Friday
Jul152011

Pa. Telecom Company Secures $12.5M Judgment in Denver 

LAW WEEK COLORADO

DENVER–A Pennsylvania-based telecom company on June 10 won a $12.5 million judgment in Denver District Court in a complex debt case involving a Colorado banking cooperative. Judge R. Michael Mullins presided the case.

Pa.-based South Canaan Cellular Equity and South Canaan Cellular Investments borrowed $7.5 million for infrastructure from Colorado-based banking cooperative CoBank, but later defaulted on that loan. Another telecom company, Rowland, Pa.-based Lackawaxen Telecommunications Services, purchased the loan from CoBank and as the new lender filed suit against the South Canaan entities.

At the same time, the South Canaan entities filed for bankruptcy in Pennsylvania. At issue was a counter claim filed by the South Canaan entities, who argued Lackawaxen breached fiduciary duties to defendants and improperly purchased the loan.

Lackawaxen was represented by Charles T. Mitchell of Sander Ingebretsen & Wake and attorneys from Pennsylvania firms Reger Rizzo & Darnall and Vuono & Gray. Representing the defendants was Charles Hecht of Hamil/Hecht, who is deceased. His partner Larry Hamil took over the case into the settlement. The case is settled and defendants won’t appeal.

http://www.lawweekonline.com/2011/07/pa-telecom-company-secures-12-5m-judgment-in-denver/

Tuesday
Jul052011

Sander Ingebretsen & Wake finalizes win for Lackawaxen Telecom, Inc. 

DENVER – After two years in court, Lackawaxen Telecom, Inc. claimed a substantial victory in its litigation dispute against South Canaan Cellular Equity, LLC, South Canaan Cellular Investments, LLC, and South Canaan Telephone Company. On June 10, attorney Charles T. Mitchell from the Denver-based business litigation law firm of Sander Ingebretsen & Wake, secured the very favorable judgment for his client, which was valued at $12.5 million.

South Canaan Cellular Equity and South Canaan Cellular Investments borrowed $7.5 million from Colorado-based banking cooperative CoBank, ACB, to expand and upgrade their rural telecommunications services but quickly defaulted on the loan. Lackawaxen Telecom purchased the loan, which was secured by the voting rights in South Canaan Cellular Communications Company that were held by the borrowers and South Canaan Telephone Company.

In January 2009, Lackawaxen Telecom filed a suit to enforce its rights under the loan agreements. The borrowers filed for bankruptcy protection but South Canaan Telephone Company filed counterclaims, asserting that Lackawaxen had breached various duties owed to defendants and interfered with contractual and prospective business relationships by its improper purchase of the CoBank loan.  The case played out in state and federal court in Colorado and Pennsylvania, but it was the Colorado ruling that resolved the litigation and provided Lackawaxen with a $12.5 million award.

“This was a decisive and total win for our client. Not only did we prevail on all defendant counterclaims, but we were able to secure full repayment of the loan, including interest and attorneys’ fees,” Mitchell said.

After more than two years of litigation in multiple state courts and federal bankruptcy court, Mr. Mitchell, with co-counsel from Pennsylvania-based Reger Rizzo & Darnall, LLP, and Vuono & Gray, LLC, secured the global victory. All counterclaims were dismissed, and the Court ruled that Lackawaxen Telecom was entitled to all benefits and voting rights under the loan agreements.

About SIW

Sander Ingebretsen & Wake is a business litigation law firm in downtown Denver that provides companies and individuals with superior legal counsel. They combine extensive trial experience, legal knowledge, and client commitment with effective staffing and technology to achieve excellent results for clients. They specialize in business litigation, class actions, commercial arbitration, corporate governance, employment litigation, financial institutions, franchise and authorized dealer disputes, intellectual property and information technology, real estate and construction litigation, and securities litigation.

Tuesday
Jun212011

Dan Wake Participates in Managing Partner Roundtable on Changing Expectations

Dan Wake recently participated in a managing partner roundtable discussion hosted by Law Week Colorado. The theme of the conversation was expectations in the private practice of law:  managing client expectations in a changing economy, understanding associate career trajectory expectations and outlining business-growth expectations.  Read the article at 

Changing Expectations discussion from Law Week Colorado.

Tuesday
May312011

Lessons from the Recent Saturn Systems v. Militare Decision: Nonsolicitation Agreements and the Protection of Trade Secrets

Originally published in Colorado Law Week, May 2011.

