Connecticut Business Litigation Blog

Fraud Lawsuits In Connecticut - Is A Promise of Happiness Fraud or Puffery?

N. Kane Bennett — Sat, 06 Mar 2010 17:02:34 -0500

Debra Cassens Weiss yesterday posted on article on the ABA's website about the psychic Sean Morton who is being sued for fraud for taking 6 million dollars from investors on the promise of piles of money and spiritual happiness. The Securities and Exchange Commission is bringing the suit and the main theory is that Morton is a fraud. No kidding.

For this post, I review what constitutes fraud in Connecticut under the common law and grounds for Connecticut attorneys to bring a lawsuit for fraud. In Connecticut, fraud is committed when:

a person makes a false representation as a statement of true fact
the person knows the statement is not true
the person makes the statement to induce another person to act upon the statement
the person who acts upon the statement sustains damages

When an attorney brings a lawsuit for fraud in Connecticut, an attorney must allege more than simple facts stating these elements. Attorneys bringing a fraud case must make specific allegations describing the actual fraud. In general the false statements must relate to an existing fact, past fact, or a promise to do something in the future with no intent to do so. Although generally affirmative statements must be made to support fraud, there are circumstances where a failure to speak can be fraud if there is a duty to speak.

When you bring a lawsuit for fraud in Connecticut, there is also a higher standard of proof. Ordinarily, in civil cases, an attorney must prove the fraud elements of the case by a preponderance of the evidence. Many people describe this standard as greater than 50% or more likely than not likely. In fraud cases, the plaintiff must prove the elements of fraud by clear and convincing evidence. This standard is greater than a preponderance of the evidence.

If a plaintiff is successful in proving fraud, there are two categories of damages that generally apply. First, a plaintiff may rescind or get out of the induced transaction (i.e. cancel the contract) and sue for restitution type damages. This type of remedy seeks to put the plaintiff in the same position as if the fraud never occurred. Alternatively, a plaintiff may affirm the transaction and seek compensatory damages. This type of remedy may apply when a plaintiff wants to keep some consideration from a transaction but sue for fraud damages.

In addition to these two categories of damages, a successful lawsuit for fraud could also result in an award of punitive damages, which is generally the cost of suit less expenses or the attorneys fees incurred in the case.

Here is a short list of some of the types of fraud lawsuits attorneys bring in Connecticut:

Contract fraud - you enter contract based on false statements
Consumer fraud - think about the recent Toyota lawsuits
Advertising fraud - you buy a product based on a false claim, bait and switch
Investment fraud - think Bernie Madoff, Sean Morton, Ponzi schemes
Real estate or mortgage fraud - false appraisals, straw buyers

When you consider the allegations against the psychic Sean Morton, it is evident he would be subject to a fraud lawsuit in Connecticut. There might be a legitimate defense, however, to the some of the claim. In general, puffery, opinions, exaggerations, and comments made in jest are not fraud.

So what do you think, is a promise of happiness and piles of money by a self proclaimed prophet fraud?

Thank You to Hartford Business Journal and Advanced Copy

N. Kane Bennett — Fri, 26 Feb 2010 15:51:18 -0500

Thank you to Advanced Copy for nominating me for Best Use of Blogs for the Hartford Business Journal's Strateg E Awards for 2010. Thank you to the Hartford Business Journal for selecting this Blog as a finalist and putting on a great event yesterday.

Congratulations to Thomas Clifford who won for his Blog, Bringing Brands to Life. Tom is a big fan of Daniel Pink who has some revolutionary ideas for business management. I just read Pink's latest book "Drive: The Surprising Truth About What Motivates Us." Great read.

You Must Preserve Evidence If A Lawsuit Is Likely

N. Kane Bennett — Thu, 25 Feb 2010 14:03:36 -0500

In the recent federal district court decision of Pension Committee of the University of Montreal Pension Plan v. Banc of America Securities (download here) , Judge Shira Scheindlin clearly explained and amplified the obligations to preserve and produce electronically stored evidence in litigation cases. The case was brought by a group of investors seeking to recover 550 million dollars in losses from a hedge fund liquidation.

The defendants in the case alleged that the plaintiffs failed to preserve electronically stored documents and filed misleading statements regarding discovery. In deciding against the plaintiff's on discovery issues, Judge Scheindlin summarized discovery obligations and stated:

the courts have a right to expect that litigants and counsel will take necessary steps to ensure that relevant records are preserved when litigation is reasonably anticipated, and that such records, are collected, reviewed, and produced to the opposing party....when this does not happen, the integrity of the judicial process is harmed and the courts are required to fashion a remedy...By now, it should be abundantly clear that the duty to preserve means what is says and that a failure to preserve records - paper or electronic - and to search in the right places for those records, will inevitably result in the spoliation of evidence.

