Monthly Archives: April 2023

Are You Protecting Your Construction Firm’s Trade Secrets?

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John Mark Goodman and Jeffrey D. Dyess | BuildSmart

The construction industry is full of valuable business information including customer lists, pricing information, project budgets, and more. The value of such information may be lost if it becomes known to a competitor or the public at large. That is why it is important to take steps to protect confidential information from disclosure. Such steps may include confidentiality agreements, limiting access on a need-to-know basis, labeling, and other basic security measures. If you fail to take reasonable steps to protect confidential information, then you may not be able to get it back if it falls into the wrong hands.

A federal court in New Jersey explored these issues last week in JRM Construction Management, LLC v. Plescia, 2023 WL 2770479 (April 4, 2023). In that case, two former employees of JRM allegedly kept confidential information and shared it with their new employer, JRM’s competitor. The information at issue included client presentations, estimating procedures, and templates used to prepare final budgets for project bids. JRM sought an injunction to prevent further disclosure and to require immediate return of the information. The court refused to grant an injunction noting that discovery was needed to resolve several key issues of fact.

One of those key issues was whether JRM took reasonable steps to protect the information. While trade secret protection was once the domain of a patchwork of state common law decisions, 48 states (including New Jersey) and the District of Columbia have now adopted a version of the Uniform Trade Secrets Act (UTSA Enactment History), and a federal civil cause of action for trade secret protection was created with the 2016 enactment of the Defend Trade Secrets Act. 18 U.S. Code § 1836(b). Under either regime, the business trying to prevent the unwanted disclosure of its trade secrets will in every instance have to prove that the subject information meets the definition of a trade secret, including that the information was the subject of reasonable efforts or measures (tailored to the circumstances) to maintain the secrecy of the information. See 18 U.S.C. § 1839(3)(A); N.J.S.A. 56:15-2

The employees argued that JRM transmitted budget estimates to clients without any understanding or agreement that the information was confidential while knowing that such estimates were often shared with JRM’s competitors. The employees also claimed that JRM sent Excel file formats instead of .pdfs, so recipients had access to the underlying formulas and calculations. They argued that because JRM failed to protect its information, the information was not confidential or trade secret. As such, they were free to share it with their new employer and could not be required to return it. The court did not rule on whether JRM took adequate measures to protects its information but noted the factual dispute over that issue prevented it from issuing a preliminary injunction.

Whether JRM ultimately succeeds in retrieving its valuable business information remains to be seen. Regardless, the case stands as a good reminder to take steps to protect your confidential information and trade secrets. If you don’t, it could be stolen, and you may not be able to get it back.

Advancing technology and connectivity combined with high employee mobility make it easier than ever to transmit proprietary data. 

When one of your cases is in need of a construction expert, estimates, insurance appraisal or umpire services in defect or insurance disputes – please call Advise & Consult, Inc. at 888.684.8305, or email experts@adviseandconsult.net.

Willful or Wanton Conduct Not Enough to Overcome Economic Loss Rule Says Colorado Court

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Amandeep S. Kahlon and Carly Miller | BuildSmart

In Mid-Century Insurance Co., v. HIVE Construction, Inc., a Colorado court of appeals recently reversed the decision of a lower court that had refused to apply the economic loss rule to a negligence claim alleging wanton or willful misconduct. The appellate court determined that, where the negligence claim was based solely on the breach of a contractual duty, it was barred by the economic loss rule regardless of whether the negligence was willful or wanton.

The project at issue involved the buildout of a restaurant in Denver, Colorado. The general contractor substituted a layer of fire-resistant plywood in place of a layer of drywall used to separate the kitchen and dining room of the restaurant. Although fire-resistant, the plywood was combustible, and the broiler selected for the kitchen required eight inches of clearance from combustible materials. The parties disputed whether the owner was on notice of the substitution. The owner installed the broiler only an inch from the plywood layered wall. Despite that, the kitchen passed inspection.

Two years later, a fire broke out in the wall next to the broiler, and the owner’s expert opined that the ignition of the plywood due to heat radiated from the broiler caused the fire. The owner asserted a single negligence claim against the contractor alleging, in part, that the contractor’s installation of the combustible plywood demonstrated a careless and reckless disregard for the rights and safety of others, which constituted willful and wanton conduct.