In Colorado, agreements prohibiting competition by former employees (commonly referred to as “noncompete agreements” or “covenants against competition”) are void, and therefore unenforceable, unless the agreement falls within one of four statutorily established exceptions. The most common (and often misapplied) exception to the general rule voiding noncompete agreements is when the noncompete agreement is designed to protect the employer’s trade secrets.

There are numerous Colorado cases clarifying what is and is not a trade secret. Less argued, and frankly, less clear from Colorado decisions is the appropriate standard for determining whether a particular noncompete provision is sufficiently tailored to the protection of those trade secrets that fall within the statutory exception. In other words, it is not enough for the employer to establish the existence of protectable trade secrets; the employer must also establish that the particular noncompetition provision at issue is actually designed to afford that protection.

An early and often cited case on the subject, Colorado Accounting Machines, Inc. v Mergenthaler, 609 P.2d 1125 (Colo. App. 1980), considered an agreement that included two separate provisions: (1) a non-disclosure provision that required the employee to keep certain information confidential; and (2) a non-compete provision that would prohibit the employee from working with or for the employer’s competitors. At issue was whether the second provision -- the blanket prohibition against competition -- was enforceable given that the trade secrets at issue were already protected by the non-disclosure agreement. The Mergenthaler Court held that when both a non-disclosure agreement and a non-compete agreement exist, and the purpose of the non-compete is to prohibit all competition (as opposed to competition that is directly tied to the employer’s secrets), the broader non-competition agreement was not enforceable. In other words, based on the Mergenthaler court’s reasoning, a “naked” covenant not to compete cannot be validated by the insertion of a companion clause dealing with trade secrets.

Despite its age, Mergenthaler is still cited because the underlying rationale of the 1980 opinion, i.e., that a trade secret provision in an employment agreement does not necessarily validate an unrelated noncompetition provision, and has not been substantially discussed or clarified over the past thirty years. That changed this past February when the Court of Appeals issued its decision in Saturn Systems, Inc. v. Militare, No. 07CA2453, 2011 WL 543759 (Colo. Ct. App. Feb. 17, 2011). While the Mergenthaler decision remains good law, the recent Saturn Systems decision clarifies the standard for determining whether a particular noncompete provision is sufficiently tied to the protection of trade secrets to fall within the statutory exception.

Saturn Systems, Inc. was a debt collection agency, and the Defendant, Delbert Militare, worked for Saturn Systems as an independent contract sales agent. Saturn Systems and Militare entered into a written sales agent agreement, which included confidentiality provisions that prohibited Militare from soliciting Saturn Systems’ clients for a period of one year after his termination. The same agreement also defined client lists, sales materials and proprietary information as confidential and prohibited disclosure of such information to anyone outside of Saturn Systems. Notably, the nonsolicitation provision and the nondisclosure provision were incorporated into the same paragraph within the sales agent agreement.

Saturn Systems stored its customer service information in a password-protected web database. Each of Saturn Systems’ clients was assigned a unique username and password which allowed them to view real-time information regarding the client’s account, including the client’s debt recovery to date, the number of pre-purchased debt collection accounts still available to the client, and the details of all pending collection efforts. As a sales agent, Militare was trained on and provided access to the confidential database.

Militare was terminated as a sales agent and went to work for a competitor. After his termination, Militare accessed the protected database, viewed approximately 72 confidential web pages and, thereafter, attempted to solicit his former employer’s clients. Saturn Systems sued for damages and injunctive relief. After a full trial on the merits, Militare was found liable for misappropriation of trade secrets and breach of the nondisclosure and the nonsolicitation provisions in his sales agent agreement.

Relying on Mergenthaler, Militare argued on appeal that the nonsolicitation provision in his sales agent agreement was not tied to the protection of trade secrets, and was therefore unenforceable. The Court of Appeals disagreed, and in doing so clarified the standards to be applied when determining whether a restrictive covenant is tied to the protection of trade secrets. First, in distinguishing Mergenthaler, the Saturn Systems court pointed out that the nonsolicitation clause at issue was not separate from the nondisclosure clause. Rather, both clauses were in the same sentence of the agreement’s confidentiality provision. The Court concluded that that the nondisclosure and the nonsolicitation clauses in the agreement were therefore both designed to protect the confidentiality of the employer’s information, and that the nonsolicitation provision was necessarily and sufficiently tied to the protection of trade secrets. The Court’s decision also highlighted the difference between a narrow nonsolicitation provision and a broad noncompete provision. Unlike the provision at issue in Mergenthaler, the Court held that the clause precluding Militare from soliciting clients was narrowly tailored because it restricted Militare only from soliciting Saturn's current clients as a way of protecting Saturn's trade secrets and confidential information.

