Suing Everyone In Sight: Asset Protection in Action

Frank Johnson invented a new type of dump truck, one that could dump its load both (1) out the back by raising up its trailer; or (2) through its doors in the belly of the hopper. It was called the “Shape Shifter.” Martin Kirbie, an employee of Hoss Equipment Co., heard about it and introduced his boss, Gregg Hoss, to the idea. Hoss bought into it hook, line and sinker, and seems to have called his lawyer for the next step.

Hoss, already the sole shareholder of Hoss Equipment Co., formed a limited partnership, JHC Ventures, LP, and a new corporation, JHC Holding Co., as its general partner. JHC Ventures was to obtain the patent for the Shape Shifter dual dump truck, manufacture it, and sell it. The limited partnership structure eliminated all franchise taxes on the earnings of JHC Ventures, and provided asset protection by keeping the income stream–and any associated liabilities–of JHC Ventures separate from his other operations.

Hoss appeared on the cusp of success as JHC began marketing the Shape Shifter. Sam Vale, sole shareholder of Fast Trucking, Inc., saw an ad and was so impressed he began negotiations to buy several Shape Shifters. Unfortunately, Hoss’s mouth nearly destroyed his asset protection planning. Hoss expressly assured Vale about the superior durability of the Shape Shifters, their ability to haul various, and very different, types of materials, and their dual-dumping capabilities. Hoss told Vale these trucks could haul grain, sand, and sludge with the purchase of certain additional accessories. These representations became an express warranty, meaning if the trucks didn’t live up to their billing as blabbed by Hoss, somebody would be liable for something.

The hot air must have worked, because on December 13, 1994, Fast Trucking, Inc., Vale’s corporation, signed a commercial invoice with JHC Ventures to buy five new Shape Shifters for $175,000 plus $21,000 in federal excise tax. Under separate invoice with JHC Ventures, Fast Trucking also bought accessories for $9,750. This one act would later become a critical fact.

Sure enough, the trucks did not live up to their spectacular billing. The sludge seeped out. Hydraulic lines and structural welds broke. The belly dump doors failed to function properly. The back dump feature worked only part of the time. Within a few short months, the Shape Shifters were returned for repairs, and returned over and over for a total of about 10 times. Apparently the repairs were completed by Hoss Equipment Co., and not the seller, JHC Ventures.

Finally, on October 30, 1998, Fast Trucking gave up and sued JHC Ventures over the Shape Shifter trucks. Fast Trucking included Hoss Equipment Co. in the lawsuit. Later, Fast Trucking added Hoss individually as a defendant, because he allegedly told Fast Trucking that the seller was Hoss Equipment, as opposed to JHC Ventures. Plus, he’s the one who was spouting all the wonderful qualities of these trucks. The asset protection planning wasn’t looking too good right about then.

In November of 1998, Fast Trucking sold the Shape Shifter trucks plus the accessories for the abysmally low price of $43,000, and that was probably a good deal for Fast Trucking.

At trial, the jury decided that damages were $104,500, plus $5,000 for transportation and freight charges, and they assessed $50,000 in punitive damages against both JHC Ventures and Hoss Equipment. On top of that, the jury awarded Fast Trucking its trial attorneys fees of $150,000. The attorneys fees were larger than the amount of actual damages!

Here’s where it begins to get interesting. Because Fast Trucking leveled different claims against Hoss and his various business entities, it ended up with a trial court judgment of different amounts against different parties, as follows:

Hoss Equipment, JHC Ventures JHC Holding: $109,500 actual damages
Hoss, Hoss Equipment, JHC Ventures, JHC Holding: $50,000 punitive damages
Hoss Equipment: $50,000 punitive damages
Hoss, Hoss Equipment, JHC Ventures, JHC Holding: $150,000 attorneys fees

And somebody was liable for everything and then some.

On appeal, the various defendants whittled away at this judgment. First, the Court of Appeals agreed that Fast Trucking could not, by law, get a judgment for its attorneys fees on its breach of warranty claims. Then, it held that Fast Trucking didn’t put on the right evidence to get its “transportation costs” and so the $109,500 was reduced to $104,500.

And here is where the case got really interesting. The defendants argued that Hoss individually should not have any judgment against him. The jury had been asked by what date Fast Trucking should have known the false, misleading or deceptive trade practices it alleged Hoss committed in the case. The jury answered “December 13, 1994.” This is the date on which Fast Trucking signed the invoice for the trucks on JHC Ventures letterhead. The invoice clearly indicated that the seller was “JHC Ventures, L.P.” Fast Trucking had 4 years after that date, December 13, 1994, to sue Hoss personally, or it would lose its right to sue him by law (these sorts of laws are referred to as “statutes of limitation). Sure enough, they waited until over 5 years after that date before they added him to the lawsuit.

