Monday, July 17, 2017

Four Factors to Consider Before Including Arbitration Provisions in Agreements

Arbitration provisions are a common feature of the agreements we review and prepare for clients.  They require the parties to the agreement to submit some or all of the disputes between them to arbitration before one or more arbitrators rather than litigating in court. 

There are several traditional justifications for favoring arbitration. Some are more persuasive than others.

Consideration #1: Arbitration is Cheaper than Going to Court

Many attorneys will justify arbitration by claiming that it is cheaper than going to court.  Savings are theoretically achieved because most arbitrations have limited discovery and little or no motion practice.  Less discovery and fewer motions to write and respond to means less attorney billing.  By contrast, a court proceeding may involve significant discovery and elaborate motions practice.  This generalization is often honored in the breach. However, a complicated arbitration can involve significant discovery.

The fees for the arbitrator or arbitrators themselves can also be significant.  In a court proceeding, the judge, the clerk and other court staff are all paid by the state or federal government.  For the cost of a filing fee (almost always less than $500), a litigant gets the benefit of all these resources.  An arbitration is not subsidized by tax money.  The parties to an arbitration pay the fees for the arbitrator (which are often more than $500 an hour), a fee for the organization that administers the arbitration (which is typically based on the amount of money in dispute) and a fee to rent the office where the arbitration will take place.  Many arbitration provisions call for multiple arbitrators, increasing fees to thousands of dollars per day.

Consideration #2: Arbitration is Faster than Litigation

Arbitration is relatively fast.  Whether it’s faster than litigation depends on your court options.  The federal courts, particularly in the Eastern District of Pennsylvania and the Court of Common Pleas in Philadelphia County, process cases very quickly.  Other state courts, for example those located in Bucks or Lancaster county, tend to move more slowly.

Consideration #3: Arbitration is More Private than Ligation

Arbitration is undeniably more private than litigation.  Nearly all filings in a court proceedings are in the public record.  Many proceedings have a verbatim record of what transpired.  Even the courtrooms themselves are open to the public.  In many courts, the public can access and download court records from the Internet.  Not so with arbitration.  The only people allowed to access the arbitration proceedings are the parties and the arbitrator.

Consideration #4: Arbitration is Final

A disappointed litigant can appeal a court’s decision at least once.  When arbitration works the way it should, the decision of the arbitrator is extremely difficult to appeal.  This helps to reduce costs and brings finality to disputes. 

But arbitration does not always go the way it should.  There are a number of procedural machinations available to an attorney wishing to avoid or delay an arbitration by challenging the arbitrator’s jurisdiction or claiming impartiality.  These sideshows can quickly eclipse the speed and finality of an arbitration.

The Take Away

Although there is an increasing emphasis on submitting disputes to arbitration, we discourage clients from kneejerk inclusion of arbitration provisions in their agreements.  The professed benefits of arbitration often fail to materialize either because the arbitrator’s fees exceed any cost savings or because the propriety of an arbitration ends up in a prolonged court battle. 

Tuesday, June 13, 2017

Saving Face: How to Protect Your Online Reputation

"It takes 20 years to build a reputation...and 5 minutes to ruin it." ~ Warren Buffet

Reputation - a difficult term to define.  It is an amalgamation of social perceptions, subliminal impressions, skills, branding, word-of-mouth and first hand experiences.  For businesses, reputation is an essential and irreplaceable asset. It is among the first considerations in trust building. It is frequently the basis of customer decisions and it can attract - or repel - talented employees. Once damaged, reputations can be difficult to repair. Second chances can be rare, if they come at all.

Reputational damage is always painful but it is especially so when the injury is the result of false or unfounded statements by customers, disgruntled employees, unethical competitors or persons with a grievance against the owners. The proliferation of social media, review sites and blogs magnifies the impact of any negative comments: there is little likelihood of criticism going unnoticed.  

Compounding the problem is the tendency of people to remember negative events more than positive ones and to use stronger words to describe them. The title of one article on the subject says it all, "Bad is Stronger than Good."[1]  In practical terms, it takes many more positive reviews or interactions to mitigate negative ones. Warren Buffet was right.

