Florida Business Litigation Lawyer Blog

Published on: March 20, 2024

FORT LAUDERDALE BUSINESS LITIGATION: NON-COMPETE BURDENS

“Florida law … contains a comprehensive framework for analyzing, evaluating and enforcing restrictive covenants contained in employment contracts.” Vital Pharmaceuticals, Inc. v. Alfieri, 23 F. 4th 1282, 1291 (11th Cir. 2022) (quotation and citation omitted). This framework includes a burden shifting approach between the restrictive covenant’s enforcer and enforcee that provides each party with an opportunity the negate the other’s position. Below we explore the framework’s burden shifting approach and each parties’ ability to use those burdens to their advantage. Peter Mavrick is a Fort Lauderdale business litigation attorney. The Mavrick Law Firm represents businesses and their owners in breach of contract litigation and related claims of fraud, non-compete agreement litigation, trade secret litigation, trademark infringement litigation, employment law, and other legal disputes in federal and state courts and in arbitration.

The restrictive covenant’s enforcer has the initial burden of pleading and proving that the restrictive covenant is supported by one or more legitimate business interests justifying the restrictive covenant. Fla. Stat. § 542.335. These legitimate business interests are identified by statute in a non-exhaustive list and include the protection of trade secrets, valuable confidential business information that does not qualify as a trade secret, substantial relationships with specific prospective or existing customers, and customer good will. Id; Alonso-Llamazares v. Int’l Dermatology Research, Inc., 339 So. 3d 385 (Fla. 3d DCA 2022) (“Section 542.335(1)(b) sets forth a non-exhaustive list of legitimate business interests that may justify the restrictive covenant sought to be enforced.”). The initial requirement that the enforcer plead and prove the existence of a legitimate business interest may present the enforcee with his or her first opportunity to thwart enforcement. If the enforcee can demonstrate the enforcer failed to prove the existence of a legitimate business interest, the court cannot enforce the restrictive covenant. See Blue-Grace Logistics LLC v. Fahey, 653 F. Supp. 3d 1172 (M.D. Fla. 2023), appeal dismissed, 2023 WL 3691014 (11th Cir. Apr. 12, 2023) (granting summary judgment against the enforcer because it “repeatedly speaks of ‘confidential’ and ‘proprietary’ information, but it never explains exactly what that information is or what makes it proprietary or confidential. Even where it describes the information with slightly more detail, it fails to explain the information’s value”).

The enforcer must also plead and prove that the restrictive covenant is reasonably necessary to protect the legitimate business interest asserted. Fla. Stat. § 542.335. This presents the enforcee with his or her second opportunity to thwart enforcement of the restrictive covenant if the enforcee can prove the covenant does not reasonably protect the legitimate business interest. For example, maybe the confidential information the enforcer is trying to protect has no utility in the hands of a competitor. See Blue-Grace Logistics LLC, 653 F. Supp. 3d 1172 (granting summary judgment because the plaintiff failed to show that the purported confidential information “was still relevant ‘given fluctuations in the industry,’ which Blue-Grace’s corporate representative agreed led to rate changes and customers having to rebid their freight”). Or maybe, the enforcer no longer conducts business with the customer it is trying to protect. IDMWORKS, L.L.C. v. Pophaly, 192 F. Supp. 3d 1335 (S.D. Fla 2016) (rejecting the plaintiff’s request to enforce a non-compete agreement because a “company cannot successfully claim a protectable business interest in a relationship with a former customer”). These are just two ways the enforcee can demonstrate that the enforcer failed to meet its second burden.

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Published on: March 16, 2024