Judge Scheindlin's decision is very lengthy and detailed. You might ask, why should a company doing business in Connecticut care about what Judge Scheindlin says in a New York federal district court case? Well, for starters, Judge Scheindlin is perhaps the most quoted and cited trial judge in the United States concerning electronic evidence following her series of decisions in the now famous case of Zubulake v. UBS Warburg. Another reason is that Connecticut state court rules on obligations to preserve and produce electronically stored information are not well established or defined. As such, a state court trial judge in Connecticut is very likely to be persuaded by anything Judge Scheindlin says on the issue of electronic discovery and, in particular, on obligations to preserve and produce electronic evidence, sanctions for failure to do so properly, and the cost and expense of producing such evidence.

Anyone facing potential litigation or reasonably anticipating litigation in Connecticut should understand the obligations to preserve and produce evidence. Although Judge Scheindlin stated that these obligations should be abundantly clear, the fact is, they either are not clear or they are often ignored. Every week, there are numerous case reports from across the country involving spoliation, destruction, and mishandling of electronic evidence. Many times, the failure to preserve critical evidence happens well in advance of the litigation because the duty to preserve is overlooked, ignored, or not understood.

The full scope and extent of discovery obligations is too in depth for a blog post. Nevertheless, Judge Scheindlin's decision provides a framework for understanding some basic obligations and rules. Here is my summary take away from the case:

Any individual or business that reasonably anticipates litigation must issue a "timely" litigation hold in writing. This means steps must be taken to preserve evidence and to stop its destruction. This also means that the duty to preserve evidence arises before litigation ever happens. The duty to preserve arises when litigation is "reasonably anticipated."
Failure to initiate a written litigation hold may constitute gross negligence.
Failure to properly collect evidence from key players in the dispute is gross negligence or willfulness. This means that evidence must be collected from the individuals that are most involved in the dispute. This type of conduct is more culpable and likely to lead to sanctions.
Destruction of emails or backup tapes after the duty to preserve arises may also consitute gross negligence and willful misconduct.
Failure to obtain evidence from "all" employees, as opposed to key players, is likely ordinary negligence and a lower degree of culpability.
Failure to take all appropriate measures to preserve electronically stored information is negligence and less culpable.

Failure to follow the above framework may result in sanctions ranging from fines and cost shifting to dismissal, preclusion of evidence, or an adverse inference instruction to the jury at the time of trial. The sanction will depend on the degree of culpability ranging from negligence to gross negligence to intentional conduct. The scope of sanctions will also depend on the relevance of the missing evidence and the prejudice to the innocent party.

The obligation to preserve evidence must be taken seriously once litigation is "reasonably anticipated." The sanctions that can result from failure to abide by these obligations can dramatically impact the result of a lawsuit and can cause a party to lose an otherwise meritorious claim or defense. Improper handling of electronic discovery can also cause an expensive detour in a litigation case that can be avoided with proper care and attention to discovery obligations.

Unfair and Deceptive Trade Practices in Connecticut

N. Kane Bennett — Sun, 14 Feb 2010 16:41:17 -0500

Each state generally has some type of consumer protection or trade protection law that seeks to prohibit and punish unfair conduct and deceptive acts in trade or commerce. Most states, including Connecticut, model their laws after section 5 of the Federal Trade Commission Act. Section 5 of the FTC Act prohibits unfair or deceptive acts and unfair competition in the marketplace.

Connecticut's Unfair Trade Practices Act (commonly referred to as CUTPA by attorneys and judges), is codified at Connecticut General Statutes section 42-110b. CUTPA states, in relevant part, that:

(a) No person shall engage in unfair methods of competition and unfair or deceptive acts or practices in the conduct of any trade or commerce.

(b) It is the intent of the legislature that . . . the courts of this state shall be guided by interpretations given by the Federal Trade Commission and the federal courts to Section 5 . . . .

(c) The commissioner may . . .establish by regulation acts, practices or methods which shall be deemed to be unfair or deceptive. . . Such regulations shall not be inconsistent with the rules, regulations and decisions of the federal trade commission and the federal courts . . .

(d) It is the intention of the legislature that this chapter be remedial and be so construed.

CUTPA's provisions can be far reaching for businesses and consumers. For example, under section 42-110g, attorneys who successfully prove a CUTPA violation in Connecticut business litigation may be able to recover attorneys fees, punitive damages, and costs for their clients. CUTPA's provisions also provide for the ability of attorneys to bring class action lawsuits in Connecticut for unfair or deceptive acts. Additionally, courts can order injunctive relief or other equitable remedies for CUTPA violations.

CUTPA's provisions may be enforced by the various State's Attorneys and the Attorney General, such as the AG's recent lawsuit against Net Health over its loss or exposure of personal identifiers (date of birth, social security number) of Connecticut residents. Private citizens and businesses may also bring actions for unfair competition or deceptive acts under CUTPA, including class action lawsuits such as the recent case against AT&T over Internet access.

To establish a violation of CUTPA, attorneys in Connecticut have to prove that their clients suffered "any ascertainable loss of money or property, real or personal, as a result of the use or employment of a method, act or practice prohibited by section 42-110g. . ." Generally speaking, this requirement means Connecticut attorneys have to show that their clients sustained damages as a result of an unfair or deceptive act in trade or commerce.

