So often in business litigation we see disputes regarding the use or disclosure of so called “confidential and/or proprietary” information or “trade secrets.” In a typical scenario, a former employee, officer or partner leaves his or her old company “ABC Electronics” and forms a new competing venture, “XYZ Electronics.” Sometimes though, it may be a potential business partner who received information in confidence and is now using it to compete.

Claims arising from such conduct typically have three potential labels. There may be a contract or confidentiality agreement among the parties such that the conduct is potentially a breach of contract. A statutory claim that may exist known as misappropriation of trade secrets. In Minnesota, the relevant statute is found at Minn. Stat. § 325C.01 et seq. Finally, there is also a common law claim very similar to the statute governing trade secrets known as misappropriation of confidential and/or proprietary information. For most purposes, the common law and statutory misappropriation counts are virtually the same, so we discuss the topic in the context of Minnesota’s trade secret statute.

A trade secret is any information that derives economic value from not being generally known to or readily ascertainable by other persons; and is the subject of efforts which are reasonable under the circumstances to maintain its secrecy.

For something to be considered a trade secret, three conditions must be met. First, the information must not be generally known or reasonably ascertainable. Second, the information must derive independent economic value from its secrecy. Finally, the person claiming misappropriation must have made reasonable efforts to maintain the information’s secrecy.

Some examples of information which may constitute a trade secret include: cosmetic formulas; food recipes; business methods; plans and negotiations; source codes and software programs; and customer lists and customer information.

Misappropriation of a trade secret occurs when a party is able to show three things: first, that a trade secret has been used; second, that the party took reasonable steps to ensure the trade secret’s secrecy; and lastly, that another party misappropriated the trade secret or used improper means to acquire the trade secret.

In a claim arising from a contract, the express contract language governs, however, when the contract arose out of an employment relationship, the claim may require further proof by the employer that there was a legitimate business purpose for the contract and that the contract is not overbroad in scope. This is because courts consider employment agreements as one-sided and try to limit the extent to which employers can control the conduct of former employees.

Potential remedies for misappropriation are broad but may include injunctive relief and any form of damages including lost profits, royalties and punitive damages. Given the serious potential consequences and relatively subjective elements of proof, it is important to have competent legal counsel when dealing with trade secret issues and agreements.

We are frequently approached by shareholders or members of small businesses struggling to figure out what duties they have to the company or whether others involved with the company have run afoul of such duties. Typical issues include:

• Mismanagement that has resulted in serious liability;
• Management has taken business opportunities that belonged to the company;
• There has been self-dealing or company funds or assets have been taken by a controlling person;
• Controlling people have excluded minority owners from the business or its revenues;
• A fiduciary has hired away employees of the company.

Often times the businesses do not have formal written agreements that govern and formalize the rights, duties and interests of the owners, officers and directors. Business operations and planning are often conducted orally and without documentation. In these circumstances, the principals should be particularly cognizant of the fiduciary duties they owe to the company and each other to avoid liability and maintain the integrity of the business.

When a person is a fiduciary, they are duty-bound to be open, honest and act in good faith. Fiduciaries cannot merely act in their own self interests but rather must inform and protect the interests of others. Fiduciary duties arise from a range of different relationships such as lawyer/client, trustee/beneficiary, etc. They arise from situations where “confidence is reposed on one side and there is resulting superiority and influence on the other…” Toombs v. Daniels, 361 N.W.2d 801, 809 (Minn. 1985).

There are two areas where fiduciary duties commonly become an issue in Minnesota businesses. The first relates to the fiduciary duties the officers (or managers in the LLC context) and directors (or governors in the LLC context) owe to the company. The second relates to the fiduciary duties shareholders (or members in the LLC context) owe each other in the closely held business context.

FIDUCIARY DUTIES OF OFFICERS AND DIRECTORS
Officers and directors of a company are fiduciaries to the company. They are required to protect the interests of the company and act in the best interests of the shareholders (including members or partners in the LLC or partnership context). Their fiduciary duties to the company fall into two categories: (i) the duty of care, and; (ii) the duty of loyalty.

Generally, the duty of care requires directors and officers to “inform themselves, prior to making a business decision, of all material information reasonably available” and to “act with requisite care” in discharging their duties. Aronson v. Lewis, 473 A.2d 805, 812 (Del. 1984). In Minnesota, the duty of care requires that managerial duties of a company be performed with the care an ordinarily prudent person in a like position would exercise under similar circumstances.

