Hanlon Niemann Blog | A Freehold, New Jersey Law Firm

By Fredrick P. Niemann, Esq. New Jersey Business Lawyer

What actions can be brought against a management employee and officer of a corporation who secretly forms a competing business while employed by the corporation?

ANSWER
New Jersey courts have found that if a management employee secretly forms a competing corporation, then the management employee may be liable for a breach of duty of loyalty to the employer which can also be imputed to the newly formed competing corporation.

In a recent case, a vice president/director and his wife formed two businesses while still employed at Vibra-Tech. One of these businesses was in direct competition for the same customer base. The other business sold equipment to Vibra-Tech. Vibra-Tech had no knowledge that one of their own executives was competing with the corporation. A suit was brought against the defendants for unfair competition and breach of fiduciary duty. The defendants moved for summary judgment, arguing that there were no fiduciary duties that the two companies owed Vibra-Tech.

The court discussed earlier New Jersey case law on fiduciary duty and stated that “A hallmark of a fiduciary relationship is one party’s placement of “trust and confidence in another.” This relationship is generally one of unequal terms, where one party is dependent on the advice and care of another. This is the duty that management and directors customarily owe their employees. Directors and officers of a corporation also have both a duty of care and/or a duty of loyalty to the best interests of the business entity. Competitors of a business entity contract in their own self interest and have no such fiduciary duty.

The attorney for the defendants argued that the two businesses of the defendant had no fiduciary duty since they had no direct relationship with the plaintiff.

The court agreed that there was no direct fiduciary duty between the businesses, but found that New Jersey courts had in similar cases,” imputed the individual defendants’ conduct to the corporation and held it liable for breach of the fiduciary duty of loyalty.”   Since the proof of a breach of imputed fiduciary duty of loyalty involves an intensive inquiry into the facts, and an inquiry as to whether the individual utilized the corporate veil to facilitate a breach of duties, the court denied summary judgment, since the facts before the court were either missing or disputed.

Contact me personally today to discuss your business law matter.  I am easy to talk to, very approachable and can offer you practical, legal ways to handle your concerns.  You can reach me toll free at (855) 376-5291 or e-mail me at fniemann@hnlawfirm.com.

By Fredrick P. Niemann, Esq. a New Jersey Partnership Attorney

Partnership Disputes are fairly common in the world of business. Trade secrets, embezzlement, conversion and business disparagement are some of the most common causes of partnership disputes. If you suspect that something like that has occurred in your business, you should consult with a qualified partnership dispute attorney in New Jersey.

If you suspect that one of your partners has engaged in some form of wrongdoing, it is important that you investigate immediately. If you fail to do so, this can lead to a more serious dispute. Your partner may be profiting while your business is losing money. That is why is it important for you to consider litigation so that your business is protected from further loss.

A qualified partnership dispute attorney can help your business in several ways. He or she will provide the legal representation that you need to protect your business’s investments and profits. First, the attorney will investigate the breach so that the rights and integrity of your business are protected. After the investigation is complete, he or she will file a claim on your behalf. In order to make sure that your claim will have a successful outcome, the attorney will enlist the help of private investigators, accountants and financial experts. If you decide to dissolve your partnership, he or she will be there to assist you with that. Additionally, an attorney will also be able to help your business recover its losses.

If you suspect that suspicious activity is going on within your partnership, you do not want to wait around because your business could be losing money. Call a qualified partnership dispute attorney in New Jersey so that this issue can be resolved right away.  Contact me personally today to discuss your partnership dispute matter.  I am easy to talk to, very approachable and can offer you practical, legal ways to handle your concerns.  You can reach me toll free at (855) 376-5291 or e-mail me at fniemann@hnlawfirm.com.

By Fredrick P. Niemann

Arbitration offers an alternative to litigation, allowing parties to present their arguments to a neutral arbitrator and allowing the arbitrator to make a decision on the matter. It typically offers a more informal forum, with the arbitrator ruling on what he/she deems to be the fairest result. The law is less binding in arbitration and certain rules and procedures that apply in court, such as the rules of evidence don’t apply. Parties simply present their best case to the arbitrator and the arbitrator decides what they believe to be the best result.

Construction is a field in which arbitration is very popular. Disputes often arise throughout the building process between owners, contractors, and subcontractors. Arbitration provides a cheaper, easier forum for the parties to address their issues. As one is probably aware, the most common way for builders to ensure they get payment for work done is to have a lien placed on the property. Liens effectively entitle contractors to money judgments against the owner of the property. In order for a lien to be placed on property, however, Courts must approve them.