To determine what constitutes an unfair or deceptive act, Connecticut courts specifically refer back to the Federal Trade Commission and what is commonly referred to as the "cigarette rule." The cigarette rule defines what type of conduct may qualify as unfair and deceptive justifying an award of compensatory or punitive damages. This rule dates back to 1964 and comes from legislative policy making by the Federal Trade Commission concerning requirements for warning labels on cigarette packages.

The three prongs of the cigarette rule are as follows:

whether the practice, without necessarily having been previously considered unlawful, offends public policy as it has been established by statutes, the common law, or otherwise-in other words, it is within at least the penumbra of some common law, statutory, or other established concept of unfairness;
whether it is immoral, unethical, oppressive, or unscrupulous;
whether it causes substantial injury to consumers, [competitors or other business persons]. . . .

All three criteria do not need to be satisfied to support a finding of unfairness. A practice may be unfair because of the degree to which it meets one of the criteria or because to a lesser extent it meets all three.

It is important to note that not every act or conduct that might seem to fit the criteria will be a violation of CUTPA. For example, generally speaking, mere negligent acts or simple breaches of a contract do not constitute unfair or deceptive acts under CUTPA. It is also important to note that some conduct automatically violates CUTPA or is considered a per se violation, such as failure to follow the Home Improvement Act or to register a trade name.

There are many nuances to CUTPA and the above is only a brief summary. Any business or consumer trying to determine whether they were damaged by conduct constituting a violation of CUTPA should contact a business litigation attorney or the Attorney General's office.

Business Blog Round Up

N. Kane Bennett — Fri, 05 Feb 2010 11:50:52 -0500

Here are some quick hits on business blogs:

The Wall Street Journal blog reports on two restaurants involved in a lawsuit to determine who is most harmful to your health. Well, sort of. The Heart Attack Grill, an Arizona eatery, filed a federal lawsuit against the owners of Heart Stoppers Sports Grill, a Florida restaurant, accusing them of stealing the idea for an unhealthy menu.

Victoria Pynchon of the Settle It Now blog is trying to decide on a cover for her conflict resolution book entitled "A is for Asshole, the ABC's of Conflict Resolution." If the cover is anything like the title, it should be a hit seller.

Edward McNally of the Delaware Business Litigation Blog has a helpful post that links to a new Delaware case for anyone looking for ways to calculate money damages or breach of a non-compete agreement. Many times, these cases are resolved with injunctions or temporary restraining orders. It is not very common to actually get to the issue of monetary damages for breach of a non-compete agreement. This new case provides some ideas on how to calculate damages.

Megan Erickson's Social Networking Blog discusses Facebook's concerns over identifying its responsibilities for privacy of its 350 million users.

Maxwell Kennerly's Litigation and Trial Blog digests recent Third Circuit law in two different cases involving first amendment and privacy rights for students creating fake MySpace pages.

The Business Law Prof Blog has an interesting post about turning a simple contractual relationship into a fiduciary relationship. Once a fiduciary relationship is established, it can have significant implications on the outcome of litigation. A mere contractual relationship is not significant enough to form a fiduciary relationship absent other special factors. One of my prior posts covers breach of fiduciary duty in Connecticut.

Twitter Defamation Case Gets Tossed - But Concerns Remain

N. Kane Bennett — Tue, 26 Jan 2010 18:02:13 -0500

In a previous post, I linked to a story about a tenant who was sued for libel after posting an allegedly disparaging comment on Twitter about her apartment. The Twitter lawsuit was a hot topic on the internet for some time. Many commentators believed it was only a matter of time before Twitter resulted in a damage award for libel. Not so in this case. A Chicago judge has tossed out the lawsuit. Reports indicate that the Judge made a specific finding that the "tweet was nonactionable as a matter of law."

In this case, the tenant made a Twitter post that her apartment was moldy. Before bringing the suit, the landlord might have considered how many people actually read the Tweet. My guess is probably a few hundred at best. After the lawsuit was filed, millions read about it. At the time of the lawsuit, the landlord company issued a statement saying "we're a sue first, ask questions later kind of organization." That is not a wise strategy in general, but in particular when it comes to an Internet defamation case. Anything involving a lawsuit and social networking has a good chance of being picked up in the media and in various places on the Internet.

The Chicago court's ruling that the statement on Twitter failed to meet the standard for defamation seems correct if you consider Connecticut's defamation standard, which is similar. The takeaway here is that not every negative statement qualifies as a defamatory statement. This does not mean a post on Twitter cannot constitute defamation. In fact, Twitter postings remain fair game for defamation suits, and we are likely to see more of these claims.