But Fast Trucking wasn’t ready to just let Hoss walk. It argued that the judgment really meant Hoss was the alter ego of his businesses. The Court of Appeals noted that the jury found that “Hoss was responsible for the conduct of JHC Holding,” a non-party to the case. It was not asked whether Hoss was the alter ego of JHC Ventures. Without an express jury finding of alter ego, Hoss could not be included in the judgment on the basis of alter ego. The corporate/limited partnership veil could not be pierced, and so Hoss was spared individual liability in this case. Things were lookin’ up.

Finally, the defendants pointed out that JHC Holding was never even a party to the lawsuit, so it couldn’t have any judgment entered against it. Fast Trucking countered “but it’s the general partner of JHC Ventures, and it’s liable for all its debts as a matter of law, and we sued JHC Ventures by serving JHC Holding as its general partner.” Said the Court of Appeals, “you should have served ‘JHC Holding Co., by and through its registered agent Gregg Hoss’ and you didn’t.” And so, all of the judgment against JHC Holding Co. was out, as well. The asset protection was looking better and better.

Next issue. This is just beautiful. Texas has a “proportionate responsibility” statute which says, for tort claims (but not for breach of contract claims), where there is more than one party involved the jury decides how much responsibility for the injury should be allocated to each party. In this case, on the fraud claim, the jury had allocated responsibility like this:

Fast Trucking: 40%
Hoss: 30%
Hoss Equipment:; 20%
JHC Ventures: 10%

Since the Court of Appeals threw out the judgment against Hoss, what was to happen to its 30%? Fast Trucking wanted to re-allocate that to Hoss Equipment and JHC Ventures. The Court of Appeals said “no can do, we have to send this case back to the jury and see what they have to say.”

And so, after all this wrangling, the final result was modified like this:

Hoss Equipment, JHC Ventures JHC Holding: $109,500 actual damages $104,500
Hoss, Hoss Equipment, JHC Ventures, JHC Holding: $50,000 punitive damages $0
Hoss Equipment: $50,000 punitive damages $0
Hoss, Hoss Equipment, JHC Ventures, JHC Holding: $150,000 attorneys fees $0

My suspicion is the only reason Hoss Equipment had the judgment against it is because it performed all the repairs to the Shape Shifter trucks. The bottom line is that this case is a good example of why us professionals like for our clients to use a separate business entity for each separate business activity. As a result of that, the ensuing $104,500 judgment (down from $359,500) was only against two entities, and not against the owner individually in any way.

This case also shows very clearly the importance of written documents, because the only thing that saved Hoss individually were the 2 written invoices signed by JHC Ventures and Fast Trucking. Those written invoices clearly indicated that JHC Ventures was the seller, notwithstanding Hoss’s oral platitudes, which made the case for the jury and preserved Hoss’s asset protection planning. They basically saved him from himself. Can your documents do that?

JHC Ventures, LP, et al, v. Fast Trucking, Inc., Case No. 04-01-00251-CV, Texas Court of Appeals, 4th District, Nov. 27, 2002.

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Enviropinions are original writings of Mark McPherson.
© 2014, Mark McPherson. All rights reserved.
15950 Dallas Parkway, Suite 400
Dallas, TX 75248
214-722-7096 Office
214-540-9866 Facsimile
mark@texasenvironmentallaw.com
www.TexasEnvironmentalLaw.com

 

Waiving The Right To a Trial by Jury in Contracts; How Enforceable Is It?

Simple facts, and very common. Landlord and tenant signed a lease that included an agreement to waive trial by jury in any future lawsuit involving the lease. The tenant and its guarantors later sued for rescission and damages, and demanded a jury trial. If they won at trial, the lease would have been “undone,” as though it never had been signed in the first place. But if they lost, the lease, and its waiver of the right to a jury trial, would be effective. You can’t try the case first, to see which way it goes, and then go back in time, to the inception of the case, to apply that decision to the issue of whether the jury trial waiver is effective. So how do you deal with the “which comes first-the chicken or the egg” situation like this?

Here we have a fairly straightforward case. Francesco Secchi, a native of Italy, and his wife Jane, a native of England, moved to Dallas in 1981. They are now naturalized citizens of our great country. In 1983, they got into the restaurant business, operating two Dallas restaurants, Ferrari’s and IL Grano.

In October of 2000, via a limited partnership they controlled through its limited liability company general partner, the Secchi’s leased space in a Dallas shopping center for another restaurant. Their new landlord was Prudential Insurance Company. The Secchis had apparently able legal counsel in the negotiation of this lease. As is fairly common, the lease waived their right to a trial by jury “of any or all issues arising in any action or proceeding between the parties hereto or their successors, under or connected with” the lease.

