Unincorporated Business Law Prof Blog

New York Times Article On Big Prizes For Innovation

The New York Times ran an article Friday (February 16) about how some venture capital firms are taking cues from the hit show “American Idol” by considering contests in which engineers and entrepreneurs can win multi-million dollar prizes for creating innovative technologies. The idea will be launched at a fundraiser for Google in March as part of an effort to raise a part of the $50 million needed to operate the non-profit X Prize Foundation. Prizes would be given for innovation in areas such as medicine, reducing poverty, and automotive fuel efficiency.

As the article notes, prize-giving for innovation is not an entirely new idea and there are current contests already in place—for instance, the announcement last week from former Vice-President Al Gore and Virgin Airlines billionaire Richard Branson of an award of $25 million to the person who comes up with a new technology to reduce greenhouse gases.

To read the New York Times article, go here.

And here is the X Prize Foundation’s website.

[Gregory M. Duhl]

New York Court On Breach Of Covenant Not To Compete In Partnership Agreement

In Dental Health Assocs. v. Zangeneh, 825 N.Y.S.2d 505 (N.Y.A.D. 2 Dept. 2006), plaintiff Steven Stern sued his former dental partner defendant Ali Zangeneh for breaching a covenant not to compete that was included in the parties’ written partnership agreement dated 1992, and which stated that the parties agreed not to compete with the partnership business for one year after retirement or termination of the agreement, within a geographical radius of 15 miles. The terms of the partnership agreement set forth specific procedures for terminating the partnership. More specifically, the agreement stated that “[t]his Agreement may be terminated, waived or modified only by a written agreement executed by the party against which enforcement of such termination, waiver, or modification is sought.” The Agreement further stated that the partnership could be terminated either (1) by execution of another written agreement, or (2) termination of employment. By a letter dated February 3, 1998, defendant informed plaintiff that it was his “intention to terminate the partnership agreement between us” and that the termination would take effect 30 days from delivery of defendant’s letter to plaintiff. Defendant continued to work full-time at the dental practice, however, until January 23, 1999. When defendant began competing with the dental business within a year of termination of his employment, plaintiff sued defendant for breach of the covenant not to compete and breach of fiduciary duty. A trial court found in favor of plaintiff on the breach of covenant not to compete count and granted plaintiff compensatory damages, punitive damages, as well and costs and disbursements. (It is not clear how the court ruled on the breach of fiduciary duty claim.)

On appeal, defendant argued that he did not violate the restrictive covenant because the partnership was dissolved by operation of his letter dated February 2, 1998, more than a year before he opened his competing dental practice. The court found that defendant’s letter did not serve to terminate the partnership agreement because plaintiff had not signed the letter and that the letter also did not sever defendant’s association with the partnership since defendant had continued to work full-time in the partnership offices until January 23, 1999. The court found that under the clear language of the partnership agreement the partnership was not terminated for purposes of the non-compete clause until defendant ended his employment on January 23, 1999. Because defendant began competing against plaintiff within one year of that date, he was liable for breaching the covenant not to compete. The appellate court, therefore, affirmed the trial court’s judgment for plaintiff. The court, however, reduced the compensatory damages from $487,487.80 to $286,503, and struck the award of punitive damages because they had not been properly pled. As to the compensatory damages, they were based in part on the trial court’s finding that defendant’s competing business had damaged the “goodwill” of plaintiff’s dental practice. The appellate court disagreed, finding that although plaintiff was entitled to lost profits, there was no showing that the competing dental practice had done any harm to the goodwill of plaintiff’s dental practice; thus, the court reduced the amount of compensatory damages.

[Gregory Duhl]

Chinese Businessman Sentenced To Death For Investment Fraud Scheme

A Chinese court sentenced Chinese businessman Wang Zhendong to death this past week based on his role in a fraudulent investment scheme involving ant breeding. (In certain parts of China, black ants are bred and sold to be used in medicinal remedies. The ants are steeped in tea or soaked with liquor for relief of ailments such as arthritis.) Zhendong had promised up to 60% returns for investing in the purchase of ants and breeding kits from two companies he ran. The court found that Zhendong defrauded more than 10,000 investors out of about $385 million. Other participants in the scheme, specifically 15 managers at the companies, were fined and sentenced to prison terms from 5 to 10 years.

To see an article about the case on FoxNews, go here.

[Gregory Duhl]

New York Appellate Court On Dissolution Of Partnership At Will

In Briscoe v. White, 826 N.Y.S.2d 109, 110-11 (N.Y.A.D. 2 Dept. 2006), the parties were partners in a general partnership that had been created through an oral agreement and which was terminable at will. After defendant told plaintiff that she no longer wished to continue in the partnership, thus triggering dissolution, plaintiff sued defendant for waste and mismanagement of the partnership’s assets, an accounting, and partition of partnership real property. After a nonjury trial, the trial court entered judgment in favor of defendant.

