ADVERSE DOMINATION

Tolling Statute of Limitations on Corporate Claims when Wrongdoer Dominates Corporation

By Maryland Business Attorney, Nicholas D. Cowie

This article provides an introduction to the doctrine of adverse domination, a legal theory that, in some cases, can effectively “resurrect” a corporate legal claim that might otherwise be barred by the statute of limitations.

Introduction: Statute of Limitations and the Discovery Rule

The statute of limitations is the time period within which a legal claim must be filed in a court of law or it will be forever barred. In Maryland, most common law legal claims (i.e., legal claims not created by statute) have a three-year statute of limitations period that “accrues” (i.e., begins to run) on the date that the claimant knew or reasonably should have known that a wrong had been committed against them. This legal formula for determining the accrual date for the general statute of limitations is also known as the “discovery rule,” first adopted in Maryland in the case of Poffenberger v. Risser, 290 Md. 631 (1981). As a general proposition (with some exceptions not discussed herein), a legal claim in Maryland must be brought within three years of “discovery,” unless a statute provides a different period of time. See, Poffenberger case and general statute of limitations set forth at § 5-101, Md. Cts & Jud. Proc. Article.

The Doctrine of Adverse Domination

There are a variety of legal theories under which courts will toll, that is stop, the running of the statute of limitations, or deem that it is prevented or delayed from accruing or commencing based on the factual circumstances of a given case. One of these theories is known as the adverse domination doctrine, which generally applies to corporate claims against directors and officers who have harmed a corporation or other legal entity (such as a limited liability company). When this doctrine applies the claims against the wrongdoing directors and officers do not accrue while they are in control the corporation.

If corporate directors have taken illegal advantage of a corporation for their own benefit, then presumably the corporation, which acts only through its directors, has knowledge of the wrong. Such knowledge would normally commence accrual the statute of limitations under the discovery rule. However, if the wrongdoing directors fail to disclose the injury to the shareholders and fail to take legal action on behalf of the corporation against themselves, can they simply sit back and allow the statute of limitations to run out by choosing to do nothing while they dominate the board of directors? This is one example where the Adverse Domination doctrine can be applied to toll or delay the accrual of the statute of limitations while the corporation is dominated by the wrongdoers, thereby affording it additional time within which to bring a legal claim.

In the case of Hecht v. Resolution Trust Corp., 333 Md. 324, 339-49 (1994), the Maryland Court of Appeals adopted the doctrine of adverse domination finding it consistent with existing Maryland law. The court held that the statute of limitations on a corporation’s legal claim “against its directors and officers for injuries to the corporation” did not accrue, or begin to run, while “the culpable directors constituted a majority of the board of directors.” Hecht at 352. Thus, unless rebutted (as discussed below) there is a presumption that accrual cannot occur until after the culpable directors have been replaced by disinterested directors “in control of the corporation.” Hecht at 352. The doctrine applies to claims belonging to the corporations as well as the claims of individual shareholders. See, Shah v. HealthPlus, Inc., 116 Md.App. 327, 339-340 (1997).

Rationale for the Adverse Domination Doctrine

The adverse domination doctrine is based on the recognition that “it is unrealistic to expect that [the wrongdoers] will either facilitate discovery of a claim or assert a claim against themselves in favor of the corporation. Such actions are clearly adverse to their own interests….” Hecht at 345 . The Hecht decision recognizes the practical reality that an adversely dominated board will not sue itself and should not be allowed to argue that the statute of limitations accrued or expired under its watch.

The adverse domination doctrine is analogized to and consistent with the principle of Maryland agency law known as the “adverse interest exception” under which the knowledge of an agent whose interests are adverse to the principal cannot be imputed to the principal. Hecht at 345. The doctrine extends the discovery rule to situations in which a corporation is prevented from discovering a cause of action because there is no one who has the knowledge, ability, and motivation to act for the corporation. Hecht at 351. It goes beyond the principles of agency law by providing a rebuttable presumption that a corporate plaintiff cannot have knowledge of wrongdoing by directors when they are in control of the corporation and, therefore, there can be no accrual of the statute of limitations based on discovery until after control is relinquish or terminated. Hecht at 351. This presumption is rebuttable by showing someone other than the wrongdoing directors had knowledge of the basis for the corporate legal claims, combined with ability, and motivation to bring suit during the period of culpable director control. Hecht at 352.

