Category Archives: Litigation

Online Advertisers Beware

By Zachary Levy, Esq.

A lawsuit was filed in federal court earlier this month by an online advertising agency alleging a prevalent, yet seldom litigated form of e-commerce fraud, referred to in the industry as “click fraud.” Click fraud causes online advertisers to overpay for their ads in two main ways. First, the cost of placing an advertisement on a particular website is largely based on the amount of users who visit that website each day (the amount of “web traffic.”). The higher the web traffic on a particular website, the more they are able to charge to place an advertisement because there are more potential consumers. Second, rather than paying a flat-fee to place an advertisement on a website, other contracts may require that the advertiser pay a nominal amount each time their advertisement is clicked on. Clearly, it would be problematic for an advertiser to be paying for clicks even though those clicks are being generated by fraudulent users, or “bots.”

In the lawsuit, Congoo (a.k.a. Adiant), an online news and networking company, is alleging fraud with regard to a one-year advertising contract it signed with Sell It Social, who operates an e-commerce website known as Rebel Circus. Congoo agreed to pay $300,000 in fees to advertise on Rebel Circus based on the purported volume of web traffic on the website. Further analysis conducted by Congoo revealed, however, that a substantial amount of the web traffic on Rebel Circus is generated by “click farms,” or bots, which are programed to visit specific websites and create the illusion that several more human users are visiting the website than there actually are. According to the Complaint, Congoo suspected a high presence of artificially generated web traffic based on two different analyses. First, an empty advertisement placed on Rebel Circus, containing no content whatsoever, was still being clicked on several times by purported users. Second, the purchase rate stemming from clicks from Congoo’s advertisement on Rebel Circus was much lower than the statistical average, therefore evidencing the presence of bots, which obviously would not be purchasing anything. Congoo is seeking to rescind its contract with Sell It Social as a result of the suspected high amount of fraudulent web traffic.

While obtaining evidence of click fraud can be difficult, it is not impossible, and online advertisers should take steps to minimize their risk of being taken advantage of. First, advertisers can simply conduct online research to learn whether a website they are considering placing an ad on is known to have a high presence of bots or fraudulent users that inflate web traffic figures. Additionally, there is software available which gathers data from websites and advertisements and uses that information to monitor for signs of click fraud. For example, if an advertisement on Website A is generally clicked on by only 0.25% of visitors, but Advertiser X’s advertisement is clicked on by 2.5% of visitors, ten-times the statistical average, would likely be indicative of click fraud. One more way an online advertiser can protect themselves is to always include language in the advertising contract which provides for relief in the event click fraud is detected.

Fees on Fees for Corporate Indemnification: Who pays the bill when you have to sue your company to defend you?

As it appeared in the New Jersey Law Journal.

Schwartz, A.By Adam Schwartz, Esq.

So you are an officer or director of a company and you have been sued for some action (or inaction) you took in your corporate capacity. Does the company defend and indemnify you? In most instances, unless you are being sued for fraud, the company’s bylaws, and in some instances even New Jersey statutes, require the company to provide defense and indemnification. But what happens if the company refuses?

Under New Jersey’s corporate indemnification statute, you can sue to obtain the defense and indemnification to which you are entitled, but at what cost? Will you spend more suing the company than paying for your own defense in the underlying matter? Unless you can recover the attorney fees you incur in suing the company (often referred to as “fees on fees”), you will not be made whole. Moreover, if the company is not compelled to pay your legal fees, it creates an incentive to deny coverage in the first instance. Maybe you won’t bother suing. Maybe you won’t realize you can challenge the company’s decision to deny coverage.

There are no reported New Jersey cases addressing “fees on fees” in the corporate indemnification context. However, a New Jersey court will inevitably face this issue. How will it be resolved? On issues of first impression, New Jersey courts often look to other jurisdictions for guidance, such as Delaware and New York, which have similar corporate indemnification statutes. However, those states have reached opposite conclusions—Delaware allows an officer to recover “fees on fees” while New York does not. Thus, New Jersey courts facing this issue will likely follow the state—Delaware or New York—with the most persuasive reasoning.

