How to Hire a Domestic Worker and Stay Out of Trouble

peranersweet_andreaby Andrea Peraner-Sweet

Practice Tips

The Massachusetts Domestic Workers’ Bill of Rights (“DWBR”), G.L. c. 149, §§ 190191, enacted in 2015, provided expansive new protections to domestic workers and imposed new obligations on their employers. Violation of the DWBR can result  in substantial penalties, including mandatory treble damages, attorneys’ fees and costs.  Employers who fail to comply with the DWBR can face enforcement actions by the Attorney General (“AG”), the aggrieved worker, or the Massachusetts Commission Against Discrimination (“MCAD”). Yet, many remain unfamiliar with the DWBR and its implementing regulations.  940 CMR 32.00. This article reviews key provisions of the DWBR.

Who Is Covered?

The DWBR protects workers employed within a household, regardless of their immigration status, who perform domestic services, including housekeeping, house cleaning, nanny or home companion services, and in-home caretaking of sick or elderly individuals for “wage, remuneration or other compensation.” G.L. c. 149, § 190(a); 940 CMR 32.02. The DWBR does not alter who is deemed an independent contractor (rather than domestic employee) under G.L. c. 149, § 148B.

The DWBR does not cover:  (i) babysitters who work less than sixteen hours per week providing “casual, intermittent and “irregular” childcare, and whose primary job is not childcare; (ii) personal care attendants (“PCAs”) who provide services under the MassHealth PCA program; and (iii) employees of a licensed or registered staffing, employment or placement agency.  G.L. c. 149, § 190(a); 940 CMR 32.02.

Employment Agreement

The DBWR requires employers to provide domestic workers with “notice of all applicable state and federal laws.”  G.L. c. 149, § 190(m); 940 CMR 32.04(6).  “Notice of Rights” and “Record of Information for Domestic Workers” forms can be found on the AG’s website.  Additionally, before work commences, employers must provide domestic workers who work sixteen or more hours a week a written employment agreement in a language the worker understands.  The agreement should contain the terms and conditions of employment and specify any deductible fees or costs and worker’s rights to grievance, privacy, and notice of termination.  G.L. c. 149, § 190(l); 940 CMR 32.04(3).

Both employer and worker must sign the agreement, which must be kept on file for at least three years.  A “Model Domestic Worker Employment Agreement” can be found on the AG’s website.

Working Hours, Rest Periods

Domestic workers must be paid for all time they are required to be on the employer’s premises, on duty, or any time worked before or beyond normally scheduled shifts to complete the work.   G.L. c. 149, § 190(a); 940 CMR 32.02.

Workers on duty for less than twenty-four consecutive hours who do not reside on the employer’s premises must be paid for all working time, including meal, rest or sleep periods, unless the worker is free to leave the premises and completely relieved of all work-related duties during that period.  G.L. c. 149, § 190(a) and (c).

For workers on duty for twenty-four hours or more, all meal, rest and sleep periods constitute working time. However, the worker and employer can agree to exclude from working time a regularly scheduled sleeping period of not more than eight hours if there is advance written agreement in a language understood by the worker, signed by both the worker and employer.  G.L. c. 149, § 190(d) and (e); 940 CMR 32.03(2).

Workers working forty or more hours per week must have at least twenty-four consecutive hours off each week and at least forty-eight hours off each month.  A worker may volunteer to work on a day of rest but only if there is a written agreement made in advance, signed or acknowledged by both the worker and employer.  The worker must be paid time and a half for all hours worked in excess of forty hours.  G.L. c. 149, § 190(b); 940 CMR 32.03(3).

Wage Deductions

Under certain circumstances, an employer may deduct food, beverages and lodging costs from a worker’s wages.  G.L. c. 149, § 190(f) and (g); 940 CMR 32.03(5)(b) and (c).  Such deductions are subject to the statutory maximums found in 454 CMR 27.05(3) pursuant to G.L. c. 151.

Food and beverage costs can be deducted only if they are voluntarily and freely chosen by the worker.  If the worker cannot easily bring, prepare or consume meals on the premises, the employer cannot make such deductions. G.L. c. 149, § 190(f); 940 CMR 32.03(5)(b).

Lodging costs can be deducted only if the worker voluntarily and freely accepts and actually uses the lodging.  An employer cannot deduct lodging costs if the employer requires the worker live in the employer’s home or in a particular location.  G.L. c. 149, § 190(g); 940 CMR 32.03(5)(c).

There must be a written agreement specifying the deductions, made in advance, in a language understood by the worker, signed or acknowledged by both the worker and employer.  940 CMR 32.03(5)(a).

Record Keeping, Times Sheets, Written Evaluations

Employers must keep records of domestic workers’ wages and hours for three years.  G.L. c. 149, § 190(l); 940 CMR 32.04(2). Employers must provide workers who work more than sixteen hours per week with a time sheet at least once every two weeks.  940 CMR 32.04(4).  Both the worker and employer must sign or acknowledge the time sheet. Signing or acknowledging a time sheet does not preclude a worker from claiming that additional wages are owed. Id. Likewise, a worker’s refusal to sign or acknowledge a time sheet does not relieve the employer from paying wages owed.  Id.  A sample time sheet can be found on the AG’s website.

After three months, a worker may request a written performance evaluation and, thereafter, annually.  G.L. c. 149, § 190(j).  The worker can inspect and dispute the evaluation under G.L. c. 149, § 52C, the Massachusetts Personnel Records law.  Id.

Right to Privacy

The DWBR prohibits employers from restricting, interfering with or monitoring a worker’s private communications and from taking a worker’s documents or other personal effects. G.L. c. 149, § 190(i); 940 CMR 32.03(6). Additionally, employers are barred from monitoring a worker’s use of bathrooms and sleeping and dressing quarters. Id.

A worker who resides in the employer’s home must be given access to telephone and internet services, including text messaging, social media and e-mail, without the employer’s interference.  940 CMR 32.03(8).

Prohibition Against Trafficking, Harassment and Retaliation 

It is a violation of the DWBR (and a crime) for employers to engage in any conduct that constitutes forced services or trafficking of a person for sexual servitude or forced services under G.L. c. 265, §§ 49-51. G.L. c. 149, § 190(i); 940 CMR 32.03(7).

The DWBR protects both domestic workers, as well as PCAs, from discrimination and harassment based on sex, sexual orientation, gender identity, race, color, age, religion, national origin or disability and from retaliation for exercising their rights. G.L. c. 191; 940 CMR 35.05(2).

Domestic workers are entitled to job-protected leave for the birth or adoption of a child under the Massachusetts Parental Leave Act, G.L. c. 149, § 105D.   Id.

Termination

Employers who terminate live-in workers “for cause” must provide the worker with advance written notice and at least 48 hours to leave.  G.L. c. 149, § 190(k); 940 CMR 32.03(9)(c).

Employers who terminate live-in workers “without cause” must provide the worker with written notice and at least thirty days of lodging or two weeks severance pay. G.L. c. 149, § 190(k); 940 CMR 32.03(9)(a).

Neither notice nor severance is required where good faith allegations are made in writing that the worker abused, neglected or caused any other harmful conduct against the employer or members of the employer’s family or individuals residing in the employer’s home. G.L. c. 149, § 190(k); 940 CMR 32.03(9)(b).

No termination notice or severance is required for workers who do not reside in the employer’s home.