Expansion of the Adverse Domination Doctrine by Maryland Business Attorneys

Experienced Maryland Business Attorneys know that there are many complex legal nuances applicable to the adverse domination doctrine, including varying versions of the doctrine with specific legal elements, exceptions and expansions adopted by other jurisdictions that have yet to be considered by the Maryland appellate courts. For example, precedent from other jurisdictions opens the door for the logical application and extension of the doctrine in Maryland to third parties who are not members of the wrongdoing board of directors. See, e.g., Alexander v. Sanford, 181 Wash. App. 135, 176, 325 P.3d 341, 365 and FN 26, 33 (stating that doctrine of adverse domination can toll the accrual of unit owner vicarious liability claims against a third party developer / builder of condominium based on actions taken by developer-appointed directors of condominium association who allegedly concealed and misrepresented the existence of condominium construction defects and failed to take action to address those defects), petition for review granted, 339 P.3d 634 (2014); Lease Resolution Corp. v. Larney, 308 Ill. App.3d 80, 241 Ill.Dec. 304, 719 N.E.2d 165 (Ill.Ct.App.1999) (applying adverse domination to toll accrual of claims against third parties who act as board members’ co-conspirators).

Importance of Consultation with Maryland Business Litigation Attorneys regarding Statute of Limitations Issues

Anyone seeking to pursue legal claims on behalf of a business entity should seek an immediate legal consultation from one of the experienced Maryland business attorneys at Cowie Law Group, P.C. for purposes of determining all applicable statute of limitations time periods within which suit must be filed in order to preserve those claims. Different legal claims can have different statutes of limitations periods accruing at different times so a comprehensive evaluation is warranted to ensure that all claims are pursued in a timely fashion. Time is of the essence. Even when settlement of legal claims is a possibility, the running of the statute of limitations should not be ignored during negotiations. In such circumstances, a tolling agreement can and should be utilized to stop the statute of limitations from running so as to preserve legal claims without having to file a law suit. Finally, any business seeking to rely on the doctrine of adverse domination should seek legal advice from experienced Maryland business attorneys to determine the doctrine’s potential applicability to the facts as a legal basis for tolling the accrual of the statute of limitations.

MARYLAND BUSINESS ATTORNEYS

1321 Generals Highway, Suite 302, Crownsville, MD 21032 • Tel: 410-327-3800 • Fax: 410-327-3801 • cowielawgroup.com

COWIE LAW GROUP, P.C. is a Maryland business law firm with Maryland business attorneys and Maryland business litigation lawyers who handle business transactions and business law legal disputes. Our main law offices are located in Crownsville, Maryland, but the Maryland business attorneys and business litigation lawyers at COWIE LAW GROUP, P.C. are known for handing complex commercial and business law legal matters throughout the State of Maryland. The experienced Maryland business law attorneys and business litigation lawyers of COWIE LAW GROUP, P.C. provide legal advice and legal representation to business professionals, entrepreneurs, local businesses, national corporations and multinational companies.

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Licensing Agreements

Maryland Business Lawyers and Maryland Litigation Attorneys
By Maryland Business Lawyer, Nicholas D. Cowie

Licensing agreements are legally binding contracts utilized by businesses (“licensors”) to protect their inventions and ideas while sharing them with others (licensees) for profit. Licensing agreement are used to distribute, merchandise, franchise and sell software, technology, designs, products, services, creative works and other intellectual property over which the licensor/owner has a patent, copyright, trademark or other recognized property right.

