Saturday, February 27, 2010

Maryland Court of Appeals to Consider Mandatory CLE

Stepping outside our usual precincts of judicial opinions, this posting reports on two related developments: the proposal by the Professionalism Commission set up by the Court of Appeals to establish rules for mandatory continuing legal education and the demise of The Maryland Institute for Continuing Professional Education of Lawyers, Inc. (MICPEL).

The press release by the Court of Appeals on the proposed rule change states that:
The Professionalism Commission, which was set up by the Court of Appeals, is asking the Court to set a minimum annual requirement of 10 hours of continuing legal education (CLE) for attorneys practicing in the state. The Commission, headed by Court of Appeals Judge Lynne A. Battaglia, also proposes that a Commission on Mandatory Continuing Legal Education be set up to oversee the requirement.
Both of these developments have been the subject of a great deal of discussion on the various MSBA listserves. However, the discussions have been taking place in isolation from one another. That is, there's a business law section discussion, a small and solo section discussion, a litigation section discussion, and so on.

We have posted the news about both the proposed rule change and the demise of MICPEL with the hope that the discussions on the various listserves will be conducted through the comment section of this posting. In other words, the comment section will become a venue for an integrated discussion among lawyers in every practice area.

Update: Paul Carlin, executive director of the MSBA, has released a memorandum on rebuilding the CLE function. In the memorandum, he reports that the MSBA Board of Governors "wants the MSBA to facilitate the provision of quality, cost effective CLE through its Sections." The memorandum also states that the MSBA is attempting to place many MICPEL publications online with free access.

Friday, February 26, 2010

Hertz Corp. v. Friend (U.S. Supreme Ct.)

Filed: February 23, 2010
Opinion by Justice Stephen G. Breyer

Held: In a unanimous decision, the Court held that for purposes of determining whether diversity jurisdiction is present, a corporation’s "principal place of business" is the place where a corporation's high level officers direct, control and coordinate the corporation's activities, which is typically referred to as the "nerve center" of the corporation.

In September of 2007, Melinda Friend and John Nhieu, both citizens of California, filed a class-action suit in California state court against Hertz Corporation seeking damages for alleged violations of California's wage and hour laws. Hertz filed a notice seeking removal of the case from California state court to federal court on the grounds of diversity jurisdiction.

In support of removal to federal court, Hertz submitted a declaration by one of its employee relations managers stating that its "principal place of business" was in New Jersey. Hertz's employee relations manager's declaration went on to allege that the leadership of Hertz and its domestic subsidiaries and the corporate headquarters was located in New Jersey and that Hertz's core executive and administrative functions were carried out mostly from its headquarters in New Jersey. With regard to its operations and revenues, the declaration also stated that out of all of its facilities, which are operated in 44 States, California only accounted for 273 of Hertz's 1,606 car rental locations, 2,300 of its 11,230 full-time employees, $811 million of its $4.371 billion in annual revenue and 3.8 million of its 21 million annual transactions.

The District Court held that Hertz was a citizen of California. In determining Hertz's citizenship for purposes of diversity jurisdiction, the District Court applied the precedent of the Ninth Circuit by using the "business activity" test, which instructed courts to identify a corporation's "principal place of business" by first determining the amount of a corporation's business activity state by state. Under the "business activity" test, if the amount of activity of a corporation in one state was significantly larger or substantially predominant than in other states, then that state was considered the corporation’s "principal place of business." If, however, if the business activity in one state did not predominate over its activities in other states, then the principal place of business for the corporation would be the corporation's "nerve center." Applying this test, the District Court noted that while Hertz's corporate headquarters were in New Jersey, because California led all other states significantly in the amount of Hertz's car rental locations, full-time employees, revenue and transactions, California was Hertz's principal place of business. The District Court's ruling was affirmed by the Ninth Circuit Court.

