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COURT FINDS THAT AN ELECTRONICALLY SIGNED AGREEMENT PERFECTS A MECHANIC’S LIEN

Posted on: August 29th, 2014 by admin

ABC In a case that modernizes the Massachusetts mechanics’ lien statute, M.G.L. c. 254 et seq., Bennett & Belfort Attorney Eric LeBlanc successfully argued that electronic signatures satisfy the mechanics’ lien statute’s “written contract” requirement.  In the recent Massachusetts Superior Court decision Clean Properties, Inc. v. Riselli, the Middlesex Superior Court decided that “[n]othing in the mechanics’ lien statute requires a physical signature…on a piece of paper rather than an acceptance of written contract terms by an electronic signature that is conveyed by email.” (C.A. No. 2014-04742) (Salinger, J.)

In Clean Properties, it is alleged that Defendant, Carol Riselli, was provided with a written proposed contract by Clean Properties, Inc., an environmental services company, to perform environmental cleanup work on an emergency basis at Riselli’s property.  Riselli apparently responded via email, stating that she agreed to the terms of the contract.  After Clean Properties performed substantial work on the property, it is claimed Riselli failed to make a single payment.  Clean Properties placed a mechanics’ lien on Riselli’s property, and initiated litigation to recover payment for its services.  Riselli attempted to dissolve the mechanics’ lien, claiming that because there was no signed, written agreement, the “written contract” requirement of the mechanics’ lien statute was not satisfied. The Court disagreed.

Defendant unsuccessfully argued that “no written contract was ever formed because neither party affixed a handwritten signature to a paper form of the contract.”  However, the Court appears to have been persuaded by the plain meaning of the Massachusetts Uniform Electronic Transactions Act (“MUETA”), M.G.L. 110G et seq., which provides that an electronic record or acceptance by email results in a binding contract, and satisfies the statutory requirements of a “written contract.”   The MUETA defines an electronic record as, “a record created, generated, sent, communicated, received or stored by electronic means,” and does not require a physical signature for it to be enforced.

Superior Court Judge Kenneth W. Salinger agreed and found on these facts that the email Riselli sent to Clean Properties, Inc., which contained her name in the signature block, and expressed her assent to be bound by the deal, formed a binding electronic record under the Uniform Electronic Transactions Act.

The Clean Properties, Inc. v. Riselli decision is further evidence that the law is evolving to meet the pervasive use of new technology in business and society at large.  In light of today’s wide use of electronic communications, this precedent adds clarity that both businesses and individuals can rely upon.  The decision underscores that even in our rapidly evolving world of tweets, face book and electronic mail, the old adage coined by William Penn still holds true: “Rarely promise, but, if lawful, constantly perform.”

Company That Fails to Safeguard Information Cannot Hold Contractor Liable for Stealing It

Posted on: February 14th, 2014 by admin

15286003-confidential-stampA recent Massachusetts Superior Court decision underscores the importance of being proactive when it comes to protecting trade secrets.  The Plaintiff, C.R.T.R., Inc., filed suit for misappropriation of trade secrets against an independent contractor who took customer lists, accounting records, and other sensitive information with him when his contract ended.  However, the Court granted judgment in favor of the Defendant and dismissed the case.

Although customer lists and financial data are typically considered confidential, Massachusetts Courts will not find a defendant liable for misappropriation unless the plaintiff can show it took sufficient measures to protect the information.  In this case (C.R.T.R., Inc. v. Lao), the Court held that the Plaintiff did not do enough to safeguard its information.  The company did not require the contractor to sign a confidentiality agreement; it had no policies concerning trade secrets or confidential information; and the customer lists were freely available through its computer system.  In addition, some of the company’s customers were publicly identified on its website.

The moral of the story, is that a business cannot hold someone liable for stealing their confidential information if the business did not treat the information like it was confidential before it was stolen or otherwise misappropriated.  There are a variety of methods for safeguarding trade secrets and other confidential information, depending upon the nature of the business and specific information to be protected.  In light of the legal framework, it is prudent to take a proactive approach to shielding sensitive information.

Keep Your Shareholders Close, But Your Shareholder Employees Closer

Posted on: January 22nd, 2013 by admin No Comments

It is well recognized that the shareholders of a Massachusetts closely held corporation are fiduciaries of each other, and owe each other a duty of the utmost good faith and fair dealing in the operation of the business, similar to that of partners. Brodie v. Jordan, 447 Mass. 866, 869 (2006).

