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.

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.

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.

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.

Verizon Corporate Services Corp. v. Communications Workers of America, AFL-CIO (4th Cir.)

Filed: January 25, 2010
Per curiam opinion

Held: Affirming the district court’s setting aside of an arbitration award in which the arbitrator ignored critical language in an applicable collective bargaining agreement (CBA), the Court held that courts are bound to set aside awards when an arbitrator exceeds the scope of his authority and the express provisions in the parties' agreement.

Facts: Verizon and a union disputed whether a local letter agreement was superseded by a renegotiation of the parties' CBA. The dispute, which concerned what level of employees would perform certain tasks, was submitted to arbitration. The arbitrator found that the letter agreement was not superseded by the new CBA by virtue of a provision which stated that all local agreements that were valid and enforceable under the previous CBA would continue in effect for the life of the new CBA. Ignoring a negotiated letter agreement that was incorporated into the new CBA and that expressly addressed the issue, the arbitrator ruled in favor of the union.

Analysis: The governing documents were not disputed. As such, the arbitrator was bound to consider and apply the relevant contractual provisions defining the duties of the employees. Under the renegotiated CBA, and a letter agreement that was specifically incorporated into the new CBA, the parties explicitly agreed concerning assignment of the tasks. In the arbitrator’s decision, he did not acknowledge the existence of that agreement. The Court set aside the arbritrator’s award and concluded that the award was beyond the scope of the arbitrator’s authority because he “ignored” “critical language in a Collective Bargaining Agreement” and “introduce[d] some of his own brand of industrial justice.”

The full opinion is available in PDF.

Davis v. The Terminix International Co., LLP (Maryland U.S.D.C.)

Filed: January 27, 2010
Opinion by Judge Frederick Motz

Held:

1. Purchaser of all of the assets of a business is not liable for liabilities arising prior to the date of purchase unless it expressly assumes those liabilities.

2. The Maryland Bulk Transfers Act, Title 6 of the Maryland Commercial Law Article, does not subject bulk transferees to claims for personal injury or property damage caused by the negligence of the transferor.

Facts and Analysis: The Plaintiffs’ asserted claims for property damage and personal injury arising from a pest control application at their home on August 11, 2006. The application was performed by Safeguard Pest control, not by The Terminix International Co., LLP. Thereafter, Terminix purchased Safeguard’s assets. The Asset Purchase Agreement obligated Terminix to continue to perform services at the accounts that were acquired from Safeguard. However, Terminix did not assume Safeguard’s liabilities in the Asset Purchase Agreement. Indeed, the Asset Purchase Agreement expressly excluded Terminix’s assumption of any Safeguard liability arising prior to the Agreement’s closing date. Thus, the Plaintiffs have no claim against Terminix under the Agreement.

The Plaintiffs also raised a claim under the Bulk Transfers Act. Citing Fico, Inc. v. Ghingher, 287 Md. 150 (1980), and Chromacolour Labs, Inc. v. Snider Bros. Prop. Mgmt., 66 Md. App. 320 (1986). The Court held that the Bulk Transfers Act was designed to protect a merchant’s unsecured creditors from his disposition of inventory outside the ordinary course of business, not to subject bulk transferees to claims for personal injury or property damage caused by the negligence of the transferor.

The opinion is available in PDF.

Freedman v. Comcast Corporation (Ct. of Special Appeals)

Filed: January 28, 2010.
Opinion by Judge J. Matricciani.

Held:

1. Defendant's (a) filing of a motion for summary judgment that sought a judicial determination on the merits of the action, (b) request for the court to instruct the arbitrator to hear plaintiff's claims on an individual basis, and (c) attempt to remove to federal court did not constitute a waiver of defendant's right to compel arbitration of claim.

2. The presence of a meaningful choice to enter into an arbitration provision precludes the need for a court to analyze whether an arbitration provision is a contract of adhesion in order to determine whether the provision is procedurally unconscionable.

