ke kumu - Fall/Winter 2022

4 Welcome!

Hulihia, Pōhai Nu‘uhiwa Campbell

5 Contributors

Learn about our authors’ practices and how to contact them

6

A Brief Guide to Ground Lease Terminations: Considerations for Lessors and Lessees When a Leasehold Expires

Imran Naeemullah

9 Hawai‘i’s New Uniform Trust Code: Part II

Summer G. Shelverton and Janine M. Yim

12 Third-Party Subpoenas: Who’s going to pay for that?

Trisha H.S.T. Akagi

14 Hawai‘i Supreme Court Issues Landmark Decision Regarding Enforceability of Non-Compete and Non-Solicitation Clauses

Paul M. Saito and Michael R. Soon Fah

19 An (Informal) Opinion on Legal Opinions

Geoffrey T. Mukae and Nathan C. Yang

2022

Management Committee: Amanda M. Jones Nathan T. Okubo

Ryan M. Wilson

Cades Schutte Building 1000 Bishop Street, Suite 1200 Honolulu, Hawai‘i 96813

The contents of this newsletter should not be construed as legal advice on any specific fact or circumstance. Its content was prepared by Cades Schutte LLP. It was designed for general information purposes only. Your receipt of such information neither creates an attorneyclient relationship with any Cades Schutte LLP attorney, nor a business relationship with any of its administrators. You should not act or rely on any of the information contained herein without seeking professional legal counsel. Prior results or outcomes referred to in these materials do not in any way suggest or guarantee a similar result in other matters.

The comments and opinions expressed in this publication do not necessarily represent those of Cades Schutte LLP or the attorneys or staff of Cades Schutte LLP.

HULIHIA

Hulihia is a Hawaiian term describing a period of change, overturning, or overthrow. The pandemic has resulted in a period of significant hulihia in many sectors, including health-care and the economy, and the law is no exception. The recent changes in our laws continue to transform the way we practice, as well as the needs of our clients. In this issue of ke kumu, we delve deeper into the newly enacted Hawai‘i Uniform Trust Code and review the enforceability of non-compete and non-solicitation clauses. We also feature articles on ground lease surrenders and third-party subpoenas.

On the Cover

Your most fruitful source of recent legal issues in Hawai‘i.

Mahalo nui loa

Patricia J. McHenry was instrumental in the creation of this newsletter, acting as lead proofreader and editor. Pōhai Nu‘uhiwa Campbell, our resident polyglot, assisted with drafting the forward of this issue.

Feedback?

If you have questions, or would like to see an article on a particular area of law, please let us know!

Submit feedback via email to: feedback@cades. com

A COMMUNITY EFFORT

Trisha H.S.T. Akagi Partner

Trisha is a partner in the Litigation Department at Cades Schutte. Her practice encompasses a wide range of commercial litigation matters including bankruptcy and creditors’ rights, water resources, non-competition covenants, and insurance disputes. She is a member of the firm’s Recruiting and Centennial Committees.

(808) 521-9318

takagi@cades.com

Paul M. Saito Partner

Paul is actively involved in counseling and educating business owners and human resource managers on employment law issues through the Chamber of Commerce of Hawai‘i, the Society for Human Resource Management certification programs, and the University of Hawai‘i’s Outreach College.

(808) 521-9225

psaito@cades.com

Summer G. Shelverton Partner

Summer concentrates her practice in the areas of estate planning, probate and trust administration, conservatorship and guardianship proceedings, and trust and estate disputes.

As part of the drafting committee for Hawai‘i’s new Uniform Trust Code, she presented testimony to the legislature.

(808) 521-9236

sshelverton@cades.com

Geoffrey T. Mukae Of Counsel

Geoffrey is a member of the Corporate and Business Law Practice Group. He has been practicing law for more than 20 years as a corporate and business attorney. He began his practice in New York City, followed by several years in Silicon Valley, and five years in Tokyo.

(808) 544-9335 gmukae@cades.com

Imran’s real estate and finance transactional practice focuses on real estate acquisitions and dispositions, commercial financing, resort and commercial projects (including condominium development), commercial leasing, and other real estate matters.

(808) 521-9324

inaeemullah@cades.com

Michael is an associate in the Litigation Department. His practice focuses on all types of civil litigation, particularly in the areas of commercial litigation, construction law, and both residential and commercial landlord-tenant disputes. (808) 521-9322 msoonfah@cades.com

Nate is an associate in the Finance, Corporate, and Real Estate Practice Groups at Cades Schutte. He has successfully guided a diverse range of clients, from individuals to multinational corporations, in navigating Hawai‘i’s unique legal environment, particularly in the area of affordable housing finance and development.

(808) 521-9351 nyang@cades.com

Janine M. Yim Associate

Janine is an associate in the firm’s Trusts & Estates and Litigation Departments. Before joining Cades Schutte, Janine clerked for the Honorable Chief Justice Recktenwald of the Hawai‘i Supreme Court. She earned her law degree from the University of California, Berkeley, School of Law.

(808) 521-9363 jyim@cades.com

Michael R. Soon Fah Associate

Imran Naeemullah Associate

Nathan C. Yang Associate

We invite you to take a moment and learn about the team who contributed to this issue.