The contractor answered the complaint by arguing the economic loss rule barred recovery on the negligence claim. After the jury returned a verdict in favor of the owner, the contractor moved for a directed verdict based on the economic loss rule. The trial court denied the motion, relying primarily on prior Colorado precedent that the “economic loss rule does not apply to intentional conduct.” The contractor appealed.

Per the appellate court, the “economic loss rule generally provides that a party suffering only economic loss from the breach of an express or implied contractual duty may not assert a tort claim for such breach absent an independent duty of care under tort law.” The rule is intended to maintain a distinction between breaches of contractual obligations/promises and breaches of duties imposed by law without agreement or contract (tort). “Even if the duty allegedly breached is separately recognized under tort law, it is not ‘independent’ of the contract for the purposes of the economic loss rule if it addresses the same obligations created by the contract.

The parties agreed that the relief sought by the owner under the negligence claim was identical to the relief it could have sought under a breach of contract claim — purely economic damages. The appellate court concluded the duty allegedly breached under the negligence claim was indistinguishable from the duty the contractor owed under the parties’ contract. In other words, no independent duty existed.

In rejecting the trial court’s application of existing Colorado precedent, the appellate court noted that there was no allegation of  an intentional tort. Specifically, the court wrote “willful and wanton conduct is that which approaches but does not include an intentional tort nor can it be classified as such.” The court further noted that there was no need for an exception from the economic loss rule for wanton or willful misconduct. That sort of conduct cannot be abrogated or limited by contract in Colorado, so the wronged party maintains a remedy under the contract. Per the court, application of the economic loss rule depends more on the nature of the duty owed and not on the nature of the defendant’s conduct. The appellate court reversed the trial judge’s denial and remanded with instructions to grant the directed verdict.

The Colorado appellate court’s opinion is instructive in describing the basis for and application of the economic loss rule. Inexplicably, the owner in Mid-Century did not file a corresponding breach of contract claim, which resulted in a particularly harsh outcome in this case. Parties to a contract may want to be careful to pursue tort claims in the alternative to or in addition to contract claims to prevent this sort of result. Parties sometimes pursue tort claims to avoid contractual limitations on remedies, and there may be exceptions to the economic loss rule that permit this approach. But, relying solely on those exceptions to pursue a claim may result in an unfavorable or unexpected ruling.

When one of your cases is in need of a construction expert, estimates, insurance appraisal or umpire services in defect or insurance disputes – please call Advise & Consult, Inc. at 888.684.8305, or email experts@adviseandconsult.net.

Are You Prepared to Avoid Spoliation? The Duty to Preserve Begins Sooner Than You Might Think.

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Michael Delulis | Burns & Levinson

Few terms make litigators shudder like the dreaded spoliation; and for good reason. The consequences of a company’s failure to preserve evidence that might be relevant in prospective litigation can be severe.  What many non-litigators (including in-house counsel) may not realize, however, is that decisions made before litigation counsel is engaged can profoundly affect the chances that spoliation will later become a significant issue during litigation. A recent decision in the Business Litigation Session, JFF Cecilia LLC v. Weiner Ventures, LLC, highlights that very risk.

In JFF Cecilia, Weiner Ventures and its principals, Stephen and Adam Weiner, agreed to partner with Suffolk Construction owner, John Fish, to develop a luxury, high-rise tower on Boylston Street over the Massachusetts Turnpike in Boston.  Just as construction was set to begin, the Weiners abruptly backed out of the project, which had been over a decade in the making.  Four days later, on August 20, 2019, Fish sent the Weiners a formal notice, claiming that they had breached their agreement and stating that he was reserving all rights.  While Fish ultimately filed suit, he did not do so until two months later.  During the period between Fish’s August 20th notice letter and the commencement of litigation in October, the Weiners not only failed to implement document preservation measures, but they actively deleted emails and text messages, and performed a “factory reset” to wipe data from their cellphones.