A closely held corporation is defined as one which has a small number of stockholders; there is no ready market for its stock; and there is substantial majority stockholder participation in the management and direction and operations of the corporation.  Donahue v. Rodd Electrotype Co. of New England, 367 Mass. 578, 586 (1975).

Despite the existence of the “partnership” standard, the controlling/majority shareholders in a closely held corporation must have some room to maneuver in establishing the business policy of the corporation and effectively managing the corporation.  Wilkes v. Springside Nursing Home, Inc., 370 Mass. at 851-52.  In Wilkes v. Springside Nursing Home, Inc., the Supreme Judicial Court determined the standard to be applied relating to the termination of an employee minority shareholder.  See id.  The Court adopted a two step process to balance these competing interests: (1) the majority must demonstrate a “legitimate business purpose” for its decision to terminate the minority shareholder; and (2) the minority shareholder employee must prove that the same legitimate purpose could have been achieved through less drastic measures than a discharge.  See id.  Ultimately, the trial court must balance the business purpose against “the practicality of a less harmful alternative.”  Id. at 852.

Nevertheless, if a majority shareholder of a closely held corporation decides to terminate a minority shareholder, it often leads to litigation by the minority shareholder(s).  In many cases, minority shareholders depend on their employment as the primary benefit of their ownership interest.  Therefore, termination of a minority shareholder can lead to fiduciary duty claims, in addition to the usual panoply of employment-related claims.  For that reason, the majority shareholders will need to prove that they had no “less harmful alternative” to termination in the case of an employee-shareholder.  Thus, there is a delicate balance between majority shareholders exercising reasonable discretion to advance legitimate business purposes of the corporation while abstaining from interfering with the rights of minority shareholders who are also employees.

Accordingly, it is imperative for majority shareholders of closely held corporations to maintain open channels of communications regarding the company’s business needs, and where minority (employee) shareholders need to focus their energy, and improve their performance.  It is also imperative that any shareholder agreements are carefully drafted to help avoid any potential pitfalls.  By taking these two steps, closely held companies can minimize the risk of a lawsuit for breach of a shareholder agreement, and maintain a healthy partnership within their business.

The Growing Web of Public Accommodation under the ADA

Posted on: September 14th, 2012 by admin No Comments

A recent Federal District Court decision in Massachusetts held that Netflix’s “Watch Instantly” web site may be a place of public accommodation under the Americans with Disabilities Act.  The lawsuit, National Association of the Deaf v. Netflix, Inc., was filed on behalf of deaf and hearing-impaired individuals who seek a court order compelling Netflix to provide closed captioning for all of its “Watch Instantly” content.

The Court’s decision was issued in response to Netflix’s motion to dismiss the case on the grounds that, among other things, a web site could not be a “place of public accommodation” that was subject to the ADA.  Netflix argued that the “Watch Instantly” site and other web-based businesses were not actual physical structures and were not specifically identified as places of public accommodation in the statute.

The Court was not persuaded, and it based its denial of Netflix’s motion on the legislative history of the ADA, which clearly set out Congress’ intent that the ADA “should keep pace with the rapidly changing technology of the times.”  Even though web-based video streaming services did not exist at the time the ADA was enacted, Congress viewed the statutory protections to disabled individuals as extending to emerging and yet to be developed technologies.

In addition, the Court found that the mere fact that web-based video services were not specifically listed as places of public accommodation in the ADA was not compelling because those services were part of the general categories enumerated in the statute.  The Court held that “Watch Instantly” may qualify as a “service establishment,” a “place of exhibition or entertainment,” and a “rental establishment,” all of which are types of businesses that fall under the ADA.

The Court noted, as well, that a “place of public accommodation” need not be an actual physical location.  Netflix argued that because individuals access its services in the home, and not in public spaces, it could not be a place of public accommodation.  The Court disagreed and drew comparisons to other businesses – plumbers, pizza delivery services, and moving companies – that are undisputedly subject to the ADA, but whose services are used in people’s homes.

Some commentators have expressed alarm over this decision, mainly out of a concern that requiring web-based businesses to accommodate consumers’ disabilities will cause undue expense and ultimately restrict the variety of internet content for everyone.  (See commentary here and here.)

While the future remains to be seen, it is worth keeping in mind that this decision came in the context of a preliminary motion on the pleadings, where the Court did not consider such issues as whether the requested accommodation placed an undue burden on Netflix.  In fact, the Court took pains to clarify that, despite finding that the “Watch Instantly” service was a place of public accommodation, the plaintiffs were by no means assured of victory.

