Wednesday, August 27, 2008

Maryland Court of Appeals Quotes Jerry Seinfeld, Rules in Favor of Tom Clancy on Fiduciary Duty Claim

In an interesting juxtaposition of pop culture icons, the Maryland Court of Appeals cited Jerry Seinfeld in an opinion ruling in favor of novelist Tom Clancy. The case is Clancy v. King (opinion available here), decided August 26, 2008. In the case, Tom Clancy’s ex-wife (King) sued Clancy when Clancy decided to remove his name from the “Op-Center” series of books to which he had licensed his name. The Circuit Court for Calvert County had ruled in favor of ex-wife King issuing a declaratory judgment that Clancy’s removal of his name from the series was a breach of his fiduciary duty to King and the partnership. The Court of Special Appeals affirmed but remanded to the Circuit Court for Calvert County, Maryland for some clarification. Before any such clarification by the Circuit Court could occur, the Court of Appeals granted Certiorari and reversed.

The Court of Appeals held that while Clancy’s actions would have been a breach of fiduciary duty under typical circumstances, those actions were not a breach of fiduciary duty because of language in the partnership agreement that limited Clancy’s duties. In so holding, the Court determined that parties to a partnership can agree to limit their duties to one another and that their agreement would be analyzed under contract law and not under traditional partnership law.

In discussing the contract law issue, the Court found that Clancy’s actions were limited only by good faith, and not the broader fiduciary duties usually enforced against partners. The Court’s discussion of good faith led the Court to the 1996 “The Wig Master” episode of Seinfeld. Specifically, the Court (at footnote 27) referred to the episode as follows:

Jerry Seinfeld, perhaps an unlikely legal illustrator, once epitomized the duty of good faith in contract. In an episode of his television show, Jerry's character purchased a jacket at a men's clothing shop. The terms of the contract permitted Jerry to return the item for refund at his discretion. When Jerry attempted to return the jacket after an unrelated personal quarrel with the salesman, the following discussion took place.

Jerry: Excuse me, I'd like to return this jacket.
Clerk: Certainly. May I ask why?
Jerry: For spite.
Clerk: Spite?
Jerry: That's right. I don't care for the salesman that sold it to me.
Clerk: I don't think you can return an item for spite.
Jerry: What do you mean?
Clerk: Well, if there was some problem with the garment. If it were unsatisfactory in some way, then we could do it for you, but I'm afraid spite doesn't fit into any of our conditions for a refund.
Jerry: That's ridiculous, I want to return it. What's the difference what the reason is?
Clerk: Let me speak with the manager . . . excuse me . .. Bob! (walks over to the manager and whispers)
Bob: What seems to be the problem?
Jerry : Well, I want to return this jacket and she asked me why and I said for spite and now she won't take it back.
Bob: That's true. You can't return an item based purely on spite.
Jerry: Well, so fine then . . . then I don't want it and then that's why I'm returning it.
Bob: Well you already said spite so . . . .
Jerry: But I changed my mind.
Bob: No, you said spite. Too late.
Seinfeld: The Wig Master (NBC original television broadcast 4 April 1996).

In attempting to exercise his contractual discretion out of "spite," Jerry breached his duty to act in good faith towards the other party to the contract. Jerry would have been authorized to return the jacket if, in his good faith opinion, it did not fit or was not an attractive jacket. He may not return the jacket, however, for the sole purpose of denying to the other party the value of the contract. Jerry's post hoc rationalization that he was returning the jacket because he did not "want it" was rejected properly by Bob as not credible.

The Court’s sense of humor is refreshing, and serves to illustrate that the Court is made up of people just like everyone else who draw on all of their experiences in making reasoned judgments. Of course, Ms. King and her counsel probably aren’t laughing….

Tuesday, August 26, 2008

New Maryland Court of Appeals Case on Attorney's Fees and Indemnification

On July 25, 2008, the Maryland Court of Appeals addressed an issue that often arises in commercial disputes: whether an indemnification clause in the parties’ contract which provides that one party is indemnifying and holding the party harmless for losses including attorney’s fees will allow for an award of attorney’s fees that were incurred in the dispute between the two parties to the contract.

In Nova Research, Inc. v. Penske Truck Leasing Co., L.P., 405 Md. 435, 952 A.2d 275 (2008), the Maryland Court of Appeals held that attorney’s fees are not recoverable in a first party action between parties who have such an indemnification clause in their agreement. Instead, the Court of Appeals reasoned, the American Rule on attorney’s fees (each party is responsible for its own fees) controls and each party is responsible for its own legal fees. By holding as it did, the Court of Appeals reversed the unpublished decision of the Maryland Court of Special Appeals in which that Court had held that attorney’s fees were recoverable. Three members of the Court of Appeals dissented.

What this means for businesses is that if they expect to have fee-shifting occur they must not only include such an indemnification clause, but also they must make sure that their agreements include an explicit clause that provides that the prevailing party in any dispute shall be awarded its attorney’s fees.

Monday, August 25, 2008

Change in Maryland Wage Payment Law

Another example that goes to show that you must be careful of what you read on the Internet.

In 2006, several former employees of Catapult Technologies represented by my law partner, Marc Smith, sued their employer for the value of their unused accrued vacation pay. The employees prevailed and the decision was affirmed on appeal by the Maryland Court of Special Appeals in an unpublished decision.

The Maryland Department of Labor Licensing and Regulation, which oversees Maryland’s employment policies and the like was informed of the Court decision. In response, the DLLR updated its policy/regulations to now include vacation leave as “wages” that must be paid to terminated employees. This change in policy based on the Catapult case was written up in many employment law blogs and still remains on those blogs.

Once DLLR updated its policy/regulations on this, some large Maryland employers complained to their representatives in the state legislature, etc., and the law was clarified and changed.

Specifically, Section 3-505 of the Labor and Employment Article of the Maryland Annotated Code was amended effective April 24, 2008 so that it now provides:

§ 3-505. Payment on cessation of employment

(a) Except as provided in subsection (b) of this section, each employer shall pay an employee or the authorized representative of an employee all wages due for work that the employee performed before the termination of employment, on or before the day on which the employee would have been paid the wages if the employment had not been terminated.

(b) An employer is not required to pay accrued leave to an employee if:

(1) the employer has a written policy that limits the compensation of accrued leave to employees;

(2) the employer notified the employee of the employer's leave benefits in accordance with § 3-504(a)(1) of this subtitle; and

(3) the employee is not entitled to payment for accrued leave at termination under the terms of the employer's written policy.

In sum, despite what it may say in an employment lawyer’s blog or on his website, the law now is that unused vacation pay does not constitute wages that are required to be paid at the termination of employment so long as the written company policy on such leave clearly provides that vacation pay will not be paid out at termination of employment and so long as that written policy has been provided to the employee. If you do not have a written policy, you should seek counsel to create one for you.