Ripken Baseball Sex Discrimination Case - Arbitration Clause Not Enforceable

In a recent decision, Raglani v. Ripken Professional Baseball, the United States District Court for the District of Maryland denied an employer’s motion to dismiss or stay and compel arbitration in a gender discrimination action brought by a former employee. The decision rested on two grounds: 1) there was insufficient consideration for agreement, i.e., a mutual exchange of promises to arbitrate; 2) the requirement of a neutral forum was not met.

Briefly, the case involved an action under Title VII of the Civil Rights Act of 1964 and Maryland state law, alleging that the plaintiff was unfairly terminated for engaging in a romantic relationship with a subordinate, when, despite a company policy forbidding such relationships, she alleges several of her male counterparts engaged in sexual relations with their subordinates and never were reprimanded. The plaintiff’s action also alleged negligence, wrongful discharge and breach of contract.

Upon her hiring, the plaintiff was required to sign a Problem Support Policy Acknowledgement and Agreement (“PSP”), which stated it was “‘a valid and binding legal obligation … in consideration of [her] hiring for employment or [her] continued employment … .’” The PSP stated it was a “procedure” to be used by “‘[a]nyone who feels they have a problem that requires management’s attention.’” The court provided a pointed criticism of what it characterized as an unbalanced agreement: “The PSP is entirely one-directional, binding employees to dispute resolution procedures …. but silent on [the employer’s] obligations to do anything other than “facilitate” this process in the event an employee submits a ‘problem’ to management.”

The “binding arbitration” provision in the company’s PSP stated:

Human Resources will provide a list of qualified Arbitrators upon a formal request to move to this step. … The rules of the arbitration will be subject to the Federal Arbitration Act and agreed to by both parties. … [Employer] will assume responsibility for the costs of the Arbitrator. If the [employee] decides to have their attorney present, the cost of that attorney will be the responsibility of the [employee]. After the meeting, the Arbitrator will submit a decision in writing and this decision shall be final.

The court found the arbitration provision defective and unenforceable because by giving the employer exclusive control over the list of arbitrators, it denied one party (the employee) access to a neutral, arbitral forum. The court also stated that the arbitration provision was too vague with regard to establishing rules by which arbitration would be conducted. (The provision does state that arbitration rules would be subject to the Federal Arbitration Act, but the FAA does not establish rules.)

While the court addressed the potential for bias where one party has the authority to limit the arbitrator selection process, something not discussed is the exponential bias one might imply from the fact that the employer both circumscribed arbitrator selection and assumed sole responsibility for paying the arbitrator. Given this pairing of control and monetary power, the arbitrator could be viewed as the employer’s “hired gun.”

A link to the decision is here:

http://www.mdd.uscourts.gov/Opinions/Opinions/Raglani%2016%20April%202013.pdf

New Fourth Circuit Opinion on Arbitration -- Appeal of Arbitrability Decision Divests Trial Court of Jurisdiction

I have addressed arbitration issues many times before on this Business Law Blog. They are important because so many agreements now contain mandatory arbitration clauses. On February 10, 2011, the United States Court of Appeals for the Fourth Circuit issued an opinion in the case of Levin v. Alms and Associates, Inc. A copy of the decision can be found here. In this case, the appellate court held that when a trial court order regarding arbitrability of a dispute was appealed, the trial court is divested of jurisdiction and cannot continue on to handle the case until the appeal is resolved. The appellate court reversed the trial court which had allowed what it believed was the “non-arbitrable” portion of the case to go forward while the appeal was pending.

The appellate court also went on to decide that the trial court was wrong on the merits. That is, the appellate court held that the trial court was wrong to decide that certain claims were not subject to arbitration.

Before including an arbitration provision in your business agreements, you should be sure to consult with counsel to determine whether such a provision is in your interest and to discuss the scope and effect of such a provision.