In light of the Saturn Systems decision, employer’s counsel should keep the following points in mind when drafting restrictions against competition based on the trade secret exception:

First, decisions regarding the structure and location of language used in a noncompete agreement may affect the agreement’s enforceability, particularly when the enforceability of the agreement is based on the protection of trade secrets. Based on the reasoning of the Saturn Systems’ Court, the simple act of incorporating nondisclosure and noncompete provisions into a single paragraph or section, or including express language tying each clause to the other, increases the likelihood that the noncompete clause will be enforced. Accordingly, care should be taken to ensure that the language and the structure of the agreement as a whole indicate that the noncompetition and/or nonsolicitation provisions at issue are tied to and expressly designed to protect identifiable trade secrets.

Second, nonsolicitation provisions are easier to enforce under the trade secret exception than noncompete provisions. While agreements not to solicit clients/customers are undeniably a form of an agreement not to compete, and must therefore fit into one of Colorado’s four statutory exceptions to be enforceable, it is apparent from the Saturn Systems decision that nonsolicitation agreements are easier to tie to the protection of trade secrets, particularly when the trade secrets at issue relate to confidential information about those same clients. When, as in Saturn Systems, the trade secrets at issue flow from the relationship between the employer and its customers, the employer should strongly consider whether a less restrictive prohibition against soliciting clients, as opposed to a broader prohibition against working for a competitor, would still meet the employer’s needs.

Thursday
May262011

OOPS! THAT WASN’T MEANT FOR YOU: PRIVILEGE “CLAW BACK” AGREEMENTS UNDER THE NEW RULES

This article was originally published in in e-Discovery, a Special Publication by the ABA Section of Litigation, at pp. 30 – 33, 2007.

In this age of increasingly vast and complex databases of electronic information, lawyers involved in document production for large-scale litigation live in fear that a document may be inadvertently produced that will result in a waiver of a privilege. This fear of an inadvertent waiver can add significant costs, and often significant delays, to the discovery process. In addition, many businesses simply cannot afford for lawyers to review every single shred of electronic data for privilege when responding to discovery requests.

In addition, many businesses cannot afford to have lawyers review every shred of electronic data for privilege when responding to discovery requests. Even for those businesses that can afford such a review, the massive volume -- and expanding types -- of information stored by companies renders the task virtually impossible.

Even for the more conscientious litigator, willing and able to spend days, nights and weekends reviewing an endless stream of data and documents for the proverbial “privileged needle in the haystack,” there may be many sleepless nights worrying about missing that one document, the disclosure of which could result in a waiver of the privilege altogether.

Some litigators facing the daunting task of reviewing corporate records for attorney-client privilege or attorney work product may look for a way to produce documents without the review and still be protected from a subsequent claim that a privilege was waived. A tool known as a “claw back” agreement, put to increasing use in the past few years, would appear to provide such protection. As the name suggests, claw back agreements provide that if a party inadvertently produces documents that are privileged or protected, the receiving party is required to notify the producing party, to promptly return the documents, and not seek to admit them into evidence. The agreements also provide that the production of privileged or protected documents will not result in a waiver. In other words, claw back agreements are designed to allow a producing party to turn documents over without fear of waiving any claims of privilege.

The Problem with Claw Back Agreements

The standards for privilege waiver are different from jurisdiction to jurisdiction; and one size clearly does not fit all when it comes to actually mitigating against the risk of an inadvertent waiver.

A review of the national landscape reveals three schools of thought about the effect of an inadvertent production.2 On the strict side, some courts, including the Federal Circuit, First Circuit and D.C. Circuit, have held that any disclosure – inadvertent or otherwise - results in a blanket waiver of the applicable privilege or protection. See e.g., In re Sealed Case, 877 F.2d 976, 980-82 (D.C. Cir. 1989).

In contrast, the Eighth Circuit and a small number of district courts have accepted a more lenient standard holding that a waiver results only if the producing party was extremely or grossly negligent. Essentially, these courts hold that to be effective as a waiver of the privilege such negligence must amount to a knowing and intentional relinquishment of the privilege. See e.g., Gray v. Bicknell, 86 F.3d 1472, 1483 (8th Cir. 1996); Mendenhall v. Barber-Greene Co., 531 F.Supp. 951 (N.D. Ill. 1982). In these more lenient courts, claw back agreements appear to be generally accepted.