When reputational injury does occur, reputational marketing experts have an extensive toolkit, ranging from establishing or enhancing a positive on-line presence to a total re-branding including changes to the company name and intellectual property.  Such repairs are costly. Moreover, they do nothing to deter or temper the behavior of vicious and vindictive posters. Such bad actors are free to post and repost, generally diluting the impact of marketing dollars spent to repair the damage. Such cases may require more than reputational repair; they may require legal action to recover the funds necessary to undo the damage and to ensure that the poster does not continue a campaign of vilification.

Actions against the Poster

Laws protecting business and personal reputations originated in an era of print media.  Nonetheless claims for defamation continue to be among the most common claims brought by plaintiffs against internet detractors. Defamation occurs when a person or business publishes a false, derogatory statement about another person or business that causes injury.  When such statements are in writing or posted to the internet, they are termed "libel."

While defamation law varies somewhat from state to state, plaintiffs seeking to establish a claim must prove that (i) a defendant made a statement about the plaintiff; (ii) the statement was false; (iii) the defendant knew the statement was false or was negligent in ascertaining the truth of the statement at the time that it was posted;  (iv) the statement was "published"  - i.e. was disseminated to others besides the defendant and the plaintiff; and (v)  the plaintiff suffered an injury because of the false statement. In those cases where a plaintiff is a "public official" or a "public figure," he must be able to prove that defendant made the statement with reckless disregard for whether or not it was true.

In addition to defamation, plaintiffs seeking damages for injury to their reputation caused by on-line posts have brought successful claims based on the tort of "false light." Although similar to defamation, there are several differences that make false light a distinctive tort. Unlike defamation in which the requirement of publication can be established if the falsehood is disseminated to even a single party - as for example a customer - false light requires wider dissemination to be actionable. While both defamation and false light require the posted statement be false, false light also requires that the statement be "highly offensive to a reasonable person."[2] Innocent misstatements are not generally actionable. Plaintiff must be able to demonstrate that the defendant was at fault when he caused the false impression, either because the poster knew the statement was false or acted with "reckless disregard" for its truth or falsity. 

Action Against Subsequent Posters

The practice of "re-tweeting" information and of citing web sources and blogs can compound the reputational damage of the original post. The regurgitation of defamatory material creates a virtual "whack a mole" where the injured party successfully requires the poster to remove offensive material - only to have it to "pop-up" at another site.

Individuals who disseminate information that proves to be false are not protected from liability simply because they did not generate the original post. A plaintiff must prove all of the same elements required to establish defamation or false light in order to successfully make a claim against subsequent posters. Frequently, however, the threat of tort litigation can be sufficient to encourage such posters to take down offending material, thereby reducing reputational damage to the plaintiff.

Action Against Internet Service Providers (ISP)

Internet service providers enjoy broad protection against claims for libel and false light under provisions of the Communications Decency Act (CDA)[3]  Unlike other media sources, an ISP is not liable for the defamatory materials that may be posted on its site by third parties. Section 230 of the CDA is clear: "No provider or user of an interactive computer service shall be treated as the publisher or speaker of any information provided by another information content provider."[4]  
Section 230 grants immunity to the ISP so long as the posted content has been created primarily by third parties.[5]  Internet service providers lose their immunity when the ISP is itself a content provider. Whether an internet service provider is also a content developer is a particularized inquiry, depending on the structure of the website and the manner in which the website allows access. [6] 

For an ISP, the operative rule appears to be "ignorance is bliss."  Although internet service providers are not responsible for the libelous statements of third party posters, they can be held liable as  distributors of libelous information if they know, or have reason to know, of its defamatory content.[7]  To avoid such potential liabilities, internet service providers are frequently willing to take down material from their sites once they have been advised by a plaintiff of the libelous nature of such material.