Enforcement

Violations of the DWBR are enforced by the AG or by the aggrieved worker pursuant to the Massachusetts Wage Act, G.L. c. 149, § 150.   Workers who prevail in court are   awarded treble damages, the costs of litigation and attorneys’ fees.  Violations of the DWBR’s anti-discrimination and anti-harassment provisions are enforced by the MCAD.

Andrea Peraner-Sweet is a partner at Fitch Law Partners LLP.  Her practice focuses on general business litigation with an emphasis on employment litigation as well as probate litigation. 

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Distinguishing Employees’ “General Skill or Knowledge” From Protectable Trade Secrets Under Massachusetts Law

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by Gregory S. Bombard and Adam M. Santeusanio

Legal Analysis

Trade secret claims often arise when a highly skilled employee leaves to work for a competitor. Under Massachusetts trade secret law, this fact pattern creates a tension between the employer’s interest in protecting its trade secrets and the employee’s competing interest in using his or her own general experience and abilities to foster a successful career. Though Massachusetts courts have long recognized this tension, the line between what constitutes a protectable trade secret as compared to an employee’s “general skill or knowledge” is not explicitly defined in Massachusetts case law. The inquiry is highly fact-based and does not easily lend itself to bright lines. This article examines the leading cases addressing the distinction between trade secrets and general skill or knowledge, and identifies the four factors courts most commonly use to draw the line.

I. The Legal Framework

Massachusetts law protects trade secret information, which is defined by statute as “a formula, pattern, compilation, program, device, method, technique, process, business strategy, customer list, invention, or scientific, technical, financial or customer data that (i) at the time of the alleged misappropriation, provided economic advantage, actual or potential, from not being generally known to, and not being readily ascertainable by proper means by, others who might obtain economic advantage from its acquisition, disclosure or use; and (ii) at the time of the alleged misappropriation was the subject of efforts that were reasonable under the circumstances . . . to protect against it being acquired, disclosed or used.”[i]

Although a company must safeguard the secrecy of purported trade secrets in order to seek legal protection for them, the company must, of course, disclose such secrets to at least some of its employees for use in the company’s business. That disclosure creates a legally-implied duty by the employee to maintain the confidentiality of the trade secrets. In addition, employees are often subject to contractual nondisclosure covenants, which survive the termination of employment.

However, Massachusetts courts recognize an important limitation on trade secret protection: a departing employee may continue to use his “general skill or knowledge acquired during the course of the employment” following his departure.[iii] This doctrine, which has been the law in Massachusetts since at least 1912,[iv] provides that an employer may not claim trade secret protection over an employee’s general skill or knowledge regardless of whether the employee developed it prior to or during his employment. By limiting the types of information that an employer can protect as trade secrets, the general skill or knowledge rule “effectuates the public interest in labor mobility, promotes the employee’s freedom to practice a profession, and [promotes] freedom of competition.”[v] The rule applies both when a former employer sues a former employee for misappropriation of the former employer’s trade secrets,[vi] and when an employer seeks to enforce post-employment restrictive covenants, like noncompetition agreements.[vii]

The facts of Intertek Testing Servs. NA, Inc. v. Curtis-Strauss LLC provides an example of how the doctrine plays out in practice. Intertek was a product inspection, testing and certification company that sued several of its former salespeople for having misappropriated “secret” information about “the quality of the relationship that certain customers had with Intertek,” including whether those relationships were “good,” “bad,” or “in-between.” Judge Gants, then sitting in the Business Litigation Session, granted summary judgment in favor of the salespeople, ruling that the strength of an employer’s relationship with a particular customer “certainly falls into the category of general knowledge acquired during the course of employment.” Speaking to the rule’s policy goal of promoting labor mobility, Judge Gants observed that “if this general information were deemed secret or confidential, then no salesman could ever work for a competitor, because every salesman inevitably knows this information and could not help but use it in some fashion.”[viii]

II. Distinguishing Trade Secrets from General Skill or Knowledge

Although the general skill or knowledge doctrine is widely cited in Massachusetts case law, no court has articulated a test for distinguishing between protectable trade secrets and nonprotectable general skill or knowledge. In the cases applying the doctrine, however, the courts most commonly consider the following four factors: (1) whether an employee had significant experience or expertise prior to starting their employment; (2) whether an employee assisted in the development of the alleged trade secret; (3) whether the alleged trade secrets were actually put to use or were merely inchoate “concepts” or “goals”; and (4) whether the alleged misappropriation involved the removal of documents or merely the contents of the employee’s memory. None of the four factors standing alone is dispositive.

     A. The Employee’s Prior Experience or Expertise

Massachusetts courts are more likely to find that an alleged secret falls within an employee’s general skill and knowledge if the employee had significant experience, expertise, or education in the field before starting his employment. This factor is based on the policy that “the loss to the individual and the economic loss to society are both greatest when a highly trained and specialized person is prevented from employing his special abilities.”[ix]

For example, in Dynamics Research Corp v. Analytic Sciences Corp., an employer claimed its former employee misappropriated a system for managing data and providing feedback during the development of weapons systems for government contracts. Prior to his employment, the employee had been decorated by the Air Force for his management ability and had worked as a manager of an MIT laboratory. In fact, the employer hired him “in part because he [already] understood its management system concept.” The Appeals Court ruled that the alleged secret fell within the employee’s general skill and knowledge, observing he had come to the job “with knowledge and skill in the plaintiff’s area of operation” and “much of the [alleged trade secret] was known to the defendant prior to his employment.”[x] Conversely, in Junker v. Plummer, the employer’s claimed secret was a novel machine for “combining shoe cloth,” and the former employees “had never seen a combining machine” before their employment.[xi] There, the SJC ruled that the machine’s functionality was not part of the employees’ general skill or knowledge and was instead a protectable trade secret of their former employer.

     B. The Employee’s Personal Participation in Developing the Secret

Massachusetts courts are more likely to find that an alleged secret falls within an employee’s general skill and knowledge if the employee directly participated in developing the alleged secret. The rationale behind this factor is that if the employee personally contributed towards the alleged secret’s creation or development, then the alleged secret may consist, at least in part, of the skill, knowledge, and experience that the employee brought to bear on the project.

Thus, in Chomerics, Inc. v. Ehrreich, the employee had been “personally actively involved in all of the inventions and discoveries made” by the employer in developing the alleged secret.[xii] Indeed, the employer’s “effort in this field was pioneered largely through [the defendant employee’s] inventions and research,” and the research into conductive plastics was “peculiarly his . . . almost private domain.” The Appeals Court ruled that the information fell within the employee’s general skill or knowledge as a scientist, despite the fact that the employer took reasonable measures to safeguard the information as a trade secret, including requiring the defendant to keep his laboratory notebooks locked up. Similarly, in New Method Die & Cut-Out Co. v. Milton Bradley Co., the employee “took part to a substantial extent in developing the [allegedly secret] process” for manufacturing cardboard toys, bringing to bear “his faculties, skill and experience.”[xiii] The SJC held that the process for manufacturing cardboard toys did not constitute a protectable trade secret, but rather was “the product of [the employee’s] knowledge,” which he developed in the course of his work for his former employer.