As an initial matter, all three states follow what is called the “American Rule,” which provides that each litigant must bear his own legal costs unless a statute, court rule or contract specifically provides that a successful plaintiff can recover attorney fees. See Porreca v. City of Mellville, 419 N.J. Super. 212, 224 (App. Div. 2010); see also Goodrich v. E.F. Hutton Group, 681 A.2d 1039, 1043 (Del. Sup. Ct. 1996); Baker v. Health Management Systems, 98 N.Y. 2d 80, 88 (2002). Thus, the ability to recover “fees on fees” will be determined by corporate indemnification statutes and/or the company’s bylaws. As bylaws frequently provide for coverage “to the fullest extent” allowed under the law, the corporate statutes will be the focal point for any analysis.

The applicable Delaware Statute, 8 Del. C. 145(a), provides as follows:

A corporation shall have the power to indemnify any person who was or is a party or is threatened to be made a party to any … suit or proceeding … by reason of the fact that the person is or was a director, officer, employee or agent of the corporation … against expenses (including attorneys’ fees), judgments, fines and amounts paid in settlement actually and reasonablyincurred by the person in connection with such action, suit or proceeding.

In Stifel Fin. Corp. v. Cochran, 809 AD.2d 555 (Del. Sup. Ct. 2003), the Delaware Supreme Court noted that § 145(a) permits indemnification “in any action,” may extend to the indemnification action itself. It further noted that § 145(a) is remedial in nature and “should be broadly interpreted to further the goals it was enacted to achieve.” Those goals include (i) assisting corporate officials resist what they consider to be unjustified suits, and (ii) encouraging “capable men to serve as corporate directors, secure in the knowledge that expenses incurred by them in upholding their honesty and integrity as directors will be borne by the corporation they serve.”

In light of those objectives, the Stifel court held that “without an award of attorneys’ fees for the indemnification suit itself, indemnification would be incomplete.” Thus, it concluded that, while § 145(a) does not expressly state that “fees on fees” are recoverable, the language provides that “fees on fees” are “permissible” and therefore “authorized”—although not required. As the company’s bylaws provided for indemnification to the fullest extent of the law, and “fees on fees” are permissible under the law, the officer was reimbursed for the fees he incurred in seeking indemnification. Moreover, the Stifel court observed that allowing “fees on fees” under these circumstances would prevent a company with “deep pockets” from wearing down a former director, “with a valid claim to indemnification, through expensive litigation.”

In essence, Stifel subordinated the American Rule and looked to the purposes behind § 145(a) to determine that “fees on fees” supported the statute’s remedial purpose. It did not believe corporations would be unduly punished by this result because they can tailor their bylaws to exclude “fees on fees” if so desired.

On the other hand, New York’s highest court has held that New York’s corporate indemnification statute does not permit “fees on fees.” Baker, 98 N.Y.2d at 88. The corporate indemnification statute in New York, McKinney’s Business Corporation Law § 722, provides that:

A corporation may indemnify any person made, or threatened to be made, a party to an action or proceeding … by reason of the fact that he … was a director or officer of the corporation … against judgments, fines, amounts paid in settlement and reasonable expenses, including attorneys’ fees actually and necessarily incurred as a result of such action or proceeding, or any appeal therein.

In Baker, a corporate officer who successfully obtained indemnification argued that he was entitled to “fees on fees” because the attorney fees he incurred by suing to obtain indemnification were “necessarily incurred as a result” of his being sued in his corporate capacity for securities fraud. The Baker court rejected the officer’s argument, holding that the fees he incurred in the indemnification lawsuit were caused by the company’s refusal to indemnify; they were not incurred as a result of the officer being sued in the underlying securities fraud action.

The Baker court then examined the legislative history of §722 and discerned no evidence suggesting an intention to allow “fees on fees.” It further held that even if the officer’s argument had merit, it would be preempted by the American Rule. In essence, the Baker court held that, since “fees on fees” were not expressly authorized in §722, they are not available. It did not believe its holding would unduly punish corporate officers because they “remain free to provide indemnification of fees on fees in bylaws, employment contracts or through insurance.”

New Jersey’s corporate indemnification statute provides that: “Any corporation … shall have the power to indemnify a corporate agent against his expenses and liabilities in connection with any proceeding involving the corporate agent.” N.J.S.A. 14A:3-5(2). As with the Delaware and New York statutes, it is silent on the issue of fees on fees. The reasoning of Delaware and New York, provide credible arguments for and against “fees on fees.” However, New Jersey is more likely to follow the logic of Stifel.