About nine months after signing the lease, the Secchis and their limited partnership sued Prudential claiming, in part, that it was impossible to do business on the premises because of a persistent odor of sewage. The last thing you want to smell with your pasta–or any type of food for that matter–is sewage. Prudential played hardball and filed a counterclaim for all monies due under the lease and personal guaranties.

Now let’s take a side trip right here. Apparently the Secchis had some good advice on asset protection. They used separate limited partnerships for each separate business, and they had one limited liability company as the general partner for each of those limited partnerships. One never knows when an unexpected liability may come from. Surely, the Secchis did some evaluation of the proposed new space. But it was only AFTER they signed the lease that the problem developed. Granted, they had signed personal guarantees of this lease, but with a correctly structured estate, this threat can be minimized, fear of the lessee reduced.

This sort of business structure/asset protection planning helps the most to prevent damage from non-negotiated liabilities, instances where, for some reason, a personal judgment is obtained against individual business owners. And you must design and implement the plan before any threat is made or lawsuit filed. Times must be peaceful. To be “Yogi Berra-ish” about it, “if you haven’t done it, that’s why you need it.”

And now, back to the story. The trial court set the case for trial. Then the Secchis filed a demand for a jury trial, and paid the jury trial fee. Prudential was not about to give them a jury trial, so it filed a motion to quash the jury demand (“Dear Judge, please throw it out”), based on the jury trial waiver in the lease.

The Secchis claimed that they were fraudulently induced to sign the lease, and that the entire lease should be voided. What happens when the document that includes the waiver of jury trial provision is challenged as having never been effective? Does the jury trial waiver apply to determine that issue?

Here’s what the Texas Supreme Court said on how to determine that issue:

Any provision relating to the resolution of future disputes, included as part of a larger agreement, would rarely be enforced if the provision could be avoided by a general allegation of fraud directed at the entire agreement. The purpose of such provisions–to control resolution of future disputes–would be almost entirely defeated if the assertion of fraud common to such disputes were enough to bar enforcement. [Specific clauses] should be enforced, even if they are part of an agreement alleged to have been fraudulently induced, as long as the specific clauses were not themselves the product of fraud or coercion…We agree that the rule should be the same for all similar dispute resolution agreements.

Thus concluded the Texas Supreme Court that a parties’ contractual jury waiver is enforceable unless that clause itself is specifically attacked for fraud or some other similar basis.

This opinion also addresses the larger issue of whether contractual waivers of jury trials are enforceable, and concluded after a fairly decent detailed analysis that these waivers are enforceable so long as they are voluntary, knowing, and the party doing the waiving is intelligent, with full awareness of the legal consequences. That’s a pretty easy test to pass if the waiver is in writing, and the person signed it. Under Texas law, you are presumed to have read and understood what you signed.

And so, if your real estate contract, lease, etc., includes a jury trial waiver, you can rest assured that, absent some pretty remarkable circumstances, no jury is going to hear any case relating to that document (assuming the Court correctly follows the law). Make sure this is the result you want before agreeing to a jury trial waiver.

More importantly, make sure to structure your business operations in a manner that lessens the effect of litigation in the first place. If you’re having to worry about a jury trial, you may have bigger problems. The right business structure, one that includes concepts of asset protection, will minimize your concerns as you fight your battles in the business world.

In re The Prudential Ins. Co. of America and Four Partners, LLC, d/b/a Prizm Partners, Relators, Case No. 02-0690, September 3, 2004

Enviropinions are original writings of Mark McPherson.
© 2014, Mark McPherson. All rights reserved.
15950 Dallas Parkway, Suite 400
Dallas, TX 75248
214-722-7096 Office
214-540-9866 Facsimile
mark@texasenvironmentallaw.com
www.TexasEnvironmentalLaw.com

Cybersquatting, Texas Style

Have you ever done a Google search on your business’s name, only to find that the first website reference is to a website set up by a disgruntled customer to punish your business? Or worse yet, a competitor? They could be stealing your web traffic, as in leads generation, moolah, “show me the money.” They could be running your potential customers off. Do you have rights? Can you stop it? Well the answer is a resoundingly firm “it depends.” This article surveys several cybersquatting cases in light of a recent case on this subject, and distinguishes between legitimate “alternate” sites you can’t do anything about, and those that you can eliminate.

TMI, Inc., d/b/a TrendMaker Homes, builds houses. Their internet site is “www.trendmakerhomes.com.” Until this situation developed, it was their one and only domain name. Joseph Maxwell became interested in their product, and began the process of selecting his dream home, his Shangri-la and all the visions of Camelot that come with it (sorry to mix metaphors like that). But he didn’t get very far. He decided that TrendMaker Homes’ salesperson made “misrepresentations about the availability of a certain model.” Oooooh. Sounds baaad. But nothing was apparently purchased, no money was lost.

