The leading authority for this principle is the 1967 United States Supreme Court decision in Prima Paint Corp. v. Flood & Conklin Mfg. Co., 388 U.S. 395 (1967). In Prima Paint, the plaintiff brought an action seeking to rescind a contract based on fraud in the inducement. The contract contained an arbitration provision, and the Supreme Court held that the plaintiff’s action for fraud was undoubtedly encompassed by the broad wording of the arbitration provision. In so holding, the court reasoned that if the alleged fraud related to the arbitration clause itself, then a court should resolve the issue. But if the fraud in inducement related to the whole contract which contained an agreement to arbitrate, that issue should be resolved by arbitration.

Although Prima Paint was decided under federal law, Florida courts have found its reasoning persuasive and have extended Prima Paint’s holding to contracts formed and executed in Florida. For example, in Simpson v. Cohen, 812 So. 2d 588 (Fla. 4th DCA 2002), the Florida Fourth District Court of Appeal cited Prima Paint when holding that “[c]ontract language agreeing to arbitrate ‘[a]ny controversy or claim arising out of or relating to this Agreement, or breach thereof ’ has been found to be broad enough to encompass a claim that the execution of an agreement itself was procured by fraud…The fraud in the inducement claim arises from the contract and relates to the other claims that the arbitrator must determine.”

There is an exception, however, to the general rule in Prima Paint which was explained by Florida’s Fifth District Court of Appeal in Beazer Homes Corp. v. Bailey, 940 So. 2d 453, 457 (Fla. 5th DCA 2006). Beazer discussed a line of Florida decisions that departed from the Supreme Court’s rationale in Prima Paint and instead held that “where a party seeks to rescind a contract based on fraud in the inducement, the arbitration provision itself is not enforceable.” This line of Florida decisions relies on the rationale stated by the minority in Prima Paint that “[i]f there is not contract, there can be no arbitration clause ‘of the contract.”’ Nevertheless, Beazer clarified that this exception is limited to cases “where only rescission is sought, and where the controversies between the parties have no relation to the contract itself.” If you have any questions concerning commercial arbitration agreements or the application of Prima Paint to Florida contracts, Peter Mavrick is a Fort Lauderdale Business litigation lawyer who can assist you.

The Fort Lauderdale business litigation attorneys at the Mavrick Law Firm have extensive experience dealing with arbitration, claims for fraud, and other types of business litigation cases throughout the Miami-Dade, Broward, and Palm Beach County areas encompassed by the Third and Fourth District Courts of Appeal, as well as Hillsborough, Sarasota, and other counties encompassed by the Second Circuit Court of Appeal. This article is not a substitute for legal advice tailored to a particular situation. Peter T. Mavrick can be reached at: Website: www.mavricklaw.com; Telephone: 954-564-2246; Address: 1620 West Oakland Park Boulevard, Suite 300, Fort Lauderdale, Florida 33311.

(2) A complaint in a proceeding brought in the right of a corporation must…allege with particularity the demand made to obtain action by the board of directors and that the demand was refused or ignored by the board of directors…

As such, under Florida law, a shareholder must first make a demand to the board of directors to bring the lawsuit. It is only when the board of directors refuses to bring such an action that the shareholder may file the derivative suit. In some cases, however, a shareholder may attempt to circumvent the pre-suit demand requirement by alleging it would be “futile” to bring such a demand to the board of directors. The Fort Lauderdale business litigation attorneys at the Mavrick Law Firm have successfully defended corporate officers and directors in corporate derivative actions.

Prior to the statute’s 1990 revisions, Florida case law historically recognized a futility exception to the pre-suit demand requirement. In Belcher v. Schilling, 309 So. 2d 32 (Fla. 3d DCA 1975), the Third District Court of Appeal quoted from the 1975 version of the § 607.07401, which stated:

The complaint must set forth with particularity the efforts of the plaintiff to secure the initiation of such actions by the board of directors of such corporation or the reasons for not having made such effort.

