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Garden State Gavel

A New Jersey Litigation Blog

Arbitration: Avoid Traps for the Unwary

Posted in Business Litigation

Most complex litigation ends with a settlement agreement and most settlements of complex litigation include an arbitration clause to address any disputes over the settlement.  New Jersey’s Supreme Court over the past fifteen years has repeatedly made clear that arbitration clauses are not automatically enforceable and has interpreted them narrowly.

In Garfinkel v. Morristown Obstetrics and Gynecology Associates, PA, 168 N.J. 142 (2001), New Jersey’s Supreme Court made clear that arbitration agreements will not compel the arbitration of statutory employment claims unless the agreement conspicuously states that the former employee is waiving his right to jury trial and to assert such statutory employment claims.

In Atalese v. U.S. Legal Services Group, L.P., 219 N.J. 430 (2014), the New Jersey Supreme Court again struck down an arbitration clause, this time because it was not sufficiently clear to a reasonable consumer.

In a recent decision, Morgan v. Sanford Brown Institute Career Ed. Corp., 2016 WL 3248016 (June 14, 2016), the New Jersey Supreme Court held that the court, not the arbitrator, should determine whether a dispute is arbitrable, unless the arbitration agreement clearly and unmistakably delegates to the arbitrator the authority to decide whether the claim is arbitrable.

In short, arbitration clauses must be carefully drafted particularly when statutory employment or consumer claims are implicated.  Although arbitration has been traditionally favored by the courts in most states, the modern trend in New Jersey seems to be to the contrary.

Minority Members: Till Death Do Us Part?

Posted in Business Law, Business Litigation

It is a familiar adage that business partnerships are like marriages, and in many instances, that saying holds true.  But, what happens when the forming members of a limited liability company offer a small slice of equity to Mary the head sales rep or Bob the head software engineer?  In a perfect world, nothing.  But, in a perfect world there would be no need for lawyers, and because we’re here, there must be trouble lurking.

It sometimes happens in the early, “feel-good” days of a new business venture that the founders reward loyal employees with small equity positions.  It is an easy thing for a founder to do, and can make good business32511428_ss sense if the employee is valuable to a young business unable to pay high salaries.  But the honeymoon does not always last.  Sometimes a competitor woos Mary or Bob away; other times personality conflicts erode an otherwise good working relationship.  This breakdown can lead to a business divorce.

I’ve dealt with these sorts of business divorces in a variety of settings.  In one, the majority owners in a company had a falling out with Mary (all names, of course, are fictional), one of their sales reps who did such a stellar job in the first few years that the owners had granted her an equity interest in the company. What otherwise may have been a simple termination of an employment agreement became complicated by the sales rep’s minority interest in the company.  The matter was complicated further by the omission from the operating agreement of a provision to deal with the termination of this co-member employee or the recapture of the former employee’s equity.

While it is often true that the parties can agree on a mutually acceptable buy-out, the lack of language in a company’s operating agreement addressing this issue can lead to protracted and costly litigation. In some cases,  the costs involved in litigating and evaluating the interest can  exceed the value of the interest at issue.  That’s not to mention the havoc litigation can wreak on a growing business.

What’s the solution?  Good planning.  There are a myriad of ways to address the issue in an operating agreement.  If you’re thinking of forming a new venture, take a look at my three-part primer on operating agreements available here, here, and here.  The message remains the same.  A good operating agreement is like a pre-nuptial agreement; regardless of its cost, it can lead to exponential savings down the road.

 

Entering a Business Transaction with Your Lawyer? Proceed with Caution

Posted in Business Litigation, Court Procedure and Demeanor, Legal Malpractice Issues

Recently, I litigated a breach of contract case brought by a lawyer against his client.  Standard contract issues, right?  Consideration, offer, acceptance?  Not quite.

Because the alleged agreement was between an attorney and his client, special rules applied.  The alleged contract was only enforceable if it complied with both contract law and the Rules of Professional Conduct governing lawyers.  Indeed, without even considering contract law, the Court held the alleged agreement was unenforceable because it did not comply with the R.P.C.’s.