Irrelevant. Maxwell was sufficiently peeved to register “www.trendmakerhome.com” and set it up for a year. During this site’s existence, it contained Maxwell’s story of his dispute with TrendMaker Homes. He was careful to put a disclaimer at the top of the website that it was not TrendMaker Homes’ website, but it was your basic “gripe site.”

And his website included a page called the “Treasure Chest”, for readers to share and obtain information about contractors and tradespeople who had done good work. This amazingly clever idea spawned all of only one name, and that was of a man who had performed some work for Maxwell. And–it gets better–this listing “was not made at the contractor’s request.”

One year to the date after obtaining the domain name, it expired and Maxwell didn’t renew it. So, that very day TrendMaker Homes, which had predictably been watching the expiration date, registered the name. It then sent a letter to Maxwell demanding that he take down the site and relinquish the “www.trendmakerhome.com” domain name.

And here’s where things got a bit funny. Maxwell immediately tried to re-register “www.trendmakerhome.com” but found that his nemesis had beaten him to that punch. SO, he registered instead “www.trendmakerhome.info.” Needless to say, TrendMaker Homes was less than thrilled, and so they sued Maxwell under just about every state and federal law that addresses cybersquatting. We’ll get to that in a minute but first we’ll look at some interesting litigation strategy.

Let me just quote the Court’s opinion on this next set of facts. It is interesting to me that these sort of facts even made it into the opinion.

 Almost immediately, the parties entered into settlement negotiations. Maxwell retained a lawyer, but knew he would not be able to afford to pay the legal fees that would be required to defend the entire lawsuit. TMI and Maxwell’s lawyer negotiated a settlement, while Maxwell researched his case. Following this research, Maxwell backed out of the settlement agreement and proceeded pro se [on his own without counsel]. He continued to represent himself through the bench trial….

Can’t you just imagine Maxwell having to divulge all that in a deposition? Can you imagine how angry TMI was? TMI likely concluded that Maxwell had not negotiated in good faith, so they were probably in full blown punishment mode themselves by this time.

Well, Maxwell lost the bench trial in just about every possible way. That was predictable. Never proceed pro se. Even a lawyer who represents himself has a fool for a client. I can’t imagine that rule as applied to non-lawyers. In any event, for the appeal he apparently retained counsel, and competent counsel at that, because he got the judgment not just reversed, but got one entered in his favor. Here’s why.

One of TrendMaker Homes’ claims was based on the federal Lanham Act, a part known as the anti-dilution provision. Here’s what it says:

The owner of a famous mark shall be entitled, subject to the principles of equity and upon such terms as the court deems reasonable, to an injunction against another person’s commercial use in commerce of a mark or trade name, if such use begins after the mark has become famous and causes dilution of the distinctive quality of the mark, and to obtain such other relief as is provided in this subsection.

“Commercial use” means used in the ordinary course of trade. Maxwell’s use was not commercial, so he didn’t violate this section. His was a “gripe site”, he didn’t use it to sell anything, nor was the use in any ordinary course of trade for Maxwell. So long as the site does not contain any links to commercial sites, and contains no advertising or other certain content, the site is not commercial. Maxwell’s failure to turn the “Treasure Chest” portion of his site into an advertising feeding frenzy saved him on this one.

Then there’s the Anti-Cybersquatting Consumer Protection Act, or the ACPA. Under this act, the owner of a mark can recover against a person who, acting with a bad faith intent to profit from that mark, registers, traffics in or uses a domain name that is identical or confusingly similar to that mark. The ACPA then lists 9 non-exclusive factors for courts to consider when determining whether a defendant has a bad faith intent to profit. When the appeals court reviewed these nine factors, they found 4 factors in favor of TrendMaker Homes, and 5 factors in favor of Maxwell.

Finally there’s the Texas Anti-Dilution Statute. This statute reads:

A person may bring an action to enjoin an act likely to injure a business reputation or to dilute the distinctive quality of a mark registered under this chapter or Title 15, U.S.C., or a mark or trade name valid at common law, regardless of whether there is competition between the parties or confusion as to the source of goods or services.

This statute specifically excepts from its coverage non-trademark issues of a name to comment on, criticize, ridicule, parody, or disparage the goods or business of the name’s owner. Since this exception described Maxwell’s use, he was not liable under this statute either.

And so it was one, two, three strikes against TrendMaker Homes, and Maxwell took the game. Free speech was not so free, but it was eventually allowed.

What lessons can be drawn from this? Two, I think. First, if you want to protect your business against “gripe sites”, you should get your business a novel and unique name, what is known as a “strong mark”, meaning one that can be registered as a trademark, and defended successfully. Examples are Nabisco, and FedEx. Avoid common names like “Trendy” or “Quality” or “North Texas.” It needs to be unique. If you can find it in the dictionary, consider avoiding it. Then, register as many domain names as you can afford, with dot com, dot net, dot info, dot whatever. Include any common misspellings of your name as well.

