Email Theft, Hacking, Sanctions
It might seem obvious that hacking into your adversary’s email account and stealing email is a dangerous litigation tactic, but that has not stopped New York litigants from trying. Unsurprisingly, New York Courts do not condone email theft and the trend appears to be towards harsher penalties, including recently striking a defendant’s answer and giving the hacked plaintiff a total victory.
In Forward v. Foschi, 27 Misc.3d 1224(A), 911 N.Y.S.2d 692 (Sup. Ct. Westchester Co. May 18, 2010), the parties were warring former business partners with a romantic past fighting over their former business. Plaintiff secretly accessed defendant’s business and personal email accounts to forward emails to plaintiff’s attorney. Defendant failed to safeguard her email accounts, having given plaintiff the password for a work account and leaving a personal account open on a shared work computer. Defendant discovered plaintiff was accessing her work email, and intentionally sent phony emails to provide plaintiff with misleading information. In a lengthy decision, the State Court excoriated plaintiff and his attorneys, but also scolded defendant for her deceptive tactics. The Court precluded the use of the emails in the litigation, but because both parties engaged in deceitful conduct, refused to issue any further sanctions.
In Pure Power Boot Camp, Inc. v. Warrior Fitness Boot Camp, LLC, 759 F. Supp. 2d 417 (S.D.N.Y. 2010), plaintiffs sued two former employees for establishing a competing business while still employed and stealing proprietary business information. While still employed with plaintiffs, the former employee accessed her personal email accounts and her newly created email account for the competing business from plaintiffs’ office, leaving the login credentials stored on plaintiffs’ server. Defendants claimed that plaintiffs accessed and printed e-mails concerning the new competing business and unrelated personal issues. The Federal Court precluded the use of the hacked emails in the litigation. The Court also held that the plaintiffs violated the Stored Communications Act, which makes actionable (i) intentional access of an email account (ii) without authorization or in excess of authorization, and imposed a $4,000 statutory penalty comprised of a $1,000 fine for each unauthorized access of the email accounts. The Court reserved decision on further sanctions, including payment of defendants’ legal fees, until making a determination at trial as to which of the plaintiffs stole the emails.
In Iris Mediaworks, Ltd. v. Vasisht, 2017 NY Slip Op 31145(U) (Sup. Ct. N.Y. Co. May 26, 2017), plaintiff sued defendants for using plaintiff’s trade secrets and resources to establish a competing business while trying to drive plaintiff out of business. After retaining a computer forensics expert and conducting an investigation, including subpoenas to Google, plaintiff claimed that, around the time plaintiff commenced suit, defendant hacked plaintiff’s business email account and secretly auto-forwarded plaintiff’s emails over a 1.5 year period, specifically targeting confidential communications with plaintiff’s attorney. The State Court, in its recent decision, held the hacking was “an egregious act” and defendant showed a “disregard for the judicial process.” The Court granted the extraordinary relief of striking defendant’s answer to the complaint. The sanction serves as an admission of liability by defendant, leaving only the amount of damages for trial.
Breach of Contract, Business Receipt Purchases, Loans, Usury
New York, like many states, provides a usury defense against enforcement of certain loans, which stated simply means that if the interest rate is too high, the borrower can avoid repayment. Usury applies to non-contingent loans (e.g. the lender has an absolute right to payment), and does not apply to investments where returns are based on future contingencies. Whether the subject transaction is truly a loan and the lender’s right to repayment is truly absolute are fact-intensive issues heavily litigated in cases with usury defenses concerning sophisticated transactions.
In broad strokes, the usury defense in New York for individuals covers loans in an amount between $250,000 and $2.5 million with an interest rate equal to or greater than 16% per year. For loans to corporate entities, usury applies to loans under $2.5 million with interest equal to or greater than 25% per year.
Transactions involving the “purchase” of future receivables can raise issues about whether the transaction is, or is not, truly a loan with an absolute right to repayment. Around ten years ago, in Clever Ideas, Inc. v. 999 Rest. Corp., Index No. 602302/06, we sued in the Commercial Division of the New York State Court to enforce two Advanced Meal Sales Agreements by which our client advanced $235,000 to a restaurant in exchange for $363,500 of future credit card receipts. We alleged the restaurant cut off the credit card payments, and sued for the balance due, interest and legal fees. The restaurant raised a usury defense claiming the transaction was a loan with repayment being assured given the high level of credit card payments and a personal guaranty. The restaurant claimed that given the expectedly short repayment time, the effective interest rate far exceeded 25%. The Court refused to summarily grant or deny the defense, and held a trial was needed to determine the fact issues, including whether the plaintiff intended for the interest rate to exceed 25% per year.
