Category: Business Litigation

The Advantages of Litigating in the Commercial Division by Rich Friedman

The Advantages of Litigating in the Commercial Division

Since its inception in 1995, the Commercial Division of the Supreme Court of the State of New York has expanded to become the preeminent forum for resolution of complex commercial disputes in New York State due to the expertise of its judges and rules designed to promote efficiency. Among other things, the Commercial Division is noted for its Commercial Division Advisory Council, which is composed of experienced commercial litigators, judges, and in-house counsel who have been judicially appointed. The Council provides advice concerning: (i) issues of interest to commercial litigators; (ii) the changing landscape of commercial litigation in New York; (iii) amended rules of practice; and (iv) other important issues relating to practice in the Commercial Division. The New York County Commercial Division also has an Advisory Committee comprised of judicially appointed private practitioners who meet periodically with the judges of that court.

The Commercial Division employs its own statewide rules, located at 22 N.Y.C.R.R. § 202.70, which significantly augment New York’s Civil Practice Law and Rules (“CPLR”). These rules are tailored to promote efficiency and fairness to commercial litigants and provide them advantages over litigating in the regular Civil Branch. Among these advantageous rules are:

  • Proportionality
    • The preamble and guidelines of the Commercial Division Statewide Rules state that principles of proportionality apply to discovery.
  • Optional Accelerated Adjudication
    • Rule 9 of the Commercial Division Statewide rules permits parties in all actions other than class action to accelerate litigation, with the intention of ensuring that all such actions are trial-ready within nine months from the date of filing.
  • Depositions
    • There is a presumptive limit of ten depositions per side with each lasting presumptively no more than seven hours.
  • Depositions of Entities
    • Pursuant to Rule 11-f, parties may subpoena and examine at deposition entities by questioning an individual designated by the entity to be examined.
  • Limits on Interrogatories
    • Pursuant to Rule 11-a, the Commercial Division generally limits the number of interrogatories to 25, including subparts, and limits interrogatories during discovery to:
      • names of witnesses with material knowledge or information;
      • computation of each category of damage alleged; and
      • the existence, custodian, location, and general description of material and necessary documents.
  • Streamlined Privilege Logs
    • Rule 11-b states that the Commercial Division prefers that parties use categorical designations to reduce the time and costs associated with preparing privilege logs.  Accordingly, the Commercial Division may, upon application by the burdened party, require the party who insists on document-by-document privilege log listings to pay costs and attorney’s fees associated with their creation.
  • No Boilerplate Objections to Document Requests
    • Pursuant to Rule 11-e, the Commercial Division requires parties to either:
      • state that the production will be made as requested; or
      • state with reasonable particularity the grounds for any objection to production.
    • Accordingly, parties can no longer object to document requests with broad, vague language.
  • Streamlined Discovery Disputes
    • Rule 14 provides that, in the absence of a specific judge’s rules, parties must seek a pre-motion court conference concerning a discovery dispute via submission of letters of up to three pages, saving clients the substantially greater expense and delay of motion practice.
  • Standardized Confidentiality Order Form
    • Pursuant to Rule 11-g, the Commercial Division encourages parties to use the Confidentiality Order Form located in Appendix B of the statewide rules and requires parties who resist this practice to provide a written explanation of why deviations are warranted.
  • Settlement Conference Before Non-Presiding Justice
    • Pursuant to Rule 3(b), the Commercial Division permits parties (upon joint request by counsel) to proceed with a settlement conference before a justice other than the justice assigned to the case.
  • Testimony by Affidavit
    • Pursuant to Rule 32-a, the Commercial Division may require that the direct testimony of a party’s own witness in a non-jury trial or evidentiary hearing be presented in affidavit form.
  • Time-Limited Trials
    • Pursuant to Rule 26, the Commercial Division requires parties to furnish the court with a realistic estimate of the length of the trial at least ten days prior to the trial.
  • Monetary Thresholds
    • Of the ten jurisdictions which have one or more Commercial Division judges, six counties in or near New York City have the following minimum monetary thresholds to bringing an action in their courts to promote efficiency:
      • Kings County: $150,000
      • Nassau County: $200,000
      • New York County: $500,000
      • Queens County: $100,000
      • Suffolk County: $100,000
      • Westchester County: $100,000

As illustrated, the Commercial Division’s rules and procedures are designed specifically for the needs of commercial litigants, making litigation more time and cost efficient, more predictable, and more hospitable to complex commercial cases. Having a lawyer with substantial experience in, and a deep understanding of the rules and procedures of, the Commercial Division can be vital to success in commercial litigation.