More broadly speaking, the takeaway message is that, whether or not a particular website will be required to provide accommodations, individuals with disabilities can now invoke the ADA in their efforts to make the internet more accessible.   Internet businesses would be wise to brace for changes that may permit greater access to their content and services.  Given that the internet has become a major – if not the major – outlet for entertainment, commerce, and communication for all people, advocates for the disabled believe that the marginal cost of including the handicapped is fairly born by those profiting from the internet boom.  They argue that including those with disabilities is a move toward greater accessibility and inclusion – core principles that underscored the signing into law of the ADA by President George H. W. Bush in 1990.

When Personal or Financial Data Is Compromised – Act Fast! Data Breach Enforcement Action Leads To $110K Fine By The AG

Posted on: May 19th, 2011 by admin No Comments

The Massachusetts Attorney General’s office (“AG”) recently announced that it had entered a consent judgment with Briar Group, LLC, a restaurant operator, due to Briar’s 2009 release of patron credit card information at the hands of computer hackers.

Briar was notified of its data breach on October 29, 2009, but did not remove the ‘malware’ from its network until December 10, 2009, all the while continuing to accept credit and debit cards from its customers.  Over 125,000 transactions were impacted by the breach.  The AG specified a number of grounds for its action including Briar’s failure to regularly change passwords, its failure to limit administrative access to its networks and its delay in notifying consumers of the breach while continuing to accept credit and debit cards.

The AG alleged that Briar failed to properly secure the personal information of its customers and therefore violated consumer protection laws, including M.G.L. c.93A, the Massachusetts Consumer Protection Act.  Interestingly, the AG relied upon the charge card security standards erected by the Payment Card Industry trade association in arguing Briar’s deviation from acceptable industry protocol.  Briar was fined $110,000, even through its claimed violations preceded Massachusetts’ new Data Privacy Act (201 CMR 17.00), which went into effect on March 1, 2010 and effectively codifies many of the standards underlying this enforcement action.  In addition to the financial penalty, Briar was required to agree to expressly comply with this new privacy regulation.

As technology advances, companies and consumers must remain vigilant in protecting personal and financial information.  Ongoing evaluations of systemic vulnerabilities and immediate action to resolve security lapses in advance of a breach are critical.  Furthermore, the AG has made it clear that it will not tolerate delays in investigating, reporting, or resolving data breaches, and that such violations will result in significant penalties and fines.  Stay tuned for updates as cases premised upon the Massachusetts Data Security Regulation make their way through the system.

No Fiduciary Duty Owed By Minority Shareholders When Selling Stock

Posted on: April 26th, 2011 by admin No Comments

The Demoulas saga continues in Massachusetts.  This ugly family feud has kept dozens of lawyers, the courts and even the bar licensing authorities busy for many years.  In this newest skirmish, a superior court judge has ruled that minority shareholders do not owe a fiduciary duty to the corporation when selling their stock even though by selling their shares the minority shareholders would cause the Company to lose valuable tax protections.

In Merriam, et. al. v. Demoulas Supermarkets, Inc., et. al., the plaintiff shareholders had given written notice to the defendant corporation of their intent to sell their stock in the supermarket.  The notice was required by the stock transfer provision set forth in the articles of organization of the corporation.  The board of directors for the corporation rejected the plaintiff shareholders’ stock purchase proposal and sought to obtain its own valuation of the stock.  In the lawsuit that was commenced by the  selling shareholders, the corporation filed counterclaims seeking a declaration from the court that these shareholders would violate their fiduciary duties of utmost good faith and loyalty owed to the corporation.  The company suggested that because the sale of these shares would result in the corporation losing its tax-saving status as a Subchapter S corporation the sale was improper as it would hurt both the company and the remaining shareholders.  In reply to the corporation’s position, the minority shareholders argued that they did not owe any fiduciary duties to the majority shareholders in connection with the proposed sale since the articles of organization alone governed the sale of stock and thus any obligations owed by the minority to the majority shareholders are determined exclusively by the terms of the stock transfer restrictions of the articles of organization.   The plaintiff shareholders persuasively claimed that, in Massachusetts, “when rights of stockholders arise under a contract [such as the corporation’s articles of organization] . . . the obligations of the parties are determined by reference to contract law, and not by the fiduciary principles that would otherwise govern.”  Chokel v. Genzyme Corp., 449 Mass. 272, 278 (2007).  Observing that the articles of organization did not contain an explicit restriction designed to ensure the survival of the corporation’s Subchapter S status, the court agreed with the plaintiffs that the shareholders “do not owe [Demoulas] a fiduciary duty to refrain from selling their shares in a manner that terminates [Demoulas’] Subchapter S status . . .”  Merriam, Middlesex Superior Court Civil Action No. 2010-02681, Consolidated Memorandum of Decision and Order on Cross-Motions for Judgment on the Pleadings, March 30, 2011 (Haggarty, J). 