Nevertheless, the 1990 revisions removed all exceptions to the demand requirement. Thus, Florida courts when interpreting the post-1990 version of the statute have consistently held that a derivative lawsuit requires demand upon the board of directors prior to being brought by the shareholder. See Ferola v. Blue Reef Holding Corp., 719 So. 2d 389, 390 (Fla. 4th DCA 1997) (citing § 607.07401 (1997)) (“A derivative action…requires service of a demand to take action on the board of directors”).

By persuading the courts in Florida that there is no longer a “futility” exception to the pre-suit demand requirement for corporate derivative suits under Florida law, the Mavrick Law Firm has obtained dismissals of actions where shareholders intentionally fail to make such a demand. However, it is important to be aware that this article only covers derivative lawsuits in the context of corporations. Derivative lawsuits also may be brought by members of limited liability companies pursuant to Florida’s Revised Limited Liability Company Act at § 605.0802, Fla. Stat., but the pre-suit demand requirement in such lawsuits is subject to a “futility” exception under the express wording of subsection (2) of the statute.

The Fort Lauderdale business litigation attorneys at the Mavrick Law Firm have successfully represented many businesses in Florida business litigation cases throughout the Miami-Dade, Broward, and Palm Beach County areas encompassed by the Third and Fourth District Courts of Appeal, as well as Hillsborough, Sarasota, and other counties encompassed by the Second Circuit Court of Appeals. This article is not a substitute for legal advice tailored to a particular situation. Peter T. Mavrick can be reached at: Website: www.mavricklaw.com; Telephone: 954-564-2246; Address: 1620 West Oakland Park Boulevard, Suite 300, Fort Lauderdale, Florida 33311.

To prevail on a tortious-interference claim, the plaintiff must prove “(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.” Ethan Allen, Inc. v. Georgetown Manor, Inc., 647 So.2d 812 (Fla.1994). Pursuant to the Southern District of Florida’s ruling in Duty Free Americas, Inc. v. Estee Lauder Companies, Inc., 946 F. Supp. 2d 1321 (S.D. Fla. 2013), the plaintiff is the factual scenario supra will likely be unable to demonstrate a protected business relationship sufficient to justify a claim for tortious interference.

Duty Free involves the competitive bidding process for airport duty-free stores. Duty-free operators, such as the plaintiff Duty Free Americas, Inc. (“DFA”), generally secure space to operate duty-free stores in a particular airport via competitive bidding. Defendant, Estee Lauder Companies, Inc. (“ELC”), is the largest manufacturer of beauty products sold in duty-free stores. Prior to June 2008, DFA and ELC had a healthy business relationship. However, beginning in June 2008, ELC announced it would be raising its pricing, causing DFA to object and refuse to further sell ELC products. DFA subsequently discovered that ELC ultimately did not raise its prices, and thus tried to mend its relationship with ELC, but ELC refused to continue doing business with DFA.

Thereafter, in December 2008, an RFP was issued for the operation of a duty free store at Newark Liberty International Airport (“Newark Airport”). DFA and its rival duty free stores submitted bids. However, before the identities of the bidders were made public, ELC sent an unsolicited letter to the leasing agent who managed the RFP process for Newark Airport, which highlighted and promoted ELC’s authorized duty-free retail partners, specifically excluding DFA. DFA’s bid was ultimately rejected. Approximately two and a half years later, an RFP was issued to lease and develop a duty-free store in Boston Logan International Airport, where DFA was the incumbent duty-free store, for a new seven-year term. During the bidding process, ELC communicated with decision makers for the RFP in a manner similar to the letter ELC had sent during the Newark RFP, and DFA’s bid was ultimately rejected. ELC also intervened during the bidding process for an RFP in Orlando International Airport in 2011, where the airport decision makers specifically cited DFA’s inability to sell ELC products as a central reason why DFA’s bid was ultimately rejected.

