Business Record - Iowa Biz

Your "Corporate Counsel": Part 1- Finding the one

Large companies reach a benchmark at which the company adds a full-time lawyer. But should you have an attorney before you get “big?" If so, how do you find that attorney? This blog addresses finding the best attorney for your business. My next blogs address:

• Responsibilities of your business attorney before start up?

• Responsibilities of your business attorney on an ongoing basis?

• How to determine if your attorney is still the best for your business?

If you do not think that you need an attorney, talk to a successful CEO in a similar field. Ask that CEO if the business has an attorney and what that attorney does. If you believe that you need an attorney, the following steps may lead you to the right attorney for your business:

1.)    Look for firms or attorneys who represent similar businesses. Years ago, I represented a friend’s bar. When I walked in, the bartender would introduce me as the “bar lawyer.” The mixed compliment aside, within two years I obtained four bars as clients. I got to know the system and my clients benefited from this knowledge. I have a friend who is a “babysitter lawyer.” She knows exactly what it takes to set up a child care facility and keep it moving. Attorneys who represent multiple restaurants understand the compliance and HR issues that are unique to food service. Attorneys who represent multiple ag producers know environmental law and the changing legal landscape facing farmers. Attorneys who represent multiple cosmetologists are familiar with the applicable Iowa regulations. 

2.)    Get an opinion from your tax advisor. You want your "trusted advisors" to work well together.

3.)    Interview at least two attorneys. You would not hire a receptionist without an interview? You want a lawyer who is with your business for the long haul.

When interviewing a potential attorney, look for someone who is genuinely interested in what you do and wants to help you reach your objectives. An attorney does not have to ride to represent a motorcycle shop, but that attorney better know that a Hog is not a Kawasaki.

- Christine Branstad

How to protect your business from an employee background check

Image by ElvertBarnes via Flickr

President Obama’s proposed American Jobs Act purports to offer a $4000 tax credit for hiring a worker that has been unemployed for more than six months.  

Hiring someone who has been unemployed comes with obvious questions. When sifting the unfortunate from the incompetent, savvy employers use available tools to complete the profile of a potential hire.

What can you legally find out? Online research includes: social media, criminal history, and paid sources.  I assume each online reader is proficient enough with Google, Bing or at least lycos to run an internet search; therefore, this blog focuses on Iowa criminal searches and credit checks.

One simple preliminary source is Iowa Courts Online which compiles case dockets for Iowa legal matters. As stated in a previous blog, docket information for criminal charges remains on the Iowa Courts Online website, even if the charges are subsequently dismissed.

For certified confirmation of charges and disposition, the Iowa Department of Criminal Investigations (“DCI”) certifies search requests for a fee of $15. Iowa Code provides the Department of Criminal Investigation “may provide copies . . . [of] criminal history data to . . . (1) a person . . . upon written application[.]” The available “criminal history data” includes: arrests, convictions, the disposition of charges, correctional institution information, and any adjudications.

Note, employers do not need signed authorization for a search by the Iowa DCI, but, without an authorizing signature, an employer may not receive information about arrests more that 18 months old if the arrests do not have a final disposition. Additionally, without authorization, employers will not receive information about deferred judgments.  

Employers increasingly rely on credit checks. Credit checks require signed releases. More importantly, employers must comply with specific requirements if adverse action is taken based on the candidate’s credit score. If a potential employer uses a credit score in the hiring process, the employer must disclose:

• that a credit score was used
• information on the credit score
• the credit score
• up to four key adverse factors in the score
• the agency that provided the score

If an adverse hiring decision is made, the employee must receive:

• a copy of the report
• the name of the reporting agency
• the guidelines on disputing the report

As you consider taking advantage of any incentive to hire the previously unemployed, be aware that checking criminal history and credit comes with restrictions. Make sure that your job posting clearly requires consent to these checks and that you get written authorization from the candidate. If you find anything adverse, you will save time. If you get the green light, you may find a great employee in time for an incentive under the American Jobs Act. 

- Christine Branstad 

Business blockbusters from the Iowa Supreme Court

My last post discussed Summer Reads for Iowa Businesses. 

Starting today, viewers may again watch arguments in front of the Iowa Supreme Court. In case you missed reading Iowa Supreme Court cases this summer, this post reviews some of the summer’s business cases from the Iowa Supreme Court.

Iowa Supreme Court decisions are readable and a few decisions are released each week. If you skip the criminal and divorce cases (which are fascinating but hopefully not necessary for your business), a few business cases might help you spot potential problems and help your business steer clear of potential legal situations.

This year not only were the Green Hornet and Green Lantern in theatres, we also saw State Office v. Polk County Court and State Office v. Linn County Court.

STATE COURT ADMINISTRATOR, vs. IOWA DISTRICT COURT FOR LINN COUNTY, DEPARTMENT OF PUBLIC SAFETY, DIVISION OF CRIMINAL INVESTIGATION, JUDICIAL BRANCH, STATE COURT ADMINISTRATOR and POLK COUNTY CLERK OF COURT, vs. IOWA DISTRICT COURT FOR POLK COUNTY,

In both cases individuals were charged with criminal offenses which were later dismissed. Though the charges were dropped, certain information remained on the Iowa Courts website. The individuals attempted to expunge their records, including those on the Iowa Court’s website. Read the cases to understand the epic battle between “public records” and “due process.”

At present, docket information remains available to the public regardless of the outcome of a criminal charge. Watch this for sequels by the court or the legislature . . .

ANNETT HOLDINGS, INC., vs. KUM & GO, L.C.,

An employee of a trucking company was allowed to receive cash from credit card transactions at a truck service station, purportedly for fuel purchases by other trucking company employees. The pattern of transactions was noticed by management. The employee was convicted of theft and ordered to pay $298,524.79 in restitution. The trucking company could not recover from the credit card transaction company because of a written agreement that company cards could be used for purchases and cash advances, that the trucking company was responsible for fraudulent use of the cards, and that the trucking company would hold the transaction company harmless for the acts of the trucking company employees. The trucking company had no such agreement with Kum and Go and sued, asserting Kum and Go was negligent in allowing the trucking company employee to receive the cash. The court determined that the trucking company’s recovery was barred due to the economic loss rule, which “. . . bars recovery in negligence when the plaintiff has suffered only economic loss.” Also discussed was the “contractual economic loss rule” which “bars tort claims for economic loss, on the theory that tort law should not supplant a consensual network of contracts.” For an alternate ending, read the dissent of two justices.

JOHN PAVONE and SIGNATURE MANAGEMENT GROUP, L.L.C., vs. GERALD M. KIRKE and WILD ROSE ENTERTAINMENT, L.L.C.,

In Pavone v. Kirke, the parties entered into an agreement in which Pavone and his company, Signature Management Group, LLC, would provide consulting services in obtaining gaming licenses and casino management services to defendants. In applications to the Iowa Racing and Gaming Commission (IRGC), it was stated that Signature Management Group would manage casinos for the defendants. Over time, the parties renegotiated their agreement and defendants hired an operations consultant. The relationship fell apart and disagreements ensued about management fees stated in the agreement versus those offered by the operations consultant. After the IRGC was informed of the breakdown in negotiations, it awarded a gaming license to defendants. Defendants then terminated their agreement with Signature Management Group and agreed to work with the operations consultant. Pavone sued, and a jury found the defendants breached the original agreement pertaining to the management agreement between the parties and a first look option and good faith negotiation obligation for future opportunities, and awarded $10 million to Pavone. The Iowa Supreme Court reviews many business issues and lends insight into what can go wrong in dealings.

MARK PEAK, vs. ELLIS ADAMS and RACHEL ADAMS,

If the parties weren’t real people, this would almost be a comedy.

Mark Peak broke his leg while helping Ellis and Rachel Adams move furniture with a U-Haul truck. During the process, Peak sustained substantial damage to his leg and incurred $50,000 in medical bills. In negotiating settlement with U-Haul, Peak’s attorney received a “Release of All Claims” to be signed in exchange for U-Haul’s $20,000 settlement. Mistakenly, the release named U-Haul, U-Haul’s insurance company and Ellis Adams as parties discharged. The mistake was not caught by Peak’s attorney nor Peak and the release was signed. The Adams’ insurance company then refused to pay on the grounds that Ellis Adams had been discharged in the signed release.

The plot twists and turns as the district court finds that the release was unambiguous, but the Iowa Court of Appeals reverses because of the surrounding circumstances and the parties’ intent in signing. In the final act, the Iowa Supreme Court states “enforcement [of the release] is governed by principles of contract law” and “it is well settled that failure to read a contract before signing it will not invalidate the contract.” “In the construction written contracts . . . the intent of the parties must control . . . [as] determined by what the contract itself says.” The court declined “[t]o allow a party to avoid a signed release based on a unilateral mistake,” and affirmed the district court’s judgment pertaining to Ellis Adams; however, the court reversed the district court’s judgment pertaining to Rachel Adams as she was unnamed in both the U-Haul rental agreement and the release signed by Peak.

After this chilling read . . .  you won’t sign without reading again.

Check back frequently for additional installments from the Iowa Supreme Court, and remember, light reading now may save you a trip to the litigator later.

-Christine Branstad

 

Summer reads for Iowa businesses

Summer Reading for business leaders often includes motivational books. Classics include:

Good to Great - Jim Collins 

Getting to Yes - Roger Fisher and William Ury   

How to Win Friends and Influence People - Dale Carnegie  

If you read my blog, you are likely a family member or recognize the need to “brush up” on the law before your business is in trouble. With so many topics of interest for savvy business people to cover, I have developed my list of “Summer Reads for real Businesses in Iowa.”

Summer Reads for Businesses in Iowa:

Cyber Law: A Legal Arsenal for Online Business -  Brett J. Trout

Cyber Law offers a guide to online business, including navigating pitfalls Cyber Law effectively translates “online geek” to “everyday business owner.” Unlike, the rest of my list, this book is actually fun to read.

The Human Resources Manual of a large organization or state agency.

You can get one from a business associate or buy an up to date version. As you read the manual, ask yourself why each provision is in the manual and if your business (no matter how small) may use some of those ideas.

Your own Human Resources manual.

Each business owner should be the expert in the business’s human resources manual. If you don’t understand it, talk with your lawyer about re-writing it. No business owner ever won a case by saying “I did not understand my own manual.”

The “standard” contracts used by your business. 

If you don’t understand it, talk with your lawyer about re-writing it. No business owner ever won a case by saying “I did not understand my own contract.”

The actual regulations of your industry (and then the website that explains the regulations that you just read). 

For this I recommend an iPad, Kindle or reader. State and federal regulations are free to the public and published in the Code of Federal Regulations (“CFR”). The US Government site provides a keyword search.

Some agencies provide websites with quick explanations of their regulations as well as FAQ pages. Additionally, many agencies publish updates on their websites, of which a complete listing is available here.

Iowa also publishes administrative regulations in the Iowa Administrative Code, available from the Iowa General Assembly’s website. Familiarizing oneself with these resources can not only consume numerous hours of free time, but also allow a quick answer to be found when issues do arise.

Iowa Supreme Court cases (just the business cases).

The Iowa Supreme Court regularly releases opinions which touch on business, as does the Iowa Court of Appeals. The Iowa Supreme Court and Iowa Court of Appeal opinions are well reasoned, concise, and usually enjoyable to read. More often than not I find my weekly review of recent opinions has bearing on a client’s matter or a personal interest. My next blog will be about recent Iowa Cases.

The Iowa UCC.

Iowa has adopted the Uniform Commercial Code (“UCC”), which governs myriad aspects of business, from creation of a contract (see Article 1) to sales of goods (see Article 2) to transactions involving security interests (see Article 9). The UCC is no light afternoon read. An entire law school course may only cover one Article of the UCC; though this should not dissuade you from reading it. Knowing the actual language of the law will help any business leader to ask the right questions when the next contract is negotiated.

Anything your tax advisor tells you to read.

Finally, a bit of a reminder that professionals are here to help you. Often, articles or other materials that are “suggested” for reading could end up saving a business (and any professionals employed by that business) time. Whether it is keeping receipts or ensuring a document is signed and notarized, advice from professionals is meant to aid a business. My advice is to take some time and read up on a topic which affects your business. Not only will you be more knowledgeable, you may just head off a “situation” before it arises, or prevent one from growing exponentially.