MIAMI BUSINESS LITIGATION: TORTIOUS INTERFERENCE WITH BUSINESS RELATIONSHIPS

By Mavrick Law Firm

In the absence of a non-compete agreement, Florida law prohibits tortious interference with certain business relationships. The Supreme Court of Florida, in Tamiami Trail Tours, Inc. v. Cotton, 463 So.2d 1126 (Fla. 1985), explained that the elements of a claim for tortious interference with a business relationship are “(1) the existence of a business relationship…(2) knowledge of the relationship on the part of the defendant; (3) an intentional and unjustified interference with the relationship by the defendant; and (4) damage to the plaintiff as a result of the breach of the relationship.” A protected business relationship need not be evidenced by an enforceable contract. In Landry v. Hornstein, 462 So.2d 844 (Fla. 3d DCA 1985), Florida’s Third District Court of Appeal explained in pertinent part: “An action for intentional interference is appropriate even though it is predicated on an unenforceable agreement, if the jury finds that an understanding between the parties would have been completed had the defendant not interfered…A mere offer to sell, however, does not, by itself, give rise to sufficient legal rights to support a claim of intentional interference with a business relationship.” In other words, “an action for intentional interference with a business relationship will lie if the parties’ understanding would have been completed if the defendant had not interfered.” Charles Wallace Co. v. Alternative Copier Concepts, Inc., 583 So.2d 396 (Fla. 2d DCA 1991). Peter Mavrick is a Miami business litigation attorney, and represents clients in Fort Lauderdale, Boca Raton, and Palm Beach. The Mavrick Law Firm represents businesses and their owners in breach of contract litigation and related claims of fraud, non-compete agreement litigation, trade secret litigation, trademark infringement litigation, employment litigation, and other legal disputes in federal and state courts and in arbitration.

Important precedent from the Supreme Court of Florida, in Ethan Allen, Inc. v. Georgetown Manor, Inc., 647 So.2d 812 (Fla. 1995), held that “a plaintiff may properly bring a cause of action alleging tortious interference with present or prospective customers but no cause of action exists for tortious interference with a business’s relationship to the community at large…As a general rule, an action for tortious interference with a business relationship requires a business relationship evidenced by an actual and identifiable understanding or agreement which in all probability would have been completed if the defendant had not interfered.” In reaching its decision, the Supreme Court found the Landry decision persuasive. In Landry, a pharmacist who rented premises for his drugstore entered into negotiations, with his landlord’s permission, with a prospective purchaser to sell the pharmacist’s business and to assign the pharmacy lease. However, when the landlord told the prospective buyer that the landlord was “going to get rid of” the pharmacist and that the landlord would rent the premises directly to the buyer, the negotiations stopped between the pharmacist and the prospective buyer. Thereafter, the prospective buyer leased the drugstore from the landlord. The pharmacist then sued the landlord for tortious interference with a business relationship. The appellate court in Landry found a business relationship existed between the pharmacist and the prospective buyer, explaining: “[T]he negotiations had progressed beyond the stage of a mere offer, to an understanding between [the pharmacist and the prospective buyer] for the sale of the business and assignment of the lease, transactions which would have been consummated had [the landlord] not interfered. Evidence disclose that [the landlord]…had undertaken their own negotiations with [they buyer] regarding the rental of the drugstore premises while [the buyer and the pharmacist] were still involved in negotiations.” In Ethan Allen, the Supreme Court explained that the plaintiff, Georgetown, was entitled to damages reasonably flowing from Ethan Allen’s interference with existing relationships. Ethan Allen also qualified its decision, stating that Georgetown’s “relationship with its past customers was not one upon which a claim for tortious interference could be based. Georgetown had no identifiable agreement with its past customers that they would return to Georgetown to purchase furniture in the future. The mere hope that some of its pas customers may choose to buy again cannot be the basis for a tortious interference claim.” The Supreme Court recognized, however, that there are situations where a plaintiff may have valid tortious interference claim based on the plaintiff’s reasonable expectation of future business from a recurring practice of performing work for certain clients. Such a scenario would be distinguishable from a situation of a retail furniture dealer, like Georgetown, with tens of thousands of past customers who may or not return for future furniture purchases.

Peter Mavrick is a Miami business litigation lawyer, and represents clients in Fort Lauderdale, Boca Raton, and Palm Beach. This article does not serve as a substitute for legal advice tailored to a particular situation.