Firestorm Over Whether Bysiewicz Legally Qualified To Be Connecticut Attorney General

N. Kane Bennett — Thu, 14 Jan 2010 14:28:35 -0500

As many of us know, the Connecticut Attorney General, Richard Blumenthal, is stepping down and running for Chris Dodd's U.S. Senate seat. Several candidates have stepped forward indicating that they are going to run for Attorney General. The Connecticut Attorney General has a significant impact on businesses in this state. For one thing, the Attorney General often brings lawsuits to protect businesses and consumers related to unfair trade practices. For example, within the last few days, Attorney General Blumenthal filed a lawsuit on behalf of over 400,000 Connecticut residents related to the Health Net data breach. The old saying in legal circles is that the Attorney General runs the largest law firm in the state.

Secretary of State Susan Bysiewicz is one of the candidates running for Attorney General. Ryan McKeen, at A Connecticut Law Blog, has a very interesting post today about whether Susan Bysiewicz has the legal resume to meet the statutory qualifications to be elected Attorney General based on needing 10 years in "active" law practice. The media has jumped on his blog post and there are several reports on it already in the news. The Bysiewicz campaign has responded and claims that she is qualified despite only six years of practice in the state based on her years of "supervising" attorneys at the Secretary of State's office. Now that the issue has been joined, everyone is waiting for Ryan to respond, including me.

Class Action Lawsuit Filed In Connectiut Against AT&T Over Internet Access Tax

N. Kane Bennett — Thu, 14 Jan 2010 08:59:01 -0500

On January 11, 2010, a class action lawsuit (download here) was filed against AT&T alleging that it improperly charged sales tax to access the Internet in violation of Connecticut law and the Internet Tax Freedom Act.

The case was brought on behalf of David Rock who subscribed with AT&T for a "wireless data plan that permits access to the Internet by radio device." The plan permits Internet access remotely by computer or smartphone, such as an iPhone or BlackBerry.

The complaint alleges improper charges from AT&T for state and local sales taxes on internet access on monthly bills. The complaint is based in part on Connecticut General Statutes 12-407(a)(26)(A) which excludes Internet access from the state's sales tax on telecommunications. The Internet Tax Freedom Act also prohibits taxes on Internet access. The complaint alleges thousands of potential members for the class in Connecticut. The complaint alleges breach of contract and violation of Connecticut's Unfair Trade Practices Act.

Nate Anderson of ars technica reported on several identical lawsuits filed in Georgia, Indiana, and Alabama over the last month. Mr. Anderson reported that the same lawyers where behind the multiple filings. In a Hartford Courtant article today by Matthew Sturdevant, the attorney for Mr. Rock,Michael Koskoff, noted that perhaps a dozen similar suits will be filed in various states.

Mr. Anderson made a humorous comment that all the complaints in the Georgia, Indiana, and Alabama cases have the same typo or misuse of the word "I-Phone" rather than iPhone. The complaint in the Connecticut case has the same misuse of "I-Phone." So, either there is some cooperation nationwide on the plaintiff side on the content of the complaints or perhaps none of the lawyers involved own iPhones.

In any event, these cases will be interesting to track as all of the lawyers involved on the consumer side have significant experience in class action lawsuits, including against telecom providers. I also agree with Mr. Anderson that the actual definitions of "sales tax" and "Internet access" might seem simple enough, but can actually be quite complicated. I expect AT&T will make use of those complications.

Don't Get Rocked like RockYou - - Protect Your Customers' Personal Information

N. Kane Bennett — Tue, 05 Jan 2010 11:20:36 -0500

A recently filed class action lawsuit (download complaint) against RockYou highlights the very real threats to businesses related to hackers stealing customer data also known as personally identifiable information (PII).

According to the complaint filed in federal court in San Francisco, RockYou is a publisher and developer of popular online applications and services for use with social networking sites such as Facebook and MySpace. RockYou allegedly exposed 32 million of its users to identity theft by failing to encrypt or otherwise protect email account information and passwords. The suit alleges violations of California Civil Code, breach of contract, and negligence.

Jason Remillard of Web Host Industry Review provided a detailed post on the lawsuit noting that RockYou may face more difficulties than expected because RockYou is a "launchpad type of service, that hold credentials for other services (myspace, facebook, etc)..." As such, RockYou may face liability for data exposures across other platforms.

Mr. Remillard notes that he has been warning site owners about the risks of holding PII information of consumers. I agree with Mr. Remillard that avoiding storage of such personal data in the first place is often the best way to prevent liability exposure for both loss of data and a security breach. If a business must store PII in its systems then a data loss and security plan must be in place to protect the data. In prior posts, I offer some suggestions and tips for Connecticut business owners that have sensitive data or store PII of its customers.

Dave Kravets of Wired.com offers some more details about RockYou's alleged security failures that apparently resulted from the same common vulnerability exploited by hackers in the cases of Hannaford Brothers, 7-Eleven and Heartland Payment System. The vulnerability results from RockYou's SQL database,which relates to the actual storage method and management of millions of email accounts and passwords. The complaint against RockYou alleges that the prior well publicized flaws in SQL should have been addressed with readily available protection measures.