- Christine Branstad

Immigration for Businesses

Image by doug88888 via Flickr

You have a non-U.S. citizen working at your business, so get a green card for him or her.

End of blog post.

Wait.

It isn't that easy. But you knew that. Numerous factors influence immigration status:

-          Is the immigrant in the United States for the first time?

-          Is the immigrant from India, Canada or Nigeria?

-          Is the person an unskilled owner, part owner of the company or an artist?

The U.S. government provides information for businesses regarding non-U.S. citizen workers, but immigration is complex. Many businesses find the only way to navigate the field is to get a lawyer who specializes in immigration.

There are also resources available online to gain an understanding of the process of working with an immigrant.

Whether your business has an immigration attorney on speed-dial or is wading into the immigration pool without counsel, there are “dos” and “don’ts."

Don't:

-   Don't believe there is such a thing as an “easy guide”. The first reliable Immigration guide that I found was over 400 pages long. Do not believe a pamphlet, or website, that explains immigration any more than you would believe a pamphlet that explains world history.

- Don't think a current legal immigrant is an expert. Immigration cases have many moving parts. Listening to a person who has immigrated successfully can be like getting advice on starting a pet shop from someone who runs a successful restaurant.

-   Don't ignore warning signs. Hiring an immigrant as an independent contractor to “keep your distance” may garner trouble. Businesses that have a reason to believe a new hire is using a fictitious name or social security number probably have a duty to investigate.

-  Don’t use ignorance as an excuse. Just as the state trooper will not allow ignorance of a speed limit as an excuse for speeding, government agencies may be less than willing to accept ignorance of a worker’s immigration status as an excuse from a business. And remember, it may not only be the illegal worker in legal trouble.

Do:

-  Do fix problems that you already have. Often, government agencies look more favorably on - and work better with businesses that engage in - self-reporting than on those “caught in the act.”

- Do document they way you insure you only employ legal hires. Train your human resources personnel and provide for an audit of HR files. The easiest way to execute the plan is to have a checklist in each file.

- Do make a plan before it is too late. Know the right steps to take before your worker leaves his or her country of origin can save, money, time, and hassle - also known as dealing with “red tape."

Christine Branstad

 

I Spy [an Employee on Facebook]

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As discussed in my previous blog, the electronic age provides ample opportunities for publishing mistakes. Increased technology also provides additional opportunities to monitor employees to record their missteps. When contemplating employee monitoring, employers must address three questions:

1)    What do you have the technical ability to monitor?

2)    What may be legally monitored?

3)    What should you monitor?

 

Ability is Limitless:

With technology, employers have the ability to monitor everything but employees’ thoughts. With the full spectrum of gadgets, an employer can tell how fast an employee drove to work, with whom they communicated, what information they relayed, and where they went. Video and audio technologies provide the ability to track every word and facial expression made in the office. Perhaps employees' thoughts can be monitored.

Technology has a role in the workplace. Monitoring employees is on the rise. One study indicates that:

Two out of three employers review internet usage of employees;

More than fifty percent of employers use website blocking;

Emails and/or phone reviews occur at more than 25% of workplaces.

 

Legal?:

Rules are not easily defined. Before you take action: talk with your HR or internet lawyer; have a specific plan; and follow that plan.

Examples of restrictions to employee monitoring include the Electronic Communication Privacy Act of 1986, which bars intentional interception of wire, oral, or electronic communication, or unauthorized access of stored information (anyone who receives email from me sees a disclaimer citing the statute).

In Iowa, it is a misdemeanor to listen to, record, or intercept a conversation or communication without proper authorization.

The Fourth Amendment to the United States Constitution, which guarantees "[t]he right of the people to be secure in their persons, houses, papers, and effects, against unreasonable searches and seizures,” has been applied to monitoring by government employers.

Exceptions to privacy laws may allow employers to monitor business-related communications under cerrtain circumstances. One case held that an employee did not have a reasonable expectation of privacy regarding information stored on a work computer in a folder labeled “personal” and password protected. Another case found no reasonable expectation of privacy in business email, even when the company stated that emails were not monitored.  Once the limits are ascertained, the questions is “should you monitor?”

 

Monitoring Employees has Pitfalls: 

The benefits of monitoring employees are easy to ascertain. Employers get better data to determine if employees are using time appropriately and if they are following the rules. Employers may also determine if employees are sending illicit photographs or messages by tweet or email.

The downside of monitoring is also easy to ascertain. Monitoring can be expensive. Employee morale may be damaged by feeling that trust is breached, and improper monitoring may lead to liability or PR gaffes.

If you decide to use technology to monitor or limit employees, the following steps may be helpful:

-          Develop a computer policy for:

• Permissible usage (no personal, no personal use during working hours, no restrictions, etc.).
• Email usage (no personal emails, no profanity, no personal emails during company hours, etc.).
• Search usage (personal sites are unlimited, discouraged, restricted, banned, blocked, etc.).

-          Develop a phone usage and monitoring policy.

-          Delineate WHO does the monitoring, as well as when and how.

-          Determine how the monitor responds to different types of violations. Some violations may merit a warning. Some may merit a report to law enforcement.

-          Share the policy with employees (and determine if you need consent to the policy).

-          STICK WITH YOUR POLICY!

-          Train employees and plan to refresh training.

For many businesses, the simplest answer is to take the steps one at a time. First, just set the policy. See if it works. Ask employees if it is difficult to abide the policy. Once you are sure you have the right policy, determine if you need to take steps to enforce the policy. Finally, always ask whether a monitoring policy is really needed. Sometimes it is best not to know how the sausage is made.

- Christine Branstad

 

Avoid Risk. Behave as if You are on TV (or YouTube or Twitter . . .)

Image by Tony the Misfit via Flicker

A recent New York Times article addressed the Economics of Men Behaving Badly. Bad behavior has potential personal and business costs. In this technological age, the risks are heightened.

Historically, liability for bad behavior could be hidden or limited by plausible deniability, as many accusations of bad behavior turned into a “he said she said” debate. Now, a moderately priced cell phone offers a plethora of methods to capture bad behavior for mass distribution. Any of the following can become 'exhibit 1':

• Social media content (Twitter, Facebook, Youtube…)
• Emails
• Voicemails
• Photos
• Videos (surveillance or just some kid with a cell phone)
• Audio recordings
• Texts

Bad behavior resulting in liability (and embarrassment) can occur at all levels of a business. Transmission of an illicit photo may be harassment. Intimate emails on the corporate PDA could be misuse of company property. Either could be a breach of contract.

Customer service gaffes are abundant on the web (Warning: Explicit language).  A captured gaffe may be a PR snag, but a video may be prima facie evidence of a breach of contract or even a criminal act. Violations of sanitary requirements are the subject of stings. Work conditions are broadcast. Fired by Facebook is now a reality (and has at least one Facebook page).  Anti-business Facebook pages can have thousands of “friends.”   

Bad behavior is fodder for amateur journalists and competitors. Diligence and planning may stave off future issues resulting from bad behavior. To avoid a personal injury action, assume your entire business is on a surveillance camera. To avoid a sexual harassment suit, assume each conversation is recorded. To avoid a charge of misappropriation of funds or breach of fiduciary duty action, assume that each transaction is recorded and shared. To avoid administrative penalties, assume that your business activities will be audited. To avoid penalties for unsafe work conditions, assume that the next visitor or employee is using a camera to record the conditions.   

An unfortunate technological reality is that computers and cell phones transform rumors into allegations into facts. What can you do?

• Assume you are always being watched.
• Live accordingly.
• Encourage your employees to do the same.
• Every time you consider questionable behavior, weigh the benefits.
• Coach your employees. Sit down. Show them videos of ‘caught’ behavior.
• Make a plan for how technology will  help you benchmark your business aspirations for safety, compliance, customer service, and integrity.

In 1933, U.S. Supreme Court Justice Louis D. Brandeis stated, “Publicity is justly commended as a remedy for social and industrial diseases. Sunlight is said to be the best of disinfectants.” The Digital Age has brought new methods for “sunlight” to peer into a business. The best path to avoiding an embarrassing discovery is to have nothing to hide.

In my next blog . . . tips if you decide to monitor your employees.

- Christine Branstad

 

 

Changing the nametag: Independent Contractors v. Employees

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If you are considering changing an employee into an independent contractor, wait.

First, weigh the actual benefits. Ask your lawyer, your liability insurance carrier and your CPA.

Second, determine what role the person really fills. Pretending an employee is an independent contractor may cause legal hassles.

Most businesses explore how to cut overhead and maintain productivity. I am no business process expert, but I know that numerous companies explore achieving “cost efficiency” by changing a worker’s status from employee to independent contractor.

The change should not be taken lightly. Employees and independent contractors may occupy the same amount of desk space at your business, but they differ in control of work, risk of loss and tax liability.

Who controls the work may determine whether a worker is an employee or independent contractor. Employees tend to have work directed through a hierarchy. For example, employees may have set arrival and departure times, breaks and vacations. Employers may discipline or terminate an employee for unsatisfactory performance. To the contrary, independent contractors typically enter contracts regarding the expected work product, control their own work and simply provide the deliverable work product. Independent contractors often set their work hours, breaks and vacations, subject only to the deadline of the work product.

The employer carries the risk of loss regard an employee’s work product. If the employee performs poorly, the employer suffers. Conversely, independent contractors carry the risk of loss regarding their work product. Depending on the terms of the independent contractor agreement, the employer may terminate a contract with an independent contractor for poor performance, and may even bring legal action based on breach of contract.

The Iowa Department of Revenue and the Internal Revenue Service (IRS) also have an interest in how a business classifies its workers because of tax liability. Employers withhold and pay taxes to the federal and state government regarding earnings, social security and certain other benefits. Federal and state governments also offer certain rights and protections to employees versus independent contractors (See, for example, Title VII of The Civil Rights Act of 1964).

Thus, governments have an interest in both protecting workers and collecting tax revenues. Given the budgetary issues of late in the federal and state governments, there have been increased audits focused on misclassification of workers as independent contractors. When found, the IRS may reclassify workers as employees and assess back-taxes as well as interest and penalties. Iowa also charges fines, back-taxes and penalties for misclassification of workers. These accumulate quickly and can be taxing (pun intended) for businesses when hit.

Resources are available to assist businesses in determining whether a worker is an employee or an independent contractor. The IRS provides tips for small businesses and allows questions to be submitted on Form SS-8 for worker status determination. The Iowa Department of Revenue also provides a website to guide in this determination. Finally, the IRS has a guide and Iowa Workforce Development has a guide for determining correct worker status determinations.

A rose by any other name would smell as sweet.-Shakespeare

An Employee by any other name may stink.-IRS

- Christine Branstad

Boring Blog 3 - More Secured Interests

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This is the final blog about secured interests.

Boring Blog 1 addresses security interests in goods sold.

Boring Blog 2 deals with perfecting security interests.

This blog addresses priority of secured interests.

Priority of a security interest may determine who receives payment when a debtor cannot fulfill obligations to multipe creditors. If the same collateral was used to secure different loans, or if a debtor is in bankruptcy, priority will determine distribution. Often, the first security interest that is perfected takes priority. This post is limited to Iowa UCC provisions on priority.

Priority by first to perfect/file:

Filing prioritizes security interests over later-created perfected interests and prior unperfected interests. Iowa Code Section 554.9322 provides the general rules for prioritization. Common interpretations include first to perfect, first in priority; and if no interests are perfected, first in time, first in priority. There are many exceptions to the priority by filing rules. Examples of exceptions include perfection by possession of collateral, perfection through a Purchase Money Security Interest (PMSI), and automatic perfection of PMSIs in consumer goods.

Filing a financing statement with the Iowa Secretary of State perfects a security interest in the listed collateral. If an interest is unperfected, Iowa Code Section 554.9317(2) provides that a future buyer of that collateral may take it free and clear of a security interest, leaving a secured party with an unsecured open account against the original debtor.

Perfection by possession or control:

Iowa Code section 554.9312 provides that perfection in deposit accounts, investment property and certain other collateral may be perfected by filing, or through possession or control by the secured party, without filing. The Iowa UCC defines possession and control, and, significantly, states that those taking a security interest in a deposit account may ONLY perfect that interest through control of the account as set out in section 554.9104.