Federal Court: Injunction Denied Where It Would Put Restaurant Out of Business

Franchisors often seek injunctions in situations where their franchisees are violating the terms of the operative franchise agreements. In a case pending before the United States District Court for the District of Maryland (Greenbelt) titled Prosperity Systems, Inc. v. Ali, the Pizza-Bolis franchisor (Prosperity) sued its franchisee (Ali) alleging various violations of the parties’ franchise agreement. Specifically, Prosperity alleged that Ali advertised outside of his limited territory and that he used an unauthorized website. Prosperity sought an injunction that would have shut down Ali’s restaurant. The Court found that Prosperity was likely to win the case, and that Ali almost certainly was in breach of the franchise agreement. Nevertheless, the Court denied the request for an injunction finding that that the damage that Ali would suffer if the injunction was entered and the restaurant was shut down would outweigh the damage caused to the franchisor, Prosperity, resulting from Ali’s breaches of the agreement. A copy of the opinion is found here.

This shows a litigant that even where one can prove a breach of contract that does not mean that the court will necessarily grant an injunction barring further breaches of that contract; nor will a court shut down a business if lesser restrictions are available.

Federal Court Jurisdiction - Non-Compete Case

A question that often arises in litigation practice is: where do we file suit? We often have a choice of federal or state court. To sue in federal court, one needs either a federal question or diversity jurisdiction. Federal courts have diversity jurisdiction where there is $75,000.00 or more in controversy and the parties are citizens of different states. In JTH Tax Inc. v. Frashier, decided on November 10, 2010, the United States Court of Appeals for the Fourth Circuit issued a decision regarding the amount in controversy for the purposes of diversity jurisdiction under 28 U.S.C. Section 1332(a). In the case, Plaintiff JTH Tax had originally sued a former franchisee in the United States District Court for the Eastern District of Virginia for $80,000.00, and for an injunction for breaches of contract arising out of a franchise agreement including breaches of non-compete obligations. Later, the Plaintiff filed documents with the court showing that its actual monetary damages were only approximately $60,000.00. The District Court dismissed the case on its own motion due to its determination that the amount in controversy was conclusively less than $75,000.00. The Fourth Circuit reversed, holding that District Courts could only dismiss in such cases where there was “legal certainty” that the amount in controversy was less than $75,000.00. The Court found many ways that the controversy could be valued in excess of $75,000.00 even where money damages were only $60,000.00. One such way was to value the injunctive relief sought.

A copy of the full opinion is here.

More Arbitration Related Case Law - Arbitration Clause Not Enforceable

Another recent case, Henry v. Gateway, Inc., et. al., (No. 0537, September Term 2008, Issued August 31, 2009), shows that binding arbitration clauses are not always binding in Maryland. The case arose from plaintiff-appellant’s purchase of a Gateway computer at a local Best Buy retail store, and the subsequent malfunctioning of said computer. The computer came with a standard One Year Limited Warranty, the terms of which the consumer was required to agree to in order to render the computer operational. One of those terms was submission of all disputes to binding arbitration, which would be governed by the Federal Arbitration Act, 9 U.S.C. § 1, et. seq. Disregarding the binding arbitration clause, plaintiff-appellant elected to file a complaint in The Circuit Court for St. Mary’s County, alleging three state law claims: 1) breach of express warranty; 2) breach of implied warranty; and 3) violation of the Maryland Consumer Protection law, Md. Code (1975, 2005 Repl. Vol.), Commercial Law Article §§13-101 et seq. In addition, there was one federal claim: violation of the Magnuson-Moss Warranty Act, 15 U.S.C. § 2301 et. seq. The Circuit Court for St. Mary’s County ruled in favor of defendant-appellee, dismissing plaintiff-appellant’s state law claims (with prejudice) and ordering the arbitration of said claims.

On appeal, the Court of Special Appeals of Maryland ruled that the binding arbitration clause in the consumer contract was unenforceable given a 2007 ruling by the Court of Appeals of Maryland, Koons Ford of Baltimore, Inc. v. Lobach, 398 Md. 38 (2007). In Koons Ford, the Court of Appeals held that the Magnuson-Moss Warranty Act supersedes the Federal Arbitration Act, so that a litigant advancing a federal warranty claim cannot be forced to resolve his or her claim through binding arbitration.

Further, the contract in Henry had a South Dakota choice-of-law designation. The choice-of-law question was whether, in the absence of a controlling decision by the U.S. Supreme Court, and given the divided nature of the relevant federal precedent, a Maryland Court is bound to apply a contractual choice-of-law rule that has the effect of interpreting federal law in a way inconsistent with a decision of the Court of Appeals of Maryland. The Court of Special Appeals answered with a resounding no, finding that it would be contrary to the fundamental policy of the state (as embodied in Article 2 of the Maryland Declaration of Rights, and a 1979 case, Pope v. State) for a Maryland court to apply a choice-of-law provision that conflicts with the state’s highest court’s interpretation of federal law.