Added protections in attorney-client business transactions exist because, in such circumstances, the lawyer wears two hats – lawyer and businessman.  On one hand, the lawyer is representing the client, receiving sensitive, personal, and confidential information.  On the other hand, the lawyer is adverse to the client, sitting on the opposite side of the bargaining table.  When wearing these two hats, the lawyer can potentially overreach in the transaction – to the client’s detriment.

To protect clients in attorney-client business transactions, R.P.C. 1.8 requires that lawyers provide clients with certain disclosures, including a writing delineating all of the transaction’s terms, and a writing advising the client of the desirability of seeking the advice of independent legal counsel concerning the transaction.  Also, the client must give informed consent, in a signed writing, to the transaction and to the lawyer’s role in the transaction.

Before entering a business transaction with a lawyer, clients should consider: did the lawyer comply with this Rule?  The Rule is critical, as it ensures that the client fully understands the transaction, and that the lawyer does not take advantage of the client.

After entering a business transaction with a lawyer, clients should ask the same question.  If the lawyer seeks to enforce an agreement that fails to comply with R.P.C. 1.8, under the law, the agreement might not be enforceable.  Bad news for the lawyer, who could also face ethical sanctions for violating the R.P.C.’s.

Federal Courts Corner: When Will The Court Make A Decision About My Motion?

Posted in Business Law, Business Litigation, Court Procedure and Demeanor

Clients always ask: When will the Court make a decision about my motion? The general rule is that lawyers cannot predict with any certainty when the federal courts will resolve any particular pending motion.

In the federal courts, there is no requirement that judges issue an opinion within any time frame. However, the Civil Justice Reform Act (the “CJRA”) provides some guidance.  It encourages judges to resolve matters before them within a certain period of time.

Among other things, the Act periodically requires the District Courts to publish a report, listing the motions that remain unresolved for more than six months, along with the judge to which the motion and matter is assigned. Colloquially, in the District of New Jersey, we refer to this as the “Six Month List.”  Similarly, the Act requires publication of all cases, and the judge to which it is assigned, that remain open three years after the filing of the initial complaint.

By virtue of the CJRA’s reporting requirements, Congress attempts to leverage the peer pressure between the federal judges to encourage productivity. Congress also attempts to capitalize on the potential public scrutiny attendant to the publication of these statistics to spur the quick and efficient administration of justice.

In a perfect world, clients could generally expect a decision about their pending motion within six months of its filing date. But our world is not perfect.  The District of New Jersey faces a judicial emergency, which has made it increasingly difficult for the Court to promptly address litigants’ motions.  Under the present conditions, litigants cannot rely on the “six month” rule of thumb with any certainty.

Clients’ concerns are grave because their unresolved motions and protracted litigation negatively affect their wallets. Next time your client wants to know when the District Court for the District of New Jersey will decide a pending motion, consider explaining the Six Month List and its parameters.  Also consider explaining that Congress has yet to confirm nominations for new judges for the District, making it increasingly difficult for the Court to timely handle its pending disputes.

The old adage “knowledge is power” proves true. Clients may be able to use information about the Six Month List and our judicial emergency to budget, forecast, and strategize.  Clients that better understand how the political battles over the judicial nomination and confirmation process directly affect them and their wallets may find it prudent to pressure their Senators to address the pending judicial nominations and to schedule a vote.

Federal Courts Corner: The Numbers Don’t Lie. But What About The Politics?

Posted in Business Litigation, Court Procedure and Demeanor

New Jersey’s federal judges are busier today than they have been before. One reason for the ever-increasing caseload is obvious.  Today, three District of New Jersey judgeships remain vacant.

Although January 2016’s confirmation and addition of the Honorable John Michael Vasquez to the District Court will undoubtedly ease some of the demands placed on the other New Jersey federal judges, the Court remains in a state of “judicial emergency.” This is a designation conferred by the federal judiciary due to the District’s heavy case load and number of vacancies that need to be filled through the judicial nomination and confirmation process.

New Jersey’s “judicial emergency” is demonstrated, in part, by the number of weighted civil filings per judgeship, which has trended upward since 2006. This measure reflects the complexity and type of cases filed. In 2006, the number of weighted civil filings in the District was 417 per judgeship.  Today, it is 659.