The majority of jurisdictions have adopted a middle-of-the-road approach, finding that the question of waiver depends upon the consideration of a number of factors: (i) the total volume of information produced, (ii) the amount of privileged information disclosed, (iii) the reasonableness of precautions taken to prevent inadvertent disclosure, (iv) the promptness of actions taken to notify the receiving party and remedy the error, and (v) the overriding issue of fairness. See e.g., Hydraflo, Inc. v. Enidine Inc., 145 F.R.D. 626, 637 (W.D.N.Y. 1993).

In the jurisdictions that follow the strict approach, courts have refused to enforce claw-back agreements, holding that any voluntary disclosure results in a waiver. Examples of cases rejecting claw back agreements are listed in In re Columbia/HCA Healthcare Corp. Billing Practices Litig., 293 F.3d 289, 295-98 (6th Cir, 2002). Other jurisdictions following the more lenient and middle of the road approaches have approved of claw back agreements, under appropriate circumstances. Examples of cases approving claw back agreements can be found in Epstein, supra at pp. 287-92. However, many courts will not enforce claw back agreements that effectively immunize attorneys from negligent handling of documents. See e.g., Koch Materials Co. v. Shore Slurry Seal, Inc., 208 F.R.D. 109, 118 (D.N.J. 2002).

Clearly, given that the standards for and treatment of inadvertent disclosure of privileged materials vary, blind reliance on a claw back agreement to protect against such a waiver is at best foolhardy, and at worst, malpractice. Moreover, even in jurisdictions that routinely enforce claw-back agreements courts have held that, like any other contract, claw back agreements bind only those who are parties to it. In other words, once confidentiality has been compromised, even pursuant to a claw-back agreement, the privilege or protection has been waived for purposes of other cases. An example of such a case recently played out in the Tenth Circuit where the appellate court rejected the notion of a “selective waiver” and held that a corporation’s agreement to disclose privileged materials to the DOJ and SEC pursuant to a non-waiver agreement did not preclude the discovery of the same materials by third-parties in a subsequent litigation. See In re Quest Comm. Int’l, Inc., 450 F.3d 1179 (10th Cir. 2006).

Amended Rules Address the Mess . . . Kind of

Until recently, the Federal Rules of Civil Procedure had been silent on claw back agreements and other similar mechanisms to streamline the discovery process in document-intensive litigation. Cognizant of the fact that the problems created by inadvertent waiver become more likely and more acute when dealing with electronically stored information, the Advisory Committee on the Federal Rules of Civil Procedure proposed changes to both Rules 16 and 26 to address the growing problem and, to some extent, for the first time acknowledge the solutions, like claw back agreements, that many litigators have been utilizing for a number years. Those changes took effect December 1, 2006.

Rule 16(b) has been amended to include among the topics to be addressed in a Scheduling Order any agreements the parties may reach to minimize the risk of waiver of privilege or work-product protection. Similarly, Rule 26(f) has been amended to provide that parties should discuss issues relating to assertions of privilege or of protection as trial-preparation materials, including specifically the discussion of whether the parties can and should reach an agreement on procedures for asserting claims of privilege or production after the production itself. In addition, the amendment to F.R.C.P. 26(f) adds a requirement that parties include in their proposed discovery plan whether to ask the court to include their agreements relating to claims of privilege in an order of the court.

The amendment with the most potential to have an impact on the enforceability and use of claw back agreements is Amended Rule 26(b)(5)(B), which essentially codifies the procedures set forth in most claw back agreements for dealing with inadvertent disclosures. Under the amended rule, even in the absence of an agreement, a producing party may notify the receiving party of the inadvertent production and the basis for the assertion of privilege or protection. After receiving such notice, the party that received the purportedly privileged or protected materials “must promptly return, sequester, or destroy the specified information until the claim is resolved.”

Amended Rule 26(b)(5)(B) puts a hold on the spread of potentially privileged or protected information and allows the parties and the court to efficiently address the consequences of the disclosure, while at the same time minimizing the risk that the “cat will be let out of the bag,” so to speak, before the issue van be resolved. Towards that end, Amended Rule 26(b)(5)(B) also provides a mechanism to resolve the dispute quickly by giving the receiving party the option to present the information to the Court under seal for resolution before returning the materials to the producing party.