Second, to protect against other commercial parties, be aware of your rights under these statutes, and run Internet searches from time to time on your company’s name, and on its website address, just to see if anyone is misusing it. As soon as you find one, contact a lawyer (of the intellectual property sort) so the necessary notices and “cease and desist” demands can be sent. Protect yourself; if you don’t, who will?

TMI, Inc., v. Joseph M. Maxwell, Case No. 03-20243; 03-20291, 5th Circuit U.S. Court of Appeals, decided April 21, 2004.

Enviropinions are original writings of Mark McPherson.
© 2014, Mark McPherson. All rights reserved.
15950 Dallas Parkway, Suite 400
Dallas, TX 75248
214-722-7096 Office
214-540-9866 Facsimile
mark@texasenvironmentallaw.com
www.TexasEnvironmentalLaw.com

What Does “Interference with Prospective Contractual or Business Relations” Mean?

Turns out, until 2001 Texas has never had a really good definition of what “bad acts” are considered tortious interference with prospective contractual or business relations. Leaving something undefined is better for plaintiffs; it’s easier to get the case to a jury and then just leave it up to them, serving up the case with as much emotional umph as possible. But no more. Now, a business seeking to prove wrongful interference must prove that the alleged improper conduct was “independently tortious or unlawful.”

Although Texas law has included a cause of action known as “tortious interference with with prospective contracts or business relations” for many years, the conduct that is prohibited had never been defined until 2001. Now, before we go much further, think about that. You could sue someone, or they could sue you, and nobody really knew what it took to win. Or lose. What that means, in practice, is that these cases most often got thrown to a jury without much direction from the judge or the lawyers. Is it just something you know when you see it? Is that really justice?  This is just one instance of “sight justice.”  There are still others in Texas and federal law.

Prior to this case, judges got around the lack of a specific definition by using broad, vague terms to define the standard of unacceptable, illegal conduct, terms like “wrongful,” “malicious,” “improper,” of “no useful purpose,” “below the behavior of fair men similarly situated,” or “done with the purpose of harming the plaintiff.” Would you like a side of loopholes to go with that? Conduct that is “competitive” or “privileged” or “justified” is exempt, even if it is meant to harm the plaintiff.

Well, the Texas Supremes finally got ahold of a case that gave them the opportunity to, as they said, “bring a measure of clarity to this body of law.” And fortunately, they did just that. In the process, they even admitted that these vague concepts “have not only proved to be overlapping and confusing, they provide no meaningful description of culpable conduct…” So, let’s look at the clearer standard of prohibited conduct, and then apply it to some examples.

Here’s the rule, quoted directly from the Texas Supremes: “we conclude that to establish liability for interference with a prospective contractual or business relation the plaintiff must prove that it was harmed by the defendant’s conduct that was either independently tortious or unlawful. By ‘independently tortous’ we mean conduct that would violate some other recognized tort duty.” That’s on Page 2 of the opinion, and of course the Court next says “We must explain this at greater length…” and continues for 21 additional pages with 84 footnotes.

Now for some examples the Court used to show us what this cause of action is all about.

First example. A defendant threatens a customer with bodily harm if the customer does business with the plaintiff. In that instance, the defendant’s acts towards the customer were independently tortious–known as “assault”–and so that defendant would have committed tortious interference with prospective business relations of the plaintiff.

Second example. One business (the one who becomes the defendant) says something defamatory or fraudulent about the plaintiff to a prospective customer or business relation of the plaintiff. Again, we can point to conduct already prohibited by law–defamation and fraudulent misrepresentation. Are you getting the sense that this cause of action has now been substantially narrowed in its application?

Third example, slightly more complicated. One piece of real property, desired by two different persons, in beautiful Nederland, Texas. This tract of property was situated right next door to the local Wal-Mart, and Wal-Mart held a right to approve development of that tract. Harry Sturges, III, Dick Ford, Bruce Whitehead and J.D. Martin, III, (we’ll call this group the “Local Investors”) negotiated a contract with Bank One, Texas, to buy this piece of property. They planned to construct a 51,000 square foot facility, and they had a non-binding letter of intent to then lease said structure to Fleming Foods of Texas. Flemings liked the location, location, location, of being right next door to Wal-Mart.

The Local Investors had one problem. Wal-Mart had only approved a building of 36,000 square feet, so they would have to get Wal-Mart to agree to change the development restrictions to allow the larger 51,000 square foot structure.

Actually, the Local Investors had another, much bigger problem, which they wouldn’t find out about until a little later. But in the meantime, keep in mind that all throughout this process, the Local Investors only had a contract to purchase the property; they never actually purchased the property.