The licensing agreement not only specifies how the licensee user will compensate the licensor owner for the use of its ideas and inventions, but also provides the owner with contractual protections by defining the terms under which the licensee can use the inventions and ideas so as to prevent or deter misuse or misappropriation. These protections can include confidentiality provisions that protect proprietary formulas, technologies or other trade secrets as well as indemnification provisions that impose liability on the licensee for any infringement or other unauthorized use that may occur due to the licensee’s failure to comply with the licensing agreement.

The licensing agreement most people are familiar with is the so-called “end-user license” associated with the purchase of patented software used on smart phones, laptops and personal computers. The end user licensee must click an “accept” button signifying his or her agreement to the terms before the software will install on their device. These end-user license agreements typically prohibit the end-user from sharing the software and grant access to install and use the software on a limited number of devises.

Licensing agreements are also used in franchising a branded product (protected by a trademark) or a branded service (protected by a service mark). In such cases, the business franchisor grants permission to a franchisee/licensee to distribute products or sell services under its trademark / service mark. The franchising agreement will contain a licensing provision that allows the franchise licensee to use and sell the branded product or service without fear of a trademark or service mark infringement claim.

Another example of the use of a licensing agreement is where a licensee is granted permission to copy and distribute copyrighted works such as “art” or fictional characters. With such license, a licensee need not fear a claim of copyright infringement brought by the copyright owner.

The terms of a licensing agreement can be customized to establish conditions and limits for use of intellectual property. For example, the license agreement may specify the period of time during which the licensee has a right to use the product or intellectual property, or limit the licensee to a specific territory or geographic region. Likewise, the licensing agreement may specify whether the scope of the license is exclusive to the licensee or multiple licensees, and whether and to what extent the licensee has permission to sublicense the product. Maryland Business Lawyers at Cowie Law Group can assist in drafting and negotiating the terms of licensing agreements.

When a party fails to comply with the terms of a licensing agreement, there may be contractual rights and claims for breach of the licensing agreement, as well as claims for: infringement of copyrights, trademarks, patents, and trade secrets; misappropriation of trade secrets; business torts; and other claims for unlawful trade practices and unfair competition. These claims can be pursued and prosecuted by the Maryland business lawyers and Maryland business litigation attorneys at Cowie Law Group, P.C. Such licensing or franchising litigation is pursued by licensors both to recover lost profits, payments due, and other damages as well as to obtain injunctive relief, including temporary restraining orders (TRO’s), intermediate injunctions, and final injunctions to protect intellectual property from further infringement and improper use. Enforcing property rights and licensing claims can also serve as a proactive step to ensure that others do not follow suit and that a business retains full control of its intellectual property.

1321 Generals Highway, Suite 302, Crownsville, MD 21032 • Tel: 410-327-3800 • Fax: 410-327-3801 • cowielawgroup.com

COWIE LAW GROUP, P.C. is a Maryland business law firm with Maryland business lawyers and Maryland business litigation attorneys who handle business transactions and business legal disputes. Our main law offices are located in Crownsville, Maryland, but the Maryland business lawyers and business litigation attorneys at COWIE LAW GROUP, P.C. are known for handing complex commercial and business law  matters throughout the State of Maryland. The experienced Maryland business lawyers and business law attorneys of COWIE LAW GROUP, P.C. provide legal advice and legal representation to business professionals, entrepreneurs, local businesses, national corporations and multinational companies. See us at Bing Places & Google & Facebook

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Non-solicitation, Non-disclosure, Confidentiality and Non-competition Agreements

Maryland Business Litigation Attorneys and Lawyers can assist Companies in the Contractual Protection of their Proprietary Information and other Business Assets through Written Agreements with Clients, Business Partners, Subcontractors and Employees.

When transacting business, companies must often disclose confidential or proprietary business information developed through hard work and monetary investment. For example, client contact lists, marketing strategies, business opportunities, employee identities and skills, manufacturing techniques and technology. If not protected, such information can be unfairly used by existing and potential competitors.