At present, two additional nominees await confirmation: Julien Xavier Neals, nominated to take the seat formerly held by the Honorable Faith S. Hochberg, who retired on March 6, 2015, and Brian R. Martinotti, nominated to take the seat formerly held by the Honorable Stanley R. Chesler, who assumed Senior Status on June 15, 2015.

Will these nominees — and a third unnamed individual — be confirmed before President Obama’s term expires? That remains to be seen, and politics may play a significant role in answering this inquiry.

The media coverage following Justice Antonin Scalia’s recent passing, the resulting vacancy on the Supreme Court, and the debate about whether a new Justice will be confirmed during President Obama’s final year in office crystalizes an important point. Only the naïve can ignore the political undertones and overtures attendant to the judicial nomination and confirmation process.  Just as politics affects the judicial confirmation of the next Justice of the United States Supreme Court, it also affects the confirmation of District Court judges.

However fast or slow the turn of the great political wheel, the following is certain: New Jersey’s currently sitting federal judges will continue to steadfastly resolve disputes and gracefully handle New Jersey’s judicial emergency.

Federal Courts Corner: New Jersey’s New District Court Judge – The Honorable John Michael Vasquez

Posted in Business Litigation, Court Procedure and Demeanor

We are grateful – and the federal bench and bar must be too – because on January 27, 2016, the Senate voted and confirmed John Michael Vasquez, who joins the honored few to serve under Article III of the U.S. Constitution.  His confirmation fills one of the four seats that were empty prior to his nomination.  Reportedly, Judge Vasquez has been sworn in, and his chambers will be located in Newark.

The confirmation of Judge Vasquez culminated after implementation of the procedures set forth in the Constitution and early acts of Congress.  Article II, Section 2 of the U.S. Constitution and various Acts of Congress bestow the President with the power to select a Nominee to fill a vacant judgeship. Once the President chooses a Nominee, that individual is referred to the Senate Judiciary Committee for evaluation.

Next, the Committee evaluates the Nominee, holds a hearing, and determines whether to report the Nominee to the full Senate. The Senate will then debate the nomination. A Senator may, at any point, request unanimous consent to end debate and move to vote on the Nominee.  A single objection to this request will result in a “hold” and require a cloture motion to be filed to end debate and move to a vote. Cloture motions require 51 votes to pass, after which the full Senate will vote on the confirmation and a majority is required for confirmation.

Why do we appreciate this recent confirmation?  Thanks to the addition of one more judge in the District, we can conclude that our clients’ motions and cases will be adjudicated a little more quickly than we would have previously expected.

The Bluebook, Van Halen, and Brown M&Ms . . . .

Posted in Business Law, Business Litigation, Court Procedure and Demeanor

There’s a connection here, I swear it.  Rumor has it that Van Halen’s 1982 tour rider contained a requirement that the venue provide the band with a bowl of M&Ms . . . less the brown ones.  But, this wasn’t an act of caprice or ego.  The band tucked their M&M requirements into the portion of the contract that contained the technical specifications for stage set-up, including some relatively important aspects of their pyrotechnics show.  If the band found brown M&Ms in the dressing room, they knew that the venue staff had not read the contract carefully enough to catch the M&M decree, and likely not carefully enough to catch the safety-related technical specifications of the band’s stage set-up either.  The M&Ms were a proxy.12458706_s

The same is true of The Bluebook (and, if you’re writing for a New Jersey court, the Manual on Style for Judicial Opinions).  Sure, The Bluebook stands on its own as a resource for formatting citations.  Certainly, The Bluebook has inherent value in its standardization of citation forms.  But, is there really a difference between “Fed. R. C. P.” and “F.R.C.P.”?

Unfortunately for the detail-averse, yes.  Like the brown M&Ms, the presence of bad Bluebook-ing is a proxy.  As a former appellate clerk, I can assure you that clerks notice.  A properly cited brief (along with the proper cover color and format) was a signal that the authors paid attention to detail.  A poorly cited brief, on the other hand, was a signal that the authors could not be bothered with what they viewed as unimportant detail, and was highly correlated with poor citations to the record, inaccurate citations to case law, and poor arguments.

