies to employee's and assistants of the expert witness. In other words, communication and drafts fully discoverable under the old rule are protected and not discoverable by opposing counsel any more. 

However, there are some limited exceptions to the new rule. The following categories of expert-attorney communications would continue to be subject to full discovery under revised FRCP 26 and will not garner work-product protection:  (1) Data or facts provided by the lawyer that the expert used in forming opinions; (2) Assumptions the attorney provided and the expert relied on in forming opinions; (3) Communications related to an expert's compensation. 

The changes are going to save a lot of time and money for litigants.  However, communications between lawyers and expert witness remain discoverable until December 1, 2010.  So continue to be careful until that date.