Published on: March 14, 2024

FORT LAUDERDALE BUSINESS LITIGATION:TRADE SECRET MISAPPROPRIATION VIA “SUBSTIANTIAL DERIVATION”

By Mavrick Law Firm

Under Florida law, a trade secret means information not commonly known by or available to the public, which derives economic value from not being generally known to or ascertainable by proper means by others who can obtain economic value from the information, and that was subject to reasonable efforts to maintain its secrecy. Florida’s trade secret statute, at Florida Statutes section 688.002(2), states that a defendant “misappropriates” a trade secret when, among other things, it discloses or uses “a trade secret of another without express or implied consent” knowing at the time of the disclosure or use that the trade secret was “[a]cquired under circumstances giving rise to maintain secrecy or limit its use.” To prove the trade secret was acquired in a manner that imposed a duty of secrecy on the receiving party, businesses often use confidentiality or non-disclosure agreements to clarify, in writing, the obligations of the receiving party. The United States Court of Appeals for the Eleventh Circuit, in Penalty Kick Mgmt. Ltd. v. Coca Cola Co., 318 F.3d 1284 (11th Cir. 2003), explained that a non-disclosure agreement can be the basis for imposing a duty not to disclose a trade secret. The Penalty Kick decision explained that “a defendant is liable for misappropriation of a trade secret only if the plaintiff can show that the defendant (1) disclosed information that enabled a third party to learn the trade secret or (2) used a ‘substantial portion’ of the plaintiff’s trade secret to create an improvement or modification that is ‘substantially derived’ from the plaintiff’s trade secret.” By contrast, if the defendant independently created the allegedly misappropriated item with only “slight” contribution from the plaintiff’s trade secret, then the defendant is not liable for misappropriation. Peter Mavrick is a Fort Lauderdale business litigation attorney. The Mavrick Law Firm represents businesses and their owners in breach of contract litigation and related claims of fraud, non-compete agreement litigation, trade secret litigation, trademark infringement litigation, employment law, and other legal disputes in federal and state courts and in arbitration.

The Restatement (Third) of Unfair Competition, section 40, at Comment c (1995), summarizes a well-established body of law concerning a defendant’s liability for trade secret misappropriation based on substantial derivation from the original trade secret. The Restatement explains in pertinent part: “As a general matter, any exploitation of the trade secret that is likely to result in injury to the trade secret owner or enrichment to the defendant is a ‘use’…. Thus, marketing goods that embody the trade secret, employing the trade secret in manufacturing or production, [and] relying on the trade secret to assist or accelerate research or development … all constitute ‘use.’ The unauthorized use need not extend to every aspect or feature of the trade secret; use of any substantial portion of the secret is sufficient to subject the actor to liability…. [A]n actor is liable for using the trade secret with independently created improvements or modifications if the result is substantially derived from the trade secret…. However, if the contribution made by the trade secret is so slight that the actor’s product or process can be said to derive from other sources of information or from independent creation, the trade secret has not been “used” for purposes of imposing liability under the rules.”

Peter Mavrick is a Fort Lauderdale business litigation lawyer, and represents clients in Miami, Boca Raton, and Palm Beach. This article does not serve as a substitute for legal advice tailored to a particular situation.

Published on: March 9, 2024

MIAMI BUSINESS LITIGATION: DIRECT AND INDIRECT TRADE SECRET MISAPPRORIATION

By Mavrick Law Firm

Federal courts distinguish between “direct” and “indirect” claims of trade secret misappropriation. The United States District Court for the Northern District of California, in Heller v. Cepia, L.L.C., 2012 WL 13572 (N.D. Cal. Jan. 4, 2012), explained that the difference depends on whether a plaintiff alleges the defendant obtained the trade secrets directly from the plaintiff or indirectly “from someone other than plaintiff.” Proving a claim of direct trade secret misappropriation is generally more simple than one asserting indirect misappropriation. Peter Mavrick is a Miami business litigation attorney, and represents clients in Fort Lauderdale, Boca Raton, and Palm Beach. The Mavrick Law Firm represents businesses and their owners in breach of contract litigation and related claims of fraud, non-compete agreement litigation, trade secret litigation, trademark infringement litigation, employment litigation, and other legal disputes in federal and state courts and in arbitration.

To state a claim for direct trade secret misappropriation under the Defend Trade Secrets Act, “a plaintiff must allege (1) that it is the owner of a trade secret; (2) that the defendant misappropriated the trade secret; and (3) that it was damaged by the defendant’s actions.” Alta Devices, Inc. v. LG Elecs., Inc., 343 F.Supp.3d 868 (N.D. Cal. 2018).