The Circuit Court for St. Mary’s County ruling was reversed and the case was remanded to that court for further proceedings. The Court of Special Appeals ordered that all costs be covered by defendant-appellant.

It just goes to show that what is written in a contract is not always an accurate reflection of a consumer’s actual rights and/or potential recourse.

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….

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.

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.

New Developments in Anti-Spam Law – Spam Plaintiff Ordered to Pay Spam Defendant’s Attorneys’ Fees under CAN-SPAM

Under CAN-SPAM, courts have discretion to award a prevailing party defendant its attorneys’ fees incurred in defending a case brought under that law. In a decision issued on August 1, 2007, in Gordon v. Virtumundo, the United States District Court for the Western District of Washington awarded Virtumundo, see previous post, more than $100,000.00 in attorneys’ fees and costs incurred in defense of that suit. The Court, however, only awarded Virtumundo approximately 20% of the more than $500,000.00 that its counsel requested. The opinion is accessible here.

In ruling on the request for fees, the Court took into account the fact that Gordon had not claimed that he had suffered any actual injury, that Gordon actually benefitted from receiving spam, and that Gordon appeared to be in the business of collecting email in order to bring lawsuits. The Court commented that:

First, it is obvious that Plaintiffs are testing their luck at making their “spam business” extraordinarily lucrative by seeking statutory damages through a strategy of spam collection and serial litigation. Plaintiffs are parties to ten additional cases similar to the instant case in the Western District of Washington alone, see Case Nos. C06-1118-MJP, C06-1129-JCC, C06-1210-TSZ, C06-1284-TSZ, C06-1348-MJP, C06-1350-JCC, C06-1469-MJP, C06-1537-JCC, C07-222-RSM, and C07-386-MJP, as well as at least one “spam” case in the Eastern District of Washington, see Case No. C05-5079-FVS. The Court is not merely speculating on Plaintiffs' motives or assessment of potential profits. In analyzing Plaintiffs' CAN-SPAM standing, this Court noted that Gordon testified that the “benefits” of receiving spam can be quantified in terms of his dissertation research, as well as “settlement agreements for people who have said that they wouldn't spam me any longer.” (May 15, 2007 Order 7.) The Court recounted the lists of Gordon and Omni “clients,” more than half of whom share the “Gordon” surname. (Id. at 6-7.) The Court recognized that Gordon took over control of e-mail accounts for “gordonworks” clients in order to continue collecting spam. (Id. at 7.) The Court noted that none of the Omni or Gordon clients has paid Plaintiffs for their services. (Id.) Gordon testified that all of Plaintiffs' income or revenue for 2006 and 2007 has been from settlements and disputes. (Id. at 7-8.) Gordon also testified regarding the “time-consuming process” of collecting, sorting, and compiling spam regarding these and other defendants. (Id. at 8.) Clearly, Plaintiffs are assembling a litigation factory, which, if successful, could net millions of dollars in profit, at least theoretically.

Moreover, after assessing the utter lack of evidence going to any technical impact or financial harm due to the alleged illegal spam, this Court found it significant that Gordon did not seek actual damages in the instant litigation, because none exist, and that he is instead seeking solely statutory damages for each e-mail sent. (Id. at 8.) Plaintiffs admitted that they benefit from receiving spam, and this Court concluded that “Plaintiffs' continued use of other people's e-mail addresses to collect spam and their undisputed ability to separate spam from other e-mails for generating lawsuit-fueled revenue directly contradicts any hint of adverse effect that otherwise might exist.” (Id. at 15.) Not only are Plaintiffs “ not the type of entity that Congress intended to possess the limited private right of action it conferred on adversely affected bona fide Internet access service providers” (id. at 15), they are not the type of plaintiff that should be allowed to pursue the strategy outlined above without financial cost.(emphasis added

In light of the August 1st decision in the Gordon v. Virtumundo case, professional spam collecting plaintiffs (like Beyond Systems in its dozens of Maryland cases) need to beware that they may be subject to paying the legal fees incurred by those that they choose to sue in baseless cases.