Based on the foregoing, DFA filed suit against ELC, alleging, inter alia, tortious interference with a business relationship. The Southern District of Florida dismissed DFA’s tortious interference claim because DFA failed to properly allege a protectable business relationship, holding as follows:

[A] bidder generally cannot establish a protected business relationship with an entity soliciting bids through a competitive bidding process…[T]o establish a protected business relationship within a bidding process, a plaintiff must allege additional facts indicating that the relationship went beyond the bidding process and into negotiations which in all probability would have been completed.

Pursuant to the Southern District’s holding in Duty Free, tortious interference claims in the competitive bidding context will likely fail due to lack of a protectable business relationship. Although Duty Free provides a way for plaintiffs to establish a protectable business relationship, the majority of unsuccessful bidders will be unable to allege such facts. If you have any questions or concerns regarding tortious interference or other causes of action that could arise in the competitive bidding context, the Fort Lauderdale business litigation attorneys at the Mavrick Law Firm are available to help.

The Fort Lauderdale business litigation attorneys at the Mavrick Law Firm have successfully represented many businesses in Florida business litigation cases throughout the Miami-Dade, Broward, and Palm Beach County areas encompassed by the Third and Fourth District Courts of Appeal, as well as Hillsborough, Sarasota, and other counties encompassed by the Second Circuit Court of Appeals. This article is not a substitute for legal advice tailored to a particular situation. Peter T. Mavrick can be reached at: Website: www.mavricklaw.com; Telephone: 954-564-2246; Address: 1620 West Oakland Park Boulevard, Suite 300, Fort Lauderdale, Florida 33311.

Exceptions to the buyer beware doctrine exist. Purchasers may be able to prevail in misrepresentation claims if they can prove that: 1) a trick was employed to prevent the purchaser from making independent inquiry; 2) the purchaser did not have an equal opportunity to become apprised of the misrepresented fact; and, 3) the seller disclosed some facts but failed to disclose the whole truth. Transcapital Bank, 2017 WL 3169271, at *5. However, the exceptions do not apply to commercial transactions between sophisticated parties. See Wasser v. Sasoni, 652 So. 2d at 413 (“where the parties are equally sophisticated, and have an equal opportunity to discover a defect…a negligent purchaser is not justified in relying upon a misrepresentation which is obviously false, and ‘which would be patent to him if he had utilized his opportunity to make a cursory examination or investigation’”). Courts expect relatively sophisticated buyers to use their acumen to screen out deceptive tactics.

If prospective purchasers have any doubt regarding the viability of the buyer beware doctrine, the Fourth District Court of Appeal’s recent decision in Transcapital Bank v. Shadowbrook at Vero, LLC, is instructive. The court found that the buyer beware doctrine entitled the defendants to a judgment as a matter of law on the plaintiffs’ fraudulent misrepresentation claim. See 2017 WL 3169271, at *5 (“Even if … defendants … misrepresented the property’s appraised value, such a misrepresentation would not be actionable under the doctrine of [buyer beware] in the absence of … fraudulent means in preventing a prospective purchaser from making an examination of the property under consideration”). Therefore, prospective purchasers have a duty to protect themselves when evaluating the representations of the seller of a business. Moreover, if purchasers have doubts about the validity of a seller’s claims, they may want to protect their interests by avoiding certain contractual terms that could prevent a misrepresentation claim. See Wasser v. Sasoni, 652 So. 2d at 413 (holding that contractual provisions such as “integration clauses … are recognized as valid defenses to claims of fraud [ and misrepresentation]” when there is no evidence that the contract induced by fraud.) Moreover, fraud can be difficult to prove as “there must be evidence of ‘the [speaker’s] knowledge that the representation is false.” MDVIP, Inc. v. Beber, 42 Fla. L. Weekly D1248 (Fla. 4th DCA May 31, 2017). In sum, purchasers who do not make best efforts to evaluate a business do so at their own peril.