By: Imran Naeemullah inaeemullah@cades.com

Ina typical ground lease transaction, a lessor leases property to a lessee for several decades. At the outset of the lease, there are many factors that both the lessor and lessee consider as they negotiate the lease terms and conditions, perform due diligence, and otherwise prepare to enter into a long-term real estate transaction. Although the parties, in drafting a new lease, contemplate end-of-lease matters, such as negotiating surrender clauses that address what happens to the property when the lease term comes to an end, those events are typically so far into the future that the parties who negotiated the lease may no longer be involved at the conclusion of the term.

At Cades Schutte, we often represent lessors and lessees in negotiating ground leases. That likely comes as no surprise. Perhaps less well-known is that we also frequently assist clients with the ground lease termination process. For instance, many ground leases in Hawai‘i were negotiated decades ago and they are now approaching the natural expiration of their terms. Whether representing the lessor or the lessee, we have found that both parties have much to consider as the lease comes to an end. Essentially, the end of the lease is like a closing, with various conditions that must be satisfied before the parties can finalize the transaction.

This article discusses some of the most common issues that arise during the process.

Title

Title to the property is a significant issue. The lessor’s expectation at the time it enters into a ground lease is that unless the lease term is extended or the lessee exercises an option to acquire the fee simple interest in the property, the lessor will regain control and possession of the demised premises at the conclusion of the lease term in accordance with the terms specified in the lease. This usually means the lessor will expect title to the premises to be free of liens and other encumbrances except for those which existed prior to the effective date of the lease or were otherwise approved in writing by the lessor during the lease term. The lessor is particularly focused on this issue because title encumbrances could affect the marketability of the property.

The process begins by carefully reviewing what the lease says. For instance, a “no liens and encumbrances” requirement in the surrender clause typically works in concert with a general prohibition on liens and encumbrances. The combined effect is that at the end of the lease term, the lessor will review title (by ordering a title report from a title insurance company) to verify that the recorded encumbrances are consistent with what the lessor is expecting to see. Some encumbrances often need to be cleaned up. For instance, many lessees obtain financing during the lease term using the leasehold interest as collateral for the loan. The lender will in turn record a leasehold mortgage. However, it is not uncommon for a lender to forget to record a release of mortgage upon the full repayment of the loan. In those circumstances, the lessee will need to work with its former lender to record a release of mortgage prior to lease expiration. This can be time-consuming so it is generally advisable to begin working on this several months before lease expiry.

We also assist lessor clients with preparing and recording a document that confirms the expiration of the lease by its terms. That document helps to ensure that a title insurance company searching the fee simple title to the property no longer shows the lease—or the leasehold encumbrances—as affecting the title to the property. Ideally the lessee will voluntarily cooperate in signing such a document (or will otherwise be required to do so by the lease terms). If not, a lessor can still consider signing a unilateral confirmation of lease expiration. Under certain circumstances, title insurance companies in Hawai‘i may accept a unilateral confirmation recorded in the Bureau of Conveyances (recordation may be an issue for Land Court registered property) in lieu of a written affidavit from the lessor in order to remove the lease as an encumbrance upon the fee simple interest.

Property Condition

Upon the expiration or earlier termination of the lease, the lessor expects the premises to be surrendered in the condition required by the lease. For example, the lease might require the premises to be returned in the same condition as at the beginning of the lease

except for reasonable wear and tear. Alternatively, the premises may need to be returned in “good” condition, “broom clean” condition, or some other standard—such as by removing the improvements altogether and restoring the surface of the land to its former state. The variety of potential requirements emphasizes why it is important to carefully review the lease. Just assuming that the lease surrender process uses “common sense” may not be enough; the contract language must be analyzed.

Depending on the required standard, the lessee may need to perform repairs to the premises. For instance, if the roof has developed leaks then, depending on the lease requirements, the lessee may need to repair or even replace sections of the roof. The extent and quality of the necessary repairs (or the need to perform replacements) will depend on the exact language of the lease. This can also end up being the subject of end-of-term negotiations between the parties.

Environmental issues can cause particular concern, especially where the lessee’s use of the premises is likely to have caused environmental contamination. To help address this risk the lease may require the lessee to perform an environmental site assessment before the lease terminates, provide a copy of the report to the lessor, and pay for necessary remediation. This, too, can be a time-consuming exercise and it is advisable to begin it as early as possible in the termination process.

Selected Other Issues

The issues discussed above are just a few key considerations that frequently arise at lease end. Other common issues include, but are not limited to, ensuring that any required real property taxes have been paid (including rollback taxes), identifying any lessee permits and licenses to be transferred to the lessor (assuming they are transferable), performing walk-throughs and key returns, transferring utility services, and considering insurance needs (for instance, identifying policies that can be terminated versus those that must be kept in force to satisfy continuing lease obligations). The potential

complexity of this process underscores why, just as with a real estate closing, using a “checklist” approach is helpful. Note that if the lessee refuses to vacate at lease expiration, a complaint filed in the Circuit Court (not the District Court) is likely required.

Imran Naeemullah (Associate) focuses on real estate acquisitions and dispositions, commercial financing, resort and commercial projects, commercial leasing, and other real estate matters.

Janine

Summer

In a previous ke kumu article, we introduced the newly adopted Hawaiʻi Uniform Trust Code (“UTC”), which went into effect on January 1, 2022. In that article, we highlighted some of the important changes to trust law in Hawaiʻi following the UTC’s enactment. A link to our previous article is below:

This article is a continuation of the UTC discussion— highlighting further changes to trust law in Hawaiʻi and explaining the implications of these changes on settlors, beneficiaries, trustees, and attorneys.