Nearly a decade later, New York courts still grapple with usury defenses in transactions involving repayment by future business receipts. In Colonial Funding Network, Inc. v. Epazz, Inc., No. 16 CIV. 5948 (LLS), 2017 WL 1944125 (S.D.N.Y. May 9, 2017), plaintiff alleges that, pursuant to three Merchant Cash Advance Agreements, it advanced the defendant-software company $600,000 in exchange for up to $900,000 of the software company’s future business receipts. Plaintiff would receive approximately $5,400 per day, but at the end of each month, plaintiff would either credit or debit the software company the difference between the amount received and 15% of the software company’s total monthly receipts.
The software company raised a usury defense relying on the decision in our Clever Ideas case, claiming repayment would be short and secure, and the effective interest rate was just under 50% per year. The Federal Court looked at the “real purpose” of the transaction and whether the transaction was “repayable absolutely.” The Court summarily dismissed the usury defense, carefully distinguishing Clever Ideas in finding the software company failed to show that the advance was repayable absolutely. Unlike in Clever Ideas, the amount of repayment could decrease and was conditioned on the amount of revenue the company generated (if any). The transaction was, thus, not a loan, and the Court expressly held “[i]f the transaction is not a loan, there can be no usury, however unconscionable the contract may be.”
Finders, Oral Agreements, Statute of Frauds
It is not uncommon for a person to act as a finder and receive compensation for presenting a business opportunity to a businessperson. The two might agree the finder will receive a cash fee or perhaps a percentage of revenue derived from the opportunity. Sounds great! The businessperson has a chance to make money from an opportunity she would not have otherwise had, and the finder is compensated for passing along the opportunity. And it is great – as long as the two parties write down their agreement that the finder will be compensated.
Many people might know that a contract to sell a house in New York is not enforceable unless a signed writing memorializes the terms. Fewer people likely realize that the same New York statute requires a writing to enforce most agreements for compensation in connection with negotiating or finding a business opportunity. The New York Statute of Frauds requires a writing to pay a finder for negotiating “the purchase, sale, exchange, renting or leasing … of a business opportunity, business, its good will, inventory, fixtures, or an interest” in a business. The Statute of Frauds even applies where a person is not directly negotiating, but uses her “connections, ability and knowledge” to arrange meetings between appropriate people and procure contracts.
Acting as a finder of a business opportunity without a written agreement can lead to a situation where the finder’s efforts go entirely unrewarded, while the businessperson legally reaps and keeps all the benefits. Recent New York plaintiffs learned this lesson the hard way. In Vanacore v. Vanco Sales LLC, No. 16-CV-1969 (CS), 2017 WL 2790549 (S.D.N.Y. Jun. 27, 2017), the plaintiff presented his cousin with a potential contract to deliver pharmaceutical drugs for a major drug company. The plaintiff apparently lacked the capital to start the business. The parties allegedly orally agreed that the cousin would fund the capital to set up the business and pay plaintiff a commission of 15% of revenues for finding the deal and putting it together. The cousin paid the plaintiff a total of $300,000 over 12 years and then stopped. Plaintiff sued and defendant moved to dismiss the complaint, arguing that the New York Statute of Frauds bars the alleged oral agreement to pay plaintiff for his role in finding the delivery contract.
The court agreed and dismissed the plaintiff’s claim as barred by the Statute of Frauds. The court found the plaintiff alleged he acted only as a “finder” by negotiating the business opportunity and securing a delivery contract, while the cousin put up the capital and managed the business. Without a writing, the Statute of Frauds voided the alleged oral agreement to compensate plaintiff for his efforts as a finder.
If you have an issue with an agreement for compensation relating to finding or sharing a business opportunity, please do not hesitate to contact us.
Attorney-Client Privilege, Waiver
This post provides a cautionary tale about using work email for confidential communications with your attorney. It might seem obvious that discussing confidential legal strategy with your attorney in a crowded elevator could waive the attorney-client privilege because you shared the secret with the strangers in the elevator. What happens if an employee emails with her lawyer on her work email? The answer is — it depends — factors include what the employer’s email use policies are and whether the employer reserves ownership of the email and the right to review it (relatively common provisions in corporate email policies).