Priority by PMSI[1]:

In Iowa, security interests may be created and perfected in categories of goods such as “equipment,” “inventory,” or “all confection ovens” (harkening back to examples in prior blogs). Section 554.9317(5) allows a PMSI in goods of a certain category (except inventory) to take priority over other pre-existing security interests for that category, if the PMSI is perfected through filing within 20 days after delivery of the goods to the buyer. For a PMSI in inventory, Iowa Code section 554.9324(2) states that, to take priority over pre-existing interests, the PMSI must be filed and any holders of perfected security interests must be notified before delivery of the goods to the buyer.

Automatic perfection, PMSI in consumer goods:

Security interests in consumer goods are perfected upon attachment (see Boring Blog 1), and require no filing. This rule makes business dealings in smaller goods, like dishwashers or stereos, easier as there is no need for a race to perfect by filing. Some consumer goods which are transferred through certificates of title (e.g., cars) may have specific requirements for perfection of security interests that are not listed in the Iowa UCC.

Perfection and priority tips[2]:

• Inspect proposed collateral before accepting. First, to confirm the collateral is not in the possession of another, and second to assess the value of the collateral.
• Ascertain the history of the collateral. When and how did the party receive it? Did the debtor borrow money to obtain the collateral?
• Check online records under the debtor’s name and under any prior owners' names for perfected security interests. The Iowa Secretary of State offers two search sites to assist, here and here.
• If a filed financing statement references the collateral, determine if the debt is paid. A termination statement may be filed.

I hope the boring helps you avoid the truly aggravating.

 - Christine Branstad

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[1] Boring Blog 1 describes a PMSI as “a security agreement…where the entity which gave the funds to the debtor to procure the good/s has a security interest in those goods as collateral." As some may have expected, this special definition leads to special treatment when it comes to priority.

[2] These are only tips and cannot substitute for specialized legal advice.

Boring Blog - Part 2

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If you read my previous blog, you may recall that the boring stuff saves money. The last blog addressed Iowa law regarding security interests in goods sold.

Iowa’s UCC provides that it may be necessary to place the public on notice of a security interest to protect that interest. This blog focuses on filings at Iowa Secretary of State to protect or "perfect" security interests. 

Bill’s Bakery Supplies has a security interest in equipment sold to Smith’s Confectionary Inc. Bill will want to protect his security interest and place others on notice of his interest. (This is called perfection[1].)

Article 9 of the Iowa UCC codifies the steps necessary for Bill to perfect his security interest. If the security interest is in goods, Iowa Code section 554.9501 designates that a financing statement is to be filed with the Iowa Secretary of State. A form that has all the required information is available from the Iowa Secretary of State’s website.

 A financing statement must provide:

(1) the name of the debtor;

(2) the names of the secured party or a representative; and

(3) the collateral covered by the financing statement.

Financing statements are filed under the debtor’s name. For registered organizations (LLC, corporation, limited partnership, etc.) the exact name of the organization as it appears in a state’s record must be used on the financing statement. If the debtor is an individual, the full legal name must be used. For example, If Bill’s Bakery Supplies mistakenly placed Joe Smith’s name on the financing statement instead of Smith’s Confectionary Inc., Iowa Code section 554.9506(b) states the financing statement would be seriously misleading.

"Seriously misleading" financing statements are not sufficient to place the public on notice of the security interest or to protect the secured party. Even simple errors such as spelling a corporation’s name incorrectly or using a symbol instead of a word (“&” instead of “and”) may render a financing statement seriously misleading.

The necessity of these nuances becomes clear when viewed through the eyes of a third party who attempts to determine if there is a security interest in certain property. If Smith's Confectionary Inc. later attempted to use the ovens purchased as collateral for a bank loan, the bank would check the public records to ensure there are no security interests attached to the ovens. Without proper filing under a specific name, the bank would have  difficulty verifying information.

Avoid problems by:

• Knowing with whom you are dealing. As a matter of dealing, get government issued verification of names.
• Checking public records. Many Iowa organizations must file with the Iowa Secretary of State.
• Remembering that handshakes seal deals, but contracts prevent problems. Putting it “in writing” is a greater show of trust than a handshake.
• Filing immediately. In my next post (and last in the series of boring blogs), I will address how to determine the priority of competing security interests.

If you read through to the end, I commend you. Business leaders who read the boring stuff avoid pesky problems . . . and have less need for me (a litigator).

- Christine Branstad 

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[1] Lodge complaints about legalese elsewhere. I use NO legalese in my writing.

The Gift That Keeps on Giving…Until Expiration

Image by sdc2027 via Flickr

This week, I spoke to merchants from the Historic East Village and answered questions about gift cards. Gift cards, or gift certificates, are subject to state and federal restrictions - some overlapping, some conflicting and some confusing.

Federal regulations are found primarily in the 2009 Credit Card Accountability Responsibility and Disclosure Act (“the Credit CARD Act”). This Act gives the Federal Reserve Board authority to govern business practices regarding credit cards, gift cards, pre-paid cards and the information consumers receive. The federal regulations are controlling unless a state enacts laws which provide greater protection for consumers.

“Can my business place expiration dates on gift certificates issued?” Yes. But federal regulations allow expiration dates as long as certain requirements are met. Requirements include:

• allowing a purchasing consumer at least five years before expiration;
• providing a toll free number or website where information about the card can be obtained;
• providing information about replacing the card; and

• informing of any fees charged against the balance and where information about the fees can be obtained.

In Iowa: Iowa law states that unredeemed gift card funds are considered abandoned after three years have lapsed since purchase or last use, compared with the five-year requirement in the federal regulations. The Federal Reserve Board chose to not preempt (overrule) state laws regarding abandonment of property which took effect before the federal five-year mandate. The board instead reserved the right to declare individual states' laws preempted on a case-by-case basis. The board has not yet ruled on Iowa’s three-year abandonment law regarding unused gift cards, leaving open the possibility that a gift card issuer will have to turn over abandoned property to the state treasurer after three years, but honor gift cards for five.

“What are the reporting requirements after the three year period in Iowa?”

Iowa Code provides that a holder of presumed abandoned property is to file a report regarding the property with the state Treasurer. The code also provides that when filing the report, the property shall be paid or delivered to the treasurer.

“What if I give gift cards to a charity or an auction and receive no money for them?”

Federal regulations create exceptions for cards issued for ‘loyalty, award, or promotional purposes.’ For example, shorter expiration dates are allowed. Significantly, there must be a disclaimer on the face of the card or certificate stating it was issued for loyalty, award or promotional purposes to qualify for this exception.

If you are confused, the Federal Reserve Board has a guide to gift cards.

The Iowa Treasurer has a complete guide to reporting.

The Iowa Attorney General also has a guide.^*

- Christine Branstad 

* Be careful. It appears that the Iowa Attorney General guide came out in 2007 and the most recent federal rules came out in 2010.

Boring Blog

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The UCC is only exciting when you are in a dispute. Read this boring blog and avoid the excitement.

Article 9 of the Iowa UCC (Iowa Code Section 554.9101 et seq.) governs the purchase and sale of goods and related secured interests. This blog will deal with protecting a business during an initial transaction. My next blog will deal with placing the public on notice of a security interest.

Bill’s Bakery Supplies is an equipment wholesaler.

Joe Smith is CEO (and sole employee) of Smith’s Confectionary Inc.

Smith purchases equipment from Bill's. If Smith cannot pay, how can Bill’s recoup the unpaid balance?

Often, security agreements arise where an item is sold on account (six months same as cash) or a loan is received for the purchase of an item (bank loan for a car), and the purchaser is allowed to pay off the balance over a period of time. A seller may want to retain certain rights to the goods until paid in full.[1]

Smith pays 10 percent of the total price, signs the purchase agreement, and takes the equipment. Bill’s Bakery Supplies may be entitled to full payment on the account, but has it retained a security interest in the goods?

Likely no. In Iowa, an agreement to sell goods alone is not enough for a security interest to attach to the goods. Iowa Code Section 554.9203 provides that for a valid security agreement there must be:

(1) value given;

(2) a right in the collateral that the debtor can transfer to the secured party; and

(3) a signed security agreement with a description of the collateral or the collateral in  possession of the secured party.

This means Bill’s no longer has an interest in the goods sold and, essentially, has an unsecured open account.

If your business wishes to keep a secured interest after sale, create an agreement that:

(1)  specifies that a security interest is held by the seller;

(2)  is signed by the purchaser; and

(3)  includes a detailed description of the goods (e.g. serial number, make, and model).

-Christine Branstad

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[1] (Author’s Note: The UCC refers to a security agreement in this situation as a Purchase Money Security Interest, where the entity which gave the funds to the person to procure the good/s has a security interest in the goods as collateral.)

Following Rules is Easier when you Write the Rulebook

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My last blog was about dealing with “red tape” and following agency rules and regulations. Sometimes the most efficient way to deal with rules is to help write the rulebook.

 There are many ways to write the rules.

1)      Write to your legislator.

2)      Participate on a board or commission.

3)      Join a trade association that lobbies on your behalf.

4)      Lobby for yourself.

5)      Hire a lobbyist.

U.S. citizens have a first amendment right to petition their government. Corporations also have first amendment rights.  Many businesses exercise that right through lobbying.

Lobbyists are paid advocates who educate and persuade legislators. Most people assume lobbyists simply push for or against proposed legislation, but lobbyists may help draft proposed legislation or suggest amendments. Often, the lobbyist’s job is simply to make a bill “fit.” For example, if a proposed bill would heavily regulate balloon sales, the clown lobby may seek an exception for non-helium balloon animals.

Lobbyists may also put together research that would otherwise go unnoticed by legislators who have to address legislation on myriad issues.

A skilled lobbyist will:

• Have rapport with lawmakers and know who will serve a key role in specific legislation.
• Be proactive by heading off contrary or obstructionist legislation.
• Keep clients informed of upcoming legislation and the associated rules.  
• Maintain contact with legislators or members of the executive branch with influence over government agencies.
• Develop relationships with other lobbyists for collaborative efforts and negotiation.

If you help write the book, it is less likely they will "throw the book at you."

- Christine Branstad

New Administration -> New Rules

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Despite the refrain of pundits, new administrations are not "same old same old." New leaders come in with new ideas, new agency leaders, and plans to “make a difference."

The most direct effects are felt at the agency / administration / department level (I will just use "agency" for the remainder of the blog). If your company has someone dedicated to the regulatory process, that person will get to know the new guard and review changes. If, like most small businesses, that job falls on you, take steps to recognize upcoming changes.

1)    Check the agency website every week until June.

2)    Call and find out if the agency sends out a newsletter. Get on the list.

3)    Call the lobbyist for your business association and ask to be in on the lobbyist’s newsletter.

4)    Check your association website regularly.

If you are tech-savvy, get the appropriate RSS feeds. If you are not, ask a teenager to help you.

Most agencies want you to be in compliance and want things to move smoothly. Find a liaison who will help ensure that you have the appropriate information to be in compliance.

My next blog will focus on proactive steps you may take regarding the laws/rules before you become ensnarled in red tape.

- Christine Branstad

Unexpected Partnerships: Santa and Lemonade Stands

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(It is good he never crashed the sled.)

Your lemonade stand with your best friend was probably a partnership. Unlike many other business entities (LLC, LLP, Corporation), a simple general partnership requires no paperwork.

Iowa adopted the Uniform Partnership Act ("UPA"), which defines partnership as "the association of two or more persons to carry on as co-owners a business for profit." If you provide half the service and your friend provides the other half, you may both have all the liability for breaches of contracts or negligence.

Similar to a corporation, partnerships are distinct entities from the forming partners. A general partnership leaves all partners sharing liability for partnership debts and obligations. In terms of your lemonade stand, this means that after your pal fails to provide lemonade promised to a party, that angry customer can come after the lemons and pitchers (partnership assets) as well as your piggy bank (partner’s personal assets).

In the absence of a partnership agreement, there may be internal conflict between partners about who gets to make decisions (voting rights and weight of votes), who contributes to the business entity (through money, other assets, or time), and who gets paid (partners can receive distributions, if any, from the partnership, or reinvest the money in the business).