As explained in our previous article, the UTC is primarily a default statute, meaning that—except for certain UTC provisions—the terms of a trust override the UTC provisions. But where the trust is silent or fails to sufficiently address an issue, the UTC can provide guidance and procedures on that issue.

For example, the UTC provides guidance on capacity requirements to create, amend, and/ or revoke a revocable trust. Consistent with common law, the same capacity required to make a will is required to make or add property to a revocable trust. Hawaiʻi Revised Statutes (“HRS”) § 554D-601. The capacity required to make or add property to a revocable trust can differ from the capacity required to amend, revoke, or direct the actions of a trustee of a revocable trust. Id. For example, if, in the terms of the trust, a settlor wishes to require a higher level of capacity to amend or revoke the trust, those terms will control. This can be useful, especially in cases of a vulnerable adult and to avoid situations of undue influence.

Additionally, the UTC provides greater guidance on the duties and powers of trustees and cotrustees. For instance, the UTC clarifies that,

during a settlor’s lifetime, a trustee does not have a duty to inform or report to contingent remainder beneficiaries whose interests in the trust do not vest until the settlor’s death. HRS § 554D-813(a). Id. Rather, this duty is owed solely to the settlor. Id. If, however, the settlor becomes incapacitated, then the trustee may provide such information and reports to certain individuals on the settlor’s behalf in the following order of preference: (1) persons designated in the trust to receive such information and reports on the settlor’s behalf; (2) the settlor’s conservator; (3) the settlor’s guardian; (4) the settlor’s agent under a durable general power of attorney; or (5) the settlor’s spouse, if the spouse is a beneficiary under the trust. Id. This section of the UTC recognizes that, while incapacitated, a settlor lacks the ability to effectively monitor the actions of the trustee and may need another individual to assist with this monitoring.

After the settlor’s death, the trustee has a duty to inform and report to “qualified beneficiaries”— and not more remote beneficiaries—of the trust. HRS § 554D-813(b). The term “qualified beneficiaries,” which is a new term in Hawaiʻi trust law, includes both current beneficiaries (i.e., beneficiaries who are presently entitled to receive distributions from the trust) and “firstline” remainder beneficiaries (i.e., beneficiaries who would be eligible to receive distributions if an event triggering the end of a current beneficiary’s interest or of the trust itself—such as the current beneficiary’s death—were to occur on the date in question). HRS § 554D-103.

The UTC also addresses, for the first time, situations where co-trustees cannot reach a unanimous decision or where a co-trustee has a conflict of interest. If co-trustees are unable to reach a unanimous decision, the UTC allows co-trustees to act, after consultation, by majority decision. HRS § 554D-703(a). By requiring “consultation,” the UTC prevents the majority of co-trustees from acting without informing the minority. Additionally, if a co-trustee has a conflict

of interest, the UTC requires that co-trustee to notify the other co-trustees of the conflict. HRS § 554D-703(e). And if the co-trustee with the conflict recuses themself from the transaction, the other co-trustees may act on behalf of the trust and proceed with that transaction (which prevents what would otherwise require court intervention). Id.

Furthermore, the UTC addresses reimbursement and compensation for trustees and designated trustees.1 Under the UTC, a designated trustee, who acts for the benefit of the beneficiaries, is entitled to reimbursement, regardless of whether they later become a trustee. HRS § 554D-709(a). Additionally, under the UTC, a trustee, who acts in good faith and does not willfully or wantonly commit a material breach of trust, may be reimbursed for expenses incurred while defending or prosecuting an action to protect the trust estate, regardless of success in this action. See HRS § 554D-709(a)(1). The UTC also allows the court, in its discretion, to award attorneys’ fees and costs to any party in a trust proceeding who has acted in the best interest of the trust, even if that party does not ultimately prevail. HRS § 554D-1004(a). In this way, the UTC modifies prior Hawai‘i case law that denied attorneys’ fees to a nominated personal representative, who was unsuccessful in a will contest. See Estate of Camacho, 140 Haw. 404, 400 P.3d 605 (Ct. App. 2017).

Finally, under the UTC, a trustee may provide a certification of trust, in lieu of a complete copy of the trust instrument, to third persons other than the beneficiaries (e.g., financial institutions). HRS § 554D-1013(a). This certification contains the basic information of the trust and essentially takes the place of the short form trust. However, unlike the short form trust, this certification limits the liability of persons acting in reliance on this document. HRS § 554D-1013(f)-(g).

1 A “designated trustee” is a person who has been named as a trustee in a trust but has not yet accepted trusteeship.

This article—like our previous article—does not provide an exhaustive review of the UTC provisions. It does, however, discuss some of the more significant changes to trust law in Hawaiʻi and highlights UTC provisions that we believe will have the greatest impact on settlors, beneficiaries, trustees, and attorneys engaging in trust law. For more information on the UTC, please review the UTC (HRS §§ 554D-101 to 554D-1104) and its commentary.

Summer G. Shelverton (Partner) is a member of the Trusts & Estates Department. She enjoys creating and implementing estate planning strategies to accomplish a client’s goals. Summer recently served on the drafting committee for Hawai‘i’s new Uniform Trust Code and presented testimony to the legislature.

