Connecticut Business Litigation Blog

What To Do If You Suspect Your Business Partner Is Stealing - Some Basics

N. Kane Bennett — Mon, 13 May 2013 01:01:01 -0500

In any case involving theft by a business partner or business dispute, it is very important to have an understanding of the basic issues and legal framework. Although these cases often involve complex problems, you cannot determine a good course of action without starting with the basics.

Here are 5 of the basic issues and what to do if you anticipate a business dispute with a partner or small business in Connecticut.

1. Figure out the type of entity you formed for your business

Principals of small or closely held companies or partnerships typically start off their businesses by choosing an entity such as a Limited Liability Company (LLC), Limited Liability Partnership (LLP), or Corporation (C Corp. or S Corp.). This may seem like a "no brainer" but you might be surprised that many partial business owners (typically minority owners) do not know the exact type of business entity they own.

To determine what type of entity you formed look for documents such as Articles of Organization, Articles of Amendment, Certificate of Incorporation, Organization and First Report, Certificate of Amendment, Certificate of Limited Liability Partnership, or Statement of Partnership Authority. These are the so called "incorporating" documents or "originating" documents filed with the Secretary of State. These documents clarify the type of entity chosen and the original incorporators or members of the entity. These documents are available to the public and are available for searching at the Secretary of State website www.concord-sots.ct.gov . If you cannot find your documents, try searching the Connecticut Commercial Recording Division website.

2. Figure out the structure and control of your entity.

The structure and operations of an entity often are governed by formal documents in most cases, or by default rules in others. Formal documents may include bylaws, resolutions, shareholder agreements, stockholder agreements, voting agreements, or operating agreements. These documents likely detail your ownership and management rights.

Of course, we see many cases where these agreements do not exist or were never finalized. It remains important to find what you have to show any agreement, even if informal. Maybe you exchanged some emails or you drafted a memorandum of understanding or informal partnership agreement. However, if you do not have a formal or informal agreement, Connecticut General Statutes can operate as a fall back or default to govern the operation and management of corporate entities. You can review the basic statutory laws of Corporations on the Connecticut General Assembly Website www.cga.ct.gov/current/pub/titles.htm . For example, Connecticut statutory laws for Corporations are found in Title 33.

3. Get access to the books and records of the business.

Many times, clients come to us after the business partnership has fallen apart, become insolvent, or dissolved. In many of these instances, one of the partners has access to all the records, and the other partner does not. Your rights to obtain company records may be spelled out in the agreements or documents mentioned in # 2 above. Alternatively, inspection rights for books and records are provided by statutory law. For example, Connecticut General Statutes § 33-946 - 950 permits inspections of books and records by shareholders and directors. However, many times feuding business owners end up having to file a so called "books and records" lawsuit in Connecticut state court to get access to the corporate books and records.

Getting access to the company financials is important. At minimum, you should seek to obtain summary financials, such as income statements, profit and loss statements, or trial balances. However, the ideal is to have access to the actual raw data. This means getting access to bank account(s) (including web access), loan accounts, credit accounts, and the company accounting journals. Getting access to this data may depend on whether the accounting software is server based, such as Peachtree, or cloud based such as QuickBooks online.

4. Identify all sources where records might be stored

Businesses generate all kinds of data and records. Increasingly, this data is completely digital and electronically stored on a computer, server, or at third party sites such as Rackspace or Boxnet. Additionally, emails seemingly become critical in every case that ends up in litigation. You need to identify where emails and other electronic means of communication (text or instant message) might exist such as the company email servers or third party sites (i.e. Google, Microsoft, Comcast, or Verizon).

Once you identify the locations of the records, you may need to try to preserve this information so you have it in usable form in the event of a dispute. Correctly copying digital records may require an expert in computer forensics. You also may want to involve an attorney so that you understand the full extent of your obligations to preserve evidence and gain protections from discovery.

If your dispute requires a lawsuit to resolve, you many need to act quickly to subpoena records from third party providers before records become lost, destroyed or deleted. If you suspect key evidence exists in emails, you may need to subpoena Internet service providers or third parties that provide applications over the Internet such as Google. Generally, to get the authority to issue a subpoena, an attorney will need to bring a lawsuit concerning the dispute or a lawsuit seeking permission to seek "discovery" of these documents to help build a case. This is known as a bill of discovery.

5. Seek help from professionals.

Various professionals, such as forensic accountants, computer forensic experts, fraud investigators, and attorneys can assist in most business disputes. It is a good idea to consider a conference with a professional to review your concerns. Also, you should always consider having your attorney lead the investigation as the involvement of an attorney can add a layer of protection when your opponent later seeks to obtain the results of your investigation.

New John Doe Copyright Infringement Suit Filed in Connecticut

N. Kane Bennett — Tue, 23 Apr 2013 10:48:33 -0500

A lawsuit relating to online copyright infringement of synthesizer software using “peer-to-peer” networks was filed recently in Connecticut District Court. The case is captioned reFX Audio Software, Inc. v. Does 1-89. The complaint alleges that certain individuals and Connecticut residents committed acts of copyright infringement through the use of a common “peer-to-peer” (“P2P”) file transfer protocol known as BitTorrent.

A common tactic in mass copyright infringement lawsuits is the use by plaintiffs of “tracking software” which identifies the internet protocol addresses (“IP Addresses”) that were allegedly used to commit acts of software piracy.

By way of background, Internet service providers, (i.e., Comcast, Cox, etc.) provide the account holders with specific IP addresses from which users can access the Internet. In these lawsuits, attorneys bringing the lawsuits allege that each IP address is unique and is therefore linked to a specific user account. In order to identify the allegedly infringing users, reFX hired a Connecticut attorney to file a motion with the court, asking to conduct discovery in order to learn the identities of the account holders. If granted by the court, the attorney for reFx will issue a subpoena to each of the Internet providers requesting that they turn over information (typically name, address, telephone number) for the account holder.

