Archives for September 2019

Delaware Court of Chancery Denies Director’s Motion to Compel Attorney-Client Privileged Documents

In Eric Gilmore v. Turvo, Inc., C.A. No. 2019-0472-JRS, the Delaware Court of Chancery denied a director’s Motion to Compel seeking attorney-client privileged communications between Turvo Inc.’s (“Turvo”) Preferred Directors, officers, or employees and an outside law firm. The general rule in Delaware is that all directors are within the umbrella of privilege between the Board and its counsel and, as a result, a Delaware corporation cannot assert privilege to deny a director access to legal advice furnished to the board during the director’s tenure. The communications in question took place before the Board meeting where the Preferred Directors removed plaintiff as CEO and retained the outside law firm as counsel to the Board. Plaintiff argued that, even though the Board had longstanding counsel, the outside law firm’s advice was being furnished to the Board prior to the formal engagement of the outside law firm by Turvo and therefore Plaintiff was entitled to the communications. The Court disagreed, holding that there was no basis to conclude that outside counsel had been retained by the Board before the meeting because there had been no act by the Board to hire the firm before the meeting. The Court found that any advice provided by outside counsel prior to being engaged by Turvo was in connection with its representation of one specific Preferred Stockholder of Turvo and the director it had appointed. As a result, Plaintiff was an outsider to the relationship and had no right to pierce it.

The Court’s ruling is a reminder to Delaware corporations of the weight the Court of Chancery will place on Board actions and engagement formalities in determining the availability of privilege in Board communications.

A link to the full case is below.

Gilmore v Turvo

Attorney Sean C. Wagner Gives Presentation in Washington, D.C. on Corporate Formation, Organization, and Governance Issues to Healthcare Industry Entrepreneurs

Wagner Hicks attorney Sean C. Wagner recently presented to a group of healthcare industry entrepreneurs at an event in Washington, D.C., during which he led a discussion on the importance of corporate formation, organization, and governance. During his presentation, Mr. Wagner highlighted common, preventable reasons for partnership disputes and the potentially disastrous consequences these disputes can have on otherwise successful businesses.

Wagner Hicks is a leader in providing comprehensive, proactive advice to businesses of all sizes and industries, including healthcare practices across the country, in matters involving shareholder disputes and derivative litigation, corporate governance, and other related matters.


Lead Generator Pays $30 Million to Federal Trade Commission to Settle Deceptive Lead Generation Claims

The Federal Trade Commission (FTC) recently announced that Career Education Corporation (CEC) and its subsidiaries, American InterContinental University, Inc., AIU Online, LLC, Marlin Acquisition Corporation, Colorado Technical University, Inc., and Colorado Tech., Inc. (collectively, CEC), have been ordered to pay $30 million to the FTC to settle Federal Trade Commission charges that the operator used sales leads from lead generators that falsely told consumers they were affiliated with the U.S. military, and they used other unlawful tactics to generate leads. CEC’s lead generators also induced consumers to submit their information under the guise of providing job or benefits assistance. The FTC also charged that CEC’s lead generators falsely told consumers that their information would not be shared, and that both CEC and its lead generators illegally called consumers registered on the National Do Not Call (DNC) Registry.

This recent FTC enforcement action highlights the regulatory risk associated with lead generation and telemarketing activities. Given the significant regulatory risks, as well as the increasing risk of class action litigation brought under the Telephone Consumer Protection Act (TCPA), businesses should carefully evaluate their telemarketing practices to ensure compliance with the complex regulatory framework surrounding telemarketing activities.

The full text of the Proposed Stipulated Order for Permanent Injunction and Monetary Judgment is set forth below.

Career Education Corporation Proposed Stipulated Order for Permanent Injunction 8-27-19

New York Governor Cuomo Signs Stop Hacks and Improve Electronic Data Security Act (SHIELD Act) into Law

On July 25, 2019, New York Governor Cuomo signed the Stop Hacks and Improve Electronic Data Security Act (SHIELD Act) into law. The law amends the existing data breach notification law and adds new cybersecurity requirements. The SHIELD Act takes effect in March 2020.

The Governor also signed into law the Identity Theft Prevention and Mitigation Services Act (ITPMSA). The ITPMSA requires that credit reporting agencies suffering a breach involving Social Security numbers must provide five years of identity theft prevention and mitigation services to affected consumers. The ITPMSA takes effect in September 2019.