By contrast, the United States District Court for the Northern District of California, in Cal. Police Activities League v. Cal. Police Youth Charities, Inc., 2009 WL 537091 (N.D. Cal. Mar. 3, 2009), explained that claims of indirect trade secret misappropriation must set forth facts showing that a defendant: “(a) knew or had reason to know before the use or disclosure that the information was a trade secret and knew or had reason to know that the disclosing party had acquired it through improper means or was breaching a duty of confidentiality by disclosing it; or (b) knew or had reason to know it was a trade secret and that the disclosure was a mistake.” The knowledge element places a much higher burden on the plaintiff.

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Published on: March 6, 2024

FORT LAUDERDALE BUSINESS LITIGATION: MATERIAL BREACH OF CONTRACT

By Mavrick Law Firm

Not all contractual breaches are treated equally. Some breaches are material, while other breaches are not. Materiality matters because a material breach relieves the non-breaching party of his or her duties to perform under the contract. JF & LN, LLC v. Royal Oldsmobile-GMC Trucks Co., 292 So. 3d 500 (Fla. 2d DCA 2020) (“…[N]ot every breach permits the nonbreaching party to cease performance. Instead, the failure to perform the contractual obligation must be central to the contract or, in other words, material.”). Material breaches occur when the breach “go[es] to the essence of the contract; it must be the type of breach that would discharge the injured party from further contractual duty on his part.” Eclectic Synergy, LLC v. Seredin, 347 So. 3d 27 (Fla. 4th DCA 2022). However, “trivial noncompliance and minor failings do not constitute material breaches.” Burlington & Rockenbach, P.A. v. Law Offices of E. Clay Parker, 160 So. 3d 955 (Fla. 5th DCA 2015). By extension, trivial breaches do not relieve the non-breaching party from performing. See DK Arena, Inc. v. EB Acquisitions I, LLC, 121 So. 3d 634 (Fla. 4th DCA 2013) (The “failure of the appellee to cause the release of the escrow deposit was a non-material breach of contract, [because n]othing in the contract or addendum obligated appellee to take any action to cause the deposit to be released.”). Peter Mavrick is a Fort Lauderdale business litigation attorney. The Mavrick Law Firm represents businesses and their owners in breach of contract litigation and related claims of fraud, non-compete agreement litigation, trade secret litigation, trademark infringement litigation, employment law, and other legal disputes in federal and state courts and in arbitration.

A “time is of the essence” provision can transform an immaterial breach into a material breach. Imagine a scenario where a seller agrees to sell a widget to a buyer for a specific price to be paid by January 1. Then imagine the buyer does not pay the full purchase price until January 2. Many would argue a one-day tardiness in payment is trivial and immaterial. However, a “time is of the essence provision” can make the buyer’s late payment a material breach relieving the seller of his obligation to sell the widget. In fact, “time is of the essence provisions” where created for this very purpose. Rybovich Boat Works, Inc. v. Atkins, 587 So. 2d 519 (Fla. 4th DCA 1991) (A “time is of the essence provision” is “intended to give the sellers an immediate right to cancel the contract if the buyer were unable to timely demonstrate an ability to purchase.”). For example, in Rybovich Boat Works, Inc., 587 So. 2d 519, the court granted summary judgment in favor of the seller because the buyer failed to set a closing date and failed to close by the latest date called for in the agreement despite the “time is of the essence” provision. Id.

“Time is of the essence” provisions are not always enforced. In equitable proceedings, “time is of the essence” provisions are only given effect when the party seeking enforcement demonstrates clear applicability to the relevant contract requirement. Jackson v. Holmes, 307 So. 2d 470, 472 (Fla. 2d DCA 1975) (A “‘time is of the essence’ provision will be given effect in an equitable proceeding probided [sic] it is shown to be clearly applicable to the contract requirement against which it is sought to be applied.”). Court do not want to “‘achieve [a] result by merely putting into the contract the words time is of the essence….’” Jackson v. Holmes, 307 So.2d 470 (Fla. 2d DCA 1975) (quoting 3A Corbin, Contracts § 715 (1960)). Therefore, “time is of the essence” provisions may be rejected in equitable proceedings when applied to matters of minimal consequence. Arvilla Motel, Inc. v. Shriver, 889 So. 2d 887 (Fla. 2d DCA 2004) (cautioning courts “not to apply a general provision that time is of the essence to all of the many ‘promises for sundry performance, varying in amount and importance,’ because parties often insert the provision in the contract without any realization of its significance.”) (quoting 3A Corbin, Contracts § 715 (1960)).