On March 20^th Judge Janet Hall granted Plaintiff’s motion for leave to take discovery in the reFX Audio case. As a result, certain Internet providers have now sent letters to cable customers and account holders notifying them of the pending lawsuit. Typically, Internet providers will wait 60 days to allow the account holders to seek legal counsel prior to providing the court-ordered personal information.

If you have received a letter from your Internet provider identifying your IP address as having participated in the alleged copyright infringement of reFX software, read here from our earlier post on the issue for next steps and to consider if you need to hire an attorney to represent you.

We already have received calls in response to this lawsuit. Many callers have read or been told to ignore these letters. Each circumstance is typically unique in these cases, and there is no one size fits all defense. Do not assume that ignoring the letter will result in the problem going away. While it is true that in some cases ignoring the letter is an appropriate response, it many other cases the risks are too high to simply ignore the problem. Once you are fully informed of all of your options such as, filing motions to quash, settling or compromising the claim, defending the action, or ignoring it, you can then decide the proper cost/benefit for your case.

Deciding to Enforce A Non-Compete Agreement in Connecticut - 5 Tips

N. Kane Bennett — Wed, 10 Apr 2013 12:59:08 -0500

Many Connecticut business owners have agreements (so called "non-compete agreements") in place with their employees concerning competition or solicitation. When an employee leaves a company, business owners have to decide if they should try to enforce the non-compete agreement by filing a lawsuit or engaging an attorney. Here are 5 factors to consider:

1. Is the contract reasonable? I have reviewed hundreds of these agreements, and they are all different (even the agreements I draft). There are various legal and factual requirements that you will need to satisfy for enforcement of non-compete or non-solicitation contracts. However, in general, the first question you have to ask is whether the contract is reasonable in light of the business you are in and purpose behind the specific contractual terms.

For this reason, it is always a good idea to have an attorney draft your agreement specifically tailored for your legitimate business concerns. Getting a form template online and applying it to your business may seem like a cost effective approach, but what happens when you really need to enforce your agreement?

2. What are you trying to protect? Generally speaking, it is easier to convince a court to stop a departing employee from taking your customers or manufacturing process than it is to stop the employee from working for a competitor. For example, the chances of successful enforcement increases if your contract was drafted to protect customers the employee was working with as opposed to trying to stop the employee from working in any type of role for a competitor. Additionally, courts are much more likely to entertain an injunction for protection of legitimate confidential information.

3. Are you worried about creating a standard for other employees? Employees that leave always talk to the employees that stay behind. It is a fact of life. In addition, word gets around about the details of any settlement involving non-competes. Why? Well, for one, everyone wants to know whether a business will actually seek to enforce their contracts. If a company continually declines to enforce their non-compete agreements, other employees may get the idea that the same rule will apply.

4. What are the risks involved? It may be difficult to know the full extent of the risk posed by a departing employee. However, it is important not to underestimate the risks. I have seen circumstances where a business loses only one small client at first, but suffering major loses many months down the road. Some questions to consider: (1) have you lost clients or are you in danger of losing clients; (2) is there a danger of the employee disclosing or using legitimate confidential information; (3) what did the employee have access to while at work (i.e. client lists, trade secrets, and financial information); and (4) was there an exit interview conducted and return of confidential information verified.

5. Litigation costs v benefits. I ask clients to make a business decision by weighing the risks (see # 4) versus the costs involved. Litigation costs are dependent on a number of factors. Some examples of factors that impact litigation costs include (1) the nature of the dispute; (2) the strength of the contract; (3) the ability of the departing employee to defend the case; (4) the lawyer defending the case; and (5) the type of action you decide to bring.

These are only some of the many factors a business should consider when confronting a decision on enforcement of a non-compete.

Damages for Breach of Non-Compete Agreement In Connecticut

N. Kane Bennett — Wed, 30 Jan 2013 17:23:57 -0500

When deciding whether to hire an attorney to seek enforcement of a non-compete agreement in Connecticut, a business should consider the available remedies or damages. The following are the basic remedies or damages for breach of a typical non-compete agreement in Connecticut.

1. Injunctive relief. Injunctive relief basically means a court ordered act or prohibition against an act. For example, when seeking to enforce a non-compete or non-solicitation agreement, your attorney will request that the court issue an order preventing the employee from working for a competitor. If there is a non-solicitation clause in the contract, the attorney will ask the court to issue an order to prevent the departing employee from soliciting or "stealing" clients. The court will only issue such an order if the agreement meets a series of factual requirements. Essentially, the restrictions in the agreement must be reasonable in relation to protecting legitimate business interests.

2. Actual losses. In some situations, a business will have no measurable losses and will need to resort to injunctive relief only. However, in other instances, a business will have provable loss of business from breach of an agreement. The traditional rule for breach of contract is to measure the damages or losses to the business and not the gains of the departing employee or competing business. A typical example would be the loss of incremental profits from losing a customer arising from the improper conduct of the departing employee. In Connecticut, a business must prove these damages with reasonable certainty and not guesswork.

3. Disgorgement of profits. In certain circumstances, a business could win an award that disgorges (or takes away) the ill gotten gains or profits of the departing employee. For this type of damages, the focus is on the profits of the departing employee.

4. Attorney's fees. The traditional rule requires each party to pay their own attorney's fees. However, if the employment contract has a provision that covers an award of attorney's fees, a court may award attorney's fees incurred in enforcement of the non-compete.