Interesting Developments in Anti-Spam Law – Gordon v. Virtumundo – CAN-SPAM Preempts Washington State Anti-Spam Law Causes of Action

The law in regard to CAN-SPAM’s preemption of state law causes of action continues to develop. On May 15, 2007, the United States District Court for the Western District of Washington at Seattle decided the case of Gordon v. Virtumundo, Case No.: 06-00204, the Court held that CAN-SPAM preempted a plaintiff’s claims under Washington State’s Commercial Electronic Mail Act: WASH. REV. CODE §§19.190.010–.110. The Court relied, in part, on the decision of the Fourth Circuit in the Omega World Travel v. Mummagraphics case. The Court specifically held that:

This Court agrees with the Omega court's assessment of congressional purpose as well as its preemption holding. Applying the Omega analysis here, the Court finds the following. Plaintiffs' allegations here are that “from addresses” ending, for example, with “vm-mail.com” do not suffice to make the header not false or misleading because they require one to figure out to whom or what “vmmail.com” refers-i.e., the message is not obviously from “Virtumundo.” The parties agree that identification can be achieved by reverse-look-up using, for example, the “WHOIS” database, which “is an Internet program that allows users to query a database of people and other Internet entities, such as domains, networks, and hosts.” Definitions, Implementation, and Reporting Requirements Under the CAN-SPAM Act; Proposed Rule, 70 Fed.Reg. 25,426, 25,446 n. 233 (May 12, 2005). The WHOIS database is maintained by domain registrars and “includes the registrant's company name, address, phone number, and e-mail address.” Id. Plaintiffs do not dispute that WHOIS data can identify Defendants, and they have pointed to no e-mails that fail to provide information useful to a correct WHOIS look-up. Plaintiffs instead contend that this extra step should not be required of consumers. Regardless of the merits of that argument, the Court cannot find that “from addresses” ending with a domain that facilitates an accurate identification of Defendants could in any sense be found “false” or “deceptive.” Accordingly, while claims actually alleging falsity or deception under CEMA would not be preempted, Plaintiffs' claims here-for, at best, “incomplete” or less than comprehensive information-are for immaterial errors that may not be litigated under state law. Plaintiffs have not raised any issues of material fact that could prove Defendants' e-mails materially “false or deceptive” as those terms are used in the CAN-SPAM Act. Accordingly, Plaintiffs' CEMA claims are preempted by CAN-SPAM.

It seems that a consensus is building in regard to CAN-SPAM’s preemption of state law causes of action that are not based on traditional fraud claims of actual injury suffered by the plaintiff seeking to enforce the law.

Business Litigation - New Case on CAN-SPAM's Preemption of State Anti-Spam Law Claims

Another case in the burgeoning case law in regard to CAN-SPAM’s preemption of state law claims for alleged spamming activity has been decided. In Kleffman v. Vonage Holdings Corp., decided on May 23, 2007 by the United States District Court for the Central District of California, the Court held that a plaintiff’s claims that he received 11 emails advertising Vonage’s telephone service in violation of the California Business and Professions Code Section 17529.5 were preempted by CAN-SPAM.

Specifically, the Court held that Kleffman’s claims were “clearly preempted” because “He does not allege a traditional tort theory at all, or even that he was at any point misle[d] by any of the eleven Vonage emails.”

The decision is based on reasoning similar to that set forth in the case of Omega World Travel v. Mummagraphics see earlier post here a 2006 decision by the United States Court of Appeals for the Fourth Circuit (which is the Federal Appeals Court for, inter alia, Maryland and Virginia). Even though the Kleffman Court’s opinion relied on the same underlying authorities as the Mummagraphics opinion, the Court distinguished Mummagraphics and seemed to try and limit its holding. The Kleffman case is now on appeal to the United States Court of Appeals for the Ninth Circuit. A copy of the Court’s opinion will be made available soon.