     C. The Employer’s Unfinished Concepts and Goals

Massachusetts courts are more likely to find that information is within an employee’s general skill or knowledge where the alleged secret is merely an unfinished “concept” or “goal,” as opposed to information that has been reduced to practice in the form of a functioning devise, machine, or system. For example, in Chomerics, Inc. v. Ehrreich, the employer sought to develop electrically conductive plastics using “metal particles embedded in a plastic matrix.”[xiv] During his employment, the employee worked on a project to develop an electrically conductive gasket that contained less than 10 percent silver particles. The employee eventually quit and began working for a competitor, which soon thereafter patented an electrically conductive gasket that used less than 10 percent silver. The Appeals Court ruled that the use of a certain amount of silver represented only a “concept,” and that “when [the defendant] left [the plaintiff’s employ] he took with him nothing but possibilities and goals which had hitherto proved impossible to bring to fruition.” The Appeals Court ruled those “possibilities and goals” were part of the employee’s general skill or knowledge, not a protectable trade secret of the former employer.

By comparison, in Junker, the machine for combining shoe cloth was fully operational, in use in the employer’s manufacturing facility in “actual and substantial production.”[xv] Several of the plaintiff’s employees quit, started working for a competitor, and duplicated the machine, up to which point “there was none other faintly resembling it in use anywhere.” The SJC ruled that the machine was a protectable trade secret belonging to the employer.

     D. Employees’ Memory and Nondocumentary Information

Massachusetts courts are more likely to find that an alleged trade secret falls within an employee’s general skill and knowledge if the employee allegedly used information from his memory, without taking away documents or electronically stored information. The SJC has, in several cases, “considered it significant that the former employee did or did not take actual lists or papers belonging to his former employer.”[xvi] For example, in American Window Cleaning Co. of Springfield v. Cohen, the plaintiff alleged that its former employees had misappropriated secret information regarding its customers. The SJC ruled the former employees had not breached their duty of confidentiality to their former employer because “[r]emembered information” regarding certain of the employer’s customers was “not confidential” and “a discharged employee, without the use of a list belonging to his former employer, may solicit the latter’s customers.”[xvii]

Similarly, in New Method Die & Cut-Out Co., the SJC ruled that an allegedly secret method for manufacturing cardboard toys was within the defendant employee’s general skill or knowledge, noting that “the defendant . . . when he left the employment of the plaintiff . . . took no documentary manufacturing data, cost figures, or customers’ lists and no drawing which were a part of the plaintiff’s files or were final drawings which had been used by the [plaintiff] for the manufacture of toys.”[xviii]

By contrast, in Pacific Packaging Products v. Barenboim, the plaintiff employer alleged that five of its former employees removed, among other things, sales history reports, cost books, invoices, and spreadsheets containing the employer’s information about particular customer accounts, all in order to form a competing company using the plaintiff’s customer base. In granting the plaintiff’s request for a preliminary injunction against the defendants’ use of the information, Judge Billings ruled “[m]y focus herein is almost exclusively on documentary information” alleged to have been misappropriated because “while it is theoretically possible to make the showing that a former employee used his memory to compete unfairly with the former employer, it is not―particularly where business, not technical, information is concerned―an easy task.”[xix]

III.       Conclusion

Distinguishing trade secrets from general skill and knowledge is not a precise science and requires a fact-specific analysis. While Massachusetts courts have not articulated a specific set of rules to apply in making the distinction, the four factors discussed above provide an outline of the key considerations Massachusetts courts have used to decide whether certain information was within a departing employee’s general skill or knowledge.

[i] Massachusetts adopted a version of the Uniform Trade Secrets Act (“UTSA”), effective October 1, 2018.  See Mass. Gen. Laws ch. 93, §§ 42-42G.  Other UTSA jurisdictions distinguish trade secrets from general skill or knowledge.  See, e.g., American Red Cross v. Palm Beach Blood Bank, Inc., 143 F.3d 1407, 1410 (11th Cir. 1998) (applying Florida law).

[ii] Jet Spray Cooler, Inc. v. Crampton, 361 Mass. 835, 840 (1972) (citing Restatement of Torts § 757, cmt. b.).

[iii] Junker v. Plummer, 320 Mass. 76, 79 (1946).

[iv] American Stay Co. v. Delaney, 211 Mass. 229, 231-32 (1912).

[v] CVD, Inc. v. Raytheon Co., 769 F.2d 842, 852 (1st Cir. 1985) (applying Mass. law).

[vi] See, e.g., Dynamics Research Corp. v. Analytic Sciences Corp., 9 Mass. App. Ct. 254, 267 (1980).

[vii] See, e.g., EMC Corp. v. Loafman, No. 2012-3115-F, 2012 WL 3620374 (Mass. Super. Ct. 2012) (Wilkins, J.) (“Nor does general knowledge acquired on the job justify a non-compete.”) (citing Dynamics Research Corp. v. Analytic Sciences Corp., 9 Mass. App. Ct. 254, 267 (1980)).

[viii] Intertek Testing Servs. NA, Inc. v. Curtis-Strauss LLC, No. 98903F, 2000 WL 1473126, at *8 (Mass. Super. Ct. Aug. 8, 2000) (Gants, J.).

[ix] Dynamics Research Corp., 9 Mass. App. Ct. at 268 (quoting Harlan M. Blake, Employee Agreements Not to Compete, 73 Harv. L. Rev. 625, 684-85 (1960)); see also Harvard Apparatus, Inc. v. Cowen, 130 F. Supp. 2d 161, 175 n.31 (D. Mass. 2001) (applying Mass. law) (“The issue of whether the information lies within the employee’s general skill or knowledge depends, in part, upon the amount of knowledge and skill the employee had in the relevant area at the start of his employment.”).

[x] Dynamics Research Corp., 9 Mass. App. Ct. at 268; see also New Method Die & Cut-Out Co. v. Milton Bradley Co., 289 Mass. 277, 281-82 (1935) (finding no protectable secret where “much of the [allegedly secret] process was familiar to [the employee] from his [prior] experience”).

[xi] Junker v. Plummer, 320 Mass. 76, 79 (1946).

[xii] Chomerics, Inc. v. Ehrreich, 12 Mass. App. Ct. 1, 4 (1981).

[xiii] New Method Die & Cut-Out Co., 289 Mass. at 282.

[xiv] Chomerics, 12 Mass. App. Ct. at 4.

[xv] Junker, 320 Mass. at 77.

[xvi] Jet Spray Cooler, Inc. v. Crampton, 361 Mass. 835, 840 (1972) (citing cases). Like the other factors, however, this factor is not dispositive. The SJC ruled in Jet Spray Cooler that “the fact that no list or paper was taken does not prevent the former employee from being enjoined if the information which he gained through his employment and retained in his memory is confidential in nature.” Id.

[xvii] Am. Window Cleaning Co. of Springfield v. Cohen, 343 Mass. 195, 199 (1961).

[xviii] New Method Die & Cut-Out Co., 289 Mass. at 280.

[xix] Pac. Packaging Prod., Inc. v. Barenboim, No. MICV2009-04320, 2010 WL 11068538, at *1 (Mass. Super. Ct. Apr. 20, 2010) (Billings, J.).  To avoid an injunction on that basis, the defendants represented to the court they had completely divested themselves of the paper and electronic versions of the plaintiff’s information.  The court later found that representation to be a fraud on the court because the defendants had not in fact turned over the information; the court entered a default on the defendants’ counterclaims and awarded fees and costs in excess of $1 million to the plaintiff.