5. Punitive or multiple damages. In a standard breach of contract case, punitive, exemplary, or multiple damages are not available. However, if the conduct involved provides the basis for a violation of some other statutory or common law, a business may recover some type of extra contractual damages. An example would be if the breaching conduct also provided the basis to prove a willful violation of Connecticut's Uniform Trade Secrets Act.

Time Does Not Run Against The King Or The State of Connecticut

N. Kane Bennett — Mon, 12 Nov 2012 13:08:33 -0500

Imagine you are a subcontractor hired to work on a project for the State of Connecticut in 1994. You did not deal with the State at all in your contractual dealings. You were hired by a general contractor to do a small part of a large building project. Next, you priced your work, completed it, and got paid.

Now, fast forward 12 years. Without any notice to you (some defendants claimed they had no notice of issues) of any problems for 12 years, the State of Connecticut knocks on your door with a lawsuit seeking over 15 million dollars from more than 20 defendants, including your company.

When you receive this lawsuit, you might immediately conclude that the lawsuit is time barred by the statute of limitations for breach of contract and negligence. You might even ask your attorney, and your attorney probably would agree that the statute of limitations for your work has long expired. Nothing to worry about, right? WRONG.

Here is the case: State of Connecticut v. Lombardo Brothers Mason Contractors, et al. In this case, the Supreme Court of Connecticut upheld the ancient doctrine of nullum tempus occurrit regi, or "no time runs against the king." The king is the State of Connecticut. The court noted that nullum tempus is "a common-law rule that exempts the state from the operation" of time based statutes, such as statutes of limitation and repose. In short, the 12 year passage of time does not matter because the state is like the king.

The state filed its lawsuit against more than 20 contractors in 2008 for over 15 million dollars in alleged damages caused by faulty construction and water leakage at the University of Connecticut law library. The work was completed in 1996. The state immediately began to notice problems with water leakage. This was not a hidden defect case. The State knew right away, and did not bring a lawsuit for damages for 12 years. The state sought recovery for breach of contract, negligence, and product liability.

None of this mattered as the Supreme Court found that nullum tempus has been alive and well in Connecticut since at least 1879 and traceable all the way back to English common law. The court deemed it "well established and clear-cut." Maybe so, but clarity to the court does not make it any less shocking to contractors and their attorneys. The court also noted that if someone wants the common law of Connecticut changed, that is the job of the legislature.

Nothing like a 15 million dollar lawsuit to remind you that our law is largely based on English common law....

You Should Not Ignore Choice of Law or Forum Selection Provisions In Business Contracts

N. Kane Bennett — Wed, 22 Aug 2012 17:51:29 -0500

In a typical business deal, the parties negotiate over essential terms such as price, payment, deliverables, indemnification, warranties, etc. Once you work out all the important details, the parties put together a written contract with the essential terms in it. If a lawyer is involved, the contract also will include a bunch of so called boiler plate clauses. The boiler plate clauses are the 10 or 12 clauses that appear at the end of a contract.

Many times the boiler plate clauses get overlooked because the parties typically say "these clauses are in every contract." Ignoring these provisions can be a costly mistake if the relationship breaks down and a lawsuit becomes necessary. In fact, when parties finalize a business deal they do not anticipate how these clauses might impact litigation down the road.

Two of these clauses that frequently get overlooked are known as "choice of law" and "forum selection" clauses. This post will focus on forum selection. I will address choice of law in the next post.

Forum selection clauses typically govern the location and venue where the parties can file a lawsuit arising out of any dispute subject to the contract. The provisions vary. Parties usually negotiate over the location, but often times the exclusivity of the location gets overlooked. Some examples might require the parties to file a lawsuit:

in only one location, such as Connecticut or Massachusetts (exclusive)
in only one court, such as Hartford Superior Court in Connecticut (exclusive)
in multiple locations or courts (non-exclusive)

The forum selection clause might also include a waiver of any defenses to personal jurisdiction and consent to the chosen location. The laws in each state vary on enforcement of forum selection clauses. However, for the most part, if a party cannot avoid enforcement of the contract based on other defenses (such as fraud, durress, coercion, etc), courts tend to enforce these clauses.

Every business deal raises different concerns, but it is important to analyze these clauses with the potential scenarios that might occur. For example, sometimes, these clauses carry no particular concern, such as in a dispute between two companies in the same state. However, there are many scenarios where this simple boiler plate clause becomes problematic to one side, and very favorable to the other. This is especially so in the case of an exclusive forum.

Take for example a clause that requires all lawsuits to be filed in Connecticut state court . If you are a Connecticut business, and you expect that you might have to file a lawsuit, this could be an important advantage to you. It might eliminate the possibility and expense of an out-of-state opponent filing a motion to dismiss based on jurisdiction. You might also avoid the need to hire an out-of-state law firm.

On the other hand, in some circumstances, a Connecticut business might want to file a lawsuit in another location where the out-of-state defendant resides. This may become important to more easily enforce a judgment or attach assets. Additionally, in some circumstances, you might want to get an injunction enforced by a court where the defendant resides.

This post only touches upon some of the possible concerns with forum selection clauses. The take away here is that you should never ignore these clauses. You might not be able to solve all your concerns by negotiation of these terms, but forum selection should always be factored into decision making.

New Update to Connecticut Data Breach Law

N. Kane Bennett — Sun, 15 Jul 2012 17:58:21 -0500

Connecticut Updates Its Data Breach Statute by Attorney David Benoit.

A month after Vermont made substantive amendments to its Security Breach Notice Act to address a number of consumer protections, Connecticut followed suit on June 12^th with a similar amendment to Connecticut General Statutes Sec 36a-701b to include a notice to the State’s Attorney General.