The New Jersey Supreme Court has noted that Delaware’s corporate indemnification statute is similar to and in fact, constitutes “the very genesis of New Jersey’s Indemnification Statute.” Vergopia v. Shaker, 191 N.J. 217, 220, fn. 1 (2007). Thus, it will likely look to Delaware courts for guidance as it has previously done for corporate law issues. Moreover, New Jersey courts have recognized the remedial nature of the corporate indemnification statute and the goals it seeks to achieve—goals identical to those identified in Stifel. SeeCohn v. Southbridge Park, 369 N.J. Super. 156, 160 (App. Div. 2004) (noting that the statute (i) helps corporate officials resist what they consider to be unjustified suits and claims, and (ii) encouragescapablemen to serve as corporate directors.)

Moreover, one of the primary differences between New York and Delaware is who the courts believe are responsible for protecting themselves against an unfavorable result. Delaware believes that it is incumbent upon the company to amend its bylaws to exclude “fees on fees”; while New York places that burden for ensuring the availability of “fees on fees” on the individual officer.

Faced with this dichotomy, New Jersey will likely place the burden on the company to exclude coverage. In other instances, New Jersey courts have looked to the relative bargaining power of the respective parties to determine the viability of a claim. SeeMohammed v. Count Bank of Rehoboth Beach, Delaware, 189 N.J. 1, 15 (2006) (contracts of adhesion); see also Alloway v. General Marine Industries, 149 N.J. 620, 628 (1997) (whether tort or contract principles apply to transaction). In this instance, the relative bargaining power clearly rests with the company, which has already approved the bylaws and has deeper pockets that the individual.

Thus, notwithstanding New Jersey’s adherence to the American Rule, a New Jersey court will likely find that “fees on fees” are permitted under N.J.S.A. 14A:3-5(2).•

Reprinted with permission from the February 9, 2015 issue of The New Jersey Law Journal. © 2014 ALM Media Properties, LLC. Further duplication without permission is prohibited. All rights reserved.

Unconscionable Commercial Practice

By Suzanne M. Bradley, Esq.

In an opinion analyzing what constitutes an “unconscionable commercial practice” under the New Jersey Consumer Fraud Act (“NJCFA”), the United States District Court for the District of New Jersey recently dismissed a putative class action brought under the Act and New Jersey common law regarding defendant Novartis AG’s pricing of its Excedrin Migraine product.  In Yingst v. Novartis AG, 2-13-cv-07919, District Judge Claire Cecchi determined that Novartis’ pricing of the product, while strategic, was not illegal under the NJFCA, and therefore dismissed Plaintiff’s claims.

Plaintiff Kerri Yingst alleged that Novartis sells Excedrin Migraine and a pharmacologically equivalent product, Excedrin Extra Strength, at different wholesale prices which in turn caused Yingst and other consumers to pay a premium for Excedrin Migraine, despite the fact that the two products consisted of “identical ingredients in identical quantities.”  Compl. ¶21.  Yingst alleged that at the time she purchased Excedrin Migraine, she believed that because Excedrin Migraine was sold at a higher price, it was a more effective product for migraine relief.  Novartis moved to dismiss the complaint pursuant to Fed. R. Civ. P. 12(b)(6), and the court granted the motion.

As Judge Cecchi explains, New Jersey’s strong Consumer Fraud Act provides that a plaintiff is entitled to treble damages, reasonable attorneys’ fees, and reasonable costs if she proves that the defendant engaged in an unlawful practice that caused an ascertainable loss.  In this case, Plaintiff did not argue that Novartis committed any affirmative act of deception, fraud, false pretense, false promise, or misrepresentation, and did not argue that Novartis knowingly concealed, suppressed or omitted any material fact with intent to induce reliance.  Instead, Plaintiff contended that Novartis engaged in an “unconscionable commercial practice” within the meaning of the NJFCA by using the U.S. Food & Drug Administration (“FDA”)’s requirement that Excedrin Migraine and Excedrin Extra Strength have separate packaging as a means to extract a premium from consumers while providing no extra benefits.  The New Jersey Consumer Fraud Act does not define the phrase “unconscionable commercial practice.”  However, Judge Cecchi noted that the New Jersey Supreme Court has defined the term as an act lacking good faith, honesty in fact and observance of fair dealing.  Turf Lawnmower Repair, Inc. v. Bergen Record Corp., 655 A.2d 417, 429 (N.J. 1995) (citing Meshinsky v. Nichols Yacht Sales, Inc., 541 A.2d 1063, 1066 (N.J. 1988)).  As with the broader Act, New Jersey case law provides that the phrase “unconscionable commercial practice” should be interpreted liberally to effectuate the Act’s public purpose.