Gregory S. Bombard, a trial lawyer at Duane Morris, focuses his practice on trade secret litigation, business torts, and other complex commercial disputes. He represents pharmaceutical, manufacturing and technology companies in state and federal courts and arbitration proceedings throughout the United States.

Adam M. Santeusanio is a trial lawyer at Duane Morris. His practice focuses on intellectual property and commercial litigation.


The Nuts and Bolts of Crafting a Derivative Case

myslinskiparker

by Tara J. Myslinski and Stephanie R. Parker

The Profession

Filing a new complaint?  If your client is part of a for-profit corporate entity and the dispute concerns that entity, there is a good chance that you are wondering whether some or all of your client’s potential claims are derivative or direct claims.  There are plenty of ways to get tripped up in this context; it is wise to think early about all of the possible pitfalls in such a case and understand the road ahead.

In this article we discuss the steps an attorney facing this issue must take, including understanding the nature of your client’s entity at the outset of a case, determining whether your client has direct or derivative claims, and following the unique procedural and substantive rules applicable to derivative claims.

Understand the Nature of Your Client’s Entity and its Place of Formation.

The law of the state of the entity’s incorporation or registration will dictate substantive issues of law for claims concerning that entity.  Procedural rules for the forum will govern procedural issues.

Issues of substantive law include whether claims are derivative or direct and whether a plaintiff has standing to pursue derivative claims against the entity.  See Cannonball Fund, Ltd. v. Dutchess Capital Mgmt., LLC, 84 Mass. App. Ct. 75, 93 (2013) (quoting Harrison v. NetCentric Corp., 433 Mass. 465, 471 (2001)).  The differences among the states on derivative suits can be substantial; for example, whereas under Massachusetts law a shareholder is required to make demand on directors in every case alleging derivative claims on behalf of a corporation, see G.L. c. 156D, § 7.42, a suit on behalf of a Delaware corporation may still allege futility of such demand.  See Johnston v. Box, 453 Mass. 569, 578 & n. 15 (2009); Del. Ct. Ch. R. 23.1; see also 6 Del. C. §§ 18-1001 & 18-1002 (allowing any LLC member to bring derivative action).

In addition to ascertaining the state of your entity’s formation, study the entity’s governing documents for specific provisions that may apply to derivative suits.  See, e.g., G.L. c. 156C, § 56.

Determine Whether Your Client has Direct or Derivative Claims, or Both.

In your complaint, you must specify whether each claim is brought directly by your client as an individual or derivatively by your client on behalf of the entity.  This distinction is important because, as discussed below, you must comply with special procedural requirements for any derivative claims you assert.

In general, a derivative claim asserts a wrong done to the corporation, as opposed to any particular shareholder.  As such, a derivative claim belongs to the corporation and any damages recovered on a derivative claim will go to the corporation.  Examples of derivative claims include:

Wasting, mismanaging or misappropriating corporate assets, resulting in a general diminution of the value of corporate stock, assets, or cash on hand; see, e.g., Rubin v. Murray, 79 Mass. App. Ct. 64, 80 (2011);

A direct claim, in contrast, alleges breach of a duty owed to the plaintiff as a shareholder, investor, or creditor of a corporation and seeks to remedy some harm that is distinct from that suffered by shareholders generally.   IBEW, 476 Mass. at 558.  As such, damages recovered on a direct claim will go directly to the plaintiff.  Examples of direct claims include:

In certain contexts, particularly cases involving a close corporation, the line separating direct and derivative claims can be blurred.  In those contexts, good pleading practice may require alleging certain claims both individually and derivatively.

Follow the Procedural Prerequisites and Substantive Rules that Apply Uniquely to Derivative Suits.

1. As a Threshold Matter, Ensure Your Plaintiff has Standing.

Massachusetts law on a plaintiff’s standing to bring a derivative claim varies somewhat depending on the type of entity at issue.  See G.L c. 156C, §§ 56-57 (LLCs); G.L c. 156D, §§ 7.40-7.47 (corporations); G.L. c. 109, §§ 56-59 (limited partnerships).

With respect to any entity in Massachusetts, however, to have standing to bring a derivative claim, a plaintiff must have been a shareholder (or member or partner) at the time of the alleged misconduct and must continue to be a shareholder throughout the entirety of the derivative litigation.  G.L. c. 156D, § 7.41; see Billings v. GTFM, LLC, 449 Mass. 281, 289-96 (2007) (involuntary loss of ownership interest during pendency of litigation deprived plaintiff of standing to press derivative claims); see also Kolancian v. Snowden, 532 F. Supp. 2d 260, 262-263 (D. Mass. 2008) (“a narrow exception to this rule arises where the [event causing the loss of the plaintiff’s ownership interest] itself is the subject of a claim of fraud. . . [t]o establish that a merger was fraudulent, a plaintiff must plead with particularity that it was undertaken ‘merely to eliminate derivative claims’”) (quotation omitted).  If your client is concerned that, during the pendency of the case, the defendant may eliminate your client’s interest, preliminary injunctive relief to halt that transaction may be necessary.  See IBEW, 476 Mass. at 564 n.15.

If your client controls the entity by owning a majority of its shares or serving as its manager or president, your client may be able to bring a direct suit against a wrongdoer.  But if the company is owned 50/50 and your client is one of the 50% owners seeking to sue the other 50% owner in the company’s name, the analysis is different.  Although Massachusetts has yet to issue a clear decision on this issue, other jurisdictions uniformly hold that a 50% owner may not bring suit against another 50% owner in the company’s name without following derivative procedures.  See, e.g., Swart v. Pawar, No. 1:14-cv-10, ECF #162 (N.D.W.Va. Nov. 19, 2015); Barry v. Curtin, 993 F. Supp. 2d 347, 352-53 (E.D.N.Y. 2014); Crouse v. Mineo, 189 N.C. App. 232, 238-39 (2008).

If the entity is a limited liability company, G.L. c. 156C, § 56 imposes additional constraints on a plaintiff’s standing.  It requires that a plaintiff alleging a derivative claim be either: (1) a member authorized to sue by the vote of members owning more than 50% of the unreturned contributions to the LLC; or (2) a manager of the LLC authorized to sue by a vote of a majority of the managers.  In either case, the vote of any member or manager who has an interest in the outcome of the suit that is adverse to the LLC’s interest must be excluded.  Given this statutory rigor, unless the LLC’s operating documents state otherwise, a minority member, or single manager in a multi-manager LLC, would have to secure a favorable vote to obtain a non-interested majority in order to have standing to sue on behalf of the LLC.  Compare G.L. c. 156D, § 7.41 (any shareholder holding stock at the time of wrongdoing may commence a derivative proceeding so long as they “fairly and adequately” represent the interests of the corporation).

2. Comply with Procedural Rules for Derivative Claims in Massachusetts State or Federal Court.

State and federal rules of civil procedure impose special pleading requirements on derivative claims.  Specifically, in addition to any substantive law governed by the entity’s state of formation, Massachusetts Rule of Civil Procedure 23.1 requires that the derivative complaint:

  • Be verified;
  • Allege that the plaintiff was a shareholder or member at the time of the transaction at issue, or that the plaintiff’s share or membership thereafter devolved on him by operation of law from someone who was a shareholder or member at the time; and
  • Allege with particularity the efforts made by the plaintiff to obtain the action he or she desires from the directors or comparable authority and the reasons for his failure to obtain the action.