Going into effect on October 1, 2012, Connecticut’s amended breach notification requirements will now include an obligation to notify the Connecticut Attorney General’s office pursuant to a new subsection (b)(2):

“If notice of a breach of security is required by subdivision (1) of this subsection, the person who conducts business in this state, and who, in the ordinary course of such person's business, owns, licenses or maintains computerized data that includes personal information, shall not later than the time when notice is provided to the resident also provide notice of the breach of security to the Attorney General.”

Regarding when notice is to be made (both to the Connecticut resident and the Attorney General), the statute allows the notifying party a reasonable amount of time to accommodate delays resulting from law enforcement and company-led investigations meant to: (i) determine the nature and scope of the data breach, (ii) identify the individuals affected by the breach, and (iii) restore the reasonable integrity of the data system.

Additionally, subsection (c) was amended to clarify that the state’s notification requirements are applicable only to personal information of “a resident of this state.”

Furthermore, pursuant to Section (g), failure to comply with the statute will continue to be deemed an unfair trade practice under Connecticut’s Unfair Trade Practices Act (“CUTPA “), however, enforcement is still limited to the Attorney General with no private right of action.

Have You Received a Copyright Infringement Letter form a Connecticut Internet Provider?

N. Kane Bennett — Mon, 04 Jun 2012 11:17:41 -0500

What To Do If You Receive a Copyright Infringement Letter From Your Internet Service Provider (ISP)

If you’ve recently received a copyright infringement letter from your Internet service provider, you’re not alone. Recently, there’s been a rise in the number of copyright infringement lawsuits filed across the country involving alleged copyright infringement or “piracy of content” via peer-to-peer (P2P) and file sharing services such as BitTorrent and The Pirate Bay. A recent report has identified over 220,000 individuals as having been sued since mid-2010 in mass BitTorrent lawsuits, many of them based upon alleged downloading of copyrighted works.

Typically, plaintiffs involved in these cases file suit against a series of “John Does” alleging the illegal downloading of images, blockbuster movies and oftentimes, adult-themed videos. In their complaints, plaintiffs will often include a list of Internet protocol (IP) addresses that were used to engage in the illegal transfer of copyrighted materials.

How will a plaintiff get my name and contact information?

Through the use of court-ordered subpoenas, plaintiffs will request the Internet Service Providers (ISPs) (i.e., Comcast, Verizon, Cox, Time Warner) to turn over the individual names and contact information of the Internet account holders associated with the IP addresses that were identified in their complaint. Oftentimes, the ISPs will file motions to quash the subpoenas (motions asking the court to relieve them from having to turn over the requested information). If an ISP does not file a motion to quash, or the court rules in favor of the plaintiff, the ISP is then ordered to produce the requested information. Before it turns this information over to the plaintiff, the ISP will send a letter to the account holder that unless such individual takes legal action, the ISP will provide the plaintiff with their name and contact information.

What should you do if you receive a letter from your ISP?

1) Don’t panic, but don’t ignore the letter either. More likely than not, you have a few weeks to make a decision. Use this time to learn more about your options and your situation. Learning more about the facts of the case will shed more light on the types of options that you have. Ignoring the letter won’t make it go away and could limit your chances of success.

2) Don’t reach out to the plaintiff or its attorney. You should not contact the plaintiff or plaintiff’s counsel without assistance of a copyright attorney to help you. Plaintiffs’ counsel often will harass and threaten Internet subscribers who reach out and identify themselves in an attempt to plead their case as to why they were wrongly targeted. I compare this situation to the well-known carnival game: Whac-A-Mole. Plaintiffs’’ counsel is likely to make an example out of you in order to coerce the others if you come forward and identify yourself.

3) Educate yourself. More likely than not, the letter you received from your ISP came from their legal department. The letter is likely to provide some basic facts about the case, including the title of the litigation, the name of the plaintiff and the location of the federal court that the case is being in. Sometimes, the letter isn’t entirely accurate as to your specific situation – these are typically form letters and may incorrectly identify you as a defendant when you aren’t an actual party to the lawsuit. This is an important fact to find out because it will determine what judicial rights and options you have to prevent your information from being disclosed.

4) Prepare a list of valid reasons why you’re not at fault. By educating yourself about the specific facts of the case, importantly, the facts concerning what the copyrighted material was, when it was downloaded and by what means, you are likely to be in a better position to provide evidence to your attorney as to why you may have been mistakenly targeted. Reasons such as using an unprotected wireless network, having multiple tenants in an apartment building share a single IP address, or being out of town on the day and time of the alleged infringement have been determined to be valid reasons in various jurisdictions for not being liable.

5) Speak to an experienced attorney. In addition to the shock of receiving a letter from the ISP, you may be faced with the fear or worry of being publicly harassed or exposed due to the sensitive or adult-themed nature of the illegally downloaded material. These factors can significantly interfere with your ability to objectively assess your options and plan the most effective course of action. You should consider working with a copyright infringement attorney that has experience counseling clients in similar situations. An experienced attorney can help you decide what your best options are and develop a game plan that will increase the odds of a favorable result.

IP Advice for Connecticut Start-Ups: Protecting Your Client's Personally Identifiable Information

N. Kane Bennett — Sun, 27 May 2012 11:08:00 -0500

David Benoit presents his fourth post as a guest blogger on the topic of Intellectual Property for Connecticut Start-Up companies. In his fourth installment, he focuses on the need for entrepreneurs to protect their client’s most important assets: client personal information.