With respect to mitigating the risk of an inadvertent privilege waiver and providing procedures for dealing with inadvertent disclosures, the Amended Rules appear to be a step in the right direction. But do the new rules solve any of the more substantive problems with claw back agreements identified above? The answer is no. While the amended rules clearly encourage counsel to discuss claw back agreements when appropriate, they do not even attempt to resolve the scope of waiver question. As acknowledged in the Committee Notes to Rule 26(b)(5)(B), the amended rule “does mot address whether the privilege or protection that is asserted after production was waived by the production.” Instead, the new rule merely “provides a procedure for presenting and addressing these issues.” Thus, in jurisdictions where the agreements are not favored or enforced, the new rules do nothing more than send a message to those courts that the tide is turning in favor of allowing parties to litigate disputes in a more cost-effective manner without giving up their rights to protect privileges and protections. Unfortunately, there is no telling how long it will actually take for all jurisdictions to get the message.

In addition, some jurisdictions, including the D.C. Circuit and a number of states, do not adhere to the Federal Rules of Civil Procedure, instead following the principles of evidence developed and described by John Henry Wigmore (“Wigmore Rules”). Under the Wigmore Rules, any inadvertent disclosure may be treated as a waiver, whether governed by an agreement or not. In these jurisdictions, it is fair to assume that the Amended Rules 16 and 26 will have no impact on the enforceability of claw back agreements whatsoever.

Finally, Amended Rule 16 and 26 do not change the fact that a claw back agreement only binds the parties to the contract. Because the Federal Rues of Civil Procedure are procedural rules and not substantive rules of law, the Amended Rules will have little to no impact on the risks of subsequent claims of waiver by non-parties to the claw back agreement.

Proposed Federal Rule of Evidence 502

While Amended Rules 16 and 26 are clearly not the answer many litigators have been looking for, there is some hope on the horizon. In Hopson v. Mayor and City Council of Baltimore, 232 F.R.D. 228 (D. Md. 2005), a federal magistrate advocated a “back-door” approach to the third-party enforceability problem, suggesting that courts instead incorporate non-waiver language into case scheduling orders, discovery management orders and/or protective orders, thereby binding third parties. While some argue that such an approach does not necessarily solve the problem, the theory is that because disclosure compelled by a court is technically involuntary, it cannot result in a waiver.

Consistent with the approach taken in Hopson, in May 2005, the Advisory Committee on Evidence Rules proposed new standards for the treatment of inadvertently disclosed privileged materials. Among other things, Proposed Fed. R. Evid. Rule 502 recognizes the challenges presented by the era of electronic discovery and attempts to impose a universal standard relating to inadvertent disclosure of privileged or protected material. If enacted, Proposed Fed. R. Evid. Rule 502 would ensure that claw back agreements are enforceable as against claims by third-parties, in both federal and state court, by providing that such a non-waiver agreement incorporated in a federal court order would also bind third parties in all state or federal proceedings.

Proposed Rule 502 adopts the middle ground standard accepted by the majority of courts and provides that inadvertent disclosure of privileged or protected communications will not result in a waiver if the producing party took “reasonable precautions” to prevent disclosure and took “reasonably prompt measures” to rectify the error. However, these substantive changes in the rules of evidence will require Congressional approval and there is no telling when, or if the proposed changes will survive the political process. See Rules Enabling Act, 28 U.S.C. 2074(b).

Even with the new FRCP Rules, the usefulness and enforceability of claw back agreements remain up in the air. Given that, lawyers and clients facing large scale document production will have the same two choices now that the Amended Rules have taken effect as they did before: (1) perform a comprehensive privilege review, resulting in increased time and expense; or (2) perform a more limited privilege review, resulting in increased risk of waiver. Under either scenario, executing and seeking court approval of a claw back agreement always makes sense because it affords the lawyer and her client options she may not otherwise have to protect against waiver in the event of an inadvertent disclosure. However, as the cases in this article illustrate, how far the agreement actually goes in protecting against a finding of waiver will depend in large part on the substantive law of the jurisdiction involved, and the degree to which the lawyer and the client took reasonable steps to prevent the disclosure in the first place. In sum, while claw back agreements are a tool that can and should be used, it remains unclear whether they can truly fix what’s broken.

ii For an excellent and more comprehensive discussion of the all three approaches, see Edna Selan Epstein, The Attorney-Client Privilege and the Work-Product Doctrine, 309-316 (4th ed. 2001).

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