Technological advancements drive more and more communications to email, text message and other written form, leaving a lasting and mountainous record of electronically stored information (ESI) that commercial litigators and courts are forced to deal with. The proliferation of smartphones and other communications technology continues to blur the line between communications and ESI in people’s business and personal lives. In Peerenboom v. Marvel Entertainment, LLC, 148 A.D.3d 531, 50 N.Y.S.3d 49 (1st Dep’t 2017), the First Department Appellate Division in Manhattan held that the chairman of Marvel Entertainment waived his attorney-client privilege by using his work email to communicate with counsel.
The case arose from a dispute about management of the parties’ tennis club and spiraled into litigation claims of defamation in Florida state court. Plaintiff Harold Peerenboom subpoenaed Marvel Entertainment seeking the email of its chairman, defendant Isaac Perlmutter. Perlmutter and Marvel resisted production and the dispute landed in New York state court where Marvel is located. Defendant, among other objections, alleged that certain emails were protected by the attorney-client privilege.
A party can lose the privilege over communications with an attorney if the party fails to safeguard the secret nature of the communications. The court held the key issues are whether Perlmutter held a reasonable expectation of confidentiality and if Perlmutter’s use of the employer’s email system can remove the “reasonable assurance of confidentiality” necessary to invoke the attorney-client privilege. Waiver of the privilege is a fact-based inquiry and the court adopted and applied the four part test used by federal courts sitting in New York to determine whether a person has a reasonable expectation of privacy in emails sent through an employer’s email system: (1) does the employer maintain a policy banning personal emails, (2) does the employer monitor an employee’s e-mail, (3) do third parties have a right of access to the emails, and (4) did the employer notify the employee, or was the employee aware, of the company’s use and monitoring policies.
The court found that Marvel’s stated policy allowed its employees to use its email system for personal purposes, but that Marvel “owned” all emails on its systems and the emails were subject to Marvel’s rules and policies as well as periodic audit by Marvel. The court further found that Perlmutter had constructive, if not actual, knowledge of Marvel’s policies through his status as Marvel’s chairman. With actual or imputed knowledge that Perlmutter knew Marvel “owned” the emails and reserved the right to review the emails, the court held Perlmutter did not have the requisite assurance of confidentiality and his use of Marvel’s email systems to communicate with his attorneys waived the attorney-client privilege.
Business Divorce, LLC Law
Sometimes when partners are starting up a business, they fail to follow corporate formalities. Whether because of a lack of funds, lack of attention to detail, lack of time, lack of desire to crimp new business relationships or simply a lack of desire, corporate founders can fail to exercise various good corporate governance practices. Written agreements among owners are vital to make clear (and enforceable) the agreements between new partners in a startup company, and can be especially important to minority partners. One of the reasons that limited liability companies have become the go-to corporate form is because the New York Limited Liability Company Law allows tremendous flexibility in the terms of operating agreements – the agreements governing the relationship between the members of the company. But, to take advantage of these vast corporate governance rights, the LLC Law states that operating agreements have to be in writing.
A New York plaintiff in 2015 came to learn the downside to laxity in demanding a written agreement when a limited liability company is formed. In Shapiro v. Ettenson, 2015 N.Y. Slip Op. 31670(U) (Sup. Ct. N.Y. Co. Aug. 16, 2015), aff’d 146 A.D.3d 650, 45 N.Y.S.3d 439 (1st Dep’t 2017), three founding members, each with an equal 1/3 ownership interest, formed a limited liability company. Two years later and without prior notice, the plaintiff received a notice from the two other members stating that they had adopted a written operating agreement, which provided for management action to be approved by only a majority in interest of the members. A year later, the two other members provided notice to the plaintiff, pursuant to the new operating agreement, stating that the other members (constituting a majority in interest) voted to issue a capital contribution call and that plaintiff’s equity interest would be diluted if he failed to make the capital call and another member did so in his place.
The plaintiff refused to recognize the validity of the operating agreement and make the capital call pursuant to the agreement. The other two members diluted the plaintiff’s membership. The plaintiff sued claiming that the three members orally agreed that such decisions would require unanimous consent (a common provision with two or more members with equal membership interests).
The case started in a Manhattan trial part and ended in an appeal to the First Department Appellate Division (the appellate court that covers New York County and Bronx County). The appellate court affirmed the holding of the trial court that the alleged oral agreement requiring unanimity in corporate decision-making was void and unenforceable under the New York LLC Law. The LLC Law expressly provides that in the absence of a written operating agreement, action may be taken after a vote of the majority in interest of the members (i.e. over 50%). The court found the defendant members, collectively holding a majority interest, properly adopted the operating agreement, made the capital call and diluted the plaintiff’s membership interest – all without notice to the plaintiff and without the plaintiff’s consent.