Analysis: The Supreme Court vacated the ruling and remanded the case back to the District Court for further proceedings consistent with the Supreme Court's conclusion that the proper test to use when determining a corporation's principal place of business required a court to determine the location of the corporation's "nerve center." According to the Supreme Court, a corporation's "principal place of business" is best read as "the place where the corporation's officers direct, control, and coordinate the corporation's activities. It is the place that Courts of Appeals have called the corporation's "nerve center." And in practice it should normally be the place where the corporation maintains its headquarters -- provided that the headquarters is the actual center of direction, control and coordination."

In comparing and contrasting the "business activities" test used by the two courts below and the "nerve center" test, the Supreme Court explained that the "business activities" test had proved "unusually difficult to apply" due to the courts having to weigh the numerous factors, such as location of facilities and service centers, sales, transactions, employee location, payrolls, and revenue generation, while the "nerve center" test was a comparatively simpler jurisdictional rule that would provide easier judicial administration and predictability to corporations and plaintiffs. The Supreme Court also noted that having complex jurisdictional rules, such as the "business activities" test, only served to waste court resources and to "complicate a case, eating up time and money as the parties litigate, not the merits of their claims, but which court is the right court to decide those claims." Acknowledging that the "nerve center" test would not be easily applied in all cases, the Supreme Court stated that the "nerve center" test would serve to point courts in a single direction and provide a sensible test that would be comparatively easier to apply.

The full opinion is available in PDF.

Penson Financial Services, Inc. v. Holland (Maryland U.S.D.C.)

Filed: February 18, 2010
Opinion by Judge Catherine C. Blake

Held: Objections to the qualifications of arbitrators or the procedure of an arbitration hearing must be raised prior to or during the arbitration hearing or are deemed to have been waived.

Facts and Analysis: Aaron Holland set up a customer account with Penson Financial Services, Inc. in 2007 by signing a Combined Customer Account Agreement. The Combined Customer Account Agreement contained several provisions in large type that provided that the parties were agreeing to a pre-dispute arbitration clause by signing the agreement and explained that all parties to the agreement were waiving their right to a court trial and to have a jury trial.

When a dispute arose regarding Holland's failure to pay a debit balance in his account with Penson, the parties proceeded to have a hearing before three arbitrators in Baltimore, Maryland. In the arbitration hearing, Penson sought $214,661.10 in compensatory damages as well as interest, attorneys' fees, and costs. After the final arbitration hearing on September 30, 2009, Penson was awarded the full amount of compensatory damages sought, but did not receive the requested interest, attorneys' fees or costs.

When, on November 12, 2009, Penson filed an application to confirm the arbitration award, Holland served a Statement of Answer on Penson's counsel, which was later submitted to the Court, requesting the denial of the arbitration award based on (i) the alleged mental competency of one of the arbitrators, (ii) the replacement of one of the arbitrators a day before the hearing without giving him an option to choose the replacement and (iii) Holland's preference for a jury trial.

In addressing Holland's opposition, the Court found that Holland had waived his objection to the arbitration award by not raising his arguments prior to or during the arbitration hearing. The Court also found that the qualifications of the arbitrator whose competency was questioned by Holland and the replacement of an arbitrator a day before the hearing were all in accordance with the Federal Arbitration Act and the arbitration rules established by the Financial Industry Regulatory Authority. With regard to Holland's preference for a jury trial, the Court found that Holland had waived his right to a jury trial by signing the Combined Customer Account Agreement.

The full opinion is available in PDF. The opinion has not been recommended for publication.

Thursday, February 25, 2010

Micro Focus (US), Inc. v. Bell Canada (Maryland U.S.D.C.)

Filed: February 23, 2010
Opinion by Judge Roger W. Titus

Held: The forum selection clause in the license agreement between the parties did not allow courts in Maryland to exercise personal jurisdiction over Bell Canada, a Canadian corporation with its principal place of business in Toronto. Other than this provision, the plaintiffs did not assert any other basis for the exercise of personal jurisdiction over Bell Canada.