Act Quickly To Seek Professional Advice

Legal options to reduce or repair reputational damage are multi-layered, complex - and require quick responses. Most states, including Pennsylvania and New Jersey - have a one year statute of limitations on defamation and libel actions. Absent extraordinary circumstances, this requires plaintiffs to file an action within twelve months of the posting of the material - no matter when it was discovered. Individuals or businesses that have been injured by false, disparaging claims should contact counsel as quickly as possible to determine their legal options. The first step toward repairing a reputation may be defending it.

[1] Roy F. Baumeister & Ellen Bratslavsky et al., Bad is Stronger than Good, 5 Rev. Gen'l Psych. 323 (2001).
[2] See e.g. Larsen v. Philadelphia Newspapers, Inc., 543 A. 2d 1181, 1188 (Pa. Super. Ct., 1988).
[3] 47 U.S. C. §230(c)(1), (f)(3).
[4] 47 U.S.C. §230(c)(1).
[5] Courts have held, however, that the act of selecting third party materials or minor editing of such information was not sufficient to lose the immunity of the DCA. See e.g., Batzel v. Smith, 333 F.3d 1018 (2003) (act of selecting material for internet site insufficient to void the immunity of the CDA); Donato v. Moldow, 865 (A.2d 711 (N. J. Super. Ct. 2005)(minor editing of comments and providing tips on posting insufficient to void the immunity of the CDA).
[6] See e.g.,  Fair Hous. Council of San Fernando Valley v. Roomates.Com LLC, 521 F.3e 1157 (9th Cir. 2008)(holding that pre-populated drop down menu was sufficient to make made defendant a content provider for purposes of the CDA).
[7] Cubby, Inc. v. CompuServe, Inc., 776 F. Suppl. 135 (1995).

Tuesday, May 9, 2017

A Practical Guide to the "Nastygram": Best Practices for "Conflict" Emails

We spend hours each week writing letters accusing people of breaching their obligations, defending our clients against the accusations of others and telling other lawyers to "pound sand" when they are not being reasonable.  We affectionately refer to these communications as "nastygrams."

You have probably written a few yourself.  There are often several volleys of emails exchanged in a typical business dispute before any lawyer is ever involved.  Since these emails can affect the trajectory of a dispute and its eventual resolution, we encourage our clients to contact us early when a dispute crops up.  But the ideal is not always feasible.  Here are a few of our best practices for your "conflict" communications:

Include Context
No one wants their emails taken out of context; so include the context.  It can be tedious but it's important.  For example, you sell 10,000 widgets to a customer but 5,000 are broken.  You call the furious customer and agree that if the customer does not sue you, you will give them a significant discount on their next order.  After the call, you write a brief email: "I am sorry about the broken widgets and I am looking forward to putting this behind us."  Although you give the discount on the next order, the customer sues you anyway and claims that your email admits liability.  A better email would have been: "This will confirm our agreement that you agree to forego taking any action against us because of the broken widgets and we will give you a 50% discount on your next order. I am looking forward to putting this behind us and hope to have a mutually beneficial relationship going forward."

Write Your Emails To The Judge.

If a small dispute turns into a large one, a number of people are going to look at and make decisions based on your conflict emails.  Opposing counsel will review them.  You may be questioned about them during a deposition.  A judge may make decisions based on their content. 

When you write conflict emails, pretend you are writing them to a judge.  Stick to the facts and leave out emotional invective.  Absolutely no profanity or personal attacks.  Try to stay away from technical jargon, use plain language instead.  Why?  Because these things make you look horrible in front of a judge!

Don't Admit Things If They Are Not True.

Some people treat the resolution of a business dispute-particularly one involving a customer-like making up with a boyfriend or girlfriend after a fight.  There is a tendency for both sides to say, "I was wrong to."  It allows the other person to avoid the full blame for the dispute and can smooth the way to reconciliation.

Resolving a business dispute is different.  Do not admit wrongdoing unless you are sure you have done something wrong.  Your admission can haunt you.  You do not have to be cantankerous with the other party by blaming them for the dispute but if you do not believe you are at fault say so.  Something like "I disagree that our company is at fault but we value this relationship and want to move forward amicably" will usually do the trick.