If you have no partnership agreement, there may also be conflicts about who owes external parties, such as the lemon supplier or the sugar provider. The Iowa UPA has gap-filling provisions which kick in if aspects of a partnership are not agreed upon by the partners, such as the "equal rights in management and conduct" provision and "differences settled by a majority"  provision. If you cannot get along, breaking up is pretty easy, but your liability will likely remain to people who sue for conduct that occurred in the course of the partnership. 

Dear Santa:

I would like to memorialize our agency arrangement so that we are not confused as partners or joint venturers.

Please agree that I will work as an independent contractor obtaining presents and wrapping them for you to deliver. Although I may be paid in cookies, milk and reindeer jerky, I shall not be responsible for late deliveries, chimney damage, or the aggrieved child who didn’t get a present because of an erroneous listing of naughty instead of nice. All responsibility belongs to Santa, which should be made clear in all contracts, communication and marketing materials. I request an indemnity clause in our agreement.

I want to make sure we avoid internal disagreements in our mutually beneficial relationship, and also that the world (especially the two little customers in my house) is on notice that we are not partners.

 . . . and new gloves.

 

 - Christine Branstad

 

 

 

Be Thankful for Mistakes (Yours and Others)

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It is easy to be grateful for friends and family. It is easy to appreciate bounty. The happiest people (and businesses) appreciate their mistakes and the related lessons learned.

The smartest also learn from the mistakes of others.

When you stay current on business law in Iowa by reading cases and summaries from the Iowa Court of Appeals and Iowa Supreme Court, you get the current law and a look at how mistakes could have been avoided.

Before you have to see your lawyer, read about others’ mistakes and be thankful for the opportunity to avoid litigation.

 - Christine Branstad

Use Your Email 'Draft' Folder

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It is better to write nothing than to be wrong.

As I started to post my blog today (at deadline), I checked a source and found an error.

This reminded me why I usually hold blog drafts a week before final edits. Quick work is often inaccurate.

Electronic media encourages hasty writing. Employer/employee communication may incorrectly reflect terms. Buyer/seller communication may misstate conditions. When one party fires off an email agreeing to an untenable term, that email is later labeled “Plaintiff’s Exhibit 1.”

If you are not positive that your words will help the situation (and reflect the truth), write nothing.

It is acceptable to write “I need to reflect on this matter. I will respond soon.”

- Christine Branstad

Eminent Domain and Condemnation: Taking a Bone from a Dog

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My property professor described ownership as “how a dog feels about his bone.”* Your ownership can be taken away by the government to discharge its functions, including: appropriating resources for military service, turning swaths of private property into streets, or even giving to another business (if it qualifies as a public use). This is the power of ‘eminent domain’ and it occurs at municipal, county, state, and federal levels.

There are many debates about that power and how it is used.

The relativity of ownership is a result of governmental limitation on its own sovereignty. The Fifth Amendment to the U.S. Constitution reads, "...nor shall private property be taken for public use, without just compensation." The Fifth Amendment, therefore, limits the power to taking private property for public use. The exercise of this power is called condemnation. This blog only addresses condemnation for public use. Condemnation for public safety includes the act of declaring a building uninhabitable, a corollary use of eminent domain. 

What does this mean to the average Iowa citizen or business owner? There you are, minding your business [of making widgets/developing software/cooking pork tenderloins]. You receive notice that the city is going to acquire your property to build [a park/a road/an electric substation/an area for a large business]. You are outraged. What can you do? 

The taking of private property must be for “public purposes which are reasonable and necessary as an incident to the powers and duties conferred upon” the city or county in most cases. If the government's justification is shaky, you may challenge the condemnation. An experienced property attorney will make sure that the condemning entity has legislative authority, that the proposed conversion of your property to public use is for a valid purpose, that no more property is taken than necessary, and that the effect of the taking does not diminish the value of your remaining property. 

Then, you may seek just compensation, including a fair relocation benefit. In Iowa, the condemning authority must offer to buy the property for fair market value and must make a good faith effort to negotiate. While the purchase and closure or relocation of your business is a tremendous hassle, it can also be a financial boon to your business. In many cases, established businesses find they are given an unexpected opportunity to receive a publicly-financed relocation, a better location, a newer facility, and/or a cashout of a good lease rate. In the best cases, businesses expand, sometimes in conjunction with economic development incentives if they qualify. Some find that this alleviates questions about how to cash out and retire.

If you cannot agree with the government on a buyout amount, you may hire an attorney and an appraiser and duke it out in front of the county compensation commission. If you have been low-balled by the government, a good result from the commission can even get your fees and costs paid (if the award given is at least 110% of the final offer made by the condemning authority).     

Even if you find that you are just a dog and your property is just another bone . . . get your bite in. 

-          Christine Branstad           

* He credited former law student Roxanne Conlin with that colloquial definition. 

Practices that Supplement Contracts

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How Many in a Baker's Dozen?

Industry practices and specific relationships may create unwritten contractual terms that bind the parties. This blog has more legal analysis than usual, but read on. Really.

 

Iowa’s Uniform Commercial Code (UCC) governs transactions in goods. Iowa’s UCC section 554.1303 addresses three principles that may supplement or amend contracts:

• course of performance,
• course of dealing, and
• usage of trade.

Course of Performance: This addresses conduct between the parties in a current contract when:

(a) the agreement of the parties with respect to the transaction involves repeated occasions for performance by a party; and

(b) the other party, with knowledge of the nature of the performance and opportunity for objection to it, accepts the performance or acquiesces in it without objection. To better understand Course of Performance read ABC Metals & Recycling Co., Inc. v. Highland Computer Forms Inc. which is a case involving claims about amounts paid for paper. A contract provision provided the price for the paper was on a particular website. After the contract was formed, the website shut down, but the information became available on another website. The second site was used by both parties. The five year use of the second website became a determining Course of Performance.

 

Course of Dealing: Your prior dealings with a party may create a Course of Dealing, which is an understanding that becomes part of a future contract, even if not specifically stated. To better understand Course of Dealing read St. Ansgar Mills Inc. v. Streit which is a case involving a hog farmer who regularly ordered feed corn from the mill. The mill would either send order confirmations to Streit for signature, or hold the orders for Streit’s signature. Often, turnaround for signatures was a month or greater. The hog farmer called in two orders for future delivery of corn; the mill held the confirmations for a signature. When the farmer returned more than one month later, the price of corn had significantly dropped. The farmer refused to sign the order, stating that the written confirmation had not been delivered within a reasonable time. The Iowa Supreme Court considered prior orders showing Course of Dealing where significant time passed between oral purchase orders and delivery of written confirmations.

 

Usage of Trade: Some industries work with such similar goods that industry-wide standards and practices develop. To better understand Usage of Trade read C-Thru Container Corp. v. Midland Mfg. Co. which involves a contract between a manufacturer of bottles and a buyer. The manufacture asserted that the buyer did not order a sufficient amount. The buyer asserted that the manufacture did not provide samples to assure a suitable product. The Iowa Supreme Court found that the buyer was allowed to provide evidence of trade practice and could argue that the industry has a standard of providing samples prior to orders.

 

What does this mean for your business?

1)    Know how other businesses handle similar contracts. (Especially if you are venturing into a new industry.)

2)    If you want to deviate from a common business practice, get written agreement.

3)    Define your business relationships in the same way that you define the actual terms of a contract, with attention to clarity.

- Christine Branstad

It is Hereby Time to Use the "Replace" Function

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In 2003, I finally received a set of checks with a blank date line. After much crossing out of the 19___, my checks acknowledged the new millennium. In an attempt to save paper, business forms often are used well after they are obsolete.

The handiest tool to meet changing times is the word processing “replace” function. This year when you change dates, look at other aspects of your forms. Some governmental agencies have changed names. If your form requires INS compliance, you may be out of date AND vague. I recently received an application with a request for my wife’s name. A simple replace of “husband” to “spouse” and “wife” to “spouse” is a quick fix to sexist stereotypes and also acknowledges same-sex spouses.[1]

Look at contact information. If a telefax number is still requested, but there is no blank for an e-mail address, it may be time for an update. Also, look at all the locations where forms are stored. Oddly, the forms that are often out of date are the online forms. (I suspect this is because too many businesses outsource all Web content and have no means to update Web forms in-house.) Additional issues may arise if your online offer binds you to an out-of-date contract.

“Replace” is also a tool to trim legalese from your agreements. Words such as heretofore, thusly and aforesaid, and phrases such as "party of the first part" can be retired. UCLA Law Professor Eugene Volokh created a chart to interpret legalese which may help you expedite your simplification of these arcane obfuscations. As a rule, you can hereby eliminate hereby with no replacement.

I hereby say it is that easy.

I say it is that easy.

-  Christine Branstad

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[1] If your forms also address domestic partners, you may need to gather additional information.

Until same-sex spouses are treated the same uniformly, be aware that tax implications and domestic partnership implications may vary.

Avoid fighting even the little gorilla

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In case you haven’t heard, YouTube won its case against Viacom, who sued for copyright infringement based on thousands of Viacom videos that were uploaded to YouTube.

Now that YouTube escaped liability for piracy, you may post ANYTHING you like on your website, right?

To put the answer in legal terms: no, no, No, NO.

The 1000-pound gorilla just defeated the 800-pound gorilla. (800-pound gorilla has vowed to appeal.)

Before drastically changing the content policy for your website, consult your Intellectual Property attorney. Copyright law is old but evolving. At this point it may be better to stay the course and heed trusted advice for your online business.

Now may be the wrong time to mess with the 800-pound gorilla who is looking for the fight it can win.

- Christine Branstad

 

We are from the government; We are here to help [your business]?

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Federal, state and city government agencies are crucial partners to many businesses. Regulation ranges from determining import tariffs on goods and the tonnage a truck can carry, to proper workplace safety procedures to sanitation requirements for combs and brushes.  Government agencies’ rules and regulations define, clarify and sometimes muddy the water swum in by the big and small business fish.

Federal and State agencies are created by the legislature, often to oversee specific realms of commerce or interactions in business. These agencies can be given the power to create rules and regulations that carry the force of law, and can take action to enforce their rules against businesses or individuals.

Who makes the law affecting your business? The Department of Health and Human Services, Department of Agriculture and the Environmental Protection Agency are just a few prolific rule-makers, and compliance considerations can be especially daunting considering that the rules are enforced by the Department of Justice which includes the FBI, DEA, INS and US Marshall Service.

For example, the FDA recently sent a warning letter to a Canadian company stating their website is marketing products that are intended to treat or mitigate symptoms of the H1N1 flu virus, but the company has not yet received FDA approval for sale in the U.S. While this may seem a bit far from home, the small mom-and-pop holistic medicine shop across the street may be subject to the same FDA regulations as Bayer and Pfizer. The difference is in the ability to afford a legal defense and penalties for rule violations.

In Iowa, the EPA’s recent decision to tighten air pollution levels may force some Muscatine County businesses to invest large amounts into controlling pollution from existing factories to comply with the new air quality standards.

Also, the family farmer must comply with wide ranging regulations from the Iowa Department of Natural Resources to the multiple aspects of the Department of Agriculture. Iowa farmers may find they are soon involved with the EPA in the same way that the EPA is currently involved with Amish and Mennonite dairy farmers in Lancaster County, Pennsylvania to stop manure run off from fields and pastures.

The examples that get the most press involve large companies, and the state or federal court system may be called upon when agency rules are violated or decisions are appealed. For example, the Supreme Court recently decided the case Monsanto v. Geertson Seed Farms, about the USDA decision to allow sales of a genetically engineered alfalfa seed before completing an Environmental Impact Statement. Environmental groups and conventional alfalfa growers brought suit to stop the sale of the seed until an EIS was completed. A district court entered an injunction banning the sale of the genetically engineered seed pending the completion of the EIS and Monsanto appealed. Ruling for Monsanto, the Supreme Court overturned the lower court’s ban on the sale of genetically engineered alfalfa seed so that limited sales could occur until the final impact statement was completed.