In addition to implementing best practices with respect to a company’s own IP, start-ups need to be as mindful in taking adequate safeguards to ensure that any client IP that is being collected, stored, manipulated or distributed is not being used in a manner that will expose the start-up to liability. Client IP most often includes “NPI” (nonpublic personal information) and includes personally identifiable financial information and any lists, descriptions or other groupings of consumers derived using personally identifiable financial information. Unauthorized disclosure or access of personally-identifiable customer data typically results in financial liability (i.e., regulatory fines, penalties and legal fees) and reputational liability (i.e., damage to goodwill that the startup has worked hard to build).

Knowing which IP safeguards to implement and what steps need to be taken if an IP breach occurs requires a thorough understanding of the ever-changing, multi-jurisdictional laws and regulations applicable to the start-up’s business. This could include federal regulations, state- and industry-specific requirements surrounding the collection, storage, deletion and distribution of sensitive customer or end-user data. Utilizing the services of a privacy attorney who understands not only your business, but also your client's, is important to implementing best practices.

Having an understanding of these regulations and standards, such as the Children’s Online Privacy Protection Act (COPPA), the Health Insurance Portability and Accountability Act (HIPAA), the Health Information Technology for Economic and Clinical Health Act (HITECH Act), Gramm-Leach-Bliley Act (GLBA) the Fair Credit Reporting Act (FCRA), the Fair and Accurate Transactions Act (FACT Act) and the Payment Card Industry Data Security Standards (PCI DSS), is extremely important to minimizing liability exposure. Furthermore, knowing how to use customer IP without overstepping boundaries requires a well-written privacy policy, terms of service and other applicable data use agreements.

Connecticut Intellectual Property Series - IP Portfolio Building Increases Chances of Investment

N. Kane Bennett — Sun, 15 Apr 2012 13:37:26 -0500

Intellectual Property Series – IP Portfolio Building Increases Chances of Investment

Technology Attorney David Benoit presents his third post as a guest blogger on the topic of Intellectual Property for Connecticut Start-Up companies. In his third installment, he focuses on the ability for entrepreneurs to boost their companies’ valuations through the building of IP portfolios.

No. 3 - Out of Thin Air: Increasing Company Valuation Through IP Portfolio Creation.

Determining an early stage company’s worth can be one of the more difficult components of a fundraising process. While there are traditional rules of thumb, a company’s valuation is highly subjective and there is no steadfast method of calculation.

The company’s founders typically place a higher valuation on the company due to their optimistic future growth and business potential. Investors, however, often view an early-stage company as one that carries a higher risk of failure and as such, will often view its worth in a lower valuation light.

That being said, both sides of the fence generally agree that strategically-created intellectual property can have a beneficial and significant impact on a company’s overall valuation. Keeping this in mind, if a company’s founders anticipate a need to raise investment capital in the future, they should consider implementing a growth strategy that focuses on the development, management and commercialization (i.e., licensing) of Intellectual Property.

As I’ve often reiterated to fledging start-ups, there are very few investors willing to invest capital in a company that only has good ideas. Perhaps a product prototype exists, but rarely is that sufficient to address the concerns of investors, be they a seed, angel or otherwise. Furthermore, the ability to take a company to the next level and execute on a sound operating and distribution model is extremely important, but it is only one of the business areas of a start-up that investors will scrutinize.

Memorializing good ideas into semi-tangible property (i.e., patents and applications, trademarks and protectable trade secrets) is absolutely necessary to maximizing the company’s chances of success – and that is what investors want to see. Savvy investors view a strategic IP portfolio as the necessary foundation to a company’s “Four I’s” – Investment, Improvement, Innovation and Invention – none of which should be made unless a company is positioned to protect them from its competitors.

One good exercise for company management to implement is to hold semi-annual “IP Identification” whiteboard sessions with an IP attorney and incorporate similar exercises in annual strategy planning meetings. Being able to identify company assets as worthy of patent, trademark, copyright or trade secret protection, and strategically segregating them into categories of IP will help to formalize the company’s growth strategy. Additionally, it will help the company and its attorney to identify areas of vulnerability, room for improvement and possible business avenues to avoid. Most importantly, however, it will increase the overall value of the company and position it in a light that is favorable for investment.

Intellectual Property Series - Protecting Your Company's IP Assets

N. Kane Bennett — Tue, 03 Apr 2012 18:25:04 -0500

In this post, Attorney David Benoit continues with his guest blogging on Intellectual Property. Here is the second installment in the Top 5 IP Issues for Connecticut Start-Up Companies.

It is important for technology attorneys to counsel start-up companies to preserve IP that is being developed on an on-going basis. Utilizing contract best practices to ensure that that valuable intellectual assets are not contracted away will help maximize the overall value of the start-up and enable it to maximize commercialization opportunities.

No. 2 - Don’t Be So Quick to Open the Kimono: Protecting and Retaining IP Going Forward.

Once a tech start-up has taken sufficient measures to preserve its IP vis-à-vis its development team, it is equally important to employ contract best practices to enable the company to retain full control of future IP and to protect the company’s opportunities for future exploitation and commercialization. IP in this context especially includes, for example, source code for new application customizations, modules, functionality or interfaces.

This is especially true for software companies and web-based service providers that offer application development or software customization services to its customers. Most improvements to existing products and services are developed by these technology companies during the course of customer engagements. Industry knowledge, technical know-how and new business processes are learned during their interactions with their customers. It is precisely these interactions that spawn evolutionary upgrades and/or new products and generate substantial value in the company’s future growth.

Preserving the ability to use these valuable assets and integrate them fully into a company’s products and services, without restriction, should therefore be a top priority for the company and its lawyer during any contracting and negotiating process with a customer. All too often software start-ups, in the context of professional service or application development engagements, are overly eager to please their clients and avoid contract negotiation or confrontation. In some instances, start-ups make a decision to contract for new business without a lawyer to negotiate or draft agreements. As a result, they may inadvertently cede ownership rights to “work product,” know-how and/or “residuals” to their clients. Doing so may severely restrict their ability to offer similar services to future customers for fear of infringing on their former client’s IP rights or breaching former client contracts.