In the case at hand, Judge Cecchi noted that there was no dispute that both Excedrin Migraine and Excedrin Extra Strength were properly labeled and contained no misinformation regarding the medications.  Therefore, because Plaintiff had conceded that there was no dishonesty by Novartis, Judge Cecchi determined that its pricing of Excedrin Migraine was not an act that lacked good faith or honesty in fact.  Further, Judge Cecchi found that Plaintiff could  not establish that Novartis’ pricing of Excedrin Migraine lacked fair dealing; Plaintiff did not cite any cases, and the Court was aware of none, in which an “unconscionable commercial practice” was found under the Act based solely upon disparate pricing of substantively identical products manufactured by the same defendant.  Although the dearth of case law was not itself fatal to Plaintiff’s claim, the fact that Plaintiff paid, at most, $1.05 more for a 300-count package of Excedrin Migraine than for a 300-count package of Excedrin Extra Strength was a “minor detriment” that did not “rise to the level of unfair dealing.”  While Novartis’ creation of a pricing structure in which migraine sufferers paid a higher price for pills pharmacologically identical to Excedrin Extra Strength in order to obtain the directions and warnings mandated by the FDA was “strategic,” Judge Cecchi held that such behavior was not proscribed by the NJCFA and dismissed Plaintiff’s NJFCA claim.[1]  As Judge Cecchi’s opinion demonstrates, slight price differentials in otherwise identical products, absent any evidence of misrepresentation or misinformation, are “within the bounds of reasonableness and concomitantly outside the ambit of the NJCFA.”

[1] Judge Cecchi also dismissed Plaintiff’s unjust enrichment claim.  In New Jersey, a constructive or quasi-contract is a vehicle by which a plaintiff may enforce a public duty to prevent unjust enrichment or unconscionable benefit.  To state a claim for unjust enrichment, the plaintiff must allege (1) at plaintiff’s expense (2) the defendant received benefit (3) under circumstances that would make it unjust for the defendant to retain the benefit without paying for it.  Judge Cecchi again noted that Plaintiff did not allege any misrepresentation or misinformation by Novartis, and also did not allege that Excedrin Migraine failed to relieve her ailment or that Excedrin Extra Strength performed better than Excedrin Migraine; Plaintiff “deliberately purchased the higher-priced product and received exactly what she paid for.”  See Def.’s Reply p. 6.  Therefore, the Court found nothing “unjust” about Plaintiff’s transaction, and granted Novartis’ motion to dismiss with respect to Plaintiff’s unjust enrichment claim.



NJ Courts Implement Complex Business Litigation Program

By Sean Mack, Esq.

After many years of discussion and consideration, Chief Justice Rabner announced on November 13, 2014, that effective January 1, 2015, the New Jersey judiciary will accept cases into a new program for the resolution of complex business, commercial and construction cases.  The program is designed to assist New Jersey businesses effectively resolve their disputes through the use of individualized case management by selected judges and by continuing “to develop a body of authoritative case law that will aid all parties in business litigation.”  (New Jersey Courts, Press Release, 11/13/14)

To be eligible for the program, the case must be a business, commercial or construction case involving damages in excess of $200,000.  If the damages are less than $200,000 a party can make a motion to have their case handled under the program.  The motion will need to demonstrate that there is compelling reason for inclusion under the program.  Examples of compelling reasons may be:  the existence of complex legal or factual issues; substantial complex discovery issues involving multiple parties, witnesses or voluminous documents; the case requires  the interpretation of a significant business or commercial statute; or resolution of the case may have a business impact beyond the parties to the dispute.

Under the program, a single judge, with experience in complex civil litigation, will oversee the resolution of each commercial matter from start to finish.  Arbitration or mediation will be encouraged, but not required.  Each of the Assigned Complex Business Litigation judges will receive special training on relevant areas of the law, including the UCC, securities, business valuation, as well as training on case management and e-discovery.