The same rules that govern large corporations apply to Joe and Jane Business-owners. Savvy business people keep their ear to the ground and sometimes even have a compliance officer on staff. You may be able to give input on proposed regulations before they take effect, or change your business ways before a regulation is enforced. Often, administrative regulations take years to develop and agencies may allow input from those potentially affected by proposed regulations. Even after a regulation is passed, there may be a certain amount of time given for your business to become compliant with the new rule/regulation. Keep up-to-date on your industry’s news and developments. You just may be able to defer agency action or spread out the costs of compliance over a couple years, instead of a couple months.

Quick Rules for dealing with Agencies:

-    If you are too small to have a compliance officer, have one person whose job is to review and stay in compliance.

-    Have a yearly review of compliance for each agency that regulates you. During that review, make sure you have up-to-date manuals and checklists.

-    Subscribe to newsletters or email from each of those agencies.

-    Get to know your agencies and officers. Most agencies prefer initial compliance over initiating penalties.

Learn which agencies affect you. In Iowa, the list may include:

-    Department of Natural Resources

-    Department of Public Health

-    Department of Public Safety (including Fire Marshall)

-    Workforce Development

-    Department of Revenue

As you are developing, look to their websites and reference materials for tips on compliance and maintaining good status. Otherwise, you may have to deal with the government when they show up at your door to “help”.

- Christine Branstad

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Arbitration: Decision by the Village Elder

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My last post was about mediation. Mediation is often confused with its less attractive cousin, arbitration. Arbitration and mediation are NOT the same even though they are both considered forms of alternative dispute resolution (ADR).  Many myths surround arbitration.

Benefit 1: Arbitration may take less preparation because you do not need to plan for a jury trial. Arbitration eliminates jury studies and preparing for mixed experiences of juries. Preparation is still extensive. (Then again, solid attorneys are fully prepared before entering mediation.)

Myth 1: You can “wing” arbitration. Arbitration requires knowledge of the facts and the law of your case. Arbitration requires a different type of preparation than trials because (if done properly) the case will be decided by an expert in the subject matter. Think of it this way: As an architect, you can explain your building design by educating a layperson about the general principles and then the specifics. Explaining the same design to another architect can be done more quickly and artfully, however it will require detailed preparation to be persuasive to another expert.

Benefit 2: Arbitration may eliminate much of the waiting time. Some of my cases took longer to reach trial than a good cheese takes to age.  Arbitration may eliminate much of the waiting time.

Myth 2: Arbitration is often instant. ‘nuff said.

Benefit 3: Arbitration allows the parties to narrow the issues and get to the point.

 Myth 3: Arbitration is as casual as Friday. Arbitration comes in as many styles as clothing. The parties may agree that the arbitrator has great discretion and may base the decision on “anything” or the parties may have four pages of rules, and require the arbitrator to set out findings of fact and legal reasoning. The parties may waive appeal or may set out specific appeal procedures. The parties may also waive evidentiary rules or even add new ones.

Benefit 4: Arbitration often gives you final resolution.

Myth 4: I can appeal an arbitration award against me and have it reversed. Generally, an award is final and binding and can only be reversed or vacated by courts in very limited circumstances, See I.C.A. § 679A.12.

Benefit 5: Arbitration may be flexible.

Myth 5: Arbitration is either mandatory or discretionary. Look at your contract. If you have agreed to a specific form of arbitration, you may be stuck with that form. If not, you may have some leeway to determine certain aspects the arbitration.

Benefit 6: Arbitration may be used to decide only one or two issues instead of an entire case. For example, the parties want one expert (instead of a jury) to determine who is responsible for a building collapse. The parties then want a jury to determine damages.

Myth 6: You have to decide in advance if you want mediation or arbitration. The parties may decide prior to mediation that, if they don’t agree, they want to put the decision in the hands of the mediator (med-arb). If the mediator agrees, that decision may be made mid-process.

Benefit 7: Arbitration may allow you to get a real expert in the area. There are attorneys who only arbitrate construction cases or who only arbitrate specific business claims.

Myth 7: The arbitrator must be a lawyer. Although I often believe an attorney is the best arbitrator, there are times when a chemist, engineer or fire expert may be better suited to interpret technical information. In those cases, the expert may serve as the sole arbitrator or may work with a lawyer to decide the case.

Benefit 8: Arbitration may provide the parties with some limits. The parties can do anything from agreeing to a floor and ceiling on the award (high-low arbitration) to providing the arbitrator with only two options (pendulum arbitration).

Myth 8: You can gain or lose as much in an arbitration as a trial.

Benefit 9: Arbitration is a cost savings.

Myth 9: Arbitration is cheap. See Myth 1.

Benefit 10: You may negotiate confidentiality into the process and the final decision. Court cases are usually open records and proceedings are public. Arbitration usually allows the parties to agree to maintain confidential proceedings and/or outcomes.

Arbitration clauses are also increasingly being thrown into the fine-print of many consumer contracts (read one of your credit card agreements), website click-through agreements (see previous blog about reading what you sign/agree to), and sealed user manuals that come with products (pretty hard to meaningfully agree to arbitration if you have to purchase a product in order to read the agreement).

Searching for the right arbitrator can be similar to searching for a mediator. Ask trusted advisers, research credentials. If you use an organization to find an Arbitrator, make sure the rules fit your case.

Christine Branstad

Mediation in Business

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Most of my business clients see mediation as the thing you do when you are almost at the end of litigation.

Mediation can be a cost-savings tool if used early when a dispute is still minor.

Times to use mediation early:

1) You have a good business relationship that you would like to save

2) You suspect the other party "doesn't get it"

3) The other party says you "don't get it"

4) The best solution involves something other than just money

A mediator may help you find resolution while you can still afford it. You may use mediation to resolve issues with suppliers, contractors, employee and customers.

Find a great mediator the same way you find a great lawyer:

   a) Ask trusted advisors

   b) Research credentials

   c) Interview more than one and make comparisons

Getting to the solution may be easier if you have someone who specializes in facilitating calm meaningful negotiation. As Abraham Lincoln said, "Discourage litigation. Persuade your neighbors to compromise whenever you can."

-  Christine Branstad

“Nobody expects the Spanish Inquisition!” (Legal Defenses to Contracts)

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My last post was a sprint through the factors to consider when seeking to avoid contract obligations. In some cases, you may be seeking avoidance due to an unforeseen event where release of obligations is a fair and legally justified result.

 

Contracts for future performance (executory contracts) are formed to promote stability and certainty of business relationships. Although we would like to believe that the best-laid plans will follow through swimmingly, nearly all contracts are premised upon assumptions, which, if incorrect or modified may result in unfairness. Natural disasters, changes in governments and legal systems, or sudden enforcement of orthodoxy laws by an ad hoc tribunal (e.g. The Spanish Inquisition) can render a contract relationship not only undesirable, but absurd.

 

The doctrines of Impossibility/ Impracticability of Performance and Frustration of Purpose are the main avenues used to justify termination of service contracts.  Contracts regarding goods have different rules on this subject governed by the UCC.

 

Impracticability for services contracts:  Impracticability is more that the etymology of the word suggests. For an unforeseen event to render and contract "impractible", the following must be true: 

(1) occurrence of the event (or the 'condition') must have been assumed not to occur when the contract was made,

(2) that event makes performance extremely expensive or difficult, and

(3) there is no contract provision for "unforeseen events".

 

Impracticability for good contracts: The UCC generally governs contracts for goods. Again "impractability is more than the word suggests. A party who undergoes an event that creates expenses or difficulty  cannot excuse performance, but rather that party must allocate their limited resources between current customers and inform them of change, reason, and the expected timeframe. Increased expense does not usually constitute impracticality under the UCC.

Impossibility: Impossibility mirrors impracticability, except that the unforeseen event renders performance impossible rather than just expensive or difficult.

Frustration of Purpose: This occurs when an unforeseen event removes the principle purpose that one party entered the contact to obtain. To use this defense, both parties had to have known of the principle purpose at the time they entered the contract, and the event that created issue could not have been foreseen at the time of contracting. These situations may appear similar to those in impracticability as one party, typically the paying party, could still perform their aspect of the contract, but their reason for the contract is removed.   

 

Since a legal defense is a justification for terminating a contract, possibly in a manner that is unfair to one party, the party seeking termination needs to make a very good case.  In Mel Frank Tool & Supply, Inc. v. Di-Chem Co., 580 N.W.2d 802 (1998) the Iowa Supreme Court considered a lessee’s claim of impossibility to get out of a warehouse lease that the lessee used to store chemicals. After the lease began, the city passed an ordinance restricting the storage of hazardous chemicals.  The Court stated that Di-Chem did not establish that all their chemicals stored were hazardous and therefore did not meet their burden to excuse performance through the frustration of purpose doctrine.

 

Sophisticated parties may agree to waive the right to the aforementioned legal defenses.  These are commonly called “hell or high water clauses” and typically mandate continued payment in the event of an unforeseen occurrence that would normally frustrate the purpose or render performance impossible/impracticable.

 

Another option is to simply agree which party bears the risk of unforeseen events thorough a “Force majeure” clause.  “Force majeure” is “an event that can be neither anticipated nor controlled.” Black's Law Dictionary 657 (7th ed. 1999).

 

Legal defenses which void contracts are intended to avoid unfair or even absurd results unless parties agree otherwise. Plan for the expected; and plan for the unexpected by agreeing who will be responsible.  Or risk finding yourself in the position of that Monty Python character who said “I didn’t expect the Spanish Inquisition.”

 

- Christine Branstad

I want out! (of this contract)

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You are in a contract and want out. Ask yourself the basics: How, when, why and will it be worth the expense?

Ask these questions in reverse order.

1)    Will it be worth the expense?

If a court finds that you breached or repudiated a contract, the court may 1) order you to complete the contract, 2) award the amount of benefit you already received to the non-breaching party, 3) award the amount the non-breaching party would have received in the contract, or 4) award the amount needed to return the non-breaching party to the same position it was in prior to the contract.

Most of the time, you will pay your own litigation costs.

In addition to these costs, assess other costs of breaching a contract. Will the breach cause:

-   a marketing/publicity fallout?

-   an insurance problem?

-   problems with other contracts due to cross-default provisions?

-   a conflict with who you are (as a person, a leader, a business)?

Keeping your “word” is worth a lot personally and in business. Following through on what you say sets the tone for ongoing business relations. Usually it is worth losing a bit of money to keep your good name. There are some exceptions. If you determine this time it is “worth it”, 1) address it early, 2) try to mitigate everyone’s damages, 3) put it in writing.

If it is worth it to get out, do you want out because the other party has breached, too? Was there a communication or mistake of fact between both parties? Are you unable to do what you promised?

2)    Why?

If THEY do something wrong:

-   Address it early: Early recognition of the problem gives everyone more time to make corrections which may solve the problem or at least mitigate damages. In most situations, parties have an obligation to keep damages as low as possible. Put another way, if someone sets your tablecloth on fire, you need to put out the fire, you cannot just watch it burn down the house and then say “your fault”.

-   Put it in writing: It you get into a fight down the road, it will be easier to prove your position if you document the problem.

-   Keep records: Proving expenses that need to be corrected is easier if you have accurate records.

If YOU do something wrong:

-   Address it early: See above. Mitigation of damages applies to both parties. Again, this allows everyone to address a problem before it balloons and becomes too expensive.

-   Decide if you can negotiate a forbearance or renegotiate the contract. If a business partner will not go broke renegotiating, you may find the best businesses will give up a little profit now to cultivate long term loyalty.

If there was a misunderstanding:

-   Address it early: If the misunderstanding requires court intervention, it is tough to believe someone who waited too long to address a misunderstanding.

-   Set out the misunderstanding in writing. Even if the original agreement is not in writing, documenting a misunderstanding will preserve information for later use. (Putting it in writing from the start can help avoid misunderstandings before entering into a contract).

If you CANNOT do what you promised to do

-   Address it early: See above. Addressing it early allows everyone to mitigate damages, renegotiate and avoid further conflict.

3)    When?

Communicate with others in the contract as soon as you are aware of the breach, mistake or misunderstanding. See above. Mitigate.

4)    How?

By penalty clause: Look at the contract for specific breach ramifications. Some contracts (often phone contracts) have a liquidated damages or forfeiture clause. These set out a specific result for breaching the contract.

By legally voiding the contract: Even if you believe you have a legal defense to this contract, you still must go through the analysis of whether it is worth it to breach your contract and go to court. You may win a fight with an 800 pound gorilla but will walk away with some bruises.