Brennon Slattery of PCworld wrote about the security breach and compared RockYou's security system to storing passwords and emails on sticky notes. He noted that RockYou stored the information in plain text words. In other words, once the hacker got inside RockYou's system, the passwords and email accounts were easy to read like sticky notes because there was no encryption of the text.

RockYou has issued a statement explaining the breach and intends to defend the lawsuit. RockYou also has implemented new steps to avoid future breaches including implementation of encryption for all passwords. Encryption is the method used to make the passwords unreadable once the hacker gains access to the system.

The RockYou case is another example of the increasing number of data loss and security lawsuits and should serve as a reminder to any business that stores PII to implement a data loss and security plan.

Business Litigation Roundup

N. Kane Bennett — Mon, 28 Dec 2009 11:40:19 -0500

As we head to the new year, here is a round up from some fellow bloggers on contracts, cobra, wage disputes, patents, and oral agreements for limited liability companies.

The California Business Lawyer Blog offers a very detailed post about contractual relationships between manufacturers and suppliers. The focus is on well drafted agreements eliminating the fears and concerns of both sides.

A lot of talk about the AT&T suits in different states for $1 billion dollars for unpaid overtime. The suits picked up a lot of steam with a recent employee favorable ruling from the federal court in Connecticut allowing the claim to proceed as a class action. Rush on Business covers some tips for businesses to avoid these suits.

Just in time for Christmas, President Obama has extended the COBRA subsidy. Dan Schwartz's Connecticut Employment Law Blog covers this topic in detail for employers.

Twin Cities Business Litigation Blog has an interesting post on concerns you might have as a shareholder of corporation that fails to follow corporate formalities. Gavin Craig gives examples of how a shareholder could be exposed to liability.

Anyone who frequently litigates matters involving limited liability companies will tell you that there is not much case law out there in Connecticut. It is still a developing area of the common law. Delaware law is often a good option for law in this area because these issues are more frequently litigated by volume in Delaware. A good resource is the Delaware Corporate and Commercial Litigation Blog. Two recent posts concerning oral partnerships and LLC agreements are just an example.

PatentlyO hits on some themes for 2010, including an expected increase in patent prosecution and litigation. They also have a cool picture of heat miser, a childhood classic.

Jeff Mehalic, author of the West Virginia Business Litigation Blog, writes a detailed follow up post to his coverage of the Connecticut dispute between Charter Oak Lending and CTX Mortgage. Jeff also comments about a post I wrote on the same case. The case remains significant as it is an example of what can go wrong when a business grows too fast and no written agreements are in place with employees.

Just In Time For Christmas - - Lawsuits, Snowball Fights, and Michael Bolton

N. Kane Bennett — Thu, 24 Dec 2009 10:37:31 -0500

Here's some humor for the holidays:

A very funny post from Faces of Lawsuit Abuse.org. It is a 2009 poll of the most ridiculous lawsuits of the year. My vote was for the April winner: "Tourist sues New York club after she slipped while dancing on top of the bar." (story here). The judge carefully examined the facts and made his ruling according to simple math: drunk + dancing + wet bar = case dismissed.

"You dont bring a gun to a snowball fight," brought to you by one of my favorites Above the Law, a legal tabloid. This is now a viral holiday story about a snowball fight between a lawyer and a police officer. Who do you think wins that fight? Read the lawyer's take here, and to make your own decision, check out the video.

Inmates do not like Christmas music, but judges do! According to the Phoenix news blog, the Maricopa County Sheriff has won its fifth lawsuit from inmates related to playing Christmas tunes in county jails. My guess is they were playing Michael Bolton's Christmas album, which has made a few "worst album ever" lists for christmas songs. Look for an appeal based on cruel and unusual punishment.

Riskvue, a website for risk management professionals, has a detailed post on holiday party disasters and how to avoid them. The Denver Business Journal says "Don't let Your Holiday Party Become A New Year's Lawsuit." What is it about drinking at an office party and the photocopier? For some funny videos, check out YouTube "holiday party disasters."

For some humorous reports on a series of recent lawsuits, check out Jester's Courtroom on the Center for Individual Freedom blog.

Happy Holidays everyone!

Are Settlement Agreements Enforceable In Connecticut

N. Kane Bennett — Wed, 23 Dec 2009 07:27:53 -0500

The short answer is that it depends. Settlement agreements are generally enforceable if the terms of the agreement are clear and authorized by the litigants or parties to the litigation. In Gengaro v. City of New Haven (to be officially released December 29th), the Appellate Court had another opportunity to comment on the long standing law in Connecticut that "a compromise agreement . . . if free from fraud, mistake or undue influence . . . is conclusive between the parties."

In Gengaro, a trial court granted summary judgment in favor of the City concerning employment claims because Gengaro had signed a confidential settlement agreement prior to the lawsuit. Gengaro claimed he was forced to so sign the agreement because of threats of losing his job. He claimed undue influence to attempt to invalidate the settlement agreement. Gengaro claimed that he had serious financial and medical problems. Coupled with the threat of job loss, he claimed that he had no reasonable alternative but to agree to the settlement.