Do You Really Want To Put That In An Email?

Before firing off scathing emails, consider whether an email is the right way to communicate. We like email because it builds a permanent record of communication, including the exact time it was sent.  Also, taking the time to write a thoughtful email can allow the sender to cool down and carefully consider the communication.
When improperly used however, emails can alienate the recipient, seeming more like an unrelieved monologue than a valuable interchange.   Emails also lack the information that body language or tone of voice conveys. Language printed in an email may seem harsher than in a spoken conversation. Moreover, the "permanence" of email, which makes it a valuable recordkeeping device, also allows them to be easily forwarded to a wider audience or posted on social media.

Think carefully about how you choose to communicate. A phone call or an in person meeting can often de-escalate a situation and lead to a quicker resolution in a way that emails cannot.

What Do You Want To Happen?

Have a clear picture of what you want to accomplish with the communication.  There are a variety of legitimate reasons for conflict emails but they usually fit into a few categories.  You may be trying to build a record of what happened.  You may need to correct someone else's misstatement of events so that it does not appear you agree with them.  You may want the other person to do or not do something. 

If you do not have an easily articulated reason for writing an email or the reason is to punish someone, "vent" or generally "get something off your chest", do not send it.  Remember that not sending a communication can be a very effective strategy.  Silence has its advantages.  It conceals your position and your knowledge of the facts, possibly making it more difficult for the other party to interfere with your strategy.  But be careful not to let silence look like acquiescence.

Tuesday, May 17, 2016

How To Make Money Getting Into Fights

The mantra of many defendants is “I don’t have any money,” “you can’t squeeze blood from a stone” or “I’m judgment proof.”  Sometimes they are right but sometimes they are just not looking hard enough. 

Many defendants have fallen on hard times because of the actions of a third party.  Someone refuses to pay the defendant and now the defendant can’t pay you.  “Not my problem,” you say.  The defendant should sue the third-party so he can pay me my money.  But defendant doesn’t have any money to sue the third-party. 

A depressing reality in litigation?  Bad luck stacked on bad luck? Maybe not. We encourage our clients to view legal claim as assets.  And just like any other asset, a claim can be bought, sold or traded.  If a defendant cannot pay but has a lawsuit against a third party, the defendant can offer the claim in lieu of or in addition to a cash payment to the plaintiff.

 Defendant transfers claim against third-party to plaintiff as settlement of plaintiff’s claim against defendant.

After a defendant conveys the claim against the third-party to the plaintiff, plaintiff steps into the shoes of defendant for the purposes of asserting the claim against the third party.  This may be very appealing if the third party has the financial wherewithal to pay a judgment.

Before accepting a claim against a third-party to satisfy a judgment, there are some big questions to answer.  How strong a claim does defendant have?  Am I going to need defendant to cooperate in the litigation on an ongoing basis?  Does the third party have any money to pay?  Getting the answers to these questions requires detailed legal analysis and due diligence on the financial status of the target company.

“Oh that’s cool, I could build an entire business around buying and selling litigation” you say.  Probably not.  Champerty (pronounced CHampÉ™rtÄ“) – scrabble players, your welcome – is the common law doctrine that prohibits a person with no previous interest in litigation from financing it and sharing in the proceeds.  For a transaction to be champertous – scrabble players, again, your welcome – and, therefore, illegal, the party taking assignment of the claim must have no previous interest in the claim, must expend its own money to prosecute the claim and must be entitled to the proceeds of the claim.  Courts have held a plaintiff in the position described above has an interest in a claim and does not present a champerty problem.

What’s the take away?  Legal claims, whether for breach of contract, fraud, civil RICO or anything else, are assets that may have value.  They are often overlooked and may present opportunities for you to exchange claims against judgment-proof defendants for claims against “deep pocket” parties.

Wednesday, October 21, 2015

So we are becoming a Benefit Corporation...