In a recent New Jersey court case, the question arose as to whether an arbitrator could grant a contractor a lien on a property. The facts involved a dispute between a homeowner and contractor after the homeowner had performed construction on the homeowner’s house. Since the parties had agreed in their contract that all disputes would go to arbitration, the case first came before an arbitrator. The arbitrator ruled that the contractor had a valid lien claim against the homeowner. The homeowner, claiming that the courts must confirm the lien, brought the case to trial. The trial court sided with the contractor, stating the arbitrator’s ruling was legitimate and the contractor would be entitled to a money judgment resulting from the lien. On appeal however, the New Jersey Court of Appeals reversed the decision. The Court stated that liens must be confirmed in litigation and the arbitrator was not able to establish a valid lien without the confirmation of the Courts. The Courts therefore remain the only forum where liens may be established.

Arbitration law can be a complicated area of expertise. With so many disputes arising, it is important to have a knowledgeable Construction Law Attorney by your side. Please call Fredrick P. Niemann, Esq., a NJ Construction Law Attorney today at 855-376-5291 or email him at fniemann@hnlawfirm.com. He would be more than happy to meet with you to address any arbitration matter you may have.  For further information, go to http://www.youtube.com/user/NJBusinessLaw#p/search/0/_r6sY2W8L2E to learn more.

There’s Hope in Immunity

Fredrick P. Niemann, Esq., Business Litigation Attorney

Whether an employer-employee relationship ends on good terms or with acrimony, a common final act - the employee’s request for a reference for a new job - is increasingly leading to litigation.

From the former employer’s standpoint, it can be a case of damned if you do and damned if you don’t. A candid, negative response to the request can invite a suit by the former employee. A glowing recommendation that omits some serious shortcomings in the employee’s performance, or that declines to say anything about the employee except perhaps dates of employment, could result in litigation brought by the new employer, who would have preferred to be warned about a subpar employee. The prevalence of such disputes only figures to increase in the current economic downturn.

The growing dilemma is such that some employers are telling their employees from the outset that they will get no job reference - good, bad, or indifferent - when they leave. Under such a policy, inquiring prospective employers would get only the employment equivalent of “name, rank, and serial number.” Other employers are willing to give a reference, but only after they have in their files documents in which an employee consents to having prospective employers find out all there is to know, and waiving their right to sue over anything that is said in the reference.

The good news for businesses is that their exposure to liability to disgruntled former employees who requested references is constrained in most states by statute. These laws gen¬erally provide immunity to the givers of references, so long as their actions were not motivated by malice. Of course, former employees, perhaps hurting while in between jobs and inclined to blame former employers for their predicament, are quick to argue that a negative response to a reference request was malicious.

In one such case, a nurse sued her former supervisor for defamation when the supervisor responded to a request for a job reference by stating on a form, without elaboration, that the nurse had “unacceptable work practice habits.” A court ruled that the statement came within a statutory privilege or immunity for former employers’ communications to prospective employers concerning former employees, because it was information provided about a former employee’s work performance at the request of both the former employee and a placement agency.

Although the nurse made the general argument that the immunity was lost because the statement about her was made with malice, she was unable to back up that contention with factual evidence of ill will or spitefulness directed toward her. She argued, to no avail, that if the former employer considered her work habits to be acceptable enough not to fire her, then it was reasonable to infer that the later negative inference must have been motivated by malice.

For further information and advice in any business matter, do not hesitate to contact me at 732-863-9900 Ext. 101 or 105, or fniemann@hnlawfirm.com.

New Jersey courts have long sought to protect the right and ability of a person “to pursue one’s own business, calling or occupation free from undue influence or molestation.”  In the latter part of the 19th century, the courts recognized that a “wrongful and malicious combination to ruin a man in his trade may be ground for [legal action].”  Similarly, in a line of cases spanning the middle of the 20th century, New Jersey courts protected the rights of real estate brokers whose clients surreptitiously cut them out of a transaction to avoid paying a brokerage commission.  The courts have continued their oversight of business dealings through the present, and now call this an action for tortuous interference.

Tortious Interference With Contract
There are two separate causes of action for tortuous interference:  tortious interference with contract and tortious interference with prospective economic advantage.  The primary distinction between the two torts is the existence of a contract.  Each tort results from the need, or society’s desire, to protect certain types of business relationships.