The duty of loyalty encompasses discharging one’s duties in good faith and in the best interests of the company based on reasonable belief. Generally, the duty of loyalty prohibits directors and officers from assuming positions in conflict with interests of the company and/or from engaging in self-dealing by taking personal advantage of (“usurping”) company opportunities. See Dedrick v. Helm, 14 N.W.2d 913, 919 (Minn. 1944)(directors and officers cannot serve their own personal interests at the expense of the corporation and its stockholders); Matter of Villa Maria, Inc., 312 N.W.2d 921, 922 (Minn. 1981)(officers and directors may not appropriate to themselves a business opportunity which belongs to the corporation). Directors and officers similarly, cannot offer company employees competing jobs.

Although businesses are often established, in part, to insulate operators from liability, failure to act consistent with these duties may expose directors and officers to personal liability. Similarly, if you are a shareholder where the company directors or officers have breached these duties, you (or the company as the case may be) may have recourse for any resultant damages to the company.

FIDUCIARY DUTIES OF SHAREHOLDERS
Shareholders of “closely held” companies typically have the same fiduciary duties of an officer or director although the scope of these duties is likely more limited where they are not actively employed by the company. Moreover, in Minnesota, shareholders (or members in the LLC context) in closely held companies owe fiduciary duties to other shareholders because their relationship is considered tantamount to that of partners in a partnership. Shareholders in closely held companies have no ready market to sell or transfer their ownership interests in the company. As such, they are often subject to unfair treatment by controlling shareholder(s). One common scenario is the shareholder “squeeze out” where the controlling shareholder(s) exclude the non-controlling shareholder from working at the company or from having a voice in management in the company.

Minnesota courts have held that in closely held companies shareholders owe each other the “highest standard of integrity and good faith in their dealings with each other,” and require each shareholder to deal “openly, honestly and fairly with other shareholders.” Pedro v. Pedro, 489 N.W.2d 789, 802 (Minn. Ct. App. 1992). Finally, although not specifically deemed a fiduciary duty, those in control of closely held companies must not act in a manner that is “unfairly prejudicial” to minority shareholders. See Minn. Stat. § 302A.751, subd 1(b)(3). If they do, the prejudiced shareholder may be entitled to equitable relief such as a court ordered buy-out or the corporation may face dissolution. Minn. Stat. § 302A.751.

These concepts are broad, subjective and somewhat dependent on the facts of each case. As a result, there is always uncertainty. It is always better to resolve disputes through negotiation and reasonable compromise. Mutual fairness is always a key to resolution. However, where parties have acted with fraud and deception, or where dialogue has completely broken down, litigation may be the only option. Cases involving shareholder fiduciary duties are complex and costly. Good representation is imperative in such cases.

At Doyle Hance, we welcome inquiries and always provide a free initial consultation to help you ascertain your rights, duties and options.

In real estate transactions and increasingly in many other areas, buyers and sellers commonly sign an agreement to arbitrate disputes not through the courts but instead through a private arbitration forum. Often in real estate transactions the chosen forum is the American Arbitration Association or “AAA.” Creditcard holders often agree to arbitration disputes with the National Arbitration Forum. Similarly, investors usually agree to arbitrate disputes with FINRA (Financial Industry Regulatory Authority, Inc.). Although many lawyers (who generate their livelihood from handling expensive district court cases) discourage arbitration agreements, they are often a very effective and economical alternative to the district courts, but only if you understand the forum and the rules.

When litigants have previously agreed to arbitrate any dispute, the arbitration usually starts with a “demand” by one party to arbitrate. When a party files a demand with the hosting forum and pays the fee to start the arbitration, the demand is given to the opponent, and the opponent is given an opportunity to respond. When the demand is filed, the case has begun.

Once a case has begun, the hosting forum circulates a list of people known as “qualified neutrals” who might serve as arbitrator in the case. Although the process varies slightly depending on the forum and whether the parties are required to select one or three arbitrators, generally the parties select the arbitrator panel by striking unacceptable candidates and ranking the rest. Arbitrator candidates are usually lawyers or other professionals who have experience in the subject matter at issue in the case.

Once the arbitrator panel is agreed upon, the parties typically confer with the arbitrator(s) and come up with a schedule for conducting the arbitration. Typically a month or two is allocated for the parties to informally exchange information and a date is established for the arbitration hearing.