We have had a number of inquiries from clients and friends about becoming a benefit corporation or "B-Corp."  Can we do it?  Does it make any sense to convert?  Should we convert to benefit corporation or just try to get certified by B-Labs?

Our colleague Regina Robson is an expert in benefit corporation law and has published a number of articles on the subject.  But talk is cheap.  There is no better way to advise clients than to make ourselves the proverbial guinea pig and become a benefit corporation ourselves.

Becoming is benefit corporation is relatively simple as a legal matter but successfully integrating the sustainability and community value generating goals into an organization is a more holistic endeavor. Enter our friends at the Erivan K. Haub School of Business at Saint Joseph's University, in particular, friend of the firm and all around good guy Professor Ron Dufresne, Ph.D.  Dr. Dufresne focuses his teaching and research on applied sustainable leadership and has been generous enough to use our firm as the subject of his capstone Applied Leadership and Sustainability course.  As part of the course, a group SJU business students will evaluate the firm's practices and advise us on what we need to do to make the successful transition to B-Corporation land.

This will be the first in a series of posts mapping out the experience from beginning to end.  Our goal is to set out a soup to nuts road map for other small and mid-sized organizations to make the transition to a benefit corporation.

Do we really need a warning to "consider the environment before printing this email" in our signature lines to become a B-corp?  We will find out.

Tuesday, September 1, 2015

“You have no idea how expensive it is to look this cheap” – Pennsylvania Uniform Fraudulent Transfer Act

Everyone loves a bargain and businesses and individuals that deal in distressed assets really love cheap stuff.  But if it looks too good to be true, it might turn out to be very expensive.  If you are considering purchasing the assets of a distressed business, you need to consider the implications of the Pennsylvania Uniform Fraudulent Transfer Act.

The typical situation involves a business with significant debts.  Some creditors have initiated collection actions, others have threatened.  The owners have decided to throw in the towel and want to salvage what value they can by selling the assets at “fire sale” prices to third parties.  The purchaser completes the purchase only to be sued by creditors of the defunct company. The creditors claim that sale violated the Pennsylvania Uniform Fraudulent Transfer Act and want the purchaser to pay them the full value of the assets.

The Pennsylvania Uniform Fraudulent Transfer Act prohibits three types of transfers.  First, it prohibits debtor from transferring assets “with actual intent to hinder, delay or defraud any creditor of the debtor.”  In determining whether a debtor had such “actual intent,” courts look to a variety of factors and there is no bright line test for making such a determination.  The factors include: (1) whether the transfer was made to an insider; (2) whether the debtor retained possession or control of the possession property after the transfer; (3) whether the transfer was concealed; (4) whether the debtor had been sued or threatened with a lawsuit at the time the transfer was made; (5) whether the transfer was of substantially all of the debtors assets; (6) whether the debtor absconded; (7) whether the debtor removed or concealed assets; (8) whether the value received for the assets was reasonably equivalent to the value of the assets; (9) whether the debtor was insolvent; (10) whether the transfer occurred shortly before or after a substantial debt was incurred; and (11) whether the purchaser of the assets subsequently transferred the assets to an insider of the debtor.

Second, the act prohibits a debtor from transferring assets [when] “without receiving a reasonably equivalent value in exchange for the transfer or obligation, and the debtor: (1) was engaged or was about to engage in a business or transaction for which the remaining assets of the debtor were unreasonably small in relation to the business or transaction; or (2) intended to incur, or believed or reasonably should have believed the debtor would have incurred, debts beyond the debtors ability to pay as they became due.”  This provision, known as the “constructive fraud” prohibition, is somewhat better defined then the actual “actual intent” provision, in that receipt of “reasonably equivalent value” renders the debtor in compliance with the provision. 

Third, “a transfer made [] by a debtor is fraudulent to a creditor whose claim arose before the transfer was made [] if the debtor made the transfer or incurred the obligation without receiving a reasonably equivalent value in exchange for the transfer [] and the debtor was insolvent at the time or the debtor became insolvent as a result of the transfer.”