To be sure, good Bluebook-ing will not make weak arguments strong, but if you are looking to stack the odds in your favor, it cannot hurt to signal the Court early that you are a good lawyer and one the Court can trust.  Who would not want to do that?

New Year, New Rules, and Proportionality

Posted in Business Litigation, Court Procedure and Demeanor, e-Discovery

Last month, my colleague James Kravitz wrote a blog elucidating a significant amendment to the document production rule under FRCP 34. His blog encouraged me to take a closer look at the other amendments that are now effective and share some of the highlights to kick- off 2016.  Among other changes, lawyers should note the following:

FRCP 4 (Summons) reduces the time for service to be effected from 120 days to 90 days after the complaint is filed. Notice and waiver of service forms are appended directly to FRCP 4;

FRCP 16, 26(f) (Pre-trial Conferences and Scheduling Orders)  encourages courts to hold scheduling conferences in- person or by telephone to facilitate direct communication; reduces the time in which a court must issue the scheduling order to the earlier of 90 days (reduced from 120) after any defendant is served; or 60 days (reduced from 90) after any defendant appears and provides that scheduling orders may: (i) preserve ESI; (ii) include privilege agreements under FRE 502, and directs parties to request a court conference before moving for a discovery order.

FRCP 26(b)(1) (Scope and Limits of Discovery) brings the notion of “proportionality” to the rules by limiting discovery to information that is relevant to the parties’ claims or defenses and bids adieu to the old standards of information that is “reasonably calculated to lead to the discovery of admissible evidence” and “subject matter” discovery.

FRCP 26(d)(2); 34(b)(2) (Early Document Requests) permits parties to serve requests for FRCP 34 production more than 21 days after service and before the FRCP 26(f) conference. The requests are deemed “served” at the conference and parties must respond within 30 days of the conference.

FRCP 84 (Sample Forms) have been eliminated. Forms 5 and 6 are incorporated into Rule 4 (d). If you need a form, go to website of the Administrative Office of the United States Courts: www.uscourts.gov.

I suppose the biggest change (especially for those of us who have been practicing for awhile) is the introduction of the proportionality concept which supplants the longstanding discovery standard that lawyers have previously relied upon in seeking or defending against discovery orders.  Now, instead of arguing that the discovery sought is “reasonably calculated to lead to the discovery of admissible evidence,” practitioners must instead ensure that the discovery is proportional to the case.  But what does “proportionality” in discovery mean?

Amended Rule 26 (b)(1) uses certain factors to define “proportionality” by mandating that discovery requested must be relevant and proportional to the case considering the: (i) importance of the issues at stake in the action; (ii) the amount in controversy; (iii) the parties’ relative access to the relevant information; (iv) the parties’ resources; (v) the importance of the discovery in resolving the issues; and whether the burden or expense of the proposed discovery outweighs its likely benefit.

It will be interesting to see whether the new proportionality guidelines promote the worthwhile  goals of reducing discovery expenses and promoting resolution.  In the meantime, I have a new standard to memorize.

Changes to Federal Rule of Civil Procedure 34

Posted in Court Procedure and Demeanor

Rule 34 of the Federal Rules of Civil Procedure was recently amended to provide that if an objection is made to a request for production (“RFP”), the objection must state whether any responsive documents are being withheld on the basis of that objection. This is an important amendment to the Federal Rules, as it eliminates significant gamesmanship by attorneys in regard to responses to RFPs.

The Rule change was brought about by attorneys who make broad objections to RFPs without articulating whether any documents are being withheld. Often, attorneys then state that notwithstanding the objection, certain documents are being produced, to make it appear that documents are not being withheld.  This type of response is problematic because it is unclear whether the objection is made as a prophylactic measure or whether documents have actually been withheld based upon the objection.

As a result of the Rule change, this litigation tactic should end. By prohibiting sweeping objections that do not make clear that documents are being withheld, attorneys will have to carefully assert objections.  There is little benefit to making objections and then producing the very documents that the objection pertains to.  This conduct may create a waiver.