District Court of Maryland for Montgomery County - New Cellphone & Camera Policy

The District Court of Maryland for Montgomery County recently issued a new policy on the use of cellphones and cameras in its two courthouses. The policy is as follows:

CELL PHONE AND PROPERTY POLICY
FOR DISTRICT SIX, MONTGOMERY COUNTY
This policy applies to everyone using a courthouse facility in Montgomery County, including attorneys (public or private), police officers and court employees.
A violation of this policy can result in the confiscation of the phone and/or ejection of the violator.
1. A person may possess a cell phone in a courtroom only if the phone is on a belt clip, in a pocket, briefcase or handbag.
2. Cell phones must be in the off or silent position at all times while in the courtroom.
3. Cell phones may not be removed from a pocket, clip, briefcase or handbag at any time while in the courtroom unless removal of the cell phone is authorized by the presiding judge.
4. The wearing of Bluetooth earpieces or other similar cell phone accessories is prohibited in the courtroom at all times.
5. Taking of photographs by cell phone or otherwise is prohibited anyplace in the Courthouse at all times.
6. Use of cell phones at clerk window stations is prohibited at all times.
7. Any violation of this cell phone policy may result in confiscation of the cell phone.
8. Any cell phone which has been confiscated and which has not been claimed within thirty days of the date of confiscation shall be donated to sheriff’s office for use in the domestic violence program.
9. The bailiff will not accept or hold anyone’s cell phone or other property while that person attends Court. Any property left unattended shall be deemed abandoned property, and subject to be disposed of by the Bailiff.

Business Law and Litigation - New Maryland Case Law on Accountant Client Privilege

In an important case for Maryland businesses, accountants and lawyers, the Maryland Court of Appeals on Friday July 27, 2007, Court held that there is no exception to the Maryland Accountant-Client Privilege, Maryland Code Courts & Judicial Proceedings Article Section 9-110 in cases involving alleged fraudulent conveyances. BAA, PLC v. Acacia Mutual Life Insurance Company, ___ A.2d ___ (Md. July 27, 2007). A copy of the opinion can be found at the Maryland Judiciary Website HERE.

In so deciding, the Court of Appeals specifically overruled a long-standing Court of Special Appeals opinion, Dixon v. Bennett, 72 Md.App. 620, 531 A.2d 1318 (1987), cert. denied, 311 Md. 557, 536 A.2d 664 (1988).

Litigation - New Fourth Circuit Opinion - "John Doe" Defendants

Last week the United States Court of Appeals for the Fourth Circuit issued an opinion further refining its previous holdings on relation-back of amended pleadings. In Goodman v. Praxair, Inc., ___ F.3d ___ (4th Cir. July 25, 2007), the Court specifically reaffirmed its decision in Locklear that the replacement of a “John Doe” placeholder defendant with an actual defendant does not trigger the relation back doctrine. Specifically, the Court held:

Moreover, the majority of courts agree that Rule 15(c)(3) does not permit substitution for “Doe” defendants after the limitations period has run. See, e.g., Wayne v. Jarvis, 197 F.3d 1098, 1103-04 (11th Cir.1999); Jacobsen v. Osborne, 133 F.3d 315, 321 (5th Cir.1998); Baskin v. City of Des Plaines, 138 F.3d 701, 704 (7th Cir.1998); see also Locklear, 457 F.3d at 367. In denying substitutions of new defendants for “Doe” defendants, some courts base their analysis on the Rule's “mistake” language. See Wood v. Worachek, 618 F.2d 1225, 1230 (7th Cir.1980) (“Rule 15(c)(2) permits an amendment to relate back only where there has been an error made concerning the identity of the proper party and where that party is chargeable with knowledge of the mistake, but it does not permit relation back where, as here, there is a lack of knowledge of the proper party”).

Thus, for example, substitutions for “Doe” defendants after limitations have run would be barred by the two separately stated requirements of Rule 15(c)(3) that focus on the new party. Rule 15(c)(3)(A) requires that the change not prejudice the party being substituted for Doe, and Rule 15(c)(3)(B) requires that the new party knew or should have known within the limitations period that but for a mistake, it would have been a party. Most parties substituted for “Doe” defendants would be protected against being added either because they were prejudiced or because they did not have proper notice. Moreover, while parsing among different kinds of mistakes does not typically aid application of the Rule, naming Doe defendants self-evidently is no “mistake” such that the Doe substitute has received proper notice.

As a result of the decision in Praxair, it remains the law in the 4th Circuit that suing a “John Doe” defendant does not preserve the statute of limitations against any real defendant.

Business Law - Residential Landlord Licensing

One very common small business is that of the residential landlord. Just as with any small business, this one should not be entered into without first considering the laws that govern it. We represent landlords and tenants in both residential and commercial landlord tenant lease negotiations and disputes. My partner David W. Lease conducts seminars on landlord tenant law twice a year and both of us regularly are in Court on both simple and complicated issues facing landlords and tenants.