So off they went to Wal-Mart to negotiate the size of the building. A manager in Wal-Mart’s property management department told the Local Investors to submit their revised site plan, and indicated that Wal-Mart would approve it. The Local Investors were seeing the gold.

Unbeknownst to that manager, though, higher up the Wal-Mart management food chain, Wal-Mart had decided to either expand the Nederland store, or move it. The assignment of figuring out which, and acquiring the necessary dirt in either case, eventually went to local realtor Tom Hudson. This guy was like “Magnum, P.I” without the Ferrari, but then could you imagine somebody actually tooling around Nederland, Texas, in a Ferrari?

Hudson discovered the Local Investors’ plans to buy the adjacent lot. And he dutifully, and perceptively, told Wal-Mart to just deny the Local Investors’ request to approve the revised site plan. Wal-Mart did so. Hudson then contacted Fleming Foods and said, basically, “‘Heads I win, Tales you lose’ because either we get the property you wanted, for Wal-Mart’s expansion, or Wal-Mart won’t be there when you build your store, and Wal-Mart being there was the only reason you wanted to be there, so….what’s it gonna be?” It didn’t take Fleming Foods long to realize that this was, as the Court says, “an ultimatum not to move forward on the proposed lease with [the Local Investors].” They didn’t, and several months later, Wal-Mart purchased this tract of land and expanded its store.

“Ouch” cried the Local Investors. “Unfair” they screamed.” “We had this deal locked up, and Wal-Mart tortiously interfered with our deal with Fleming Foods.” They claimed all the lost rents as their damages. Never mind that (1) they never actually bought the property, and (2) their deal with Fleming Foods was non-binding, and (3) Wal-Mart had the contractual right to not approve any change to the site plan. Now remember that they never even purchased the land.

So what happened? The case made it to a jury, and the jury slammed Wal-Mart. One million dollars of actual damages, $500,000 in punitives, and $145,000 in “reasonable” attorneys fees. (This being a tort claim, though, the attorneys fees were not awarded.) Wal-Mart then did us all a big favor by appealing this case all the way through to this opinion.

Here’s how the Texas Supremes applied their new definition of this cause of action to these complicated facts. The Local Investors did not have any evidence of any conduct by Wal-Mart that was recognized as “wrong” by any other principle of law. There was no evidence of fraud, no deceit, no misrepresentation. Wal-Mart said they wanted it, and after they derailed the Local Investors’ scheme, Wal-Mart followed through with the purchase and expansion. That Wal-Mart actually bought the tract of real property in question and used it for their expansion basically sealed the deal as to the truthfulness of their statements. With “no evidence” of an independent wrong the case should not have gone to the jury, thus there should have been no jury award, case basically dismissed.

So what does it all mean? I think it means that this nefarious, vague, ambiguous tort claim has had much of its bite, and a lot of its terror, removed. If trial court judges will follow the law and will genuinely consider and be willing to grant motions for summary judgment, this cause of action will decline substantially in popularity. Fewer of these cases will ever get to a jury, and even those that do should go with some pretty detailed instructions as to what the jury must find before imposing liability. And it will give us lawyers a greater ability to plan your conduct as you are aggressively competing for business opportunities of whatever kind.

Wal-Mart Stores, Inc., v. Sturges, 52 S.W.3d 711 (Tex. 2001).

Enviropinions are original writings of Mark McPherson.
© 2014, Mark McPherson. All rights reserved.
15950 Dallas Parkway, Suite 400
Dallas, TX 75248
214-722-7096 Office
214-540-9866 Facsimile
mark@texasenvironmentallaw.com
www.TexasEnvironmentalLaw.com

Cameraphones Create Liabilities for Employers

Those little phones that also take pictures are dangerous to employers. They have the ability to create big privacy problems on the job. The wrong picture taken at the wrong time in the wrong place could violate not just state law, but federal law as well. Let’s take a moment to consider the downside of this technology and some of the dangers it creates for business owners, and get some ideas for how to protect your business with a cameraphone policy.

I first wrote this article in 2004, when the prediction was that by 2007, more than half of all cell phones would be equipped with cameras. In North Texas we’re probably closer to 100% now. But our familiarity with this technology doesn’t eliminate its potential for mischief, even in the hands of adult employees. Consider the following.

Does your business have a place where people change clothes, or use the restroom? Suppose someone takes a cameraphone picture of someone else in the act of availing themselves of such facilities. All it takes is a bad-judgment nanosecond by the picture taker for that picture to exist in Cyberspace, in digital form. Once they hit “send”, it’s gone. And the fact they’d even take such a picture in the first place gives an indication about their “wisdom.” Can you vouch for the maturity of every one of your employees, all the time?