For this reason, start-ups should consider consulting an attorney experienced in technology and business before signing a contract. Having a technology lawyer carefully craft client agreements (and knowing how to effectively negotiate ownership rights and license provisions) will allow a tech start-up to fully incorporate valuable improvements into future product and services releases.

Next up, Out of Thin Air: Increasing Company Valuation Through Portfolio Creation.

Software Liability Act in Connecticut - Good Idea or Too Much Regulation?

N. Kane Bennett — Wed, 07 Mar 2012 18:41:56 -0500

Do software publishers need more regulation to encourage creation of safe and reliable software?That was the general question posed for a debate at the RSA Conference USA on February 29, 2012. Sean Doherty of Law Technology News wrote an interesting article summarizing the two different positions. One side of the debate favors creating a regime of "civil liability for software manufacturers whose code causes harm to consumers." Opponents view a regime of civil liability for damages caused by software as another unnecessary regulation. In addition, opponents maintain that our existing laws already provide remedies for software liability.

In Connecticut, there is no software liability statute or act. However, there are various existing legal theories that might apply to the sale of defective software, including:

breach of contract;
breach of express warranty;
breach of implied warranty; and
misrepresentation.

Of course, there are also defenses to breach of warranty claims regarding software. In many instances, a software attorney writing a contract or license agreement will include a disclaimer of all warranties and a cap on damages.

Some consumers and purchasers do not have the ability to hire an attorney to negotiate a purchase of software. Will a software liability act prohibit such disclaimers? Conversely, not all software vendors or manufacturers hire a software lawyer to protect their interests by drafting appropriate disclaimers in license agreements and contracts. Will a software liability act also protect software publishers from frivolous claims?

As noted by the debaters at the RSA conference, everyone wants better, more reliable software. However, I doubt that creating a new software liability regime, and thus more regulation, is the right answer. I tend to favor the market solution. Let the better software win.

New Connecticut Business and Technology Law Firm

N. Kane Bennett — Wed, 01 Feb 2012 17:39:39 -0500

I am pleased to announce that I have started a new law firm, Aeton Law Partners LLP. At my new firm, I will continue my litigation practice involving a wide array of business and technology matters. In this new venture, I have partnered with Attorney David Benoit. Dave brings a wide range of experience in transactions related to business, technology, and intellectual property. Together, we provide a broad base of experience and general counsel legal services for our existing and expanding client base. For more information on Aeton Law Partners, please contact me at 860 724 2163.

Will A Crack In Data Breach Litigation Open Floodgates

N. Kane Bennett — Tue, 01 Nov 2011 12:02:29 -0500

Data loss and security breach incidents have become common. However, lawsuits related to these incidents are not so common or successful. The problems plaintiffs have encountered include not only figuring out the proper cause of action to seek recovery (many states lack laws permitting private lawsuits for damages related to data loss) but also how to establish provable damages. For example, if a large retail store suffers a security breach of 2 hours leaving your personal identifying information exposed to thieves or hackers, have you really suffered any damages if the information is never used or compromised? What about so called "mitigation" damages or out of pocket expenses for future protection such as credit card insurance, fraud protection, or getting a new credit card and incurring an annual fee?

The First Circuit Court of Appeals in Anderson v. Hannaford Bros. Co recently shed some light on the potential for recovery of mitigation damages in data breach litigation. In the Hannaford case, hackers stole up to 4.2 million credit and debit numbers, expiration dates, and security codes, but they did not steal customer names. Hannaford also had received notice that there were 1,800 cases of alleged misuse or fraud from the theft. In response, many financial institutions cancelled consumers' cards and fees were incurred to reinstate new cards. Additionally, several consumers purchased identity theft protection for fear of future misuse. 26 separate lawsuits followed that were consolidated into one action in Maine.

At the trial court level, nearly all of the plaintiffs' claims (20 out of 21) were dismissed based on problems with the alleged theories of recovery or the damages claims. The court found that the damages were not recognized under Maine law for claims for lost time and effort or too speculative to prove for claims involving lost points on cards, fees for replacement cards, and insurance.

On appeal, the First Circuit upheld implied contract and negligence as proper theories of recovery. In regards to damages, the First Circuit reversed the trial court and found that "a plaintiff may recover for costs and harms incurred during a reasonable effort to mitigate." To recover, however, the plaintiffs needed to establish an actual injury such as money lost as opposed to only time and effort.

In finding that the plaintiffs stated a proper claim for damages in a data breach case, the First Circuit noted that the Hannaford breach was not inadvertent loss or simple breach with no misuse. Rather, the court emphasized that there was actual misuse of the information that may have been global in reach running up thousands of charges. This type of breach presented a "real risk of misuse." Thus, it was foreseeable that a customer might replace a card or purchase insurance to avoid or mitigate future misuse. The court specifically noted the many other cases finding no action for damages, but distinguished those cases based on the real threat and misuse that occurred with the Hannaford breach.

Although the Hannaford case appears to show a possible breach in the dam regarding damage claims in data breach cases, a closer look reveals that it may be more limited in scope. The Hannaford case involved actual misuse of the information with sophisticated thieves intent on doing harm for financial gain. It is unlikely that Hannaford will provide support for other mitigation cases unless those claims involve actual or legitimate threats of misuse.