Legal defenses include:

Mistake

Fraud

Duress

Impossibility/ impracticability of performance

Failure of consideration

Unconscionability

Do not use an online dictionary to determine if you have a legal defense. There are many cases interpreting each of those terms. Also, there are many things that affect the interpretation of your contract. You must analyze not only the particular provision and other provisions that effect it, but you may also need to look at the circumstances leading up to the contract, the facts surrounding performance, and whether there is a statute or public policy governing the subject matter.

Also consider:

-   If the contract is in writing.

-   The length of the contract (does it span more than one year?).

-   Whether the contract is for goods or for services.

-   The total value of the contract.

By renegotiation: You may want to sit down and discuss options with the other side (informally or through a mediator). Open communication in the situation may bring about a creative solution. Perhaps you will be able to provide contacts to ease the burden on the other side. For example, a contractor who was unable to complete a job was able to get significantly discounted materials from a contact who had an oversupply. This allowed the other party to finish the job at approximately the same cost.

Getting out of a contract requires the same skills as getting into a contract.

· Read everything.

· Be thoughtful about what you put in writing.

· Be proactive in your approach.

· Look at the whole picture from marketing to business relations.

· Be honest.

Getting into the right contracts is a skill. Getting out of a contract gracefully is an art.

 

- Christine Branstad

“I ACCEPT” “I ACCEPT” – License Agreements for real businesses

Image by [Brian] via Flickr

Scroll through the 5000 words and click “I accept the terms”. Most likely, you just entered a license agreement.

A license grants someone (licensee) permission via contract to engage in an activity or to use property owned by the person granting the license (licensor). These prolific interactions are part of daily transactions. Obtaining a hotel room for a night is a license. Franchise agreements involve a license. The computer on which I am typing this has software licenses from Microsoft, Apple, Intel, and HP.

My iTunes license agreement is 4,289 words long.

For personal use, license agreements are often reasonable. What about when you click through for business? Sometimes not. There may be specific provisions stating you cannot use certain programs, images or words for business. The license agreements may reserve a fair amount of control for the licensor. Additionally, various other terms are working their way into license agreements. (See my prior two posts: nondisclosure agreements and indemnity agreements).

The licensor will request the licensee not share business secrets obtained through the license agreement and will also ask the licensee to indemnify, or hold harmless, the licensor in the event of injury or damage from the licensed item.

What does this mean? If you post a Microsoft Word document on your website, are you violating your Microsoft License Agreement? What if your link allows the user to access Word through your server?

Step 1: Read that long long long boring license agreement.

Step 2: Decide if you are engaging in any activities that may extend beyond the term of the license (e.g. making copies of a program for other business computers or using the source code for your own custom program or simply using images for which you have no license. Yes, they will sue you even if you are a “little” business.

Step 3: Ask yourself whether your business property, such as your website, would benefit from a license agreement, which should not be 7,000 words long.

Is the license for exclusive use of the licensee or is it non-exclusive – can it be used by multiple people at once? What is the term of the license? Can you charging a fee or a royalty for use?

If your business owns a patent, trademark or has a business model that works, a license is one way that you may be able to protect your asset. Or perhaps earn money from that asset. It is a wise, and sometimes mandated, decision to work closely with a licensee to be sure that your business property is not used in a manner that is inconsistent with your business.

 

Getting sued for violating an agreement is not fun. The best way to avoid that lawsuit is to read the agreement before clicking "I agree". Reading the agreement may give you ideas about which of your products you wish to protect and how you will create that protection.

- Christine Branstad

Avoid [paying for] litigation: Indemnification Agreements

Image by Aquila via Flickr

I title my posts "avoid litigation" because many clients spend time working to avoid litigation. The best way to do this is to act conscientiously, be fair and prudently choose with whom you associate.

Businesses use Indemnity Agreements to avoid paying for litigation. Indemnification Agreements allow parties to contract so that one party (indemnitor) will pay the other for any loss suffered by the other party (indemnitee) under the contract. Those losses are commonly claims from third parties which can include litigation costs, settlements or awards. Indemnity Agreements are a double edge sword. While an Indemnity Agreement may protect your business, an Indemnity Agreement may also put your business in the position where it is responsible for costs and damages outside your control. You can find Indemnification Agreements in subcontractor agreements, rental contracts, leases, go cart use agreements, sales slips and Goldman Sachs’ agreement with its Board of Directors.  

Writing an Indemnity Agreement into Articles of Incorporation may make sense. Often boards work at no pay. If board members faced individual liability and attorney fees, you may find fewer individuals willing to serve.

For example: a broad agreement may provide that an equipment user (indemnitor) is responsible for all liability related to the use of the equipment even if the equipment distributor (indemnitee) is negligent. The user (indemnitor) may then be liable for injuries caused because a distributor removed a safety feature.

A “good” Indemnification Agreement is like any good contract. It says what it means. If you want an Indemnification Agreement in a contract, specify:

-   Who is covered (just claims from outside parties or claims from the employees of the other parties?)

-   What is covered (only actual amounts paid, only items that go to litigation, provable business losses, only personal injuries, any loss at all?)

-   Will the other party be indemnified if the loss is a result of that party’s own negligence?

There are no cases about sensible Indemnification Agreements because, in those situations, everyone understood their rights and obligations. Bad Indemnification Agreements lead to litigation.

Bad agreements are kitchen sink agreements with no clear intention of the parties. Resist the urge to cut and paste the following:

You agree to be entirely responsible for and to protect, indemnify and hold harmless me from any and all losses, actions, debt, demands, claims, lawsuits, legal fees, costs, and expenses for any injury, death, property damage, or any other liabilities incurred by me.

Moreover, resist the urge to “cut and paste” anything important. Remember: there is no such thing as a “standard” Indemnification Agreement . Read what you sign and be sure that you are comfortable with an agreement. If you are signing a contract for your business, make sure the business is specifically listed as the indemnitor or you may be putting your bank account in the hands of someone who has nothing to lose.

Also, know what your insurance covers and doesn’t cover. Verify that your liability insurance covers liability as a result of a contractual agreement.

Additionally, if you are the indemnitee, understand the indemnitor's coverage. (You may want a certificate of insurance or you may want to be a named insured).

Finally, decide if you really want an Indemnity Agreement. It may be the right time to include an Indemnity Agreement when:

•  it is the fair thing to do.
• the other party is “the big dog” who has the resources.
• your business only deals with professionals who do their own risk assessment and are prepared to take on the risk.
• you want to afford protection to a consultant, board member, agent or business party and are in a position to offer that protection.
• there is a financial incentive because sorting out percentage of fault would be impossible.

Caution should be exercised when:

• the big dog wants you to take on the liability.
• you could not cover the loss (through insurance or otherwise).
• the other party doesn’t have assets or insurance with which to pay.
• a landlord requests that a tenant take responsibility for damage even if from the negligence of the landlord.
• the intent to indemnify is not clearly expressed.
• you just don’t understand the agreement.

Just like waivers of liability, Indemnity Agreements have a purpose. If you don’t know that purpose, don’t sign it.

-	  Christine Branstad

Avoiding Lawyers and Lawsuits - Waivers of Liability

Waivers are everywhere: the back of concert tickets, Web sites, sales agreements. As a business consumer, you may wish to make sure that you are willing to give up the stated rights. As a business owner, ask:

• From what are your protecting yourself?
• Is this a real danger?
• What is your goal?
• Do you run a PR risk by warning your clients that your product “may cause death” (especially if you sell coffee tables)?

This post addresses personal injury waivers: the kind you sign at batting cages and skating rinks.

 

My next post will address the types of waivers that are part of sales agreements and are found within websites for products..

 

The post that follows that will address Indemnification Agreements.

 

First, the easiest way to avoid lawsuits and judgments for personal injury is to be prudent in taking care of your business. Common sense safety is more cost effective than waivers.

-   Encourage employee common sense through a wellness program.

-   Have a plan to keep your employees and patrons safe.  

-   Talk with your insurer about risk analysis and risk reduction.

 

The Iowa Supreme Court addresses waivers in a number of cases:

Personal injury waivers must “be specific enough to identify all possible causes of injury so that a reasonable person is on notice.” A waiver that simply agrees that one party is not responsible for any injuries is not specific enough to waive all claims related to acts by that party¹. 

 

A waiver must be "voluntary", "intentional" and "knowing". The waiver must intentionally relinquishment a known right.”²  The court uses the standard of a reasonable person to determine whether a party had notice of the provisions in question and may be bound by terms within a contract/agreement.³

 

The parties must be clearly identified to be considered released parties.⁴

 

Once the release is clear in its intent, parties may be bound. Even if you (or your client) does not read the release, a party who is able to read and has the opportunity to do so must suffer the consequences of failing to do so.⁵

 

The more dangerous your business, the more likely you can set out the risk and put them in the hands of a person who assumes the risk. For example,“Hang gliding is associated with injuries and death.” If you run a shoe-shine stand, it is more difficult to set out the risks and pass them on to a client. (Then again, hopefully the shoe-shine isn't dangerous.) From a client perspective, you may have clients who wonder why they must sign a waiver that states that “death is a possible consequence” of their shoe shine. If you are leading  rock-climbing expedition, the client likely expects a waiver.

 

A well drafted waiver will:

• specifically set out the parties involved,
• address the type of danger,
• specifically waive the damages, if any,
• show that the waiver is voluntary, and
• provide clear language.

 

We will see how the Iowa Supreme Court handles the inevitable case about "throw in the kitchen sink waivers" written in three-point font. For amusement or consideration, the waiver below from an actual ticket. I used a magnifying glass to read it. Apparently a kids’ concert needed the following waiver:

“warning! Despite enhanced spectator shielding measures, pucks still may fly into the spectator area, serious injury can occur, stay alert at all times including during warm up and after play stops. If struck, immediately ask usher for directions to medical station. Holder voluntarily assumes all risks and danger incidental to the event for which the ticket is issue, whether occurring prior to, during or after the event, including, but not limited to, danger of being injured by thrown, batted, kicked, shot, struck, etc. objects such as balls bats hockey sticks pucks racquets and other objects or equipment or by other spectators or players or by entering a mosh pit. Holder voluntarily agrees that the management, facility, league, participants, participating clubs, Ticketmaster, and all of their respective agents, officers, directors, owners, and employees are expressly released by holder from any claims arising from such causes”

-   Christine Branstad

 

1. Sweeney v. City of Bettendorf, 762 N.W.2d 873, (Iowa 2009)

2. Benton v. Slater, 605 N.W.2d 3, (Iowa, 2000)

3. Joseph L. Wilmotte & Co. v. Rosenman Bros. 258 N.W.2d 317, (Iowa 1977)

4. Huber v. Hovey, 501 N.W.2d 53, (Iowa 1993) (plaintiff injured by fireworks misfiring into pit area of race track); Grabill v. Adams County Fair and Racing Association, 666 N.W.2d 592,( Iowa 2003) (plaintiff injured by detached wheel of race car flung into pit area of race track).

5. Forrester v. Aspen Athletic Clubs LLC, 766 N.W.2d 648, (Iowa App. 2009).

The (business) Climate in Iowa

I saw only the title of a New York Times piece by Nicholas Kristof titled "The Happiest People" and started to write about "The Happiest Businesses." Kristof's story is about Costa Rica. The author credits education for superior "happiness." I agree. The businesses I represent are “happiest” when leaders and workforce are educated. The happiest lawyers know their business and the business of their clients. I believe Iowa’s literacy rate and overall education leads to happiness through educated businesses and educated workers.

Iowa weather (-2 as I write this) differs from Costa Rica weather (currently 82 in Alajuela). Iowa’s business climate remains sunny. Iowans are better equipped to ride out business storms (last pun) not because of legislation. . . nor because of the tax situation . . . but because we are educated.   

As with other business assets, smart investments garner happiness dividends. In the past I encouraged businesses to watch what they write. Now I say watch what you read. Clients who read have the best results. They read contracts. They read sales slips. They read trade journals. The read thought-provoking articles.  Reading the ridiculous warnings at the end of a user agreement may lead to ideas about how to protect yourself and how to evaluate your real risks. Reading trade journals may do the same. The business section of the newspaper can certainly illuminate mistakes and strokes of genius by competitors and friends.