Although the defendants have filed a motion for reconsideration of the decision in Merriam, it is unknown whether Demoulas intends to appeal that decision.  However, if past practice gives any indication, this battle is not over yet.  Even if an appellate court finds that the shareholders owed a fiduciary duty to the corporation in this sale of stock, it is questionable whether the appeals court would reverse the lower court’s decision.  It appears unlikely that the appeals court would hold that the proposed sale of stock by these shareholders would constitute a breach of their fiduciary duties given that the trial court determined that the shareholders had a legitimate business reason to sell the stock and that there was not a less harmful alternative to the contemplated sale of stock since the corporation’s board of directors had rejected the shareholders’ proposed sale. 

While the trial court ruled that minority shareholders do not owe a fiduciary duty to a corporation in the sale of stock where the sale is governed by the corporation’s articles of organization, the court indicated that shareholders are still bound by the covenant of good faith and fair dealing which is implied in the corporation’s articles of organization.  As the court pointed out, Massachusetts law provides that a corporation’s articles of organization form a contract between the corporation and its shareholders, and the shareholders are bound to exercise their contractual rights in accordance with the covenant of good faith and fair dealing implied in the articles of organization.  Chokel v. Genzyme Corp., 449 Mass. 272, 275-276 (2007).  However, the court declined to opine on whether the proposed sale of stock would constitute a breach of the implied covenant of good faith and fair dealing because that issue was not before it.  Therefore, if the trial court’s decision in Merriam is upheld on appeal, future litigation between these parties might conceivably involve the question of whether the shareholders’ contemplated sale that would destroy the corporation’s Subchapter S status constitutes a breach of the implied covenant of good faith and fair dealing.  Stay tuned for further updates in this ever developing court and family drama.

Season Ticket Holder Sacked by Patriots’ Enforcement of Contractual Obligation in Ticket License Agreement

Posted on: March 23rd, 2011 by admin No Comments

If you sign a contract in Massachusetts, the New England Patriots may be largely responsible for the enforceability of certain damages provisions set forth in the agreement, known as a “liquidated damages clause.”

Liquidated damages clauses are designed to represent a reasonable forecast of damages expected to occur in the event of a breach, particularly where actual damages are difficult to ascertain. For example, in nearly every real estate purchase and sales agreement, there is a liquidated damages provision, providing that in the event the buyer backs out of the deal, the seller’s remedy is to retain the deposit as “liquidated damages.” These types of liquidated damages clauses are also commonly found in commercial lease contracts and… yes, even in contracts for the purchase of professional football tickets, including New England Patriots’ season ticket license agreements.

In the Massachusetts Supreme Judicial Court case entitled NPS, LLC v. Minihane, 451 Mass. 417, 886 N.E.2d 670 (2008), the developer of Gillette Stadium entered into an agreement with the Defendant, Paul Minihane, for the purchase of a 10 year license for two luxury Club level seats. The agreement included a liquidated damages provision, which provided that in the event of a default, including failure to pay any amount due under the license agreement, all payments due throughout the contract term would be “accelerated,” so that the defendant would be required to immediately pay the entire balance for all years remaining on the contract.

Mr. Minihane paid a security deposit and paid for the first year’s worth of tickets, but made no further payments. The Patriots sought to enforce the liquidated damages provision in the ticket license agreement, which required Mr. Minihane to pay for the remainder of the 9 years that he initially promised to pay.

A liquidated damages provision in a contract will usually be enforced provided two criteria are satisfied: 1) at the time of contracting, the actual damages flowing from a breach were difficult to ascertain, and 2) the sum agreed on as liquidated damages represents a reasonable forecast of damages expected to occur in the event of a breach. NPS, LLC v. Minihane, 451 Mass. 417, 886 N.E.2d 670 (2008); Cummings Properties, LLC v. National Communications Corp., 449 Mass 490 (2007). However, where damages are easily ascertainable or calculable, and the liquidated damages amount is grossly disproportionate to the actual damages or unconscionably excessive, a court will award the aggrieved party no more than its actual damages.