Small Business Insurance For Data Loss and Security Breach

N. Kane Bennett — Sun, 25 Sep 2011 15:43:57 -0500

The Hartford has recently announced a new insurance product specially tailored to fit small business for data loss and security breach. It has been touted as more affordable for the smaller business owner. More and more small businesses are experiencing the devastating effects of a security breach incident or data loss. The statistics and stories are well reported from various sources. Experts agree that costs can exceed $200 per lost page of data. This can cripple a small business and leave it exposed to lawsuits and litigation.

The front line defense to data loss and security breach risks should always be a good security and privacy plan. A technology attorney working in conjunction with your IT support can develop and help implement an effective security and privacy plan. The process of developing and implementing such plans often reveal the problem areas for any business. Nevertheless, at the end of the day, there is no 100% fail safe plan to secure data, whether the data is on the cloud or in a server in the office. There are also unavoidable risks associated with paper documents. Likewise, there is no plan to provide 100% protection to paper documents. That is why insurance is a good choice to cover the unavoidable risks.

In addition to providing valuable financial protection in the event of a covered incident, the underwriting and application process for data loss insurance will often require best practices. This process alone will substantially reduce the likelihood of a significant data loss incident. Accordingly, small businesses should consider a three step process for data loss and security breach:

1. Develop and implement a security and privacy plan

2. Implement best practices as part of insurance application process

3. Purchase and maintain data loss insurance

Connecticut State Court Judges Adopt Electronic Discovery Rules

N. Kane Bennett — Wed, 20 Jul 2011 16:17:55 -0500

Connecticut state court judges recently adopted new electronic discovery rules. The rules will become part of the Connecticut Practice Book for civil discovery and take effect on January 2, 2012.

The judges present at the annual meeting unanimously adopted the new electronic discovery rules. You can read the new e-discovery rules here. I removed the sections not relevant to civil cases. The new rules or modifications are indicated by the underlined portions of the rule.

Here is a quick hit list, and my brief commentary, of the new e-discovery rules in Connecticut state courts:

Definitions of electronic and electronically stored information (ESI) added to the list of definitions. The new definitions are intentionally broad to adapt to new technology changes.
Grounds to move for a protective order in discovery include the terms and conditions of discovery of ESI and the allocation of costs between the parties. This rule permits the court to take into account a series of factors in fashioning a protective order and cost shifting for discovery of ESI.
Litigants should be disclosing ESI that is readily accessible and likely to lead to the discovery of admissible evidence. This basically clarifies that reasonably accessible ESI is no different than other types of discovery.
Whether a litigant needs to disclose ESI that is not reasonably accessible will depend on a variety of factors that the court may consider.
Court can shift the costs of production for ESI.
ESI added to the list of information a party can demand to inspect.
Safe harbor from sanctions for not only ESI, but all information, that is lost if the information is lost as the result of routine, good faith operation of a system or process in the absence of showing of intentional actions designed to avoid known discovery obligations. This rule is based on the federal rule 37(f) safe harbor and the commentary indicates that good faith may require a party to stop or intervene a routine destruction policy.
Claw back provisions permit a party to notify an opponent of inadvertently disclosed privileged information. There is a procedure the party must follow upon receipt of the notice. The rule does not address issues of waiver of privilege by the inadvertent disclosure.

Until Connecticut courts interpret these provisions, a good resource for attorneys may be found in the commentary to the rules. Additionally, the new rules are based on the Uniform Rules Relating to the Discovery of ESI adopted by the National Conference of Commissioners on Uniform State Laws in 2007. There are various courts in other states that have interpreted these rules.

Social Media Continues To Impact Litigation and Trial

N. Kane Bennett — Tue, 12 Jul 2011 14:40:15 -0500

The impact of social media (Facebook, Twitter, LinkedIn, etc) continues to grow in legal matters including litigation and trial. The court decisions cut across numerous areas from employment law and personal injury to privacy rights and defamation. Social media use has involved all the key players in lawsuits inclding judges, jurors, consultants, attorneys, reporters, and witnesses. Lawyers are using Facebook to screen jurors; jurors are using Facebook to post about the case they are sitting on; judges are checking Facebook to make sure jurors are not using it; jury consultants are following Twitter to give advice on trial strategy to attorneys during the trial; and reporters are giving first hand accounts of trials 140 characters at a time. Bottom line: Social media is everywhere and lawyers and litigants should pay attention.

In keeping up to date on the topic, here are some new resources and articles on social media and litigation and trial:

Vianei Lopez Robinson published an article for Texas Lawyer featured on Law Technology News that covers some recent decisions involving Facebook and the discovery of public and non-public information. The article also discusses some of the ethical implications for attorney's "friending" litigation opponents.

Dan Schwartz's Connecticut employment law blog continues to cover social media for employers. He recently posted a new update for employers on the newest social network site, Google +.

Corey Dennis, who previously submitted to this blog a great summary on the basics of Connecticut civil procedure, has just published a comprehensive law review article on social media and the various laws implicated by its use. Here is a link to his article for the Massachusetts Law Review.

Leita Walker and Joel Schroeder published a thorough review of social media "crashing into the courtroom" in an article posted by Law.com. The article describes several recent cases, juror misconduct with social media, attorney use of social media in discovery and cases ranging from employment to trademark matters.

A year or two ago it used to be relatively easy to track social media and the impacts on lawsuits and litigation. There were very few cases, and I posted about most of them. Now, there are new reports and articles, cases, and legal issues involving social media almost daily. Just today, a Google search of social media and trial brings up articles about the Roger Clemens perjury trial and the Casey Anthony murder trial.

The bottom line is social media is here to stay and has clearly "crashed into the courtroom." Attorneys, and especially trial lawyers and litigators, have to become familiar with all the legal implications as social media just might crash into one your cases.