The assigned commercial judges are encouraged to post on the Judiciary’s website written decisions that may help guide other businesses facing similar issues.

Effective January 2015, the assigned Complex Business Litigation judges in each vicinage are:


Vicinage Complex Business Litigation Judge(s)
1. Atlantic/Cape May Judge J. Christopher Gibson (primary)

Judge James P. Savio (backup)

2. Bergen Judge Robert C. Wilson
3. Burlington Civil Presiding Judge Marc M. Baldwin
4. Camden Judge Michael J. Kassel
5. Essex Judge James S. Rothschild, Jr.
6. Hudson Judge Barry Sarkisian
7. Mercer General Equity Presiding Judge Paul Innes
8. Middlesex Assignment Judge Travis L. Francis
9. Monmouth Judge Katie A. Gummer
10. Morris/Sussex General Equity Presiding Judge

Stephan C. Hansbury

11. Passaic Judge Thomas J. LaConte
12. Union Judge Thomas J. Walsh
13. Somerset/Hunt./War. Assignment Judge Yolanda Ciccone
14. Ocean Civil Presiding Judge Craig L. Wellerson
15. Cumberland/Glou/Sal Judge Richard J. Geiger


Will New Jersey Courts Enforce Rotating Credit Association Agreements?

By Sean Mack, Esq.

Rotating credit associations in immigrant communities go by a variety of names  — “kye” in Korean, “hui” in Chinese, “cundina” in Mexican, “tanomoshi” in Japanese — but all involve a group of people who pool their savings on a regular basis (often monthly) and then rotate the pool around the group until all members have received a pool distribution.  These credit associations provide an alternative to mainstream financial transactions, and often support the growth of many small to mid-size businesses in predominantly immigrant communities.  Reports suggest that more than 50% of adults in certain communities participate in Kyes or similar credit associations.

A recent decision of the New Jersey Appellate Division raises the question of whether participants in these transactions may resort to the court system to enforce their rights.  Han v. Jang, N.J. App. Div. No. 11-2-4238 (June 16, 2014).

In Han v Jang, each member of the Kye was required to deposit $3,000 per month into the Kye, and each month one member of the Kye would receive a payout of $72,000.  Litigation arose after certain members of the Kye refused to make their monthly payments.  The Kye dissolved and required all members who had received a payout to return any amounts they received above their total investment.  Defendant claimed that the obligation to reimburse the Kye could not be enforced because the Kye was illegal, violating state and federal tax and securities laws.

The Appellate Division remanded the case back to the trial court to determine “whether, as a matter of law, the contract was unenforceable because the Kye violated the law or was against public policy, or whether it is inappropriate to apply Western law to this uniquely Asian economic model in which the parties voluntarily engaged.”

The decision by the trial court on remand will be one of first impression in New Jersey as there are no reported decisions under New Jersey law discussing whether these credit pools are legal or if obligations may be enforced in courts.  Across the country, there also is scant legal authority.  The LA Times reported a 1993 decision in a Los Angeles superior court case finding that a Kye was illegal, and therefore a lawsuit to enforce rights and obligations under the Kye agreement could not be enforced in state court.  Courts in Maryland, Hawaii and Guam have enforced obligations owed to Kye participants based on contract law, but it does not appear that the defense of illegality of contract was raised in those cases.

The trial court’s decision on remand will be one to watch for, as a finding that rights and obligations undertaken in a Kye agreement are unenforceable could have significant repercussions for an unknown number of other persons involved in other rotating credit associations across New Jersey.


Advancement Provisions In Corporate Bylaws: I Have to Pay for What!

By Dennis Smith, Esq.

Many corporate by-laws contain provisions that obligate corporations to advance litigation expenses to corporate officers and directors who are sued by reason of their corporate position  in advance of the final disposition of the  litigation upon a promise to repay the sums advanced if it is determined that the officer or director is not entitled to indemnification (for example if they are found guilty or liable for the conduct alleged).  These advancement provisions typically are thought about in the context of a company paying to defend its officers against claims by third parties.

