Bluegrass Business Law

September 23, 2007

When is business litigation like making stew? When all else failed:

A recent Kentucky Court of Appeals decision provides a veritable grocery list of business related causes of action and their elements: Kenney v. Hanger Prosthetics & Orthotics, Inc., (2006-CA-000939-MR)(to be published).

In the case, John M. Kenney had been an employee of Hanger Prosthetics, but ventured out on his own. He alleged that Hanger employee Michael Adams said many bad things about him, such as that he embezzled from Hanger and was barred from competing with Hanger per a non-compete contract provision. Only Kenney’s claim of breach of contract passed summary judgment while the defamation and tortious interference with business claims died there.

Since the litigation souffle fell with those carefully crafted claims, Kenney’s persistent lawyer(s) decided to make stew. They tried to amend the complaint with just about every conceivable claim:

    A. Interference with Prospective Contractual Relations
    [t]he tort of interference with a prospective advantage is plagued with the absence of a uniformly recognized terminology. It has been referred to as the tort of interference with a business relationship, inducing refusal to deal, interference with a prospective economic advantage, interference with advantageous relations, interference with reasonable economic expectancies, or interference with prospective business expectancies. . . . The American Law Institute has named the tort “Intentional Interference with Prospective Contractual Relation.”
    . . . .
    B. Defamation Per Quod
    The difference between defamation per se and defamation per quod is that, in the former, damages are presumed and, in the latter, the plaintiff must prove special damages.
    . . . .
    C. Unfair Competition/Trade Practices
    unfair competition consists of either (1) injuring the plaintiff by taking his business or impairing his good will, or (2) unfairly profiting by the use of the plaintiff’s name, or a similar one, in exploiting his good will. Underlying the whole theory is the matter of actual or intended deception of the public for business reasons.
    . . . .
    D. Slander of Title, Trade Libel/Disparagement, Injurious Falsehood
    Corporations and other businesses can and do recover for libel or slander when they have been defamed by charges such as crime or fraud. But defamatory charges commonly made against individuals–adultery, for example–have little relevance to corporations and many of the imputations about corporations are harmful without being defamatory. When the publication asserts that the corporate product is defective, inadequate, or harmful without asserting personal defamation, the traditional view regards the claim as essentially different from the claim for defamation. The same is true if the publication merely says that the plaintiff has gone out of business. This different claim goes under the general name of injurious falsehood. When the publication attacks a product, it is also called trade libel or commercial disparagement. When the publication attacks title to property rather than
    quality of a product, the claim is likely to be called slander of title.
    . . . .
    1. Slander of Title
    that the defendant has knowingly and maliciously communicated, orally or in writing, a false statement which has the effect of disparaging the plaintiff’s title to property; he must also plead and prove that he has incurred special damage as a result.
    . . . .
    2. Trade Libel/Disparagement
    Trade libel involves disparaging and false assertions about the quality of one’s property rather than title to it.
    . . . .
    3. Injurious Falsehood
    One who publishes a false statement harmful to the interests of another is subject to liability for pecuniary loss resulting to
    the other if (a) he intends for publication of the statement to result in harm to interests of the other having a pecuniary
    value, or either recognizes or should recognize that it is likely to do so, and (b) he knows that the statement is false or acts in
    reckless disregard of its truth or falsity. Restatement (Second) of Torts § 623A (1977).
    . . . .
    E. Illegal Restraint of Trade and Commerce
    A restraint of trade may be adjudged unreasonable if it is per se unreasonable or violates the rule of reason. Id. Examples of per se unreasonable conduct include price-fixing arrangements, tying arrangements, agreements among competitors to divide markets or to allocate customers, group boycotts, and agreements to limit production. . . . Kenney has clearly not alleged any of these practices or any comparable practices. As for a restraint which violates the rule of reason, “showing merely injury to oneself as a competitor is insufficient.” . . . . Thus, the trial court did not err by failing to permit Kenney to amend his claim in this regard.
    (internal citations omitted)

The Court of Appeals found this cause of action stew rather bland and rejected each one of these attempts to amend the original complaint to survive summary judgment. I do not know if Mr. Kenney retained his attorney’s on a contigent fee or was being billed hourly. If the latter, Mr. Kenney got very expensive pot of unsavory legal stew. But for this huge bill, he also achieved fame through a published case which is an excellent primer on potential business litigation causes of action and how they did not fit his situation.

Lesson of the day: Business litigation strategy should be focused to create a cogent theme. This may include multiple causes of action, but the relevant facts should be put forth so that each cause of action plausibly follows from those facts. Overreaching to try and force tenuous causes of action to fit those facts simply creates excess litigation costs and, like in this case, probably will not change the result.

September 16, 2007

Charge back of commissions in “bill validation” provision

Filed under: Business — G.A. Napier @ 9:50 pm

An opinion of the Kentucky Court of Appeals rendered September 14, 2007, rules in favor of AT&T on enforcing charge back of commissions based on a “bill validation” provision in the agreement with the sales reps. In AT&T Corp. v. Fowler et al., (2006-CA-000402-MR, 2006-CA-000535-MR)(to be published), Mr. Fowler worked for AT&T selling high speed data services and Mr. Grant was a specialist and consultant earning commissions derivatively from Mr. Fowler’s sales. Part of the compensation agreement governing Mr. Fowler’s employment stated:

    Under circumstances listed below, a Sales Associate may be debited for a sale that has been credited to them. This may be accomplished through debiting future commissions or the issuance of a certified personal check to AT&T by the sales associate. . . . .
    All services must remain installed, billing and maintain an acceptable payment history (including meeting commitments) for 12 months. If all or part of the service comprising a sale is discontinued before that time, a Sales Associate will be debited.

Fowler earned $100,000.00 in commissions on sales to Darwin Networks, Inc. which began having financial problems and eventually declared bankruptcy. Darwin’s financial problems resulted in not maintaing an “acceptable payment history” for the required 12 month period. Subsequently, AT&T charged back the lion’s share of Fowler’s commissions as set-offs of future commissions. Fowler and grant challenged the charge back as a violation of KRS 337.060 prohibiting companies from recovering losses from their employees’ wages.

Fowler and Grant lost at the administrative level. The Commissioner of the Department of Labor disappointed Fowler and Grant by ruling that the charge backs were allowed because the commissions were contingent “wages” subject to a certain income stream from the sales. Franklin Circuit court agreed with the Commissioner that the commissions were wages, but disappointed AT&T by ruling that the charge backs were unlawfule under KRS 337.060(2)(e).

The appeal followed where AT&T argued that the commissions were advances and not earned wages. The Court of Appeals deemed this argument to be just plain silly, but AT&T prevailed anyway because the language of the statute refers to wages that were “agreed upon”. The purpose of the statute, says the Court of Appeals, is to prevent employees from losing wages that were agreed to be paid by the employer. Here, the agreement to charge backs were expressly agreed to in the compensation plan.

Lesson to be learned by employers: write good clear contracts regarding compensation. Lesson learned by employees: read the contracts to avoid surprises and be sure your time and effort is worth what is agreed upon. Both parties can benefit from investing a small amount of money in the beginning to have an independent attorney review and clarify any employment agreement.

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