Janine M. Yim (Associate) is a member of the firm’s Trusts & Estates and Litigation Departments.

Third-Party Subpoenas:

Who’s going to pay for that?

By: Trisha H.S.T. Akagi takagi@cades.com

In litigation, responding to requests for production of documents can be time-consuming and expensive yet those costs are considered part of litigation and are generally born by the parties themselves. But what happens when discovery is sought from a person or entity who is not a party to the litigation? Who is responsible for paying for the costs associated with responding then? The answer to this question depends on whether the lawsuit is in federal court or state court.

Federal Court

Under the Federal Rules of Civil Procedure, an order compelling compliance with a subpoena “must protect a person who is neither a party nor a party’s officer from significant expense resulting from compliance.” Fed. R. Civ. P. 45(d)(2)(B)(ii) (emphases added). The Ninth Circuit Court of Appeals has interpreted this rule to require the shifting of the non-party’s costs of compliance if those “expenses” are “significant.” Legal Voice v. Stormans Inc., 738 F.3d 1178, 1184 (9th Cir. 2013). Thus, a two-step inquiry is required: (1) whether the subpoena imposes “expenses” on the non-party; and (2) whether those expenses are “significant.”

What are “expenses”?

Generally, “expenses” are those costs resulting from compliance with the subpoena. This includes costs incurred in searching for and collecting documents, reviewing documents for responsiveness, reviewing documents for privileges such as the attorney-client privilege, ensuring compliance with laws and regulations such as HIPAA, and preparing the document production.

Costs incurred in fighting the subpoena are not considered “expenses” within the meaning of Rule 45 and are thus not recoverable. Therefore, costs incurred in researching, drafting, and filing a motion to quash the subpoena are not Unreasonably incurred costs are also not considered “expenses” incurred in responding to the subpoena and are likewise not

In some situations, those costs could be recovered as a sanction under Rule 45(d)(1) of the Federal Rules of Civil Procedure.

recoverable. Similarly, expenses that are incurred solely for the third-party’s benefit or peace of mind are not recoverable. For example, if the third-party insists that its attorney sit through a deposition in which the third-party’s documents will be used, those fees would not be considered recoverable expenses as they were not incurred in responding to the subpoena.

Once a court determines that the subpoena imposes “expenses” on the responding party, the court must then determine if those expenses are “significant.”

When are expenses “significant”? In determining whether an expense is significant, the court must consider the ability of the responding party to bear the costs of responding to the subpoena. For example, courts have found the following to be significant:

•

$9,000 in expenses for two attorneys, see Williams v. City of Dallas, 178 F.R.D. 103, 113-14 (N.D. Tex. 1998);

•

$20,000 in expenses for non-profit legal group, see Legal Voice v. Stormans, Inc., 738 F.3d 1178, 1181, 1185 (9th Cir. 2013);

•

$200,000 in expenses for the Department of Defense, see Linder v. Calero-Portocarrero, 251 F.3d 1178, 1179-80, 1182-83 (D.C. Cir. 2001).

Not all “significant expenses” must be shifted. Once a court determines that a subpoena imposes “significant expense,” the court must protect the responding party. This does not mean that the court must order the payment of all of the responding party’s expenses. Instead, the court must require the party seeking the discovery to pay “at least enough of the expense to render the remainder ‘non-significant.’” Linder, 251 F.3d at 1184.

State Court

Under the Hawai‘i Rules of Civil Procedure, the shifting of significant expenses is not mandatory. Instead, in response to a motion to quash the subpoena, the court may condition its denial of the motion on the requesting party’s payment of the reasonable cost of producing the requested documents or things. Haw. R. Civ. P. 45(b). In other words, the decision to shift expenses is left to the discretion of the court. Importantly, and unlike under the Federal Rules of Civil Procedure, in state court, to recover the costs of production, the responding party must bring a motion to quash the subpoena at or before the time specified in the subpoena for compliance.

Whether in federal court or state court, in the absence of an agreement between the parties, it is likely that some type of motion will need to be brought to either compel compliance with the subpoena if you are the requesting party, or, seek payment of the costs associated with responding to the subpoena if you are the responding party, which means that attorneys’ fees will be incurred. Parties should weigh the cost to bring such a motion with the cost of compliance with the subpoena. In other words, if you are the requesting party, it might cost you less to just pay the responding party’s expenses than to file a motion to compel. Conversely, if you are the responding party, it might cost you less to eat the costs of responding to the subpoena than to file a motion to quash.

Trisha H.S.T. Akagi (Partner)’s practice focuses on high-stakes litigation matters including bankruptcy proceedings, non-competition covenants, and environmental issues including water resources.

Hawai‘i Supreme Court Issues Landmark Decision Regarding Enforceability of Non-Compete and Non-Solicitation Clauses

By: Paul M. Saito psaito@cades.com

By: Michael R. Soon Fah msoonfah@cades.com

On February 17, 2022, Hawai‘i’s Supreme Court established guidelines for employers to follow to ensure enforceable non-competition and non-solicitation agreements in Hawai‘i. In Prudential Locations, LLC v. Lorna Gagnon and Prestige Realty Group, LLC, SCWC-16-0000890, a real estate sales coach left her employer to form her own real estate brokerage firm and her former employer sued to enforce the employee’s non-compete and non-solicitation agreement. Hawai‘i’s Supreme Court upheld the trial court’s invalidation of the employer’s non-compete agreement because the employer could not provide a legitimate purpose for the restriction. Hawai‘i’s high court also held that a violation of a non-solicitation clause requires the active employee’s initiating contact.