Notice that a purchaser need not know that the seller is insolvent or engaging in duplicitous behavior to be liable for the seller’s debts.  So what is a purchaser to do?  If a deal seems too good to be true, some due diligence is in order.  Why are the assets being sold? Do the public records indicate that the seller has judgments against it?  Are all or substantially all of the assets of a company for sale?  Are the assets encumbered by security interests?

If a transaction raises red flags, there are a number of strategies to reduce the risk but you cannot address unknown risk. 

Wednesday, July 22, 2015

What is "Discovery"?

After the initial stages of filing a lawsuit, the pleading stage, is complete, the parties will have an opportunity to obtain information to each other regarding factual and legal basis for their respective claims and defenses.  This is known as the discovery phase of litigation.  

What is the discovery phase?

During the discovery phase, each party has an opportunity to use the various discovery “tools” to obtain information regarding the other party’s claims or defenses.  The most common discovery tools are:

“Rule 26” Disclosures

In federal court, the parties are required to exchange “Rule 26” disclosures with one another.  These disclosures require that each party provide basic information on what discoverable information it possesses.  For example, “Rule 26” disclosures require that a party identify individuals that may have knowledge regarding the facts of a case and requires parties to identify relevant documents in their possession.  The purpose of the “Rule 26” disclosures is to streamline the discovery process for all parties involved.

There is no state court equivalent for “Rule 26” disclosures.  Instead, parties typically utilize other discovery tools to obtain the same information. 

Requests for Production of Documents and Things

A request for production of documents and things is precisely what the name implies.  Such a request is made in writing to an opposing party which must respond in the time period provided under the rules.  Requests for production now typically include request for electronic records, such as e-mails, text messages and information from social media.


Interrogatories are written questions which are directed from one party to another.  The receiving party is required to respond with written answers within the period of time provided under the rules. Typically, counsel is heavily involved in providing the responses to interrogatories and rarely yields “smoking gun” information. 


Depositions are the center piece of the discovery process and involve a real time interchange between individuals and counsel.  During a deposition, counsel asks a series of questions and the deponent provides a series of answers.

Depositions typically takes place in a law firm conference room but are sometimes held at a court house or other location.  The interchange between counsel and deponent is recorded verbatim by a stenographer who produces a written transcript that can be used at trial or in the context of a motion.

Because of the preparation time required to conduct a deposition or defend a client who is being deposed, a deposition is typically the most expensive discovery tool available.  Moreover, stenographers charge by the page and their rates range from four to ten dollars per page depending on the speed in which the transcript is needed.

Notwithstanding the costs, a deposition is often the most effective discovery tool as it requires the deponent to provide information without the softening effect of counsel.  The deposition also allows a preview of how a witness may behave at trial.


A subpoena is a device used to compel information from individuals or entities that are not parties to litigation.  A subpoena is used in combination with some other discovery tool.  For example, you may send a subpoena to a third party in order to compel them to produce documents or appear for a deposition.

How long does the discovery phase last?

The length of the discovery phase depends primarily on the jurisdiction and venue where the case is being litigated.  The discovery phase in federal court is typically much shorter than in state court.  The discovery phase in federal court is typically less than one year. 

The discovery phase in state court can be extremely long as judges in state court do not set deadlines for propounding discovery.   Many parties use delays in discovery as a tactic to exhaust the opposing party.

Although state courts typically have long discovery phases, the Court of common pleas in Philadelphia has a sophisticated case management system that significantly reduces that time. The discovery phase of the majority of cases in Philadelphia is completed in less than eighteen months.

What will I need to disclose in discovery?

Although the specific documents and information that you will need to produce depend heavily on the particular circumstances of your case, the scope of discovery is generally quite broad.  A party may obtain discovery regarding any matter, that it not privileged, which is relevant to the subject matter in the pending litigation.  Moreover, even irrelevant information is subject to disclosure if the information appears reasonably calculated to lead to the discovery of “appears reasonably calculated to lead to the discovery of [admissible] evidence.”