The trial court granted summary judgment finding insufficient issues of fact concerning undue influence. Essentially, the court concluded that the threat of losing his job was not sufficient for the exercise of undue influence. The Appellate Court agreed. For a good analysis of what employers should to to avoid these type of claims check of the Connecticut Employment Law Blog post on the case.

To establish undue influence in Connecticut, four elements must be established:

a person is who is subject to influence
an opportunity to exert undue influence
a disposition to exert undue influence; and
a result indicating undue influence

Relevant factors in the inquiry include age, physical and mental condition, whether the person had disinterested or legal advice, the consideration of value of the contracted for exchange, and active solicitations and persuasions by the other party.

In summary, undue influence is the exercise of control by one person over another in an attempt to destroy the person's free agency and "constrain him to do something other than he would do under normal control..." Undue influence, if demonstrated, may invalidate a contract because the free assent of one party to the contract is lacking.

Settlements agreements are enforceable in court if the terms are clear and authorized by the parties. Attempting to invalidate the agreement by showing undue influence, fraud, or mistake are difficult claims to make. The take away here is to carefully review your settlement agreements with counsel because once you sign an agreement, it is likely to be enforced absent special factors.

Connecticut Guaranty Fund Offers Some Recovery For Homeowners Harmed By Construction Contractors

N. Kane Bennett — Sun, 13 Dec 2009 11:17:40 -0500

Recently,the Attorney General's office announced another criminal conviction against a home improvement contractor responsible for many failed home improvement contracts. The report also indicated that the homeowner consumers were going to get some financial relief from the Home Improvement Guaranty Fund (HIGF). The HIGF offers up to $15,000 in relief to consumers who meet certain conditions including:

failed contract with a register contractor
contract was for residential dwelling
you must first obtain a court judgment against the contractor
you must take reasonable steps to enforce the judgment without success

Any consumer who meets this criteria can file an application that is posted online. This applies to home improvements, not new construction. Consumers of new home construction in Connecticut can apply to the New Home Guaranty Fund (NHGF) for up to $30,000 in relief. The same basic criteria apply here, but the fund involves new home construction contracts.

Many times, when a contractor goes bankrupt or has no assets, the HIGF and NHGF are the only source of recovery for consumers that were victim of defective or negligent construction for new construction and home improvements. When a consumer decides to bring a lawsuit against a contractor, the first questions asked should be whether the contractor has assets to pay any judgment. If not, the funds may be the only realistic option for recovery

Of course, the goal is for homeowners to find their way to the many reputable contractors in Connecticut to avoid this type of problem. Reputable contractors will urge consumers to look up a contractor's history of complaints with the Department of Consumer Protection before signing a contract. Consumers should also ask for references and follow up on them before signing any contract. A reputable contractor will have no problem providing several references and examples of work product.

It is also critical that a consumer check to see if a contractor is properly registered before signing the contract. Although failing to properly register may be criminal, the lack of registration could prevent a consumer from recovering even the limited amounts under the guaranty funds.

Health Net's Data Loss In Connecticut Was Theft

N. Kane Bennett — Wed, 09 Dec 2009 08:45:23 -0500

Attorney General Richard Blumenthal issued a scathing press release related to Health Net's recent data loss and security breach. Blumenthal called Health Net's story on it "sanitized" and its six month delay in reporting "unconscionable." Blumenthal called for a federal investigation and intensified state efforts because of the sensitive financial and health information at risk for exposure.

Health Net is based in Shelton, Connecticut and is one of the largest health plans in the Northeast serving approximately 580,000 members. A report by Lucas Mearian of Computerworld stated that the information stolen was a portable hard drive that had not been encrypted. Proper encryption could have prevented access of the information.

Connecticut consumers have been affected by the data loss and more than a million people had social security numbers and financial and medical information exposed. Consumers in Arizona, New Jersey, and New York also had sensitive information exposed. Thus far, there has been no report of identity theft or misuse of the information.

Connecticut Businesses Should Check Massachusetts Privacy Laws

N. Kane Bennett — Wed, 02 Dec 2009 09:29:25 -0500

I have put together several posts on Connecticut's privacy laws and the potential impacts on small businesses concerning data loss or a security breach. It is important to point out that Connecticut companies doing business in Massachusetts or with Massachusetts residents must also consider Massachusetts privacy laws. Tracy Fox, from ForeSite Technologies, recently commented on the small business study I posted and provided a copy of a checklist for small businesses trying to comply with the relatively new, and complex privacy law framework in Massachusetts. I will write a more detailed post about the Massachusetts privacy law in the near future. The checklist is a good starting point.