Employer Can Protect Confidential and Proprietary Information

In 2008, Lorna Gagnon moved from New Hampshire to Hawai‘i to work as a sales coach at Oahu-based real estate brokerage firm Prudential Locations. Prior to moving to Hawai‘i, Gagnon owned and operated a franchise of a large American international real estate company.

When Gagnon started her employment with Prudential, she signed a “Confidentiality and Non-Competition Agreement” (“Gagnon’s Agreement” or “Agreement”). The non-compete provision in Gagnon’s Agreement generally prohibited Gagnon from performing any services that were similar to Prudential’s services in the State of Hawai‘i for a period of one year after she left Prudential. Her Agreement, however, permitted Gagnon to work independently or become an employee of an existing real estate brokerage company, but prohibited her from starting her own real estate brokerage firm. Her Agreement also contained a non-solicitation clause, which prohibited Gagnon from soliciting Prudential employees or persons affiliated with Prudential.

In June 2013, Gagnon terminated her employment with Prudential and opened a new real estate brokerage firm in Hawai‘i registered as RE/MAX Prestige Realty Group (“Prestige”). Around the same time, some of Prudential’s real estate agents also left Prudential and joined Gagnon in opening Prestige. Thereafter, Prudential sued Gagnon alleging she breached her Agreement because she established Prestige and solicited Prudential’s agents.

Gagnon Wins at the Trial Court Level

In the trial court proceedings, Prudential filed a motion for summary judgment which asked the court to enforce Gagnon’s Agreement. Prudential argued that its Agreement was tailored to meet its legitimate business interests of (1) protecting its confidential business information, (2) preventing its personnel from forming competing brokerage firms, and (3) preventing former employees from poaching Prudential’s agents. Prudential also argued that its Agreement was reasonable because it did not prohibit

Gagnon from working at an existing real estate firm and only prevented Gagnon from starting a new competing real estate firm. Finally, Prudential argued that Gagnon violated the Agreement’s non-solicitation clause based on allegations that Gagnon had conversations with Prudential’s agents during which she encouraged them to leave Prudential.

Gagnon opposed the motion and filed her own motion for summary judgment arguing that Prudential’s NonCompete Agreement was unenforceable because its sole purpose was to restrict competition. Gagnon pointed to deposition testimony from Prudential’s executives which admitted that the purpose of Prudential’s Agreement was to stop employees from forming competing companies. Furthermore, Gagnon pointed out that the statutory exception to Hawai‘i’s anti-trust restrictions was only available if the employer took steps to protect the confidential information and trade secrets it claims its non-competition agreement was necessary to protect. Gagnon showed that Prudential did not take steps to protect its information because it only required non-compete agreements from some of its sales coaches and other Prudential executives were not bound by any non-compete clause. Since these individuals had similar or more access to the confidential information, Gagnon argued that Prudential could not have a legitimate confidentiality interest that justified the restrictions in her non-compete agreement. Gagnon also argued that she did not violate the non-solicitation clause because Prudential’s agents were independent contractors, and not “employees” or “persons affiliated” with Prudential under the clause.

The trial court agreed with Gagnon, holding that Prudential’s Agreement was invalid and unenforceable. The court highlighted Prudential’s executives’ deposition testimony, which established that the primary purpose of Prudential’s Agreement was to prevent competition. Even if Prudential had a legitimate interest justifying its non-compete provision, the court held the Agreement was unreasonable because it was greater than required to protect Prudential’s interests, it imposed an undue hardship on Gagnon, and any benefit to Prudential was outweighed by the injury to the public in the real estate salesperson market. The trial court also found that the non-solicitation clause was unreasonable and an illegal restraint on trade and commerce under Hawai‘i’s unfair competition law.

A Non-Compete Clause Must Be Ancillary to a Legitimate Purpose

The primary issue before Hawai‘i’s Supreme Court was whether Prudential had a legitimate purpose for its Agreement. The Court was also asked to consider whether the Agreement’s non-compete provision was reasonable.

The Court explained that, under Hawai‘i Revised Statutes, Section 480-4(a), contracts that restrict trade and commerce are generally illegal. To be enforceable, employers must have a “legitimate purpose” for entering into non-compete and non-solicitation agreements. Non-compete and non-solicitation clauses are not enforceable if their sole purpose is to prevent competition. In addition to having a legitimate purpose, non-compete provisions must also be reasonable under the circumstances. A non-compete clause is not reasonable if (1) it is greater than required to protect the employer; (2) it imposes undue hardship on the person restricted; and (3) the benefit of the non-compete provision is outweighed by injury to the public.

Prudential’s Not So Confidential Business Information

The Court held that Prudential’s non-compete provision was unenforceable and rejected Prudential’s two proffered purposes for the clause. The Court agreed with the trial court, finding that Prudential’s actions were inconsistent with its first claim that its protected information was confidential or trade secrets. Prudential argued that the non-compete clause was necessary to prevent Gagnon from using Prudential’s proprietary information that Gagnon had obtained as a sales coach. However, the Court found that while many Prudential employees had access to Prudential’s claimed confidential information, not all Prudential employees and managers had signed similar Confidentiality and Non-compete Agreements. Furthermore, the Court observed that the non-compete clause did not prohibit Gagnon from working for an existing Hawai‘i real estate firm where her use and disclosure of Prudential’s allegedly confidential information was unrestricted.