After Fish learned through discovery about the defendants’ conduct, he moved for sanctions.  Judge Salinger initially denied that motion based on his finding that Fish’s August 20th letter did not put the Weiners on notice that litigation was “likely.”  Fish appealed, and a single justice of the Appeals Court determined that the issue was not whether litigation was likely, but whether the August 20th letter put the Weiners on notice that litigation was “possible.”  Not surprisingly, when Judge Salinger reconsidered Fish’s motion in light of that standard, he found that the August 20th letter had put the Weiners on notice that litigation was possible, and therefore, triggered their obligation to preserve evidence going forward.  Because the Weiners failed to do so, and their spoliation of evidence was prejudicial to Fish, Judge Salinger ruled that:

The appropriate sanction is to permit plaintiffs to offer evidence at trial of the Weiners’ alleged spoliation of emails and text messages, and to order that plaintiffs are entitled to a jury instruction that the jury may, but are not required to, infer from the Weiners’ deletion of emails and texts that the message contents were unfavorable to the defendants.

As JFF Cecilia highlights, failing to take pre-litigation measures to prevent the destruction of evidence can be costly.  When rumblings of a dispute first arise, rather than quibble over whether litigation is “possible” versus “likely,” in-house counsel  should strongly consider (i) circulating an internal “litigation hold” notice to business colleagues, instructing them to retain all hard-copy and electronic files relevant to the business deal at issue, and (ii) ensuring that routine auto-delete functions related to emails and other electronic files concerning the substantive matter are at least paused. Waiting to take such steps until litigation has formally commenced may be too little too late.

When one of your cases is in need of a construction expert, estimates, insurance appraisal or umpire services in defect or insurance disputes – please call Advise & Consult, Inc. at 888.684.8305, or email experts@adviseandconsult.net.

Resolving Disputes Between Insurer and Insured in Liability Cases

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Peter S. Selvin | Insights & Successes

Conflicts between an insured and defense counsel appointed by the insurer often lead to disputes about whether the insured is entitled to counsel of its choosing. See Simonyan v. Nationwide Insurance of America, 78 Cal.App.5th 889, 2022 WL153894 (2022). More broadly, where a liability carrier has assumed its insured’s defense under a reservation of rights, there may be a variety of conflicts between those parties that arise when there are settlement discussions to resolve the underlying liability case. These conflicts include:

  • The insurer wants to settle in order to end its exposure for defense costs and the insured wants to continue to fight for business or reputational reasons.
  • Where the policy has “burning limits” – i.e., defense costs reduce the amount of coverage available to pay a settlement or judgment – the insured has an incentive to have the carrier settle with the claimant early in the litigation.
  • When coverage may be nullified if so-called “conduct exclusions” (typically found in D & O policies) may be supported by findings in the underlying case if it goes to trial, the insurer has a disincentive to settle. This is because carrier cannot litigate those “conduct exclusions” in a coverage suit if the underlying liability case is settled.

The question then arises: what tools does the insured have to compel its insurer to accept a settlement that it wishes to accept?

Independent Counsel. Under Civ. Code § 2860 an insurer is required to fund independent counsel for its insured when a conflict of interest arises between the parties. Such a conflict is deemed to arise when “an insurer reserves it rights on a given issue and the outcome of that coverage issue can be controlled by counsel first retained by the insurer for the defense of the claim”. § 2860(b).

This option, however, has limitations. While independent counsel may more effectively advocate for settlement than the counsel selected by the insurance company, the insurer, even where it is defending under a reservation of rights, retains control of settlement. See, e.g., Rose v. Royal Ins. Co., 2 Cal.App.4th 709 (1991).

Policy Limits Demand. If the insured faces the prospect of a judgment in excess of policy limits, the insurer has an obligation to accept a reasonable settlement demand within policy limits. See Comuale v. Traders & Gen Ins. Co., 50 Cal. 2d 654, 660 (1958). If the insurer spurns such a settlement opportunity, and the insured is later hit with a judgment in excess of policy limits, then the insurer may be liable for amounts above its policy limits. See Johansen v. Cal. State Auto Assn. Inter-Ins. Bureau, 15 Cal. 3d (1975). But importantly, this outcome is only available if the insured is able to demonstrate that the claim was covered from an indemnity point of view. DeWitt v. Monterey Ins. Co., 204 Cal.App.4th 233 (2012).