Obviously if attorneys have to identify whether documents are being withheld, simply making an objection without withholding documents will become a tactic of the past.

The change to the Federal Rules was long over-due and will be very helpful to the discovery process.

New Jersey’s Offer of Judgment Rule: Forcing Litigants to Evaluate the Strength of Their Cases

Posted in Business Law, Business Litigation

In New Jersey, the Offer of Judgment Rule flies under the legal radar of many litigants. The Offer of Judgement Rule exists to foster settlement by forcing litigants to take a good, hard look at the strength of their case. And miscalculating the strength or value of one’s case when faced with an offer of judgment can have costly consequences.

The Offer of Judgment Rule – New Jersey Court Rule 4:58 – provides that in any action (other than a matrimonial action), a party may serve on any adverse party an offer to take a monetary judgment in the offering party’s favor (or, on the other hand, to allow judgment to be taken against it) for a specific stated amount, including costs.

The party receiving the offer has until 10 days before trial date or 90 days from service of the offer to accept the offer of judgment, whichever expires first. If the offeree does not accept the offer within those time parameters, it is deemed rejected.

There are potential consequences for non-acceptance of the offer. If the offer of a claimant, i.e., the party making the claim and seeking to be compensated, is not accepted and the claimant obtains a money judgment in an amount that is 120% or more of the offer (excluding prejudgment interest and counsel fees), then the claimant is entitled to, in addition to costs of suit: (1) all reasonable litigation expenses incurred following non-acceptance; (2) prejudgment interest of eight percent on the amount of any money recovery from the date of the offer or the date of completion of discovery, whichever is later; and (3)  reasonable attorney’s fees for services provided after the non-acceptance of the offer.

For example, if a plaintiff offers to settle a case for $100,000.00, the offer is rejected, and the plaintiff is ultimately awarded 120% or more of the offer, the plaintiff is also entitled to litigation expenses, interest, and attorney’s fees accruing after the offer’s rejection.

On the other hand, if an offer of a non-claimant, i.e., typically a defendant, is not accepted, and the claimant obtains a monetary judgment that is favorable to the offering non-claimant, then the offering non-claimant shall be entitled to litigation expenses and attorney’s fees. A “favorable determination” in these circumstances is a money judgment in an amount (excluding allowable prejudgment interest and counsel fees,) that is 80% or less of the offer.

For example, if a defendant offers to pay a plaintiff $100,000 to settle a case, the offer is rejected, and the plaintiff ultimately receives only $80,000.00 or less, the defendant would be entitled to its expenses and attorney’s fees accruing after rejection of the offer.

In practice, the Offer of Judgment Rule can have rather drastic consequences, and the Appellate Division has recently reinforced that the Offer of Judgment Rule does, in fact, have teeth. In Feliciano v. Faldetta, 434 N.J. Super. 543 (App. Div. 2014), the Appellate Division upheld a trial court’s award of attorney’s fees pursuant to a valid offer of judgment.  In Feliciano, which arose out a car accident, the plaintiff served and filed an offer to take judgment in the amount of $15,000.00. The defendant rejected the offer and, following a three-day trial, the jury returned a verdict in favor of the plaintiff and awarding her $50,000 in damages, well above the 120% threshold provided by the Offer of Judgment Rule. The plaintiff subsequently filed a motion seeking attorney’s fees, litigation expenses, and interest pursuant to the Offer of Judgment Rule, and the trial judge awarded $42,230.00 in attorney’s fees, $6,831.09 in litigation expenses, $6,998.67 in interest, and entered judgment against the defendant for nearly $110,000.00.

The Appellate Division affirmed the trial court, recognizing that the Offer of Judgment Rule “accords the judge no discretion regarding whether or not to award attorney’s fees and costs of suit in an offer of judgment case.”  Only the amount of the assessment is discretionary.

The Feliciano decision is a potent reminder of the possible consequences of misreading the strength of one’s case when faced with an offer of judgment. Although the defendant could have settled the litigation for $15,000.00, the defendant is instead on the hook for more than seven times that original offer.