On appeal, a New York appellate court affirmed. The court first noted that the partnership was dissolved as a result of defendant’s statement that she did not want to continue in the partnership, even though she did not expressly state that she wanted the partnership to end. The court further found that plaintiff did not prove any loss as a result of defendant's alleged management of property. The court noted although it was undisputed that at some point defendant had stopped filing partnership tax returns and instead began deducting the property’s losses on her personal tax return, plaintiff did not provide evidence of any expenditures she made toward the property that would have allowed her to claim tax deductions. The court held that plaintiff, therefore, did not show that she was injured by defendant’s deduction of the property’s losses on her personal tax return. The court also found that plaintiff failed to show that the partnership was devalued as a result of defendant’s alleged mismanagement. It was undisputed that the partnership never operated at a profit and was sold for $6,000, and the court noted that plaintiff offered no expert testimony regarding valuation and had merely relied on her own opinion that the property would have sold for $140,000 if defendant had managed it properly. The appellate court, therefore, affirmed the trial court in full.

[Gregory Duhl]

House Ways And Means Committee Unanimously Approves Small Business Tax Relief Act

On February 12, the House Ways and Means Committee gave unanimous approval to the Small Business Tax Relief Act of 2007. The legislation would give about $1.335 billion in tax breaks to small businesses and was originally offered as leverage for the Democrats' hopes of raising the federal minimum wage. The current legislation is much less ambitious than the $8.3 billion package that Senate Democrats attached to a minimum wage bill in January. The proposed legislation includes, among other things, an extension through 2008 of tax breaks encouraging the hiring of traditionally unwanted employees such as high-risk youths and ex-felons. The legislation would also extend through 2010 provisions allowing small businesses to write-off up to $125,000 of initial investments in equipment and would ensure that restaurant owners continue to enjoy the same tax credits as they currently do if their employees earn more than the minimum wage with tips added to their base pay.

To read a New York Times article about the legislation, go here.

Also, for links to various relevant legislative documents, go to the February 13 entry about the legislation on Tax Prof Blog here.

[Gregory Duhl]

Texas Federal District Court Reiterates Liberal Standard Of Pleading On Motions To Dismiss In Cases Alleging Individual Liability of Partner in LLP

In Software Publishers Ass'n v. Scott & Scott, LLP, Civ. Action No. 3:0cv0949-G, 2007 WL 92391 (N.D. Tex. Jan. 11, 2007), plaintiff Software Publishers Association sued defendant law firm Scott & Scott, LLP, and its managing partner Robert Scott, after the law firm allegedly set up a web site domain name that was owned by plaintiff. Plaintiff brought claims against defendants for cybersquatting, trademark infringement, trademark dilution, and copyright infringement. In support of individual liability as to Robert Scott, plaintiff alleged that Scott was “the managing partner of Scott & Scott and controled the activities of Scott & Scott complained of herein.” Moreover, throughout the amended complaint, plaintiff collectively attributed the alleged wrongful conduct to all “defendants.” On a motion to dismiss brought by both Scott and the defendant law firm, Robert Scott specifically argued that he should be dismissed as a defendant because plaintiff failed to state a claim against him individually based on wrongful conduct allegedly committed by the law firm.

The court denied defendants’ motion to dismiss, holding, among other things, that plaintiff sufficiently alleged that defendant Robert Scott was individually liable for the wrongful acts of the partnership. The court first noted that, as an LLP, the law firm was governed by the Texas Revised Limited Partnership Act. The court stated that, under § 6132b-3.08 of the Act, although one partner cannot be held liable for the conduct of another partner, the first partner can be held liable if he was “directly involved in the specific activity in which the . . . negligence or malfeasance” was “committed by another partner” or “had notice or knowledge of . . . negligence . . . or malfeasance by the other partner . . . at the time of occurrence and then failed to take reasonable steps to prevent or cure the . . . negligence . . . or malfeasance.” The court noted that the Act also provides that nothing in § 6132b-3.08 affects the liability of a partner independent of his or her partnership status. The court held that although plaintiff’s allegations were “imprecise,” they did not warrant dismissal of the actions against Scott under the liberal Fed. R. Civ. P. 12(b)(6) standard. The court observed that by alleging that Scott “control[led] the activities of Scott & Scott complained of,” plaintiff had sufficiently alleged a claim against Scott individually based on the theory that he was directly involved in the law firm’s wrongful conduct or that he knew about the wrongful conduct but did not take reasonable steps to prevent it.

[Gregory Duhl]

Outsourcing to China Not Always Good Business Move For Entrepreneurs

According to a recent article from BusinessWeek.com, even savvy entrepreneurs—that is, those who are very familiar with China’s language and business customs—are getting fleeced more and more by widespread counterfeiting that the Chinese government has yet to rein in. According to the article, here’s how it works: a business initially cuts its production costs by outsourcing its manufacturing to China. Within a few years, however, counterfeiters are cutting into the business’s profits by offering knockoffs in the U.S at lower costs than the originals. With China’s continued slack enforcement of the country’s intellectual property laws, the business has limited recourse against the counterfeiter.

To read the BusinessWeek.com article, go here.

[Gregory Duhl]