The requirements of Federal Rule of Civil Procedure 23.1 are similar, but add that the plaintiff must plead that “the action is not a collusive one to confer jurisdiction that the court would otherwise lack.”  The requirements of the Massachusetts Rule can be waived if a defendant proceeds to trial without addressing these issues, see Diamond v. Pappathanasi, 78 Mass. App. Ct. 77, 89 (2010) (involving a general partnership), but there is no analogous case law concerning the Federal Rule.

You also must name the company as a nominal defendant in any derivative action when filing suit in Massachusetts state or federal court, regardless of the state of formation of the entity.  See Fusco v. Rocky Mountain I Investments Ltd. P’ship, 42 Mass. App. Ct. 441, 447 (1997); Gabriel v. Preble, 396 F.3d 10, 14-15 (1st Cir. 2005).

3. Properly Apply Substantive Law on Demand Requirements Prior to Filing a Derivative Suit.

The most frequently litigated issue of substantive law in derivative cases is demand/demand futility.  Massachusetts substantive law imposes hurdles additional to the procedural requirement of Mass. R. Civ. P. 23.1.

Corporations

A plaintiff intending to bring a derivative claim on behalf of a Massachusetts corporation must first demand that the corporation pursue the claim.  G.L. c. 156D, § 7.42.  “The rationale behind the demand requirement is that, as a basic principle of corporate governance, the board of directors or majority of shareholders should set the corporation’s business policy, including the decision whether to pursue a lawsuit.”  Harhen v. Brown, 431 Mass. 838, 844 (2010).  The procedure for making demand is detailed and is set forth in G.L. c. 156D, §§ 7.40, et seq.  Massachusetts is a universal demand state, which means that demand must be made even if the plaintiff believes it would be futile due to a board’s interest or lack of independence.  See Johnston, 453 Mass. at 578 n.15.

A plaintiff may only initiate a derivative action once the corporation has either (i) refused a demand to bring suit; or (ii) ignored the demand for at least 90 days (or 120 days if the decision regarding whether to pursue the claims is submitted to the shareholders for a vote).  A derivative plaintiff may file suit before expiration of the waiting period if the plaintiff can show that irreparable injury would result by waiting for the period to expire.  G.L. c. 156D, § 7.42.

If your client’s demand is refused and she disagrees with the corporation’s decision, you should carefully study G.L. c. 156D, § 7.44 and be prepared to challenge the refusal in your complaint and in your opposition to the inevitable motion to dismiss.  In this context, the “business judgment rule” precludes the suit if the corporation can show that it determined in good faith and after reasonable inquiry that the suit would not be in the best interests of the corporation.  G.L. c. 156D, § 7.44(a).  Although challenging a director vote to refuse a demand is difficult because of the protections of the business judgment rule, Judge Kaplan of the Superior Court’s Business Litigation Session recently denied a motion to dismiss derivative claims in just that context.  See Brining v. Donovan, No. 1684-CV-3422-BLS1 (Mass. Super. Ct. Sept. 14, 2017).  The court questioned the directors’ independence given their close ties with the alleged wrongdoer and also found reasonable doubt as to whether the board conducted its investigation in good faith because its conclusion in the face of glaring financial improprieties was “so different from what an independent Board would be expected to do.”  Id.

Limited Liability Companies

In contrast to corporation derivative suits, the futility exception is still alive in the context of LLC derivative suits, but must be well-pleaded to satisfy Mass. R. Civ. P. 23.1.  See Billings, 449 Mass. at 289-90 n.19; see also Harhen, 431 Mass. at 844 (futility exception is pled by alleging that “a majority of [members] are alleged to have participated in wrongdoing, or are otherwise interested” and adopting definition of “interested” director as stated in ALI’s Principles of Corporate Governance, §§ 1.15 & 1.23); Diamond, 78 Mass. App. Ct. at 89 (“to satisfy rule 23.1, a complaint in a derivative action must plead with particularity either the presuit demand the plaintiff has made or the reasons why making such demand would have been futile”).

Partnership

Limited partners alleging damage to the partnership must make demand upon the general partner or allege the reasons that doing so would be futile.  G.L. c. 109, § 58.

4. Follow Procedural and Substantive Rules at the Conclusion of a Derivative Case.

A derivative proceeding filed in Massachusetts may not be discontinued or settled without court approval.  Mass. R. Civ. P. 23.1; G.L. c. 156D, § 7.45.

As discussed above, damages recovered on a derivative claim will go to the entity.  The Massachusetts Appeals Court recently noted that there may be some irony, particularly in the context of a close corporation, if this rule results in the wrongdoer benefiting from a share in the recovery.  See Beninati v. Borghi, 90 Mass. App. Ct. 566, 567, n.11 (2016).  This irony can be mitigated by the trial judge, who is “free to take the equities into account in fashioning any remedy under c. 93A.”  Id.  In an effort to remedy that type of unfair result, on remand to the Business Litigation Session in Beninati, Judge Sanders recently reduced a G.L. c. 93A damages award by a wrongdoer’s percentage of ownership interest in the company and directed that the company “shall not permit” any distribution of the damages to the wrongdoer.  Beninati v. Borghi, Nos. 1284-cv-1985-BLS2, 1384-cv-1772-BLS2 (Mass. Super. Ct. June 30, 2017).  An appeal of that decision is currently pending.

Massachusetts law authorizes the court to award attorneys’ fees and costs to the plaintiff upon conclusion of a case if the court finds that the proceeding has resulted in a “substantial benefit to the corporation.”  G.L. c. 156D, § 7.46; see also Beninati , 90 Mass. App. Ct. at 568 (affirming denial of fee application in part because time records failed to make that distinction).  The court may award the defendant its fees and costs if the court finds that the proceeding was commenced or maintained without reasonable cause or for an improper purpose.  G.L. c. 156C, § 57 contains parallel fee-shifting provisions for derivative claims in the Massachusetts LLC context.  Because Massachusetts law is not clear on the issue of whether an award of attorneys’ fees in derivative litigation is procedural or substantive, be sure to also understand the law of the entity’s formation state on this issue at the outset of your case.

Tara J. Myslinski is a partner in the business litigation boutique O’Connor Carnathan & Mack LLC based in Burlington. She focuses her practice in complex commercial and corporate litigation, frequently involving small-business shareholder disputes, complex contractual disputes, trade secret and non-compete litigation, and internal pre-litigation investigations. 

Stephanie R. Parker is an associate in the business litigation boutique O’Connor, Carnathan & Mack LLC, based in Burlington, MA. Ms. Parker graduated from Northeastern University School of Law in May 2013. Prior to joining OCM, Ms. Parker worked as a judicial intern for The Honorable Patti B. Saris at the U.S. District Court for the District of Massachusetts. 


A Signed Text Message Can Result in a Binding Real Estate Contract

saccardi

by Peter F. Carr, II

Practice Tips

The commonplace reliance upon and acceptance of text messaging in commercial dealings has forced courts to examine the legal implications of texting within the seminal rule that a contract concerning real estate shall not be enforced “[u]nless the promise, contract or agreement upon which such action is brought, or some memorandum or note thereof, is in writing and signed by the party to be charged therewith or by some person thereunto by him lawfully authorized.” G.L. c. 259, § 1, Fourth. At the trial court level, courts have embraced the concept of “contract by text message” for real estate so long as additional key elements are established. One, the text message must either contain or incorporate by express reference all material terms of an agreement concerning land. Two, the text message must conclude with the signature of the “party to be charged” or its authorized agent. A formal signature or even a complete first and last name is not required. However, the sequencing is critical. The cases to date largely have turned on whether the name of the sender appears at the end of the text message to signify the authentication of its preceding substance. The text message is sufficiently signed and binding provided that it concludes with a “mark” to indicate that the sender adopts the message.