Although arbitrators have some discretion regarding how much “discovery” to allow in a case, depositions and formal written requests are not typically allowed. Arbitrators also may refuse to hear motions, favoring an arbitration on the merits over summary dismissal. These are some of the more expensive aspects of court litigation. The parties may nonetheless secure subpoenas or compel the testimony of witnesses if necessary for the arbitration.

Arbitrations are usually conducted either at the site of the dispute or a location selected by the arbitrator. Some of the forums have their own offices for arbitrations. Most arbitrations last less than a day. Parties to residential real estate arbitrations often submit their arguments, exhibits and witness testimony at the dining room table in the home or property at issue. The arbitrators are not bound by the rules of evidence and rarely disallow the submission of evidence offered by either party.

Once all evidence is submitted, the arbitrator(s) usually takes the matter under advisement and issues a written decision within a few weeks.

Since the arbitration process is favored by courts as a fair alternative to district court litigation, the arbitrator’s decision is binding and enforceable, and subject to only a limited set of appeal issues. As such, arbitrations should not be taken lightly and it is every bit as important to be represented by counsel as it would be in district court.

At Doyle Hance we have a solid record of success in arbitrations and we welcome inquiries regarding arbitration disputes. Our first consultation is always free.

Most commonly, the bank or investor invests in property based, in part, on the value attributed by an appraiser who they hired. Later on, through foreclosure or re-sale, the property is sold for a fraction of the appraised value. So the lender or investor hires another appraiser to do a retrospective (or “review”) appraisal to determine what the value “should have been” when the original appraisal was performed. If the review appraisal determines that the original appraisal significantly overstated the value, the bank or investor sues the original appraiser for damages.

The cases are primarily based on theories of negligence and/or misrepresentation. The underlying principal of the cases, under any theory, is that the appraiser carelessly or recklessly fails to exercise reasonable care in preparing the appraisal resulting in an overstatement of value and damages to the plaintiff. Reasonable care is based on what a reasonable trained appraiser should do in like circumstances.

Specific mistakes that are commonly the subject of appraisal cases include: using bad comparables; making improper adjustments; improperly describing the property or failing to account for material conditions of the property.

Lawsuits regarding appraisers almost always depend on the testimony of experts. In particular, the plaintiff will usually introduce a report prepared by an appraiser who will testify that the appraisal at issue was negligent. It will always be in the best interest of the accused appraiser to have their own responsive expert appraisal. The strength of these expert opinions is often determinative in the case.

Beyond the above, there are other claims and defenses that arise in appraisal cases. For example, plaintiffs will sometimes allege that the appraiser violated a state statute governing appraisal practices or colluded with others involved in the underlying transaction. Defendants will often allege that the plaintiff contributed to the loss by not following their own lending practices or by failing to mitigate damages.

If you are involved in a case dealing with appraiser liability or have been damaged, we are happy to have a free initial consultation to provide our expert perspective.

At Doyle Hance, LLC from time to time we encounter this and other variations of business ownership disputes, and we know that your reaction could determine survival of your business, or result in protracted, expensive and destructive litigation. 

One thing you must do to minimize cost and impact of this potential conflict is to recognize the need to act in the best interests of the company, and consistent with your duty to treat co-owners in an honest, fair and reasonable manner. 

UNDERSTANDING YOUR DUTIES
The starting point is understanding your role and duties (and those of your rogue partner) in the company. Business ownership is reflected in shares of stock (known as “membership units” for llcs). Officers (also known as “managers” for llcs) are responsible for the day-to-day affairs of running the company and the Board of Directors (or Board of Governors for llcs) is responsible for overseeing operation of such businesses. 

State laws establish some rights and restrictions regarding company officers, directors and shareholders. For example, shareholders are entitled to: (i) vote on issues that affect the corporation as a whole; (ii) their pro-rata share of dividends; (iii) access to books and records, and; (iv) they have rights relative to their pro-rata ownership interests in other stock. Officers, directors and shareholders are required to be loyal to the company and avoid self-dealing, among other things. 

Beyond basic statutory requirements though, the scope of duties and specific roles of owners, officers and directors is spelled out, if at all, in company articles, bylaws or shareholder/member control agreements. For small businesses, however, the formalities of ownership, control and management are often ignored and undocumented. In this informal structure of ownership and control, significant challenging disputes occasionally develop. 