Companies doing business in Maryland have a legal right to protect or restrict the use of such information when transacting business by entering into agreements that contain contract provisions: (1) prohibiting solicitation of employees and customers; (2) requiring that disclosed information be kept confidential; and (3) restricting certain types of unfair competition. Such provisions are often added to employment agreements, subcontracts, business purchase agreements, service contracts and other business transaction agreements.

No contractual provision can prevent misappropriation of proprietary business information or instances of unfair completion. However, if enforceable, such contractual provisions can make it much easier for a Maryland business litigation lawyer to enforce rights, protect business interest and resolve business disputes. As such, these contractual provisions can serve as a strong deterrent. To this end, additional provisions providing for the recovery of attorneys’ fees and other litigation expenses and the choice of court location and applicable law can also be incorporated.

This article contains a brief overview of some contractual provisions commonly used by Maryland business lawyers and litigation attorneys to protect information disclosed in connection with conducting business and engaging in business transactions. Whether or not such contractual provisions will be enforceable through emergency injunctive relief (e.g., temporary restraining orders) or monetary damages or both, will depend on how they are written and the facts of each case, including the type of business involved. Therefore this article should not be relied upon as legal advice. Consultation with an attorney is esential when entering into or seeking to enforce any agreement containing such contractual provisions.

Non-solicitation Agreement

A Non-solicitation Agreement is an agreement that contains a contractual provisions under which a party to the agreement promises not to solicit the other parties’ employees or customers by hiring them away or seeking out their business.

Non-solicitation provisions are used in employment agreements to prevent employees from soliciting other employees or customers of a business after terminating employment. These provisions are also used by businesses in subcontract agreements and service agreements to prevent contract partners or clients from luring away skilled company employees or interfering with valued customer relationships.

A Non-solicitation provision is typically limited in time to the duration of agreement and for an additional period of time after the agreement has ended. There are many direct and indirect ways to solicit a businesses’ employees and clients so the meaning of the terms “solicitation,” “employee” and “customer” as used in a non-solicitation provision should be carefully defined to meet the circumstances the business in question.

Non-disclosure or Confidentiality Agreement

A non-disclosure agreement (also known as a “confidentiality agreement”) is an agreement that contains a contractual provision whereby one party to the agreement promises not to disclose or otherwise use information received from the other party, except as specifically permitted under the agreement.

Non-disclosure agreements are entered into when two companies are considering doing business and need to have access to each other’s business information and technology for the purpose of evaluating potential business relationships or working together to pursue a joint business opportunity. Non-disclosure provisions are also utilized in employment agreements to restrict employees’ use and dissemination of confidential information owned by or disclosed to the employer.

Non- disclosure agreements are designed to protect trade secrets and other proprietary information by prohibiting a party from disclosing information covered by the agreement. In order to effectively enforce such an agreement it should: (1) identify the confidential material, knowledge or other information that is to be disclosed and/or kept confidential; (2) define the limited manner in which that information can be used, if at all; and (3) describe how the information should be handled / protected, including the identify which individual employees can have access to that information and under what circumstances.

Other uses for non-disclosure provisions include agreements negotiated with websites to remove photographs, logos or other proprietary information when the publication thereof constitutes an invasion of privacy or violation of other legal rights. Such agreements include a promise not to disclose the content in the future (or to or destroy it) as well as payment of damages if the website publishes the content in the future.

Non-competition Agreement

A non-competition agreement (also known as a “non-compete agreement”) is an agreement that contains a contractual provision under which one party agrees not to enter into business competition with the other party for a period of time in a specific geographical area. Non-competition provisions are best known for their use in employment agreements to prevent employees from leaving to start up competing companies or to work for competitors. Employers justify these agreements because they invest time and money in teaching employees the company business, and, in some cases, entrusting them with confidential proprietary information, only to have them use that knowledge to start an identical business in direct competition with them.

Non-competition contractual provisions are also used outside the employer-employee context. For example these provisions are useful in connection with the purchase of a business where the business seller agrees not to start a new business that competes with the business being purchased.