Recent cases from the Land Court bear out these core concepts. In a commercial real estate dispute that hinged on text message exchanges between the parties’ brokers, a judge denied a special motion to dismiss a lis pendens that was issued in favor of the plaintiff buyer seeking to enforce a sales contract. St. John’s Holdings LLC v. Two Electronics, LLC, 24 LCR 190, 16 MISC 000090 (RBF), 2016 WL 1460477 (Mass. Land Ct. April 14, 2016), aff’d, 92 Mass. App. Ct. 1114 (2017). Although the defendant seller ultimately prevailed at trial, the Court steadfastly held that the text message of the seller’s broker satisfied the signed writing requirement of the Statute of Frauds. The text message incorporated by reference the final letter of intent for the purchase and sale of the property following ongoing negotiations between the parties. The contract was deemed signed and accepted by the seller when the seller’s broker concluded the text message with the inclusion of his first name. The Court held, “In the context of these exchanges between the parties, the court infers that the text message sent by [Tim, the seller’s broker] was intended to be authenticated by his deliberate choice to type his name at the conclusion of his text message.”  In another case, the Court similarly found compliance with the Statute of Frauds because, “[t] he broker’s writing her first name ‘Laurie’ at the end of the text message constitutes a signature for the purpose of the Statute of Frauds.” However, the Court ruled that the text message did not contain or incorporate sufficient material terms to form a contract. Fiore v. Lindsey, No. 17 MISC 000533 (RBF), 2017 WL 5969332 (Mass. Land Ct. Nov. 29, 2017). In contrast and underscoring the critical nature of the sequencing, text exchanges between brokers did not satisfy the Statute of Frauds where none of the operative texts concluded with the names of the brokers, even though those names appeared in the bodies of the messages. Donius v. Milligan, 24 LCR 440, 443, No. 16 MISC 00277 (HPS), 2016 WL 3926577 (Mass. Land Court July 25, 2016). The Court denied relief because the “text messages here are not signed by either the proposed buyer or seller, nor are they signed by the agents.” In addition, the Court ruled that the substance of the text messages evidenced mere negotiations.

Although no appellate court has yet addressed squarely text messages in the context of the Statute of Frauds, the prior appellate decisions affirming the binding nature of informal email exchanges coupled with the expanding usage of electronic communications arguably signal that reviewing courts are likely to embrace the theories established at the trial court level. Accordingly, to avoid being bound to an agreement involving land that may never have been intended, parties should insist upon more formal means of communicating with clear documentation, at least as negotiations proceed. A party involved in a transaction may be wise to limit or eliminate all text messaging with a counterparty during the course of negotiations, or to include written disclaimers to memorialize that text messages will not be accepted as part of a deal. At a minimum, parties must avoid a course of conduct which creates the presumption that a text message is sufficient to express offer and acceptance. Otherwise, as the judge observed in St. John’s Holdings, “a text message, all too familiar to most teenagers and their parents, can constitute a writing sufficient under the Statute of Frauds to create an enforceable contract for the sale of land.”

Peter F. Carr, II is a member of the litigation department of Eckert Seamans Cherin & Mellott, LLC, a regional law firm, practicing out of the Boston Office since joining the firm in 1995 after completing a clerkship with the Massachusetts Appeals Court assigned to former Chief Justice Joseph Warner. Peter’s daily practice covers a wide variety of business counselling and commercial litigation matters to include substantial trial experience. Peter served as trial and appellate counsel in the Land Court case of St. John’s Holdings referenced above.


Trustees of Cambridge Point Condominium Trust v. Cambridge Point, LLC – SJC Proscribes “Poison Pill” and Prescribes an Uncertain Way Forward

saccardi

by Samuel B. Moskowitz

Case Focus

On January 19, 2018, the Supreme Judicial Court ruled that a condominium bylaw that, “for all practical purposes, makes it extraordinarily difficult or even impossible” for condominium trustees to sue the developer for defects in the common areas and facilities, is void as contravening public policy. Trustees of Cambridge Point Condo. Trust. v. Cambridge Point, LLC (“Trustees”), 478 Mass. 697, 709 (2018). Condominium boards celebrated the demise of this “poison pill” that developers increasingly insert in condominium documents to shield themselves from liability. Yet that celebration was premature, because the decision has limited reach and the “poison pill” continues to limit condominium trustees’ ability to initiate litigation in almost all other contexts.

Background

When the trustees of the seven-year-old Cambridge Point Condominium decided to sue the developer for $2 million in alleged common area defects, a condominium bylaw severely restricted their ability to initiate litigation. Under that bylaw, before suing anyone other than a unit owner, the trustees had to obtain the written consent of at least 80% of the unit owners. To do so, they first had to circulate their proposed complaint, specify a limit on legal fees and costs to be paid, and institute a special assessment to collect that sum. To prevent the owners from easing these requirements, the bylaw required that at least 80% of the owners must consent to its amendment. Making matters worse, the developer owned at least 20% of the units.

The trustees sued without first obtaining the requisite consent, seeking damages and a declaration voiding the bylaw. The superior court dismissed their suit, concluding that the bylaw was not prohibited by the condominium statute, G.L. c. 183A (the “Act”), and its use by developers did not constitute “overreaching” in contravention of public policy.” Trustees, supra at 691-701. The SJC granted direct appellate review.

No Violation of Condominium Act

Writing for the Court, Chief Justice Gants first addressed whether a “bylaw provision requiring unit owner consent to initiate litigation is … per se void because it is ‘inconsistent’ with the [A]ct.” Trustees, supra at 703. The Court rejected the trustees’ argument that the Act’s grant, in § 10(b)(4), to trustees of the exclusive authority to litigate common area claims proscribes any bylaw restricting that authority, reiterating the Court’s view that the Act is “essentially an enabling statute” that lays out minimum requirements for establishing condominiums and otherwise provides developers and unit owners with “planning flexibility” to work out in condominium bylaws matters not specifically addressed by the statute. Id.  at 701-02 (citing Scully v. Tillery, 456 Mass. 758, 770 (2010)). The Court also declined to apply the maxim of negative implication to invalidate a bylaw requiring unit owners’ consent for trustee litigation simply because such consent is statutorily required for some other trustee actions.