Facts and Analysis: Prior to December 31, 2008, Bell Canada entered into a license agreement with Micro Focus for certain software. The license agreement had the following provision:
If Licensee acquires the Software in North America, the laws of the state of Maryland govern this License Agreement. If Licensee acquires the Software in France, Germany or Japan, this License Agreement is governed by the laws of the country in which Licensee acquired the Software. In the rest of the world the laws of England govern this License Agreement. The aforesaid applicable law shall apply without regard to conflicts of laws provisions thereof, and without regard to the United Nations Convention on the International Sale of Goods. This License Agreement shall be subject to the exclusive jurisdiction of the courts of the country determining the applicable law as aforesaid.
(Emphasis by the Court.)

Applying Maryland law, the Court found that Micro Focus' interpretation was unreasonable:
Micro Focus’ interpretation requires two questionable inferences. The first inference is that the “country” governing licenses executed by North Americans must be the United States because Maryland is part of the United States. The second inference is that “courts of the country” means all federal courts in the United States. Both inferences are tenuous. Accordingly, the Court rejects Micro Focus’ contention that the forum selection clause unambiguously refers to the federal courts of the United States.
(Footnote omitted.)

Further, the Court found that the "clause at issue is . . . nonsensical in that it vests courts with exclusive jurisdiction over a 'License Agreement' rather than over parties or over actions arising out of the License Agreement."

Perhaps as an admonition to drafters of contracts, the Court warned that "the best of intentions, if not clear and unequivocally communicated, simply will not suffice when it comes to a waiver of objections to personal jurisdiction."

The full opinion is available in PDF. The opinion has been approved for publication.

Tuesday, February 23, 2010

TEKsystems, Inc. v. Bolton (Maryland U.S.D.C.)

Filed: February 4, 2010
Opinion by Judge Richard D. Bennett

Held: A covenant not to compete is enforceable even where the competing former employee does not solicit his former employer's clients or use its confidential information if the scope of the restrictive covenant is limited to reasonable temporal and geographical limits, the employer is protecting legitimate business interests with the covenant, the employee has unique and specialized skills, there is no undue hardship on the employee to comply with the restriction and the public interest is served by enforcing the restrictive covenant; and the court held that it would extend the duration of the restrictive covenant for so long as the employee was in breach of it.

Facts: In 1999, the Defendant signed an employment agreement with Plaintiff, containing (among other provisions) a covenant not to compete against Plaintiff for 18 months after his employment terminated and within a 50-mile radius of his former office. Substantively, the covenant prohibited Defendant from engaging “in the business of recruiting or providing on a temporary or permanent basis technical service personnel, industrial personnel, or office support personnel” within these temporal and geographic limitations.

A separate covenant also prohibited Defendant from soliciting or competing for any persons or entities who were clients or customers of Plaintiff within the two years prior to the termination of the Defendant's employment. In 2008, the Defendant resigned from his employment with Plaintiff and, immediately thereafter, accepted a similar position in the IT-staffing business with one of Plaintiff's competitors and within the temporal and geographic limits of the covenant not to compete. None of the IT-staffing placements Defendant made for his new employer (Plaintiff's competitor) involved solicitation of or competition for Plaintiff's clients or customers. Plaintiff admitted at deposition that it was unaware of any such solicitation by Defendant.

Analysis: Under Maryland law, covenants not to compete may be enforced only against those employee who provide unique services or to prevent the future misuse of trade secrets, routes or lists of clients or solicitation of customers. Such covenants will be enforced if the restraint is confined within limits which are no wider as to area and duration than are reasonable for the protection of the business and do not impose undue hardship on the employee or disregard the interests of the public.

In reaching its decision, the court analyzed and concluded on the following:

(1) the 18-month temporal and 50 mile geographic scope of the covenant is facially reasonable and comports with similar limitation upheld by Maryland courts;

(2) the Plaintiff was protecting its legitimate business interests by enforcing the covenant because the employee was critical to the growth in revenue for the region, was key to building the personal relationships with clients in the area as required for the staffing industry, and had access to high level client contacts and confidential information;

(3) the employee at issue possessed unique and specialized skills because of his training and success in the banking industry in New York and had the most knowledge of each customer in the area;

(4) the employee would not suffer undue hardship by enforcing a covenant with the temporal and geographical restraints in this case because the employee was able to conduct business everywhere else in the world except for the area within 50 miles of New York City; and

(5) the public interest is protected by enforcing reasonable restrictive covenants against former employees of high technology and high-growth business.