A practical joke like this can instantly become an employer’s nightmare. An employee whose picture is taken in a work location where privacy is reasonably expected can sue the employer for violation of right-to-privacy laws and, possibly, both state and federal anti-discrimination laws. Ouch.

How about where an employee takes a cameraphone picture or two of some favorite (or not so favorite) co-workers while they are all in an employee meeting? Seems harmless. But photos of employee meetings can violate the National Labor Relations Act, which prohibits employer surveillance that might chill union organizing activity. The problem here isn’t that the employee would go against the business, but that an otherwise innocent act of an employee could bring federal-agency-problems onto the employer. The NRLB could not care less why the picture was taken, nor could the union, so what’s your defense?

Does your business handle customer credit cards? A cameraphone in the hands of a dishonest employee could lead to fraud (against your business) through the photographing of customers’ credit cards and other identifying documents. By the time you caught up to such an ex-employee, do you think they’d have the money to cover the judgment your customer got against your business? Or that they could even afford to pay your attorneys fees to defend such a case? I’m thinking “no.” I’m having visions of those identity theft credit card commercials. The thieves always have a less-than-wealthy economic status.

Does your business have employees? A disgruntled employee could use a cameraphone to fabricate evidence to support their later claim of unlawful harassment or a violation of workplace health and safety rules. Imagine the scene. An employee could artificially create a scene, take a picture of it, and later claim (on the witness stand) that “that’s a fair and accurate representation of what my workplace looked like every day I worked there.” Where’s your controverting evidence, employer? And remember the time-tested wisdom that a picture is worth a thousand words.

Or the employee may just be on their way to their next employer, a job they lined up on your business’s time over the course of a few weeks, first one interview, then the next, none of which you know about, of course, while it’s happening. That next employer might just want to see some of your records, particularly if they’re a competitor. Receipt of a “two-week notice” may be too late.

And then there’s the more obvious use of cameraphones for corporate espionage. A cameraphone user can secretly snap a picture of any part of your research and development process, any secret documents, and so forth, and just walk away.

There are several reasons why cameraphones are so dangerous, as these few example illustrate. First, they are an integral part of a very important device, a cell phone. And since cell phones are everywhere, cameraphones can easily be everywhere too.

Second, they are nearly impossible to detect. Digital cameraphones don’t make a sound, they don’t look like a camera, and you can just look at the phone itself to frame the picture, something people do with phones anyway.

Third, the picture is digital and can be transmitted instantly, and completely secretively. The picture taker doesn’t have to walk out with the picture, they can send it wirelessly, immediately. Not that the taker may even intend to be secretive. The secret transmission part is inherent in the nature of digital images and wireless technology.

And here’s the “thing.” Cameraphones are not “bad.” Nor are the substantial majority of their users. Your employees may not have a malicious thought in their head, and yet their actions can bring potentially huge liabilities on your business. And while employees may be able to afford being ignorant, immature, etc., you as the employer and business owner cannot.

So how do you control the seeming uncontrollable? Establish and publish a set, written policy on cameraphone use in the workplace. And enforce it. What sort of policy? I’m glad you asked.

Let’s start with a few examples of cameraphone policies from some large companies, because those are the ones that make the news. DaimlerChrysler and BMW ban cameraphones altogether, as does cameraphone manufacturer Samsung, with a touch of irony. Texas Instruments requires their employees to disable the camera function in the workplace. GM requires employees and visitors to surrender their cameraphones before entering R&D and other sensitive locations, but allows them otherwise.

In addition to whatever level of use you, as the owner, decide to allow, an effective cameraphone policy should also:
1. Strictly prohibit the taking of photographs and videos-whether by cameraphone or other device-in areas where employees have a reasonable expectation of privacy (which you should define);

2. Require employees to obtain written permission before taking or distributing any photographs, videos, or recordings of any type in the workplace;

3. Set out your employees’ existing nondisclosure and confidentiality obligations; and

4. State the consequences for violation of the policy (perhaps including confiscation of the cameraphone).

As a business owner, you have two options here. First, do nothing and just hope nothing happens. This puts you in the situation of reacting to anything that does happen, and with absolutely no defense whatsoever, other than “I just didn’t get around to taking care of it” or “I didn’t think it was a big deal.” Or, second, you can manage these risks proactively by working with counsel to develop and implement a sound policy on cameraphone usage in your workplace. The people who rely on you for privacy would reasonably, of course, prefer the latter.

And although a strong policy doesn’t guarantee a lack of problems in the future, it does give you much better ability to manage the problems, and you will have more options for dealing with them if and when they arise. You at least have the defense that you did your best.

Being proactive on dealing with this new technology is more a matter of strengthening your business’s profit than increasing it, but it still enhances your bottom line.