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Published on: March 2, 2024

MIAMI BUSINESS LITIGATION: FLORIDA HOMESTEAD PROTECTIONS

By Mavrick Law Firm

Florida’s broad homestead protection laws are enshrined in Florida’s Constitution. They offer unique asset protection most states do not, and prevent most creditors from levying against a debtor’s home so long as that home qualifies as a homestead. Peter Mavrick is a Miami business litigation attorney, and represents clients in Fort Lauderdale, Boca Raton, and Palm Beach. The Mavrick Law Firm represents businesses and their owners in breach of contract litigation and related claims of fraud, non-compete agreement litigation, trade secret litigation, trademark infringement litigation, employment litigation, and other legal disputes in federal and state courts and in arbitration.

Florida’s constitution provides that:

There shall be exempt from forced sale under process of any court,… the following property owned by a natural person:

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Published on: February 28, 2024

FORT LAUDERDALE BUSINESS LITIGATION: ENFORCEMENT OF NON-COMPETE AGREEMENTS

By Mavrick Law Firm

Florida law protects employers and similarly situated persons from unlawful competition. But every competitive act does not qualify as an unlawful competitive act. White v. Mederi Caretenders Visiting Services of Se. Florida, LLC, 226 So. 3d 774 (Fla. 2017) (“Section 542.335 does not protect covenants ‘whose sole purpose is to prevent competition per se’ because those contracts are void against public policy.”). There “must be special facts present over and above ordinary competition” to be protected by Florida’s non-compete laws. Passalacqua v. Naviant, Inc., 844 So. 2d 792 (Fla. 4th DCA 2003). “These special facts must be such that without the covenant not to compete the employee would gain an unfair advantage in future competition with the employer.” Id (emphasis removed). Peter Mavrick is a Fort Lauderdale business litigation attorney. The Mavrick Law Firm represents businesses and their owners in breach of contract litigation and related claims of fraud, non-compete agreement litigation, trade secret litigation, trademark infringement litigation, employment law, and other legal disputes in federal and state courts and in arbitration.

Florida’s legislature created a list of special facts constituting unlawful competition. They are called legitimate business interests and are as follows:

1: Use of another’s trade secrets;

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Published on: February 11, 2024

MIAMI BUSINESS LITIGATION: NON-COMPETE CONTRACTS BARRED BY PROPOSED WORKFORCE MOBILITY ACT

By Mavrick Law Firm

We previously wrote about two potential laws that might limit enforceability of non-compete agreements. The first law is a proposed Florida statute that would constrain or prohibit restrictive covenants for certain medical professionals. The second law is a Federal Trade Commission rule that would ban most non-compete agreements as unfair competition. Congress is proposing a similar law that would ban most non-compete agreements, called the Workforce Mobility Act (the Act). The relevant wording of the Act, in its present form, is as follows: “…No person shall enter into, enforce, or attempt to enforce a noncompete agreement with any individual who is employed by, or performs work under contract with, such person with respect to the activities of such person in or affecting commerce. S. 220, 118th Cong. § 3 (2023-2024). Peter Mavrick is a Miami business litigation attorney, and represents clients in Fort Lauderdale, Boca Raton, and Palm Beach. The Mavrick Law Firm represents businesses and their owners in breach of contract litigation and related claims of fraud, non-compete agreement litigation, trade secret litigation, trademark infringement litigation, employment litigation, and other legal disputes in federal and state courts and in arbitration.

Public agencies and private citizens can enforce the Act. If passed, the Act would make any violation an unlawful unfair and deceptive act or practice under 15 USC § 57a. Id. The Federal Trade Commission, the United States Department of Labor, and the States of the United States would each have authority to enforce the law. Id. Individuals will also have a private cause of action to enforce the Act. Id. They can sue to recover damages (if any) along with attorney’s fees if they are the prevailing party. Id.