Relatedly, the Court noted that this was not a case where Prudential was asserting any trade secrets violations. The Court cited Hawai‘i’s Uniform Trade Secrets Act, which defines a “trade secret” as information that (1) derives independent economic value from not being generally known or readily ascertainable by those who can obtain economic value from its disclosure or use and (2) is subject to reasonable efforts to maintain its secrecy.

The Court rejected Prudential’s second argument, that the Agreement was necessary to prevent competition, finding that Prudential’s purpose to prevent competition could not be a legitimate purpose because Hawai‘i’s antitrust laws prevent restrictions on trade and commerce. Because the sole purpose of Prudential’s Agreement was to restrict competition, the Agreement had no legitimate purpose that allowed an exception from Hawai‘i’s anti-trust statute. Therefore, it was not enforceable under Hawai‘i law.

Solicitation Requires Active Initiation of Contact

The Court then turned to the Agreement’s nonsolicitation provision. Like non-compete provisions, solicitation clauses are disfavored restraints on trade or commerce that require a legitimate ancillary purpose to be enforceable. In this regard, the Court noted that workforce stability and maintaining customer relationships can be legitimate ancillary interests for non-solicitation agreements.

The Court then examined whether Gagnon had actually violated Prudential’s non-solicitation clause and established a new test. As a matter of first impression, the Court held that a violation of a non-solicitation agreement requires the perpetrator to have actively initiated contact with the employee or customer. Mere encouragement was not enough to establish a violation of a non-solicitation clause because employees may be encouraged by family and friends to switch employers for any number of reasons. The Court concluded that Gagnon, except possibly for one person, did not solicit former Prudential employees who left to join her at Prestige because there was no evidence that Gagnon actively initiated contact with those employees. For the one possibly solicited employee, the record disclosed

that Gagnon invited the employee to lunch where Gagnon told the employee about her plans to open her new real estate brokerage firm and expressed interest to the employee on possibly becoming her partner. The Court, therefore, sent the case back to the circuit court to decide the sole remaining issue of whether Gagnon violated the non-solicitation agreement with respect to this employee.

Bottom Line

Hawai‘i’s Supreme Court’s Gagnon decision provides several key lessons for employers who ask their employees to sign non-compete and non-solicitation agreements. First, employers must have and clearly state the legitimate purpose for their non-compete and non-solicitation agreements. Second, employers must ensure they implement consistent policies and procedures to protect confidential information. Here, Prudential failed to provide a legitimate reason for its non-compete provision in the Agreement and Prudential’s executives could not explain the legitimate purpose through their testimony. Those factors led the courts to find that the managers did not understand the standards for when a non-compete clause could be enforceable. Furthermore, although Prudential’s Agreement contained sections describing its confidential and proprietary information, Prudential failed to specify in the Agreement that the purpose of the non-compete provision was to prevent former employees from using Prudential’s confidential information to compete with the company in an unfair manner.

If an employer’s purpose for a non-compete clause is to protect confidential information, the employer should ensure that it subjects all employees and managers with access to confidential information to a non-compete clause, i.e., takes steps to protect its confidential information. Moreover, employers should carefully evaluate whether their non-compete clause actually protects the company from former employees using its confidential information. For example, the Gagnon court observed that the Agreement did not prohibit the employee from working for an existing company and using the company’s information in that capacity after she left Prudential.

Lastly, employers should understand that a violation of a non-solicitation clause requires evidence that the perpetrator actively initiated contact with an individual. Merely encouraging an employee or customer to switch companies is not enough. Employers should carefully document all communications by any former employee to existing employees or clients and ensure they have actual proof of solicitations before seeking to enforce a non-solicitation agreement.

Prudential Locations, LLC v. Gagnon, No. SCWC-160000890, 2022 WL 482601 (Haw. Feb. 17, 2022)

Paul M. Saito (Partner) is in the firm’s Litigation Department and represents business owners and managers on employment law issues.

Michael R. Soon Fah (Associate) has a practice focusing on all types of civil litigation, particularly in the areas of commercial litigation, construction law, and landlord-tenant disputes.

An (Informal) Opinion on Legal Opinions

A brief look behind the curtain of the Hawai‘i legal opinion practice at Cades Schutte . . . .

By: Geoffrey T. Mukae gmukae@cades.com

By: Nathan C. Yang nyang@cades.com

While judicial opinions are familiar to many, another type of legal opinion, given by law firms, is a niche area of transactional legal practice, usually appearing in the debt or equity financing (both public and private offerings) context, with rare application in M&A (mergers and acquisitions) and other corporate practices. In the transactional context, a legal opinion, or colloquially, an “opinion,” combines analyses of facts and law to present certain legal conclusions regarding specific aspects of a transaction. Such conclusions are confined or limited by certain assumptions, exclusions, and qualifications. Predominantly for the comfort and due diligence of the requesting party, such as a lender in a financing transaction, a legal opinion is given in the form of a letter from the law firm representing the borrower and addressed to the lender. Where required, legal opinions are a prerequisite to closing a transaction. However, depending on their role in a transaction, most non-attorney parties, and even certain participating attorneys, are often not part of the opinion-giving process because opinion counsel will work directly with each other on the opinion. In this feature, we pull back the curtain a little to offer insight into our firm’s transactional legal opinion practice, observations on broader state trends, and practical tips for facilitating the preparation of legal opinions.