Richard B. Friedman
Richard Friedman PLLC

830 Third Avenue, 5th Floor
New York, New York 10022
TEL: 212-600-9539
rfriedman@richardfriedmanlaw.com
www.richardfriedmanlaw.com
www.richardfriedmanlaw.com/blog
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Restrictive Covenants in Franchise Agreements Under New York Law by Richard Friedman

Restrictive Covenants in Franchise Agreements Under New York Law

What Are They?

Restrictive covenants are often found in agreements between franchisors and franchisees. The purpose of such covenants is to prevent franchisees—who are the owners and operators of businesses such as “chain-style” stores and restaurants—from harming franchisors by providing similar goods or services after the franchise agreement expires or is terminated. Restrictive covenants can serve to protect the good will of the franchisor after the franchise is reconveyed. See Jiffy Lube Int’l, Inc. v. Weiss Bros., 834 F. Supp. 683, 691 (D.N.J. 1993). 

A typical restrictive covenant clause in a franchise agreement provides that the franchisee may not own or operate a similar or competing entity in a specified area for a specified period of time after the franchise relationship expires or is terminated. 

When Are They Enforceable? 

In order to be enforceable in New York, restrictive covenants in franchise agreements must be:

1. reasonable in geographical and temporal scope; and

2. necessary to protect a franchisor’s legitimate interest. 

ServiceMaster Residential/Commercial Servs., L.P. v. Westchester Cleaning Servs., Inc., No. 01 CIV. 2229 (JSM), 2001 WL 396520, at *3 (S.D.N.Y. Apr. 19, 2001). 

In determining whether to grant an injunction to enforce a restrictive covenant, New York courts weigh the harm that such an injunction would likely cause to the franchisee and to the general public. Golden Krust Patties, Inc. v. Bullock, 957 F. Supp. 2d 186, 198 (E.D.N.Y. 2013) (citing BDO Seidman v. Hirshberg, 93 N.Y.2d 382, 389, 690 N.Y.S.2d 854, 712 N.E.2d 1220 (N.Y.1999). 

New York courts have held franchise agreements akin to employment agreements. Am. Jur. 2d, Monopolies, Restraints of Trade, and Unfair Trade Practices §§ 511-521. Accordingly, the general rules and policies that govern restrictive covenants in employment agreements also apply in courts’ analyses of such covenants in franchise agreements. Id. We have written recently on the current state of restrictive covenants under New York law. That article can be found here

1) Reasonable in Geographical and Temporal Scope 

Under New York law, a restrictive covenant will be found enforceable where it is reasonable in geographic and temporal scope. Golden Krust Patties, Inc. at 198. Whether geographic and temporal scope is reasonable is acutely fact specific. Courts recognize franchisors’ interests in preventing ex-franchisees selling to customers of the former franchise, thereby profiting from and potentially damaging the franchisor’s good will. See ServiceMaster Residential/Commercial Servs., L.P. v. Westchester Cleaning Servs., Inc., No. 01 CIV. 2229 (JSM), 2001 WL 396520, at *3 (S.D.N.Y. Apr. 19, 2001); Carvel Corp. v. Eisenberg, 692 F.Supp. 182, 185–86 (S.D.N.Y.1988) (restriction against competing stores within two miles for three years was “reasonably related to Carvel’s interest in protecting its know-how and to its ability to install another franchise in the same territory”). However, courts will not enforce restrictions regarding when and where a former franchisee can compete when such restrictions are found to be overbroad and detrimental to the franchisee’s ability to earn a livelihood. 

In Singas Famous Pizza Brands Corp. v. New York Advertising LLC, 468 F. App’x 43 (2d Cir. 2012), the Second Circuit held that a restrictive covenant that prohibited a former pizza store franchisee from engaging in “the Italian food service business” within ten miles of the franchisee’s former location for a two-year period was reasonable. The Court based its conclusion on evidence that it had taken four years for the former franchisee to find a suitable location for the Singas. The Court also stated that the ten-mile geographical restriction was “reasonably calculated towards furthering [the franchisor’s] legitimate interests in protecting its ‘knowledge and reputation’ as well as its ‘customer goodwill.’” See Id. at 46–47. 

However, the court reached a somewhat different result in Golden Krust Patties, Inc. v. Bullock. In that matter, Golden Krust, a Caribbean fast-food chain, sought a preliminary injunction against a former franchisee whose franchise agreement was terminated after the franchisee was discovered to have been selling food products manufactured by Golden Krust’s competitors. The franchise agreement stated that, for two years after expiration or termination of the agreement, Golden Krust franchisees were restricted from opening any restaurant at or within ten miles of the franchise location, or within five miles of any other Golden Krust in operation or under construction.