In reaching its decision with respect to each factor, the court relied on Becker v. Bailey, 268 MD. 93, 299 A.2d 835 (1973); Ruhl v. F.A. Bartlett Tree Expert Co., 245 Md. 118, 225 A.2d 288 (1967); TEKsystems, Inc. v. Spotswood, 05-CV-1532-RDB, Memorandum Opinion (D. Md. June 28 2005); Intelus Corp. v. Barton, 7 F. Supp. 2d 635 (D. Md. 1998) and PADCO Advisors, Inc. v. Omdahl, 179 F. Supp. 2d 600 (D. Md. 2002).

The court granted summary judgment for Plaintiff, finding that Defendant breached the covenant by competing against Plaintiff in the IT-staffing business within the agreed temporal and geographic limits. The Plaintiff, however, would not be awarded monetary relief exceeding nominal damages because there was no proof that the Defendant solicited Plaintiff's customers or clients.

Injunctive relief against future violations of the covenant was warranted. The court held that the Plaintiff was entitled to an equitable extension of the entire 18-month period, running from the date of the court's opinion, because Defendant began violating the non-compete provision almost immediately after the termination of his employment with Plaintiff.

Practice Pointer: Plaintiff's affidavit, alleging that Defendant did, in fact, solicit Plaintiff's clients while working for his new employer, would not be considered on summary judgment. The affidavit contradicted Plaintiff's prior deposition testimony, and there was no showing that the facts asserted in the affidavit were unknown or inaccessible at the time of the deposition. Given this ruling, litigators are cautioned to prepare a Rule 30(b)(6) witness thoroughly. A party may not, on summary judgment, contradict its own Rule 30(b)(6) deposition testimony with evidence that was reasonably accessible at the time of the deposition.

The full opinion is available in PDF.

Friday, February 19, 2010

Keller v. Rudolph Buildings Limited Partnership (Cir. Ct. for Mont. Co.)

Filed: January 20, 2010
Opinion by Judge Ronald B. Rubin

Held: A right of first refusal given in an agreement affecting real property was, by law, perpetual where the parties omitted to state that it was not. Accordingly, the promise violated the Rule Against Perpetuities. The legal inability of the promissor to fulfill the promise constituted a complete failure of performance. As a consequence, the counterparty was relieved of its obligation to perform under the agreement.

Facts: Neighboring owners of property made an agreement by which one, the Grantor, gave the other, the Grantee, easements to use the Grantor's property. In exchange, the Grantee gave a right of first refusal to purchase his property.

Years later, the Grantee sued to quiet title. He sought a declaration that the right of first refusal bound only him, and that it would not encumber the property after a sale. The Grantee had received offers to buy the property, and the Grantor had declined to purchase the property on the offered terms or to sign a release expressly terminating its right. The Grantee was having trouble disposing of the property given the concern that the right of first refusal would continue to encumber the property.

Analysis: The Rule Against Perpetuities does apply to rights of first refusal. Ferraro Constr. Co. v. Dennis Rourke Corp., 311 Md. 560 (1988). In addition, section 1-103 of the Real Property Article provides:
Unless otherwise expressly provided, any obligation imposed on or right granted to any person automatically is binding on or inures to the benefit of his assigns, successors, heirs, legatees, and personal representatives.
Because the parties did not expressly provide that the right would not bind the Grantee's successors and assigns, it did so bind them. Accordingly, the right was perpetual and thus violated the Rule Against Perpetuities.

The inability of the Grantee to fulfill his promise constituted a complete failure of performance. The failure relieved the Grantor from its reciprocal obligations under the agreement.

Practice Tip: A mutual mistake of law is not grounds for rescinding a contract, Janusz v. Gilliam, 404 Md. 524 (2008). The Court, however, held that the problem did not relate to formation of the agreement. The problem was a failure to perform. The failure to perform warranted the Court, in equity, to relieve the counterparty of its own promises.

The full opinion is available in PDF.