As the largest full-service Hawai‘i law firm, Cades Schutte has the privilege of working on transactions of all varieties, a number of which have a legal opinion component. Despite that only a handful of publicly listed companies operate in Hawai‘i, Cades Schutte has been asked to provide opinions relating to bond offerings or public company matters under the Securities Act of 1933. Often, we are also asked to opine on matters relating to financings of a non-Hawai‘i parent company where the wholly-owned local subsidiary is a guarantor or pledgor of certain assets in support of its parent’s financing. And most commonly, we provide Hawai‘i legal opinion support for real estate financings where the mortgagor, the property mortgaged as collateral, or both, are located in Hawai‘i. In addition to giving legal

opinions, we regularly review and negotiate opinions on behalf of clients, such as lenders, on the types of transactions mentioned above, with a focus on real estate and corporate financings.

Two canons of established opinion literature serve as the basis for the opinion letters issued or reviewed by our firm. The first canon is the Real Estate Finance Opinion Report, which was prepared by an American Bar Association joint drafting committee in 2012 (ABA Opinion Report). The second canon is the Local Counsel Opinion Letters in Real Estate Financing Transactions (2016 Local Counsel Report), which supplemented the ABA Opinion Report. Both the ABA Opinion Report and the 2016 Local Counsel Report comment on and provide forms and explanations of customary opinions on the authorization of a borrower or guarantor entity to enter into a transaction, the enforceability of the transaction documents against such entity, and the perfection of liens on collateral given by such entity, among others. The 2016 Local Counsel Report provides language and guidance with respect to additional opinions applicable to local counsel. Adhering to these two reports allows us to deliver and negotiate legal opinions that are consistent with established practice and facilitate the closing of transactions.

At many Hawai‘i firms, including Cades Schutte, the legal opinion practice is a collaborative, though firm-specific, one. Each firm typically has its own “Opinion Committee,” whether formal or informal, that is comprised of one or more attorneys with specialized expertise on legal opinions who work with their transactional colleagues when deals require a legal opinion. We have noticed that, notwithstanding the specific guidance and language of the ABA Opinion Report and the 2016 Local Counsel Report, many Hawai‘i firms continue to use their own forms of opinion letters. While the assumptions, opinions, and limitations contained in most opinions we have received echo the language of the Reports or an alternative approach called the Legal Opinion Accord the process of giving and reviewing legal opinions remains more art than mathematical proof. Experienced opinion counsel can provide much assistance in negotiating the opinion with opposing counsel and guiding this aspect of the deal to completion.

The opinions that are appropriate for a given transaction are dictated by, among other factors, the parties and the underlying transaction’s structure and governing law. Lenders in transactions with unusual collateral, high dollar values, or complex borrower entity structures often require legal opinions. In financing deals where, for example, all of the financing documents may be governed by non-Hawai‘i law (e.g., New York law), or the entities to be opined on are organized in a state other than Hawai‘i (e.g., Delaware), the opinions that local Hawai‘i counsel can provide are limited, since Hawai‘i counsel is generally not qualified to practice in other states such as New York or Delaware. The

“Golden Rule” of legal opinions, paraphrased candidly, is: if you wouldn’t give it, don’t ask for it.

Finally, the preparation of a legal opinion involves detailed review and requests for documents and information from clients. The following suggestions on document and record maintenance for borrower and guarantor entities can help clients save time and cost on opinions:

• Keep all borrower and guarantor entities up-to-date in annual filings and in “good standing” with the Hawai‘i Department of Commerce and Consumer Affairs;

• Maintain all organizational documents (e.g., Articles of Incorporation and Bylaws for Hawai‘i corporations, and Articles of Organization and Operating Agreement for Hawai‘i LLCs, etc.), including all exhibits and executed signature pages, in an accessible, assembled, and complete format;

• Ensure that all stock (or other equity) records and certificates (if any) of any entities that will be pledging ownership as security for a financing are available and in good order; and

• To the extent possible, identify the legal opinion requirements early in a transaction so that opinion counsel can assist with meeting the closing deadline.

Geoffrey T. Mukae (Of Counsel) is a member of the Corporate and Business Law Practice Group and has been practicing law for more than 20 years as a corporate and business attorney.

Nathan C. Yang (Associate) collaborates with clients to develop creative and cost-effective solutions on complex finance, corporate, real estate, and international legal matters, particularly in the area of affordable housing finance.

Recent Wins and Developments

20 for the Next 20

Trever K. Asam was selected to Hawaii Business Magazine’s 20 for the Next 20 List. Each year, Hawaii Business Magazine publishes a list of 20 individuals in the state of Hawai‘i who it believes will have an important and positive impact on Hawai‘i over the next 20 years.

40 Under 40

Pohai Nu‘uhiwa Campbell was recognized by Pacific Business News as an honoree for its selective 40 Under 40 Awards this year. The 40 Under 40 Awards recognize young professionals who are making a difference in the workplace and shaping the future of our community.