To establish a claim for tortious interference with contractual relations, a plaintiff must prove: (1) actual interference with a contract; (2) that the interference was inflicted intentionally by a defendant who is not a party to the contract; (3) that the interference was without justification; and (4) that the interference caused damage.

To have acted “intentionally”, a client must have known of the contract,” but cannot have been a party to that contract.  Thus, this tort does not redress a breach of contract.  Rather, this tort addresses the separate injury caused by a third party inducing the breach.  Viewed from the perspective of plaintiff’s counsel, having a claim against party B for inducing that breach provides two potential pockets from which to recover.

The law governing this tort is relatively straightforward, inasmuch as the protected relationship between the parties is defined by contract.

Tortious Interference 
To prevail on a claim for tortious interference with prospective economic advantage, a plaintiff must prove: a reasonable expectation of advantage from a prospective contractual or economic relationship; that the defendant interfered with this advantage intentionally and with malice – that is, without justification or excuse; that the interference caused the loss of the expected advantage; and that the injury caused damage.

New Jersey’s emphasis on adequate proof of a reasonable probability of success is consistent with the national trend.  Summing up the standard for determining the existence of a reasonable expectation of economic advantage, one group of commentators has concluded:

[I]t is vital for the plaintiff – when pursuing a claim – to make certain that there is a bona fide and reasonable expectancy of a continuing and reasonable expectancy of a continuing and prosperous relationship, not just the mere desire or possibility for one.  In a prospective advantage case, the plaintiff must demonstrate that expected benefit with a reasonable degree of specificity.  More than a mere hope or optimism is needed; although the law does not require reasonable probability of economic benefit from a valid prospective relationship.

Malice
New Jersey courts describe malice in a variety of ways.  First, the courts make clear that malice does not mean ill will.  Rather, malice means that the conduct was engaged in without justification or excuse.  In the typical business case, competition between the parties may constitute justification.  The courts, however, require more than the assertion of competition:  A defendant must have a legitimate motive, such as success in the marketplace, and employ legitimate means to obtain that goal.

In Ideal Dairy, the Appellate Division specifically addressed proof of malice when competition is invoked as a justification.  The Ideal Dairy court held that there was nothing wrong with targeting a competitor, and that targeting a competitor by offering lower prices was, in fact, “the very essence of competition.”

New Jersey case law does not permit a competitor to use wrongful means.  New Jersey courts use the term “malice” to describe conduct that is “injurious and transgressive of generally accepted standards of common morality or of law.”

The New Jersey courts have reduced this inquiry to whether the conduct was sanctioned by the “rules of the game.”  The rules of the game standard first appeared in 1957 in DiCristofaro v. Laurel Grove Memorial Park, and has become the standard for determining malice in tortious interference cases.  The DiCristofaro court found that a cause of action might lie based on allegations that the defendant cemetery owners imposed excessive charges and costs upon patrons who obtained monuments and memorials from someone other than the cemetery when, as a result, the outside company was prevented from realizing its “normal business expectancies.”

The tort of tortious interference with prospective economic advantage requires that business competitors act within the moral and ethical framework required by society, as well as their own industry.  The rules of the game depend on the customs, practices or code of ethics of the industry, which have typically been vetted time and again by what is necessary to achieve efficiency in the marketplace.

New Jersey courts, harkening back to the advice dispensed by all mothers in our society that “just because someone else is doing it doesn’t make it right,” require that conduct during the course of competition must not only be consistent with the rules of the game, it also must not be “fraudulent, dishonest, or illegal.”

The New Jersey courts have enumerated several examples of what may constitute fraudulent, dishonest or illegal conduct, but the list is by no means exhaustive.  For example, liability will ensue where a competitor uses “violence, fraud, intimidation, misrepresentation, criminal or cruel threats, and/or violations of the law.”  Moreover, the conduct complained of must be independently actionable.  For example, one of the issues analyzed by the Appellate Division in Ideal Dairy was whether the defendant had violated the antitrust laws through the use of extremely low pricing.

The Ideal Dairy court held that, absent a violation of the antitrust laws, a claim of tortious interference could not be premised on “extremely low, or unprofitable prices” because that conduct was not independently actionable.”

Conclusion
The painful irony is that you may not have done anything wrong, and may have been engaging in intense, but legitimate, competition in the marketplace, but you may, nonetheless, have to endure months of expensive discovery to prove that this conduct does not subject him/her to liability so goes the capitalist way.