However, the language in common advancement provisions also would require the company to advance defense costs in actions by the corporation against the officer. Why is this type of provision significant? If a corporation sues an officer or director for breach of fiduciary duty the officer can turn around and request that the corporation advance him his defense costs pending resolution of the lawsuit. Thus a corporation can wind up paying a lawyer for its affirmative action and also pay the lawyer defending the corporate officer it sued.   Similarly, if the officer sues the corporation and the corporation counterclaims that the officer breached his fiduciary duty the corporation may have to advance the officer’s costs for defending the counterclaim.  Now if the corporation ultimately succeeds in the lawsuit, it can try to recoup its defense expenses; however, the officer may not have the financial capacity to reimburse.

Under Delaware law (which New Jersey court’s look to for guidance) the question of entitlement to advancement is generally handled in a summary fashion—usually involving briefing and argument before the court. Thus, it is important for corporations to carefully review the advancement provisions of their by-laws and not rely upon boilerplate language.  Also before contemplating suing an officer or director you may want to engage counsel to review the corporation’s bylaws so that you can be fully informed on claims subject to advancement and the potential financial ramifications of bringing suit.

Court Dismisses Class Action Lawsuit Challenging Classification of Workers as Independent Contractors

By Sean Mack, Esq.

Over the past year, numerous articles have been written warning employers that state and federal government agencies (and plaintiffs’ attorneys) have made it a priority to investigate and pursue claims of worker misclassification – that is, claims that workers have been wrongly classified and treated as independent contractors, instead of as employees.

A recent decision from a federal district court in New Jersey explored this issue and in the context of a trucking business, upheld the classification as independent contractors (for now).

The trucking industry, like many others that are largely built on a business model using independent contractors, was ripe for this type of challenge, and in New Jersey, there has been little judicial precedent to provide guidance to trucking companies regarding whether they are properly classifying their drivers.  Most of the trucks hauling containers out of New Jersey’s busy ports are operated by independent contractors, who own their trucks and lease them to trucking companies or brokers, who make the arrangements for pick-ups and deliveries.  This relationship usually is memorialized in a lease agreement that states that the drivers are independent contractors.

That business model was challenged in court last year when several operators filed a class action lawsuit against one of the Newark based trucking companies, alleging that they were really employees who had been misclassified as independent contractors.

On June 28, 2012, the Federal District Court in New Jersey issued its decision rejecting the drivers’ claims and dismissed their lawsuit.  In reaching its decision, the Court analyzed six factors to determine if the drivers were employees or independent contractors.

Federal courts in New Jersey use these six factors not just in the trucking industry, but anytime they are required to determine if a worker is an employee or independent contractor under federal wage laws:  (1) the degree of the alleged employer’s right to control the manner in which the work is to be performed, (2) the alleged employee’s opportunity for profit or loss depending on his managerial skill; (3) the alleged employee’s investment in equipment or materials required for his task, or his employment of helpers; (4) whether the service rendered requires a special skill; (5) the degree of permanence of the working relationship; and (6) whether the service rendered is an integral part of the alleged employer’s business.

The Court concluded that four of the six factors favored finding the drivers to be independent contractors, and were not outweighed by the two factors that favored finding them to be employees (i.e., (5) the degree of permanence of the relationship and (6) the service being an integral part of the business).  The Court concluded (factor 1) that telling the drivers where to report, when to report, what they would be paid and where to deliver the containers was insufficient to establish sufficient control over the manner in which the work is performed.  The drivers retained authority to select their delivery routes, to determine how to properly secure the load, to select when and where to rest, to select when and where to obtain gas and oil, to select where to repair the trucks, to determine how to finance the vehicle, to select insurance carriers, and to determine the working hours; all of which showed a lack of control.

The Court found (2) that there was an opportunity to profit because the drivers could acquire additional vehicles, could hire other drivers to work for them, and control how frequently they would drive and thereby control their pay since they were paid on a per trip basis.

The Court also noted (3) that the drivers invested in the vehicles used to conduct the business.

The Court (4) further determined that having to obtain a commercial drivers license to drive the trucks was a specialized skill not possessed by the average citizen.

Based on those factors, the court concluded that the drivers were not employees.  The Court has permitted the drivers to amend their lawsuit and refile it.  The case is Luxama v. Ironbound Express, Inc., Civ. No. 11-2224 (D.N.J.)