Some Guidance From Delaware On Seeking Corporate Books and Records in Connecticut

N. Kane Bennett — Tue, 21 Jun 2011 16:00:00 -0500

If you own shares of a corporation or an interest in a limited liability company, there are two basic sources in Connecticut concerning your rights to have access to company books and records. The first source may be found in any agreements that concern governance of the company such as the by-laws of a corporation or the operating of a limited liability company. The second source may be found in Connecticut's General Statutes (limited liability company records; business corporation records).

The statutes permit an owner to make written demand for access to company books and records and to bring a lawsuit in court if the demand is refused. Although the process seems straight foward enough, many times it is not. Management may deny the request and claim the request is overly broad, not sufficiently detailed under the statute, or sought for an improper purpose. In Connecticut, the results of "books and records" cases are not consistent and a proper demand for books and records in not always clear. If the demand is not proper, a court will not grant the request.

As in many instances when matters are not clear in Connecticut, Delaware law is always a good resource. Here is an informative article by Jeff Mordock of the Delaware Business Court Insider (you have to subscribe for free to get the full article) that discusses some of the details in drafting a proper, or more likely to be enforced, books and records demand.

Connecticut Supreme Court and Appellate Court Cases and Briefs Online

N. Kane Bennett — Thu, 09 Jun 2011 09:01:45 -0500

There are three good online resources to get information on appellate court cases in Connecticut.

The first resource is a new addition to the state judicial branch website. The public now has access to the case and docket information regarding Supreme Court and Appellate cases. Here is the link. Previously, you could only access trial level cases. This is a great addition to the website and will cut down on trips to the clerk's office to check on the status of a case.

You can get download advanced release opinions from the Supreme Court and Appellate Court. Here is the link.

You can also download copies of some briefs for cases assigned for argument before the Supreme Court. Here is the link. This website is maintained by the Appellate Advocacy Committee of the Connecticut Bar Association. Briefs are typically posted several months after being filed with the court.

Forensic Accounting in Connecticut Business Litigation

N. Kane Bennett — Wed, 27 Apr 2011 15:46:02 -0500

Forensic accountants are frequently necessary in business litigation. This is my next installment of the "ask the experts" series. Stephen Pedneault is an expert in forensic accounting. He is the principal of Forsenic Accounting Services. Here is my interview with Stephen.

Disclaimer: I am not endorsing any experts that I feature on this blog or the opinions expressed. I am posting these interviews to offer insights from the various professionals that get involved with business litigation cases.

What are the biggest issues you see now with respect to forensic accounting and business litigation? Probably the biggest issue we face in every case regardless of the venue it’s in is the availability of records. We can pretty much figure out anything if we have records available, computerized records or paper records. The biggest challenge for us is getting access to them and actually getting the opposing side to produce them. That’s our biggest stumbling block in pretty much every engagement we do.

If a business owner suspects fraud, how soon should they come to you or an attorney to deal with that issue?

Well as soon as possible. We get a lot of calls from exactly the audience you described and one of the first things we have to ask them is you know do you have counsel, do you have an attorney that’s either representing you as a shareholder or a partner or a member, or does the LLC or the entity have counsel because before I hear too much of the story there’s no privilege between an accountant and a client. So I don’t want to hear too much, what I want to make sure is as early as possible, I want to be involved early, but I got to make sure that before I’m involved early on there’s an attorney involved so we can establish some attorney/client privilege and then we can get retained directly by counsel to be part of that privilege and then we can start talking about what are the issues and concerns.

What can business owners do to stop or detect or prevent fraud amongst it’s employees? When we’re talking employee embezzlement, there’s really only three things that are available. You can prevent certain things, you can detect certain things, and then you can insure against the things you didn’t prevent and detect. Certainly setting up the controls to prevent as much as possible, so employees not signing checks, having business owners involved in the signing of checks, not issuing credit cards and bank cards to employees, limiting what they have access and opportunity. That’s on the prevention side but you can’t prevent everything from occurring so on the detection side, starting with the basics, the owners looking at the bank statements every month, looking at the cancelled check images, looking online at the banking activity, looking at accounts receivable, knowing who owes what balances and are we getting paid, managing the cash flows. These are all important basic controls that over time probably start out as the owners are doing but then people get busy and they hire key people and they delegate the responsibilities and once again you know down the road that key employee, and it’s almost always the key employee that we depend on, has taken advantage of the situation and started either stealing the checks or paying themselves extra payroll or stealing the deposits.

What kinds of problems have you come across that have been created in terms of your investigations of fraud brought about by smartphones and portable devices?

Well there is two clear trends. One is that our evidence which was already computerized is now becoming wireless. The evidence meaning the transactions and also where the records are maintained. This whole concept of cloud computing, businesses are putting all their business records no longer on their servers, their putting it out on a server somewhere in the world. So they can access it anywhere on the internet. The problem is gaining access to that evidence is going to be a challenge because nobody really knows where it’s hosted. It could be hosted next door, it could be hosted in Nigeria. So getting access to the ultimate records of where the company’s accounting system is maintained is a challenge. Using cellular devices to do the banking there is no history on any laptop servers or computers, it’s all wireless. So the whole nature of gaining evidence is changing and becoming a huge challenge for us just to get access to it.

What records do you look to get access to from an audit perspective and also what form of the records do you like to receive it in?

That answer depends on what the context is for the forensic accounting. Ultimately we want to see the underlying reliable records: bank statements, cancelled check images, deposit details, credit card statements. We like the general ledgers, we like the computerized records but they can all be manipulated so we like to get, we’d like to get the records but we’d like to be able to corroborate them to underlying source third party records that are ultimately reliable and whether we get them in computerized form, we get them in images, we get them in paper, it doesn’t really matter to us, we’re used to dealing with boxes and boxes of records.