The sweeping nature of the Act’s wording will likely have broad effect throughout interstate commerce. However, the Act does not ban all non-compete agreements outright because the definition of “non-compete agreements” is somewhat narrow. Congress defined non-compete agreements as:

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Published on: February 3, 2024

MIAMI BUSINESS LITIGATION: CORPORATE OFFICERS AND THE BUSINESS JUDGMENT RULE

By Mavrick Law Firm

The business judgment rule is a critical feature of the law governing corporations throughout the United States. The United States Court of Appeals for the Eleventh Circuit, in In re Bal Harbour Club, Inc., 316 F.3d 1192 (11th Cir. 2003), explained that “[t]he business judgment rule is a judicial presumption that corporate officers and directors acted in good faith, even if their actions were ultimately detrimental to the corporation.” Florida courts adhere to the business judgment rule. The rule was solidified in English and American common laws over 200 years ago, and was created because directors are usually more qualified to make business decisions than judges. Royal Harbour Yacht Club Marina Condo. Ass’n, Inc. v. Maresma, 304 So. 3d 1268, 1269 (Fla. 3d DCA 2020); Gerard V. Mantes & Emily S. Fields, The Business Judgment Rule, 99 Mich. B.J. 30 (Jan. 2020). The business judgment rule applies to corporations, limited liability companies, and not-for-profit companies. See Fla. Stat. Sections 607.0831, 605.04093, and 617.0834. The business judgment rule can also apply to home owner’s associations in some jurisdictions. See, e.g., Hollywood Towers Condo. Ass’n, Inc. v. Hampton, 40 So. 3d 784 (Fla. 4th DCA 2010) (allowing application of the business judgment rule to condominium associations if the association has contractual or statutory authority to perform the relevant act and the board’s actions were reasonable). Peter Mavrick is a Miami business litigation attorney, and represents clients in Fort Lauderdale, Boca Raton, and Palm Beach. The Mavrick Law Firm represents businesses and their owners in breach of contract litigation and related claims of fraud, non-compete agreement litigation, trade secret litigation, trademark infringement litigation, employment litigation, and other legal disputes in federal and state courts and in arbitration.

The business judgment rule insulates corporate officers from personal fiduciary duty liability if they did not abuse their discretion, commit fraud, act in bad faith, or act illegality. Int’l Ins. Co. v. Johns, 874 F.2d 1447 (11th Cir. 1989). Corporate officers can apply the business judgment rule if they acted on an informed basis, in the best interests of the company, and observed corporate formalities. In re Fundamental Long Term Care, Inc., 527 B.R. 479 (Bankr. M.D. Fla. 2015). Litigants seeking to defend themselves from claims under the business judgment rule do not need to plead the issue as an affirmative defense because the rule applies presumptively by operation of law. New Horizons Condo. Master Ass’n, Inc. v. Harding, 336 So. 3d 796 (Fla. 3d DCA 2022) (“The rule does not need to be raised in defensive pleadings to shield corporate conduct from judicial review. Instead, it applies presumptively by operation of law.”). The presumption is so strong that some jurisdictions require a plaintiff to rebut it before challenging the corporate officer’s business judgment. Solomon v. Armstrong, 747 A.2d 1098 (De. Ch. 1999) (“Under the business judgment rule, the burden of pleading and proof is on the party challenging the decision to allege facts to rebut the presumption.”). This is a powerful weapon for officers and directors because it can place the burden of disproof on the plaintiff. See Harding, 336 So. 3d 796 (denying summary judgment because the plaintiff could not prove the business judgment rule did not apply).

Officers and directors should still be careful when discharging fiduciary duties owed to the corporation because the business judgment rule is not a blank check. For example, in DiSorbo v. Am. Van Lines, Inc., 354 So. 3d 530 (Fla. 4th DCA 2023), the court rejected application of the business judgment rule because the corporate officer was an interested party to the relevant transaction. The court therefore determined that the officer should not benefit from the deferential business judgment rule, and instead applied a harsher law relating to conflict-of-interest transactions. Consequently, officers and directors should always endeavor to make decisions on an informed basis, make decisions in the best interests of the company, and observe corporate formalities before undertaking any action on behalf of the company. Davis v. Dorsey, 495 F. Supp. 2d 1162, 1176 (M.D. Ala. 2007) (“If the defendant has engaged the corporation in a conflicting-interest transaction or has usurped a corporate opportunity, the business-judgment rule will not bar a claim based on the duty of care.”).