Invalid as Against Public Policy

The Court next determined whether developers’ use of the bylaw to shield themselves from common area defect claims contravenes public policy. Recognizing that the bylaw’s cumulative requirements “make it extraordinarily difficult for the trustees to sue the developer for defective construction,” the Court ruled that the “well-established public policy in favor of the safety and habitability of homes” outweighs the “public interest in freedom of contract.” Trustees, supra at 705-708. The Court noted that the right to obtain legal redress for homes that fail to meet minimum standards of safety and habitability are so vital they cannot be waived, and that “[t]his clear expression of public policy” required that the bylaw “be carefully scrutinized to determine whether it contravenes that … policy.” Id. at 708. Doing so, the Court found the bylaw more sweeping and unfair than a broad, express waiver, and it struck its use as overreaching by the developer, citing a long-standing exception to freedom of contract in condominium developments first laid out in Barclay v. DeVeau, 384 Mass. 676, 682 (1981) (“Absent overreaching or fraud by a developer, [courts] find no strong public policy against interpreting [the Act] to permit the developer and unit owners to agree on the details of administration and management of the condominium…”). Trustees, supra at 709.  In Trustees, the SJC determined that “it is overreaching for a developer to impose a condition precedent that, for all practical purposes, makes it extraordinarily difficult or even impossible for the trustees to initiate any litigation against the developers regarding the common areas and facilities of a condominium.” Id (emphasis in original)

Where Does That Leave Us?

Trustees continues the Court’s expansion of the rights of residential property owners to sue builders for defective construction, which the Court initiated in Albrecht v. Clifford, 436 Mass. 706, 710-11 (2002) (applying warranty of habitability to new home sales). It also continues the expansion of the rights of condominium trustees to sue developers for common area defects, following Berish v. Bornstein, 437 Mass. 252, 265 (2002) (organization of unit owners may sue for breach of the implied warranty of habitability over latent common area defects that implicate the habitability of individual units) and Wyman v. Ayer Properties, LLC, 469 Mass. 64 (2014) (economic loss rule does not apply to damage caused to common areas by builder’s negligence).

Yet, for condominiums, the decision is also quite narrow, because it invalidates the use of the bylaw only for building defect claims against developers. Even here, the Court provided little guidance on whether a modified bylaw might be acceptable. Would, for example, a bylaw requiring the same 75% owner consent that is statutorily required for improvements and casualty repairs be acceptable, especially if developer units cannot vote? Trustees does not say.

Moreover, the Court’s refusal to strike the provision universally presents far-reaching consequences for condominium boards. Outside of common area defect claims against developers, the provision continues to apply to all litigation by condominium trustees except suits against unit owners. Other litigation must be preapproved and specially assessed in condominiums where the bylaw exists. Is this a useful check on board power or an overly restrictive set of handcuffs that make condominium management more difficult? Those boards who celebrate the demise of the “poison pill” may come to realize that their indigestion is a long way from being over.

Samuel B. Moskowitz is shareholder at Davis Malm & D’Agostine, P.C. His practice focuses on real estate and condominium law. He is a former Chair of the Boston Bar Association Real Estate Section, the editor and a contributing author of Massachusetts Condominium Law (MCLE, May 2017). He gratefully acknowledges the assistance of Nour E. Sulaiman, a law student at Northeastern University School of Law, who contributed invaluably in the preparation of this article.


Just the Right Size: Benefits (and Potential Pitfalls) of Limited Assistance Representation

saccardi

by Christopher T. Saccardi

Practice Tips

Every day in Massachusetts state courts, people take on the burden of representing themselves in civil cases. While there are a number of reasons for this, the principal factor is obvious: lawyers are expensive, and many individuals simply can’t afford them.

There are no easy solutions to this problem, but Limited Assistance Representation (LAR), which was introduced in Massachusetts in 2009 and has been expanding through the trial courts, can help. It allows litigants to retain counsel for an essential phase of litigation, or for a crucial hearing, at a cost that is much less than what an attorney might charge to represent the client for a full case. LAR also allows an attorney to offer pro bono services for a particular litigation event without having to commit to taking on an entire case.

While this article draws primarily on procedures and experience with LAR in Housing Court to introduce practitioners to LAR, highlight its benefits, and identify key issues and potential pitfalls, the rules are very similar in the other courts in which LAR is now available to civil litigants—the District Court, the Boston Municipal Court, Probate and Family Court, and the Superior Court.

Under LAR, attorneys are permitted to represent clients on a limited basis after registering with the appropriate court and watching a short video or attending a training on the mechanics of LAR. The duration of the representation can vary by agreement reached between counsel and client. Representations can be as short as a single hearing or discrete task, or they can cover a longer period of time, such as assisting through the completion of discovery or even preparing for and conducting a trial.

For example, common parts of a Housing Court case that are particularly conducive to LAR are: answering or drafting discovery requests; drafting and filing motions; appearing to argue a motion, such as a motion to vacate a default judgment or to issue an execution; conducting a mediation with a Housing Specialist; or trying a summary process (eviction) case.

The mechanics of appearing and withdrawing under LAR vary slightly from court to court, but generally follow the same basic parameters throughout the Commonwealth: attorney and client must sign an agreement that details the specific nature of the representation and the tasks and period of time to be included. The attorney will then complete a set of LAR appearance and withdrawal forms that can be obtained from the appropriate court (or online) and which must be signed by both the client and the attorney. The withdrawal is filed as soon as the representation ends; in the case of LAR for a discrete hearing, it is not unusual to file the limited appearance form at the beginning of the hearing and to file the withdrawal in open court immediately following the conclusion of the hearing.

While LAR can be a convenient tool for both attorney and client, it does present some unique challenges that are important for practitioners to keep in mind. Litigants can risk disjointed or incomplete counsel from an LAR attorney who focuses narrowly on the specific task at hand without considering the overall litigation strategy. Or, a client who engages an attorney only to draft a motion could be ill-served, even if the motion is excellent, if the LAR agreement does not provide for properly preparing the client to argue that motion. It is therefore important for both attorney and client to carefully consider the appropriate duration of the representation and the way in which the included tasks will be defined. A failure to do this can lead to awkward situations, as a judge will occasionally not allow the LAR withdrawal if he or she feels that an additional task should be completed by the attorney. For example, a judge will sometimes ask the LAR attorney to postpone the withdrawal after a hearing in order to receive a copy of the decision and explain it to the client.

Another challenge can result if it is unclear to opposing counsel when exactly an LAR attorney has entered and, more importantly, has exited the case. Not knowing whether the adverse party is represented or is pro se can hamper the ability of opposing counsel to negotiate a resolution or simply to communicate about procedural issues. Timely providing copies of the limited appearance and withdrawal to opposing counsel is therefore critically important.

Housing Court Standing Order 1-10, which governs LAR in the Housing Court, contains several requirements counsel must follow to help avoid those potential pitfalls. For example, the signature block of any document filed by an LAR attorney must indicate that it is filed under a LAR representation; a failure to do this could convert the engagement from limited to full representation. The Standing Order also requires opposing counsel to serve documents related to matters within the scope of the limited representation on both the LAR counsel and the party. Similar rules apply in other courts. See, e.g., BMC Standing Order 1-10, District Court Standing Order 1-11, Superior Court Standing Order 2-17, and a memo and FAQ regarding LAR in Probate and Family Court. The LAR page on the Massachusetts state website provides a good summary of the various LAR rules, along with links to FAQs, standing orders, and court forms.

In sum, LAR can be a valuable tool, especially in courts that serve a large population of unrepresented parties. It can be used on a pro bono basis or for paying clients, and can be a helpful way to provide assistance to a party with a critical piece of litigation at considerably lower cost than full representation. Judges are generally appreciative of LAR attorneys because they understand that often the alternative is no representation at all. So long as counsel give careful consideration to how they delineate the duration of the representation and are familiar with the applicable rules, LAR can be a useful part of any practice.