CLOSE CORPORATIONS
Court decisions and state laws recognize a distinction between public companies and the so-called “close corporation.” Close corporations have three common attributes: (1) a small number of shareholders; (2) no ready market for corporate stock; and (3) active shareholder participation in the business. Berreman v. West Publishing Co., 615 N.W.2d 362 (Minn. Ct. App. 2000); (citing Donahue v. Rodd Electrotype Co., 328 N.W.2d 505, 512 (Mass. 1975)). 

Courts generally recognize that close corporations are really more like partnerships in corporate guise, and that the relationship among shareholders in closely held corporations is analogous to that of partners. As such, shareholders or members of such businesses have a duty to the company and each other to act in an “honest, fair, and reasonable manner.” Minn. Stat. §302A.751, subd. 3a. This is known as a “fiduciary duty” and alternatively described as a duty to act in the “utmost good faith and loyalty” toward the company and other owners. 

Additionally, courts have authority to grant equitable relief to a shareholder or member of a close corporation when the officers or directors have “acted in a manner unfairly prejudicial” toward that shareholder in his capacity as shareholder or director. Minn. Stat. §302A.751, subd. 1(b)(3).  “A court may grant any equitable relief it deems just and reasonable…” including dissolving the company or ordering a buyout of one or more shareholders. Courts have found that unfairly prejudicial conduct is conduct that frustrates the reasonable expectations of the affected shareholder. 

REASONABLE EXPECTATIONS
In the absence of specific written agreements, reasonable expectations are determined by reference to the understandings “that would normally be expected to result from associative bargaining.” Berreman, 615 N.W.2d at 374. Courts make assumptions about the understandings objectively reasonable close-corporation shareholders would have reached if, at the venture’s inception, they had bargained over how their investments should be protected. Gunderson v. Alliance of Computer Professionals, 628 N.W.2d 173 (Minn. Ct. App. 2001). One example of such a reasonable expectation would be a founding shareholder’s expectation of continued employment with the company. 

What this summary tells you is that in litigation, these general concepts of fairness and reasonableness often dictate the outcome and should always dictate the parties’ position in negotiations. Moreover, what amounts to reasonable and fair often depends on the facts of each particular case. 

OTHER TYPICAL SCENARIOS
Shareholders and members often run afoul of these general principles in a couple of common ways: (i) by taking company assets or opportunities for personal use; or, (ii) by excluding co-owners from having a voice in management or reasonable benefits in the company. Taking corporate opportunities is referred to legally as “usurpation of corporate opportunity.” Excluding co-owners from the company is sometimes referred to as a minority shareholder “squeeze-out.” 

Even if company shareholders or members breach their duties though, it is imperative that the company and/or other owners respond based on these principles of fairness and reasonableness. To do otherwise may well backfire. 

One example is a 2005 Minnesota Supreme Court decision involving the well known fourth generation Minnesota construction company Carl Bolander & Sons, Inc. The former COO, Bruce Bolander, whose father David was the Board Chair, was terminated allegedly for taking unauthorized advances to cover his personal expenses even though the company had been suffering substantial financial losses. Although the case involved a number of complex issues, a jury awarded Bruce Bolander $1.3 million in unpaid compensation plus over $500,000 in attorney’s fees after deciding that his employment agreement had been orally extended by the company, and despite his alleged misconduct. It was an expensive mistake for the company to decide it could disregard existing agreements in reaction to Bruce Bolander’s misconduct. Bolander v. Bolander, 703 N.W.2d 529 (Minn. 2005). 

It is important to get advice early in disputes involving co-owners of close companies to minimize the damages and preserve the chance of resolving the conflict without litigation. Communicating with other owners either informally or through formal shareholder or director meetings can often bring about a resolution. 

In the absence of resolution, owners or the company can pursue injunctive relief, money damages or equitable relief from a judge or jury. Minnesota Courts have wide latitude in granting relief ranging from granting a money judgment for damages, dissolving the company or ordering a buy-out of one or more owners. 

Disputes over business ownership and/or control can be very time consuming and expensive. Often the owners have had a long history, the issues are emotional, and a trial involves many witnesses and exhibits. If conflict arises, it is essential for the parties to have experienced, competent and level-headed counsel. At Doyle Hance, Stephen Hance and Stephen Doyle welcome inquiries from businesses, shareholders or officers, and our first consultation is always free of charge.