In Montgomery County, Maryland, as well as other jurisdictions within the State (City of Rockville and City of Gaithersburg have licensing departments separate from the County’s Department of Housing and Community Affairs). In order to obtain a license, the landlord must file an application and pay a fee. By so doing, the landlord subjects the property to inspections by the County so that the government can determine whether the rental housing is safe and maintained in accordance with the applicable building code.

Being a licensed landlord is important, because failing to obtain a license subjects the landlord to a fine of $500.00. More important, however, is that failing to have a license, whether that failure is intentional or unintentional, may preclude the landlord from collecting rent from its tenants, and may otherwise render a lease illegal and invalid.

Licensing information can be found here and the application for a license is located here. The sample lease approved for use in Montgomery County is located here.

In an upcoming article, I will discuss some of the most important Maryland appellate court opinions in regard to landlord licensure.

Business Law - Important Clauses for Small Business Contracts - Funds Held in Trust for Contracting Partner

In some instances your company may have a business opportunity that it cannot contract for on its own and it needs the assistance of another company to help it pursue that opportunity. Oftentimes your company may be willing to agree to pay a percentage of the revenue received on the deal to the company that is providing its assistance. You may consider having the revenue flow through the company assisting your company. That company can receive 100% of the funds from the customer and agree to send you 98% of those funds, keeping a 2% fee for its services. If the revenue flows through the company assisting your company you can run into a serious problem: What happens where the company assisting you receives payment from the customer, and then promptly files for bankruptcy before paying you your 98% of the revenue on the deal?

There is no easy answer to this question. If you do nothing, then the revenues received by your business partner will be a fund for the creditors of your bankrupt business partner, and you will be an unsecured creditor and unhappily receive pennies on the dollar, if anything.

One way to protect against such a catastrophe is to include “trust fund” language in your agreement with your business partner. If the funds in question are “trust funds,” then that can be excluded from the bankruptcy and paid over to your company. Specifically, if your company is XYZ Company and your partner is Partner Company, and you have agreed to pay Partner Company 2% of the revenue received by it, an example of such language could be:

Partner Company agrees that all funds received by it from the customer are to be received as trust funds, and are to be held in trust for the benefit of XYZ Company. Partner Company shall not have any beneficial interest in the funds received from the customer except to the extent of 2% of the funds received.

While such a clause is no guarantee that you will be safe in the bankruptcy situation, it will certainly be helpful in your effort to protect your business. A case illustrating the "trust fund" situation is Holmes Environmental, Inc., 287 B.R. 363 (Bankr.E.D.Va. 2002). In that case, the Court reviewed the state of the law in Virginia in regard to the exclusion of property from the bankruptcy estate under trust theory. Specifically, in Holmes, the Court held that funds that were held in a trust created by the debtor were not property of the debtor’s estate. In so holding, the court quoted Old Republic Nat. Title Ins. Co. v. Tyler (In re Dameron), 155 F.3d 718 (4th Cir. 1998), as follows:

Virginia law recognizes three basic forms of trust. Of these, the two that are potentially relevant to the instant case are the express (or actual) trust and the constructive trust. An express trust is created when the parties affirmatively manifest an intention that certain property be held in trust for the benefit of a third party. An express trust may be created "without the use of technical words." All that is necessary are words, or circumstances, "which unequivocally show an intention that the legal estate was vested in one person, to be held in some manner or for some purpose on behalf of another ...,". In contrast to an express trust, a constructive trust "arise[s] by operation of law, independently of the intention of the parties...." Such trusts "occur not only where the property has been acquired by a fraud or improper means, but also where it has been fairly and properly acquired, but it is contrary to the principles of equity that it should be retained...." With either form of trust, Virginia law recognizes the beneficiary as "equitable owner of the trust property." Holmes, 287 B.R. at 375 (citations omitted) (emphasis added).

While we have not litigated this issue through to a court decision, because of language in our client's contracts, we have been able to argue the issue and reach a favorable settlement in a bankruptcy case where our client would otherwise have lost more than $300,000.00. Before contracting to pay another company to be involved in an important business deal, you should always have counsel assist you in the process of developing agreements that protect your interests.