Facts: Plaintiff claimed defendant violated the 1997 Maryland Wiretapping and Electronic Surveillance Act, alleging the various phone calls he made were recorded without warning. After several pleadings, the Circuit Court denied defendant's motion to dismiss but granted its motion to compel arbitration. Plaintiff appealed the Circuit Court's decision to compel arbitration.

On appeal, plaintiff challenged the validity of the arbitration provision, arguing waiver and unconscionability, among other theories. The Court of Special Appeals denied the appeal after construing the plain terms of the arbitration provision.

Analysis:

1. Waiver.

The plaintiff contended the defendant waived its right to arbitration because defendant (a) filed an alternative motion for summary judgment in conjunction with one of its motions to dismiss, (b) requested the court instruct the arbitrator to hear plaintiff's claim on only an individual basis, and (c) sought to remove the case to federal court.

The Court recited prior cases regarding waiver, stating "the intention to waive must be clearly established and will not be inferred from equivocal acts or language . . . Thus, waiver is a question of intent that ordinarily turns on the factual circumstances of each case."

The Court found plaintiff relied "on a misstatement of federal case law" to argue that a party filing a motion for summary judgment, which seeks judicial determination on the merits of the action, has waived the right to arbitration. Rather, the Court noted that a motion for summary judgment could waive arbitration if it approached a "voluminously documented defense." Here, defendant's motion to dismiss relied on a single document outside the pleadings, a Maryland Public Service Commission certificate, to argue defendant was exempted by the statute that gave rise to plaintiff's claims. As the motion was limited to a procedural flaw, the Court did not find an effective waiver.

The Court found one of defendant's motions, which argued plaintiff was barred from arbitrating his claims on a class basis, was not a waiver. Instead, the motion was a reaffirmation of its intent to arbitrate and merely protected a right defendant believed it possessed.

Lastly, defendant's attempt to remove to federal court did not waive the right to arbitrate because defendant argued in federal court that the court's jurisdiction was limited rather than lacking entirely.

2. Unconscionability.

The plaintiff contended the arbitration provision was (a) procedurally unconscionable because it was a contract of adhesion and (b) substantively unconscionable because it (i) required the arbitrator decide the "validity, enforceability and scope" of the provision, (ii) required the arbitrator to apply the rules of the provision if they were to conflict with the arbitrator's rules, (iii) required the arbitrator to enforce the provision as written, (iv) required the plaintiff to reimburse defendant if defendant overturns an award greater than $75,000, (v) only allowed limited discovery, and (vi) is enforceable only if the class action waiver clause is also enforceable.

Both procedural and substantive unconscionability must be present for a court to invalidate a contract provision as unconscionable. In making its determination on procedural unconscionability, the Court declined to analyze the bargaining power among the parties in order to determine whether the arbitration provision was a contract of adhesion because plaintiff had a "meaningful choice." Here, both the notice plaintiff received and the opt-out provision contained in the notice were clear, conspicuous, and, regarding the opt-out provision, convenient.

Although not necessary, the Court thought it was prudent to address plaintiff's substantive unconscionabilty arguments as well, finding that none of the provision's features were unconscionable individually or in their entirety.

This opinion is available in PDF.

Collins/Snoops Associates, Inc. v. CJF, LLC (Ct. of Special Appeals)

Filed: January 27, 2010.

Opinion by Judge Timothy Meredith.

Held: In a rare manifestation of the principle of equipoise, the Court held that where plaintiff and defendant file breach of contract claims against each other, neither party will prevail if the breach is not proven by a preponderance of the evidence.

Facts: A contractor engaged a subcontractor to perform certain renovations on school buildings. In the middle of the renovations, the contractor terminated the subcontractor for allegedly failing to make sufficient progress. Subsequently, the owner terminated the contractor because the owner was not satisfied with its progress.

The subcontractor sued the contractor for breach of contract, claiming damages in the amount of work and materials provided. The contractor counterclaimed for breach of contract, claiming damages flowing from the subcontractor’s alleged failure to perform.

After a bench trial on the merits, the trial court denied relief to both parties. With respect to the subcontractor’s claim, the court held that subcontractor failed to prove by a preponderance of the evidence that the contractor wrongfully withheld payment. Regarding the contractor’s claim, the court held that the contractor failed to prove by a preponderance of the evidence that the subcontractor failed to perform.