Readable business insight is available from Iowa’s judicial system. I point out Iowa business-related appeals cases to my Twitter followers whenever one is released. No J.D. is needed to read the cases. Iowa Appellate courts seem to take pride in writing understandable, concise opinions (something for which most Iowa attorneys are grateful). Lighter reads are supplied through the Court of Appeals summaries. Reading about litigation can help avoid litigation (and some cases are pretty interesting).

Go ahead and curl up with a nice contract, an Iowa Supreme Court decision, or a trade journal.  Take a step beyond circumspection and invest in business happiness.

- Christine Branstad

Santa Blog

Image via Wikipedia

Dear Santa,

I am grateful for your organization’s intrepid spreading of holiday cheer, but it is apparent that you have not read recent blogs.

For example, it does not appear that you read about safeguarding your business trade secrets. Without contract language in place, employees who are dissatisfied with a holiday bonus of sugarplums, might walk off the job with a copy of the “nice list” or the secrets to reindeer aviation. If a competitor sets up shop at the South Pole, you have some ability to minimize [s]elfish measures by your staff.

How are you protecting confidential information? I would hate to have my prior wish for parachute pants or glitter headbands fall into the wrong hands.  If you don’t have methods of protecting information, business secrets may be purloined.  Although you want to avoid litigation, it is easier to make your case if you have systems in place. (See Nick v. Ebenezer, 2 N. Pole Rptr 23 and Herbie ex. rel. Santa v. Grinch, 4 N. Pole Rptr. 111).

Additionally, mall “santas” appear to be infringing on your territory. If you are working with the “santas", you may consider the protection of a non-compete, non-solicitation, or especially (wink) non-disclosure agreement. If you aren’t working with these ersatz santas, it may be too late to benefit from the intellectual property protection otherwise afforded to your red-suited, rosy-cheeked image and your toy production and distribution process.

Clearly, your current business structure does not appear to have a succession plan. As you approach another century mark in business, you may consider the inevitable conflict between Dave Claus and Mrs. Claus if you retire or fall off a roof. If you plan to sell the business to Mike Clause, get things in writing to avoid an elf walk out or reindeer guidance confusion. A smooth transition is more likely if ownership and management transitions are defined and styled to avoid disputes, taxes and regulatory interference.

A business that has existed successfully for such a long time should be hesitant to change the nature of what it does and anxious to protect its essence. Please deliver this message to all the old businesses who want to fortify a solid “shop”.

On a personal note, I appreciate the new gloves, and the best book for business owners . . . but next year . . . playoff tickets?

-Christine Branstad

The Perfect Gift for the Business Owner

Never Ceases to Amaze

As an intellectual property attorney, I see my share of online train wrecks. The train wrecks are usually business owners who thought the law was one thing when much to their chagrin, it turned out to be quite another. Many figure since there is no way to understand ALL of the laws governing online commerce, it is not worth the time to educate themselves about ANY of them. They learned out the hard way what a bad strategy that is.

80% of the Benefit for 20% of the Effort

The Law of the Internet is not only complex, but constantly changing. Even if you awoke knowing everything there was to know about Internet Law (which no one does), your warehouse of knowledge would be outdated by noon. It is no wonder business owners faced with such a Sisyphean task, opt to tumble blindly onward. Little do they know for about 20 percent of the effort, they can spot about 80 percent of the issues which cause the most grief to most business owners. You do not need to know how to solve every online legal issue to succeed. Being able to spot the usual suspects is often enough to keep your business out of hot water.

Handy Desk Reference

No one book will solve all of your legal problems. Actually, by itself, a book is not going to solve any of your legal problems. CyberLaw, however, might just give you enough information to steer clear of the most common online legal problems in the first place. Some business owners never realize that spotting the issues is half the battle. Spotted in time, you and your attorney can address most online legal problems and avoid their potentially catastrophic consequences. 

Leverage the Opportunity

Many companies see the complexity of online legal regulations as a hindrance, while more savvy companies see it for the opportunity it presents. Understanding the why online laws are the way they are gives your company a leg up on the competition. You can expand your business more vigorously in areas of lax legal enforcement or where the law is well settled and pull back in areas of heavy enforcement or unsettled law. Most importantly, understanding the reasons behind the laws allows you to extrapolate your strategy forward. Where your competitors are busy digging themselves out of holes they never saw coming, you can be anticipating the changes two or three years down the road and reaping the subsequent rewards. If you know a slightly nerdy business owner who has been good this year, now is the time to reward him/her with a holiday gift that really will keep on giving.

Brett Trout

Get it right the first time

Image via Wikipedia

Running to the secretary of state to get corporate filings is not the first step in developing your business.

Incorporating before your business has an identity is like getting a marriage license before you decide on a groom. You will likely have to start over.

First, determine: Who are you? What do you want? What is your growth strategy? What is your exit plan? 

Second, talk with advisers including: your lawyer, business mentors, tax professional, business partners. Gather information to use in determining an organizational chart, managerial structure, initial investors and future direction.

Finally, look at the types of business entities:

• C Corporation
• S Corporation
• Professional Corporations (PC)
• Limited Liability Company (LLC)
• General Partnership
• Limited Partnership
• Limited Liability Partnership (LLP)
• Sole Proprietorship
• Trust

Yes, there is a right time to get the real security of a business entity. If you are inventing, dividing profits or shopping ideas, you may want and need the protection of limited liability. Additionally, if you are beginning to negotiate contracts (even "little" contracts like your cell phone), you want your business entity in place. It is easier to have assets and liabilities in the name of your entity from the start. . . if you do it right the first time.

Like a good marriage, your business entity will need maintenance to go the distance. Like a marriage, it is easier to care from the start than to fix the problems. 

- Christine Branstad

Right from the Start - Non-Disclosure Agreements

Image via Wikipedia

Non-Disclosure Agreements (also called NDAs, Confidentiality Agreements or Secrecy Agreements) have broad use in business.

The “form” NDA is a business myth. Each is designed for a purpose; the provision to protect a trade secret in a severance agreement bears little resemblance to one used when exploring a joint venture. An intellectual property attorney protecting your patent-pending machine in “pitches” to manufacturers uses a significantly different NDA than an employment law attorney protecting your client list from “walking away” with current employees.

All non-disclosure agreements should be:

-   Realistic: Protecting information should not involve parties agreeing to lock themselves in windowless rooms while dealing with each other. If you are dealing with an unscrupulous person with no assets, an NDA may not protect you.

-   Tailored enough. If collaborating, do you expect the other party to disclose information to contractors or employees?

-   Broad enough. If you provide a plant tour, is information discovered in the plant tour protected?

-   Specific enough. If one party drops out, may the other use information obtained? Is there a specific penalty for disclosure? Is there a penalty for accidental disclosure (e-mail intercepted by hacker, cleaning service theft, et cetera)? Does the NDA adhere to the laws of the state where it is written and to the laws of states where each party does business?

The Iowa Supreme Court sets out a test to determine whether a “nondisclosure-confidential agreement” is enforceable. The courts look at whether the restriction is: “(1) reasonably necessary for the protection of the employer's business; (2) unreasonably restrictive of the employee's rights; and (3) prejudicial to the public interest.”

Among ethical business partners, an NDA will set boundaries of conduct and mutual expectations. A well-worded agreement may save future headaches.

But even the best NDA will not make an unethical employee act ethically. In the event of unethical behavior, a properly drafted NDA may be a corporate lifesaver.

- Christine Branstad

Right from the Start - Non Solicitation Agreements

Image by lumaxart via Flickr

My previous post reviewed non-competition agreements to keep employees from walking away with the kitchen sink - trade secrets, client lists and knowhow. This post focuses on Non-Solicitation Agreements, a more narrow method of keeping other companies from luring employees or clients away. The next post will address non-disclosure agreements.

 

In the second year of your burgeoning IT business, you have 5 employees. You land a project that requires a temporary workforce of 10 employees. A staffing company offers to provide workers, but a clause in the contract prohibits you from soliciting any of the temporary staff for 2 years. Should you sign?

 

In its third year, your company competes for a project requiring onsite work. You plan to embed your team, but are concerned that you risk losing the contract if you muddy negotiations with a requirement that the client not solicit your employees. How do you address the issue?

 

A non-solicitation clause is a normative approach to both situations. Non-solicitation clauses are a common method for setting boundaries with staffing companies, consultants, and trainers.

 

A non-solicitation agreement with another company may prohibit luring employees. The strictest agreements prohibit all contact, which has led to litigation about whether purely social interaction violates the clause. Additionally, employees may be prohibited from hiring other employees away.

 

Other non-solicitation agreements prohibit luring away customers. Companies have agreed that, as employees move between companies, each will not solicit the clients previously serviced by the employee for the other company. In the alternative, the non-solicitation agreements may be directly between employer and employee (often in lieu of a non-competition agreement). Those agreements may be narrow (e.g. employee may not solicit clients for whom employee was account manager) or broad (e.g. employee may not solicit any client on company’s client list). The more broad the provision, the more likely it will be scrutinized by the court.

 

Agreements to limit competition, disclosure or solicitation are, by their nature, restrictions on trade. Iowa courts have long held that any restraint of trade is strictly construed against the one seeking to restrain another from pursuing employment or business pursuits. As one example, Iowa Courts specifically distinguished “selling” and “solicitation” based on who initiated the transaction.

As you consider non-solicitations agreements, consider:

• Is non solicitation good for your business?
• Is it good for the industry in general?
• What time limit should apply?
• What geographic limit should apply?
• Is the agreement limited to a certain type of client?
• Is it limited to a certain type of employee?
• Will it affect your ability to recruit and retain employees?
• Is it fair?

-    Christine Branstad

Right from the Start - Protect Business Assets with a Non Compete Agreement

Image via CrunchBase

Even though the economy has stabilized, American Recovery and Reinvestment Act (stimulus) money continues to flow into expanding and start up businesses. Now is the time to protect your fledgling business from competitors who will not hesitate to take your innovations, ideas and employees with impunity or to sue you for taking theirs.  Common rationalizations are based on the perception that because the business is not “first in the field” or “big enough," finances don’t justify a trademark, patent, Web site protection or a non-competition agreement. Think about the social media networks that came before Twitter and Facebook. Think about the auction sites before eBay, the search engines before Google. You remember these later companies and not their predecessors because these later companies protected themselves from the outset.  (I cannot name the earlier companies because I don’t know their names.)

This post concentrates on the threat from within. Trade secrets may be taken by a thief in the night, by a hacker, or by an employee who walks across the [virtual] street with your processes, client lists, templates (and even other employees).  If you wait too long, you risk losing everything. The person stealing your company out from under you need not be a stranger. It may be an executive employee or partner. As emphasized in an earlier post, putting your  relationship into a written contract is a sign of trust, not mistrust. Your business is more than a lark – it has its own identity. Take selfless steps to protect that distinction. Stand behind your commitments and clearly define your expectations. Writing is friendly. Writing drastically reduces the likelihood of fisticuffs down the road.

A non-compete agreement may provide everyone with assurance as to expectations and may address a wide range of issues including:

-   For whom a current employee/partner may work in the future.

-   The time limit for that restriction.

-   The penalty for breaking the agreement.

-   Trade secrets that are protected under the agreement.

-   Which state’s law applies to a dispute. [1]

-   The type of work for which the non-compete applies.

-   The type of industry to which the non-compete applies.

-   Distance from original business within which the non-compete applies.

An unfair or ill-conceived non-compete agreement may be modified or ignored by the court. Therefore, your agreement should not contain:

-   Restrictions that last until the employee is greeting customers at Wal-Mart. Many states strike provisions which are unreasonable in duration.

-   Restrictions which prevent the employee from ever touching a computer again. Restrictions need a reasonable underlying justification to be enforceable.

-   Provisions that restrict the employee from ever competing anywhere but Latvia. Geographic restrictions in the agreement must be reasonable.

For employers, my next blog post will explore two additional possible provisions:  1. A non-solicitation agreement with other companies to inhibit the ability to lure away employees.  2. A non-disclosure agreement to provide protection from the leak of proprietary information that an employee may release to a third party without leaving your employment. 