Breach of Fiduciary Duty In Connecticut

N. Kane Bennett — Sun, 29 Nov 2009 10:58:17 -0500

Here is a quick summary of another of the so called "business torts" in Connecticut known as breach of fiduciary duty. A fiduciary duty can arise in a number of contexts in business including relationships with partners, lawyers, accountants, trustees, investment advisers, brokers and employees. When one party in a relationship is a fiduciary, it requires the party to act with the utmost good faith, fair dealing and loyalty.

Many times, breach of fiduciary lawsuits are filed in Connecticut when the relationship breaks down over lost or mismanaged money. Frequently, business partners are also found to be fiduciaries with respect to each other. A fiduciary relationship may be formed when the following factors exist:

unique degree of trust and confidence between the parties
one party has superior knowledge and skill
the party with superior knowledge has a duty to represent the interests of the other part

Connecticut's common law on breach of fiduciary duty law is flexible in that it will not exclude new situations, but is also clear that not all business relationships are fiduciary relationships. For example, courts will not recognize a fiduciary relationship for parties that are dealing at arm's length for transactions. This is because the relationship lacks a dominance by one party or dependence by the other, or the lack of a special relationship.

The legal recognition of a fiduciary relationship is very significant in a lawsuit in Connecticut. If a plaintiff proves that a fiduciary relationship exists, the standard and burden of proof changes. A plaintiff has to prove that a fiduciary duty exists by a preponderance of the evidence. Once established, the burden shifts to the fiduciary as a defendant to prove good faith and fair dealing. Further, the fiduciary must prove good faith by clear and convincing evidence.

Because of the burden shifting and higher standard, fiduciary cases are often won or lost on the legal characterization of the relationship.

Auto Body Association Wins 15 Million Dollar Verdict For Unfair Trade Practices

N. Kane Bennett — Wed, 18 Nov 2009 11:31:25 -0500

On November 17, a superior court jury in Stamford returned a 15 million dollar verdict in favor of the Auto Body Association of Connecticut (and three other auto body repair shops) arising out of claims againt the Hartford for unfair trade practices. The case docket goes back to 2003 and was filed based on claims that the Hartford was supressing auto body labor rates by steering customers to preferred appraisers and auto body shops.

The website search-autoparts.com provided some insights into the case stating that the claims were supported by "extensive documentation including internal memoranda detailing company policies, as well as several depositions by company employees." In addition to the 15 million dollar verdict, the Association is now looking to obtain injunctive relief, and potentially punitive damages according to a article in the Hartford Courant by Kenneth Gosselin. According to an article by Rob Varnon on newstimes.com the problem started when the Association believed that customers with damaged cars were being steered to preferred shops with lower rates according to terms of the insurance company, not the customer.

The Auto Body Association of Connecticut has taken issue with the practices of appraisals and auto body repair rates for years now. At one time, even before this current case, I represented one of several independent appraisal companies sued by the Association seeking discovery of documents related to the same set of issues. Our group of defendants was successful in defending the discovery lawsuit, but it was clear then that the Association intended to bring additional claims. The Attorney General is also getting into the dispute now seeking federal intervention after having sided with the Association in the past.

The Hartford intends to continue defending its appraisal and repair program on appeal and with post trial motions. The Hartford stated "we are disappointed with the verdict and plan to appeal. We remain confident that our auto-body repair program is fully consistent with Connecticut law . . ."

This litigation seems far from over. Only time will which side will eventually prevail.

New Study Shows Small Businesses Vulnerable to Cyber Attacks

N. Kane Bennett — Sat, 14 Nov 2009 11:00:31 -0500

The National Cyber Security Alliance recently released a new study with some startling numbers concerning small businesses and the threat of data loss, security breach, or cyber attack. Some of the key numbers obtained from polling small business owners include:

65% store customer information on computer systems
43% store financial records
33% store credit card information
86% do not have anyone focused on system security
11% of owners never check their computer security systems.
75% use the internet to communicate with customers
28% have formal internet security policies

What do these numbers suggest? Deborah Cohen, who covers small business for Reuters.com, published an article following release of the study and “confirmed that small businesses are among the most vulnerable to Internet crime. . .” She quoted Michael Kaiser, executive director of the National Cyber Security Alliance, who noted that “small businesses are pretty robust targets” for cyber attacks citing the lack of Internet protocol and employee training. Cohen’s article also offers some tips from Kaiser for small businesses to help confront cyber attacks.

If you are looking for some guidance or help with cyber security, read here for some of my earlier posts. If you are looking for a do-it-yourself placer to start, try the U.S. Chamber of Commerce. The Chamber offers a great resource entitled“Common Sense Guide to Cyber Security for Small Businesses.” It’s a 12 step plan to increase cyber security. Here are some highlights:

· Use strong passwords and change them regularly

· Watch for strange email attachments

· Install computer security software and network security

· Keep software updated

· Limit access to sensitive and confidential data

· Establish and follow security plan

· Maintain insurance coverage

The threat of data loss or security breach is not going away, but will only increase. Lawsuits concerning data loss and security breach are more frequent. Business owners need to stay on top of the threat by implementing a sound data loss and privacy plan. There is no one size fits all approach and every business will have its own risk exposures. If you are a business owner, consider having your business evaluated for risks of cyber attack or data loss.