The Eastern District Court ultimately granted the injunction but modified the geographic constraints of the non-compete provision to reflect “the densely populated nature of the New York Metropolitan area.”  Golden Krust Patties, Inc. at 199 (E.D.N.Y. 2013). Reasoning that “most consumers in that region will not travel ten miles—or even five miles—to a fast-food establishment,” the Court determined that a four-mile restriction from the franchise location was more appropriate than the original ten-mile restriction. Id. Additionally, the Court reduced from five miles to two and a half miles the required minimum distance of restaurants that could be opened by the former franchisee from any Golden Krust location. The Court cited the close proximity between Golden Krust locations (often less than one mile apart) as evidence that a broad non-compete zone was not necessary. Id. 

The Golden Krust Court distinguished the case from Singas, holding that Singas had only restricted franchisees from operating Italian food service businesses, whereas Golden Krust restricted former franchisees from operating any type of restaurant business. Id. It is reasonable to believe that the court would have been less inclined to modify the geographic scope of the non-compete had Golden Krust restricted franchisees only from serving Caribbean-style food. Thus, one major takeaway from these cases is that New York courts are more likely to find temporal and geographic restrictions to be reasonable if a franchise agreement’s non-compete clause is sufficiently narrow in other ways. 

2) Legitimate Business Interests 

New York courts have traditionally required that restrictive covenants in franchise agreements, in addition to being reasonable in time and scope, serve legitimate business interests. ServiceMaster Residential/Commercial Servs., L.P. at *3. As already noted above, courts recognize in franchisors a legitimate interest in guarding against former franchisees’ exploitation of i) the knowledge provided by the franchisor and ii) the franchisor’s customer base. In ServiceMaster Residential, the Court held there to be “a recognized danger that former franchisees will use the knowledge that they have gained from the franchisor to serve its former customers, and that continued operation under a different name may confuse customers and thereby damage the good will of the franchisor.” ServiceMaster Residential/Commercial Servs., L.P at *3 (citing Jiffy Lube Int’l, Inc. v. Weiss Bros., Inc., 834 F.Supp. 683, 691-92 (D .N.J.1993) (upholding ten-month, five-mile restriction on rapid lube operation); Economou v. Physicians Weight Loss Ctrs., 756 F.Supp. 1024, 1032 (N.D.Ohio 1991) (upholding one-year, fifty-mile restriction on diet center). 

Legitimate business interests are strengthened when the franchisor has provided the franchisee with unique access to training and clientele. In finding that ServiceMaster’s restrictive covenant served a legitimate interest, the Court emphasized that the franchisor had provided the franchisee with training and confidential manuals regarding how to launch a restoration cleaning business. ServiceMaster Residential/Commercial Servs., L.P at *3. 

Likewise, in RESCUECOM Corp. v. Mathews, No. 5:05CV1330 (FJS/GJD), 2006 WL 1742073, at *1 (N.D.N.Y. June 20, 2006), the Court found that the franchisor-plaintiff had provided the former franchisee with “training and manuals pertaining to the best methods for operating a successful computer sales and services business . . . [and] extended to the defendant the knowledge and ability to launch and successfully operate a computer sales and services business.” The franchisor had also provided the franchisee with access to clientele, evidenced by the fact that the franchisee successfully diverted at least five of the franchisor’s former customers. Id. at *2. The Court granted a preliminary injunction against the defendant, who had opened a computer sales company in the same location as the franchise he had previously operated. 

3) Weighing the Interests of the Franchisee and the Public 

In determining whether to grant injunctions based upon the restrictive covenants of franchise agreements, recent cases have emphasized the balancing of the franchisor’s interests against the interests of both the public and the franchisee. See Singas Famous Pizza Brands Corp. at *12; Golden Krust Patties, Inc. at 198. 

Singas and Golden Krust—two of the most recent leading New York decisions involving restrictive covenants in franchise agreements—explicitly consider the potential harm of enforcing the non-compete provisions at issue to both the former franchisees and the public interest. Both decisions ultimately found the covenants enforceable and granted injunctions (though the Golden Krust Court, as discussed above, modified the temporal and geographic scope of the provision). 

In Singas, the Court acknowledged that defendants invested significant time and money into restaurants they had hoped would be Singas franchises. However, according to the Court, “any hardship caused by an injunction was caused by the defendants’ own violation of the Agreement” when they opened a restaurant location as a purported franchise without having received permission from Singas. Singas Famous Pizza Brands Corp. at *12. 

In Golden Krust, the Court also found that any harm caused to defendants by an injunction would stem from their own wrongdoing, as the former franchisee had sought to pass off a competitor’s product as a Golden Krust product, and had continued to operate after termination in contravention of the franchise agreement. Golden Krust Patties, Inc, at 199–200. In addition, the Golden Krust Court found that the public would be harmed if the defendants were allowed to continue to use the franchisor’s trademarks and solicit Golden Krust customers. The Court stated as follows: “There is likely a greater harm to the public in the form of consumer confusion if defendants are not enjoined.” Golden Krust Patties, Inc. at 200. 