Nevertheless, because of this potential exposure, a liability insurer may be incentivized to contribute more toward a settlement than it otherwise would. This is a key leverage point that the insured’s counsel can utilize in the course of settlement discussions.

The Insurer’s Duty To Accept A Reasonable Settlement. In considering whether to accept the claimant’s settlement demand, an insurer has an implied duty of good faith that requires it to consider the interests of its insured on at least an equal level with its own. This duty requires it to evaluate settlement proposals as though it alone carried the entire risk of loss. Diamond Heights Homeowners Ass’n v. Nat’l Am. Ins. Co., 227 Cal. App. 3d 563, 581 (1991).

In this regard, the pendency of a coverage dispute with its insured is not to affect, much less lessen, the insurer’s duty to act in good faith with respect to the settlement of a potentially covered claim. In fact, in California an insurer may not consider its own coverage defenses in evaluating the reasonableness of a potential settlement. Johansen, supra, at p. 16. Indeed, “the existence of a coverage dispute, however meritorious the insurer’s position, is simply not a proper consideration in deciding whether to accept an offer to settle the claim against the insured”. Archdale v. American International Specialty Lines, 154 Cal.App.4th 449, 464-65 (2007).

This duty of good faith is important because an antecedent breach by the insurer of that duty relieves the insured of its obligation to secure the insurer’s consent before settling with the claimant. Jamestown Builders v. General Star Indem. Co., 77 Cal.App.4th 341, 348 (1999) (“The no-voluntary-payments provision is superseded by an insurer’s antecedent breach of its coverage obligation. And the burden of proof shifts to the insurer to show that the settlement was not reasonable or was the product of fraud or collusion”).

In such a case, the insured will argue that the carrier’s breach of its duty to settle excused its own compliance with the policy’s no-voluntary-payments provision. Indeed, some courts hold that when the insurer has refused, either negligently or in bad faith, to effect a reasonable settlement, the insured may make a settlement on its own initiative, then sue the insurer to recover the amount expended, notwithstanding the policy provision that no action may be filed against the insurer unless the insured has complied with all policy terms. Couch On Insurance 3rd, § 293:13 at pp. 203-10.

Another treatise summarizes this principle as follows: “Once an insurer breaches the duty to deal in good faith with respect to settlement, the insured may make a reasonable settlement and then seek reimbursement from the insurer (see, e.g., Diamond Heights, 227 Cal.App.3d at 581). A breach of the insurer’s implied duty to deal in a good faith on settlement issues, like breach of any express provision of a policy such as the duty to defend, results in the insurer forfeiting its rights to enforce such policy provisions, including a no-action clause or cooperation clause, which may have given the insurer the rights to be involved in settlement of the underlying claim [see Fireman’s Fraud Ins, Co., 367 A.2d at 869 (stating that the insured can act prudently and settle rather than being required to wait for trial, which the court equated to being “required to wait until after the storm before seeking refuge” (citing Traders & General Ins. Co, v. Rudco Oil & Gas Co., 129 F. 2d 621, 627 (10th Cir. 1942))].” 2 Appleman Insurance Law, 2021 edition, § 24.19 [2].

But this course is not without risk if the insured settles with the claimant without the insurer’s participation or consent. Because the insured’s breach of the policy’s consent or no-voluntary-payments provision will usually lead to a loss of coverage, the insured must establish in any subsequent bad faith lawsuit that the carrier committed an antecedent breach by failing to satisfy its duty to settle.

Convince The Carrier To Front The Settlement Payment, Subject To A Right Of Reimbursement. The California Supreme Court in Blue Ridge vs. Jacobsen, 25 Cal. 4th 489 (2001) held that where a liability insurer funds a settlement of a claim involving both covered and uncovered claims, it may seek reimbursement from its insured in a subsequent lawsuit as to settlement amounts allocable to the non-covered claims.