Do You Need A Contract To Stop A Former Employee From Competing?

N. Kane Bennett — Tue, 03 Nov 2009 17:34:16 -0500

The short answer is yes, a business does need a contract, also known as a "non-compete agreement," to prevent a former employee from fairly competing in business once the employee resigns. Even with a written agreement, there are limitations on non-compete agreements because they are viewed as a restraint of trade. To be enforceable, the restrictions in the agreement must be reasonable in time, scope, and geography. The restrictions also must be reasonable in relation to legitimate business interests you are seeking to protect.

A poorly drafted agreement, or no agreement at all, can leave a business with little legal recourse to stop a former employee from fair competition once the employee resigns. Simply put, the law in Connecticut permits fair competition upon resignation. However, the lack of a written agreement does not give free license to employees to unfairly compete in all circumstances.

For example, what about an employee that starts competing against your business without your knowledge while continuing to work for you? Is this fair competition that should be freely permitted? Depending on the circumstances, this type of conduct can be actionable in a civil case for damages. The actionable conduct is breach of the employee's common law duty of loyalty, which exists without a written agreement in certain circumstances. There are also statutes in Connecticut that can protect businesses in certain situations that do not require contracts such as unauthorized computer access or misappropriation of trade secrets.

I just read a story about a recent case that demonstrated some of the legal issues involved when there are no contracts in place with former employees. According to the small business report by Carlye Adler of CNN, Charter Oak Lending, located in in Danbury Connecticut, lost a trial against several former employees who allegedly left to work for a larger company, CTX Mortgage. Charter Oak alleged it lost more than a third of its business and a million dollars in fees after a sudden departure of 10 employees to CTX. The litigation lasted four years and ended with a defense verdict for the former employees. Charter Oak is appealing the decision.

It appears that the decision against Charter Oak was based in part on the lack of contracts and the categorization of the defendants as independent contractors rather than employees. The Trade Secrets Blog by Womble Carlyle picked up the story and had an interesting take focused on pure versus unfair competition. The blog post supports the legal concept that a line can be crossed turning pure competition into unfair business.

Charter Oak's appeal of this case will be interesting to follow. The outcome will likely depend on what evidence existed at trial to demonstrate unfair competition prior to the employees' departure along with consideration of the duty of loyalty. The takeaway is that it is always better to have written agreements to protect your business' customers, client lists, and confidential information. However, the lack of such an agreement will not always give free license to former employees to unfairly compete in all circumstances. A close examination of the facts of each case must be undertaken to consider common law and statutory remedies that do not necessarily require agreements.

Did A Secretary Cause A Billion Dollar Default Judgment Against PepsiCo?

N. Kane Bennett — Thu, 29 Oct 2009 09:22:15 -0500

Imagine your company is so busy preparing for a board meeting that a secretary sets aside paperwork from a recently served lawsuit for a billion dollars over trade secrets. Imagine further that your company bureaucracy fails to put it together that a lawsuit has been filed until such a time that your company becomes defaulted in the case, to the tune of $1.26 billion dollars. Ouch.

Well, that is exactly what happened at PepsiCo according to a report by Lynne Marek in the National Law Journal. According to the story, PepsiCo for various reasons, failed to realize a lawsuit had been filed or a motion for default until it was too late. The case involved allegations that PepsiCo stole trade secrets and ideas for Aqaufina from two Wisconsin men. When the suit went unnoticed, a Wisconsin state court judge granted a motion for default against PepsiCo.

Marek writes that PepsiCo is trying to undo the damage and vacate the default. Perhaps PepsiCo can vacate the default, but if not, it is a devastating blow in litigation to lose your liability defenses. By all accounts PepsiCo indicates the lawsuit is questionable suggesting numerous defenses exist. Unfortunately, it appears there is a chance they may never get to assert the defenses.

In Connecticut, if you are defaulted for failing to respond to a lawsuit and a default judgment enters against you, you also can lose the ability to defend against the allegations in the complaint. If you further fail to appear in the case before the court determines the amount of damages (usually at a hearing), then you may also lose your ability to defend against damages claims. Of course, there are various ways to avoid a default judgment (such as filing an appearance before judgment enters), but if a lawsuit is ignored too long, you could face a similar fate as PepsiCo.

To avoid the PepsiCo disaster, Connecticut businesses should have a policy in place to handle all matters related to litigation or lawsuits. A business should designate one person that all staff can refer litigation issues, lawsuit papers or any other documents. Lawsuits should be given immediate attention so as to not miss any deadlines.

In state court, deadlines can determined from civil summons or cover page of the lawsuit.

A defendant has to file an appearance within 2 days of the return date listed on the civil summons
A defendant also has 30 days from the return date to file a responsive pleading to the complaint .

These deadlines should not be ignored. Although there are methods for vacating a default, even a frivolous lawsuit can end in a judgment if ignored for too long.