As we move into conference play in NCAA basketball, the country turns its attention away from college football and touchdowns and onto the basketball court and three pointers. In that spirit, the business litigators at Gallivan, White & Boyd are taking their own three point shot to advise our clients and friends of three recent litigation trends that every business owner should know about. So let's step back behind the arc and see if we can hit from downtown.
Point I - Remember your Commercial General Liability policy
Although no business ever wants to be sued, litigation is increasingly becoming an inevitable part of doing business in America. Most businesses would benefit from Commercial General Liability (CGL) policies to provide insurance from lawsuits. A recent South Carolina case highlighted the importance of tendering any lawsuit against your business to your insurance company even if the suit does not at first seem to fit into the coverage provided by the CGL.
A Greenville business was sued for trademark infringement by an out of state company. The Greenville business contested the litigation vigorously and also tendered the suit to its insurance company under the provisions of its CGL providing for coverage of injuries arising out of "misappropriation of advertising ideas or style of doing business" and out of "infringement of copyright, title or slogan." The insurance company denied coverage, claiming that trademark infringement was not covered by the language of the policy.
The South Carolina Supreme Court saw things differently. The Court interpreted the policy to find that an advertising style or idea includes trademarks and that trademark infringement was an injury arising out of a "title or slogan." Thus, even though the policy did not specifically mention trademark infringement, the Court found that suits for trademark infringement were covered.
There are two very important points for business owners in this decision. First, generally, even if it does not appear from the language of the policy that a claim against your company is covered, you should still tender the claim to your insurance company. Second, as the Court noted repeatedly, ambiguities in insurance coverage are construed in favor of the insured. Thus, it is extremely important to consult your CGL and an attorney any time you are sued. Coverage that can save you thousands in legal fees and thousands more if a judgment is obtained may be available to you even though your policy does not clearly state the injury is covered.
Point 2 - Be aware of non-competes
While foreclosures and credit defaults make national news, the down economy has also increased a number of other business disputes that are secondary to the tough financial times. A recent trend is increased litigation over non-compete agreements. As former employees and terminated franchisees and distributors look for work and businesses fight each other for fewer clients, non-compete agreements are frequently being violated. In general, non-compete agreements in the employment context are enforceable as long as they meet five criteria. The agreement must (1) be necessary to protect an employer's legitimate interests, (2) be reasonable in area and length of time, (3) not unduly burden an employee's ability to earn a livelihood, (4) be supported by valuable consideration, and (5) not violate public policy. Although the law generally disfavors favors these types of agreements and will construe them strictly against the employer, they are frequently upheld. Similar considerations govern non-competes in franchise, distribution and joint venture arrangements.
As we are emerging from a down economy, many may believe that companies will not spend the time and resources to enforce these agreements. However, our experience shows otherwise. Companies looking to compete in an area where they have previously agreed not to compete need guidance on what their obligations are under their agreements and whether or not they are enforceable. Companies considering an action to enforce a non-compete agreement need guidance to ensure that they do not waive their rights by failing to enforce the agreement against known violators or spend precious company resources attempting to enforce agreements courts might ultimately strike down.
Point 3 - Continue to obey corporate formalities
As times get tight and cash dries up, it may be tempting for businesses to ignore corporate formalities, like maintaining a separate business account and keeping accurate business records, to weather the storm. A few examples are mixing company and personal assets, failing to adhere to corporate filings, or forgoing meetings mandated by the company's bylaws. While these may seem like technicalities, they can make a big difference if the company is sued, especially in light of a recent decision of the South Carolina Supreme Court.
The corporate form generally shields a business owner's personal assets from judgment in the event a company is taken to court and loses. But if a Plaintiff can show that a business owner is not observing corporate formalities, a Plaintiff can "pierce the corporate veil" and go after a business owner's personal assets.
Piercing the corporate veil basically requires a Plaintiff to show there is really no difference between the business and the business owner. However, this recent case may make it easier to involve a business owner personally in litigation against the company because it permits Plaintiffs to seek to "pierce the corporate veil" even before obtaining a judgment against the business. The best way to protect yourself and your business from these types of suits is to continue to adhere rigorously to corporate formalities.
So that's our view from behind the arc. We hope you have found this brief discussion of business law trends beneficial. We are happy to discuss these issues and other issues further if you have specific questions.