Conclusion 

The general rules and policies that govern restrictive covenants in employment agreements also apply in New York courts’ analyses of such covenants in franchise agreements. However, courts will give deference to franchisors which have provided unique access to training and other benefits to franchisees. Thus, as with such cases in the employment context, litigations involving the alleged breach of restrictive covenants in franchise agreements are very factually intensive and are best handled by counsel who regularly represent clients in such matters.

Richard B. Friedman
Richard Friedman PLLC

830 Third Avenue, 5th Floor
New York, New York 10022
TEL: 212-600-9539
rfriedman@richardfriedmanlaw.com
www.richardfriedmanlaw.com
www.richardfriedmanlaw.com/blog
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Confidentiality Obligations of In-House and Outside Counsel in the Virtual Workplace by Richard Friedman

Confidentiality Obligations of In-House and Outside Counsel in the Virtual Workplace

As is widely known, many technological advancements have been integrated into the legal industry in recent decades. Maintaining an electronic record of all information is standard operating procedure at large and small companies and law firms. Another major development, in the last half dozen or so years, in particular, has been the dramatic increase in the number of employees who telecommute one or more days a week and in many instances full time. Indeed, there are now virtual companies and law firms which maintain limited, if any, office space. These parallel developments necessarily raise questions concerning the ability of companies and law firms alike to maintain the confidentiality of proprietary information.

Working Remotely

At the risk of stating the obvious, working from home or from other remote locations allows attorneys and other personnel to maintain a flexible schedule and eliminate commute time. With a click of a button on a remote device, in-house and outside counsel are able to access a confidential document from off-site locations, often as one or more colleagues are working on the exact same document. However, this increased flexibility and the possibility of maintaining a better work-life balance brings with it increased challenges in ensuring the confidentiality of client information.

Cyber Security and Confidentiality

Remote Access to Electronic Files

Of course, lawyers often handle very sensitive client information which must remain confidential. Questions have arisen in recent years as to whether the use of remote access violates a lawyer’s duty to preserve client confidences under Rule 1.6 of the Model Rules of Professional Conduct. In accordance with that rule, a violation occurs when one:

1. knowingly reveals confidential information; or

2. does not exercise reasonable care to prevent the compromise of confidential information while the lawyer or the service utilized by the lawyer has access to the confidential information.

The New York State Bar Association Committee on Professional Ethics has stated that, in addition to being prohibited from disclosing confidential information, a lawyer is also obligated to take reasonable care to affirmatively protect his or her client’s information (NYSBA Comm. on Professional Ethics, Formal Op. 842, 2010).

It is acceptable to use standard methods of transmitting or accessing information so long as there is a reasonable expectation of privacy. For example, confidential information may generally be sent by an unencrypted email. However, if there is a greater risk of interception due to the particular circumstances, the lawyer is obligated to take appropriate security measures bearing in mind the technology that is available at a reasonable cost (NYSBA Comm. on Professional Ethics, Formal Op. 709, 1998). The lawyer must also ensure that any security or storage service provider she plans to use has an enforceable obligation to preserve confidentiality. Any known risks in a security system must be disclosed to a client before the lawyer may obtain a client’s consent to access confidential information remotely to ensure that the consent is an informed one.

Use of Cloud Storage for Storing Client Information

When using a cloud for data storage, a lawyer must ensure that the storage system is password protected and that the stored data is encrypted (NYSBA Op. 842). Due to the rapid changes in technology and continually emerging threats to the security of stored data, a lawyer should also periodically confirm the effectiveness of the security measures provided by the service she or he uses. If there is evidence of a potential or actual lack of security, the lawyer must discontinue use of the service until the potential or actual problem is remediated by the service provider. Like the standard regarding remote access described above, a lawyer must affirmatively protect his client’s information. The American Bar Association and many state bar associations have issued opinions approving the use of cloud storage so long as reasonable care is taken to confirm the effectiveness of the security measures that are in place.

The success of the virtual workplace model in law, however convenient and liberating for many lawyers, is contingent on having an encryption system for protecting confidential information and having the means to securely store and transmit information while working from a remote location. If a virtual workplace model is tested by a court or otherwise, in-house and outside counsel must be able to demonstrate that they are affirmatively protecting their clients’ information by staying informed about technological advances and potential risks to data security. Taking reasonable care boils down to individual attorneys maintaining proper work protocols, such as choosing strong passwords, remotely accessing information from a secure Wi-Fi network, and communicating with the service provider regarding any potential security breaches.

Richard B. Friedman
Richard Friedman PLLC
830 Third Avenue, 5th Floor
New York, New York 10022
TEL: 212-600-9539
FAX: 212-840-8560
rfriedman@richardfriedmanlaw.com
www.richardfriedmanlaw.com
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