Where employment agreements are concerned, non-competition agreements must not be overly broad so as to unreasonably retrain trade and the ability to earn a livelihood. Generally, courts will enforce non-compete agreements against employees who provide unique services, or to prevent a former employee’s misuse of trade secrets and client lists, or solicitation of customers. In such cases the restriction on completion must be reasonably limited in geographic scope and duration as reasonably necessary for the protection of the employer’s justifiable legitimate business interest without imposing undue hardship on the employee or disregard of the public interests. Nonetheless, even overly broad non-competition agreement may be enforceable under Maryland’s “blue pencil rule,” which allows a Judge to strike the overbroad portion of a non-competition agreement and, in some cases, still enforce remaining provisions.

For more information about legal agreements that protect Maryland businesses from competition, contact one of the Maryland business litigation attorneys and lawyers at the law firm of Cowie Law Group, P.C.

MARYLAND BUSINESS LITIGATION ATTORNEY AND LAWYERS

1321 Generals Highway, Suite 302, Crownsville, MD 21032 • Telephone: 410-327-3800 • Facsimile: 410-327-3801

The post MARYLAND BUSINESS LITIGATION ATTORNEYS AND LAWYERS – Business Agreements Maryland Attorneys Use to Protect Companies from Unfair Competition appeared first on Maryland and DC Business Litigation Attorneys.

Misappropriation of Trade Secrets and Proprietary Business Information and other Unlawful Business Practices that can lead to Litigation.

Maryland business lawyers and commercial litigation attorneys are often called upon to resolve business disputes involving products, software, technology, business techniques, client accounts and other business assets and future business opportunities. These business disputes often arise when companies reveal trade secrets and other proprietary business information to business partners, clients or employees out of necessity in order to conduct business or pursue business opportunities. Information technology businesses often share proprietary information with companies that have complimentary technical skills for purposes cooperating on research and development or combining skills to bid on government or private contracts. This article provides a brief overview of legal protections companies can take advantage of to protect their trade secrets as well as legal actions that can be taken when those agreements are breached.

Trade secrets and other proprietary information can cover a wide territory, including manufacturing processes, chemical formulations, software programs, methods, techniques as well as business strategies and client contact lists. Parties can enter contracts where they agree that specific information is proprietary. In some cases, even absent a contractual agreement, the law recognizes information as trade secrets, typically when it is not generally known or readily ascertainable to the public and actions have been taken to protect it from such disclosure.

When disclosing information considered trade secrets, companies often turn to contractual agreements to ensure maximum protection of their information. Contracts with employees, business partners and clients can contain non-disclosure, non-solicitation and non-competition provisions to protect trade secrets and other proprietary business information as well as to deter efforts that might otherwise be taken to lure away key employees and clients. Employment agreements, non-disclosure agreements, confidentiality agreements, cooperative research and development agreements, and teaming agreements are often used for these purposes.

When business partners, clients, or employees usurp business opportunities, lure away key employees, or improperly misappropriate proprietary information for their own economic benefit, there may not only be a breach of contract claim but these actions may also constitute actionable business torts, such as Misappropriation of Trade Secrets (violation of the Maryland Uniform Trade Secrets Act), Trademark, Copyrights and/or Patent Infringement, Unfair Competition, Tortious Interference with Contract, Tortious Interference with Prospective Advantage/Business Relationship, Wrongful Appropriation of Name or Likeness, Negligent Misrepresentation, Constructive Fraud, Intentional Misrepresentation & Concealment, Injurious Falsehood, Conversion, Civil Conspiracy, and Aiding & Abetting, among others.

In addition to damages and/or injunctive relief, attorney’s fees may be recovered if provided for in a contractual agreement, if available, or under the Maryland Uniform Trade Secrets Act or other applicable law. For more information about protecting your business from misappropriation of trade secrets and other unfair business practices, contact one of the Maryland business litigation lawyers at Cowie Law Group, P.C.

MARYLAND BUSINESS LITIGATION ATTORNEYS

1321 Generals Highway, Suite 302, Crownsville, MD 21032 • Telephone: 410-327-3800 • Facsimile: 410-327-3801

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