The door swings both ways. If you hire employees with prior industry experience, inquire about the existence of a non-compete or nondisclosure agreement. In some circumstances these may impose liability on an employer.  Often the best workers already know the business and enhance your business with their knowledge. Ask yourself, how did they get to be so good?

Finally, if you already hired your employees before you read this article, offer them something extra for signing the non-compete agreement. Some courts do not recognize non-compete agreements if there is no additional “consideration” offered to the employee to sign a non-compete after employment has begun.

-Christine Branstad

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[1] In California, non-compete clauses are not enforceable based on the premise that non-competes prevent the movement of talent from company to company; such movement promotes a healthy business environment.

They can't sue me. I am a corporation.

Image by arjin jvia Flickr

Small businesses owners hiding behind the mantra “I can’t get sued! I am a corporation!” must remove misconceptions. Anyone can sue anyone for anything. If you form a valid business entity, however, you may discourage suit or find an early exit from litigation.

 

Two things to do:

One: BE A REAL CORPORATION.

Two: ACT LIKE A REAL CORPORATION.

 

One of the most desirable features of corporations, limited liability companies and limited partnership, or limited liability partnerships, is that liability is generally limited to the amount of the individual owners' investment.

 

The answer to questions about whether you are personally liable for:

• actions (negligent or intentional) of employees, or
• accounts payable to vendors, or
• failure to perform corporate obligations  

may lie in whether you have acted as a real corporation and if you can show the realness of your corporate identity.  

In a real-life-worst-case scenario: Joe Businessowner[1]comes in and states that he is being sued by Jane Bystander who was injured by an employee who ran over Jane’s foot with a forklift. Joe paid employees out of his personal account at times, and out of his business account at times. He also paid his personal electricity bill and his vacation out of his business account. Joe has never filed a certificate of incorporation and he has never kept meeting minutes. Now Joe says, “well they can’t get my money can they? I paid $50 to the Secretary of State and I am a corporation.”

In less egregious case, Jack's Construction Company claimed that Jill's dog-grooming business was under the same corporate protection. The supplies were paid for out of the corporate account, but all proceeds were going to Jill (Jack's wife). 

 

In many states including Iowa, the law provides that if the owners of a company do not follow general business protocol, creditors (including people who file lawsuits) can “pierce the corporate veil” and attribute personal liability to the owners of the company.

The attorney for the creditor (other side) will typically demand to examine your company’s records.

The best defense is to maintain precise company records[2]including:

• A Minute Book. - company’s records which may contain: written actions and minutes of meetings[3]. Anything significant should be documented in minutes including elections of directors and officers, contract approvals, budget and changes to the governance of the company. Meetings usually need not be held in person. Telephonic or e-meetings are common. 

 

• Bylaws or Operating Agreement. - documents addressing business governance (possibly including: who votes, how votes are counted, tax issues, buy/sell, dissolution and other rights).

 

• Stock or Unit certificates register. - tangible evidence of business ownership. Most commonly, the number of shares/units is less important than the percentage of ownership of the total outstanding shares/units. Certificates may also categorize shares as non-voting owners (“silent partners”); or owners may have a right to a preferential return.

 

• Taxes. - consult your tax professional about the information needed for your particular business.

 

• Separate accounting-  If I need to go over the importance of eliminating the co-mingling of owner funds and business funds, see paragraph above about worst-case scenario.

In a sentence: if owners ignore business formalities, the law will ignore the separate existence of the business entity.

In my experience, the business owners who ignore business formalities do not (or didn’t) believe in the potential for growth and success of their businesses. Attention to detail and formality at business start up is not expensive. Inattention may be costly.

 

- Christine Branstad

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[1]Not his real name.

[2]If this sounds like “too much hassle” read my prior blogs on putting things in writingand succession planning..

 

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Succession Planning - How to Divorce or Die or Retire with Dignity (and a little money)

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Does your business have a viable business succession plan? Ask yourself the following question.

Would your business survive if you (or your partner):

-   got divorced? got married (to a Yoko [1])?
-   died?
-   won the lottery?
-   got sick?
-   wanted to retire?
-   was offered a fabulous job . . . in Belgium?
-   got in a big fight with the others?

Do you want the business to survive all of those scenarios?

Are you and your business partner(s) in the honeymoon stage? Now is the time to make a plan. Are you going through the pain of growth or recession? Now is the time to make a plan. Are you too small to break up? Now is the time to make a plan. Everyone knows a business that has suffered the Yoko effect. You have the power to prevent it from happening to your business. Having a written plan for death, incapacitation, divorce, retirement and sale dramatically reduces future hassles.

Your accountant, tax advisor, financial planner and lawyer can help you implement your plan. Before meeting with them, you need to address the following issues:

Business Priorities

1)   Company structure (management and ownership). To avoid an Earnhardt-like struggle for control, you must make decisions before the company changes hands. Is it important that your oldest run the company? Is it important that your spouse get profits from the company? Do you want your spouse to have a vote in removing your oldest child as CEO?

a.    Voters

b.   Owners (including limitations on ability to sell)

2)   Evaluation of the business. (With the agreement of all owners, shares may be evaluated differently based on circumstance.)

a.    If you are leaving the business, how your shares for sale should be evaluated?

b.   If your estate must sell your shares to the remaining investors, how will shares be evaluated?

3)   Structure of buy-sell agreements.

a.    Amount of time to make payment.

b.   Does the company maintain a life insurance policy that pays for buy-sell at death?

4)   Intangibles. For example, agreement that the logo will stay the same for a period of years, that the company will not engage in the production of rubber vomit, et cetera.

5)   Other property. For example, ownership of intellectual property that is part of the business, ownership of the desk, use of the likeness of your dog (who has served as company mascot), et cetera. (or use of the No. 8 for the Earnhardt family).

6)   Tax consequences of each of your decisions.

You may wish to specify bonuses to current employees for performance or at buy out. You may wish to write severance packages to be offered at the sale of the company.  You may wish to set out a retirement package for partners as they age.

Once you decide how you think things should go, talk with everyone involved:

Your anticipated successor(s) -  If your anticipated successor has plans to pursue a Broadway musical career, you may need to make other plans. On the other hand, your successor may admit some issues with the buy-sell plan and offer tips to make the transition easier. Finally, a named successor may simply work harder for the business.

Your spouse and other heirs - Your verbalized wishes added to the written plan may head off some fights down the line and may provide the correct tone to your wishes.

Your business attorney – You must determine if you currently have the correct business structure before you put your wishes into a workable business succession plan. (FARMERS read this twice. Farm succession planning is another bale of hay altogether).

Your personal attorney – Your attorney can reconcile your personal estate plan with your business succession plan.

Your insurance agent– Your agent can help you determine how life and disability insurance policies work with your succession plan.

Your tax advisor– Each of your succession plan components may have tax implications.

Even a simple succession plan is far better than no succession plan. Failure to get a plan in place is compounding headaches for delivery when you can afford them the least.

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[1] I acknowledge the unfairness to Yoko who I believe was an inspiration not a detriment.

Good News for Good Businesses: Snake Oil* Sellers Beware

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Ever wonder how unscrupulous sellers get away with going door to door (or phone to phone) spewing pitches for deals that are too good to be true? Whether it’s a fund-raising scam, a vacation club, or a highbrow ponzi scheme, we repeatedly read about segments of the population who are swindled by miscreants. Until this year, it was incumbent upon law enforcement and the Attorney General to clean up the mess.  With the July 1, 2009 enactment of Iowa’s Consumer Fraud Act (Section 714.16), attorneys in private practice have greater power to redress unscrupulous conduct. More [bad] businesses will be targeted. The good news is that they are not targeting your business. Parasitic competitors who infringe on your clientele are in jeopardy.

Iowa is the latest and last state to adopt legislation allowing a private individual to not only sue a business for fraud, but to collect attorney fees for doing so. The new law provides a stiff deterrent to businesses that willfully and wantonly disregard the safety or rights of the consumer: Wrongdoers may be on the hook for three times the actual amount taken and attorney fees above and beyond that amount.

 

There are good reasons to legislate a private right of action for consumer fraud. Most attorneys have turned away some aggrieved consumers because we couldn’t get paid for the cases and couldn’t afford to represent consumers on small dollar cases. Wronged consumers, upon hearing that even if they won a case, the fees may exceed the award, dropped the pursuit to avoid King Pyrrhus’ fate. In the past, Iowans had to rely on a common law action for causes of fraud under which only the most seriously injured consumers would prevail. The Attorney General was left to handle all the claims and had to choose which merited attention (and litigation).  Now, Iowans have a statutory cause of action for fraud.

 

The statute provides a cause of action for a consumer who is the victim of an “unfair practice, deception, fraud, false pretense or false promise, or in the misrepresentation, concealment, suppression, or omission of a material fact with the intent that others rely upon”  them for a purchase, or solicitation of charitable contributions. Not a lot of translation is needed to determine what is actionable. (And not a lot of translation is needed to determine how to stay out of trouble.)

 

Business owners may worry about seeing more litigation. Don’t worry, buyer’s remorse is not a cause of action. The statute is clear about the nature of acts covered and cause of action only exists if the business was provably fraudulent or unfair in conduct.

 

Additionally, many regulated professionals, such as architects, doctors, attorneys, et cetera, are exempt from this legislation because their codes of conduct subject them to both discipline for unprofessional conduct and civil liability for malpractice. 

 

Avoiding lawsuits is commonsensical: be honest with your customers and clearly convey the scope of the purchased service or good.

 

Overall, the new law provides the consumer the power of industry regulation with the cost shifted to the wrongdoer rather than the government.   Good businesses will benefit – a rising tide lifts all boats.

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[*] This applies equally to sellers of bird milk.

Avoid Problems - Protect Client Identity

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In the 1980s, bad guys stole Mercedes Benz hood ornaments. Today’s enterprising criminals steal identities. Identities are stolen from homes, from trash cans, from purses and from glances over shoulders. 

And, unfortunately, often from businesses. There are many ways individuals protect themselves from identity theft Unfortunately, many businesses are not so conscientious. When clients and customers hand over birthdates, social security numbers, addresses and credit card numbers to businesses, they trust the business to protect their identity.

 

Every business must have a method to secure and protect paper and electronic information . . . from the instant the information enters the business through final disposition.

 

Customers expect identity protection.

 

Failure to implement an information security plan may cost your business: clients, revenue, and time. One breach and clients will avoid your business as if there was police tape across your front door. In most cases, if identity is stolen from your business, you are not only liable for the ensuing damages, you are also required to assist in the investigation including: finding and providing applications and business transaction records or account records.

 

Penalties for those who fail to protect identity vary by state. The Texas Attorney General initiated suits against businesses for failure to protect identity of customers. (One suit settled for $220,000.00 against a business that disposed of sensitive information in dumpsters). The law upon which one of the Texas suits is based mirrors an Iowa law.

 

Implementing a security plan involves several steps:

1)     Review your document retention plan to decide what you need to have.

2)     Review your electronic documents to determine what you have. Don’t start deleting until you have a plan. Have you checked online storage? flash drives? Employees' home computers?

3)     Review your paper documents to determine what you have. (Stop, no shredding until you have a plan.)

4)     Review specific agency requirements for your business.

5)     Review specific privacy requirements for your business.

6)     Determine where/how to store your electronic documents.

7)     Determine where/how to dispose of electronic documents.

8)     Determine where/how to store your paper documents.

9)     Determine where/how to dispose of paper documents.

10) Review how you receive electronic documents. Is your website secure?

11) Review how you receive paper documents. Most identity thefts take place before the information is recorded.

12) Write down your plan and go over it. Set timelines and reminders.

 

None of this matters if your storage is not secure. Physical storage is easier: lock it, hide it and treat every document like cash (it may be).  Electronic storage is becoming increasingly complex. Network security experts (and expert criminals) are everywhere.   As a business owner, you must understand Internet Law. You must know terms like firewall, encryption, breach detection and offsite back up. You must also have a plan to update your security regularly. State-of-the-art security from five years ago is now as easy to breach as your grandparent’s old screen door.

 

The Federal Trade Commission has a detailed but usable 15 page guide for businesses to protect client information. You would not leave your cash on the counter. You wouldn’t post your own social security card on the front window. Don’t leave your clients' identification or money exposed either.