Last month gave us three noteworthy post-trial decisions in three different cases from three different states, all centering on disputes among business co-owners over the ownership and exploitation of the businesses’s core intellectual property. While each case stems from a unique set of facts, they all have in common failures to allocate IP ownership by means of clear contractual undertakings ex ante and/or failures to exercise due diligence at inception or during the life of the business.

The first highlighted case hails from New York, involving an extremely high stakes financial dispute between family members comprising the minority and controlling shareholders of the famous Palm restaurants located throughout the United States and elsewhere. The second case comes from Delaware, in which the court ordered dissolution of a limited liability company where the 50% member who licensed to the LLC the patented technology on which rested its entire business plan, as it turned out, did not own the rights. In the third case, from Arkansas, the judge dismissed a one-third LLC member’s claims for copyright infringement and dissolution after finding that he was equitably estopped from enforcing his copyrights in the company’s principal software products.

Derivative Suit Over Palm Restaurant IP Yields $120 Million Award

The original Palm Restaurant was founded in Manhattan in 1926 by Pio Bozzi and John Ganzi, who ran it with their wives. Today, despite the ubiquity of Palm-branded restaurants throughout the U.S. and worldwide, the original corporation formed by Pio and John, now owned by third-generation family members, does not operate a single restaurant. Rather, its sole asset consists of the enormously valuable Palm IP consisting of a series of trademarks and service marks, and design elements including its menu and distinctive restaurant décor, all of which is licensed to independent Palm restaurant operators as well as Palm restaurants owned in whole or with other investors by two family members, Bruce Bozzi and Walter Ganzi, who also happen to own 80% of the original Palm corporation that owns the IP, which I’ll called Palm IP Corp. Continue Reading IP Disputes Among Private Business Co-Owners Dominate Three Recent Cases

It’s no surprise that the quorum requirements found in close corporation by-laws and LLC operating agreements rarely step into the limelight in business divorce disputes. After all, the typical quorum provision for meetings of shareholders, directors, and LLC members and managers requires attendance by a bare majority of voting shares or membership interests or, at the board or managerial level, a bare majority of the board of directors or managers. In other words, it’s usually not the holding of the meeting that generates the dispute, it’s the action taken at the meeting by the control faction that generates the dispute.

In the case of closely held entities with two owners having equal interests and control, a quorum provision requiring majority attendance effectively requires attendance by both owners. If owner #1 doesn’t attend the meeting, not because of some benign reason but due to a disagreement with owner #2 over the action proposed by the latter to be voted upon at the meeting, that produces a deadlock the same as if both owners attended the meeting and cast conflicting votes. Deadlock is deadlock, meeting or no.

Now imagine a closely held entity that has three or more voting shareholders or members, or three or more members of the board of directors or managers, with a quorum provision requiring the presence at a meeting of all the shareholders or members, or of all the directors or managers. With such an entity, a dissenter with minority voting power who couldn’t otherwise defeat a proposed action requiring majority approval, nonetheless can block the action simply by not showing up at the meeting. So much for majority rule.

Actually, we don’t have to imagine the scenario because that’s what happened in Casilli v Natan, 2018 NY Slip Op 32621(U) [Sup Ct NY County Oct. 12, 2018], recently decided by Manhattan Commercial Division Justice Andrea Masley. In her decision, Justice Masley was invited to substitute the statutory default rule under LLC Law § 404, requiring the presence at meetings of a majority in interest of the members, for an “unworkable” quorum provision in the LLC’s operating agreement requiring the presence of all. Not surprisingly, at least to this writer, Justice Masley declined the invitation. Continue Reading Think Twice Before Putting 100% Quorum Requirement in By-Laws or LLC Agreement

The Nobel Prize symbolizes the apex of human achievement in the arts and sciences. It is no guarantee, however, that its recipients are equally adept when it comes to their own business endeavors.

Dr. Günter Blobel, pictured accepting his Nobel Prize in Medicine in 1999 for his revolutionary work in molecular cell biology, shortly afterward formed a business venture with two others — one his research assistant, the other a corporate lawyer — to commercialize a patented process called Chromovert, used in cell discovery assays. Almost two decades later, their company, Chromocell Corp., appears to be flourishing.

Not so for Dr. Blobel’s relationship with his fellow shareholders, eventually naming them defendants in a lawsuit he brought in Manhattan Supreme Court, seeking to enforce an alleged oral agreement to equalize his ownership stake. It didn’t turn out well for Dr. Blobel, whose suit was dismissed earlier this year by Manhattan Commercial Division Justice Andrea Masley in Blobel v Kopfli, 2018 NY Slip Op 30298(U) [Sup Ct NY County Feb. 13, 2018].

Five days after the court’s decision, Dr. Blobel succumbed to cancer at the age of 81. Continue Reading No Prize for Nobel Laureate in Fight for Bigger Stake in Biotech Company