Enviropinions are original writings of Mark McPherson.
© 2014, Mark McPherson. All rights reserved.
15950 Dallas Parkway, Suite 400
Dallas, TX 75248
214-722-7096 Office
214-540-9866 Facsimile
mark@texasenvironmentallaw.com
www.TexasEnvironmentalLaw.com

 

The Sanity Behind (Stupid) Disclaimers

Donell Coleman worked at The Quarry at Lincoln Heights Golf Club as a groundskeeper. He basically raked sand traps, removed weeds, and operated lawn mowers, helping to make the golf course beautiful in the eyes of its beholders. His uniform was supplied by Cintas Sales Corporation. It was made of a standard, 65% polyester, 35% cotton, non-flame retardant material.

During one workday, the grounds crew was cooking up a barbequed-steak lunch. Coleman got out the grill, loaded it up with charcoal, soaked the charcoal with lighter fluid, and lit the briquets, all without incident. He slapped two steaks on the grill, and turned around to reach for the third. It was about this time that a gust of wind carried the flames from the grill to his shirt, catching it on fire. Coleman stopped, dropped and rolled, but the fire was stubborn. His supervisor extinguished the fire in about a minute by smothering it with other uniforms. Coleman’s injuries resulted in $300,000 of medical expenses and lost wages.

Coleman sued Cintas, claiming that the uniform wasn’t marketed properly, that Cintas had a duty to warn him that the uniform would catch fire if placed next to a flame. Cintas replied “hogwash; everybody knows material burns, so we had no duty to warn you of this particular danger.” And hence the battle was joined in court.

Here’s the beginning point for disclaimers: manufacturers and suppliers have a duty to inform users about hazards associated with the use of their products. If the user needs certain information to safely use the product, or to have an accurate expectation of the services being provided, then the manufacturer or supplier must give that information to the consumers/users.

Cintas’ defense is known as the “common knowledge defense.” There is no duty to warn of dangers that are of common knowledge to the consuming public. This is not an easy burden to carry, though. Cintas had to show that there was a general societal understanding of the risks inherent in a specific product or class of products. A matter of common knowledge is information known by the public generally based on indisputable facts. The more disputable a fact is, the less likely it is “common knowledge.”

Cintas basically said “it is common knowledge that clothes will catch fire when exposed to an open flame. Therefore, there is no duty to warn users of this fact/danger.” Coleman replied “that may be true as far as it goes, but my real gripe is that you should have told me about the speed and manner in which the uniform would burn, and the difficulty of extinguishing the fire once ignited. THAT was not common knowledge.”

A divided Court sided with Cintas, holding that mass marketed, synthetic clothes may not be totally understood by the average consumer, but concluding that everybody knows non-flame retardant clothing will burn once exposed to an open flame, “especially flame arising from a charcoal and lighter fluid-filled barbeque pit.”

Another defense to situations like this is the so-called “learned intermediary” defense, also known as the “sophisticated user defense.” A manufacturer or supplier may meet its duty to warn, in certain situations, by relying on an intermediary to communicate a warning to the ultimate user of a product. The issue in this defense is whether the original manufacturer has a reasonable assurance that its warning will reach those endangered by the use of its product. This is a very risky defense to rely on in planning disclaimers and such, because when the warning to the intermediary is inadequate or misleading, the manufacturer remains liable for injuries sustained by the ultimate user.

Does your product include enough information to warn users about any hidden danger? Think of every possible (reasonable) way a user would use the product. Are any of those dangerous? If so, warn the users not to use it in that way.

Does your service contract advise the client what to do with your services, or what the limits of your services are? When a client hires you, what could their (reasonable) expectations be? In that realm of possibilities, add information to focus them on the kernel of your reality, eliminating the rest.

Form contracts, disclaimers and such are some of the most boring, yet most valuable, asset protecting and important documents you use in your business. Have them reviewed by counsel regularly, and keep them up to date. If you print your contracts in bulk, get your lawyer to review them in time to make changes for the next print order.

In 2002, the Porsche commercial’s disclaimer “don’t do this” was probably more for its humorous effect, than for any legitimate purpose, drawing attention to the fact that people would do crazy things just to get a look at you in your new Cayenne. It’s OK to make yourself the center of ridiculous attention in your sales and marketing efforts. But before you do, protect yourself and your business with its contracts and disclaimers, so you can afford to keep your Cayenne. Or your truck. Or your horse.

Coleman, et al., v. Cintas Sales Corporation, Case No. 04-02-00116-CV, San Antonio Court of Appeals, December 18, 2002.

 

Enviropinions are original writings of Mark McPherson
© 2014, Mark McPherson. All rights reserved.
15950 Dallas Parkway, Suite 400
Dallas, TX 75248
214-722-7096 Office
214-540-9866 Facsimile
www.texasenvironmentallaw.com