Manoa Marquee Honoree

Jeffrey S. Portnoy was honored at Manoa Valley Theatre (MVT)’s annual Manoa Marquee this year as a true patron of the arts and for serving as an advocate of MVT’s mission. Jeff has been President of MVT’s Board of Directors for over 25 years and has served on its Board since 1976.

HSBA Leadership Institute

Jarrett A. Dempsey was selected as a fellow for the 14th Annual Leadership Institute of the Hawaii State Bar Association (HSBA). The HSBA Leadership Institute is an eight-month program designed to identify and develop leaders in various sectors of Hawai‘i’s legal community. The selection process is competitive, only 15 individuals are selected for each class based on resume submissions and responses to the program application.

2022 Chambers & Partners USA Guide

Cades Schutte was recognized in a record number of eight practice areas in Hawai‘i in the 2022 Chambers & Partners USA Guide. The firm was newly recognized in the areas of Employee Benefits & Executive Compensation and Environment, and continues to be ranked in the areas of Bankruptcy/ Restructuring, Corporate/Commercial, Labor & Employment, Litigation: General Commercial, Real Estate, and Tax.

In addition, 21 Cades Schutte attorneys were recognized as top lawyers: Trever K. Asam, David F. E. Banks, Calvert G. Chipchase, Roger W. Fonseca, Vito Galati, C. Michael Heihre, Cheryl L.M.T. Itagaki, Amanda M. Jones, Grace Nihei Kido, Rick Kiefer, Kelly G. LaPorte, Michele S. Loudermilk, John R. Love, Chris S. Mashiba, Cary S. Matsushige, Nathan T. Okubo, Jeffrey S. Portnoy, Marc E. Rousseau, Paul M. Saito, E. Gunner Schull, and Theodore D.C. Young.

2022 Chambers & Partners High Net Worth Guide

Cades Schutte was once again recognized as a Band 1 firm in the Private Wealth Law category in the 2023 Chambers & Partners High Net Worth Guide. In addition, Rhonda L. Griswold was once again recognized as Band 1 in this practice, and partners Summer G. Shelverton and Daniel C. Vermillion were ranked in the Up and Coming category.

2023 Best Lawyers® and Best Lawyers: Ones to Watch

59 Cades Schutte attorneys were recognized on the 2023 Best Lawyers® and Best Lawyers: Ones to Watch Lists. In addition, Calvert G. Chipchase (Eminent Domain and Condemnation Law; Land Use and Zoning Law), Christopher T. Goodin (Litigation – Real Estate), Amanda M. Jones (Employment Law – Management), Chris M. Mashiba (Litigation and Controversy – Tax), Craig I. Nakanishi (Energy Law), and Ryan M. Wilson (Tax Law) were named as 2023 Best Lawyers® “Lawyer of the Year” in the state of Hawai‘i.

2022 IFLR1000®

Cades Schutte was ranked as a Tier 1 firm in M&A and Real Estate in Hawai‘i, and Justin M. Sugiyama has newly been recognized as a “Highly Regarded” Leading Lawyer in Real Estate.

2022 Super Lawyers®

20 Cades Schutte attorneys were recognized on the 2022 Super Lawyers® and Rising Stars Lists in 29 practice areas.

Pro Bono

Cades Schutte attorneys supported and staffed the Honolulu Access to Justice Room (ATJR) in May 2022, providing pro bono legal advice through the Legal Aid Society of Hawaii. Cades Schutte has sponsored the ATJR for a month per year for ten consecutive years since its inception in 2012. Christine E. Nowland acted as coordinator. Trever K. Asam, Ryan M. Hamaguchi, Trisha L. Nishimoto, Kristin S. Shigemura, Keith Y. Yamada, Lindsay N. McAneeley, Ellen R. Ashford, Pōhai Nu’uhiwa Campbell, Mallory T. Martin, Reyn S. P. Ono, W. Davis Prendergast, Michael R. Soon Fah, and Troy Young volunteered.

Cades Schutte attorneys staffed the Hawaii State Bar Association Legal Lines This program runs every Wednesday evening, with attorneys answering a telephone hotline and providing free legal information to the public (not legal advice). Mallory T. Martin served as the organizer, and attorneys Pōhai Nu‘uhiwa Campbell, Jarrett A. Dempsey, Sachi E. Hiatt, Bryce M. Nakamura, Molly A. Olds, Reyn S. P. Ono, W. Davis Prendergast, Nicole K. C. Yamane, Nathan C. Yang, Janine M. Yim, and Michael Soon Fah participated.

On the Board

Cheryl L.M.T. Itagaki was approved as one of Hawaii Employers Council (HEC)’s Board of Governors beginning in 2022 for a three-year term. The HEC is an employer association that assists businesses with employment law guidance, human resources advice, management training, research and compensation services, labor relations support, and collective bargaining agreement negotiations.

John R. Love was reaffirmed as a Commissioner for the Hawai‘i Real Estate Commission. The Real Estate Commission is made up of nine members appointed by the Governor and confirmed by the Senate. It is one of 25 boards and commissions administratively attached to the Department of Commerce and Consumer Affairs through the Professional and Vocational Licensing Division. He completed his first four-year term this year, and his current four-year term started July 1, 2022.

Cades Schutte Building

1000 Bishop Street, Suite 1200 Honolulu, Hawai‘i 96813

Legal counsel that helps our clients reach the highest summit