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Published on: February 2, 2024

FORT LAUDERDALE BUSINESS LITIGATION: SHAREHOLDER DERIVATIVE AND DIRECT LAWSUITS AGAINST CORPORATIONS

By Mavrick Law Firm

In a corporate derivative lawsuit, the shareholder does not have a “direct” injury that is particular to the specific shareholder. Therefore, a shareholder must turn to a derivative lawsuit. In these lawsuits, the shareholder sues to enforce rights belonging to the corporation for which the corporation itself could have sued for redress. Medkser v. Feingold, 307 Fed. Appx. 262 (11th Cir. 2008). The derivative lawsuit is an exception to the general rule requiring a company to sue on its own behalf. Daily Income Fund, Inc. v. Fox, 464 U.S. 523 (1984). Damages recovered in derivative lawsuits are paid to the corporation rather than shareholder that commenced suit because the shareholder stepped into the shoes of the corporation. The derivative lawsuit is intended to benefit the corporation and all of its shareholders. Peter Mavrick is a Fort Lauderdale business litigation attorney. The Mavrick Law Firm represents businesses and their owners in breach of contract litigation and related claims of fraud, non-compete agreement litigation, trade secret litigation, trademark infringement litigation, employment law, and other legal disputes in federal and state courts and in arbitration.

The “standing” requirement usually prevents a shareholder from suing the corporation it owns a part of (along with the corporation’s officers and directors) for mismanagement because the corporation is usually the party injured by the mismanagement. See Braun v. Buyers Choice Mortgage Corp., 851 So.2d 199 (Fla. 4th DCA 2003) (“The fact that [the shareholder ] may have lost the value of his investment because [the corporation] went out of business is, at best, an indirect injury.”). Standing is a legal concept that ensures a litigant is entitled to have a court decide the merits of his or her dispute. Warth v. Seldin, 422 U.S. 490, (1975). A plaintiff is required to prove its standing as a perquisite to recovering from the defendant. Id. A plaintiff must demonstrate that it suffered an injury that is concrete, particularized, and fairly traceable to the defendant’s action to satisfy the standing requirement. See Koziara v. City of Casselberry, 392 F.3d 1302 (11th Cir. 2004).

Limited circumstances can allow shareholders to sue their own corporation directly. But these circumstances vary state to state. Some states apply a “direct harm” test that examines whether the harm flows to the company first or to the shareholder first. For example, the California appellate court decision in Shuster v. Gardner, 127 Cal.App.4^th 305 (2005), stated in pertinent part that, “a shareholder cannot bring a direct action for damages against management on the theory their alleged wrongdoing decreased the value of his or her stock (e.g., by reducing corporate assets and net worth).” (emphasis in original)). Other states employ a “special injury” test that requires a comparison of plaintiff’s injuries to those suffered by the other shareholders, such as the Alaska court decision in Hanson v. Kake Tribal Corp., 939 P.2d 1320 (Alaska 1997). Hanson stated in pertinent part that, “[a] plaintiff alleges a special injury and may maintain an individual action if the shareholder complains of an injury distinct from that suffered by other shareholders, or a wrong involving one of the shareholder’s contractual rights as a shareholder.” A third group of states use a “duty owed” test that examines the statutory and contractual terms to determine whether the duty at issue was owed to the individual shareholder or to the company generally. See, e.g., G&N Aircraft, Inc. v. Boelm, 743 N.E.2d 227 (Ind. 2001), explaining that that (“a direct action may be brought when: it is based upon a primary or personal right belonging to the plaintiff—stockholder…. It is derivative when the action is based upon a primary right of the corporation….”). And a fourth group of states allow a shareholder to sue directly if the corporation or its directors/officers owe a separate duty to the shareholder under some contractual or statutory right. See Dinuro Investments, LLC v. Camacho, 141 So. 3d 731 (Fla. 3d DCA 2014); Patel v. 2602 Deerfield, LLC, 819 S.E.2d 527 (Ga. Ct. App. 2018) (The shareholder must allege “a wrong involving a contractual right that is independent of any right of the corporation.”). Florida courts apply a combination of tests in the form of the direct harm test, special injury test, and contract test. See Dinuro Investments, LLC, 141 So. 3d 731.

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