Changes to New York’s Data Breach Notification Law

The SHIELD Act makes several changes to the existing data breach notification law by imposing more stringent obligations on businesses handling private data of customers including:

  • Broadening the scope of information covered under the notification law to include biometric information and email addresses with their corresponding passwords or security questions and answers;
  • Updating the notification requirements and procedures that companies and state entities must follow when there has been a breach of private information;
  • Extending the notification requirement to any person or entity with private information of a New York resident, not just those who conduct business in New York State;
  • Expanding the definition of a data breach to include unauthorized access to private information; and
  • Creating reasonable data security requirements tailored to the size of a business.

If you need assistance developing and implementing a data privacy and cybersecurity compliance program that is sufficient to satisfy these new requirements, please contact us.

HHS Office for Civil Rights (OCR) Issues Subtle Reminder Regarding HIPAA Business Associate Liability

The Department of Health and Human Services Office for Civil Rights (OCR) recently issued a reminder to business associate entities regarding the potential for direct liability for certain violations of the Health Insurance Portability and Accountability Act (HIPAA). In a Fact Sheet issued on May 24, 2019, the OCR provided the following list of HIPAA violations for which business associates are directly liable:

  • Failure to provide the Secretary with records and compliance reports; cooperate with complaint investigations and compliance reviews; and permit access by the Secretary to information, including protected health information (PHI), pertinent to determining compliance.
  • Taking any retaliatory action against any individual or other person for filing a HIPAA complaint, participating in an investigation or other enforcement process, or opposing an act or practice that is unlawful under the HIPAA Rules.
  • Failure to comply with the requirements of the Security Rule.
  • Failure to provide breach notification to a covered entity or another business associate.
  • Impermissible uses and disclosures of PHI.
  • Failure to disclose a copy of electronic PHI (ePHI) to either the covered entity, the individual, or the individual’s designee (whichever is specified in the business associate agreement) to satisfy a covered entity’s obligations regarding the form and format, and the time and manner of access under 45 C.F.R. §§ 164.524(c)(2)(ii) and 3(ii), respectively.
  • Failure to make reasonable efforts to limit PHI to the minimum necessary to accomplish the intended purpose of the use, disclosure, or request.
  • Failure, in certain circumstances, to provide an accounting of disclosures.
  • Failure to enter into business associate agreements with subcontractors that create or receive PHI on their behalf, and failure to comply with the implementation specifications for such agreements.
  • Failure to take reasonable steps to address a material breach or violation of the subcontractor’s business associate agreement.

This recent unsolicited reminder from the OCR regarding direct liability for business associates is a chilling reminder of the potential consequences of an entity’s failure to implement a HIPAA compliance program. If you need assistance developing and implementing a HIPAA compliance program, either as a covered entity or as a business associate, please contact us.

New Rule Issued Requiring Foreign-Domiciled Applicants and Registrants to Have a U.S.-Licensed Attorney

The United States Patent and Trademark Office (USPTO) recently announced a new rule requiring all foreign-domiciled trademark applicants, registrants, and parties to Trademark Trial and Appeal Board proceedings to be represented by an attorney who is licensed in the United States. The requirement applies to parties whose permanent legal residence or principal place of business is outside the United States. The new rule also requires all U.S.-licensed attorneys to confirm they are an active member in good standing of their bar and to provide their bar membership information. Under Secretary of Commerce for Intellectual Property and Director of the USPTO, Andrei Iancu believes that “This rule is a significant step in combatting fraudulent submissions.” The new rule goes into effect on August 3, 2019.

The complete text of the rule is published in the Federal Register.


Delaware Court of Chancery Refuses to Extend Merger Deadline When Merger Party Failed to Provide Proper Notice of Extension

In a recent opinion, the Delaware Court of Chancery held that a party to a merger agreement properly terminated the merger agreement when its counterparty failed to extend the merger deadline by providing the required notice. In Vintage Rodeo Parent, LLC v. Rent-a-Center, Inc., two parties to the merger agreement negotiated a provision providing that the merger must be completed within an initial six-month deadline or either party could terminate the merger agreement at will and receive a termination fee. The merger agreement granted each party the unilateral right to extend the merger deadline upon written notice of extension to its counterparty prior to the deadline.