Chris Saccardi, formerly a litigation associate at Edwards Angell Palmer and Dodge, LLP, opened his own practice in 2010 in which he focuses exclusively on landlord-tenant law. He was named to the BBA’s Public Interest Leadership program in 2012-2013 and has served as Co-Chair of the BBA’s Solo and Small Firm Section.


Director Liability Under the Massachusetts Wage Act: The Supreme Judicial Court Clarifies the Law but Traps May Remain for the Unwary

finsterwald

by Mark D. Finsterwald

Case Focus

In Segal v. Genitrix, 478 Mass. 551 (2017), the Supreme Judicial Court (“SJC”) addressed whether members of a company’s board of directors may be personally liable under the Massachusetts Wage Act, G.L. c. 149, §§ 148, 150, for the company’s failure to pay wages to employees. In Segal, the SJC interpreted, for the first time, language in the Wage Act defining “employer” in the context of directors. The SJC held that the Wage Act does not impose liability on directors acting only in their capacity as directors. Even so, the Court did not fully insulate directors from Wage Act liability. There remains a possibility that directors could, perhaps unwittingly, become subject to personal liability in the event a company fails to pay wages.

The Wage Act

The Wage Act enables employees to sue employers who do not pay earned wages, with mandatory awards of treble damages and attorney’s fees for successful claims. Liability is not limited to the business entity, as the Wage Act defines “employer” to include “the president and treasurer of a corporation and any officers or agents having the management of such corporation.” This definition does not mention directors. Nor does it explain how to assess whether a person is an “agent[] having the management of such corporation.” G.L. c. 149, § 148.

Facts and Procedural History

Plaintiff Andrew Segal was the president of Genitrix, LLC, a biotechnology startup that he cofounded with defendant H. Fisk Johnson, III. Johnson was also an investor in Genitrix, and he appointed his representative, defendant Stephen Rose, to the company’s board of directors. Johnson funded Genitrix through a company called Fisk, which Johnson and Rose co-owned. Segal, as president, managed all of Genitrix’s day-to-day operations, including payroll.

In 2006, Genitrix began to have difficulty making payroll. Starting in 2007, Segal stopped taking salary to enable the company to meet its other financial commitments. Rose later declined to direct Fisk to invest enough money in Genitrix to pay Segal. In early 2009, Segal initiated Wage Act litigation against Johnson and Rose.

At trial, the judge instructed the jury that “a person qualifies as an ‘agent having the management of such corporation’ if he … controls, directs, and participates to a substantial degree in formulating and determining policy of the corporation or LLC.” The judge did not instruct the jury that the defendants needed to have been appointed as agents. Nor did the judge instruct the jury that defendants needed to have assumed responsibilities functionally equivalent to those of a president or treasurer. The jury found both defendants liable for Segal’s unpaid salary. Johnson and Rose moved for judgment notwithstanding the verdict, the trial court denied the motion, and Johnson and Rose appealed.

The SJC’s Analysis

At the outset, the Court stated that it viewed as significant the Legislature’s omission of directors from the Wage Act’s definition of “employer.” Segal, 478 Mass. at 558. Parsing the statutory language, the SJC dismissed the possibility that either defendant could be liable as president, treasurer, or any other officer, because neither of them held an office at Genitrix. Johnson and Rose could be liable only if they were “agents having the management” of the company. The Court explained that this language establishes “two important requirements: the defendant must both be an agent and have the management of the company.” Id. at 559. The Court differentiated between having some management responsibility and “having the management” of the company. “Having the management” means assuming responsibility similar to that performed by a corporation’s president or treasurer, the Court reasoned, “particularly in regard to the control of finances or payment of wages.”

As to agency, common law agency principles—set forth in the Restatement (Second) of Agency—counsel that directors are not typically considered agents. Restatement (Second) of Agency § 14C (1958). The SJC observed that “[a] board generally acts collectively, not individually.” Segal, 478 Mass. at 561. Such collective action does not confer individual agency authority on directors. Nevertheless, the Court explained that individual directors still could be “considered agents of the corporation if they are empowered to act as such, but any agency relationship stems from their appointment as an agent, not from their position as a director….” Id. at 563. An agency appointment could result from a board resolution, but also could “arise from either express or implied consent.” The Court gave as an example a scenario in which “a particular board member had been empowered to act individually as the functional equivalent of the president or treasurer of the corporation.” Genitrix, however, made no such appointment with respect to either defendant, instead delegating executive management authority (including dominion over wages) to Segal. Segal signed the checks, oversaw the payroll, and suspended the payment of his salary. Defendants had no such authority.

Moreover, just as a board’s collective authority over a corporation does not confer agency authority on an individual director, a board’s collective “oversight and control over management, finances, and policy is not oversight and control by individual board members.” Id. at 565. The Court noted that, since corporate statutes vest all management responsibility in a corporation’s board, if board members were to be considered agents and normal board oversight were considered “management,” then all directors would be personally liable under the Wage Act. That result would be inconsistent with the plain wording of the statute.

The Segal defendants’ participation in difficult board decisions that affected the company’s finances were not the acts of individual agents, did not involve the type of ordinary decisions left to individual managers, and did not confer Wage Act liability. Accordingly, the SJC determined that the trial court should have allowed defendants’ motion for judgment notwithstanding the verdict.

In addition to adjudicating the claim against Johnson and Rose, the SJC also provided guidance for instructing future juries. The Court explained that judges should instruct juries that there are two requirements for a defendant to qualify as an employer under the Wage Act: (1) the defendant must be an officer or agent; and (2) the defendant must have the management of the company. The Court cautioned that juries should be instructed that directors are not agents simply by being directors, and the collective powers of the board are distinct from the powers of individual directors. As to “having the management,” courts should instruct juries that the Wage Act imposes liability on the president, the treasurer, and other officers or agents who perform management responsibilities similar to a president or treasurer, “particularly in regard to the control of finances or the payment of wages.” Id. at 570.

Lessons for Directors and Corporate Advisors

After Segal, it is difficult, but not impossible, to establish Wage Act liability on the part of individual directors. Directors should be aware that they still may face personal liability (with attendant mandatory treble damages and fee shifting) if they are found to be agents of the corporation who performed responsibilities similar to that of a president or treasurer. Consequently, boards and their advisors should take precautionary measures to reduce the risk to directors.

Corporate counsel would be wise to include in companies’ governing documents language stating that individual directors are not authorized to speak or act on behalf of the company. Counsel should then advise boards to abide by such language in practice. While it is common for boards to delegate tasks and authority to particular directors or committees, counsel should screen such delegations carefully to ensure that they cannot reasonably be construed as conferring management or agency authority. Counsel also would be wise to monitor initiatives that might not expressly delegate agency authority but could be deemed to do so by implication.

To the extent a board bestows management or agency authority on individual directors or committees of directors, that authority should be limited to discrete issues. More importantly, that authority should not encroach on officer control over finances and wages. For example, individual directors should not have check-writing authority, control over payroll, or authority to approve or deny wage payments.

Overall, counsel should be vigilant in ensuring that boards and board committees, including compensation committees, exercise their oversight function collectively, with such collective action formally recorded. These steps would help directors perform their fiduciary responsibilities with less risk of personal liability under the Wage Act.

Mark D. Finsterwald is an associate at Foley Hoag LLP and a member of the firm’s litigation department. He focuses his practice in the area of complex business litigation.