The pathway outlined in Blue Ridge has advantages for both the insurer and the insured. As to the insurer, fronting the settlement payment subject to the right of reimbursement presumably insulates it from a subsequent bad faith suit relating to its duty to settle. As to the insured, the Blue Ridge decision enhances the likelihood that its liability insurer will resolve the underlying claim. This is because it gives the insurer the right to recoup those portions of its payment relating to uncovered claims.

In Blue Ridge, the Court conditioned the insurer’s right to pursue recovery of the settlement payment from its insured on a timely and express reservation of rights, an express notification to the insured that the insurer intended to accept the claimant’s settlement offer, and an express offer to the insured that it may assume its own defense arising from the parties’ dispute about whether to accept the settlement offer.

As noted above, from the carrier’s standpoint, this scenario has the advantage of presumably insulating it from potential bad faith claims that could be asserted by its insured if the underlying lawsuit went to trial and an excess judgment were rendered. But such protection comes at a cost: the insurer bears the economic risk that its insured may be incapable of reimbursing it for the settlement payment that the insurer has advanced. However, this serves the societal interest of transferring the risk of nonpayment from the insured party to the insurer. Blue Ridge, supra, at 503.

Seek A Stay Of The Insurer’s Declaratory Relief Action. It is not unusual for an insurer defending under a reservation to rights to bring a declaratory relief action seeking a determination that there is no coverage for the underlying claim. As suits for declaratory relief are entitled to a trial preference (C.C.P. § 1062.3), an insurer may be reluctant to settle the claim in the hopes that it will get a judicial determination that there is no coverage before the underlying liability case goes to trial.

An insured can even the playing field by seeking a stay of the insurer’s declaratory relief action pending the outcome of the underlying liability suit, especially where there are overlapping issues as between the liability and coverage suits. United Enterprises, Inc. v. Superior Court, 183 Cal.App.4th 1004 (2010). The theory behind this principle is that the insured is not obliged to fight a “two-front war”. Haskell, Inc. v. Superior Court, 33 Cal.App.4th 963 (1995).

Getting the insurer’s declaratory relief case stayed improves the insured’s bargaining power with its insurer. This is because absent the prospect of a quick determination of non-coverage, the insurer faces the likelihood that it will have to continue to fund its insured’s defense until the conclusion of the liability suit. In these circumstances, the insurer may become more flexible when it comes to settling the underlying case.

These are some of the strategies that an insured can utilize to bring its liability insurer to the table and resolve an underlying liability case.

When one of your cases is in need of a construction expert, estimates, insurance appraisal or umpire services in defect or insurance disputes – please call Advise & Consult, Inc. at 888.684.8305, or email experts@adviseandconsult.net.

Expect the Unexpected (your design contracts in a post-COVID world)

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Melissa Dewey Brumback | Construction Law in North Carolina

Have you adapted your post-COVID practice to better plan for the “unexpected” ?  In particular, have you looked at–and revised– your professional services contracts to give yourself a little more breathing room for unaccounted issues that may arise?  If not, no time like the present.

Don’t like that saying?  How about ” a stitch in time saves nine?”  No?  Still nothing?  What about a picture of something so completely unexpected it shocks you– say, a fireman commuting home, in fire-fighting regalia, on a tricycle?  Okay, here you go…

Fireman-biker

Now that I have your attention– you should make it a practice to regularly review and update your professional services agreements, and you should consider issues such as:

  1.  Does your agreement provide for extra compensation if you have to spend more time or a longer period providing construction administration services for material delays or labor shortages?  If not, it should.
  2. Does your agreement have a well-written “act of God” provision– one that includes pandemic/epidemics as part of the “act of God” conditions in which a term may become void?  If not, add it now!
  3. Have you considered whether you want arbitration instead of litigation if a lawsuit does arise?  And if you want to arbitrate, does your contract give specifics, like how many arbitrators will decide the case?  These things can be added now with little effort, or you can pay your lawyer to negotiate them down the line.  Guess which is cheaper?

You *do* have a good, solid contract to begin with, correct?  If not, I’ve previously given examples of how to craft helpful scopes of services and how to add the protection of a well-crafted exclusion to your scope of services.   Check them out, and be ready for the next biker-fireman surprise in your future.