Peter T. Mavrick has successfully represented many buyers and sellers of businesses in commercial disputes. This article is not a substitute for legal advice tailored to a particular situation. Peter T. Mavrick can be reached at: Telephone: 954-564-2246; Address: 1620 West Oakland Park Boulevard, Suite 300, Fort Lauderdale, Florida 33311.

To initiate a lawsuit, a plaintiff must have standing, otherwise described as the right to sue. Accordingly, the right to sue varies depending on the particular context of the plaintiff’s alleged harm. § 605.0802, Fla. Stat. allows for a member to “maintain a derivative action to enforce a right of a limited liability company,” but the statute does not provide the right to sue individually. A derivative action seeks to “enforce a corporate right or to prevent or remedy a wrong to the corporation,” when “the corporation, because it is controlled by the wrongdoers or for other reasons, fails and refuses to take appropriate action for its own protection.” Salit v. Ruden, McClosky, Smith, Schuster & Russell, P.A., 742 So. 2d 381, 388 (Fla. 4th DCA 1999). Whereas, an individual suit seeks to recover damages that the plaintiff suffered as a result of a wrong done to the corporation. Thus, the right to sue individually as a member of an LLC presents special considerations that were confusing and opaque in Florida until recently.

In Dinuro Investments, LLC v. Camacho, the Third District Court of Appeal used a two-prong test that has been adopted throughout Florida to resolve the issue of individual standing in actions for individual damages in LLC disputes. See Strazzulla v. Riverside Banking Co., 175 So. 3d 879, 884 (Fla. 4th DCA 2015) (“we agree with the Third District[‘s decision in Dinuro Investments, LLC v. Camacho] and adopt a two-prong test”). The South Florida offices of The Mavrick Law Firm represents plaintiff-members and defendant-members in disputes throughout the judicial circuits that are bound by Third and Fourth DCA decisions. In Dinuro Investments, LLC v. Camacho, the court thoroughly examined the three tests routinely are routinely applied to resolve the direct versus derivative claim question: The Direct Harm Test, The Special Injury Test, and The Duty Owed Test. After addressing the pros and cons of each of the tests, and in an attempt to “reconcile nearly fifty years of apparently divergent case law” the court reasoned that a two-prong test was appropriate. See 141 So. 3d at 740.

As mentioned earlier, a member can only individually sue another member for damages if the two-prong test is met, or if the member can prove the existence of a separate duty owed by the defendant-member(s) to the individual plaintiff-member that is based on a contractual or statutory mandate. Dinuro Investments, LLC v. Camacho, 141 So. 3d at 740. Concerning the first prong, direct harm, a member can only bring a direct suit if the damages are unrelated to the damages that are suffered by the LLC, and if the LLC would have no right to recover in its own action. Strazzulla v. Riverside Banking Co., 175 So. 3d 879, 885–86 (Fla. 4th DCA 2015). Regarding the second prong, the plaintiff-member’s injuries must be separate and distinct from the other members. Id. Moreover, unless explicitly stated, an LLC’s operating agreement will not function to impose individual rights and liabilities to individual members. See Dinuro Investments, LLC v. Camacho, 141 So. 3d at 741 (“[w]hen analyzing a claim for breach of an operating agreement, the precise terms of the agreement are critical”). Therefore, potential plaintiff-members should assess the nature of their harm and any individual contractual rights before suing another member of an LLC. A failure to make a thoughtful and reasoned assessment of the factors discussed in this article will likely result in a waste of resources.

Peter T. Mavrick has successfully represented many businesses in non-competition covenant litigation. This article is not a substitute for legal advice tailored to a particular situation. Peter T. Mavrick can be reached at: Telephone: 954-564-2246; Address: 1620 West Oakland Park Boulevard, Suite 300, Fort Lauderdale, Florida 33311.