As detailed in the opinion, the parties to the merger agreement worked together to seek the necessary regulatory clearance required to close the merger. During this period it became clear that the closing date would not occur until after the merger deadline provided in the merger agreement. When the closing deadline passed without either party providing the contractually required written notice to extend the deadline, Rent-A-Center, LLC (“Rent-A-Center”) exercised its right to terminate the merger agreement. In response, Vintage Rodeo Parent, LLC, and its affiliates (collectively, “Vintage”), filed suit challenging Rent-A-Center’s purported termination on multiple grounds, including, that terminating the merger transaction (and failing to inform Vintage of its intent to terminate) constituted a failure to use commercially reasonable efforts to close the transaction, as required by the merger agreement, and that Rent-A-Center breached the implied covenant of good faith and fair dealing by so terminating.

The Court disagreed, holding that Rent-A-Center properly exercised its bargained for contractual right in the merger agreement to terminate the transaction. Notwithstanding the Court’s finding that the parties had “committed much time and effort” working together to consummate the merger, the Court found that the parties were bound to their contractual bargain. The merger agreement included a robust break-up fee provision, and the Court left open the question of the enforceability of that provision. Nonetheless, the Court’s ruling underscores the vital importance of following the technical notice requirements in transaction documents rather than relying on course of dealing and good faith arguments.

The complete text of the Court’s opinion in this case is set forth below.

Vintage Rodeo Parent LLC et al. v. Rent-A-Center Inc. Opinion

Recent Decision Highlights the Broad Scope of the Securities Exemption to the North Carolina Unfair and Deceptive Trade Practices Act, N.C. Gen. Stat. 75-1.1, et seq.

In recent opinions, courts have demonstrated a willingness to significantly narrow the applicability of the North Carolina Unfair and Deceptive Trade Practices Act, N.C. Gen. Stat. 75-1.1, et seq.(NCUDTPA), in the context of business disputes by broadly interpreting the applicability of the securities exemption. Like its name suggests, the securities exemption excludes securities transactions from the scope of the NCUDTPA. A recent federal court decision in Robichaud v. Engage2Excel, Inc.,et al., Case No. 5:18-CV-00086-GCM, 2019 WL 2076561 (W.D.N.C. May 10, 2019), indicates that the scope of the securities exemption is broad. The case involved allegations that, following a merger, the defendants withheld the plaintiff’s portion of the merger proceeds because plaintiff, who owned a competing business in the same industry, refused to agree to non-competition, non-solicitation, and non-disparagement provisions. The defendants moved to dismiss the NCUDTPA claim, arguing that the claim should be dismissed pursuant to the securities exemption, because the case arose from a complex securities transaction. In response, the plaintiff argued that the securities transaction was not the focus of the NCUDTPA claim, pointing out that the offensive conduct was the unfair competition in the form of refusing to pay plaintiff his portion of the merger proceeds unless he agreed not to compete with defendants. After finding that the unfair and deceptive conduct was inextricably intertwined with a securities transaction, the Court dismissed plaintiff’s NCUDTPA claim.

The complete text of the Order partially granting Defendants’ Motions to Dismiss is set forth below.

Robichaud v Engage2Excel Inc

Delaware Court of Chancery Holds a Fully Executed Warrant Agreement is an Invalid Contract Because There Was No Meeting of the Minds

In a post-trial memorandum opinion, the Court of Chancery held that a fully executed warrant agreement between an early employee and her employer did not reflect a meeting of the minds and therefore there was no valid contract. Significant to the Court’s decision was the limited contemporaneous evidence that existed related to the negotiations surrounding the contract. The Court held that the only contemporaneous evidence of any real value was the drafts of the warrant agreement. Those drafts, and the evidence presented at trial revealed that towards the end stage of negotiations the company sent a draft version of the warrant agreement to plaintiff, plaintiff made edits to the draft including removing or diluting certain restrictive covenants contained therein, plaintiff then signed the edited version and sent it to the company for execution without addressing the fact that she had made the edits, and the company believing the version of the warrant agreement that was returned was the same as the version it had sent to plaintiff, failed to notice plaintiff’s edits and signed the agreement. The Court held that, despite the agreement being fully executed, there was credible and convincing evidence that the parties were not operating on the same page and that the company’s representatives believed they were signing the version of the agreement that they had sent to plaintiff, not a version that was edited by plaintiff. As a result, the Court held that there was no meeting of the minds and that the proffered warrant agreement was invalid.

This case serves as a reminder of the importance of documenting negotiations and changes to key terms in draft documents. Failure to do so can lead to unintended consequences and potentially result in a fully executed contract being set aside for failure to satisfy all the elements for creating a valid contract.

Kotler v Shipman Assoc