Although Mr. Minihane argued that the liquidated damages clause in the agreement with the Patriots was overly harsh and excessive, and that the Patriots could simply re-sell Mr. Minihane’s tickets to someone else, the Court disagreed and held that the Patriots’ damages were difficult to ascertain. In its holding, the Court found that the Patriots’ damages would vary depending on the consumer demand for tickets at the time of breach. The Court also found that consumer demand was dependent upon on a variety of factors such as current performance of the team; popularity of the team’s players; and relative popularity of other sports. Consequently, the Court held that it was difficult to predict, at time the contract was entered into, how long it would take the Patriots to re-sell Mr. Minihane’s seat license and at what cost it would potentially be re-sold.

While the Court focused on the sophistication of both of the parties in enforcing the terms of the contract (Mr. Minihane was a licensed real estate broker, had experience as a general contractor and real estate developer, and had entered into numerous commercial contracts, including institutional loan agreements), this case seems to apply to a wide array of contracts.

Interestingly, while liquidated damages provisions like the one used by the Patriots have been applied in commercial contracts (most notably in commercial lease agreements), the case involving the Patriots was a consumer contract. Accordingly, the importance of carefully considering the terms of every contract one signs-including what damages may result in the event a breach or breakdown in the agreement- cannot be understated.

So, whether you are a football fan or not, next time you see a liquidated damages clause, you might consider how the New England Patriots have impacted contract law in Massachusetts.

Court Narrows Homeowners’ Ability to Obtain Relief Under Home Improvement Contractor Statute

Posted on: March 1st, 2011 by admin No Comments

Due to a recent shift in the judicial interpretation of the Massachusetts Home Improvement Contractor law, M.G.L. c. 142A (“the Act”), homeowners will no longer be able to recover triple damages and attorney’s fees for mere technical violations of the Act by a contractor, where those technical violations do not cause harm to the homeowner.

The Act was designed to protect homeowners, and to give them a remedy to address unscrupulous practices by home improvement contractors.  The Act places numerous requirements upon the contractor.  For example, agreements between contractors and homeowners must contain the contractor’s social security number, a time schedule of payments, the date for the completion of the work, the total cost of the work, and other consumer protection-oriented disclosures.  The Act also requires that the material terms of the agreement and any change orders must be in writing for contracts over $1,000.  As a remedy for violations of the Act, homeowners are able to obtain orders from the court requiring the contractor to complete work under the contract or damages for violations of the Act.  Violations of the Act constitute almost automatic (per se) violations of Chapter 93A, Massachusetts’ consumer protection statute, permitting the homeowner to seek multiple damages (up to triple damages) and reimbursement of their attorneys’ fees.

Historically, homeowners could avail themselves of these powerful damages and attorney’s fees, even for a relatively innocuous, technical violation of the Act, such as the contractor’s failure to include his/her social security number on the contract.  Because of the threat of significant damages and the potential to have to pay the homeowner’s attorney’s fees arising from a technical violation of the Act, contractors were at a disadvantage.  A contractor who substantially completed a project may have been forced to waive all or a portion of monies owed by a homeowner due to an inconsequential oversight.  In certain cases, the threat of triple damages and attorney’s fees may have resulted in a windfall to a homeowner, who otherwise had received the benefit of her bargain.

In the recent case of  DeBettencourt v. Aronson,  the homeowner alleged that the contractor violated the Act by failing to include in the contract between the parties the contractor’s social security number, the date for completion of the work, the total cost of the work, a schedule of payments, and a recitation of the homeowners’ three-day right of rescission (cancellation).  Although the appellate court recognized that the contractor had committed numerous violations of Chapter 142A, the court also observed that none of those statutory violations caused any harm to the Aronsons.  Therefore, the court reversed the award of statutory damages and attorneys’ fees to the homeowner.

In doing so, the Court appears to have sent a message that, although the Home Improvement Contractor law is a powerful remedy for consumers who are harmed by unscrupulous contractors, Chapter 142A cannot be used by homeowners to avoid paying their contractor where no harm is caused by the contractor’s technical violations of the statute.  To obtain relief under Chapter 142A, homeowners will need to identify how a violation of the statute harmed them or caused them specific financial injury.  Contractors and consumers alike are strongly advised to have their contracts and procedures reviewed by a capable attorney to ensure compliance with Chapter 142A before problems arise.