Analysis: The Court of Special Appeals held that the trial court did not err in denying relief to both parties. Both breach of contract claims essentially turned on whether the subcontractor properly performed. Because the trial court found the evidence to be in equipoise, neither party prevailed on its claim. The result, while unusual, involved a standard application of principles of burden of persuasion to each claim.

The full opinion is available in PDF.

The Classics Chicago, Inc. v. Comptroller of the Treasury (Ct. of Special Appeals)

Filed: January 4, 2010.
Opinion by Judge James Eyler.

Held: When a parent company does business in Maryland, its subsidiary which does not do business in the State may be constitutionally required to pay State income taxes. Such taxation is constitutional if the subsidiary’s income is generated by the parent’s business in the State.

Facts: A subsidiary held its parent’s trademarks and licensed to the parent the right to use the trademarks in exchange for royalty payments. During a several year period, the parent, which did business in Maryland, filed State income tax returns that deducted royalty payments made to the subsidiary. The subsidiary, which did not do business in Maryland, did not file State income tax returns and received a tax assessment from the Comptroller for the royalty payments. The issue on appeal was whether the assessment against the subsidiary is constitutional.

Analysis: The court stated that the constitutionality of the tax is governed by the Commerce Clause to the U.S. Constitution and principles of due process. The analysis turns on whether there is a substantial nexus between the state and the person it seeks to tax. Both parties’ arguments addressed their differing interpretation of Comptroller of the Treasury v. SYL, Inc., 375 Md. 78, cert. denied, 540 U.S. 984 and 540 U.S. 1090 (2003).

As in the case at hand, SYL involved a subsidiary that licensed intellectual property rights to its parent in exchange for royalties. The SYL court held that a tax on the subsidiary was constitutional. In the matter at hand, the subsidiary argued that SYL adopted the “sham doctrine,” which examines whether an entity’s motivation behind a corporate structure was to obtain tax benefits. Because the subsidiary was not formed for tax-related reasons, it allegedly should not have been taxed. The Comptroller argued that SYL did not adopt the “sham doctrine,” and, accordingly, an entity’s motivation is not dispositive.

The court accepted the Comptroller’s argument, holding that SYL did not adopt the “sham doctrine.” Rather, the constitutional analysis simply turns on whether the parent’s business in the taxing state is what produced the subsidiary’s income. Because the subsidiary’s income was generated solely by the parent, the court held that the tax was constitutional.

The full opinion is available in PDF. The opinion in SYL is also available in PDF.

Chicago Title Insurance Co. v. Mary B. (Ct. of Special Appeals)

Filed: January 4, 2010
Opinion by Judge Deborah S. Eyler

Held: A recorded deed of trust dated prior to a recorded judgment has priority over the judgment despite the deed of trust being recorded after the judgment.

Facts: On May 11, 2007, a judgment was obtained for $2,000,000 following a tort action involving battery. The judgment-creditor obtained a writ of execution and the sheriff levied on the debtor's real property in Baltimore County. The sheriff's sale was scheduled for October 25, 2007.

On October 18, 2007, Aegis Funding Corporation sued the judgment-creditor and the defendant to enjoin the sheriff's sale and to establish priority of Aegis' lien against the real property.

Aegis had made a loan to the defendant secured by the real property and received a deed of trust dated before the judgment. Through "inadvertence", the deed of trust was not recorded in the land records until after the sheriff's sale was advertised.

Analysis: Section 3-201 of the Real Property Article provides that the effective date of a deed, "is the date of delivery. The delivery date is the last date of acknowledgment or the date stated on the deed, whichever is later." Both the date on the Aegis deed of trust and the date of the last acknowledgment on the deed of trust predated the judgment. Section 3-201 provides that once a deed is recorded, it takes effect from its effective date against every purchaser with notice of the deed and creditor of the grantor with or without notice. The court found the judgment-creditor to be a "creditor" of the defendant rather than a "purchaser."

The full opinion is available in PDF.